Section 7 01 Report

Analysis of the PostalAccountability and EnhancementAct of 2006

Postal Regul atory Commission

Septemb er 22, 20lI
701 Report

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Section 701 Report Table of Contents

Page

Table of Contents

CHAPTER l: Executive Summary

CHAPTER ll: Legal Background

CHAPTER lll: Procedural History

CHAPTER lV: Operation of the PAEA Amendments and Recommendations

for Legislative lmprovements

A. Overview of The Postal Regulatory Commission's Statutory Roles......

1. The Regulatory Environment Under the PAEA

2. lmplementation of the Commission's Responsibilities Under the

PAEA...

3. Commission Experience with Certain Aspects of Postal

Regulation Under the PAEA

B Financial and Transparency lssues

1. RetirementFunds..,..

2. Sarbanes-Oxley Act Compliance

C. Rate and Service Matters

Market Dominant Price Cap

Market Dominant Classes of Mai|........

Nonpostal Services

NSAs and Special Classifications .......

Service Performance Measurements and Customer

Satisfaction

6. Market Tests of Experimental Products .........

D, Enhancements to lmprove the Commission's Processes

1. Post Office Closing Procedures

2. Advisory Opinion Process

CHAPTER V: Conclusion

Attachment-Comments of the United States Postal Service

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Appendix-Comments of the United States Department of State
701 Report

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701 Report Chapter l: Executive Summary

CHAPTER I: EXECUTIVE SUMMARY

This marks the Postal Regulatory Commission's (Commission)first report under

section 7ü of the Postal Accountability and Enhancement Act (PAEA) of 2006. That

section directs the Commission to submit a report to the President and Congress, at

least every five years, regarding how well the PAEA is operating and to recommend

measures to improve the effectiveness and efficiency of postal laws.

The Commission recognizes the difficult environment that the Postal Service

faces in 2011 and how it is starkly different from the environment that existed in 2006.

At the time of the passage of the PAEA, the Postal Service's volume was growing and it

was earning revenues that exceeded costs. However, the postal sector and the

financial condition of the Postal Service have dramatically changed since the passage

of the PAEA.

This report does not propose sweeping structural changes to the Postal Service

or its universal service obligation. lnstead, in fulfillment of its responsibilities under

PAEA section 701, the Commission makes recommendations for improvements to

postal laws within the framework of the PAEA (701 Report). These recommendations

will enhance the Postal Service's flexibility, and help it to meet the challenges of today's

difficult financial environment.

The report focuses on three main areas that the Commission has been closely

involved with in the implementation of the PAEA.

1) The report addresses the financial situation of the Postal Service with

recommendations on retirement funding and discusses transparency issues

with regard to Postal Service annual reporting, including Sarbanes-Oxley Act

compliance.

2) The report discusses rate and service matters, including the price cap,

market dominant classes of mail, nonpostal services, negotiated service

agreements and special classifications, service performance measurement,

and market tests.
701 Report Chapter l: Executive Summary

3) The report addresses enhancements to improve the Commission's

processes, including post office closing procedures and the advisory opinion

process.

With respect to financial and transparency issues, the Commission makes the

following key recommendation :

The Commission recommends that Congress adjust the current Postal

Service Retiree Health Benefit Fund (PSRHBF) payment schedule. To assist

in determining how to make an appropriate adjustment, the Commission

provides actuarially sound alternative payment options for Congress to

consider in keeping with the spirit of the law while adjusting the scheduled

annual prefunding payments in recognition of the eurrent liquidity challenges

facing the Postal Service. The Commission also recommends that Congress

consider the PAEA section 802(c) report on the Postal Service's Civil Service

Retirement System liability as a potential remedy for the PSRHBF issues.

a

With respect to rate and service matters, the Commission makes the following

key recommendations:

a The Commission recommends that the PAEA be enhanced by explicitly

allowing the Postal Service to add new market dominant classes of mail.

This legislative enhancement will allow the Postal Service to adapt to the

rapidly changing needs of mail users and the postal system.

a lf Congress decides to allow the Postal Service to offer new nonpostal

services, those services should have appropriate regulatory oversight and

review. Proper regulatory review and oversight will ensure that the Postal

Service offers profitable, new nonpostal services and does not disrupt the

competitive marketplace.

The Commission recommends that Congress consider amending the statute

by raising the maximum revenue limitation on market tests of experimental

products to encourage innovation on a larger scale.

Congress should consider clarifying the law to ensure that consultations with

the Commission are required for changes to service standards.

While the Commission has not vetted this concept, Congress should

consider providing an opportunity for the Postal Service to achieve increased

pricing authority by increasing quality of service. This will provide the Postal

Service with a financial incentive to improve service and increase revenues.

a

a

a

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701 Report Chapter l: Executive Summary

With respect to enhancements to improve the Commission's processes, the

Commission makes the following key recommendations:

The Commission recommends that Congress consider requiring the Postal

Service to provide regular reports to the Commission on its retail network

plans and activities. ln recognition of the Postal Service's current plans to

realign its retail network, regular reporting on the Postal Service's retail

network's closure and consolidation efforts to Congress, the public, and the

Commission will further the PAEA goals of transparency and accountability.

a

O

a

The Commission recommends that the scope of appellate review from Postal

Service determinations to close Postal Service operated retailfacilities be

clarified and adopt the plain meaning of post office to include all retail offices

operated by the Postal Service.

The Commission recommends that Congress consider adding statutory

language that would allow the Postal Servíce to obtain expedited

consideration for time sensitive requests for advisory opinions on proposals

to change service on a nationwide or substantially nationwide basis.

Additionally, Congress should consider adding language to 39 U.S,C. 3661

requiring the Postal Service to provide a written response to Commission

advisory opinions and submit its response to Congress prior to implementing

such changes in service.

3
701 Report Chapter ll: Legal Background

CHAPTER ll: LEGAL BACKGROUND

Under the PAEA, Pub. L. 109-435, 120 Stat. 3198 (2006), section 701 , the Postal

Regulatory Commission is required to

(a) [S]ubmit a report to the President and Congress concerning-

(1) the operation of the amendments made by this Act [PAEA];

and (2) recommendations for any legislation or other measures

necessary to improve the effectiveness or efficiency of the postal

laws of the United States.

(b) Postal Service Views.-A report under this section shall be

submitted only after reasonable opportunity has been afforded to

the Postal Serviee to review the report and to submit written

comments on the report. Any comments timely received from the

Postal Service under the preceding sentence shall be attached to

the report.,..

The Commission is required to present its "701 Report" to the President and Congress

at least every five years from the date of the enactment of the PAEA. ln presenting its

701 Repod to the President and Congress, PAEA section 701(b) requires the

Commission to afford the Postal Service a reasonable opportunity to review the report

and submit written comments. PAEA section 701(b). The Postal Service's comments

are required to be attached to the Commission's 701 Report. /d.

This report marks the Commission's first 701 Report to the President and

Congress. Over the past five years, the Commission has gained a wealth of experience

implementing the provisions of the PAEA. This 701 Report reviews, as appropriate, the

operation of the PAEA's amendments to the United States Code and makes

recommendations for any legislation or other measures to enhance the effectiveness

and efficiency of the postal laws of the United States for the President and Congress to

consider.

4
701 Report Chapter lll: Procedural History

CHAPTER lll: PROCEDURAL HISTORY

ln PAEA section 701, Congress sought the Commission's views on the operation

of the PAEA and recommendations for legislative action. To assure that the public's

ideas are taken into consideration, on December 3, 2010, the Postal Regulatory

Commission announced that it was soliciting comments from interested persons to aid

in the development of the 701 Report.l ln its announcement, the Commission stated

that in order to assist the Commission's views as it conducts its review in preparation for

issuing this 701 Report, it would hold an informal public forum and allow interested

parties an opportunity to submit informalwritten comments. The Commission also

posted this information on its website and stated that the informal deadline for

comments was February 1, 2011. The Commission has reviewed all comments

submitted including those received after February 1,2011.

The Commission held a public forum on January 11 ,2011, in the Commission's

hearing room. Forty-seven members of the public attended the forum. The forum was

also webcast and garnered 89 listeners. ln addition to the forum, 26 timely comments

were received by U.S. Mail and e-mail.2 The Commission has reviewed the comments

submitted and the suggestions made at the public forum to be better informed on the

concerns of mailers and the public.

1 See Postal Regulatory Commission Press Release PRC Seeks lnput on lmproving PostalLaws

of the United Sfafes, December 3,2010.

'The United States Department of State was the only Federal agency to submit comments. lts

comments were submitted on July 6,2011, after this report was largely completed, As a result, the

Commission was unable to fully consider its proposals. As a matter of inter-agency comity, the

Commission is attaching the Department of State's comments, in its entirety, to this report for the

President and Congress's consideration. See Appendix.

5
ln accordance with PAEA section 701(b), the Commissisn submitted a copy of

the report to the Postal Se¡vice on August 5,2011, and it requested comrnents by

August 26,2A11. The PostalService's comments were received on September 16,

2011. See Attaehment.

6
701 Report Chapter lV: Operation of the PAEA Amendments

CHAPTER IV: OPERATION OF THE PAEA AMENDMENTS AND

RECOMM EN DATIONS FOR LEG ISLATIVE I MPROVEMENTS

A. Overview of The Postal Regulatory Commission's Statutory Roles

1. The Regulatory Environment Under the PAEA

The PAEA significantly altered and modernized postal law with respect to rate

regulation and service standards, increased transparency and accountability, enhanced

the authority and responsibilities of the newly reconstituted Postal Regulatory

Commission (Commission),3 and required a variety of evaluations and reports including

an annual determination of the Postal Service's compliance with applicable laws, known

as the Annual Compliance Determination. lt ended the previously mandated breakeven financial model and encouraged the Postal Service to reinvest retained earnings.

The PAEA also abolished the Postal Service's previous authority to provide nonpostal

service offerings with the exception of certain "grandfathered" nonpostal services.

The law provided the Postal Service with increased pricing flexibility and

separated postal products and services into two discrete categories, market dominant

and competitive. The market dominant category includes products for which the Postal

Service has a monopoly or would be able to exercise substantial market power. For

market dominant products, the law provides the Postal Service with flexibility to price

those products as it deems appropriate, subject to a price cap for each class of mail

equal to the annual Consumer Price lndex (CPl). The competitive category includes all

other postal products.

The Postal Service has complete flexibility in pricing each of these products as

long as each such competitive product covers its costs. Additionally, competitive

products as a whole must not be subsidizedby market dominant products, and must

3 The Postal Regulatory Commission is the successor agency of the Postal Rate Commission.

7
701 Report Chapter lV: Operation of the PAEA Amendments

make an appropriate contribution to institutional costs as determined by the

Commission. The Postal Service also gained additionalflexibility to test new

experimental postal products as well as enter into international contracts, individual

contracts, and other negotiated service agreements with mailers,

The PAEA creates three main requirements for service standards. First, the

Postal Service, in consultation with the Commission, is required to establish a set of

service standards for market dominant products that reflect current network capabilities.

Second, objective measurement systems are to be established and implemented with

the approval of the Commission. Third, the Postal Service, in consultation with the

Commission, is required to submit a plan to Congress that includes the Postal Service's

vision for rationalizing the network to improve efficiency and meet the new service

standard goals.

The PAEA requires separate accounting for the groupings of products within the

market dominant and competitive categories. A new Competitive Products Fund, apart

from the existing Postal Service Fund, was established at the U.S. Department of

Treasury. An assumed income tax is applied to profits from the Competitive Products

Fund and transferred to the Postal Service Fund to help defray costs for meeting the

universal service obligation.

Another aspect of the PAEA entails funding for Postal Service retiree health

benefits. lt requires the Postal Service to begin funding the Postal Service portion of

future retiree health benefits. Fora 1O-yearperiod, the Postal Service is required to pay

each year between $5.4 billion and $5,8 billion into a newly created PSRHBF.

Under the PAEA, the Postal Regulatory Commission's role changed significantly

from that of the Postal Rate Commission, The law directed the Commission to establish

a modern ratemaking process and to conduct a formal compliance review of Postal

Service prices and services on an annual basis.

I
701 Report Chapter lV: Operation of the PAEA Amendments

The law also significantly increased the scope and remedies available to parties

filing rate or service complaints with the Commission. Additionally, the law established

schedules for the Commission to report to the President and Congress on a number of

postal policy issues such as on the universal service obligation and monopoly status of

the Postal Service. The PAEA generally provided for a less adversarial and more

expeditious rate setting process that typically takes less than two months. Moreover,

the PAEA strengthened the Commission's oversight authority by providing it with

subpoena power over officers, employees, agents, and contractors of the Postal

Service. Finally, the law required the Postal Service to submit certain Sarbanes-Oxley

Reports to the Commission.

lmplementation of the Commission's Responsibilities

Under the PAEA

The Postal Regulatory Commission acted promptly to put into operation the new

key provisions of the law that it was tasked with implementing. ln October 2007, the

Commission issued new rules overhauling the previous cost-of-service ratemaking

regulations and setting forth the modern system of ratemaking framework as required

by the PAEA-eight months ahead of the statutory schedule. See 39 U,S.C. 3622. The

Commission, in April 2009, issued periodic reporting rules as required by the PAEA.

See 39 U.S.C. 3651-53. These rules fulfill the goal of increased transparency and

accountability of the Postal Service and identify the information production necessary to

prepare the PAEA's mandated Annual Compliance Determination and other periodic

reports. These rules balance the burden of information with the necessity to fulfill the

Commission's statutory mandate and the mailing public's right to transparency.

The Commission implemented the PAEA's enhanced oversight requirements by

publishing final rules for complaints and confidentiality in FY 2009. 39 U,S.C. 3662,

50a(g). The Commission also issued its rules for accounting practices and tax

treatment related to Postal Service competitive products in FY 2009. 39 U.S.C. 2011.

These accounting and tax treatment rules ensure that proper accounting procedures are

2.

I
701 Report Chapter lV: Operation of the PAEA Amendments

used by the Postal Service and that the Postal Service does not engage in unfair

competition with respect to its competitive products. The Commission also issued the

PAEA mandated report to Congress on universal postal service and the postal

monopoly in the United States in FY 2009, including the monopoly on mail delivery and

access to mailboxes. PAEA section 702. ln FY 2010, the Commission issued final

rules for procedures on obtaining information from the Postal Service, including the use

of subpoenas. 39 U.S.C. 504(f). All of these Commission rules and reports were

prepared with the benefit of public comments.

Commission Experience with Certain Aspects of Postal Regulation Under

the PAEA

The Postal Service is granted wide flexibility in setting prices for both market

dominant and competitive products as a result of the PAEA. However, as discussed

below, that flexibility has not always been exercised. To ensure compliance with the

law, the Commission instructed the Postal Service to make adjustments to the Postal

Service's proposed market dominant rates twice in the past five years. New procedures

and regulations made possible by the PAEA have streamlined the Commission's review

processes. Since the passage of the PAEA through November 2010, the Commission

has reviewed 238 competitive NSAs and 4 market dominant NSAs.

The PAEA also provided the Postal Service with significant flexibility in the

classification of its products. Since the passage of the PAEA through May 2011, the

Commission has reviewed 1 17 requests to make changes to the Mail Classification

Schedule, including the creation of new products, 6 experimental market test products,

16 requests for market dominant rate changes, including innovative pricing strategies

such as "summer sales," 9 requests for competitive rate changes of general

applicability, and 1 request for an exigent rate increase. ln addition, the Commission

has reviewed four requests to transfer products from the market dominant product list to

the competitive product list. See, e.9., Docket No. MC2010-36: Transferring

Commercial Standard Mail Parcels to the Competitive Product List.

3

10
701 Report Chapter lV: Operation of the PAEA Amendments

The Commission's Annual Compliance Determination (ACD) and other periodic

reports ensure that the Postal Service is following applicable legal requirements and

that there is an appropriate level of transparency and accountability to the public. Since

the passage of the PAEA, the Commission has issued four ACDs. During that time, the

rates for one product, Standard Mail Flats, were found to be out of compliance with

applicable statutory requirements.a Prior to finding the Postal Service out of compliance

with respect to Standard Mail flats, in previous ACDs and in other ways, the

Commission repeatedly encouraged the Postal Service to use the flexibility given by the

PAEA to reduce costs or change the pricing structure for flats without the need for

Commission intervention.

The Commission has considered two major mailer complaints since Congress

passed the PAEA. The first complaint, brought by Capital One Services, lnc. (Capital

One), concerned allegations that the Postal Service was allowing unfair competition to

occur since it was not providing Capital One with a negotiated service agreement similar

to that provided to Bank of America Corporation. This case was ultimately settled by

Capital One and the Postal Service without the need for a Commission decision on the

merits.

The second complaint, brought by GameFly, lnc., concerned allegations of

unlawful discrimination. Specifically, GameFly, lnc. alleged unfair discrimination

between letter and flats mailers who rent DVDs sent through the mail. The Commission

issued its decision finding in favor of GameFly, lnc. on April 20,2011, and directed the

Postal Service to modify its Mail Classification Schedule for round{rip DVD mail.5

4 Section 3653(c) of title 39 states that the Commission shall take appropriate action in

accordance with subsections (c) and (e) of section 3662 if the Commission makes a determination of

noncompliance. The reference to subsection (e) should be to subsection (d). The Commission

recommends that Congress make this technical correction.

5 See Docket No. C2009-1, Order No. 718, Order on Complaint, April 20, 2011 (Order No. 718).

11
701 Report Chapter lV: Operation of the PAEA Amendments

The PAEA granted the Commission subpoena authority. To date, the

Commission has not found it necessary to issue any subpoenas, and encourages the

Postal Service to continue providing the necessary information to ensure the

transparency and accountability of the postal system.

Most key provisions of the PAEA, as implemented by the Postal Service and the

Commission, are functioning properly. An important aspect of the PAEA is the

requirement for periodic reports to identify needed modification to the statutory

structure. ln this report, the Commission offers recommendations for legislative change

with respect to retirement funds for postal employees, Sarbanes-Oxley Act compliance,

market dominant price caps, market dominant classes of mail, nonpostal services,

negotiated service agreements, service standards, market tests, post office closing

procedures, and the advisory opinion process.

12
701 Report Chapter lV: Operation of the PAEA Amendments

B. Financial and Transparency lssues

1. Retirement Funds

a. lntroduction and Summary

The PAEA significantly altered the manner in which the Postal Service funds its

retiree health benefits, including the financing requirements for employee benefits. Prior

to the PAEA, the Postal Service, like other Federal agencies, was required to pay the

employer's share of health insurance premiums for all current postal retirees and their

survivors who participate in the Federal Employee Health Benefits Program (FEHBP) on

a pay-as-you-go basis. The PAEA requires the Postal Service to continue to make the

"pay-as-you-go" premium payments, but further requires the Postal Service to make

additional scheduled annual payments to prefund premiums for future retirees, which

are paid into a newly created PSRHBF overseen by the Office of Personnel

Management (OPM).

The Commission has found that the principal cause of the Postal Service's

current financial challenges is the current prefunding schedule.6 The Commission,

therefore, provides alternative payment options for Congress to consider in keeping with

the spirit of the law while adjusting the scheduled annual prefunding payments in

recognition of the severe current liquidity challenges facing the Postal Service.

6 See Commission Docket No. R2010-4, Order Denying Request for Exigent Rate Adjustments,

September 30, 2010, at 68-80 (Order No. 547).

13
701 Report Chapter lV: Operation of the PAEA Amendments

Pre-PAEA Funding of Retiree Health Benefit Premiums and

Pension Benefits

(1) Retiree Health Benefit Premiums

Pub. L. 99-272 and the Omnibus Budget Reconciliation Act of 1990 require the

Postal Service to pay the employer's share of health insurance premiums for all current

postal retirees and their survivors who retire on or after July 1, 1971, and who

participate in the FEHBP. The costs for the premiums are prorated for creditable civilian

service prior to July 1 , 1971, with the Federal government paying the portion of the

premiums related to service prior to that date. These "pay-as-you-go" premium

payments were the only premium payments required to be paid by the Postal Service

for its retirees until the passage of the PAEA.

(2) Civil Service Retirement System Pension Benefit

Obligation

The Postal Service's obligation to the Civil Service Retirement System (CSRS)

has been altered by several different pieces of legislation.

Pub. L. 93-349. Enacted on July 12, 1974, Pub. L. 93-349 required the Postal

Service to assume the increase in the liability of the CSRS due to increases in pay

granted by the Postal Service since July 1 ,1971. The liability increase was to be

determined by OPM and to be paid by the Postal Service over 30 equal annual

installments with interest computed at the rate used in the most recent valuation of the

CSRS. Beginning on June 30, 1975, the Postal Service began making payments to the

b

14
701 Report Chapter lV: Operation of the PAEA Amendments

CSRS for the estimated increased liability. These payments continued until FY 2003,

when Pub. L. 108-18 changed the Postal Service's funding requirements for CSRS.7

Pub. L. 108-18. The Postal Civil Service Retirement System Funding Reform Act

of 2003, Pub. L. 108-18, changed the way the Postal Service's CSRS retirement liability

was calculated and funded. At the request of Congress, OPM conducted a review of

the Postal Service's CSRS liability and the scheduled funding and found that at the

current rate of funding, the Postal Service would pay substantially more than would be

required to fully fund future pension benefits of Postal Service employees participating

in the CSRS. ln response to the apparent overfunding of the CSRS pension liability,

Pub. L. 108-18 changed the funding methodology for the Postal Service's share of the

CSRS.

There were two primary changes to the Postal Seryice's method of funding the

CSRS as a result of Pub. L. 108-18. First, military service time CSRS pension

obligations that had been credited to Postal Service employees and had been paid for

by the Federal government was made the responsibility of the Postal Service.

Additionally, the employer's share of the payment to the CSRS Fund was changed from

a static 7 percent of an employee's basic salary to an actuarially determined amount

known as "dynamic funding."

Additionally, Pub. L. 108-18 instructed OPM to reevaluate the CSRS Fund each

year as it relates to Postal Service employees. lf OPM calculates a supplemental

Postal Service liability, the Postal Service would be required to make supplemental

payments sufficient to fully fund the amount within 40 years.

7 Several Omnibus Budget Reconciliation Acts of the late 1980s and early 1990s made the Postal

Service liable for the cost of Cost of Living Adjustments (COLAs) granted to most Postal Service

annuitants. These acts also required the Postal Service to pay the employer's share of the FEHBP for all

postal annuitants and their survivors. For a complete discussion of these statutory changes, see the

Postal Regulatory Commission's Review of Retiree Health Benefit Fund Liability as Calculated by Office

of Personnel Management and U. S. Postal Service Office of lnspector General, July 30, 2009.

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701 Report Chapter lV: Operation of the PAEA Amendments

The final major change of Pub. L. 108-18 was that the Postal Service's savings

from the changes to its CSRS funding requirements would be used to reduce its

accumulated long-term debt and to delay rate increases from 2003 to 2005. Any

estimated savings after FY 2005 were placed in escrow until Congress determined a

use for the estimated savings.

c. Funding of CSRS and Retiree Health Benefit Premiums

Under the PAEA

(1) Funding of the PSRHBF

The PAEA established the PSRHBF and initially funded it with the FY 2006

escrow transfer in the amount of $3 billion and an OPM-determined FY 2006 Postal

Service surplus from the CSRS Fund in the amount of $17 billion.

The PAEA requires the Postal Service to pay annual statutory installments of an

average of $5.6 billion into the PSRHBF over 10 years from FY 2007 through FY 2016.8

Beginning in FY 2017, the PAEA requires OPM to evaluate the PSRHBF every

year and actuarially determine the overall liabilities for retiree health benefits for current

employees, annuitants and survivors, the value of assets, and the fund balance. At that

time, the Postal Service will be required to pay the actuarially determined cost for retiree

health benefits for current employees into the PSRHBF while the annual "pay-as-yougo" premiums for the Postal Service's annuitants and survivors will be paid out of the

PSRHBF.

OPM annually determines the PSRHBF fund balance and, in the case of an

unfunded liability, establishes a schedule of annual payments for the liquidation of such

t Pub. L. 109-135 altered the payment schedule for FY 2009, reducing the scheduled annual

payment for that year from $5.4 billion to $1.4 billion.

16
701 Report Chapter lV: Operation of the PAEA Amendments

liability. The Postal Service will then make annual amortization payments into the fund

to liquidate the unfunded liability by FY 2056.

(2) Funding of the Postal Service Portion of the CSRS

The PAEA also significantly changed much of the funding requirements for the

CSRS. lt removed the requirement for actuarially determining the funding for the Postal

Service's portion of the CSRS, and it also transferred the military service time for postal

employees back to the responsibility of the Federal government. OPM was also

required to evaluate the CSRS pension liability each year by June 30. lf a surplus

exists, the surplus is to be transferred to the newly created PSRHBF. Transfers of any

CSRS surplus to the PSRHBF will occur at the close of FY 2015,2025,2035 and 2039.

lf there is an unfunded liability, the Postal Service is to pay the present value equivalent

of the unfunded liability over a 0-year term with interest into the fund.

d. Commission Experience with the Retirement Funds

(1) Commission Study on the PSRHBF

At the request of Congress, the Commission undertook an analysis of the

different approaches employed by the U.S. Postal Service Office of lnspector General

(OlG) and OPM to calculate the present value of the Postal Service's obligations related

to the PSRHBF.e

The Commission's July 30, 2009 report found that the two valuations were

developed for different reasons and both were reasonable. The OPM estimate serves

to meet an annual financial reporting requirement. ln contrast, the OIG estimate is

designed to determine the funded status of the PSRHBF as of year 2016.

e The analysis was requested by the Subcommittee on Federal Workforce, the Postal Service,

and the District of Columbia, Committee on Oversight and Government Reform, U.S. House of

Representatives.

17
701 Report Chapter lV: Operation of the PAEA Amendments

ln the Commission's analysis, it recommended that OPM make changes to its

valuation methodology. Specifically, the Commission found that a graded trend rate is

preferable because such a methodology reflects current expectations of health care

inflation and the percentage of the national Gross Domestic Product that will be

consumed by health care costs in the future. Additionally, the Commission's report

noted that OPM was not taking into account the current rate of decline in Postal Service

employee levels and recommended that OPM reflect these declining workforce

estimates in its valuation methodologies.

The use of the graded inflation assumption and the declining workforce

assumption is expected to result in a lower liability for retiree health benefits in the

future as shown in the table below.l0

Table 1

OPM changed its medical inflation assumption to one in line with the

Commission's recommendation in its calculation of the PSRHBF liability for FY 2009

'o Using OPM's current valuation and the scheduled payments into the fund required by the

PAEA results in a funded status of 73 percent in 2016.

PSRHBF Estimated Payments as of 2009 to Maintain Same Funding Level Under Different

Assumptions

(Dollars in Billions)

USPS OIG OPM PRC Alternative

Workforce Declining Fixed Declining

Health Care lnflation 5% 7% 8%-s%

lnterest Earnings 5.35% 6.25% 5.35%

Discount Rate on Liability 6.2s% 6.25% 6.25%

FY 2016 Estimated Liabilities 90.50 r47.9L rr3.20

FY 2016 Estimated Assets 103.70 LO8.7r 1_03.70

FY 2016 Estimated Unfunded Liability (13.20) 39.20 9.50

2016 Estimated Asset Balance (73% fundine) 66.07 r07.97 82.64

Fixed Annual Payment 51.7 Ss.s s3.4

18
701 Report Chapter lV: Operation of the PAEA Amendments

(2) Commission Study on the CSRS

The PAEA section 802(c) contains a provision allowing the Postal Service to

request that the Commission hire an actuary to perform an independent review of

current allocations of the CSRS costs. The OIG issued a report on January 20,2010

questioning the appropriateness of the current allocations of CSRS costs.11 ln light of

that report, the Postal Service exercised its right of Commission review under the PAEA

section 802(c). The Commission hired The Segal Company (Segal)to perform the

PAEA section 802(c) independent review,

On June 30,2010, the Commission submitted its independent actuarial report

Civil Seruice Retirement System Cost and Benefit Allocation Principles,-on the

allocation of the CSRS costs and benefits-to Congress, OPM, and the Postal Service.

The report finds that an adjustment of $50 - $55 billion in favor of the Postal

Service would be equitable and in conformance with current generally accepted

actuarial principles and practices.

Currently, OPM, as the administrator of the CSRS, allocates to the Postal

Service all residual benefit liabilities in excess of a"frozen" benefit which is calculated

based on the accrued pension percentage and final rate of pay as of June 30, 1971,

when the Postal Reorganization Act of 1970 (PRA or Pub. L. 91-375) established the

Postal Service as an autonomous Federal entity. The costs resulting from the "frozen

benefit" calculation are allocated to the Federal government.

The OlG, in its report, The Postal Seryice's Share of CSRS Pension's

Responsrbility, recommends an allocation of benefit liabilities assuming uniform benefit

accruals throughout a worker's career and what it considers an equitable portion of

post-1971 salary increases granted to postal employees.

1' S"" U.S. Postal Service Office of lnspector General, Risk Analysis Research Center, Ihe

PostalSerurceb Share of CSRS Penslon Responsibility, January 20, 2010.

19
701 Report Chapter lV: Operation of the PAEA Amendments

ln its report, in conformance with Financial Accounting Standard Board

Accounting Standard CodificationTlS (FASB ASC 715) guidance,12 Segal recommends

the continued usage of the CSRS accrual formula for the allocation of costs of benefit

payments. However, in lieu of the currently used 1971 postal salaries to determine the

Federal government's share of the costs of benefit payments, Segal recommends using

the final average "high three" years of Postal Service employees' salaries to determine

the Federal government's share. Segal finds both the OIG and OPM's methodologies

within the range of acceptable options and notes that the current allocation, though fair

and equitable solely within the context of Pub, L. 93-349, overstates the Postal

Service's responsibility for CSRS for employees working prior to f 971 by approximately

$SO - $55 billion according to its proposed methodology.

OPM, in its comments on the Commission report conducted by Segal, stated that

in its role as a trust fund administrator and fiduciary, it determines the Postal Service's

CSRS costs in compliance with the current law and has no authority to apply another

methodology until directed by Congress.l3

The OIG also issued a report on August 16,2010, questioning overfunding of the

Postal Service's portion of the Federal Employees Retirement System annuity fund.la

Although neither Congress nor the Postal Service have requested any Commission

1' FASB ASC 715, the accounting standard for private industry, requires an allocation

methodology using the actual pension plan benefit accrual formula and the impact of future salary

increases on current accruals in a "high" or "final" average salary plan.

13 L"tt", from United States Office of Personnel Management Director John Berry to Honorable

Ruth Y. Goldway, Chairman, Postal Regulatory Commission, September 24,2010, aí1,4.

to See U.S. Postal Service Office of lnspector General, Management Advisory-Federal

Employees Retirement System Overfunding, August 16, 2010.

20
701 Report Chapter lV: Operation of the PAEA Amendments

action based on this report, the President has addressed returning this overfunding to

the Postal Service in his FY 2012 budget.l5

e. Commission Recommendations for Legislative Change

The Commission recommends that Congress adjust the current PSRHBF

payment schedule. The PAEA mandated that the Postal Service contribute a payment

of $8.5 billion, including a transfer of $3 billion from escrow, into the newly established

PSRHBF for FY 2007.16 ln its FY 2007 Annual Compliance Report, the Postal Service

reported a net loss of $5.1 billion largely due to these PSRHBF obligations imposed by

the PAEA. lf not for the PSRHBF obligations, the Postal Service estimates that it would

have earned a net profit of $1 .6 billion.lT

At the time of the passage of the PAEA, the Postal Service enjoyed increasing

revenues and a relatively steady volume of mail, Congress expected the Postal Service

to be able to continue to make the PAEA mandated PSRHBF payments without

compromising its financial health. However, the financial condition of the Postal Service

has dramatically changed since the passage of the PAEA. As early as 2007 , under the

PAEA, the Postal Service reported that meeting its revenue goals was challenging with

the changing financial conditions stemming from the market downturn and problems in

the financial and housing industries.ls These changes give rise to the need for a reevaluation of whether the Postal Service can afford to make these payments as

currently scheduled.

15 Executive Office of the President of the United States, Fiscal Year 2012 Budget of the U.S.

Government, February 14, 2011, al 1282-84.

1u This was partially offset by the elimination of planned FY 2OO7 Civil Service Retirement System

payment of $1.6 billion.

tt See Postalservice Press Release 07-087 (November 15,2007|

tu See United States Postal Service Form 10-Q (February 11,2011) a|20.

21
701 Report Chapter lV: Operation of the PAEA Amendments

The effect of the payments on the Postal Service's cash flow is reflected in the

table below.

Table 2

$ in millions FY

2006

FY

2007

FY

2008

FY

2009

FY

2010

Employer Premium Expense 1,637 4,684r 1,807 1,990 2,247

900 258 2,794 (2,394) (3,005) Net lncome (Loss) Before Pub. L.

1 09-435 Scheduled payments

5,400 5,600 1,400 5,500 Pub. L. 109-435 Scheduled

Payment

Net lncome (Loss) 900 (5,',t42',) (2,806) (3,794) (8,50s)

Cash Balance EOY with Pub. L.

1 09-435 Scheduled Payments 997 899 1,432 4,089 1,161

Cash Balance EOY without Pub. L

I 09-435 Scheduled Payments 997 6,299 7,032 5,489 6,661

Debt Outstanding (from Form 10-K) 2,100 4,200 7,200 10,200 12,000

r Employer premium expense of $1,726 and the transfer of 2006 escrow to the PSRHBF of

$2,958.

As Table 2 shows, the Postal Service has increased its outstanding debt in order

to cover cash payments, including the PSRHBF payments. lf not for the PSRHBF

payments, the Postal Service would have had more than enough cash flow from

operations to cover its expenses without the need to increase debt.

Additionally, it is instructive to compare the funding level of the PSRHBF with

other government and private sector entities. As demonstrated in Table 3, the current

PSRHBF payment schedule would lead to higher levels of funding than that of many

other entities that prefund retiree health benefits.

22
701 Report Chapter lV: Operation of the PAEA Amendments

Table 3

Entity Funding Level as of FY 2010

United States Postal Service 47Yo

State Governments that Prefund 18o/o

Fortune 100 Companies that Prefund 35o/o

CaIPERSt 58%

Medicare <1o/o

t The California Public Employees'Retirement System (CaIPERS) is the largest public

pension fund in the United States outside of the Federal government. lt requires its

participating agencies to use a graded trend rate of no more than l0 years with an ultimate

rate of between 4 and 6 percent. ln its July 30, 2009 report on the Postal Service retiree

health benefìts, the Commission recommended the use of a 10-year graded rate consistent

with CaIPERS, the Fortune 100 companies, and State governments with a commonly used

ultimate trend rate of 5 percent.

Modifying the prefunding level and payment schedule should improve the

sustainability of the Postal Service as a self-funded independent establishment of the

Executive Branch of the Government and help preserve the integrity of the price cap,

while maintaining the longer term goal of protecting both taxpayers and future retirees

through reasonable prefunding of retiree health benefits.

There are a var¡ety of actuarially sound alternative funding levels that could be

set for the PSRHBF. ln Table 4 below, the Commission sets forth various actuarially

appropriate funding methods. Most of these forecasted FY 2016 scenarios result in

significantly higher funding levels than their public and private sector counterparts, and

each would provide relief from the current schedule. Table 4 also reports the estimated

statutory payments and total statutory payments for FY 2011 through FY 2016 that the

Postal Service would have to make at those funding levels.

23
701 Report

Sin tilliorrs

FY 2û16 Esti mated Li abi I iti es

FY 2016 Fsti rnated Assets

FY 2û16 Lhf unded Li abi I ity

Annual Payrrent

I LISPS Statutory Payrrìents FY

20J1.-ñ76

'2016Perænt Funded

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37

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127 127

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Chapter lV: Operation of the PAEA Amendments

'11"

a3

31

3.4

n

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127

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Following the Commission's report,re OPM adopted assumptions that align

closely with the assumptions suggested in the Commission's report with the exception

of a longer timeline in reaching the ultimate trend rate for estimated medical inflation.

For FY 2010, OPM adopted the Statement of Federal Financial Accounting Standards

33 (SFFAS 33) to est¡mate the actuarial assumptions underlying the calculation of the

retiree health benefits liability.20 Previously, OPM had relied on guidance from its Board

of Actuaries to set these actuarial assumptions.

Congress also should consider the PAEA section 802(c) repoft21 on the Postal

Service's CSRS liability as a potential remedy for the PSRHBF issues. That report

found that the Postal Service's CSRS liability was overstated by approximately $50 -

$55 billion. This overstated liability was entirely funded by postal ratepayers, not

1s Postal Regulatory Commission's Review of Retiree Health Benefit Fund Liability as Calculated

by Office of Personnel Management and U. S. Postal Service Office of lnspector General, July 30, 2009.

20 Statement of Federal Financial Accounting Standards 33: Pensions, Other Retirement

Benefìts: Reporting the Gains and Losses from Changes in Assumptions and Selecting Discount Rates

and Valuation Dates.

" The Segal Group, Report to the Postal Regulatory Commission on: Civil Service Retirement

System Cost and Benefit Allocation Principles, June 30, 2010.

24
701 Report Chapter lV: Operation of the PAEA Amendments

Federal taxpayers. lf these excess funds were transferred into the PSRHBF, the fund

would be almost fully funded.

2. Sarbanes-Oxley Act Compliance

a. lntroduction and Summary

The Sarbanes-Oxley Act was enacted in 2002 as a result of several prominent

large corporate financial scandals. Pub. L. 107-204. lt was designed to increase

corporate responsibility and accountability for reporting materially accurate financial

results by requiring management and external auditors' assessment of the effectiveness

of internal controls over financial reporting. The PAEA extended section 404 reporting

requirements to the Postal Service, and, as discussed below, Congress's inclusion of

Sarbanes-Oxley Act reporting requirements in the PAEA and the implementation of

those reporting requirements at the Postal Service has resulted in an improvement in

transparency and substantial cost savings.

b. Pre-PAEA Financial Reporting of the Postal Service

Prior to the passage of the Sarbanes-Oxley Act provisions in the PAEA, the

Postal Service established an lnternal Control Group (lCG) in 2003 to assure

compliance with Postal Service policies and processes related to reporting financial

results. This initiative was undertaken pursuant to the financial systems reforms

proposed by the Committee of Sponsoring Organizations of the Treadway Commission

and later embodied in the Sarbanes-Oxley Act of 2002. The Postal Service's ICG

voluntarily implemented pafts of Sarbanes-Oxley Act on its own initiative.

c. The PAEA's Sarbanes-Oxley Act Requirements

Under the PAEA, beginning with FY 2010, the Postal Service must comply with

section 404, which effectively also mandates compliance with section 302. The PAEA

mandated Sarbanes-Oxley Act reports must be prepared in accordance "with the rules

25
701 Report Chapter lV: Operation of the PAEA Amendments

prescribed by the Securities and Exchange Commission," and must be filed with the

Postal Regulatory Commission. 39 U.S,C. 3654(a)(3). The Postal Service is only

Federal governmental entity required to comply with this legislation.

Section 404 requires that all annual financial reports must include an lnternal

Control Report stating that management is responsible for an "adequate" internal control

structure and an assessment by management of the effectiveness of the control

structure. Any shortcomings in these controls must also be reported. ln addition,

registered external auditors must attest to the accuracy of the company management's

assertion that internal accounting controls are in place, operational, and effective.

15 U.S.C. 7262.

Section 302 requires a company's CEO and CFO to personally certify that the

reports are a fair representation of the entity's financial position and result of operations.

This requires the officers to take ownership for establishing and maintaining effective

disclosure controls and procedures. 15 U.S.C. 7241.

Since FY 2010, Postal Service management has reported annually on the

effectiveness of theír internal control over financial reporting. An independent auditor

renders an opinion on the effectiveness of the Postal Service's internal control over

financial reporting and management's assessment of it.

d. Evaluation of the Sarbanes-Oxley Act Under the PAEA

The PAEA's implementation of section 404 of the Sarbanes-Oxley Act has aided

in the standardization and streamlining of business practices, processes, and systems.

It has enabled timely identification and remediation of weaknesses, increased

accountability and fostered ownership of controls. The Postal Service's FY 2010 Form

10-K received a clean opinion from auditors,22 and the Postal Service indicated that

t' See United States Postalservice Form 10-K (November 15,2010)at 53.

26
701 Report Chapter lV: Operation of the PAEA Amendments

Sarbanes-Oxley Act implementation resulted in substantial indirect cost savings through

the strengthening of controls over business mail processes, including the prevention of

lost revenue.'3 Additionally, the Postal Service was able to implement the SarbanesOxley Act well before the 60-day deadline for filing its annual report. On November 15,

2010, the Postal Service filed as an attachment to its FY 2010 Form 10-K, the required

Sarbanes-Oxley Section 302 certifications and its external auditor assessment that the

internal controls over its financial reporting were effective.

" See Sarbanes-Oxley (SOX) Compliance Audits Next Steps, MTAC Meeting, February'16,

2011

27
701 Report Chapter lV: Operation of the PAEA Amendments

C, Rate and Service Matters

1. Market Dominant Price Cap

a. lntroduction and Summary

The Commission finds that the annual rate limitation for market dominant

products as expressed by the price cap has kept prices stable and predictable since the

passage of the PAEA. Pursuant to 39 U.S.C.3622(d)(2), the Commission will conduct

a more in-depth review of the price cap in 2016, 10 years after the passage of the

PAEA.

This section briefly discusses the price adjustment process prior to the passage

of the PAEA, and then explains how the PAEA has changed the process with the

addition of the price cap. Next, it describes the Commission's experience with the price

cap. Based on that experience, the Commission fïnds that no legislative changes are

needed with respect to the price cap. The Commission recommends that Congress

consider providing an opportunity for the Postal Service to achieve increased pricing

authority for increases in quality of service.

b. Price Adjustments Prior to the PAEA

Prior to the passage of the PAEA, price adjustments reflected changes in

projected costs of service.2a Forecasts of costs, volumes, and revenues were used to

establish proposed prices that would generate sufficient revenues to recover costs.

The former price adjustment process started with a proposed rate adjustment by

the Postal Service. The Postal Service's proposal was then subject to formal,

2a A cost of service adjustment is when prices are set based on the cost of providing a service

Under the PRA, revenues received from prices charged had to approximate the costs of providing the

servtce.

28
701 Report Chapter lV: Operation of the PAEA Amendments

adversarial litigation before the Postal Rate Commission, Based on the record

developed during a 1O-month period, the Commission recommended prices in its

Opinion and Recommended Decision. The Postal Service's Governors had several

options upon their review of the Commission's recommended prices. Typically, the

rates recommended by the Commission were the rates that went into effect.

c. PAEA Market Dominant Price Adjustments

A primary goal of the PAEA is to provide stable and predictable rates while

promoting efficiency by applying the price cap to each market dominant class of mail,25

It gives the Postal Service flexibility regarding the timing and the size of price

adjustments for products within a class. lt simplified and accelerated the price

adjustment process for the Postal Service. lt provides for annual limitations on the

percentage change in rates for classes of mail. 39 U.S.C. 3622(d)(1). ln general, the

average rate increase for mail within a class cannot exceed the increase in the

Consumer Price lndex for All Urban Consumers (CPl-U) unadjusted for seasonal

variation. 39 U.S.C. 3622(d)(1), (2). When a price adjustment is less than the price

cap, the Postal Service may "bank" unused rate adjustment authority for up to five

years. 39 U.S.C. 3622(d)(2)(C). The Postal Service can utilize banked authority for

each class in future price adjustments to achieve a price adjustment greater than the

price cap.26

The Postal Service must also provide schedules of rates that change at regular

intervals and by predictable amounts. 39 U.S.C. 3622(d)(1XB). On January 13,2011,

the Postal Service filed an updated schedule of price adjustments, indicating that it

tu There are fìve market dominant classes of mail. Typically, each class has a defìning

characteristic. For example, First-Class Mail is sealed against inspection.

'u 39 U,S.C. 3622(d)(2)(C) allows the Postal Service to use banked authority from part of or more

than 1 year, requires the earliest banked authority to be used first, and limits the use of banked authority

to 2 percentage points per year.

29
701 Report Chapter lV: Operation of the PAEA Amendments

would file price adjustments in mid-January of each year, with a mid-April

implementation date. 27

ln addition, the Postal Service may request price increases that exceed the price

cap when an extraordinary or exceptional circumstance necessitates a price adjustment

greater than the price cap. Such a request is reviewed in 90 days by the Commission.

The Postal Service filed for an exigent price adjustment on July 6,2010 (Docket No.

R2010-4), which was denied by the Commission on September 30,2010. The Postal

Service appealed the Commission's decision in that case, and the appeal was ruled on

by the United States Court of Appeals for the District of Columbia on May 24,2011.

The court remanded the exigent price adjustment decision, in part, to the Commission

to address how closely an exigent price adjustment must financially offset the

extraordinary or exceptional circumstance. The Commission is currently reviewing the

court's decision and determining how to proceed on remand. See Docket No.

R2010-4R.

d. Effectiveness of the Price Cap

(1) Price Adjustments Using the Price Cap

Since the passage of the PAEA, there have been three generally applicable price

adjustments. The price cap limitation for these price adjustments are shown in Table 5.

ln each price adjustment the Postal Service has increased prices for each class almost

equal to the price cap limitation.

27 Previously, the Postal Service filed price adjustments in mid-February with a mid-May

implementation.

30
701 Report Chapter lV: Operation of the PAEA Amendments

Table 5

PAEA Price Cap Adjustments

Docket No. Date Filed Price Gap

R2008-l February 11,2008 2.9 percent

R2009-2 February 10,2009 3.8 percent

R201',-2 January 13,2011 1.741 percentr

t th" number of decimal places in the price cap was changed in Docket No.

RM2009-8 to include three decimal places rather than one decimal place.

39 U.S.C. 3622(dXA) explains that the annual limitation on the percentage

change in rates is equal to the change in the CPI-U unadjusted for seasonal variation

over the most recent 12-month period preceding the date the Postal Service files notice

of its intention to increase rates. The Commission's rules implement this requirement

by calculating the price cap as the difference between two 12-month averages of the

CPI-U.28 Using 12-month averages to calculate the price cap removes some of the

volatility present when a point-to-point comparison is done with monthly CPI-U values.

As shown in Chart 1, the Commission's use of 12-month averages creates peaks that

are not as high, and troughs that are not as low, which promotes the PAEA goals of

predictability and stability in prices.

" The calculation of the price cap is explained in greater detail in 39 CFR 3010.21.

31
701 Report Chapter lV: Operation of the PAEA Amendments

Chart 1

Percentage Change in GPI-U

Gommission 12-Month Average Method and

Month ly Point-to-Point Method

6.0%

5.O%

4.O%

3.0%

2.0%

1.0%

0.0%

-1.O%

-2.0o/o

-3.Oo/o

ln Lô tn l..) l.o |.o (o (o l'\ l'\ t\ l'\ oO 0O 0O oO Oì Oì Oì Oì O O O O Fl Fi O O O O O O O O O O O O O O O O O O C) O Fl Fl rl cl ri rl trtrtrtrtrtrrtttttrttr

-psi¡t 

to Point Method 

-Çe¡¡i5sion 

Method (Moving Average)

\

l,

Y I

\

\

\

One point of tension regarding the price cap is deflation. As shown in Chart 1,

the price cap was below zero from September 2009 through January 2010. Therefore,

if the Postal Service remained on its price adjustment schedule, it would have filed a

price adjustment using the December 2009 price cap which would not have allowed it to

raise rates. lnstead, the Postal Service waited 23 months after the prior price

adjustment to request an adjustment in rates.

While the Postal Service typically files price adjustments annually, the

Commission's rules are designed to accommodate price adjustments that are either

less than or more than 12 months apart, For price adjustments that occur more than

12 months apart, the Commission calculates the price cap for the previous 12-month

period. Any prior unused rate adjustment authority is banked. Table 6 shows the

32
701 Report Chapter lV: Operation of the PAEA Amendments

12-month averages (i.e,, indices) that were used to calculate the price cap in Docket

Nos. R2008-1 and R2009-2, the interim banked authority in Docket No, R2011-2, and

the price cap in Docket No. R2011-2. As shown in Table 6, the Commission's

calculation ensures that every month of CPI-U is either included in a price cap

calculation or is classified as interim banked authority.

Table 6

Docket Nos. R2008-1, R2009-2 andR2011-2

Price Caps and Interim Banked Authority

The interim banked authority in Docket No. R2011-2 was negative. The Postal

Service's pricing flexibility allows it to either use this negative interim banked authority in

a future price adjustment, by increasing rates less than the price cap, or let it expire in

five years pursuant to 39 U.S.C .3622(d)(2XCXii) and 39 CFR 3010.26(d).2s

At the class level, prices are not allowed to increase above the price cap taking

into account any available banked authority. However, within classes, the Postal

Service has the flexibility to give products above-average and below-average price

" Some postal stakeholders believe that the Postal Service should be required to decrease the

price cap equal to the interim banked authority, r.e., add the Docket No. R2011-2 interim banked authority

and price cap to arrive at a smaller overall price cap. See, e.gr., Docket No. R2011-1, Comments of the

Affordable Mail Alliance, November 24,2010. The Commission found that such an approach would be

contrary to the statute and inappropriately reduce the pricing flexibility of the Postal Service. The

Commission's rules appropriately address CPI deflation as well as properly maintain the pricing flexibility

of the PostalService as mandated bythe PAEA.

Docket No. Numerator Denominator Result

December 2006

lndex R2008-1 Price Cap 2.9o/o December 2007

lndex

R2009-2 Price Cap 3.8% December 2008

lndex

December 2007

lndex

R201 1 -2 I nterim Banked Authority -0.577% November 2009

lndex

December 2008

lndex

November 2010

lndex

November 2009

lndex R2011-2 Price Cap 1.741o/o

33
701 Report Chapter lV: Operation of the PAEA Amendments

adjustments. Typically, products with low cost coverages3o receive above-average

increases in an attempt to improve the profitability of the product.

For example, the Package Services class failed to generate sufficient revenues

to recover costs in FY 2009 and FY 2010. Within the Package Services class, Bound

Printed Matter Flats is the only product that has consistently had a cost coverage above

100 percent since the passage of the PAEA, and it has always received below-average

price increases. Conversely, the MedialLibrary Mail product has had a below 100

percent cost coverage since the passage of the PAEA; therefore, the product has

received above-average price increases in each price adjustment to improve its cost

coverage. The Commission finds that this is an effective use of the Postal Service's

pricing flexibility.

ln Chart 2, the percentage changes in prices for the products within the Package

Services class are shown.

30 Cost coverage is the ratio of revenues and costs for a product. lf a cost coverage is over 100

percent, revenues exceed costs.

34
701 Report Chapter lV: Operation of the PAEA Amendments

Chart2

Percentage Change in Prices by Product for the Package Services Glass

a%

6%

4%

2%

o%

-2%

4%

3.8'6

2.96

j.

- - lndl(âresthe PrlceCâp

R2008-1 R2009-2

I Bound Printed Matter Èrtels

¡ lnboundSuÉece Parcel Post

R;2011-2

I Single-Piece Parcel Post I Bound Pr¡nted Matter Flats

I Medfe/llbHry Mâll

While the Postal Service has used its pricing flexibility to address products that

do not cover costs in some instances, it has not done so ¡n other cases. The

Commission finds that the Postal Service could utilize this flexibility more broadly. For

instance, in its most recent ACD, the Commission found that the Postal Service had not

made sufficient use of its pricing flexibility to address the subsidy of unprofitable

Standard Mail flats by users of other Standard Mail products despite repeated

encouragement. FY 2010 ACD, March 29,2011, at 102-03,106. The Commission

highlighted the fact that since 2008, the Postal Service continually failed to use its

within-class pricing flexibility to correct this inequity by giving Standard Mail Flats

mailpieces below-average price increases while giving other profitable products higher

than average price increases. ld. at 106.

35
701 Report Chapter lV: Operation of the PAEA Amendments

(2) Exigent Price Adjustments

As noted, the PAEA provides an exception to the price cap known as an exigent

price adjustment, which allows for price adjustments in excess of the price cap. ln July

2010, the Postal Service filed the first ever request for an exigent price adjustment

(Docket No. R2010-4). The Postal Service asked the Commission to find that raising

prices above the price cap for all its market dominant classes of mail by an average of

5.6 percent was appropriate due to extraordinary or exceptional volume declines.

The Commission unanimously denied the Postal Service's request for an exigent

price increase. The Commission found that the recent recession and the decline in mail

volume experienced during the recession, qualified as an extraordinary or exceptional

circumstance. However, the Commission also found that a determination that

"extraordinary or exceptional circumstances" have occurred is not by itself sufficient to

authorize a price increase in excess of the price cap. The Commission cited the need

for two additional requirements. First, the proposed adjustment must be "due to" the

extraordinary or exceptional circumstances. Second, "such adjustment" (t.e., the

adjustment due to extraordinary or exceptional circumstances) must meet a "reasonable

and equitable and necessary" test.31 The Postal Service made no attempt to relate the

requested exigent price adjustment to the impact of the recent recession. Rather, the

request was explained as an attempt to address financial conditions and long-term

structural problems not caused by the recent recession.

The Commission concluded that the PAEA limits exigent price adjustments to

those amounts "due to" specific extraordinary or exceptional circumstances. lt found

that the Postal Service's failure to quantify the impact of the recession on postal

finances or to address how the requested price adjustment related to the recession's

impact on postal volumes and revenues necessitated the Commission to deny the

31 39 u.s.c. 3622(dX1XE).

36
701 Report Chapter lV: Operation of the PAEA Amendments

Postal Service's request. The Postal Service appealed the Commission's decision, and

the appeal was ruled on by United States Court of Appeals for the District of Columbia

Circuit on May 24,2011. The court affirmed that the Postal Service had not shown its

proposed price increases were due to the exigent circumstance, but remanded the

matter to the Commission to clarify how closely an exigent price adjustment must

financially offset the extraordinary or exceptional circumstance. The Commission has

since initiated Docket No. R2010-4R to respond to the court's ruling.

(3) Schedule of Price Adjustments

The PAEA allows the Postal Service the flexibility to request price adjustments

when it deems them necessary and appropriate. These adjustments are required to be

at regular intervals and by predictable amounts. See 39 U.S.C. 3622(d)(1)(B). The

Postal Service must file price adjustments with the Commission at least 45 days before

the prices are effective.32 As discussed above, since the passage of the PAEA, the

Postal Service has filed three price adjustments that required the application of the price

cap. Table 6 details these requests. The filing of each of these price adjustments has

occurred after the Postal Service filed its Annual Compliance Report (ACR) with the

Commission. The filing of the Postal Service's ACR is fixed pursuant to 39 U.S.C.

3652(a) and must be filed 90 days after the end of the Postal Service's fiscal year. The

Commission's ACD is then due 90 days later. This means that when the Postal Service

files a price adjustment during January or February, the Commission must review the

Postal Service's price adjustments prior to issuing its ACD, This is the schedule that

has existed in each review of generally applicable price adjustments requested by the

Postal Service since the passage of the PAEA.

t'The Postal Service typically provides mailers with at least 90 days notice before

implementation.

37
701 Report Chapter lV: Operation of the PAEA Amendments

The Commission appreciates that the Postal Service has chosen to file price

adjustments in January after it files its ACR. Filing price adjustments in the second

quarter of the fiscal year ensures that the most up{o-date cost data are available when

prices, product cost coverages, and workshare discounts are proposed by the Postal

Service and reviewed by the Commission. The Postal Service filing of price

adjustments in the months immediately preceding the filing of its ACR in any year would

be problematic.3s

Filings in October, November and December mean that available cost data are

more than one year old. Soon after the new prices are effective, the Postal Service

would file its ACR with updated cost data, which could reveal that prices were not set in

accordance with Commission rules. For example, the updated costs could show that

workshare discounts were set too low or too high or that a product no longer covers

costs, which may have warranted an above-average price increase in the recent price

adjustment. Every month after January the Postal Service's cost data become less

reliable.

However, the Postal Service's current schedule imposes some difficulties on

postal stakeholders as well as the Commission. When the Postal Service files a price

adjustment in mid-January, postal stakeholders and the Commission have only 2 weeks

to review the Postal Service's most recent ACR data. lssues have arisen in the past

where the Postal Service did not use proper analytical methodologies in the original

ACR filings, which affects the final numbers filed in the Postal Service's ACR.34 Since

33 The Postal Service has advised mailers that the next price adjustment for market dominant

products will take effect January 22,2012. See Association of Postal Commerce Postal Bulletin 25-11,

June 17, 2011 at 16. However, the Postal Service's officialfiling with the Commission pursuant to 39

CFR 3010.7 states that the next price adjustment is expected to take place mid-April of each subsequent

year. See Docket No. R2011-2, United States Postal Service Filing of Updated Schedule of Regular and

Predictable Price Changes, January 13,2011.

'o See, e.g.,2010 ACD at 110.

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the Postal Service currently uses the ACR data to design its prices, its price

adjustments may not reflect the same accurate, timely data underlying the final numbers

approved in the Commission's ACD.35 This could also cause harm to the time-sensitive

process which allows mailers and members of the public to comment on the Postal

Service's ACR to inform the Commission's review and findings in its annual ACD.

e. Commission Recommendations

(1) Generally Applicable Price Adjustments

The Commission finds that, in furtherance of the PAEA's goals, the use of the

price cap promotes pricing flexibility for the Postal Service; predictability and stability in

prices for mail users; and encourages cost reductions for the Postal Service. The

Commission recommends no legislative changes in this area. As discussed previously,

the Commission will conduct a more extensive review of the price cap in 2016, 10 years

after the passage of the PAEA pursuant to 39 U.S.C.3622(d)(2).

(2) Exigent Price Adjustments

The Commission finds that the current exigent price adjustment process is

effective and efficient. The Postal Service must request a proposed adjustment, with

sufficient justification, and the Commission is required to make the final determination

on the proposal. This balanced approach ensures exigent price adjustments occur only

in appropriate circumstances.

The Commission does not recommend any legislative changes regarding exigent

price adjustments at this time.

tu While in many circumstances, the final numbers approved by the Commission in its ACD reflect

those filed by the Postal Service in its ACR, the Commission may have to make adjustments in its ACD to

those calculations made by the Postal Service in its ACR. For example, when the Postal Service did not

use proper analytical methodologies in the original ACR filings, the Commission had to make such

adjustments in its ACD. ld.

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(3) Schedule of Price Adjustments

The Commission finds the current schedule of price adjustments (mid-January

request with mid-April implementation) and their correlation with the filing of the ACR is

proper. The Commission does not recommend any changes,

(4) Service Adjustments

While the Commission has not vetted this concept, Congress should consider

allowing the Postal Service to obtain increased pricing flexibility for quality of service

enhancements. Congress could legislatively provide additional rate adjustment

authority to the Postal Service if it increases the quality of its service performance for a

particular class of mail. Such service quality pricing authority would provide an

incentive for the Postal Service to increase the service performance of its products.

Currently, there are no direct financial incentives for the Postal Service to increase the

service performance of its products and services.

Under a service rate adjustment, mailers would receive a corresponding

improvement in service to go along with any increase in price. To ensure that increases

in service merit increases in rate adjustment authority, the Commission should be

required to review and make determinations on the amount of service increased price

adjustment authority that the Postal Service obtains for any particular service change.

This recommendation is further discussed in chapter |V.C.5., Service Performance

Measurement and Customer Satisfaction, Such a mechanism should be used only in a

positive manner, providing encouragement for the Postal Service to consider increasing

service quality,36

tu For example, should Congress make a determination that the Postal Service be allowed to

reduce the number of delivery days per week, the Commission is not suggesting that Congress require a

corresponding decrease in prices.

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2. Market Dominant Classes of Mail

a. lntroduction and Summary

The PAEA requires the Commission to maintain a product list that categorizes

postal products as market dominant or competitive. Pursuant to 39 U.S.C. 3642(a),

products can be added, removed, or transferred from the market dominant or

competitive product lists. Market dominant products are grouped into classes, which 39

U.S.C. 3622(d)(2)(A) defines as the classes listed in the Domestic Mail Classification

Schedule as of the date of enactment of the PAEA. The market dominant classes of

mail are:

. First-Class Mail;

o Periodicals;

o Standard Mail;

. Package Services; and

. Special Services.

The price cap is applied at the class level, as the classes were defined on the

date of enactment of the PAEA. 39 U.S.C. 3622(d)(2). Although new products may be

added, the PAEA is silent as to whether new classes of mail can be added. This

significantly limits the Postal Service's flexibility. The Commission recommends that the

PAEA be enhanced by explicitly allowing the Postal Service to add new classes of mail.

b. Classes of Mail Pre- and Post-PAEA

Prior to the passage of the PAEA, the same five classes listed above were used

by the Postat Service to group its levels of service offerings.3T Each class was divided

37 ln addition to the five market dominant classes listed above, the former Domestic Mail

Classifìcation Schedule had a class of mail called "Expedited Mail" which consisted of Postal Service

offerings that are now classified as competitive.

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into subclasses of mail. Typically, each class of mail had at least one defining

characteristic. For example, First-Class Mail is sealed aga¡nst inspection.

The PAEA allowed the Postal Service to re-categorize mail into products. These

products were then placed either on the market dominant product list or the competitive

product list. Market dominant products remained within their former classes.

c. Changes to Products and Classes Under the PAEA

Since the passage of the PAEA, the Postal Service has used its new

classification flexibility to transfer products from the market dominant product list to the

competitive product list. See, e.9., Docket No. MC2008-4: Transferring Premium

Fonruarding Service to the Competitive Product List; see also, e.9., Docket No.

MC2010-36: Transferring Commercial Standard Mail Parcels to the Competitive

Product List. When a product or rate category is transferred from the market dominant

product list to the competitive product list, price adjustments are no longer limited by the

price cap.38 Such a transfer increases the Postal Service's pricing flexibility for that

product.

The criteria for defining a product as market dominant are whether:

the Postal Service exercises sufficient market power that it can

effectively set the price of such product substantially above costs,

raise prices significantly, decrease quality, or decrease output,

without risk of losing a significant level of business to other firms

offering similar products.

3e u.s.c. 3642(bx1).

38 Competitive products must meet the requirements of 39 U.S.C. 3633, which prohibit the

subsidization of competitive products; require that each competitive product covers its costs; and requires

that competitive products collectively cover what the Commission determines to be an appropriate share

of institutional costs (currently 5.5 percent).

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701 Report Chapter lV: Operation of the PAEA Amendments

The Commission is required to consider the availability and nature of enterprises

in the private sector engaged in the delivery of the product, the views of those that use

the product, and the likely impact on small business concerns. 39 U.S.C. 3642(bX3).

The Commission rules implementing section 3642 require the Postal Service to provide

data and supporting justification when requesting the addition, removal, or transfer of a

product. 39 CFR 3020.30 ef seg. Postal products not defined as market dominant are

classified as competitive.

Unlike the creation, removal, or transfer of products, the PAEA is silent on

whether new market dominant classes can be created as the needs of the Postal

Service and mailers change over time. Rather, it states that the price cap applies "to a

class of mail, as defined in the Domestic Mail Classification Schedule as in effect on the

date of enactment of the Postal Accountability and Enhancement Act," 39 U.S.C.

3622(d)(2). This provision could be read as barring the Postal Service from creating

new classes of products. lndeed, thus far, the Postal Service has not attempted to

create a new class of mail. This apparent inability of the Postal Service to create new

classes significantly limits the Postal Service's flexibility to adapt to changed

circumstances in our postal system.

ln the future, the Postal Service and mailers may determine that it is in their best

interests to create a new class of mail that has some characteristics of First-Class Mail

and some characteristics of Standard Mail. For example, such a class could be set up

to offer the speed of First-Class Mail delivery without free mail fonruarding or other FirstClass Mail attributes. Presumably, the rates for such a service would fall somewhere

between the rates of First-Class Mail and Standard Mail. Mailers who currently send

Standard Mail mailpieces may appreciate the increased benefits of the new class and

pay higher rates for such service. However, the current rigid class structure for market

dominant products discourages these types of innovative ideas and hinders the Postal

Seryice's flexibility.

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d. Commission Recommendations

The Commission recommends that the PAEA be enhanced to explicitly allow the

Postal Service to add new classes of mail. To prevent unintended consequences and

harm to mail users, such increased Postal Service flexibility should be balanced with an

appropriate level of Commission oversight. lf Congress decides to provide the Postal

Service with an explicit grant of flexibility to add new classes of mail, the Commission

should be required to approve such proposals and evaluate how the change would

affect other products as well as the objectives and factors of 39 U.S,C. 3622. The

Commission's review will ensure, among other things, that a proposed new class is not

designed to hamper predictability and stability in prices or to benefit or harm any

specific mailer or group of mailers. This legislative enhancement will ensure that the

Postal Service is equipped to adapt to the rapidly changing needs of mail users and the

postal system.

3. Nonpostal Services

a. lntroduction and Summary

The Commission finds that the review and oversight mechanisms created by the

PAEA over the Postal Seryice's grandfathered nonpostal services have resulted in a

positive increase in the accountability and transparency of these service offerings.

Given this track record, if Congress allows the Postal Service to offer new, nonpostal

services, it should subject such services to appropriate regulatory review and oversight,

Below, the Commission outlines the legal framework under which the Postal

Service offered nonpostal services prior to the enactment of the PAEA. Next, the

Commission discusses the significant changes in the legal landscape that were made

by the PAEA with respect to nonpostal service offerings and the Commission's new

statutory role in that process with respect to grandfathered nonpostal services. The

Commission then focuses on its experiences with grandfathered nonpostal services.

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701 Report Chapter lV: Operation of the PAEA Amendments

Finally, based on the Commission's experience with grandfathered nonpostal services,

it addresses its recommendations for legislative change with respect to new, nonpostal

services.

b. Nonpostal Service Offerings Pre-PAEA

Prior to the passage of the PAEA, the Postal Service had virtually limitless

discretion to offer nonpostal services. ln former 39 U.S.C. 404(a)(6), Congress granted

the Postal Service the specific power to "provide, establish, change, or abolish special

nonpostal or similar services." The Postal Service set the rates and fees for these

"nonpostal or similar services" exclusively. The Postal Rate Commission was not

involved in the rate and fee setting process and nonpostal service offerings were not

subject to regulatory oversight. As such, there was practically no transparency in the

determination of those rates or whether such rates were profitable.

ln rate cases under the PRA, the Postal Service provided some aggregated

revenue data to the Postal Rate Commission in response to questions asked by the

Commission in the context of those cases. However, cost accounting information for

those services was not provided since the Postal Rate Commission was not setting the

rates or prices for the items. For purposes of ratemaking for postal seryices, nonpostal

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701 Report Chapter lV: Operation of the PAEA Amendments

revenues were simply considered as part of miscellaneous, "other revenue," when

calculating the revenue requirement.3s

Under this prior statutory framework, the Postal Service had a history of pursuing

a variety of nonpostal business ventures. ln total, these ventures, particularly those

related to electronic commerce, were found to be unprofitable in the late 1990s and

early 2000s by the General Accounting Officeao and the 2003 President's Commission

on the Future of the Postal Service.al GAO reported that electronic commerce services

lost $20.3 million from product inception through fiscal year 1gg7.42 Additionally, GAO

reported that none of the e-commerce initiatives for which financial information was

tn Before the passage of the PAEA, the PRA established the basic principles on which postal

rates were set. The primary requirement was that the Postal Service attained financial "breakeven." That

is, postal rates and fees needed to provide enough revenues so that total postal revenues equaled as

nearly as practicable the total costs. For a pre-PAEA rate case, the breakeven requirement was applied

for a single prospective year. The revenue requirement was the total required revenue for that single

prospective year. The revenue requirement included: (1) projected operating costs in the test year, (2)

an amount to offset prior operating losses; and (3) a contingency amount. "Other revenue" was generally

considered to be a direct offset to the revenue requirement.

a0 The General Accounting Office was renamed the Government Accountability Office in 2004,

referenced in this document as GAO. See Pub. L. 108-271(2004).

ot See U.S. Posfa/ Seryice: Development and lnventory of New Products, GAO/GGD-99-15

(Washington, D.C. November24,1998) requested by Congressman John M. McHugh, Chairman,

Subcommittee on the Postal Service, Committee on Government Reform and Oversight (GAO-02-79);

U.S. Posfa/ Seruice: Update on E-Commerce Activities and Privacy Protections, GAO-02-79

(Washington, D.C.: Dec.21,2001) requested by Senator Thad Cochran, Ranking Member Subcommittee

on lnternational Security Proliferation, and Federal Services, Committee on GovernmentAffairs; U.S.

Postal Seruice: PostalActivities and Laws Related to Electronic Commerce, GAO/GGD-00-188

(Washington, D.C.: Sept. 7,2000)requested by SenatorThad Cochran, Chairman, Subcommittee on

lnternational Security Proliferation, and Federal Services, Committee on Government Affairs (GAO/GGD00-188); see a/so Embracing the Future: Making the Tough Choices to Preserue Universal Mail Seruice,

Report of the President's Commission on the United States Postal Service, (Jul. 31, 2003), al27-28

(Embracing the Future Report).

a2 See cAO/cGD-99-15.

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701 Report Chapter lV: Operation of the PAEA Amendments

provided for the 3rd quarter of fiscal year 2001were profitable.a3 Moreover, GAO also

found that the Postal Service's entry into these markets resulted in distortion of private

markets and diversion of Postal Service resources from its core responsibility of

delivering hard copy mail.aa

The PAEA Statutory and Regulatory Requirements for

Nonpostal Services

The PAEA repealed the Postal Service's authority to offer "nonpostal services"

and prohibited the offering of any new nonpostal services, See PAEA section 102. lt

also mandated that the Postal Service could only continue to offer grandfathered

nonpostal services that met certain statutory criteria.a5

Specifically, the PAEA tasked the Commission with reviewing each nonpostal

service offered by the Postal Service to determine whether that nonpostal service

should be allowed to continue. 39 U.S.C.404(e)(3). ln making such a determination,

the statute required the Commission to take into account "(A) the public need for the

service; and (B) the ability of the private sector to meet the public need for the service."

/d. Services that continue were required to be designated and regulated as either a

market dominant product, a competitive product, or an experimental product. 39 U.S.C.

aoa(eX5).

o' U.S. Postat Seruice: tJpdate on E-Commerce Activities and Privacy Protections, GAO-02-79

(Washington, D.C. Dec. 21,2001, at 17 requested by Senator Thad Cochran, Ranking Member

Subcommittee on lnternational Security Proliferation, and Federal Services, Committee on Government

Affairs.

oo See GAO/GGD-99-15, GAO-O2-79 and GAO/GGD-OO-188.

ou See PAEA section 102;39 U.S.C. 404(e).

c

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d. GrandfatheredNonpostalServices

ln implementing its statutory responsibility under 404(e)(3), the Postal Regulatory

Commission initiated Docket No. MC2008-1 on December 20,2007 to receive evidence

on the Postal Service's nonpostal services being offered as of the date of enactment of

the PAEA in order to determine whether those services should continue, Upon receipt

of that evidence, the Commission allowed several rounds of briefings by interested

participants. The Commission found that the following nonpostal services should be

allowed to continue:

Market Dominant Nonpostal Services

o MoverSource

o Philatelic Sales

a

. Competitive Nonpostal Servicesao

o Affiliates for Website

o Affiliates - Other (Linking Only)

o Electronic Postmark Program

o Officially Licensed Retail Products

o Meter Manufacturers Marketing Program

o Non-Sale Lease Agreements (Non-Government)

o Licensing Programs other than Officially Licensed Retail Products

o Passport Photo Service

o Photocopying Service

o Training Facilities

See generatty Order No. 154.47 ln this case, the Commission also signaled its intent to

regulate these nonpostal activities in accordance with the requirements of section

ou ln Order No. 154, the Commission left open the issue of whether to allow the following

nonpostal activities to continue (1) the licensing of mailing and shipping supplies; (2) the warranty repair

program; and (3) the sale of CDs and DVDs as part of its authorized nonpostal service, Offlcially Licensed

Retail Products Program. See Docket No. MC2008-1, Review of Nonpostal Services Under the Postal

Accountability and Enhancement Act, December 19, 2008 (Order No. 154). Those issues were decided

in Phase ll of Docket No. MC2008-1.

ot This list has been updated from that in Order No. 154 to reflect the Postal Service's proposal in

Docket No. MC2010-24.

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701 Report Chapter lV: Operation of the PAEA Amendments

404(eX5) in a "light-handed" manner. /d. at 68, 88. A Federal appeals court affirmed

this Commission decision, See USPS v. PRC,599 F.3d 705 (D.C. Cir.2010).

The Commission initiated Phase ll of Docket No. MC2008-1 to resolve issues

with respect to three nonpostal services that it could not fully evaluate in Phase l.aB For

differing reasons, the Commission concluded that (1) the licensing of mailing and

shipping supplies should not be part of the competitive nonpostal service of licensing;

(2) the warranty repair program should not continue; and (3) the sale of CDs and DVDs

should be discontinued. On appeal, the United States Court of Appeals for the District

of Columbia Circuit remanded to the Commission for further consideration the issue of

licensing the Postal Service's logo for use on mailing and shipping supplies in LePage's

2000, lnc. and LePage's Products, lnc. v. PRC, 10-1031 , slip op. at 1 (D.C. Cir. June 7,

2011). The Commission is currently reviewing the court's decision.

e. Commission Experience with the Nonpostal Services

ln the Commission's most recent Annual Compliance Determination of the Postal

Service, the Commission found that the grandfathered nonpostal services generated

$430.6 million in revenue and incurred $256.1 million in expenses resulting in a net

income of $174.5 million.ae The Commission also found that the Postal Service did not

properly separate fìnancial data for postal services from nonpostal services for certain

ot see Docket No. MC2008-1 (Phase ll), Order No. 168, January 9,2009.

ae Ongoing, systematic reporting and assessment of the financial and operational performance of

the United States Postal Service are mandated by two provisions of the PAEA. The first provision,

39 U.S.C. 3652, requires the Postal Service to file certain annual reports with the Commission, including

an ACR. See 39 U.S.C. 3652(a) and (g). The second provision, 39 U.S.C. 3653, provides for the

Commission's review of these annual reports, and issuance of an ACD regarding the compliance or noncompliance of various rates and service standards. Together, these provisions establish the ACD and the

ACR as integrated mechanisms for achieving the PAEA's objective of ongoing accountability,

transparency, and oversight. The Commission's most recent ACD analyzed fiscal year 2010. See

Annual Compliance Determination of the United States Postal Service for Fiscal Year 2010, Postal

Regulatory Commission, March 29,2011, at 151-52.

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701 Report Chapter lV: Operation of the PAEA Amendments

products, and it directed the Postal Service to alter the way it reports this data in the

future to come into accord with applicable legal requirements.

f. Commission Recommendations for Legislative Change

The Commission recognizes that there are several legislative proposals that

would allow the Postal Service to offer new, nonpostal services in addition to those

grandfathered nonpostal services. lf Congress decides to allow the Postal Service to

offer such services, it should include adequate safeguards to reduce the potential for

unprofitable nonpostal business ventures. ln addition, such safeguards should ensure

that the Postal Service's entry into nonpostal markets will not distort private markets or

divert Postal Service resources from its core responsibilities.

Toward that end, the Commission recommends that if the Postal Service is

allowed to offer certain new, nonpostal services, these services be subject to the same

regulatory review that the Postal Regulatory Commission applied to determining

whether to grandfather a nonpostal service under section 404(eX3). Such an approach

would apply the section 404(eX3) test to new nonpostal services and require the

Commission, in determining whether to allow the Postal Service to offer a new

nonpostal service, to take into account, "(A) the public need for the service; and (B) the

ability of the private sector to meet the public need for the service." Further, any

nonpostal service should primarily utilize existing Postal Service assets to minimize risk.

lf the Commission finds that the new nonpostal service meets these statutory tests, the

Postal Service should be allowed to offer the service. lf it does not meet these tests,

the Postal Service could not offer the new, nonpostal service.

The same type of regulatory oversight should be applied to any new, nonpostal

services as are currently statutorily required for grandfathered nonpostal services.

Specifically, in accordance with section a04(e)(5), the "Postal Regulatory Commission

shall designate whether the service shall be regulated under this title [Title 39] as a

market dominant product, a competitive product, or an experimental product," The

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701 Report Chapter lV: Operation of the PAEA Amendments

Commission envis¡ons regulatory oversight for new nonpostal services to be a natural

extension of the regulation of grandfathered nonpostal services already legislated by

Congress.

lf Congress decides to allow the Postal Service to offer new nonpostal services,

adding these regulatory review and oversight mechanisms to title 39 for new nonpostal

services will help ensure that the Postal Service offers profitable, new nonpostal

services and minimizes the likelihood of a repeat of the problems of nonpostal service

offerings in the late 1990s and early 2000s when the Commission had no regulatory

review or oversight of nonpostal services was nonexistent.

4. NSAs and Special Classifications

a. lntroduction and Summary

The PAEA provided specific legal authority for the Postal Service to create

special classifications for mailers, including NSAs. This has resulted in improved pricing

flexibility for the Postal Service and an easily accessible, streamlined regulatory

process. Since the passage of the PAEA through November 2010, the Commission has

reviewed 242 market dominant and competitive NSAs with an average review time of 19

days.50 The Commission continues to see the potential benefits to the Postal Service

and the mailing community of both competitive and market dominant NSAs, and other

special classifications.

Below, the Commission traces the pre-PAEA requirements for the NSAs and

special classifications process. Then, it discusses how the PAEA changed the

landscape with respect to the review process for NSAs and special classifications.

5o ln many instances, especially early on, the Commission effectively stayed NSA proceedings

pending the Postal Service's filing of supplemental information to allow the Commission to complete its

regulatory review. Had the Commission dismissed those proceedings and required the Postal Service to

refìle with complete information, the Commission's average review time would be even lower.

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701 Report Chapter lV: Operation of the PAEA Amendments

Finally, the Commission focuses on its experience with the NSAs and special

classification processes. No legislative changes with respect to NSAs and special

classifications are needed.

b. NSAs before the PAEA

The PRA provided the Commission with authority to issue recommended

decisions to the Postal Service with respect to price adjustments after a thorough

examination of an evidentiary record. While the PRA did not include a specific

mechanism for the Postal Service to request NSAs applicable to a single mailer, the

Commission found that the factors of the PRA encouraged such agreements. As a

result, the Commission adopted regulations governing procedures for reviewing NSAs

The Commission provided its first recommended decision on an NSA pursuant to

"the factors set forth in Title 39 section 3622 (b) on May 15, 2003. PRC Op. MC2002-2

a|173. Under the PRA, the Commission reviewed a total of nine agreements.5l There

was a consensus among stakeholders that the standard regulatory process used to

evaluate NSAs under the PRA was unnecessarily complex and time consuming.

Representatives of both the Postal Service and mailers who agreed to a contract were

required by statute to engage in a formal proceeding pursuant to the Administrative

Procedure Act to justify the agreement. Given these requirements in addition to the

initial negotiation effort, the expense and time consuming nature of the NSA process

was cited as having a "chilling" effect on such agreements.s2

ut One agreement was withdrawn prior to a final Commission decision. See Docket No.

MC2006-3, United States Postal Service Notice of Withdrawal of Request for A Recommended Decision

on Negotiated Service Agreement with Washington Mutual Bank, December 8, 2006.

u' PRC Docket No. RM2007-1, Discover Financial Services Comments, September 24,2007,

at 2-3.

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701 Report Chapter lV: Operation of the PAEA Amendments

c. PAEA Changes to NSAs

ln contrast to the PRA, the PAEA specifically required the Postal Regulatory

Commission to establish rules for reviewing special classifications and rates not of

general applicability for both market dominant and competitive products. For market

dominant products, the statute required the Commission's rules to take into account, as

a factor, the desirability of special classifications, including agreements with postal

users. The statute also required the Commission to draft rules that would allow it to

complete its review of market dominant price adjustments within 45 days. The PAEA

envisioned that as part of those rules, market dominant special classifications and

agreements with postal users would be allowed so long as the agreements are found to

"enhance the performance of mail preparation, processing, transportation, or other

functions," "do not cause unreasonable harm to the marketplace," and are available to

similarly situated mailers,s3 39 U.S.C. 3622(c)(10). For competitive products, the

PAEA requires the Commission to draft rules that generally allow for competitive

agreements not of general applicability as long as the agreements cover their

attributable costs at the product level. 39 U.S.C. 3633(a)(2).

d. Commission Experience with the NSA Process Under the PAEA

As directed by the PAEA, the Commission issued final regulations that provide

streamlined procedures for reviewing competitive and market dominant NSAs, To

ensure the Postal Service was provided maximum flexibility as soon as possible, the

Commission promulgated these implementing regulations for the review of NSAs well in

advance of the PAEA's deadline.

ut The requirement that NSAs and special classifications be made available to similarly situated

mailers became the subject of a complaint wherein Capital One Services, lnc. asserted, inter a/ia, that it

was similarly situated to Bank of America Corporation, and thus entitled to the same or similar terms as

the Bank of America NSA. See Docket No. C2008-3. The complaint was subsequently withdrawn at the

request of Capital One as the result of a settlement with the Postal Service.

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701 Report Chapter lV: Operation of the PAEA Amendments

These rules require the Postal Service to provide sufficient information to allow

the Commission to review NSAs for consistency with applicable statutory requirements

and carefully balance the PAEA goal of increased transparency and accountability with

a streamlined process that provides appropriate due process. Additionally, the

Commission thoroughly reviews all proposed NSAs and special classifications for

compliance with regulatory and statutory criteria on an annual basis in its Annual

Compliance Determination.

The enactment of the PAEA, as well as the Commission's implementing

regulations, have created a new, streamlined regulatory process for NSAs and special

classifications. New Commission procedures reduced the need for testimony from the

Postal Service's NSA partners or for their active participation in the Commission's

review process. Accordingly, the Commission review process no longer requires

mailers to allocate additional time or financial resources beyond their negotiations with

the Postal Service.

Ninety-nine percent of the NSAs reviewed by the Commission pursuant to the

requirements of the PAEA have been agreements for competitive products.sa As of July

2011, the Postal Service has proposed over 250 competitive NSAs under the PAEA.

The Commission has reviewed these agreements in an average of 19 days. While most

of these cases require analysis of Postal Service costs and mailer profiles, the

Commission has demonstrated that it can quickly and efficiently analyze this costing

data and provide appropriate oversight that both ensures the Postal Service's ability to

compete in the marketplace and prevents cross-subsidization consistent with the PAEA

requirements.

To expedite and simplify the review of competitive NSAs, the Commission

developed a Global Expedited Package Services (GEPS) "umbrella" contract. See

uo See Negotiated Service Agreements Statistics, November 30, 2010.

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701 Report Chapter lV: Operation of the PAEA Amendments

Docket Nos. MC2011-15 and CP201 1-51 . This has significantly facilitated the review

process while maintaining an appropriate level of oversight. The Postal Service has

proposed many GEPS contracts and worked with the Commission to create a

framework that allows the Postal Service to enter into certain agreements that do not

require pre-implementation review. The Postal Service proposed, and the Commission

reviewed and approved, a framework where the Postal Service can enter into

agreements with mailers to provide shipping solutions within a certain pricing

framework. Commission review found that all of the prices within the framework's

parameters should cover their costs and be consistent with the requirements of the

PAEA. This "umbrella" allows the Postal Service considerable pricing flexibility for these

products while reducing the regulatory burden on each contract. At the same time, it

ensures valuable oversight and transparency. The success of this pricing framework

highlights the pricíng flexibility entrusted to the Postal Service under the PAEA and the

ability of the Commission to streamline regulatory oversight where opportunities for

improvement arise.

The Postal Service has successfully utilized the streamlined process to design

and implement many competitive NSAs; however, it has only proposed one domestic

market dominant NSA since the passage of the PAEA. The Commission approved this

agreement with Discover Financial Services, which was designed to maintain and

encourage additional net revenue generated by the mailer.55 The Postal Service's

strategy for utilizing pricing flexibility for market dominant products has instead focused

on the development of special classifications. The Postal Service has proposed and

implemented six market dominant special classifications, most of which were short-term

seasonal programs designed to encourage increased use of the mail through volumebased discount incentives. They shared common characteristics with NSAs, in that they

included mailer-specific thresholds that each participant had to achieve to qualify for

uu See Docket No. R2011-3, Order No. 694, Order Adding Discover Financial Services 1

Negotiated Service Agreement to the Market Dominant Product List, March 15,2011.

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701 Report Chapter lV: Operation of the PAEA Amendments

discounts. Unlike previous market dominant NSAs, these programs were made

available to a broad group of mailers and the thresholds were determined by formulae,

rather than being negotiated individually with each mailer.

e. Commission Recommendations for Legislative Change

The streamlined oversight provided by the Commission plays an important role in

ensuring that the Postal Service is using accurate information in reaching agreements

with mailers. The Commission experience with the GEPS umbrella contract shows that

much of the past regulatory burden to mailers can be significantly reduced, if not

altogether eliminated.

Experience with the review process of market dominant and competitive NSAs,

thus far, has been positive. While mailers have expressed concerns about the time and

expense associated with NSAs, these concerns include the time and expense

associated with negotiating and designing NSAs with the Postal Service. Experience

suggests that the time and effort required to put an NSA into effect is due, in greater

part, to negotiating with the Postal Service and internal Postal Service review and

approval rather than to the Commission's limited regulatory review.

There is significant potential for the umbrella{ype pricing innovation with respect

to other types of competitive NSAs as well as market dominant NSAs. Properly

designed NSAs, both market dominant and competitive, offer potential benefits to the

Postal Service and to mailers. The Commission encourages the Postal Service to fully

utilize this pricing flexibility.

5. Service Performance Measurements and Customer Satisfaction

a. lntroduction

A significant change required by the PAEA is the addition of service performance

standards for market dominant products and reporting of service performance. The

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701 Report Chapter lV: Operation of the PAEA Amendments

PAEA tasked the Postal Service with establishing modern service standards and

performance goals for each of its market dominant products. The service performance

of each market dominant product is to be measured and its performance reported to the

Commission in the Postal Service's ACR. This information is then reviewed by the

Commission in the ACD. As part of this effort, the Postal Service also is to report the

degree of customer satisfaction with each market dominant product.

Thís section begins with a review of service performance and customer

satisfaction requirements that predate the PAEA. Next, each step of the four-step

process that the Postal Service and the Commission have undertaken to implement the

PAEA requirements is examined. These steps include establishing modern service

standards, identifying service performance measurement systems, establishing

performance goals, and establishing reporting requirements. Also, this section

discusses the Commission's frequent review of the Postal Service's implementation of

service performance measurement systems. Finally, this section discusses one

potential legislative clarification regarding changes in service standards. Specifically, to

eliminate possible confusion, Congress should consider clarifying the law to ensure that

consultations with the Commission are required for proposals to change service

standards.

b. Pre-PAEA Service Performance and Measurement

Prior to the PAEA, the Postal Service was not required to measure or report on

service performance for any of its products. The Postal Service predominantly

measured seruice performance as part of its internal diagnostics to evaluate its network.

Results of these measurements were not publicly disseminated, except for the

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701 Report Chapter lV: Operation of the PAEA Amendments

performance of single-piece First-Class Mail measured using the External First-Class

measurement system (EXFC).56

Although there were no service performance measurement requirements, seryice

performance played an important role under the pre-PAEA legislation. Most

importantly, pre-PAEA service performance was considered under the factors for setting

rates and determining mail classifications.

The PAEA placed a new emphasis on service performance. The Commission

was tasked with reviewing the Postal Service's quality of service for all market dominant

products, including speed of delivery, reliability, and the level of customer satisfaction.

The review is undertaken to ensure that quality of service does not deteriorate under the

CPI price cap system because of the potential to cut costs by way of service reductions

to comply with price cap requirements. This rationale is in addition to the needs of the

Postal Service to understand the service performance of its products, and the

transparency that such reporting provides to mailers.

c. Modern Service Standards Under the PAEA

Section 3691(a) of title 39 specifies that "[n]ot later than 12 months after the date

of enactment of this section, the Postal Service shall, in consultation with the Postal

Regulatory Commission, by regulation establish (and may from time to time thereafter

by regulation revise) a set of service standards for market-dominant products."

lnitial consultations between the Commission and the Postal Service concluded

on November 19, 2007 with the Commission providing the Postal Service with

comments addressing the Postal Service's service standards proposals. The Postal

Service completed this task by publishing as a final rule Modern Service Standards for

uu From time to time, the Postal Service experimented with other measurement systems, but

EXFC was the only measurement system consistently used for which the results were publically

disseminated.

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701 Report Chapter lV: Operation of the PAEA Amendments

Market Dominant Products, December 19,2007 (Service Standards). See 72 FR72216

(December 19,2007).

d, Service Performance Reporting Under the PAEA

Section 3652(a)(2) of title 39 requires the Postal Service to include in an annual

report to the Commission an analysis of the quality of service "for each market-dominant

product provided in such year" by providing '(B) measures of the quality of service

afforded by the Postal Service in connection with such product, including-(i) the level

of service (described in terms of speed of delivery and reliability) provided; and (ii) the

degree of customer satisfaction with the service provided." ln complying with this

requirement, the Commission has authority to "by regulation, prescribe the content and

form of the public reports (and any nonpublic annex and supporting matter relating to

the report)to be provided by the Postal Service....' 39 U.S.C. 3652(e)(1). The

Commission also has the authority to initiate proceedings to improve the quality,

accuracy and completeness of data whenever it appears that "the quality of service data

has become significantly inaccurate or can be significantly improved." 39 U.S,C.

3652(eX2XB). ln addition, the Commission has access to "suppofting matter" in

connection with any information submitted under this section. 39 U.S.C, 3652(d).

Section 3622 of title 39 provides that the Commission by regulation establish "a

modern system for regulating rates and classes for market-dominant products."

39 U.S.C. 3622(a). The quality of service and its reporting forms an integral part of

many of the objectives and factors set forth in this section. Reporting on quality of

service allows assessment of whether the Postal Service is meeting the objective of

maintaining the "high quality service standards established under section 3691."

39 U.S.C. 3622(bX3). lt furthers the objective of increasing "the transparency of the

ratemaking process." 39 U.S.C. 3622(bX6). lt allows assessment of the factors

addressing value of service, and by association with the proposed measurement

systems, the value of lntelligent Mail. 39 U.S.C. 3622(c)(1), (8), and (13). Finally, it is

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701 Report Chapter lV: Operation of the PAEA Amendments

important in relation to the rate cap requirements of 39 U.S.C. 3622(d)(1)(A)when

analyzing whether quality of service is impacted in order to comply with rate cap

requirements.

Section 3651(bX1)(A) of title 39 requires that the Commission report to the

President and Congress on an annual basis estimates of the costs incurred by the

Postal Service in providing universal service. Describing the quality of service afforded

a product, both anticipated and actual, is a necessary element in analyzing what service

is being provided at a given cost. The Postal Service is to provide the Commission with

such information that may, in the judgment of the Commission, be necessary in

completing this report. 39 U.S.C, 3651(c).

On September 2,2009, the Commission established Docket No, RM2009-11 to

consider the addition of service performance and customer satisfaction reporting

requirements to the Commission's rules of practice and procedure. Final rules were

issued on May 25,2010, specifying Postal Service reporting requirements for

measuring the level of service and degree of customer satisfaction for each market

dominant product.

e. Service Performance and Measurement Systems Under the PAEA

The Postal Service is guided by objectives (39 U.S.C. 3691(b)) and factors

(39 U.S.C. 3691(c)) when establishing service standards. One objective requires the

establishment of a "system of objective external performance measurements for each

market-dominant product....' 39 U.S.C,3691(bX1)(D). However, "with the approval of

the Postal Regulatory Commission an internal measurement system may be

impfemented instead of an external measurement system." 39 U.S.C, 3691(bX2).

ln June 2008, the Postal Service identified service performance measurement

systems by providing the Commission with a draft of its Service Performance

Measurement Plan (Plan). The Plan presents the various systems the Postal Service

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701 Report Chapter lV: Operation of the PAEA Amendments

proposes to use to measure the standards presented in the Service Standards

document. The Postal Service submitted the Plan for the Commission's "review,

feedback, and concurrence."5T ln response, the Commission initiated Docket No.

P12008-1 to solicit public comment and consider the Plan. This process culminated with

Commission Order No. 140, approving the approaches that the Postal Service proposed

to take in developing internal measurement systems for various classes of mail.58 Most

notably, the Commission granted a Postal Service request to proceed with development

of an internal hybrid measurement system based on lntelligent Mail barcodes (lMb) to

measure service performance for many of its products.

The Postal Service took a variety of approaches to measure the service

performance of various market dominant products. The single-piece components of

First-Class Mail Single-Piece LettersiPostcards and Flats use the EXFC measurement

system.se The bulk components of First-Class Mail Letters/Postcards and letter- and

card-shaped Standard Mail use an lMb hybrid measurement system.60 Parcel-shaped

mail uses a Delivery Confirmation-based system.61 lnternational Mail uses an

ut Letter from Thomas G. Day, Senior Vice President, United States Postal Service, to Dan G.

Blair, Chairman, Postal Regulatory Commission, June 3, 2008.

uu See Docket No. P12008-1, Order Concerning Proposals for lnternal Service Standards

Measurement System (Order No. 140).

un EXFC is an external measurement system utilizing contractors to seed the mail and measure

the time it takes from deposit of mail into a collection box or lobby chute until its delivery to a home or

business. EXFC continuously tests service in 892 three-digit ZIP Code areas between which most

Single-Piece First-Class Mail originates and destinates.

uo This hybrid measurement system relies upon lMb data to measure the time from mail

acceptance through the last processing scan combined with external reporters recording in home delivery

to develop end-to-end service performance measurements.

u1 This system measures transit time from the time of mailing until the time of delivery for those

parcels that a customer requested Delivery Confirmation service.

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701 Report Chapter lV: Operation of the PAEA Amendments

lnternational Mail Measurement System (IMMS).62 Periodicals Mail uses Red Tag and

Del-Trak-based systems.63 Finally, Special Services use measurement systems unique

to the service being measured. To date, EXFC and IMMS are the only systems that are

fully operational and considered reliable. The Commission continues to monitor the

development of the other systems.

The Postal Service also has developed internal systems for the measurement

and reporting of customer satisfaction. Customer satisfaction is examined under two

broad categories, customer experience and access to postal services. The Postal

Service has implemented a Customer Experience Measurement system, which uses

customer survey instruments for measuring and reporting on customer experience. The

Postal Service measures customer access by reporting on changes in the number of

post offices, residential and business delivery points, and collection boxes. Also,

average customer wait time in line for retail services is reported.

f. Performance Goals for Service Standards Under the PAEA

The Postal Service, in consultation with the Commission, also is to develop and

submit to Congress a plan for meeting its service standards. See PAEA section 302.

This plan is to include the establishment of performance goals, The Postal Service

submitted its section 302 Plan on June 19,2008. The Postal Service posted its current

FY 2011 targets on its website accessible by mailers.

u'IMMS is an external measurement system relying on contractors to seed lnternational Mail and

develop end-to-end service performance measurements. The Postal Service only reports the domestic

traveltime within the United States developed from IMMS data.

ut The Red Tag Monitoring Service is operated by the not-for-profìt Red Tag News Publications

Association to monitor service for association members. The Del-Trak System is operated by Time, lnc.

to monitor service for several of its publications. Service is measured end-to-end using mailer reported

entry times to start-the-clock and external reporter delivery dates.

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701 Report Chapter lV: Operation of the PAEA Amendments

g. Current Status of Service Performance

The Commission required the Postal Service to follow a two-step process to

achieve full compliance with all reporting requirements by the filing date of the FY 2011

ACR.64 The first step allowed the Postal Service to seek semi-permanent exceptions

from service performance reporting as allowed by 39 CFR 3055.3. The Postal Service

sought and was granted multiple semi-permanent exceptions, predominantly in the

areas of Special Services and NSAs. The second step allowed the Postal Service to

seek waivers from reporting where more time is needed to fully develop service

performance measurement systems. The Postal Service sought waivers for the

majority of market dominant products requiring measurement, including all products that

use lMb-based measurement systems.

The lMb measurement system and associated electronic documentation perform

a critical role in measuring service performance for the majority of mail. However,

significant issues continue to hinder the lMb system from realizing its full potential as a

reliable and comprehensive component of service performance measurement. The

Postal Service has reported problems with data yield, which is the percentage of usable

data that may be obtained from lMb measurements. Related problems also have been

reported with obtaining an accurate "start-the-clock" time, which is the starting time for

all service peformance measurements. Furthermore, the current documentation

required by the lMb-based measurement system is not sufficient to support reporting

Standard Mail by product as required by the PAEA. This is especially problematic for

products that are not covering their costs.65

ln the interim, the Postal Service reports service performance with data that it

believes are reliable. The insight these data provide into service performance is

uo See Docket No. RM2009-11, Order Establishing Final Rules Concerning Periodic Reporting of

Service Performance Measurements and Customer Satisfaction, May 25,2011 (Order No. 465).

uu See, e.g., Standard Mail Flats, discussed supra.

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701 Report Chapter lV: Operation of the PAEA Amendments

valuable, but a significant effort is still required on the paft of the Postal Service to

provide data in compliance with the PAEA and the Commission's reporting

requirements.

Standard Mail users have expressed frustration with Postal Service decisions to

regularly seek waivers from the Commission for reporting service performance of

Standard Mail products. ln order for the PAEA's modern system of rate regulation to

work as intended, the Postal Service must effectively measure service performance for

its postal products. Effective service performance measurement would become even

more important if Congress were to enact the Commission's proposal regarding service

rate adjustments. See supra chapter lV.C.1.e.

h. Commission Recommendations

As proposed by the Postal Service and adopted by the Commission, the Postal

Service is to provide detailed quarterly service performance reports that can be used to

thoroughly analyze service performance, in addition to aggregated annual reports that

more appropriately meet the needs of the ACD. Without the transparency provided

through quarterly reports, the Commission would find it difficult if not impossible to fully

analyze service performance. To date, the Postal Service is attempting to provide this

information and, if the need arises, the PAEA has provided the Commission with

sufficient tools to ensure that the Postal Service fulfills the PAEA's service performance

and measurement requirements.

The Commission recommends that Congress consider clarifying the current

statutory language regarding changes to service standards. The law clearly requires

the Postal Service to consult with the Commission in establishing service standards for

market dominant products. 39 U.S,C. 3691(a). However, the law does not directly

address whether changes in service standards require such consultation. The

Commission finds that section 3691 requires the Postal Service to engage in such

consultations. Notwithstanding, some stakeholders have argued that such a

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701 Report Chapter lV: Operation of the PAEA Amendments

consultation is not statutorily required, To eliminate potential confusion, Congress

should consider clarifying the law to ensure that similar consultations with the

Commission are required for proposals to change service standards, Additionally, the

Commission's proposal for service price adjustments, as further discussed in chapter

|V.C.1., provides an incentive for the Postal Service to improve its service performance

Successful implementation of that proposal will require regular review and oversight of

service performance as suggested in this section.

6. Market Tests of Experimental Products

a. lntroduction and Summary

ln this section, the Commission discusses the statutory and regulatory authority

governing market tests of experimental products.

The PAEA provides the Postal Service with the authority to conduct market tests

of experimental postal products. See 39 U.S.C. 3641. Provisions such as 39 U.S.C.

3641 enable the Postal Service to create innovative postal products and services in

order to adapt to changing customer needs as well as information and communication

technologies.

Since the passage of the PAEA, the Postal Service has filed six market tests of

experimental products with the Commission. The Commission has expeditiously

reviewed and approved all of the six market tests. The Commission has worked

cooperatively and successfully with the Postal Service, mailers, and other stakeholders

in the postal community to determine whether the Postal Service should pursue a

particular market test of an experimental product. The current law is working effectively

with respect to market tests. Nonetheless, to encourage the Postal Service to innovate

on a larger scale, the Commission recommends that Congress consider amending the

statute to allow the Postal Service to experiment with larger market tests.

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701 Report Chapter lV: Operation of the PAEA Amendments

b. New Product Experiments Pre-PAEA

The PRA of 1970 provided the Postal Service with broad authority to test and

introduce new postal and nonpostal products. New domestic postal products were

subject to a Postal Rate Commission recommended decision and special Postal Rate

Commission rules for expedited review of market tests. See former 39 U.S.C. 3623;

former 39 CFR 3001.161 ef seg. The Postal Service also had the authority "to provide,

establish, change, or abolish special nonpostal or similar services[.]" See former

39 U.S.C. a0a(a)(6). The PRA, however, did not require the Postal Service to request a

recommended decision from the Commission before offering new nonpostal products,

such as telephone cards and retail merchandise.66

The Postal Service developed and marketed a number of new postal and

nonpostal products prior to the PAEA. Some examples of the products that were

developed and marketed during that period include the Firstclass Phone Card, Remitco,

Electronic Commerce Services, Global Priority Mail, Global Package Link, Retail

Merchandise, PostOffice Online, WEB lnteractive Network of Government Services,

Deliver America, lnformation Based lndicia Program, Customer-lnitiated Payment

System, Unisite Antenna Program, LibertyCash, Sure Money, and Global e-Post. 1998

GAO Report, Appendix lll.

Two main concerns arose out of the market tests conducted under the PRA.

First, the Postal Service lacked sufficient flexibility to innovate and offer new products

and services. S. Rep. No. 108-318 (July 22,2008) at 16. The PRA required the Postal

Service to request a recommended decision from the Commission before offering any

new domestic postal product or service. See ld. Although the Commission established

66 GeneralAccounting Office (GAO), U.S. Postal Service-Development and lnventory of New

Products, Report to the Chairman, Subcommittee on the Postal Service, Committee on Government

Reform and Oversight House of Representatives, November 1998, requested by Congressman John M.

McHugh, Chairman, Subcommittee on the Postal Service, Committee on Government Reform and

Oversight, at 10 (1998 GAO Report).

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701 Report Chapter lV: Operation of the PAEA Amendments

rules expediting review of experimental and market test classification requests, the

Postal Service and other stakeholders observed that the Postal Service needed more

flexibility to facilitate an entrepreneurial approach to product developmenl. ld.

Second, the Postal Service's introduction of new products stirred controversy

among stakeholders in the postal community. Many of the new products developed

were not successful. For example, during the first three quarters of FY 1998, only 4 of

the 19 new products introduced by the Postal Service covered their cost, 1998 GAO

Report at 4. The new products in the area of electronic commerce were especially

unsuccessful.6T

In particular, stakeholders were concerned about the Postal Service's new

nonpostal products. Some members of Congress and some private sector companies

believed that the Postal Service was unfairly expanding its product line to compete in

nonpostal-related markets. 1998 GAO Report at 5. They argued that the Postal

Service, as a governmental entity, would have an unfair advantage when introducing

products that compete with private sector companies . ld. al 1,32.

c. Market Tests Under the PAEA

Congress addressed the concerns about new nonpostal products and the Postal

Service's lack of flexibility in the PAEA. Like the PRA, the PAEA provides the Postal

Service with the authority to conduct market tests of experimental products. See

39 U.S.C. 3641. However, the PAEA restricts the Postal Service from engaging in

market tests of new nonpostal services. ln general, the PAEA prohibits the Postal

Service from offering new nonpostal services. H. a0a@)(2). This restriction also

appears in section 3641, which authorizes the Postal Service to "conduct market tests

67 General Accounting Office (GAO), US Postal Service-Update on E-Commerce Activities and

Privacy Protection, Report to the Ranking Member, Subcommittee on lnternational Security, Proliferation,

and Federal Services, Committee on Government Affairs, U.S. Senate, December 2001; see a/so

President's Commission on the United States PostalService, Embracing the Future Report alixand2T.

67
701 Report Chapter lV: Operation of the PAEA Amendments

of experimental producfs." Id. 3641(aX1) (emphasis added), Products must, by

definition, be postal services. \d.102(6). The statutory prohibition on new nonpostal

services is also suppofted by the legislative history, which states that the PAEA "limits

the scope of the Postal Service's product offerings to 'postal products[.]"' S, Rep. No.

108-318 (July 22,2004) at 16.

Aside from the restriction on new nonpostal services, the PAEA gives the Postal

Service much more flexibility to introduce new products and services. The Postal

Service has streamlined authority to introduce experimental products, allowing the

Postal Service to innovate and do what is necessary to make the products offered

valuable to customers. /d. at23. To ensure that proper safeguards exist to protect both

customers and competitors of the Postal Service, see id. at 16-17, the PAEA specifies

certain requirements. At least 30 days before initiating a market test, the Postal Service

must file with the Commission and publish a FederalRegisfer notice describing the

test's nature and scope and setting out the basis of its determination that the market

test meets the requirements of section 3641. 39 U.S.C. 3641(cX1). The test must also

meet the following conditions:

The product tested must be significantly different, from the viewpoint of the

mail users, from all products offered by the Postal Service within the past

two years;

The introduction or continued offering of the product will not create an

unfair competitive advantage for the Postal Service or any other mailer;

and

The product must be correctly classified either as market dominant or

competitive.

td.3641(b).

The market test period may not exceed 24 months unless the Commission grants

an extension of the test period for up to an additional 12 months. /d. 3641 (d). ln

general, anticipated or received revenues for a market test product may not exceed

a

a

a

68
701 Report Chapter lV: Operation of the PAEA Amendments

$10 million per year, as adjusted for inflation. /d. 3641(eX1), (g). The Commission may

exempt the Postal Service from this limitation as long as anticipated or received

revenues do not exceed $50 million per year, as adjusted for inflation, and the test

meets other applicable requirements. /d. 36a1(eX2), (g). lf the Commission determines

that a market test fails to meet any requirement under section 3641, it may cancel the

test or take other action as it deems appropriate. ld. 3641(f).

d. Commission Experience with Market Tests Under the PAEA

The Postal Service began to make use of the flexibility afforded by the market

test provisions in the PAEA two years after its passage by Congress. Since 2009, it has

filed a total of six market tests of experimental products: Docket No. MT2009-1

Collaborative Logistics; Docket No. MT2010-1 Samples Co-op Box; Docket No.

MT2011-1 Alternate Postage Payment Method for Greeting Cards; Docket No.

MT201 1-2 GiftCards; Docket No. MT2011-3 Marketing Mail Made Easy,68 and

l{1T2011-4 Mail Works Guarantee.

The Commission has reviewed and approved all six market tests and has

granted a temporary extension of the Collaborative Logistics market test to the Postal

Service. As part of its review process, the Commission considers comments and

opinions from interested persons, mailers, and other stakeholders in the postal

community. The Commission also reviews public comments and Postal Service

responses to information requests issued by the Chairman of the Commission.

The law allows the Postal Service to create innovative new products in response

to changing customer mailing habits and needs as well as evolving information and

communication technologies. The law also provides appropriate safeguards to protect

both customers and competitors of the Postal Service. The Postal Service is just

beginning to make use of the market test aspects of the PAEA. lt is too early to

ut The name of this experimental product was later changed to "Every Door Direct Mail Retail."

69
701 Report Chapter lV: Operation of the PAEA Amendments

evaluate whether or not any particular market test will be successful in the long run.

The Postal Service has indicated that it intends to make Collaborative Logistics a

permanent offering in the near future; however, the total revenue generated from the

Collaborative Logistics market test during the two-year test period was less than $3

million. lt is, therefore, premature to predict the effects of these products on the

financial condition of the Postal Service.

Thus far, it appears that the statutory authority and rules governing the market

test of experimental products under the PAEA have worked as intended in providing the

Postal Service with the appropriate level of flexibility to develop and conduct market

tests of new postal products.

e. Commission Recommendations for Legislative Change

To encourage more innovation at the Postal Seryice, the Commission

recommends that Congress consider allowing the Postal Service to experiment with

larger market tests by raising the maximum revenue limitation on experimental market

test products. This will allow the Postal Service to advance even more ideas that could

bolster the Postal Service's revenue streams. The Commission, the Postal Service, and

the mailing community have worked cooperatively and successfully to facilitate market

tests of experimental products as envisioned by the PAEA. The current law is working

effectively. The constraints on market tests have not proven to be unduly burdensome.

They strike a reasonable balance between allowing the Postal Service flexibility to

experiment with new products while limiting the potential for harm to private sector

competitors from encroachment by the Postal Service.

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701 Report Chapter lV: Operation of the PAEA Amendments

D. Enhancements to lmprove the Commission's Processes

1. Post Office Closing Procedures

a. lntroduction and Summary

The statutory procedures provide the public with appropriate procedural notice

and an opportunity for comment. As discussed below, the Commission has set

statutory criteria for post office closing appeals. ln the interest of furthering the PAEA

goals of transparency and accountability, the Commission recommends that Congress

consider requiring the Postal Service to provide regular reports to the Commission on its

retail network plans and activities. This will ensure that Congress, the public, and the

Commission will be informed of the status of the Postal Service's closure and

consolidation efforts.

ln the discussion that follows, the Commission traces the statutory and regulatory

basis for appeals by postal patrons of proposed post office consolidations and closings.

Accompanying that discussion is an overview of Commission appeal proceedings both

before and after the 2006 enactment of the PAEA and a description of recent

Commission proceedings involving the Postal Service's practice of imposing emergency

suspensions of post office operations for extended periods. Next, there is a discussion

of recent amendments to the Postal Service regulations governing post office

consolidations and ctosings. The regulations have potentially important implications for

the Commission's appeals process. Finally, the Commission discusses its

Congressional recommendations with respect to the post office closing appeals

process.

ln particular, Congress should consider requiring the Postal Service to provide

regular reports to the Commission on its retail network plans and activities, including

identifying all post offices that have been suspended and those where closure actions

have been taken. The reports should also contain information on how particular

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701 Report Chapter lV: Operation of the PAEA Amendments

closings conform with previously filed plans and alternative access. Additionally, while

the Commission believes that its longstanding interpretation of the scope of appeals

from Postal Service determinations to close or consolidate post offices follows the intent

of Congress, the Postal Service disagrees with the Commission's interpretation.

Accordingly, to eliminate potential confusion, the Commission recommends that the

scope of appellate review from Postal Service determinations to close Postal Service

operated retail facilities be clarified and adopt the plain meaning of post office to include

all retail offices operated by the Postal Service.

b. Statutes and Regulations

The statutory right of postal patrons to obtain review by the Commission of the

consolidation or closure of a post office was originally enacted as part of 1976

amendments to the Postal Reorganization Act, codified as 39 U.S.C. 404(b). Section

404(b) was subsequently redesignated by the PAEA as section 404(d).

Section 404(d)(2) requires the Postal Service, in making a determination whether

or not to close or consolidate a post office, to consider: (a) the effect on the community;

(b) the effect on the employees; (c) the economic savings to the Postal Service;

(d) whether the closing or consolidation would be consistent with postal policy that the

Postal Service shall provide a maximum degree of effective and regular postal services

to rural areas, communities, and small towns where post offices are not self-sustaining;

and (e) such other factors as the Postal Service determines are necessary.

Section 404(dX5) authorizes persons served by a post office to file an appeal

with the Commission within 30 days of a Postal Service determination to close or

consolidate their post office, The Commission has 120 days in which to review the

Postal Service's determination. That review must be based upon the record on which

the Postal Service based its determination. The Commission must set aside any Postal

Service determinations, findings, or conclusions that (a) are arbitrary or capricious, an

abuse of discretion, or otherwise not in accordance with law; (b) fail to observe

72
701 Report Chapter lV: Operation of the PAEA Amendments

procedures required by law; or (c) are unsuppofted by substantial record evidence. The

Commission can take one of two actions. lt can either affirm the Postal Service's

determination, or it can return the entire matter to the Postal Service for further

consideration.

It is important to note that the Commission cannot modify the Postal Service's

determination. However, the Commission can issue an order staying the effectiveness

of the Postal Service's determination pending its final decision on the appeal.

The Commission has adopted procedural rules governing Postal Service

determinations to close or consolidate post offices. Those rules are contained in

subpart H of the Commission's rules of practice. 39 CFR 3001.1 11 et seq. Briefly

summarized, the Commission's regulations provide the person appealing the Postal

Service determination and other interested persons the opportunity to challenge the

basis for the Postal Service's determination to close a post office and the procedures

used to reach its decision. ln addition to written presentations, the regulations permit

appellants to request an opportunity to make an oral presentation to the Commission,

c. Appeals Prior to the PAEA

Between 1976 and 2006, the Commission received over 300 appeals of post

office closures or consolidations. Approximately 40 of those appeals resulted in

remands to the Postal Service for further consideration based upon findings by the

Commission that the Postal Service did not follow these mandatory statutory

requirements.

d. Appeals Under the PAEA

Since the enactment of the PAEA in 2006, the Commission has docketed 45

appeal proceedings. A single appeal was filed during each of fiscal years 2007 and

2009. Six appeals were filed during FY 2010. As of the end of July 2011, 37 appeals

have been filed during the currentFY 2011. Of the 45 post office closing appeals filed

73
701 Report Chapter lV: Operation of the PAEA Amendments

since the enactment of the PAEA until the end of July 2011, 18 appeals were decided in

favor of the Postal Service; 1 appeal was remanded for further proceedings because the

record upon which the Postal Service based its decision was based on outdated

information; 2 appeals are awaiting completion of a Postal Service discontinuance

study; and 24 appeals were still pending as of the end of July 2011.

e. Current lssues

Two recurring issues of general applicability have arisen in several of the appeals

filed at the Commission.

(1) The lssue of Stations and Branches

The Postal Service and the Commission disagree whether the closure of postal

stations and branches is covered by the appeal provisions of section a0a(d)(5). The

Postal Service has taken the position that as used in section 404(dX5), the term "post

office" applies only to a postal facility that constitutes "an organizational unit headed by

a postmaster that provides retail and delivery services, and mail processing, to

residents and businesses in the ZIP Code areas that comprise that office's exclusive

delivery service area."6e By contrast, the Commission's longstanding position is that

Congress intended the term "post office" in section 404(dX5)to be interpreted "in its

ordinary sense-/.e., a fixed retail facility serving the public and acting as the point of

origin for delivery routes. ..." ln re Gresham, SC, Order No. 208, August 16, 1978, at

6-7.70 On the basis of that interpretation, the Commission maintains that the term "post

un See 76 FR 41413 (July 14, 2011); see a/so Post Office Organization and Administration:

Establishment, Classification and Discontinuance, T6 FR17794 (proposed March 31,2011).

to The Commission's continued adherence to this broader definition was restated shortly before

passage of the PAEA and has been reiterated following the PAEA's enactment. See Docket No.

42006-1, Order Denying Postal Service Motion to Dismiss and Remanding for Further Consideration,

September 29,2006, al5-12; see a/so Docket No. N2009-'f , Advisory Opinion Concerning the Process

for Evaluating Closing Stations and Branches, March 10,2010, at 61, 66.

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701 Report Chapter lV: Operation of the PAEA Amendments

office" includes not only postal facilities covered by the Postal Seryice's organizational

unit definition, but postal stations and branches, as well.

(2) The lssue of Emergency Suspensions

A second recurring issue of general applicability involves the Postal Service's

use of emergency suspensions. The Postal Service defines an "emergency

suspension" as "an occurrence that constitutes a threat to the safety and health of

Postal Service employees or customers or to the security of mail or revenue."71 Among

the circumstances which may justify an emergency suspension are natural disasters,

lease terminations, lack of qualified personnel, severe health or safety hazards, and

other similarly serious situations. /d.

After this issue was brought to light in another proceeding ,72 lhe Commission

instituted a public inquiry to investigate what appeared to be a Postal Service practice of

"avoiding...[the discontinuance]...process by suspending post offices and allowing them

to simply remain suspended without any action."73 While no specific action was taken

as a result of the public inquiry docket, it has brought the issue to the attention of the

Postal Service and the general public. As a result of the Commission's increased

transparency and accountability of the Postal Service on this issue, the Postal Service

now appears to be monitoring the practice of its local officials to ensure that the

71 Post Office Discontinuance Guide, Handbook PO-101 (August 2004) (Handbook) at section

611

72 Docket No. A2009-1, Order on Appeal of Hacker Valley, West Virginia Post Office Closing,

October 19, 2009. ln Hacker Valley, it was suggested by several participants that the Postal Service

might be using an emergency suspension as a de facfo post office discontinuance. ln its order, the

Commission announced its intent to initiate a public inquiry in order to develop a more complete record on

emergency suspensions and stated that the public inquiry would facilitate fulfillment of its responsibility to

submit reports under the PAEA section 701 recommending legislation to improve the effectiveness of

postal laws.

73 Docket No. P12010-1, Notice and Order Providing an Opportunity to Comment, November 9,

2009, at 3 (Order No. 335).

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701 Report Chapter lV: Operation of the PAEA Amendments

emergency suspension process is being used only as intended and that facilities that

were previously suspended on a seemingly indefinite basis are reviewed in a timely

manner for potential closure or other appropriate action.74

f. The Postal Service's Rulemaking

On March 28,2011, the Postal Service transmitted a letter to the Commission

explaining proposed changes to its regulations in 39 CFR parl241 intended "to improve

the administration of the Post Office closing and consolidation process" and to apply

"certain procedures employed for the discontinuance qf Post Offices to...the

discontinuance of other types of retail facilities operated by Postal Service

employees."75 On May 2, 2011, the Commission submitted written comments that

address a number of matters, including subjects with potential implications for the

appeals process authorized by section 404(dX5).?6 On July 14,2011, the Postal

Service published its final rules altering these regulations.Tt The Postal Service's final

rules adopted many of the Commission's suggestions with the notable exception of

notification of potential appeal rights to postal patrons for discontinuance decisions

involving a post office station or post office branch.

These regulatory changes proposed by the Postal Service are also the subject of

a complaint filed with the Commission by the National Association of Postmasters of the

7a Extensive information regarding emergency suspensions has been collected from the Postal

Service and the public in the public inquiry instituted by Order No. 335.

75 Letter from Mary Anne Gibbons, General Counsel, United States Postal Service to Stephen

Sharfman, General Counsel, Postal Regulatory Commission, March 28,2011. The proposed regulatory

changes were subsequently published in the Federal Register. See a/so Post Office Organization and

Administration: Establishment, Classification and Discontinuance, 76 FR 17794 (proposed March 31,

2011).

76 Comments of the United States Postal Regulatory Commission, 39 CFR Part241, Proposed

Amendments to Post Office Consolidations and Closing Process, May 2,2011.

tt 76 FR 41413 (Jury 14, 2011).

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701 Report Chapter lV: Operation of the PAEA Amendments

United States, the League of Postmasters, and certain individuals in their capacities as

association officers, postmasters or retired postmasters, and postal customers.Ts

Among the allegations set forth in the complaint are claims that the Postal Service's

proposed regulatory changes are inconsistent with section aOa(dX5). /d.

g. Commission Recommendations

The Commission finds that the statutory procedural requirements for closing post

offices under 39 U.S.C. 404(d) do not require changes at this time. They provide

members of the public with appropriate procedural notice and an opportunity to have

their views heard by the Postal Service in connection with potential discontinuance

actions. They also ensure that the Postal Service follows these statutory procedural

requirements in the form of an independent check and balance on the Postal Service

closing decisions by allowing appellate review to the Commission.

However, in the interest of furthering the PAEA goals of transparency and

accountability, Congress should consider requiring the Postal Service to provide regular

reports to the Commission on the Postal Service's plans and activities regarding its

retail network, including identifying all post offices that have been suspended and those

where closure actions have been taken. The reports should also contain information on

how particular closings conform with previously filed plans and alternative access.

The Commission recognizes that the Postal Service is currently in the process of

realigning its retail network. Regularly reporting to the Commission on its plans and

activities in this area would ensure that Congress, the public, and the Commission will

be better informed of the status of the Postal Seruice's retail network closure and

78 Docket No. C201 1-3, Complaint of the National Association of Postmasters of the United

States, the League of Postmasters, Mark Strong, Robert Rapoza, Marilyn Shaw, and Marilyn Hill, May 23,

2011.

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701 Report Chapter lV: Operation of the PAEA Amendments

consolidation efforts. This will further the PAEA goals of transparency and

accountability.

The Postal Regulatory Commission and its predecessor agency, the Postal Rate

Commission, have a long-established interpretation for the term "post office" as used in

39 U.S.C. 404(d). Since the late 1970s, the Commission has repeatedly found that the

term is used in the ordinary sense of the word, as a postal retail facility serving the

public. The Postal Service disagrees with this interpretation, This creates uncertainty

and confusion among citizens. To eliminate this uncertainty and confusion and for the

benefit of postal customers, the Commission recommends that the scope of the

Commission's appellate review of determinations to close postal operated retail facilities

be clarified to adopt the plain meaning of the term post office which would include

stations and branches.

2. Advisory Opinion Process

a. lntroduction and Summary

The advisory opinion process created in title 39, section 3661 provides sound

and beneficial advice for the Postal Service to use when it is considering nationwide or

substantially nationwide changes in service. lt also provides an expeft, unbiased

analysis of major issues to Congress and the American public. However, a few minor

changes in the statute may improve the advisory opinion process.

Below, the Commission traces the current statutory and regulatory requirements

for the advisory opinion process. Then, it discusses the historical use of the advisory

opinion process both pre- and post-PAEA. Next, the Commission focuses on its

experience with the advisory opinion process. Finally, based on that experience, the

Commission provides its recommendations for legislative change with respect to the

advisory opinion process. Specifically, Congress should allow the Postal Service to

obtain expedited consideration from the Commission for time-sensitive requests for

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701 Report Chapter lV: Operation of the PAEA Amendments

advisory opinions on proposals to change service on a nationwide or substantially

nationwide basis. Additionally, Congress should consider adding language to 39 U.S.C.

3661 requiring the Postal Service to provide a written response to Commission advisory

opinions.

b. Statutory and Regulatory Requirements

The PRA provided a mechanism for the Postal Service to request that the Postal

Rate Commission issue a non-binding advisory opinion whenever the Postal Service

determines it should make a "change in the nature of postal services affecting service

on a nationwide or substantially nationwide basis." 39 U.S.C. 3661(b). Commission

regulations currently require such requests to be submitted "not less than 90 days"

before such change is scheduled to take effect. 39 CFR 3001.72.

The law requires the Commission to conduct a court-like evidentiary hearing on

the record in accordance with the formal adjudication requirements of the Administrative

Procedure Act. See 39 U.S.C. 3661(c); 5 U.S.C. 554. The Commission must allow the

Postal Service, the users of the mail, and an officer of the Commission appointed to

represent the interests of the general public (Public Representative) to participate in the

proceeding. 39 U,S.C. 3661(c). After the hearing is completed, the Commission must

provide its advisory opinion in writing and include a certification of each Commissioner

agreeing with the opinion that it "conforms to the policies established under" title 39. /d.

c. Background on the Use of the Advisory Opinion Process

Prior to the passage of the PAEA, the Postal Service requested a total of five

advisory opinions from the Postal Rate Commission since 1971. These cases were as

follows:

PRC Docket No. N7s-1-Review of a Postal Service

program that adopted market analysis techniques for the

location and staffing of postal retail facilities.

a

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701 Report Chapter lV: Operation of the PAEA Amendments

PRC Docket No. N75-2-Review of a Postal Service

initiative to combine First-Class Mail and Airmail Service

a

PRC Docket No. N86-1-Review of a Postal Service

initiative to allow COD payments to be made directly to

the shipper rather than through Postal Service money

orders.

PRC Docket No. N89-1-Review of a Postal Service

initiative to change First-Class Mail delivery standards

PRC Docket No. N2006-1-Review of a Postal Service

initiative to realign Postal Service mail processing and

transportation networks.

More recently, after the passage of the PAEA, the Postal Regulatory Commission

reviewed two requests by the Postal Service for advisory opinions. See Docket Nos.

N2009-1 and N2010-1.

Docket No. N2009-1. The Commission reviewed a Postal Service request for an

advisory opinion on an initiative to rationalize and optimize Postal Service post office

station and branch retail facilities. At issue in that case was the Commission's review of

a focused, systemwide application of the Postal Service's station and branch

discontinuance process that was initially being applied to more than 3,000 stations and

branches nationwide. There were 20 participants in the Commission's proceeding,

including the Postal Service and Public Representative. The participants conducted

extensive written discovery. Both the Postal Service and the intervenors responded to

numerous interrogatories and documents. Upon completion of discovery, the

Commission held hearings on the record and received the dírect and cross-examination

testimony of two Postal Service witnesses as well as two rebuttal witnesses. Briefs and

reply briefs were filed by seven participants. The Commission also held two field

hearings: one in lndependence, Ohio and one in the Bronx, New York.

This formal process culminated in the Commission issuing its advisory opinion in

which it provided recommendations to the Postal Service for improving its

a

a

o

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701 Report Chapter lV: Operation of the PAEA Amendments

discontinuance process. While the Postal Service used many of the Commission's

advisory opinion recommendations to form the basis of proposed changes to the Postal

Service's regulations regarding post office closings and consolidations, it did not include

proposed changes such as notification of appeal rights for all types of postal retail

facilities and did not extend appeal rights to stations and branches. See 76 FR 41413

(July 14, 2011).

Docket No. N2010-1 . The Commission reviewed a request for an advisory

opinion on a Postal Service plan to end Saturday mail delivery, collection, and outbound

mail processing. This request involved exceptionally complex issues, such as a variety

of techniques used to determine sound estimates for the savings expected to result

from the proposed reduction in service as well as the expected loss of revenue. The

case involved several new methodologies that had not been previously investigated and

tested. ln addition, the Postal Service provided a novel application of market survey

techniques. This examination required the Postal Service to provide access to data that

were not provided at the time of filing. Adding to the complexity of the case was the fact

that it required multidisciplinary analysis across several Postal Service data systems.

These systems included costing, mail processing operations, delivery operations,

transportation, market research, service pedormance, and customer relations.

The complexity of the case was further magnified by the unusually large number

of participants from many different sectors of the mailing community. ln total, there

were 31 participants in the case, including the Postal Service and Public

Representative. During discovery, the Postal Service and private parties responded to

several hundred interrogatories,

Upon completion of formal discovery, the Commission held extensive public,

hearings on the record and received the direct and cross-examination testimony of 11

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701 Report Chapter lV: Operation of the PAEA Amendments

Postal Service witnesses as well as 10 rebuttal witnessesTe and 4 surrebuttal witnesses

who examined the Postal Service's proposal and supporting evidence. Briefs and reply

briefs were filed by ten participants. The Commission also received thousands of public

comments. ln addition, the Commission received statements from Members of

Congress, and held field hearings in Las Vegas, Nevada; Sacramento, California;

Dallas, Texas; Memphis, Tennessee; Chicago, lllinois; Rapid City, South Dakota; and

Buffalo, New York.

This process culminated in the Commission issuing its advisory opinion in which

it made the following key findings: (1) the annual net savings estimate from

implementing the plan is expected to be $1.7 billion (as opposed to the Postal Service's

savings estimate of $3.1 billion); (2) full savings would likely not be achieved until year

three after implementation; (3) the revenue losses due to volume declines caused by

the service cuts is $0.6 billion (as opposed to the Postal Service estimate of net revenue

losses of $0.2 billion); (a) the planned changes are expected to cause an average of 25

percent of First-Class Mail and Priority Mail to be delayed by two days; and (5)the

Postal Service did not evaluate the impact of the proposal on customers who reside or

conduct business in rural, remote, and non-contiguous areas who are likely to be

particularly affected by the Postal Seryice's plans.

The Commission provided its advisory opinion to the Postal Service, and to the

Congress, which has maintained appropriations' language that requires the Postal

Service to maintain six-day a week mail delivery since 1983.

d. Commission Experience with the Advisory Opinion Process

Overall, the Commission finds that the advisory opinion process is a positive

element of title 39. The statutory provision provides a useful mechanism for the Postal

Service and, where appropriate, Congress, to obtain an independent, expert view on the

tn One piece of rebuttal witness testimony was subsequently withdrawn.

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701 Report Chapter lV: Operation of the PAEA Amendments

merits of a Postal Service proposal to alter the nature of service on a substantially

nationwide basis. ln the Commission's most recent advisory opinion on the Postal

Service's proposal to end Saturday mail delivery, collection, and outbound mail

processing, the advisory opinion process provided the Postal Service and Congress

with a thoroughly researched report that objectively reviewed the methodologies and

calculations proposed by the Postal Service. Among other things, the report determined

the costs and cost savings related to the annual net savings estimate of the proposal,

the timeline for achieving full savings, the revenue losses due to the proposal, the

service-related delays that the planned changes are expected to cause, and the likely

impact of the proposed change on all segments of the public, including customers who

reside or conduct business in rural, remote, and non-contiguous areas.

The advisory opinion process provides interested mail users transparency and

accountability through an opportunity to participate and comment on a proposed

change. lt also provides mail users the ability to learn more about the details of the

Postal Seryice's proposal. For example, in the Commission's most recent advisory

opinion case dealing with the Postal Service's proposal to end Saturday mail delivery,

collection, and outbound mail processing, the advisory opinion process allowed

participants, including large mailers, to obtain details on exactly how the proposal could

be expected to impact the dropshipping of their mail and how the proposal would affect

delivery to locations that already had less than fìve-day-a-week delivery. The process

allows the Postal Service to take into consideration suggestions received from mail

users and other participants during the advisory opinion process and revise the

proposal as appropriate.

e. Commission Recommendations for Legislative Change

The advisory opinion process is a positive element of title 39; however, changes

to the legislative language will improve the process and provide better information on

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701 Report Chapter lV: Operation of the PAEA Amendments

how the Postal Service plans to implement its proposed changes in service as a result

of the suggestions made in Commission advisory opinions.

Congress should consider adding statutory language that would allow the Postal

Service to obtain expedited processing of Postal Service requests for Commission

advisory opinions. ln particular, the Commission recommends the following legislative

language be considered as an addition to 39 U.S,C. 3661: "lf the Postal Service seeks

expedited processing for time-sensitive advisory opinions, it shall state such request in

its proposal filed under subsection (b)." lncluding such or similar language will allow the

Postal Serviee to obtain an advisory opinion on an accelerated sehedule taking into

account the complexity of the case while appropriately balancing the public's right to

obtain information. This will result in the Commission being able to provide insightful

comments about Postal Service proposed changes in service consistent with

Congressional and Postal Service interest in expedited advisory opinions.

The Postal Regulatory Commission also recommends that Congress consider

adding language to 39 U.S.C. 3661 that requires, upon receipt of the Commission's

advisory opinion, the Postal Service provide a written response to Congress. Such

response should explain how it intends to implement Commission's recommendations

or justification as to why it does not agree with the Commission's recommendations.

The Postal Service should not implement such changes until its written response has

been provided to Congress. ln furtherance of the PAEA and section 3661's goal of

increased transparency of the Postal Service, this will allow Congress and users of mail

to see how the Postal Service plans to incorporate the Commission's recommendations

into its overall plan to change service on a nationwide or substantially nationwide basis

and its rationale and justification for diverging from any Commission recommendations.

Currently, the Commission's advisory opinion is required only to be provided to the

Postal Service. The proposed change would require both the Commission's advisory

opinion and the Postal Service's written response to be submitted to Congress for

appropriate review and oversight.

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701 Report Chapter lV: Operation of the PAEA Amendments

Furthermore, requiring a timely Commission decision and the Postal Service to

provide such written response in advance of implementation ensures that the Postal

Service is able to consider thoroughly the opinion and provide justifications for its

response.

Requiring a Federal agency to provide a written response to the Commission's

suggestions is supported by precedent in another provision of the PAEA. ln PAEA

section 802(c), upon request of the Postal Service, Congress requires the Commission

to produce a report that reviews certain calculations of OPM related to the Postal

Service's Civil Service Retirement System liability. Upon receipt of the Commission's

report, the PAEA requires that OPM:

shall reconsider its determination or redetermination in light of

such report, and shall make any appropriate adjustments. The

Office shall submit a report containing the results of its

reconsideration to the Commission, the Postal Service, and

Congress.

PAEA section 802(c)(2)

On February 23,2010, as modified on March 2,2010, the Postal Service

requested that the Commission produce such a report. The Commission issued its

report on June 30,2010. Upon receipt of the Commission's report, OPM reconsidered

its determination in light of the Commission's recommendations and submitted the

results of OPM's reconsideration to the Commission, the Postal Service, and Congress

on September 24,2010.

Language similar to PAEA section 802(c) may be appropriate to require the

Postal Service to "reconsider" its proposed plan in light of the advice it has received and

"submit a report containing the results of its reconsideration to the Commission...and

Congress." Cf. PAEA section 802(c).

85
701 Report Chapter V: Conclusion

CHAPTER V: CONCLUSION

The Commission appreciates the opportunity to contribute to this important policy

review by providing a701 report every five years to measure the effectiveness of the

PAEA. As a matter of practice, the Commission finds that the PAEA is generally

functioning as Congress intended. The United States Postal Service has utilized the

flexibilities granted by the law as described in this report with varying degrees of

success.

ln this, the Commission's first 701 Report, we have identified areas where key

adjustments to postal laws could help address the líquidity crisis facing the Postal

Service and better inform Congress and the mailing public.

The recommendations in this report are not proposed with the expectation that, if

adopted, they may resolve all of the Postal Seryice's difficulties, However, this report

highlights areas where there are opportunities for short-term remedies. lmplementation

of these recommendations would improve the Postal Service's current financial situation

in the near term and provide opportunities to more fully assess long-term solutions.

86
Comments of United States Postal Service

Section 701 Report Page 1 of34

Pnrnrcx R, Dorunroe

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901 N.!v York Av¡nuo, NW, Suitr 200

Werhlngton, DC 20288{001

Do¡r Ch¡lrm¡n Goldway:

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th¡ -dnll r.pon Brcparcd by thr Commiuion purruant to S¡ction 701 of th¡ Po¡t¡l Accountabiilg

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thr Comml¡¡lon to thc Prcsid¡nt rnd Congrcrc, I look fonperd to rcviowing ho llnal roport.

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701 Report

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Comments of United States Postal Service

Section 701 Report Page 3 of 34

UNITED STATES POSTAL SERVICE RESPONSE

TO COTUIMISSION'S DRAFT SECTION 7OI REPORT

September 15,2011

I. INTRODUCTION

On August 8, 201 1, the Postal Service received a copy of the Postal

Regulatory Commission's (Comm¡ssion's) draft report under Section 701 of the

Postal Accountability and Enhancement Act of 2006 (PAEA), Pub. L. No. 109-

435. Subsection 701(a) requires the Commission, at least every five years from

the PAEA's enactment date, to "submit a report to the President and Congress

concerning (1) the operation of the amendments made by [the PAEA]; and (2)

recommendations for any legislation or other measures necessary to improve the

effectiveness or efficiency of the postal laws of the United States." Subsection

701(b) further requires the Commission to afford the Postal Service a

"reasonable opportunity ... to review the report and to submit wr¡tten comments

on the report," which must be attached to the version submitted to the President

and Congress.

Because it is the first such report under the PAEA and because of the

Postal ServÍce's currently dire financial condition, this year's report represents an

historic opportunity to recommend amendments to the PAEA that would directly

address the new postal business reality and give the Postal Service a

sustainable future. The Postal Service agrees with the Gommission that

restructuring of the onerous retiree health benefits (RHB) prefunding payments is

a critical step towards improving the financial situation of the Postal Service. At
Comments of United States Postal Service

Section 701 Report Page 4 of 34

the same time, however, improving the Postal Service's financial stability in both

the short-term and the long-term requires more comprehensive changes than are

discussed in the Commission's draft report, The Postal Service hereby submits

its comments on the effectiveness of the PAEA and recommends changes to the

law that would enable the Postal Service to restore itself to financial solvency in

order to continue providing universal service to the nation.

The Postal Seruice wishes to stress that the pace of change in the

demand for the mail, and the impact of that changing demand on postal finances

and the service that the Postal Service provides to our nation, will continue to be

volatile. This makes it critical that changes be made now that give the Postal

Service the necessary flexibility to respond quickly and effectively to both the

current dire financial circumstances, and any future circumstances that may

arise, Addltionally, given the pace of change, an ongoing review and evolution of

the Postal Service's business model will be required to ensure that the Postal

Service continues to have the flexibility and tools going forward to adapt to forces

around it and continue to provide universal service.

I¡. THE POSTAL LAWS NEED SIGNIFICANT REFORM TO ENSURE

STABILITY AND THE CONTINUED PROVISION OF UNIVERSAL

SERVICE

These Postal Service comments are arranged ín four broad sections. The

first section outlines the ways in which events since the enactment of the PAEA

have threatened the Postal Service's stability, The second section offers

recommendations for additional tools to control costs, which are critically

necessary if the Postal Service is to regain financial stability. The third section

addresses pricing flexibility and discusses the role that post-PAEA

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Comments of United States Postal Service

Section 701 Report Page 5 of 34

implementation has played in limiting, rather than expanding, the revenue-raising

tools available to the Postal Service. The final section analyzes the

Commission's evaluation of various regulatory areas and its recommendations in

the Draft Report, as well as those of the State Depañment. The Postal Service

presents alternative recommendations for consideration, Where appropriate.

A. The Assumpt¡ons Underlying the PAEA Are No Longer Valid

The PAEA resulted from years of significant debate and hard work by

members of Congress and other postal stakeholders. The Postal Service is

appreciative of the efforts of Congress and all those involved in creating the

PAEA. Given what was known at the time, it appeared to most that, when the

PAEA became law, it would enable the Postal Service to finance universal

seru¡ce well into the future. Unfortunately, this did not prove to be the case'

because the assumptions underlying the PAEA were no longer valid as the

nation fell into recession, and mailvolumes plummeted'

ln enacting the PAEA, Congress implicitly assumed that the Postal

Service could maintain financial stability in the face of electronic diversion and

the accelerated RHB prefunding schedule by raising prices up to the change in

consumer inflation, generating additional revenue through pr¡cing and product

innovations spurred by the removal of the Postal Reorganization Act's (PRA's)

constraints, and cutting those costs within the Postal Service's control. This

assumption explains the three central policy choices made by the PAEA: prices

for market-dominant prices (which account for nearly 90 percent of Postal

Seruice revenue) would be capped at the level of consumer inflation, the Postal

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Comments of United States Postal Service

Section 701 Report Page 6 of 34

Service was to prefund retiree health benefits on an accelerated schedule, and

the Postal Seruice would receive no augmented authority to reduce its costs. A

necessary pred¡cate of this assumption was that volume trends in the middle of

the last decade - characterized by gradually declining First-Class Mail and stable

or rising Standard Mail - would persist for a period of time. lf this had occurred,

the Postal Service would have had an opportunity to put its cost-cutting and

product innovation strategies into place in order to maintain financial stability

while making its prefunding payments, which were going to be a significant shortterm challenge even under normal circumstances.

That the PAEA would not obviate the need for additional reform at some

point ¡n the future was implicitly understood, as volume would eventually reach a

level that would necessitate downsizing not achievable under the PAEA. lndeed,

the law itself recognized this because of the numerous studies and analyses it

required. However, there is no inherent reason that the PAEA could not have

been successful for some time, had volumes not declined so precipitously during

the period which coincided with the recession and the continuing economic

weakness.

Neither Congress, nor lhe Postal Service, nor other stakeholders

anticipated at the time the PAEA was enacted either the severity of the recession

that began soon afterwards or the extraordinary volume declines that occurred

during that period. ln the fiscal year that ended just prior to the enactment of the

PAEA (FY 200ô), the Postal Service had its highest volume ever, totaling2l3

billion pieces of mail. While the threat of electronic diversion was well-

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Comments of United States Postal Service

Section 701 Report Page 7 of 34

understood, it was not expected that First-Class Mailvolume would thereafter

decline by an estimated 25 billion pieces, or 26 percent, from its FY 2006 level

through the end of this fiscal year. This vastly exceeded the decline for the

previous flve year period, in which FirsþClass Mail declined by a total of 6 billion

pieces. While the long-term challenges due to the electronic diversion were a

problem that the Postal Service had anticipated and planned for, the decline in

mail volumes since the economic downturn began has been nothing short of

staggering, compressing what was seen as a long-term, graduál decline into only

a few years. Furthermore, it was certainly not expected that Standard Mail

volume would decline by an estimated 19 billion pieces, or 18 percent, from FY

2006 levels, after growing for most of the decade. Going forward, the Postal

Service expects First-Class Mail volume to continue to decline at a significant

pace, while Standard Mail volume will be flat. The end result is a grave

mismatch between the Postal Service's revenues and its costs.

ln the face of such precipitous volume declines, the tools available to the

Postal Service under the PAEA were simply not sufficient to maintain the Postal

Service's financíal solvency. First, despite the recommendations of the

President's Commission, the PAEA gave the Postal Service no new authority to

cut labor and network costs. Second, the PAEA's enhanced pricing and product

tools could not stem the tide of billion-fold revenue losses as volumes declined

due to macroeconOmic factors. As a result, the Postal Service could not

realístically match the lost revenue from the volume declines through cost

reductions, considering its structural network costs and labor costs (including the

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accelerated prefunding payments), which cont¡nued to rise without regard to the

rate of consumer inflation,l or through the introduction of new products or pricing

initiatives.

Nor could the Postal Service ma¡ntain financial stability through application

of the price cap. The price cap is not well-suited to a per¡od of rapidly declining

volumes: as volumes decline, the remaining volume does not provide enough

contribution to cover the Postal Service's fixed costs, imposed either by the

nature of the work performed by the Postal Service (acceptance and delivery of

hardcopy mail throughout the entire nation) or by statute. The price cap, based

on an index that measures general price levels in the economy, does not

consider Postal Service volume changes or the fact that the Postal Service's

fixed costs generally rise at levels independent of the trends in consumer

inflation.2

Furthermore, not only did volumes decline much more rapídly than was

ever expected at the time the PAEA was enacted, but the price cap index (the

r For instance, even as volumes hava declined by 20 percent from their FY 2006 peak through

the end of the last fiscal year, the delivery network increased by 3 percent in that time period as

lhe result of the addition of new delivery addresses. 2 See, e.g., H.R. 22, The Postat Reform Act of 1997: Hearing Before the Subcomm. on the Postal

Seryice of the House Comm. on Government Refom and Oversighf, 105th Cong. 249-50, 259-

60,268 (1997) (statements of Dr, Laurits R. Christensen and Dr. William J. Baumol). lndeed,

during the legislative debate on bills that led up to the PAEA, the Postal Service warned that a

CPI cap could only work ln conjunction with an appropriate measure of new cost-control authority.

Seq e,9,, U.S. Postal Service: What is Needed to Ensure its Future Viability?: Hearing Before the

Senafe Comm. on Homeland Security and Govornmental Affairs,109th Cong, 58-63 (2005)

(statement of Postmaster General/CEO John E. Potter) (noting the importance of comprehensive

reform that did not rely solely on a price cap and enhanced pricing flexibility, but also addressed

Postal Service costs and service levels); The PostalService in Crísis: A Joint Senafe-House

Hearing on Principles for Meaningful Reform: Hearing Before the House Comm, on Govemment

Reform and the Senafe Comm. on Governmental Affairs, 108th Cong. 70-74 (2004) (statement of

Postmaster General/CEO Potter) (advising that comprehensive reform was particularly important

because mail volume and revenue trends were inherently uncertain, and that maintaining

financial solvency therefore required that "a price cap be just one element of comprehensive

reform legislation that provides the Postal Service with flexibility in other critical areas"),

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Consumer Price lndex for All Urban Consumers, or CPI-U) became negative

during the recession. G¡ven that there had not been a comparable per¡od of

declining CPI-U since the 1950s, there was little expectation when the PAEA was

passed that GPI-U would be negative for a sustained period of time. While this

helped the Postal Service in some respects, such as by eliminating cost-of-living

adjustments, significant cost inputs outside of the Postal Service's control

continued to rise without regard to the overall decline in CPI-U. The Postal

Service was therefore unable to address those increased structural costs through

price increases, either through the use of the CP|-based cap, or, following the

Commission's denial of its request, through the use of the safety-valve exigoncy

provision. lndeed, the prices for market dominant products remained unchanged

for two years, even as the Postal Service's financial situation deteriorated.

The Postal Service now faces a situation in which its volume and revenue

are substantially less than stakeholders expected at the time the PAEA was

debated and enacted,s Furthermore, there ls no reasonable expectation that this

lost volume will ever return. The Postal Service projects that volumes will decline

at a consistent pace: by 2015, the Postal Service currently projects volumes of

151 billion, and by 2020, volumes of 133 billion. The biggest decreases will

occur in First-Class Mail, the Postal Service's most profitable product. Thus, the

mail mix will increasingly be weighted towards lower-margin products, particularly

a For instance, the President's Commission had projected volume ol 201.5 billion pieces in FY

2012 under a scenario of "gradual displacement" of the mail by electronic means, REPoRT oF THE

pREstDENT's Couulsslon oN THE U¡lrreo SrRtes Posta¡- SeRvlcE, EMBRAcINo rHe FutuRe:

Mnx¡.¡o rse Touo¡r C¡rolces ro PRrseRve UNveRs¡r- Mntl SrRvlce (2003) (hareinafter

"President's Commission Report"), at iv, The Postal Service currently projects that volume for FY

2012will be 161 billion pieces.

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Standard Mail, which will further impede any improvement in net f¡nanc¡al results.

This fact is demonstrated by the results in the third quarter of FY 201 1: while

market-dominant mail volume dropped by only 2.7 percent from SPLY, Postal

Service revenue still declined by 3.1 percent, reflecting the continued decline of

First-Class Mail notwithstanding an increase in Standard Mail.4 This is because it

takes roughly 3 additional pieces of Standard Mail to compensate for the loss of

a single piece of First-Class Mail, and any such volume growth in Standard Mail

is unrealistic, Thus, as the Commission noted earlier this year, the Postal

Service cannot count on a rebound in the ecoRomy to significantly improve its

financial results.s

B. The Postal SEwice Needs AdditionalAuthority to Control

Costs

The economic slowdown and its significant - and continu¡ng - impact on

the rate of mail volume decline have therefore placed the Postal Service at the

brink of collapse under the structure put in place by the PAEA. Significant

actions must be taken to revamp postal law so that financial stability can be

restored and maintained, considering the Postal Service's current financial

situation and projected volume and revenue trends, expected trends in input

costs, and necessary capital investments to þreserve high-quality service. To

restore and thereafter maintain financial solvency, the Postal Seruice needs the

authority to comprehensively address both its labor costs and its infrastructure

costs. On the labor side, the Postal Service must address its legacy costs,

including its pension and health benefit liabilitles, One alternative recently

I Postal Service, Form 10-Q (August 5,20111, al22

" FY 2010 Annual Compliance Determination at 34.

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proposed by the Postal Service would be to give the Postal Service the authority

to manage the administration of its legacy costs (in part¡cular, health care costs)

in a more efficient manner, as well as the tools to better match the size of its

workforce with its financial resources. ln addition, the Postal Service must be

given the authority to address all facets of its retail, process¡ng, and delivery

networks. The Postal Service must be given not only the ability to control costs

through flexibility over the number of delivery days, but also the enhanced ability

to replace unprofitable postal retail facilities with alternative access channels free

from statutory restrictions and political or regulatory interference, and to

consolidate mail processing plants free of political interference.

1. Labor Costs

The Commission's analysis and current legislative proposals rightly

address RHB prefunding and pension overpayments, but these solutions do not

remedy the long-term problem: the magnitude of the Postal Service's benefíts

liabilities and other labor-related costs. The Postal Seruice must be given the

tools to reduce the size of its liabilities - particularly its health benefits liabili$ - if

it is to become financially sustainaþle over the long-term'

The RHB prefunding schedule is the clearest sign that the PAEA was

premised on overly optimistic assumptions, and the Postal Service agrees with

the Commission that the schedule needs to be addressed. The Postal Service

also agrees with the Commission that one approach to addressing the RHB issue

would be to correct the overfunding of the Civil Service Retirement System

(CSRS) identified by the Postal Service Office of lnspector General (OlG) and

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the independent actuary retained by the Commission, and to use that money to

satisfy the RHB prefunding payments.o This approach has been proposed in

separate pieces of legislation by Senator Collins, Senator Carper, and

Representative Lynch.T Another approach would be to amend the manner in

which the RHB prefunding occurs to reflect a more measured approach than the

accelerated schedule imposed by the PAEA and to requ¡re payment of this longterm liability over the long term, consistent with normal actuarial practice.

However, simply amending the RHB prefunding schedule is not sufficient

to restore shoÉ-term solveney to the Postal Serviee, mueh less its long-term

solvency. ln the short-term, even if the Postal Service does not make the RHB

payment at the end of this fiscal year, it will be dangerously low on cash in

October of this year, and would experience a cash shortfall at some point during

fiscalyear 2012. Therefore, additional measures are necessary to ensure shortterm sofvency. One clear source of additional funds is the Postal Service's

overfunding of the Federal Employee Retirement System (FERS), which

amounts to approximately $6.9 billion, and which should be refunded. There is

no dispute that this overfunding exists, nor is there any actuarial or principled

reason why it should persist. Congress should address the overfunding in a way

that provides immediate liquidity: providing an immediate refund is an essential

tool to restoring short-term tiquidity to the Postal Service, thereby helping to avoid

complete insolvency in FY 2012.

6 See Draft Reoort at 2. 7S,353,112thCong. 

S 101 (2011)(Collins);S.1010, 1l2thCong. S 101 (2011) (Carper);H.R.

1 35 1 , 1 1 2th Cong. SS 2-3 (201 I ) (Lynch).

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ln addition, changing the manner by which the RHB liability is funded does

not address the fact that, over the long term, the size of that liability is simply

unaffordable as volumes continue to decline. A truly sustainable approach - and

the one favored by the Postal Service - must lead to a reduct¡on in the Postal

Service's long-term benefits liabilities. One means of doing so is to allow the

Postal Service to create its own health benefits plan, separate from the federal

plan, which would, among other things, involve better coordination with Medicare.

The Postal Service also needs to achieve savings in pension costs, At a

minimum, the Postal Service believes it should have the authority to offer a

defined contribution pension plan to future employees. This would begin to

moderate long-term pens¡on liabilities.

Also essential to helping the Postal Service regain long-term financial

stability is the necessity of providing the Postal Service with tools to reduce the

size of its workforce. Over the next three years, the Postal Service will need to

reduce its career complement by approximately 220,000 employees in order to

match costs with projected revenues. Attrition will only lead to a reduction of

approximately 100,000 employees. The layoff provisions in the postal collective

bargaining agreements prevent the Postal Seruice from reducing the size of its

workforce by the additional amount that is necessary, To achieve the fuilher

complement reductions that are financially necessary, the Postal Service must be

given the ability to reduce the size of the bargaining-unit workforce through use

of the Reduction-in-Force (RlF) rules applicable to federal employees in the

competitive service, without applicatlon of the layoff provisions. Whíle this would

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Comments of United States Postal Service

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be an extraord¡nary step and one the Postal Service does not pursue lightly,

extraordinary circumstances requ¡re extraordinary remedíes, and the Postal

Service does not believe, based on the history of collective bargaining and

interest arbitrat¡on, that it will be able to mod¡ñ/ layoff protections suff¡ciently

through the current collective bargaining process.

Finally, the Postal Service supports reforms to the workers' compensation

system, particularly the reform that would require recipients of workers'

compensation benefits to retire when they become eligible. Legislation on this

issue has been introduced by Senator Collins.s

2, Infrastructure Costs

ln addition to reducing labor costs, the Postal Service must also be given

the clear authority to right-size its network costs to reflect the environment of

significantly reduced volume. The Postal Service must evolve as demand for

postal services changes, and its current operating structure becomes fínancially

unsustainable, ïhe President's Commission recognized this essential fact,

noting that the Postal Service must be given greater flexibility over its retail,

processing, and delivery networks.e Legislative change ís necessary regard¡ng

the delivery and retail networks,

Obtaining flexibility over delivery frequency is an essential aspect of rightsizing the Postal Service for the new environment in whlch it must operate.

Senator Carper and Representative lssa have introduced bills thatwould allow

t s. 3s3, SS 301-303.

o President's Commission Report al 28-29, 7 9-84.

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Page 15 of 34

the Postal Seruice to move to a five-day delivery plan.10 While it did not reach a

decisíon in response to the Postal Service's request for an advisory opinion, the

Commission has previously recognized that five-day delivery is consistent with

the provision of universal service.ll The Postal Service's plan represents a

careful assessment of customer needs and would also significantly improve the

Postal Service's bottom line, regardless of whether the Postal Service's or the

Commission's savings estimates are used. lndeed, even if the Commission's

estimates are accepted for the sake of argument (though the Postal Service

strongly believes that its own est¡mates are more accurate), annual cost savings

of $1.7 billion would be extremely significant.

The Postal Seruice must also rationalize its retail network. The Postal

Service currently has too many under-pedorming post offices, which can be

replaced with more robust and cost-effective means of providing access to postal

services. ln the last year, the Postal Service has undertaken various measures

to right-size its retail network, including those outlined in Commission Docket No.

N2011-1, Such measures are subject to statutory restrictions, however, and

greater legal clarity is therefore appropriate. Senator Carper's billwould

implement a necessary change to 39 U.S.C. S 101(b), which currently requires

that the Postal Service provide "a maximum degree of effective and regular

postal serv¡ces" to rural areas, and to refrain from closing small post offices

"solely for operating at a deficit." The Carper bill would still require that the

Postal Service provide "effective and regular postal services" to all areas,

1os. 1010, s205; H.R. 2309,112th Cong, S 111 (2011)'

t1 postal Rãgulatory Commission, RepoRr o¡¡ UMVERsRI- P srRI- SeRvlce R¡¡o tHe PosrRl

Mol.ropor-v 1¡ (200s) (hereinafler"uso Report"), al123.

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Comments of United States Postal Service

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including rural areas, but would give the Postal Service the flexibility to choose

the means by which this service is provided.r2 lndependent post offices, staffed

by postal employees, would not be required if universal service is adequately

provided through alternate means. This is consistent with the recommendations

of the President's Commission,ro

Addressing the Postal Service's cost structure is vital to ensuring that the

mail remains competitive, affordable, and relevant going foruard. At the same

time, if Congress believes that the social policies underlying particular labor and

seruice level requirements should be maintained despite current and expected

First-Class Mail volume declines, then the law should be revised to ensure that

the Postal Service can generate sufficient revenue to remain solvent in light of

those requirements.

The PAEA's imposition of a price cap system has been an improvement

over the old structure in many respects. The acceleration of efficiency gains by

the Postal Service from the already aggressive pace prior to the passage of the

PAEA demonstrates that Congress was correct in disregarding concerns

expressed during the reform process that a price cap could not be applied to the

Postal Service, which lacks residual claimants in the form of shareholders.ra

lndeed, a more relevant concern - also expressed prior to the PAEA - is that

providing incentives for efficiency is of limited value if management lacks the

12 s. toto, g zot.

'" President's Commission Report at xiv, 81-84.

to See, e.g., H.R. 22, The Posial Reform Act of 1997: Hearing Before the Subcomm. on the

Posfa/ Servlce of the House Comm, on Government Reform and Oversìght, 105th Cong. 107-108

(1997) (statement of Dr. Michael Crew and Dr. Paul Kleindorfer).

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Comments of United States Postal Service

Section 701 Report Page 17 of 34

tools to take the actions that are necessary to operate under the cap.15 lf the

tools to control cost ¡nputs are not prov¡ded, as was the case with the PAEA, then

the price cap system should take into explicit account those cost inputs that are

outs¡de of management's control.

C. The Regulatory Approach Can Be lmproved to Expand Pricing

Flexibility

While the PAEA intended to enhance the Postal Service's pricing flexibility

for all types of postal products, Congress did include restrictions on the Postal

Service's flexibili$ to price market dominant products under the CPI-U cap. As

a procedural matter, the Postal Service agrees with the Commission that the new

system is a significant improvement over the old, as prices can now be changed

more expeditiously: a litigious process that used to take up to 10 months for the

Commission to review proposed prices is now accomplished much more quickly

for both market dominant and competitive products.lG Changes to product

parameters, such as the change to allow alf stamps to be treated as Forever

stamps, are also reviewed on a relatively quick timeframe by the Commission

under its regulations.

As a substantive matter, however, the PAEA's results are mixed in terms

of giving the Postal Service true pricing flexibility. The PostalService is able to

introduce new prices or temporary discounts and to test experimental products

tt S"", e.g., Robert A. F. Reisner, Global lnsight, "Price Caps and the U.S. Postal Servicel

Prospects, Perils and the Public lnterest" (2003), at 9.

,6 However, the benefits of this change are mitigated by the fact that the Commission requires

prior reviews of all pricing and cost methodology changes,. even whgn such reviews are not

iequired by the statute; the statute, for instance, only requires a before-the-fact review to ensure

compliancã with the price cap, but the Commíssion's review procedure is substantially broader.

ln addition, the Commission ieviews every competitive price change before-the'fact, lncluding

individual negotiated service agreements, although such review is not required or necessary.

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more quickly than it was before the PAEA. The Postal service has taken

advantage of this increased flexibilíty to introduce a number of pricing initiatives

in order to attract and retain mail volume, which would not have been feasible

under the prior system, These initiatives included "summer sales" for standard

Mail in 2009 and 2010, a First-class Mail lncentive program in the fall of 2010,

saturation Mail and High DensÍty lncentives, the Reply Rides Free incentive, and

an incentive to encourage the use of multi-dimensional barcodes on mail pieces.

For changes to existing prices, some degree of enhanced flexibility is

inherent in the fact that, unlike the prior system in which prices were

recommended by the commission and could only be overridden by the postal

Service's Governors in limited circumstances, the Postal Servíce can now design

prices, with the commission simply reviewing those prices for compliance with

the statute, However, the commission has imposed numerous restrictions on

the Postal servíce's ability to exercise business judgment in pricing, some of

these are the result of clear statutory language, rather than Commission action,

such as the rigid preferential pricing rules of 39 U,S.C. S 3626, and the

application of the price cap at the class level rather than to market-dominant

products as a whole,17 At the same time, however, the Commission has

interpreted the language of other provisions of the statute in a way that has

unnecessarily restricted the Postal Service's pricing flexibility. This has led to a

situation in which, as applied by the commission, a price cap has essentially

lt Th¡s is a significant limitation: under the PRA, an important pricing tool was the reallocation of

institutional costs âcross the subclasses of mail, based on the factors of former 39 U.S.C. S 3622,

as conditions changed. This is largely precluded under the PAEA's price cap system, becãuse

the price cap applies to each class of mail.

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Comments of United States Postal Service

Section 701 Report Page 19 of 34

been overlaid upon a system that perpetuates many of the substantive rigidities

of pricing under the PRA.

Two decisions of the Commission stand out. First, the Commission's

application of the workshare provision (39 U.S'C' $ 3622(e)) to the relationsh¡p

between single-piece First-Class Mail and commercial FirsþClass Mail, combined

with the cap, reduces much of the Postal Seruice's pricing in First-Class Mail, its

most prof¡table product, to be more an exercise in arithmetic rather than one in

strategic marketing. Second, in its most recent Annual Compliance

Determination, the Commission interpreted 39 U.S.C. S 101(d), a general policy

provision held over from the PRA, as imposing a specific requirement that each

market dominant product cover its costs, As a result, the Commission ordered

the Postal Service to concentrate price increases on Standard Mail Flats,

notwithstanding whether the Postal Service believes a different approach would

be a more prudent exercise of pricing flexibility. This compels Postal Service

pricing decisions that may not be optimal given current market conditions'

Whether these decisions are consistent with the language of the statute is

currengy before the United States Court of Appeals for the District of Columbia

Circuit.ls

ls See U.S. Posfa/ Seru. v. Posta! Reg. Comm'n No. 10-1324 (workshare); U.S' Posfa/ Sery' v'

Posfa/ Reg. Comm'n,No. 1 1-1117 (Annual compliance Determination),

Áãditionatty, ihe Postal Service disagrees with the Commission's characterization in the

request for a market

. As explained before

in the Postal Service's

subsequent submissions to the Commission, the ,,le materials to support

the relåtion of its request to the identified circumstances, and nolhing in the Court of l¡rPeals

¿".¡"ion indicates aàything to the contrary. See Unrted Stafes Posfal Serv' v. Posfa/ Reg.

Cimm;n, eqO F,3d 1ã6s ëolt). While the Postal Service wishes to make clear that it does not

báì;t" t'he Commission'i charâcter¡zations are accurate, the Postal Service also does not

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Comments of United States Postal Service

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Regardless of the ultimate outcome of these cases, the Commission has

approached the PAEA in a manner that limits rather then enhances the Postal

service's flexibility to make its own business decisions. More, not less, pricing

flexibility is needed to help the Postal Service tackle unusual financial threats like

those that have prevailed since the PAEA's enactment, Even in less dire times,

the Postal Seruice needs the ability to react swiftly and nimbly to a dynamic

marketplace, rather than being trapped amid an overly rigid pricing scheme. This

is particularly true as the Postal Service develops hybrid and digital services in

response to needs of the nrarketplace.

D. Analysis of Regulatory Suggestions

1. Market Dominant Pricing

a. Price Gap

Any analysis of "pricing flexibility" must acknowledge the multitude of

factors and objectives in 39 U.S.C. S 3622(b) and (c), and shoutd not be overly

focused on the goal of ensuring product-specific cost coverage.le Congress's

careful requirement to balance such factors and objectíves recognizes that an

undue concentration on productspecific cost coverage can be counter to sound

business judgment and the interest of sustaining Postal Service finances. For

instance, it might be more rational, in some cases, to aím price increases at

profitable products with lower demand elasticity than unprofitable products,

because the increased revenue would more likely be realized from customers of

the former products than from those of the latter. A truly flexible system, as

believe that a comprehensive discussion of those inaccuracies is relevant or necessary to the

p_urposes of this report.

1s See Draft Report at 35.

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Comments of United States Postal Service

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Congress intended, is one that acknowledges that some interests (such as

raising revenue to sustain the postal system overall) can take precedence over

others (such as the aim of product-specif¡c cost coverage), depending on the

círcumstances.

To increase pricing flexibility, the Postal Service proposes that Congress

apply the price cap to market dominant products as a whole, rather than to each

class, This would augment the Postal Service's ability to price under the cap in a

commercially reasonable manner, based on demand and unit costs, while also

adhering to the other requirements imposed by law. Over time, enhanced

flexibility would also allow the Postal Service to address the cost coverage of

products that are currently priced below cost.

b. Price Ghange Schedule

The draft report discusses the pros and cons of the Postal Service's

decision to file market dominant price adjustments in January.2o As the

Commission acknowledges, the scheduling of price adjustments is left flexible,

subject to the Postal Service's discretion and business judgment. The Postal

Service agrees with the Commission that there is no need to make any

adjustment to the PAEA in this respect.

. c. Quatity of Service Adjustment_Factors and Other

Examination of the Price Gap System

The draft report offers a novel suggestion to allow the Postal Service's

market dominant pricing authority to be adjusted upward in response to

to Draft Report at 38-40.

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improvements in service performance.2l The Postal Service applauds the

Commission's creativity and interest in opening a dialogue on the price cap

regime, However, the Postal Service believes that, rather than introducing

further regulation of the Postal Service's value proposítions, the more crucial and

pressing need is for reforms that gíve the Postal Service additional tools to set its

prices in accordance with market principles.

lf the price cap should be open to revision at this time through the

introduction of an adjustment factor based on service qual¡ty, then the

examination of the cap in a more comprehensive fashion is likewise warranted.

More meaningful reforms to the price cap are in order, given the current financial

condition of the Postal Service. Examination of such reformswould include

reconsideration of whether CPI-U is an appropriate index, as opposed to

alternative inflation indices, and whether additional adjustment factors are

necessary to account for cost and market forces un¡que to the Postal Service,22

2t td. ar 40.

22 For example, the statute could be revised to gear pricing around an alternative index that better

reflects the Postal Service's cost profile, with adjustments to continue to incentivize efficiency and

productivity gains, During the postal reform negotiations that culminated in the PAEA, the Postal

Service proposed a cap, 80 percent of which constituted the change in the Employment Cost

lndex (ECl), with the other 20 percent constituting the change in the Gross Domestic Product

Chain-Type Price lndex (GDPPI). The ECI measures changes in the cost of labor, including

salaries and benefits, while GDPPI is a broad measure of prices across the economy that reflects

all of the goods and categories included in the Gross Domestic Product. GDPPI measures more

goods and services than CPI does, as CPI focuses only on the average price of those goods and

services purchased by a typical household. Neither the ECI nor the GDPPI experienced the

significant declines that CPI-U did over the past several years, ln addition, an index based

primarily on ECI reflects the fact that the vast majority of the Postal Service's costs are labor

costs. The maintenance of an indexed price cap would continue to incentivize cost-cutting by the

Postal Service to keep pace with the private sector as a whole, but an ECI-GDPPI cap would

reflect the realities of the Postal Service's cosl profile better lhan CPI-U does.

The market-dominant pricing mechanism could also require use of adjustment factors

other than that proposed by the Gommission, ln one example of such a pricing system, the

United Kingdom's postal regulator, Postcomm, employs an "X" factor to adjust Royal Mail's

inflation-based price increases. ln calculating the "X" factor at the beginning of the periodic price

control, Postcomm makes a number of assumptions in order to ensure that the price control will

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Comments of United States Postal Service

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d. Preferred Rates

The Postal Service recommends that the Congress address the role of

preferent¡al rates for certain classes of mail, Under PRA provisions left largely

unaffected by the PAEA, the Postal Service is required to adhere to rigid

numer¡cal benchmarks in pricing certa¡n preferential categories of mail. For

instance, the prices for Library Mail must be 5 percent lower than the prices for

the most closely corresponding regular-rate category, Media Mail' This inhibits

the Postal Service's pric¡ng flexibility with respect to preferred-rate categories.

It might also prevent the benchmarked regular-rate categories from being

properly placed on the competit¡ve side, regardless of how they might compete in

the market: because the preferential categories are required by law to be priced

as market dominant products, it would eppear that the regular-rate categories to

allow Royal Mail, the U,K.'s public postal operalor, to earn sufficient revenue to provide universal

service. Îhe X factor incorporates assumptions regarding future volumes, operating and capital

expenditures, and pension deficit contributions, as well as an appropriate profit allowance' At the

same time, Postcomm establishes efficiency savings that it believes Royal Mail should achieve

during the price control. Postcomm has established other adJustmentfactors that account for

severË votúme changes (the "G" factor) and unfunded pension obligations (the 'PP" faclor),

which, if applied in the Un¡ted States, could add helpful correctives for volume'related revenue

losses and structural benefits costs outside of the Postal Service's control,

ln the recent exigent price change case, volume losses played a significant role and- the

Commission's ruling hinged in part on itJ opinion that "long-term structural pro_blems," including in

particular the RHBF prefunding requirement, were responsiblefor the Postal Service's urgent

revenue needs. PRC Order No. 547, Order Deny¡ng Rêquest for Exigent Rate Adjustments,

Docket No, R2010-4, September 30,2010, at 3, 68-80'

It shoutd be noted that postal reform bills leading up to the PAEA would have required the

useofGDPP|and/oranadjustmentfactorsimilartotheXfactor, H.R.22,106thCong.$201

(1999) (CPl with adjustmeni factors taking lnto account, among other items, "new and significant

ètatutôrily imposed iunding obligations not fully funded through appropriations," postal deficits

notwithstanding "best pract¡ces of honest, efficient, and economical management," and Postal

Service costs ãnd productivity); H,R. 22, 1 05th Cong. S 1001 (1997) (GDPPI with adjustment 

.

factors taking into äccount, among other items, Postal Service costs and productivity and "such

other considãrations as the Postal Service and the Commission mutuâlly agree to be

ãppropriate"); H.R. 3717, 104th Cong. S 1001 ( 'R' 22, 109th Cong' $

2O;1 ëOO5l (þassed in House) (CPl with except "reasonable and

equitäble and necessary to ailow the Postal Se s of honest, efficient, and

eionomical management, to maintain and continue the development of postal services of the kind

and quality adapted to the needs of the United States").

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Comments of United States Postal Service

Section 701 Report Page 24 of 34

which they are rigidly tied also must remain on the market dominant side, To

enhance pricing flexibility, the rigid benchmarks should be replaced with more

flexible standards for discounting, and the Postal Service should be allowed to

manage its products according to their actual market status,

2. Nationwide Changes in Service

Senator Carper has suggested in his bill that the Commission should be

explicitly required to issue an advisory opinion on large-scale service changes

under 39 U.S.C. S 3661 within 90 days, and that the formal hearing requirement

should be removed from the advisory opinion process.23 The Carper billwould

also not apply the advisory opinion process to competitive products. Although

the Gommission historically has not issued advisory opiníons within g0 days, this

timeframe would be consistent with the current Commission rules governing

advisory opinion procedures, which require the Postal Service to file its request

at least 90 days before the service change's planned effective date. 39 C.F.R, S

3001.72. A 90-day period would also be consistent with other complex

proceedings under the PAEA, including the Commission's review of exigent price

change requests and the Annual Compliance Determination process, which the

Commission conducts without the burdensome and lengthy formal hearing

process. See 39 U,S.C, SS 3622(dX1XE), 3653(b), This clear timeframe and

lifting of disproportionate administrative requirements would provide the

expedition needed in advisory opinion proceedings, while ensuring a level of

Commission analysis consistent with its work in other areas. Senator Carper's

23 s. toto, g zoo

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Comments of United States Postal Service

Section 701 Report Page 25 of 34

approach is clearly preferable to that set forth by the Commission in the draft

report,24

3. Post Office Glosings and Consolidations

a. Reporting on Reta¡l Network Plans and Activities

The draft report proposes that Congress require the Postal Service to

provide regular reports to the Commission on the Postal Service's reta¡lnetwork

plans and activities, including.information on how part¡cular closings conform

with previously filed plans and alternative access."zs The Postal Service

appreciates the important interests in transparency and accountability, which the

Commission correctly identifies as animating the PAEA.2u However, additional

reporting would not provide any appreciable benefit in thís regard, given the

extensive reporting and information-gathering about the retail network that occurs

in the course of the Annual Compliance ReporU Determination proceedings.

Moreover, there is significant transparency in the process used to consider

discontinuance of post off¡ce closings and consolidations. With respect to

operational decisions that Congress has placed beyond the Commission's

regulatory purview, the Postal Service already must account to Congress and the

public, Thus, it is unclear how "Congress, the public, and the Commission" could

stand to be any "better informed'' than they are today'z7

24 The draft report proposes a change whereby the Postal Service could be authorized to request

expedition, but suih a recommendation would not provlde th_eêctual assurance of expedition 

.

offbred by Senalor Carper's bill. lt should be noted that the PAEA currently does not prevsnt lhe

postal Sérvice from requesting expedited trea lent, Mandating a set timeframe would provide

the necessary assurance of timely advice, as opposed to leaving the schedule up to

admi nistrative discretion.

25 Draft ReÞort al71-72,77.

2ø rd. at7a.

27 See id. a177.

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Comments of United States Postal Service

Section 701 Report Page 26 of 34

b. PostalServiceRulemaking

The draft repod discusses a recent Postal Service rulemaking to revise its

regulat¡ons concerning the closure or consolidation of Postal Service-operated

retail facilities.2s ln connection with the rulemaking, the draft report also cites "the

notable exceptíon [to Commission suggestions adopted by the Postal Service] of

potential appeal rights to postal patrons for discontinuance decisions involving a

post office station or post office branch."2e ln fact, the rulemaking did not make

any change in whether disconlinuances of stations or branches can be appealed

to the Commission, which is governed by statute,s0 Despite the Commission's

opposing view as to the scope of 39 U.S.C. S 404(dX5) appeal rights, the final

rule went so far as to introduce an explicit recognition that the Postal Service

may, in its discretion, decline to challenge the Commission's jurisdiction in ceÉain

(or even, if it chooses, all) cases, in contrast with its previous practice of

asserting jurisdictional defenses in all cases.3r

26 ld. at76-77, The draft report notes that the changes became the subject of a complaint filed

with the Commission by postmasters and their representative organizations. However, this

complaint was recently dismissed by the Commission. Order No, 797, Order Disrnissing

Qomplaint, PRC Docket N0. C2011-3 (August '11,2011).

ze Draft Reoort at 76.

to United Siates Postal Serv,, "Post Office Organization and Administration: Establishment,

Classification, and Discontinuance," T6 Fed. Reg.41413, 41414-41415 (July 14,2011).

"' ln a related section, the draft report takes up the Commission's opinion that 39 U,S.C. S 404(d)

was meant to apply to stations and branches as well as to Post Offices. The Commission's

appeal to "plain meaning" obscures more than a century of legislative history and case law to the

effect that Congress understood and intended the distinction between Post Offices, which are

subject to 39 U.S.C. S 404(d), and stations and branches, which are not. The Commission has

never offered a detailed legaljustification for its vleq in contrast wilh the Postal Service's

extensive textual and historical analysis as to Congress's intent. See generally Comments of

United States Postal Service Regarding Jurisdiction Under (Current) Section 404(d), PRC Docket

No. A2010-3 (April 19,2010).

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Section 701 Report

Comments of United States Postal Service

Page27 o134

4. Product Management

a. New Market Dominant Glasses

The draft report states that "the PAEA is silent as to whether new classes

of mail can be added,'' concludes that this silence "limits the Postal Service's

flexibility," and recommends that the statute be amended to provide explic¡t

authority.sz The Postal Service disagrees with the Commission's conclusion that

the PAEA limits the flexibility of the Postal Service to add new classes of mail.

To the contrary, existing taw does not preclude the creation of a new mail class,

nor is it clear that the PAEA's price cap could not accommodate new mail

classes though the exercise of administrative discretion, Thus, while Congress

may wish to clariff explicitly the Postal Seruice's authority to create new market

dominant mail classes, the Postalservice does not believe that creating new

classes of mail is precluded by the PAEA'

b. NonPostal Services

Congress should give the Postal Service measured authority to engage in

new revenue-generating activities not authorized under current law, in order to

seek new sources of revenue consistent with the public interest and the needs of

the marketplace. lf the Postal Service is to take full advantage of additional

revenue opportunities, the regulatory standards of the PAEA, which are desígned

to disfavor nonpostal services, will be a poor fit. The Postal Service supports the

provisions for nonpostal services contained in Senator Carper's bill,33 which do

32 Draft Report at 41.

., S. 1010,'g 304. Bilts by Representatives Connolly (H.R, 1262)and lssa (H.R. 2309) would also

allow the Põstal Service io offer nonpostal services under certaln conditions.

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Comments of United States Postal Service

Section 701 Report Page 28 of 34

not ímpose self-defeating regulatory reshaints on authority intended to

encourage the appropriate development of such services.

c. Negotiated Se¡vice Agreements

Under the PAEA, the Postal Service has entered into hundreds of

agreements with mailers for competitive seruices, a level of activity that would not

have been possible underthe negotiated service agreement rules applicable

under the PRA. As the Commission observes, the streamlined oversight of the

NSA process is laudable; however, the process could be enhanced by having

after-the-fact review and certainty in the form of a statutory time limit on

Commission review of NSAs.

ln particular, because in many instances the Commission treats a marketdominant or competitive contract as being a separate product, it conducts a

review under 39 U.S.C. S 3642 to determine the proper categorization (or to

confirm the Postal Service's designation) of that contract as market dominant or

competitive. ïhe proper categorization of a contract rate that represents a

discount off of a generally applicable rate is self-evident, however. ïherefore,

the conduct of a proceeding that purports to decide that issue is unnecessary,

and negatively affects the Postal Service's speed-to-market in offering

customized priôes and services to mailers. The uncertainty of the regulatory

process and the implementation date inhibits the Postal Service's ability to

compete effectively with private delivery firms that can offer contract rates with

greater certainty and speed. The results have a particular impact on the Postal

Service's ability to create new solutions for postal customers, as the Commission

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Comments of United States Postal Service

Section 701 Report Page 29 of 34

subjects the first contract of a given type to the indefinite Section 3642 process.

At the very least, there should be a time limit on any review of this type.

Moreover, given the highly competit¡ve, time-sensitive market for customized

shipping solutions, regulatory review should be made after-the-fact, as proposed

in the bill introduced by Representative lssa.sa

ln addition, for other, non-contract-based product changes that implicate

Section 3642, the Commission is not subject to any statutory deadline for

reaching a final decision. Even simple changes under that provision take months

to accomplish. The lack of a time limit on these proceedings is inconsistent with

the fact that the PAEA placed time limits on nearly every other proceeding that

the Commission conducts. The Postal Service therefore proposes to place a

time Iimit on any rev¡ew of new market dominant products and new competitive

products of general applicability. Senator Carper's billwould set such time

limits.35

d. Market Tests

The Postal Service supports the Commission's recommendation for

ra¡sing the maximum revenue limitation on experimental market test products.

This additional authority to utilize the market test procedures can only enhance

the Postal Service's ability to improve its financial condition.

5. Service Performance

Service performance reporting has proven to þe one regulatory area

where an expressly limited statutory obligation has been expanded in both

.4 H.R. 2309, SS 404-405, Representative lssa's bill would require any review to be after-the-fact

and completed within five working days.

3u s, 101'0, S gog.

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Comments of United States Postal Service

Section 701 Report Page 30 of 34

breadth and depth, requiring significant compliance costs, The Commission's

rules governing the Postal Service's reporting of service performance, codified at

39 C,F.R. Part 3055, imposed challenging and burdensome service performance

reporting beyond the iequirements of the PAEA.36 The íncremental benefits of

the reporting requirements are outweighed by the associated administrative

burdens, which is inconsistentwith Congressional concern for balance in this

regard.

While the PAEA simply mandates annual reporting, and nowhere

establishes or suggests that the Postal Seruice must collect and file addilional

service performance information with the Commission,sT the Commission's rules

require quarterly reporting down to the individual district level. This action has

resulted in additionalcost, administrative burden, and delay in implementation for

the Postal Service. Although the Postal Service offered in its 2008 Service

Performance Measurement plan to file quarterly, national-level reports for each

product class in the interest of transparency and facilitating Commission

oversight, this otfer was based on current capabilities and expectations that

significant additional cost would not be íncurred. lndeed, the Postal Service had

already established a practice of posting such quarterly reports on its public

website, The Commission took this offer, howeverr as an invitation to requíre

quarterly reporting at a far more detailed level than the Postal Servíce's systems

and finances were prepared to support, notwithstanding the Postal Service's

tu Order No. 465, Order Establishing Final Rules Concerning Periodic Reporting of Service

PeÍormance Measurements and Customer Satisfaction, PRC Docket No, RM2009-11 (May 25,

2010).

'7 39'u.s.c. S 3652(aX2XBXi).

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Section 701 Report

Comments of United States Postal Service

Page 31 of 34

objections about cost, lack of express statutory authority, and proportionality'38

To the extent the Gommission has expanded 39 U.S.C. S 3652, which concerns

annual reporting, into a justification for quarterly reporting, Congress should

expressly instruct the Commission to limit its reporting ru¡es to the annual

reporting required bY the PAEA.

The commission took a similar approach in requiring the periodic

reporting of matters relat¡ng to the Postal Seruice's operational performance

generally, such as acceptance and delivery point statistics, wait-time-in-line data

for retail customers, and customer survey results.3e Such statistics may be

generated occasionally or regularly for internal management purposes, but

require additÍonal administrative effort to develop into a publicly reportable form'

postal statutes do not author¡ze the Commission to monitor such network-wide

operat¡onal statistics, and such statistics are not direct indicators of universal

service, quality of service, or customer sat¡sfaction, general statutory references

to which the commission cited to iustiff its new requirements. As noted in two

Commissioners' concurring opinion, such information is not tied to any particular

products' performance, wh¡ch is what Titfe 39 charges the Commission to

evaluate, and "may place an unnecessary burden on the Postal Service at a time

when it has limited resources."4o

Moreover, the Postal Service sees no need for clarification of the current

statutory language regarding changes to service standards, 39 U.S.C. $ 3691(a)'

38 Un¡ted States postal Service Comments in Response to Order No. 292, PRC Docket No.

RM2OO9-1 I (November 2, 2OOg), at 15'16; S. Rep. No. 108-318, at 19 (2004)'

3e order No. 465 at 52-57. * l¿ "i 

OZ,OS iConcun¡ng Opìnion of Commissioner Dan G. Blair and Vice Chairman Tony L'

Hammond).

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Section 701 Report

as the Commission recommends. The Postal Service has not objected to

engaging in such consultations thus far,

6. State Department Comments

The Postal Service largely agrees with the July 6, 2011, comments of the

Department of Slate, which are appended lo the draft report. ln particular, the

Postal Service supports the Department of State's (State's) proposal to define the

phrase "agency of a foreign government" for purposes of a requirement to file

with State and the Commission commercial or operational contracts with such

entities. 39 U,S.e . S 407(d). To the extent that an explicit definition would lend

clarity, however, the definition proposed by the Department of State is overly

broad and would be more burdensome than is the present practice for all parties

involved, without appreciably furthering the underlying oversight interests of the

Commission or State. The Department of State proposes defining the phrase to

mean"any entity in which a foreign state holds an interest, either directly or

indirectly." lf adopted, this definition would result in a need to file any commercial

or operational contract with, for example, a domestic transportation provider in

which a minority stake is held by a bank, a single share of which is held by a

hedge fund in which a foreign sovereign wealth fund owns a single share. While

this may seem to be a st¡:ained example, the Postal Service can also point to an

actual example of a large mail consolidating company operating in the United

States that is partly owned by a foreign postal operator that is owned, Ín turn, by

its national government, ln this case, the commercial contract for discounted

mail rates for large volumes of presorted mailwould have to be filed with the

Comments of United States Postal Service

Page 32 of 34

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Comments of United States Postal Service

Section 701 Report Page 33 of 34

Department of State and the Commission for transparency purposes under 39

U.S,C. S 407(d). This requirement does not appear to be an outcome

anticipated by Congress, because such contracts must already be filed with the

Commission by virtue of them being contracts establishing competit¡ve

commercial rates for postal serv¡ces. Yet the Department of State's proposed

definition would trigger the transparency f¡ling requirement for such an

agreement,

The Postal Service believes that the section 407(d) filing requirement is

meant to ensure that contracts the Postal Seruice forms with foreign government

entities acting as agents for the government should be disclosed to the

Commission and the Department of State. To illustrate the appropriate

distinction, one might contrast the manner in which the U'S. government would

recognize its own agenc¡es' activities, on the one hand, with those of companies

in which the U.S. government owns an interest, such as General Motors

Corporation, on the other hand. lt is unlikely that the United States government

would recognize General Motors Corporation as an agency of the U'S.

government, despite the fact that its ownership interest in General Motors would

meet State's own definition if it were applied reciprocally.

A more workable approach would be to adopt a definition that is focused

more specifically on examination of commercial and operational contracts with

entities wholly or partly owned by a foreign government and which operate in a

governmental rather than commerc¡al capacity. lndicators of whether an entity is

operating in a governmental rather than commercial capacity might be the

-31 -
Comments of United States Postal Service

Section 701 Report Page 34 of 34

domestic tax treatment received by the entity, whether it is operating under an

exclusive license issued by the government, and whether the entity is established

by the laws of a national government. lt bears noting that neither the affected

agencies nor the general public has expressed dissatisfaction with the level of

transpatency or oversíght exercised to date under 39 U.S.C. S 407(d),

notwithstanding the lack of a clear statutory definition. This suggests that the

Postal Service's current practice, which is to file those commercial or operational

agreèments that it forms with parties in which a foreign government holds a direct

and controlling ownership interest, is more than adequate, and that clarification of

the definition should only be adopted to fit the requirement more narrowly to the

need for transparency.

ilt. coNcLusroN

The Postal Service's dire financial condition puts in peril its ability to

provide universal service to the nation. Significant revisions to the PAEA are

needed to enable the Postal Service to restore itself to financial solvency.

lmproving the Postal Service's financial stability in both the short-term and the

long-term requires more comprehensive changes than are discussed in the

Commission's draft report. The Postal Seruice and other stakeholders would

benefit from the Commission's views on the ability of current law to produce longterm sustainability for the Postal Service and what changes are necessary to

ensure the continued provision of universal service.

-32 -
Section 701 Report

Comments of the United States Department of

Page 1 ofS

United Statee Department of

Washùryton, D.C. 20520

Y. Goldway, Chairman

Postal Regulatory Commission

Office of Public Affairs and Government Relations

July 6, 201I

901 New York Avenue N'W

Washington, DC 20268-000 I

Dear Ms. Goldway:

I

This is in response to the Commiþsion's invitation for comments on the

operation of the amendments made by tþe Postal Accountability and

Act of 2006 (the PAEA) and for recomrhendations for legislation or other

measures necessary to

the United States. 'We

recommendations, and

improve ttre effeötiveness or

appreciate the oçiportunity to

we hope that they a¡e useful

efficiency of the postal laws

provide these comments

to the Commission in its

other improvements. lnteragency

State on the formulation, coordination,

international postal services and other

revlew process.

The PAEA made significant to former section 407 ofthe Postal

Reorganization Act, as amended, concems international postal

arrangements. In or¡r experience with

few diffrculties that call for legislative

coordination as led by the Department

and oversight of foreign policy related

amendments thus far, there have been

intemational delivery services has been relatively smooth and effective within

framework provided by the PAEA.

'We note, however, a few areas thin which some improvements could b

made. First, although section 407(d) is in its requirement that a copy of a

commercial contract between the Uni States Postal Service (USPS or Postal

Service) and an agency of a foreign must be filed with the

of State and the Postal Regulatory sion not later than the effective date o

such contract, whether a postal is considered an "agency of a foreign

PAEA offers little guidance to answer

minor legislative amendment could be

goverrrment" is a question for which

For the sake of clarity, we believe that
Section 701 Report

Comments of the United States Department of

Page 2 of 5

made to provide the needed guidance eliminate any disagreement about the

application of this provision to the Service in its commercial capacity.

Our understanding is that when agency of a foreign govemment acts in

commercial capacity, it may lose to the protection of the Foreign

Sovereign Immunities Act. Under circumstances, it is in the interest of the

U.S. government to have notice that a

commercial activity. Thus, receiving

anangements is of benefit to the U.S.

government is engaging in such

ies of contracts memorial izing these

It should be clear, though,

not all commercial contracts entered in by the USPS with foreign postal

operators are subject to this only those entered into with an

of a foreign government." Therefore, vqe recommend that a specific definition o

"agency of a foreign government" be inçluded in the language of section 407(d)

title 39.

the activities of the Office of the Inspector General and the Postal Regulatory

Commission are included in the annual

Congress under section 1 105 of title 31

In the interest of clarity and

2009 of title 39 to include the funds al

activities related to section 407 would

that the Postal Service transmits

as required by section 2009 of title 39.

, we believe that amending

to the Department of Søte for its

appropriate. Including the funding for

the Department of State's activities rel to intemational postal arrangements

the Postal Service's annual budget

transparency and better enable the

tted to Congress would increase

Service, Congress, and other interested

parties to identiff quickly the support that the Postal Service is required to

expend beyond those which are to support its own infrastructure
Section 701 Report

Including the recommended language

likely that anyone revie\Ming the laws

the activities of the Department of

international delivery services are

dollars that generally support the

We consulted with other agencie

comments that they might like to make,

amendments to the mentioned sections

opportunity to have our

you to contact us ifyou have any

Sincerely,

Dean

Princi

Bureau

Enclosure: as stated

-t

Comments of the United States Department of

Page 3 of 5

section 2009 would also make it more

to the Postal Service would learn

related to international postal and other

through postâl revenue, not the tax

's activities.

concerning any recommendations or

we received none. Our

title 39 are enclosed. V/e appreciate

included in your report and encourage

or concerns about them.

Deputy Assistant Secretary of State

Intern ati onal Org an ization Affair s
Section 701 Report

Comments of the United States Department of

Page 4 of 5

Add subsection (Ð to section 407 to as follows:

(f) The Postal Service shall allocate to Department of State from any funds

available to the Postal Service such as may be necessary for the

of State to carry out the activities of 407 of title 39 of the United States

Code. To facilitate the allocation and ofthe funds, by August I the

Department of State shall present its re for the next fiscal year's expenses,

which shall be reasonable and auditable, to the Postal Service. The Postal

shall make the requested funds for use by the Department of State not

later than the first day of the fiscal year

unused at the end of the fiscal year may

request.

which they are requested. Funds

allocated to satisff the next fiscal

Amend section 2009 as follows:

. . . The budget program shall also incl separate statements of the amounts

which (1) the Postal Service requests to appropriated under subsections (b)

(c) of section 2401, (2) the Office of General of the United States

Service requests to be appropriated, out the Postal Service Fund, under sectron

8G(Ð ofthe Inspector General Act of 19 8, (3) the Postal Regulatory

requests to be appropriated, out of the

of this title, and (4) the Department of

Service Fund, under section 504 (d)

requests to be allocated to it, from

section 407 (Ð of this title. The

his recommendations but without

under section I105 of title 31.

Add new section 407(dX3) as follows:

(3) In this subsection, "agency foreign goveÍiment" means any entity

in which a foreign state holds an either directly or indirectly.

funds available to the Postal Service,

President shall include these amounts

revision, in the budget transmitted to
Drafted: IO/GS Laree Martin x7-I526

U: DelehantyDlvf/0.Workin g L 1 .07 .05 -

Clearance:

A/DAS: Julie Connor - OKay

IOIGS: Thatcher Scharpf- Okay

IO/GS: Dennis Delehanty - Okay

LÂINA: Gabriel Swiney - Okay

5 year Report comments letter.docx