ANNUAL COMPLIANCE 

DETERMINATION REPORT

Fiscal Year 2012

Postal Regulatory Commission

Submitted 5/7/2013 2:02:30 PM

Filing ID: 86931

Accepted 5/7/2013

March 28, 2013

Letter From the Chairman

Ruth Y. Goldway

Chairman

On behalf of the Postal Regulatory Commission, I am pleased to present our Annual Compliance Determination 

(ACD) reviewing the performance of the United States Postal Service for Fiscal Year 2012. This annual, afterthe-fact review is required by the Postal Accountability and Enhancement Act (PAEA) and focuses primarily on 

financial transparency and compliance with pricing and service performance standards. The Postal Service's 

comprehensive submission and its prompt responses to all Commission requests for additional information are 

required in order that this ACD fulfills its regulatory role.

The Postal Service's net financial losses eroded its already precarious situation even further in FY 2012. The 

Postal Service incurred losses of $15.9 billion. $11.1 billion of that amount was an expense for the Retiree Health 

Benefits Fund (RHBF), although the Postal Service did not make this payment. $2.4 billion was due to a workers’ 

compensation liability adjustment and $2.4 billion was attributed to operating losses. The Postal Service has 

reached its maximum borrowing limit and is not able to finance essential capital investments nor to adequately 

support needed innovations. The Postal Service has focused on reducing its costs and has undertaken ambitious 

restructuring plans that impact service levels.

Based on our review of information provided by the Postal Service, the Commission has determined it to be 

largely in compliance with postal policies and the pricing requirements of the PAEA. Notably, service performance 

improved for almost all classes of mail. Nevertheless, nine Market Dominant products' prices failed to raise 

revenue sufficient to cover even their attributable costs, causing losses of $1.5 billion, more than 50 percent 

of the total operating losses under management control. In particular, Standard Mail Flats revenues were $528 

million less than attributable costs and Periodicals produced a $670 million loss. This ACD highlights the untapped 

potential of the pricing flexibility available to the Postal Service under the law.
The Postal Service can increase contribution through adjustments in worksharing arrangements and rates charged 

for products within a class but it has not yet fully used that flexibility. While the Postal Service has implemented 

certain Standard Flats rates that respond to the Commission's previous finding of non-compliance, its pricing 

strategy continues to result in negative contributions per piece. For Periodicals, the Postal Service has maintained 

a stagnant worksharing and pricing structure since FY 2007 and, in FY 2012, the contribution per piece declined.

The Commission commends and continues to support the Postal Service’s efforts to innovate. In FY 2012, the 

Commission approved two pricing incentives designed to increase the value of the mail and slow the diversion 

of mail to electronic channels. The Commission also evaluated three market tests initiated in previous years and 

found two of them successful. The Postal Service’s first Market Dominant Negotiated Service Agreement (NSA) may 

not be as promising. The Postal Service continued to pursue competitive NSAs, agreeing to 65 domestic NSAs and 

383 international NSAs in FY 2012. And the adoption of POStPlan preserves customer access in rural communities.

In FY 2012, Congress and the Administration considered legislative action to address the Postal Service’s structural 

problems. Senate Bill 1789 included several of the Commission’s recommendations for statutory changes that 

would benefit the Postal Service. The Senate Bill adjusted the RHBF payment schedule to help address the Postal 

Service's current liquidity challenge, provided more opportunities for non-postal product offerings and clarified 

the scope of appellate review for Postal Service determinations to close retail facilities. We believe this ACD will 

help to further inform Congress's consideration of legislation in 2013.

I wish to thank Vice Chairman Robert Taub and Commissioners Mark Acton, Tony Hammond and Nanci Langley 

for their valuable work and contributions to this report. On behalf of my fellow Commissioners, I also want to 

recognize the Commission staff’s outstanding efforts and dedication to our work.

Ruth Y. Goldway

Chairman
Table Of Contents

Chapter I

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Principal Findings - Financial Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Principal Findings - Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Principal Findings - Service Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Chapter II

Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Procedural History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Chapter III

Legal Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Noncompensatory Products Since FY 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Standard Mail Flats . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Workshare Discounts for Nonprofit Standard Mail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Periodicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Chapter IV

Postal Service Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Diminishing Cash Flows and Working Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Declining Volume and Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Chapter V

Performance Plans & Program Performance Reports . . . . . . . . . . . . . . . . . . . . . . . . 35

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Statutory Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Analysis of Performance Goals and Strategic Change Initiatives . . . . . . . . . . . . . . . . . 38
Chapter VI

Service Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  4

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  4

Measurement Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  4

First-Class Mail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  5

Standard Mail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  5

Periodicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  5

Package Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  5

Special Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  6

Participant Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  6

Customer Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  6

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  6

Retail Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  6

Post Office Suspensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  6

Delivery Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  6

Wait Time in Line . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  6

Collection Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  6

Alternative Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  7

Customer Experience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  7

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  7

Customer Experience Measurement Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  7

Chapter VII

Market Dominant Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  7

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  7

First-Class Mail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  8

Periodicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  8

Standard Mail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  10

Package Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  12

Special Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  13

Market Dominant International Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  14

Market Tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  15

Market Dominant Negotiated Service Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  15
Chapter VIII

Competitive Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Cross-Subsidy Provision: Section 3633(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Product Cost Coverage Provision: Section 3633(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Appropriate Contribution Provision: Section 3633(a)(3) . . . . . . . . . . . . . . . . . . . . . . . . . 17

Competitive Market Tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Competitive Products Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Chapter IX

Nonpostal Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

FY 2012 Financial analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Future Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Appendix A

Empirical Review of Price Cap Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Appendix B

Financial Results Under Previous Classification . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Appendix C

Methodology Changes and Management Operating Data System . . . . . . . . . . 18

Appendix D

Financial Results Under Current Classification . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Appendix E

Abbreviations and Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Appendix F

Commenters–2012 Annual Compliance Determination . . . . . . . . . . . . . . . . . . . . . 21

Chapter I 

Executive Summary

This report reviews the Postal Service’s performance in Fiscal Year 2012, fulfilling the Commission’s responsibility 

to produce an annual assessment of Postal Service rates and service. 39 U.S.C. 3653. It is based on information 

the Postal Service is required to provide within 90 days after the close of the Fiscal Year and on comments 

subsequently received from the public. Specific Commission findings and directives are identified at the beginning 

of, and italicized throughout, each chapter.

Principal Findings – Financial Performance

The Postal Service’s financial situation continued to decline in FY 2012. At the end of FY 2012, the Postal Service 

incurred a loss of $15.9 billion. Of this, $11.1 billion was due to its Retiree Health Benefits Fund (RHBF) expense, 

$2.4 billion was due to a workers’ compensation liability adjustment, and the remaining $2.4 billion was operating 

loss under management control. 

For the first three years after the enactment of the Postal Accountability and Enhancement Act (PAEA), the 

statutorily required pre-funding of the RHBF contributed significantly to the Postal Service’s financial losses. 

Without these payments the Postal Service would have increased, rather than decreased, its retained earnings in 

FY 2007 and FY 2008. The inability to generate sufficient revenues to meet its financial obligations has contributed 

to serious cash flow constraints. For FY 2009 through FY 2012, however, the Postal Service would not have been 

profitable even without these obligations.

For FY 2012, the Postal Service defaulted on its payment to the RHBF. Even without these payments, the Postal 

Service exhausted its statutorily defined borrowing limit. On average, 40 percent of the Postal Service’s total costs 

are considered fixed and the severe volume losses that began in FY 2006 have continued to make it difficult for the 

Postal Service to generate sufficient funds to cover its fixed cost. 

To remain viable, prices must be set to cover the total costs of the Postal Service. As volume declines, the fixed 

costs must be spread over fewer pieces. The difficulty in recovering fixed costs through pricing has led the Postal 

Service to find ways to substantially reduce those fixed costs. The Postal Service has proposed a new delivery 

schedule that includes package delivery Monday through Saturday, and mail delivery Monday through Friday. 

It has also begun moving forward with significantly reducing overnight and two-day service, and consolidating 

approximately 50 percent of its mail processing network. 

 POSTAL REGULATORY COMMISSION 7
Principal Findings – Pricing

Nine of the Postal Service’s market dominant products failed to generate revenues sufficient to cover attributable 

costs, losing a total of $1.5 billion, including $670 million from Periodicals and $528 million from Standard Mail Flats. 

The Postal Service has the pricing flexibility to increase contribution through worksharing incentives and rates 

charged for products within a class. However, the Postal Service has not fully used this flexibility. For example, 

it has not changed the pricing strategy for Periodicals since FY 2007, and in FY 2012 the revenue per piece declined. 

Likewise, the pricing strategy for Standard Mail Flats continues to result in negative contribution per piece.

For Periodicals, the Postal Service should review its operational strategy to assess what cost savings initiatives are 

working and how they can be improved. The Postal Service should also review its pricing strategy to determine 

how to incentivize additional mailings that can be efficiently processed by current or planned operations. Since 

the current Periodicals pricing structure was implemented in FY 2007, neither the worksharing discounts, nor the 

sack, bundle or pallet charges have substantially changed. Both products in the Periodicals Class lost money during 

FY 2012; however, the Commission does not find the prices and fees to be out of compliance at this time. Instead, 

the Commission finds that the Postal Service needs to take further action to reverse the negative net revenue 

trend.

For Standard Mail Flats, the Commission finds that the Postal Service has begun to make progress toward addressing 

the issues raised by the Commission in the 2010 ACD and makes no changes to that directive. The Postal Service 

should continue with its proposed three-year schedule of above-average price increases and operational changes 

designed to reduce flats costs.

Sixteen workshare discounts were too large, as the discounts exceeded avoided costs and were not justified by a 

statutory exception. The Postal Service is directed to either align these discounts with avoided costs in the next 

market dominant price adjustment or adequately support an applicable statutory exception. 

Competitive Products generated a profit amounting to 7.5 percent of the total Postal Service institutional costs. Both 

volume and revenue increased for Shipping and Package Services despite rate increases in excess of the Consumer 

Price Index (CPI). Volume increased 25 percent and revenues increased 8.7 percent. There were 63 competitive 

domestic Negotiated Service Agreements (NSAs) all of which appear to have covered their attributable costs and 

complied with the statutory requirements of section 3633(a)(2). There were 383 competitive international NSAs, 

of which 379 complied with the statutory requirements.

Four international competitive products failed to cover attributable costs and thus did not comply with section 

3633(a)(2). Each of these products is an international Negotiated Service Agreement. The products are Global 

Plus 2B, Global Plus 2C, Inbound Air Parcel Post (at non-UPU rates), and International Inbound Competitive MultiService Agreements with Foreign Postal Operators. The Postal Service is directed to review current versions of 

those agreements and report to the Commission within 90 days.

8 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER I
Principal Findings – Service Performance

The Postal Service met its service performance targets for both Single-Piece First-Class letters and cards and Presort 

First-Class letters and cards, its flagship products.

While the Postal Service did not meet its delivery service standard target for the majority of market dominant 

products in FY 2012, it made significant improvements over the course of the fiscal year. For most of the mail 

volume, quarter 4 results were substantially higher than quarter 1 results. 

Developing reliable measurement systems continues to present challenges to the Postal Service. Low levels of 

Full-Service Intelligent Mail barcode (IMb) adoption can result in unreliable service performance measurements. 

Although the Postal Service has made progress in increasing mailer participation in Full-Service IMb, the Commission 

is concerned about the low level of participation for certain Standard Mail categories, Package Services and 

Periodicals. 

The Postal Service is also currently unable to identify the majority of Standard Mail pieces by product. This results 

in service performance for most of Standard Mail volume being reported as mixed product categories. The Postal 

Service is taking steps to address this problem and is expected to discuss its progress in identifying Standard Mail 

pieces by product in its next Annual Compliance Report to the Commission.

The Postal Service has announced plans to adjust overnight and 2-day service standards for First-Class Mail, realign 

office hours for certain small post offices, and reduce the frequency of mail delivery from six days to five days, 

while retaining 6-day delivery for packages. The various implications of these service changes have been discussed 

in previous Commission Advisory Opinions.

 POSTAL REGULATORY COMMISSION 9
10 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER I
Chapter II 

Background

Introduction

Statutory Context

Two sections of title 39, United States Code, as amended by the Postal Accountability and Enhancement Act (PAEA),1

require the Postal Regulatory Commission to conduct ongoing, systematic reports and assessments of the financial 

and operational performance of the United States Postal Service. The first provision, 39 U.S.C. 3652, requires the 

Postal Service to file certain annual reports with the Commission, including an Annual Compliance Report (ACR). 

See 39 U.S.C. 3652(a) and (g). The second provision, 39 U.S.C. 3653, requires the Commission to review the Postal 

Service’s annual reports and issue an Annual Compliance Determination (ACD) regarding whether rates were not 

in compliance with applicable provisions of the title and whether any service standards were not met. Together, 

these provisions establish the ACD and the ACR as integrated mechanisms for providing ongoing accountability, 

transparency, and oversight of the Postal Service.

Timeline and Review of Report

The Postal Service is required to file the ACR no later than 90 days after the end of each fiscal year (that is, 90 days 

after September 30). The Commission is required to complete the ACD within 90 days after receiving the ACR. The 

Postal Service filed the 2012 ACR on December 28, 2012. Thus, the Commission must issue the ACD no later than 

March 28, 2013.

Focus of the ACR

In accordance with 39 U.S.C. 3652, the ACR must provide analyses of costs, revenues, rates, and quality of service 

sufficient to demonstrate that during the reporting year all products complied with all applicable requirements of 

title 39. Additionally, for market dominant products, the ACR must include product information, mail volumes, and 

measures of quality of service, including the speed of delivery, reliability, and the degree of customer satisfaction. 

For market dominant products with workshare discounts, the ACR must report the per-item cost avoided by the 

Postal Service through the worksharing activity performed by the mailer, the percentage of the per-item cost 

avoided that the per-item workshare discount represents, and the per-item contribution to institutional costs. 39 

U.S.C. 3652(a) and (b).

1 Pub. L. 109-435, 120 Stat. 3198 (2006).

 POSTAL REGULATORY COMMISSION 11
Other Reports

In conjunction with its filing of the ACR, the Postal Service must also file its most recent comprehensive statement 

on postal operations, its performance plan, and program performance reports. 39 U.S.C. 3652(g).

Commission Responsibilities

Under 39 U.S.C. 3653, the Commission is responsible for providing an opportunity for public comment on the Postal 

Service’s submission, making a written determination as to whether any rates or fees were not in compliance with 

applicable provisions of chapter 36 of title 39, United States Code, or related regulations, and whether any service 

standards were not met. 39 U.S.C. 3653(a) and (b). If a determination of non-compliance is made, the Commission 

is directed to take such action as it deems appropriate. 39 U.S.C. 3653(c). The Commission is also required to 

evaluate annually whether the Postal Service has met the goals established under sections 2803 and 2804 and may 

make recommendations to the Postal Service related to the protection or promotion of the public policy objectives 

of title 39. 39 U.S.C. 3653(d).

Procedural History

On December 28, 2012, the Postal Service filed its 2012 ACR, covering the period from October 1, 2011, through 

September 30, 2012. The ACR includes an extensive narrative discussion and a substantial amount of detailed public 

and non-public information contained in library references. The library references include the Cost and Revenue 

Analysis (CRA), the International Cost and Revenue Analysis (ICRA), cost models supporting workshare discounts, 

and volume information presented in billing determinants. Library Reference USPS-FY12-9 summarizes the other 

materials included in the ACR submission and contains a list of special studies and a discussion of obsolescence2

in response to 39 C.F.R. 3050.12.

The Postal Service concurrently filed its 2012 Comprehensive Statement on Postal Operations, which included the 

Postal Service’s 2012 Annual Performance Report and 2013 Performance Plan.3

 Additionally, the Postal Service 

filed its annual report to the Secretary of the Treasury regarding the Competitive Products Fund, as required by 39 

U.S.C. 2011(i), as part of Library Reference USPS-FY12-39.

On January 2, 2013, the Commission issued an order providing notice of the Postal Service’s filing of the ACR and 

an opportunity for public comment, establishing Docket No. ACR2012 as a formal docket to consider the ACR, 

and appointing a Public Representative to represent the interests of the general public.4

 It established February 1, 

2013, as the deadline for comments and February 15, 2013, as the deadline for reply comments.

2 In this regard, obsolescence refers to studies that may be outdated, e.g., a study may not reflect current operating conditions and procedures. 3 2012 Comprehensive Statement of Postal Operations, December 28, 2012. This document was filed as Library Reference USPS-FY12-17. It contains 

information required by the Postal Reorganization Act of 1970 (PRA), the PAEA, and chapter 28 of title 39, as added by the Government Performance 

and Results Act of 1993, P.L. 103-62; 107 Stat. 292. 4 See Notice of Postal Service’s Filing of Annual Compliance Report and Request for Public Comments, January 2, 2013 (Order No. 1609); see also 78 FR 

1276-1277 (January 8, 2013).

12 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER II
Methodology Changes

The Postal Service reports that the 2012 ACR generally uses the methodologies applied in the 2011 ACR, except in 

cases where methodology changes were approved by the Commission after the 2011 ACR or were pending before 

the Commission at the time the 2012 ACR was filed. The Postal Service identifies 13 approved changes and 1 

pending change. The approved changes were incorporated into the 2012 ACR. Where the pending change affected 

material in the ACR, the Postal Service generally included a version of the materials incorporating the pending 

change and a version that does not incorporate the change. The Postal Service requests that the Commission 

provide each model used in the preparation of the 2012 ACD at the time the 2012 ACD is issued, in order to ensure 

that the most up-to-date models are used in the 2013 ACR.

Product Analysis

The Postal Service provides an analysis of each market dominant product, including special services provided and 

domestic and international negotiated service agreements entered into during FY 2012. This analysis includes a 

discussion of workshare discounts and passthroughs for market dominant products, required by 39 U.S.C. 3652(b). 

The Postal Service also provides data for competitive products and discusses the data with reference to standards 

under 39 U.S.C. 3633 and 39 C.F.R. 3015.7. Finally, the Postal Service discusses the four market dominant market 

tests and one competitive market test conducted in FY 2012, as well as two market dominant and nine competitive 

nonpostal products.

Service Performance

The ACR includes information regarding service performance, customer satisfaction, and consumer access, as 

required under 39 U.S.C. 3652 and 39 C.F.R. Part 3055.

Confidentiality

Commission rules require the Postal Service to apply for non-public treatment when it considers information 

required in periodic reports to be commercially sensitive. 39 C.F.R. 3007.20. An application for non-public treatment 

must specify reasons for concluding the particular information is commercially sensitive and detail the nature of 

the competitive harm that public disclosure is likely to cause. The ACR includes such an application with respect to 

certain competitive products.

Requests for Additional Information

Twelve Chairman’s Information Requests (CHIRs) were issued with respect to the ACR during the period beginning 

January 4, 2013, and ending March 8, 2013. The Postal Service responded to the CHIRs, often filing supplemental 

information in support of the responses. The Commission appreciates the Postal Service’s responsiveness to 

the CHIRs.

 POSTAL REGULATORY COMMISSION 13
14 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER II
Chapter III 

Legal Issues

Introduction

Commenters raise several legal issues: (1) whether the Commission is required to make a finding of collective noncompliance of those products that have failed to recover their attributable costs since FY 2008; (2) whether Standard 

Mail Flats remain out of compliance with title 39, and the related issue of whether High Density/Saturation letters 

are unlawfully overpriced; (3) whether workshare discounts for nonprofit Standard Mail are unduly discriminatory; 

and (4) whether the Periodicals class complies with title 39 notwithstanding its continuing failure to cover costs.

Noncompensatory Products Since FY 2008

Background

Beginning in FY 2008, seven products have failed to generate revenues that cover their attributable costs.1 The facts 

and circumstances surrounding each of these products were analyzed in the ACDs for each of the fiscal years from 

FY 2008 through FY 2011. See, e.g., 2008 ACD at 58; 2009 ACD at 75; 2010 ACD at 94; and 2011 ACD at 105-106 

(Periodicals). In each of those ACDs, the Commission identified steps intended to move those noncompensatory 

products toward full cost-coverage. Id.

Comments

Valpak asserts that the Postal Service’s current financial problems are due largely to “self-inflicted” losses from the 

seven products with consistent losses. Valpak Comments at 33-38. Valpak argues that the Commission should make 

a finding of collective non-compliance with respect to those seven products. Id. at 37-38.2

 It bases its argument 

on its reading of 39 U.S.C. 3653(b) and upon the Commission’s order on remand in the 2010 ACR proceedings.3

Section 3653(b) provides that the Commission:

shall make a written determination as to – (1) whether any rates or fees in effect during such year (for 

products individually or collectively) were not in compliance with applicable provisions of this chapter (or 

regulations promulgated) thereunder....

1 Those seven products are: Inbound International Single-Piece First-Class Mail; Standard Mail Flats; Standard Mail NFMs and Parcels; Periodicals Within 

County; Periodicals Outside County; Single-Piece Parcel Post; Media and Library Mail. See Docket No. ACR2008, Annual Compliance Determination, 

March 30, 2009 (2008 ACD); Docket No. ACR2009, Annual Compliance Determination, March 29, 2010 (2009 ACD); Docket No. ACR2010, Annual 

Compliance Determination, March 29, 2011 (2010 ACD); and Docket No. ACR2011, Annual Compliance Determination, March 28, 2012 (2011 ACD). 2 Earlier in its comments, Valpak states that eight market dominant products collectively violate requirements of title 39. Id. at 33. Those eight products 

appear to be the seven products identified in note 1, supra, together with First-Class Parcels. Id.; see also id. at 35 (Table II-2, column headed “FY 2012 

Deficit (million)”). 3 Docket No. ACR2010-R, Order on Remand, August 9, 2012 (Order No. 1427).

 POSTAL REGULATORY COMMISSION 15
Valpak argues that although the Commission has in all prior ACDs evaluated compliance for products “individually,” 

not “collectively,” section 3653(b) requires compliance determinations on a collective basis as well. Valpak 

Comments at 33.4

Valpak seeks to support its interpretation of section 3653(b) by citing the Commission’s statement in Order No. 

1427 that “[r]ates that do not cover a product’s attributable costs ...are subject to more careful scrutiny by the 

Commission because, among other things, any shortfall shifts burdens onto other mailers...[and that the]...totality 

of circumstances presented is critical to Commission evaluations under section 3653.” Id. at 36 (emphasis omitted). 

Valpak argues that the “totality of circumstances” includes the collective magnitude, duration, and impact of the 

revenue shortfalls of the seven products it identifies, as well as the Postal Service’s failure to take adequate steps 

or to develop a plan to make these products profitable. Id. at 36-37.

The American Catalog Mailers Association (ACMA) opposes Valpak’s suggestion that the elimination of losses by 

means of adjustments to the rates of all products that have failed to cover their attributable costs during the past 

five years will virtually eliminate Postal Service operating losses. ACMA Reply Comments at 3-5. ACMA’s position is 

based on the contention that under price cap regulation the net effect of price adjustments within a class results 

in price increases for some products and price decreases for others with no demonstrable causal link between an 

overall revenue deficit and any specific product or group of products. Id.

Time Inc. (Time) responds to Valpak’s “theory of collective responsibility” by arguing that Valpak has misinterpreted 

the statutory language of section 3653(b), has proposed a concept of collective responsibility that is either a 

redundancy or inconsistent with logic or principles of fairness, and misapplies the “totality of circumstances” test 

as articulated in Order No. 1427. Time Reply Comments at 12-15.

Assuming that the term “collectively” as used in section 3653(b) is, as Valpak argues, broad enough to authorize a 

compliance analysis that assesses groups of products, the Commission concludes that the record does not support 

a finding that the noncompensatory products identified by Valpak are, as a group, non-compliant. Nor does the 

Commission accept Valpak’s application of the “totality of circumstances” test set forth in Order No. 1427.

Valpak’s allegations of collective non-compliance are based solely on the fact that eight market dominant products 

do not cover their attributable costs, that seven of those same products have lost money in each of the last 5 years, 

and that the losses from noncompensatory products have constituted almost two-thirds of the Postal Service’s 

operating loss over those same 5 years. Valpak Comments at 33-34. 

While product losses are an important consideration in determining compliance with applicable statutory 

requirements, the Commission has consistently maintained that a product losing money does not, by itself, 

necessarily require a finding of non-compliance. See, e.g., 2010 ACD at 17 (“A finding that a product (either individually 

or collectively) fails to satisfy a provision of title 39 does not compel a finding of non-compliance. In making its 

4 Valpak identifies 3 possible meanings of the term “collectively” in section 3653(b): (1) all market dominant products; (2) all products within a class; and 

(3) “all products that perennially lose money and together are a financial threat to the Postal Service’s survival as a financially independent entity....” It 

is the third possible meaning that Valpak uses as a basis for its claims. Id. 

16 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER III
determination, the Commission must take into account numerous sometimes conflicting considerations.”(emphasis 

added)); and Order No. 1427 at 14 (“a finding that a product or class fails to satisfy a provision of title 39, including 

the cost coverage factor of 39 U.S.C. 3622(c)(2), does not compel a finding of noncompliance.”).

Other relevant factors in a compliance determination include: differences in the circumstances of products 

showing a loss; the specific reason(s) for the losses; the magnitude and trend of losses; the steps suggested 

by the Commission to reduce the losses; and the Postal Service’s response to the losses and the Commission’s 

suggestions for reducing those losses. See Order No. 1427. Valpak offers no reason, and the Commission finds 

none, for ignoring these other relevant factors in assessing allegations of collective non-compliance.

A review of the products which Valpak alleges to be collectively non-compliant reveals significant factors that 

lead the Commission to reject a finding of non-compliance notwithstanding the losses produced by those 

products. Together, the other relevant factors affecting each of the products in the group challenged by Valpak 

effectively preclude the finding of collective non-compliance that Valpak seeks to establish by means of cumulative 

noncompensatory product losses.

First Class Parcels

In FY 2012, cost coverage fell to approximately 98.5 percent. See Chapter VII, infra. The Postal Service attributes 

the decline to the transfer of commercial First-Class Parcels to the competitive product list. Prices for retail FirstClass Parcels were increased by an above-average of 5 percent during January 2013. The Commission has urged 

the Postal Service to improve cost coverage through cost reductions and future rate adjustments. 

Inbound International Single-Piece First-Class Mail

This product is discussed in Chapter VII, infra. As explained there, revenue from this product is subject to a unique 

pricing regime. Prices are based upon a Universal Postal Union (UPU) pricing formula renegotiated once every 

four years. The Postal Service does not independently determine prices to be paid by foreign postal operators for 

delivering foreign origin mail. The current UPU formula is noncompensatory for inbound letterpost entering the 

United States. During the past few years, the United States has sought revisions to the UPU formula. Negotiations 

concluded in 2012 have resulted in the adoption of a new formula to be effective during Calendar Year 2014 which 

should significantly improve cost coverage for this product. During the same period that the Postal Service has 

been pursuing improvements in the UPU formula, it has been attempting to negotiate bilateral or multilateral 

rate agreements with foreign postal operators as an alternative to UPU formula rates. The inclusion of Inbound 

International Single-Piece First-Class Mail in a group subject to a finding of collective non-compliance, as urged by 

Valpak, will not bind the UPU or any foreign postal operator nor would it improve the Postal Service’s ability to 

cover its attributable costs for this product.

 POSTAL REGULATORY COMMISSION 17
Standard Mail

The two Standard Mail products included in the group cited by Valpak are Standard Mail Flats and Standard Mail 

Not Flat-Machinable (NFMs) and Parcels. Standard Mail Flats are discussed below and in Chapter VII, infra. For 

the reasons set forth more fully in Chapter VII, the Commission concludes that other relevant factors preclude a 

finding of non-compliance for Standard Mail Flats on the basis of product losses alone.

At the request of the Postal Service, the market dominant product Standard Mail NFMs and Parcels was renamed 

Standard Parcels and was divided into two categories. See Chapter VII, infra. One of those two categories was 

moved to the competitive product list on January 22, 2012.5

 The other category remained a market dominant 

product. As discussed in Chapter VII, infra, cost coverage for that market dominant product, Standard Parcels, 

improved during FY 2012. Between FY 2011 and FY 2012, losses were cut more than 50 percent from a loss of 

$111.7 million to a loss of $48.9 million. In Docket No. R2013-1, the Postal Service proposed and the Commission 

approved the fifth consecutive above-average price increase of this product. That increase became effective in 

FY 2013. In Chapter VII, the Commission urges the Postal Service to continue to give the Standard Mail Parcels 

product above-average price increases and to reduce its costs.

Periodicals

The Periodicals class consists of two products, Periodicals-Within County and Periodicals-Outside County.6 Both 

products lost money during FY 2012. For the reasons set forth below and in Chapter VII, infra, the Commission does 

not find the prices and fees for those two products to be out of compliance at this time. However, the Commission 

does find that the Postal Service needs to take further action to reverse Periodicals negative net revenue trend.

Package Services

The Package Services class contains five products, three of which are included on Valpak’s list of loss-generating 

market dominant products. Valpak Comments at 35, Table II-2. Those three products are Single-Piece Parcel Post, 

Bound Printed Matter Parcels, and Media and Library Mail. Id.

As explained in Chapter VII, infra, the cost coverage for Single-Piece Parcel Post increased by approximately 2.9 

percent in FY 2012. Losses decreased from $88 million in FY 2011 to $66 million in FY 2012. Following the close 

of FY 2012, most of Single-Piece Parcel Post was removed from the market dominant product list. The remaining 

subcategory of Single-Piece Parcel Post, Alaska Bypass Service, was added as a Package Services product offering. 

Moreover, the Single-Piece Parcel Post product was eliminated from the market dominant product list. See 

Chapter VII, infra. Because of these changes, the Commission expects the cost coverage of Package Services as a 

whole to improve. 

5 See Docket No. MC2010-36, Order No. 689, Order Conditionally Granting Request to Transfer Commercial Standard Mail Parcels to the Competitive 

Product List, March 2, 2011; Docket No. CP2012-2, Order No. 1062, Order Approving Changes in Rates of General Applicability for Competitive 

Products, December 21, 2011. 6 The Postal Service notified the Commission in Docket No. RM2011-8 that it is changing the name of Within County to In-County. A final order has not 

been issued in that docket. The terms Within County and In-County are used interchangeably in this ACD.

18 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER III
The second Packages Services product included on Valpak’s list of loss-generating market dominant products is 

Bound Printed Matter Parcels. In FY 2012, Bound Printed Matter Parcels covered its attributable costs and made a 

contribution to institutional costs. Id.

The third and final Package Services product which Valpak includes on the list of loss-generating products is Media 

and Library Mail. Valpak Comments at 35. During FY 2012, cost coverage improved by over 8 percent. See Chapter 

VII, infra. Between FY 2011 and FY 2012, losses on this product were reduced by over 40 percent from $98 million 

to $55 million. Valpak Comments at 35. The Postal Service has proposed above-average price increases in its most 

recent price adjustment cases and asserts that its cost savings initiatives are expected to improve cost coverage. 

See Chapter VII, infra. The Commission is encouraging the Postal Service to continue pricing Media and Library 

Mail in a way that improves cost coverage. Id.

Even assuming it were appropriate to review collectively the products identified by Valpak, the factors discussed 

above both explain and support the Commission’s conclusion that these products are not out of compliance 

notwithstanding the collective losses cited by Valpak.

Finally, Valpak fails to satisfy the “totality of circumstances” test discussed in Order No. 1427. It cannot be said 

that the Postal Service has not attempted any meaningful steps to make profitable each of the seven products at 

issue. For example, in the case of NFMs/Parcels, “the Postal Service has responded to cost coverage shortfalls by 

proposing above-average rate increases and the transfer of mail into competitive products that allow additional 

pricing flexibility.” Order No. 1427 at 19.

Valpak’s allegations are too broadly formulated and too narrowly supported to sustain a finding of collective 

non-compliance.

Standard Mail Flats

Background

On March 29, 2011, the Commission issued its 2010 ACD. The Commission concluded that because of the Postal 

Service’s failure to address the increasing cost contribution shortfall of the Standard Mail Flats product, the prices 

in effect in FY 2010 amounted to an unfair and inequitable apportionment of costs in violation of 39 U.S.C. 101(d). 

2010 ACD at 106.

Pursuant to the authority in 39 U.S.C. 3653(c), the Commission directed the Postal Service to increase the cost 

coverage of the Standard Mail Flats product through a combination of above-average price adjustments and cost 

reductions until such time that the revenue for the product exceeds attributable costs. Id. The Commission further 

directed the Postal Service to present a schedule of future above-CPI price increases for the Standard Mail Flats 

product, with the schedule to be updated with each subsequent market dominant price adjustment and ACR. 

Finally, the Commission ordered the Postal Service to provide certain additional information in subsequent ACRs 

and notices of market dominant price adjustments until the revenue for the product exceeds attributable costs. 

Id. at 107.

 POSTAL REGULATORY COMMISSION 19
The Postal Service subsequently petitioned the United States Court of Appeals for the District of Columbia Circuit 

for review of the 2010 ACD. While the appeal was pending, the Commission granted a Postal Service motion to stay 

that portion of the 2010 ACD requiring the Postal Service to present a schedule of above-CPI price increases.7

 The 

stay was to remain in effect until 30 days following resolution of the Postal Service’s appeal.

On March 28, 2012, the Commission issued its 2011 ACD. In it, the Commission found that the rates and fees for 

Standard Mail Flats remained out of compliance and, that Standard Mail prices continued to reflect an unfair and 

inequitable apportionment of the costs of postal operations to all Standard Mail users. 2011 ACD at 118-119. 

However, because of the continued pendency of the litigation regarding the 2010 ACD, the Commission did not 

require additional remedial action at that time. Id. at 119.

D.C. Circuit Opinion

On April 17, 2012, the United States Court of Appeals for the District of Columbia Circuit issued its opinion in United 

States Postal Service v. Postal Regulatory Commission, 676 F.3d 1105 (D.C. Cir. 2012). This opinion addressed issues 

raised by the Postal Service in its appeal of the Commission’s FY 2010 ACD. 

On appeal, the Postal Service had argued that by relying on the mandate in section 101(d), the Commission had 

improperly looked beyond the criteria prescribed by 39 U.S.C. 3622(c) for market dominant products, which include 

Standard Mail Flats. 676 F.3d at 1107. The Court rejected that contention and upheld the Commission’s finding that 

section 3622(c)(14), which governs market dominant products, permits the Commission to consider the general 

standards of section 101(d) in an Annual Compliance Determination, “at least in extreme circumstances.” Id. at 1108.

The Postal Service’s second contention was that the remedy prescribed by the Commission for Standard Mail Flats 

was arbitrary and capricious because it was inconsistent with the Commission’s treatment of other market dominant 

products having comparable, or lower, cost coverages. Id. The Court remanded the case to the Commission to 

clarify its “definition of the circumstances that trigger § 101(d)’s failsafe protection [i.e., the requirement of “fair 

and equitable” cost apportionment], and for an explanation of why the particular remedy imposed...[with respect 

to Standard Mail Flats]...is appropriate to ameliorate that extremity....”. Id.

On August 9, 2012, the Commission issued its order on remand in which it concluded that not all rates that fail to 

cover a product’s attributable costs must necessarily be deemed to be out of compliance and subject to remedial 

action. Order No. 1427 at 4. However, rates that fail to cover a product’s attributable costs are subject to more 

careful scrutiny because any shortfalls will shift burdens onto other mailers. Id. Such scrutiny under section 101(d)’s 

fair and equitable standard involves consideration of the totality of circumstances. Id. After reviewing the history 

of proceedings leading up to the Commission’s 2010 ACD, the Commission identified specific factors which, in the 

case of Standard Mail Flats, constituted extreme circumstances triggering section 101(d)’s protections. Id. at 4-9.8

The Commission explained further that additional factors could emerge in other cases that would support a finding 

7 Docket No. ACR2010, Order Granting Stay, May 27, 2011 (Order No. 739). 8 The factors identified by the Commission were: a significant and growing cost coverage shortfall; the duration of the shortfall over a significant period; 

evidence that the cost coverage shortfall was likely to increase further; a significant adverse impact on users of other mail products (some of whom 

could be competitors of mailers of the subsidized mail product) requiring subsidization of the non-complying product; failure of the Postal Service to 

address the shortfall by rate increases, cost increases, or a combination thereof, despite the capability to do so; and the failure of the Postal Service to 

provide an adequate explanation for not taking necessary remedial steps designed to ameliorate the cost coverage shortfall. Id. at 9. 

20 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER III
of extreme circumstances requiring remedial action. Id. Such additional factors would be identified on a case-bycase basis.

In responding to the Court’s directive that it explain the appropriateness of its Standard Flats remedy, the 

Commission first discussed how that remedy expressly addressed the reasons Standard Mail Flats was not in 

compliance with section 101(d) (i.e., the growing negative contribution; the increasing disparity with Standard 

Mail letters; and the failure of the Postal Service to take steps to remedy the problem). Id. at 13. The Commission 

next explained that slightly less than complete cost coverage might be adequate to avert further remedial action, 

provided the Postal Service had taken adequate steps either to eliminate the shortfall or to explain the shortfall. 

Id. Finally, the Commission explained why its treatment of Standard Mail Flats was consistent with its treatment 

of the Standard NFMs/Parcels product and Periodicals. Id. at 14-18. The Commission concluded by explaining why 

the differences in treatment were justified by differences in the circumstances of those products. Id. at 19-20.

On September 21, 2012, the Commission issued an order confirming termination of the stay it had previously 

granted pending resolution of the Postal Service’s appeal.9

 In that same order, the Commission directed that as part 

of its 2012 ACR the Postal Service should respond to the specific remedy adopted by the 2010 ACD by presenting 

a schedule of future price adjustments for Standard Mail Flats. Id. at 3. In addition, the Postal Service was directed 

to provide in its next ACR and market dominant price adjustment the information on general remedial actions that 

had been required by the 2010 ACD. Id.

FY 2012 Compliance

 In FY 2012, the Postal Service increased prices for the Standard Mail Flats product by 2.209 percent, slightly more 

than the 2.041 percent increase in prices for Standard Mail overall.10 The cost coverage for the Standard Mail 

Flats product has increased from 79.3 percent in FY 2011 to 80.9 percent in FY 2012. 2012 ACR at 15. The Postal 

Service again states its agreement with the Commission that having products cover their costs is an appropriate 

long-term goal. Id. Finally, the Postal Service identifies programs that have restrained cost increases and presents a 

three-year schedule of above-CPI increases for the Standard Mail Flats product in purported compliance with the 

Commission’s 2010 ACD and Order No. 1472 directing that specific remedial actions be taken. Id. at 15-19.

Six parties filed comments addressing the Standard Mail Flats compliance issue: Valpak, ACMA, the Direct 

Marketing Association (DMA), the Association for Postal Commerce (PostCom), the Postal Service, and the Public 

Representative. Their positions are summarized below and the arguments presented in support of those positions 

are further discussed in Chapter VII, infra.

In its initial and reply comments, Valpak argues that Standard Mail Flats are out of compliance. Valpak Comments 

at 38-107; Valpak Reply Comments at 4-36. In a related argument, Valpak asserts that the Postal Service’s pricing 

of High Density/Saturation Letters also violates the PAEA. Valpak Comments at 107-122. 

9 Docket No. ACR2010-R, Notice and Order Confirming Termination of Stay, September 21, 2012 (Order No. 1472). 10 Docket No. R2012-3, Order on Price Adjustments for Market Dominant Products and Related Mail Classification Changes, November 22, 2011, at 19-20 

(Order No. 987).

 POSTAL REGULATORY COMMISSION 21
The Public Representative joins Valpak in criticizing the Postal Service’s efforts to reduce costs and increase prices 

and recommends that the Commission require the Postal Service to make a greater effort to reduce the costs of 

Standard Flats and report the effect of those efforts in next year’s ACR. PR Comments at 32-38; PR Reply Comments 

at 19-31. 

In their initial comments, ACMA and DMA oppose the finding of non-compliance advocated by Valpak and the 

Public Representative. ACMA Comments at 2-33; DMA Comments at 1-2. In reply comments, ACMA, the Postal 

Service, and PostCom also oppose a finding of non-compliance. ACMA Reply Comments at 5-12; Postal Service 

Reply Comments at 5-14; PostCom Reply Comments at 1-5. 

The Commission finds that, under current circumstances, the Postal Service is making reasonable progress toward 

addressing the issues raised in the 2010 ACD, that no changes in the 2010 ACD directive are necessary, and that the 

Postal Service should proceed with its proposed three-year schedule of price increases and operational changes to 

reduce flats costs. See discussion in Chapter VII.

Valpak’s related claim that the pricing of High Density/Saturation Letters violates the PAEA is but an extension of its 

claim that Standard Mail Flats are not in compliance. Thus, Valpak views the unjustified preference allegedly enjoyed 

by Standard Mail Flats in violation of 39 U.S.C. 403(c) as the alleged cause of unfair discrimination against High 

Density/Saturation Letters under that same section 403(c), as well as an unfair allocation of costs to High Density/

Saturation Letters in alleged violation of 39 U.S.C. 101(d). Valpak Comments at 121. These alleged pricing disparities 

are, in Valpak’s view, also a violation of 39 U.S.C. 3622. The Commission is not persuaded by these arguments.

On review of the information relied upon by Valpak in this proceeding, the Commission does not find the Postal 

Service’s pricing of High Density/Saturation Letters to be an unreasonable exercise of its pricing authority. Title 39 

gives the Postal Service pricing flexibility for market dominant products. That pricing flexibility is guided by nine 

objectives and 14 factors and is not limited to a cost-based or demand-based approach. In exercising its pricing 

flexibility, the Postal Service must engage in a balancing process. The fact that the cost coverage of one product 

exceeds the system average while another product is below the system average does not render the price of either 

unlawful. Under section 3622, prices are influenced by various, sometimes competing factors and objectives. 

By themselves, differences in product prices and resulting cost coverages do not demonstrate that prices are in 

violation of sections 403(c) or 101(d). Therefore, the Commission finds the pricing of High Density and Saturation 

Letters to be reasonable.11

11 The National Postal Policy Council (NPPC) and Pitney Bowes, Inc. argue that Presort First-Class Mail is being improvidently overpriced. NPPC Comments 

at 2; and Pitney Bowes Comments at 1-4. For the reasons set forth in Chapter VII, the Commission finds that the information provided in their 

comments is not adequate to support a finding that the difference in price increases applied to categories within First-Class is unreasonable. 

22 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER III
Workshare Discounts for Nonprofit Standard Mail

Background

On October 18, 2011, the Postal Service filed a notice of a market dominant price adjustment to be effective on 

January 22, 2012.12 Among the adjusted prices were prices for nonprofit Standard Mail. Id. at 30. Both commercial 

and nonprofit Standard Mail were subject to workshare discounts. Id. at 36-47. The Commission’s notice of 

the Postal Service’s filing was issued on October 21, 2011.13 None of the comments filed in response to that 

notice addressed the propriety of the workshare discounts for nonprofit Standard Mail. On November 22, 2011, 

the Commission issued an order which, inter alia, concluded that the “workshare discounts either satisfy the 

requirements of 39 U.S.C. 3622(e) or fall within an enumerated exception to those requirements, and may take 

effect.” Order No. 987 at 51, Ordering Paragraph 3.

Almost one year later, on October 11, 2012, the Postal Service filed a notice of its FY 2013 market dominant 

price adjustment to be effective on January 27, 2013.14 In the course of reviewing that filing, the Commission 

identified differences in the workshare discounts for commercial and nonprofit Standard Mail. An October 31, 

2012, information request asked the Postal Service to explain those differences.15 The Alliance of Nonprofit Mailers 

(ANM) challenged the Postal Service’s response to Docket No. R2013-1, CHIR No. 5 as inadequate to justify the 

disparity between the commercial and nonprofit discounts relying upon the anti-discrimination provisions of 

39 U.S.C. 403(c) and the decision in National Easter Seal Society v. USPS, 656 F.2d 754 (D.C. Cir. 1981).16 After 

reviewing the Postal Service’s subsequent explanation of why the differing commercial and nonprofit Standard 

Mail discounts were lawful17 and ANM’s response,18 the Commission found that in the circumstances presented, 

the different discounts were permissible, but specifically directed that “[i]n future rate adjustment proceedings, 

the Postal Service must continue to identify in its workpapers when nonprofit workshare discounts differ from 

their commercial counterparts and to justify deviations from the discounts applied to commercial mail.”19 Order 

No. 1573 has been appealed to the United States Court of Appeals for the District of Columbia Circuit.20

FY 2012 Compliance

The Postal Service’s 2012 ACR contains no discussion of differences between workshare discounts for commercial 

and nonprofit Standard Mail. 

12 Docket No. R2012-3, United States Postal Service Notice of Market-Dominant Price Adjustment, October 18, 2011, at 1 (2012 Market Dominant Price 

Adjustment). 13 Docket No. R2012-3, Order No. 921, Notice and Order on Planned Rate Adjustments and Classification Changes for Market Dominant Postal Products, 

October 21, 2011. 14 Docket No. R2013-1, United States Postal Service Notice of Market-Dominant Price Adjustment, October 11, 2012, at 1 (2013 Market Dominant Price 

Adjustment). 15 Docket No. R2013-1, Chairman’s Information Request No. 5, October 31, 2012, questions 8-13 (Docket No. R2013-1, CHIR No. 5). 16 Docket No. R2013-1, Reply of Alliance of Nonprofit Mailers to USPS Responses to Chairman’s Information Request No. 5, Questions 8-13, November 

13, 2012. 17 See Docket No. R2013-1, United States Postal Service Response to Order No. 1541, November 26, 2012. 18 See Docket No. R2013-1, Comments of Alliance of Nonprofit Mailers on USPS Compliance Filing, December 4, 2012. 19 Docket No. R2013-1, Order No. 1573, Order on Standard Mail Rate Adjustments and Related Mail Classification Changes, December 11, 2012. 20 Alliance of Nonprofit Mailers v. PRC, D.C. Cir. No. 13-1006 (Petition for Review filed January 10, 2013) (ANM v. PRC).

 POSTAL REGULATORY COMMISSION 23
Parties’ comments

In its comments, ANM challenges the differences between the workshare discounts of commercial and nonprofit 

Standard Mail and requests the Commission: (1) to confirm that the relationship between commercial and 

nonprofit workshare discounts in Standard Mail continues to be governed by 39 U.S.C. 403(c) and National Easter 

Seal Society (NESS); (2) to find that the workshare discounts offered to nonprofit Standard Mail during FY 2012 did 

not satisfy those standards; and (3) to make the same finding for the workshare discounts for nonprofit Standard 

Mail approved in Docket No. R2013-1. ANM Comments at 26. In reply comments, the Public Representative urges 

the Commission to find the FY 2012 nonprofit Standard Mail workshare discounts out of compliance. PR Reply 

Comments at 31-34. The Public Representative bases his recommendation on reasons essentially the same as 

those offered by ANM. Id.

The Postal Service argues that it would be arbitrary and capricious for the Commission to find the FY 2012 

workshare discounts for nonprofit Standard Mail to be out of compliance absent new information or a change 

in circumstances; and that the nonprofit workshare discounts contained in the R2013-1 Market Dominant Price 

Adjustment were not in effect in FY 2012 and, therefore, are outside the scope of the current proceeding. Postal 

Service Reply Comments at 17-18.

After filing their respective comments, ANM and the Postal Service filed a joint motion on March 13, 2013, 

requesting the Commission prospectively to adopt standards governing the pricing of worksharing discounts for 

nonprofit Standard Mail.21 The requested standards state:

In any future case in which the Postal Service proposes to establish a worksharing discount for nonprofit 

Standard Mail that differs from the corresponding discount for commercial Standard Mail:

1. The Postal Service’s notice of price adjustment shall:

― Identify each instance in which the proposed nonprofit discount differs from the corresponding 

commercial discount; 

― Provide the Postal Service’s justification(s) for each difference.

2. The Commission will review the rates established by the Postal Service in paragraph (1), above, in 

accordance with 39 U.S.C. § 403(c) and the Court of Appeals’ decision in National Easter Seal Society for 

Crippled Children and Adults v. United States Postal Service, 656 F.2d 754 (D.C. Cir. 1981).

3. The Commission’s decisions in Docket No. R2013-1 and other post-PAEA price adjustment cases that 

approved price adjustments with unequal worksharing discounts shall not control the Commission’s 

determination under paragraph (2), above when:

― the Postal Service fails to comply with paragraph (1); or

― the Postal Service complies with paragraph (1), but another party files a timely challenge to the 

lawfulness of the discounts.

21 Joint Motion of Alliance of Nonprofit Mailers and United States Postal Service to Adopt Standards Governing Pricing of Worksharing Discounts for 

Nonprofit Standard Mail, March 13, 2013 (Joint Motion).

24 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER III
4. If the Commission finds, under paragraph (2), above, that there is no reasonable justification for the 

difference in discounts, the Postal Service shall provide an alternative schedule of nonprofit rates that 

(1) generates approximately the same total revenue as the rates proposed by the Postal Service, and (2) 

eliminates the noncompliance with 39 U.S.C. § 403(c) found by the Commission.

Joint Motion, Attachment A.

The Joint Motion by ANM and the Postal Service was filed on March 13, 2013. No answers were filed in opposition. 

Adoption of the proposed standards would resolve the controversy in this proceeding over the nonprofit workshare 

discounts that grew out of the prior rate proceedings in Docket Nos. R2012-3 and R2013-1, as well as the pending 

judicial review proceedings in ANM v. PRC, D.C. Cir. No. 13-1006. Id. at 3, paragraph 8. 

As a matter of general policy the Commission encourages parties to negotiate resolutions of their disputes. 

Nevertheless, this is the first ACR proceeding in which participants have, in the course of debating the lawfulness 

of product pricing in a prior fiscal year, proposed specific standards for prospective application in future rate 

proceedings. The proposed standards identify a specific statutory provision, section 403(c), and a specific judicial 

decision, the NESS decision, as providing applicable legal criteria for evaluating workshare discounts for nonprofit 

Standard Mail. The proposed standards would also prohibit reliance upon certain Commission decisions in making 

any such evaluations. Finally, the proposed standards would prescribe actions the Postal Service would take if the 

Commission should determine that the Postal Service had not adequately justified differences in the discounts 

for nonprofit and commercial Standard Mail. This could be interpreted as impacting the Commission’s options to 

direct other actions.

Given the background to the dispute being resolved, the specific pricing issue being presented, and the history 

underlying that issue, the Commission does not object to the proposed standards. However, the Commission 

makes it clear that its decision should not be interpreted as an abdication of its legal responsibility to administer 

statutory requirements that might apply in future situations should the facts so require. 

Periodicals

During FY 2012, the overall cost coverage for the Periodicals class declined from 74.9 percent in FY 2011 to 72.1 

percent in FY 2012. 2012 ACR at 26. Both products that comprise the Periodicals class – Within County and Outside 

County – reported declines. Cost coverage of Within County Periodicals fell from 78.4 percent in FY 2011 to 70.5 

percent in FY 2012. Id. Cost coverage of Outside County Periodicals fell from 74.8 percent in FY 2011 to 72.2 

percent in FY 2012. Id. 

The revenue per piece for Periodicals overall (25.7 cents) decreased slightly (0.05 cents) in FY 2012 despite price 

increases in January 2012. In contrast, the Periodicals attributable cost per piece increased from 34.3 cents to 35.6 

cents, or 3.7 percent. Id. The net effect was a lower calculated cost coverage. Id.

 POSTAL REGULATORY COMMISSION 25
The Postal Service states that despite efforts to pursue efficiency enhancements and reduce costs, it is extremely 

doubtful that the Periodicals class can achieve 100 percent cost coverage using price increases limited to the CPI 

price-cap. Id. at 27.

Comments

Valpak cites growing losses during FY 2012 for the Periodicals class, the failure of prior steps to reverse those losses, 

and “highly speculative future cost savings,” to argue that Periodicals class pricing violates several sections of title 

39: section 3622(b); section 3622(c)(2); section 101(a); section 101(d); and section 403(c). Valpak Comments at 

122-129. In Valpak’s view, the Commission can no longer delay a finding of non-compliance. Id. at 129-133. Finally, 

Valpak renews its argument that the Commission has the statutory authority to order Periodicals price increases 

above the price cap. Id. at 133-134.

In reply comments, Time opposes both Valpak’s argument that a finding of non-compliance can no longer be 

delayed, and Valpak’s contention that increases above the CPI price-cap can be ordered. Time Reply Comments at 

3-9. Time argues further that the CPI price-cap prevails and that Valpak is essentially arguing that Congress made 

bad choices in enacting a price-cap regulatory regime. Id. at 9-18.

Similarly, in joint reply comments, the Magazine Publishers of America, Inc. and the Alliance of Nonprofit Mailers 

(MPA/ANM) argue that the Commission has no authority to approve above-CPI rate increases for the Periodicals 

class. MPA/ANM Reply Comments at 3-10. According to MPA/ANM, the real problem with Periodicals is not the 

CPI-cap, but the Postal Service’s excessive costs. Id. at 11-16.

The Postal Service responds to Valpak by stating its agreement that the Commission should determine the extent 

of its remedial powers and act accordingly. Postal Service Reply Comments at 4-5.

As discussed more fully in Chapter VII, infra, the Commission does not find the prices and fees for the Periodicals 

class to be out of compliance at this time. The Postal Service continues to implement steps to reduce the high costs 

of processing and delivering Periodicals. Operational changes begun in FY 2011 and more fully implemented in 

FY 2012 may still achieve expected results. Moreover, the Postal Service still has access to pricing tools to incent 

efficient mailings that reduce costs and increase net revenue. However, it must take further action now to address 

this situation. The Postal Service needs to take the initiative to identify and implement solutions to Periodicals’ 

worsening net revenue results.

26 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER III
Chapter IV 

Postal Service Financial Condition

Introduction

Since the enactment of PAEA the Postal Service has experienced net financial losses in each fiscal year from FY 2007 

through FY 2012. As these net financial losses continue, the Postal Service will be unable to finance capital investment 

to replace deteriorating assets and make improvements to other capital assets to further improve productivity.

For the first 3 years after the enactment of the PAEA, the statutorily required pre-funding of the RHBF contributed 

significantly to the Postal Service financial losses. Without these payments the Postal Service would have increased, 

rather than decreased, its retained earnings in FY 2007 and FY 2008. For FY 2009 through FY 2012, however, the 

Postal Service would not have been profitable even without these obligations.

FY 2012 revenues were 13 percent lower than FY 2008 and while FY 2012 operating expenses, excluding the 

RHBF payments, were 3 percent lower than FY 2008. The decrease was not enough to offset the revenue decline. 

The inability to generate sufficient revenues to meet its financial obligations has contributed to serious cash 

flow constraints. To remain viable the Postal Service must address both revenue generation and operating costs. 

Maintaining or improving service is also important as a means of retaining existing volume to the extent possible.

In FY 2012, the Postal Service defaulted on $11.1 billion in RHBF payments and by all indications will not be able to 

make these payments in the near future. This issue requires legislative action to be resolved. Although the RHBF 

expenses impact the Postal Service’s net income, because they were not paid in FY 2012, they did not affect the 

day to day financial operations of the Postal Service. Similarly, the Postal Service recognizes as an expense changes 

in the long-term workers’ compensation liability that do not impact the current year’s day-to-day operations or 

the current year’s cash flows. The focus of this chapter is on the cash flows and the net operating expense under 

management control, which does not include the RHBF expense or the expense for the change in the long-term 

workers’ compensation liability. Actions the Postal Service may take to improve its net operating financial situation 

are also discussed.

The Commission’s 701 Report included a key recommendation: that Congress adjust the current Postal Service 

RHBF payment schedule.1

 The Commission remains concerned that the current payment schedule imposes 

unsustainable burdens on the Postal Service’s financial condition, and risks impairment of the Postal Service’s 

ability to continue to perform its statutory functions.2

1 See Section 701 Report, Analysis of the Postal Accountability and Enhancement Act of 2006, September 22, 2011, at 21-24 (701 Report). 2 See 2011 ACD at 21.

 POSTAL REGULATORY COMMISSION 27
Diminishing Cash Flows and Working Capital

Liquidity for the Postal Service comes from cash generated through operations, cash on hand at the end of the 

year, and borrowing capacity. In recent years the Postal Service has relied on its borrowing capacity to fund its 

operations and financial obligations such as the RHBF payments.3

 The Postal Service’s diminishing cash balance 

and increasing debt is shown in Figure IV-1.

Since FY 2007, the Postal Service’s operations have been increasingly financed through borrowing. By the end of 

FY 2012, the Postal Service had exhausted its statutory borrowing limit of $15 billion and had fully drawn on its 

two revolving lines of credit in the amounts of $3.4 billion and $600 million.4

 Absent this borrowing, the Postal 

Service would have ended FY 2012 with a cash balance of approximately $300 million. The Postal Service uses $250 

million on average each day to meet its expenses.5

 With the borrowing, the Postal Service had a cash balance of 

$2.3 billion dollars at the end of FY 2012 but no further borrowing authority.

In its FY 2013 Integrated Financial Plan (IFP), the Postal Service forecasts 4 months during the year when average 

available cash is projected to be at or below $1 billion, which is enough to cover only 4 days of expenses. Because 

the Postal Service reached its maximum borrowing capacity in FY 2012 it no longer has access to borrowing in the 

event of a cyclical downturn. Thus, if the key economic indicators used in the Postal Service’s forecast for FY 2013 

are not accurate, there is a possibility that the Postal Service would run out of cash to fund its day to day operations.

3 See USPS FY 2012, Form 10-K at 52. 4 Id. at 91 and 92. 5 “...$1.0 billion, which represents approximately four days of average daily expenses.” United States Postal Service Fiscal Year 2013 Integrated Financial 

Plan (IFP), at 1.

1

3

5

7

9

11

13

15

FY 2012

Debt Total Cash and Borrowing Capacity

$ Billions

FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2013

Source: PRC-ACR2012-NP-LR1.

Figure IV–1—Increased Funding of Postal Operations with Debt

28 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER IV
The Postal Service’s liquidity problems are also affecting long-term investment in maintaining and improving 

business assets. Capital spending has been reduced in recent years compared to historical trends. From FY 2006 – 

2010 the Postal Service spent, on average, $2.1 billion annually on capital expenditures. Actual capital expenditures 

for FY 2011 and FY 2012 were $1.2 and $0.8 billion, respectively. The FY 2013 Integrated Financial Plan (IFP) 

estimates capital expenditures of $1 billion.6

 The Public Representative comments that the Postal Service’s FY 

2013 capital commitment plan of $1 billion is less than one–half of the recent 5 year average capital cash outlay. 

PR Comments at 5. Should capital spending continue to be restricted, important assets that are not being replaced 

will likely deteriorate due to normal wear and tear, and increase maintenance costs, and potentially impact service 

performance. For example, many Automated Postal Centers are reaching the end of their useful lives. See Chapter 

VI, infra.

Declining Volume and Revenues

As discussed below, the FY 2012 net operating loss under management control of $2.4 billion reflects continuing 

declines in volumes, revenue constraints due to the price cap, pricing strategies, and difficulties in lowering 

operating expenses.

Volume Declines

Total mail volume has declined over 8.1 billion pieces, or 5 percent in FY 2012, with First-Class Mail declining 0.2 

percent and Standard Mail volume declining 5.8 percent.7

 As Figure IV-2 shows, total mail volume has declined 25 

percent since FY 2006.

The recent decline in volume increasingly appears to reflect a permanent change in mailer behavior rather than a 

temporary result of economic activity, such as that reflected in the steep decline between FY 2007 and FY 2009. 

From FY 1970 to FY 2000 the growth of mail volume closely matched the growth of the United States economy. 

During the last 31 years of the 20th century, Gross Domestic Product (GDP) and mail volume grew at an average 

annual rate of 3.2 percent and 3.1 percent, respectively. Since FY 2001 however, the close relationship between 

GDP and mail volume growth has diverged. From FY 2000 to FY 2012, GDP grew at an average annual rate of 1.8 

percent whereas mail volume declined at an average annual rate of 1.8 percent. This has created a gap of 3.6 

percentage points between the average changes in the two measures. Figure IV-3 illustrates this trend.

The Postal Service cites the increase in household internet access as a major reason for the general decline in mail 

volumes.8

 From FY 2000 to FY 2010, the percentage of households with internet access increased from 41.5 percent 

to 71.1 percent. Increased internet access allows households to use internet services in lieu of traditional postal 

products. Other social changes such as structural changes in advertising markets and the dramatic expansion in 

the use of social media have been large factors in mail volume decline.

6 2013 IFP at 5. 7 PRC-ACR2012-NP-LR1 8 USPS 2012 Report on Form 10-K at 12.

 POSTAL REGULATORY COMMISSION 29
1.00 

1.25 

1.50 

1.75 

2.00 

2.25 

2.50 

2.75 

3.00 

3.25 

'70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12

In dex (1970 =1.00)

Fiscal Year

Total Mail Volume

GDP (Chained to 2005 Dollars)

Source: PRC-ACR2012-NP-LR1.

Figure IV–3—Gross Domestic Product (GDP) and Total Mail Volume Growth 

Fiscal Years 1970–2012

Figure IV–2—Total Mail Volume Growth Rate Since FY 2006

-0.36

-4.83

-17.02

-19.78

-21.15

-24.95

-30

-25

-20

-15

-10

-5

0

2007 2008 2009 2010 2011 2012

Percent Change

Fiscal Year

Source: PRC-ACR2012-NP-LR1.

30 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER IV
Revenue Constraints Versus Pricing Flexibility

These volume declines resulted in significant reductions in revenue. In FY 2006 total revenue was $73 billion, in FY 

2012 it was $65 billion, a reduction of 10.4 percent. In FY 2012, First-Class Mail revenue declined by almost $1.2 

billion and Standard Mail revenue declined $0.7 billion from the prior year, a reduction of 3.9 percent and 4.3 

percent respectively. This rate of decline is 0.7 percent greater in FY 2012 than in FY 2011. Table IV-1 shows mail 

revenue for selected categories.9

The PAEA provides the Postal Service with the pricing flexibility to balance multiple objectives, including the 

generation of adequate revenue and the ability to retain earnings to maintain financial viability. In FY 2012, nine 

market dominant products failed to generate sufficient revenues to cover their direct and indirect costs. These 

products, shown in Table IV-2, account for $1.5 billion in losses, over 60 percent of the total operating loss under 

management control in FY 2012.

9 Prior year revenue for the products transferred in the current year is reclassified to reflect the transfer as taking place in the prior year. This adjustment 

isolates the impact of revenue changes occurring in FY 2012.

Table IV–1—Mail Revenues

($ in Millions)

FY 

2012

FY 

2011

Increase or

(Decrease)

Percent

Change

First-Class 28,867 30,030 (1,163) -3.9%

Periodicals 1,731 1,821 (90) -4.9%

Standard Mail 16,428 17,175 (747) -4.3%

International 2,816 2,585 231 8.9%

Other 3,785 3,430 355 10.3%

Total Mailing Services 53,627 55,041 (1,414) -2.6%

Total Shipping and Package Services 11,596 10,670 926 8.7%

Total Mail 65,223 65,711 (488) -0.7%

Source: USPS FY 2012 Form 10-K at 26.

Table IV–2—List of Market Dominant Products and Services with 

Respective Negative Contribution to Institutional Costs

($ in Millions)

First-Class, Inbound Int. Single-Piece Mail International1 (92.8)

First-Class, Parcels (9.6)

Standard, Flats (527.9)

Standard, Not Flat-Machinables and Parcels (49.0)

Periodicals, Within County (28.1)

Periodicals, Outside County (642.0)

Package Services, Single-Piece Parcel Post (65.9)

Package Services, Media and Library Mail (55.5)

Special Services, Stamp Fulfillment Services (2.3)

Total (1,473.2)

1This entry includes three international mail categories.

Source: PRC-ACR2012-LR1.

 POSTAL REGULATORY COMMISSION 31
The Postal Service’s pricing strategy may not maximize potential contribution. As discussed in detail in Chapter VII, 

infra, the Postal Service has the pricing flexibility to increase contribution from worksharing programs. However, 

the Postal Service has not changed the workshare relationships for Periodicals since FY 2007 and in FY 2012 the 

contribution per piece declined. Likewise, the pricing strategy for Standard Flats continues to result in negative 

contribution per piece. See Chapter VII. The Postal Service should fully recognize these loss-making products and 

develop a pricing strategy within the price cap requirements that is designed to increase efficiency and generate 

adequate revenue.

In contrast to Mailing Services (market dominant products), volume and revenue increased for Shipping and 

Package Services (competitive products). Despite rate increases in excess of the CPI, existing Competitive Package 

Service volume increased 25 percent in FY 2012. During FY 2012, 901 million pieces were transferred from the 

market dominant product list to the competitive products list. As shown in Table IV-1 revenue for Shipping and 

Package Services, adjusted for the transfer, increased 8.7 percent, or $926 million. See Chapter VIII. The Postal 

Service should continue to pursue opportunities to increase volume and generate revenue in this market.

Operating Expenses

The Postal Service was able to reduce its operating expenses in FY 2012 by 1.1 percent. However, that reduction 

was not enough to bring operating expenses below revenues. Table IV-3 compares operating expenses for FY 2011 

and FY 2012.

The Postal Service indicates that it should be able to reduce its variable costs by adjusting the related labor costs 

to match lower volume over a period of several years.10 It is much more difficult for it to reduce its fixed costs 

10 Id. at 35.

Table IV–3—Net Loss—FY 2012 and FY 2011

($ in Millions)

FY 

2012

FY 

2011

Increase 

(Decrease)

Percent

Change

Total Operating Revenue 65,248 65,739 (491) -0.7%

Compensation & Benefits 47,689 48,310 (621) -1.3%

Retiree Health Benefit Premiums 2,629 2,441 188 7.7%

Workers’ Compensation 1,373 1,290 83 6.4%

Transportation 6,630 6,389 241 3.8%

Other Expenses 9,377 9,994 (617) -6.2%

Total Operating Expenses 67,698 68,424 (726) -1.1%

Net Operating Loss (2,450) (2,685) 235 

Workers’ Compensation Liability Adjustment 2,356 2,382 (26)

Stautory Retiree Health Benefit Fund Expense 11,100 - 11,100 

Net Loss (15,906) (5,067) (10,839)

Source: USPS FY 2012 Form 10-K at 31 and 78.

32 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER IV
which amount to about 40 percent11 of its total costs. As a result of volume declines, fixed costs are spread over 

fewer pieces. If the Postal Service is unable to generate revenues that cover total costs, its fixed costs should be 

addressed in order to remain viable. Figure IV-4 shows that the slow growth in revenue per unit since FY 2007 

has not been sufficient to cover steadily escalating unit costs when fixed costs for statutory payments to the 

RHBF are included. The need to reduce fixed costs has led the Postal Service to adjust service standards, including 

reducing overnight delivery of First-Class Mail, begin consolidating its processing plants, and consider reducing the 

frequency of delivery from 6 days to 5 days.

The various implications of these service changes have been discussed in two of the Commission’s Advisory 

Opinions: (1) Advisory Opinion on Elimination of Saturday Delivery, Docket N2010-1, March 24, 2011; and (2) 

Advisory Opinion on Mail Processing Network Rationalization Service Changes, N2012-1, September 28, 2012.

 In FY 2012, the Postal Service initiated Mail Processing Network Realignment to address the need to lower fixed costs 

and increase efficiency.12 In its Advisory Opinion on Mail Processing Network Realignment and Service Changes, 

the Commission concluded that it is possible for the Postal Service to undertake significant network rationalization 

and realize substantial cost savings while preserving most current service levels. See Advisory Opinion on Mail 

Processing Network Rationalization Service Changes, N2012-1, September 28, 2012. The Commission provided 

recommendations for achieving this goal. The FY 2012 expenses do not reflect the total savings from this initiative. 

11 In FY 2012, fixed costs were 50 percent of total costs due to the deferral of the scheduled FY 2011 RHBF expense of $5.5 billion into FY 2012. 12 Network realignment projected the closure or consolidation of 140 plants from FY 2012 through FY 2013 and an additional 89 plants in FY 2014.

25.0

30.0

35.0

40.0

45.0

50.0

55.0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Unit Expense

Unit Revenue

Source: PRC-ACR2012-NP-LR1.

Fiscal Year

Cents

Figure IV–4—Unit Operating Expense and Revenue

 POSTAL REGULATORY COMMISSION 33
The results of this initiative, as well as its potential impact on service, will be more apparent in FY 2013.

Financial Reporting Requirements

Section 3654 of title 39 requires the Postal Service to file certain reports with the Commission that conform to 

the Securities and Exchange Commission (SEC) regulations.13 The reports to be filed are the annual Form 10-K, 

the quarterly Form 10-Q, and Form 8-K. Form 10-K is an annual report which contains a comprehensive summary 

of a company’s performance, including the audited financial statements. The report also includes information 

regarding the executive compensation policies of the company, and detailed information on the compensation and 

benefits packages of all senior executive officers. This report is due to the Commission within 60 days of the end 

of the reportable fiscal year. Form 10-K for FY 2012 was filed on November 15, 2012.

Form 10-Q is a similar report to Form 10-K, but filed on a quarterly basis. Form 10-Q provides quarterly financial 

reports and a management discussion of the Postal Service’s operations and finances, including management’s 

assessment of the outlook for the rest of the year. Form 10-Q is required to be filed with the Commission within 40 

days of the end of the fiscal quarter. The Postal Service timely filed the required FY 2012 Forms 10-Q in February 

2012 (Quarter 1), May 2012 (Quarter 2), and August 2012 (Quarter 3).

Form 8-K is a report that includes major public announcements that could materially affect the financial status of 

the Postal Service. This includes public releases of financial information within a press release, public speeches, or 

presentations by operating managers or senior executives to Congress. It includes any updates of significant events 

that would affect the financial standing of the Postal Service between filings of Form 10-K and/or Form 10-Q, such 

as resignations, promotions, or retirements of senior executive officers. Form 8-K must be filed within 3 business 

days of the occurrence of the reportable event.

During FY 2012, the Postal Service filed six Forms 8-K, notifying the Commission of senior executive personnel 

changes, service standard changes, and publicly reported financial results. All of the Forms 8-K were filed within 

the 3 day time limit.

The Postal Service has fulfilled its financial reporting obligations under the PAEA by submitting applicable SEC 

reports to the PRC, thereby providing a measure of financial transparency.

13 This requirement is also embodied in the Commission’s Rules under section 3050.40.

34 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER IV
Chapter V 

Performance Plans and Program 

Performance Reports

Introduction

The PAEA requires the Commission to review the performance goals established in the Postal Service’s FY 

2012 Annual Performance Report (FY 2012 Report) and FY 2013 Annual Performance Plan (FY 2013 Plan).1

 The 

Commission must evaluate whether the Postal Service has met the performance goals established in the FY 2012 

Report, and evaluate the FY 2013 Plan. 39 U.S.C. 3653(d). It may also provide recommendations to the Postal 

Service related to protecting or promoting public policy objectives in title 39. Id.

In the FY 2011 ACD, the Commission found that the quality of information provided in the FY 2011 Annual 

Performance Report (FY 2011 Report) and FY 2012 Annual Performance Plan (FY 2012 Plan) declined compared 

to what was provided in the previous year. 2011 ACD at 43. The Commission stated the Postal Service provided 

fewer details in FY 2011 about the performance goals, performance indicators, and strategic initiatives compared 

to FY 2010. Id. It directed that “[f]uture Annual Performance Reports, Annual Performance Plans, and descriptions 

of strategic initiatives should, at a minimum, contain information similar in the level of detail provided in the FY 

2010 Comprehensive Statement on Postal Operations.”2

 FY 2010 Annual Performance Report and FY 2011 Annual 

Performance Plan. Id.

The FY 2012 Report and FY 2013 Plan contain information that was not filed in past years: a new performance goal, 

13 new performance indicators, and strategic change initiatives. The Commission notes that the Postal Service 

incorporated many of the recommendations in the FY 2011 ACD into the FY 2012 Report and FY 2013 Plan. Overall, 

the quality of information provided in FY 2012 improved over the information filed in FY 2011. Future Annual 

Performance Reports and Plans should provide explanations for any deletions.

The FY 2013 Plan meets most of the statutory requirements listed in 39 U.S.C. 2803. However, as in previous years, 

the FY 2013 Plan does not “[cover] each program activity set forth in the Postal Service budget....” See 39 U.S.C. 

2803(a). Also, the FY 2013 Plan did not meet the requirements of sections 2803(a)(2), 2803(a)(5), and 2803(a)(6) 

with respect to the Corporate Responsibility performance goal. The FY 2012 Report satisfies the requirements in 

39 U.S.C. 2804 for each performance goal except for Corporate Responsibility.

1 In the FY 2012 ACR, the Postal Service filed as a Library Reference an excerpt from the Postal Service Annual Report containing the FY 2012 

Comprehensive Statement, FY 2012 Report, and FY 2013 Plan. Library Reference USPS-FY12-17 (Combined Report). 2 Docket No. ACR2010, Library Reference USPS-FY10-17, at 51-53 (2010 Comprehensive Statement).

 POSTAL REGULATORY COMMISSION 35
Statutory requirements

Summary of Requirements 

In each ACR filing, the Postal Service must submit copies of its most recent Annual Performance Report and Plan. 

39 U.S.C. 3652(g). Annual Performance Reports and Plans must meet the requirements set forth in 39 U.S.C. 2803 

and 2804.3

 Annual Performance Plans must cover “each program activity set forth in the Postal Service budget...”. 

39 U.S.C. 2803(a). They must also establish: (1) performance goals expressed in an objective, quantifiable, and 

measurable form; and (2) performance indicators to measure or assess the relevant outputs, service levels, and 

outcomes of each program activity.4

Annual Performance Reports must set forth the performance indicators established in the Annual Performance Plan, 

along with the actual performance achieved compared with the performance goals.5

 Annual Performance Reports 

must include results for the 3 preceding fiscal years. Id. 2804(c). Each Annual Performance Report must: (1) review 

the success of achieving performance goals; (2) evaluate the Annual Performance Plan relative to the performance 

achieved toward the performance goals; and (3) include summary findings of those program evaluations.6

The Commission is required to evaluate annually whether the Postal Service has met the goals established in its 

Annual Performance Report and Plan. Id. 3653(d). It may also “provide recommendations to the Postal Service 

related to the protection or promotion of public policy objectives set out” in title 39. Id.

Compliance with Statutory Requirements

FY 2013 Annual Performance Plan

The FY 2013 Plan meets most of the statutory requirements listed in 39 U.S.C. 2803. However, as in previous years, 

the FY 2013 Plan does not “[cover] each program activity set forth in the Postal Service budget...”.7

 Also, the FY 

2013 Plan did not meet the requirements of sections 2803(a)(2), 2803(a)(5), and 2803(a)(6) with respect to the 

Corporate Responsibility performance goal.

The FY 2013 Plan establishes four performance goals: Provide High-Quality Service, Generate Net Income, Improve 

Workplace and Workforce, and Corporate Responsibility. Response to CHIR No. 6, question 2. Each performance 

goal defines the level of performance to be achieved by a program activity. See 39 U.S.C. 2803(a)(1). The FY 2012 

Plan expresses three of the four performance goals in “objective, quantifiable, and measurable form[s]” as the 

targets and results set for each performance indicator. Id. 2803(a)(2).

3 Chapter 28 of title 39, which includes sections 2803 and 2804, was added by the Government Performance and Results Act of 1993, Pub. L. No. 103-62, 

107 Stat. 285 (1993). 4 Id. The Postal Service may express performance goals for a particular program activity in an alternative form if the Postal Service determines that 

expressing those goals in an objective and quantifiable manner is not feasible. The alternative form must: (1) describe “minimally effective” and 

“successful” programs; and (2) state why expressing a performance goal in any form for the program activity is infeasible or impractical. Id. 2803(b). 5 Id. 2804(b)(1). If the Postal Service specifies performance goals in an alternative form by describing minimally effective and successful program 

activities, it must provide program results relating to those categories. Id. 2804(b)(2). 6 Id. 2804(d). If a performance goal has not been met, the Postal Service must explain and describe why the goal was not met, as well as plans and 

schedules for achieving the goal. Id. If the performance goal is impractical or infeasible, the Postal Service must explain why that is the case and 

recommend a course of action. Id. 7 See id. 2803(a). Program activity means “a specific activity related to the mission of the Postal Service[.]” Id. 2801(5).

36 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER V
The Commission finds that the Corporate Responsibility performance goal is not expressed in an “objective, 

quantifiable, and measureable form[,]” and an alternative form is not used. Thus, the FY 2013 Plan does not 

meet the requirements of 39 U.S.C. 2803(a)(2) with respect to the Corporate Responsibility performance goal. The 

Postal Service establishes “Universal and Public Services and Other Obligations” as a performance indicator for 

the Corporate Responsibility performance goal. However, unlike the other performance indicators, no targets or 

results are identified.

The FY 2013 Plan “briefly describe[s] the operational processes, skills and technology, and the human, capital, 

information, or other resources required to meet the performance goals[.]” Response to CHIR No. 6, question 

2; see 39 U.S.C. 2803(a)(3). It establishes 20 performance indicators used in “measuring or assessing relevant 

outputs, service levels, and outcomes of each program activity.” 39 U.S.C. 2803(a)(4). Ten performance indicators 

relate to the performance goals, and ten relate to the strategic change initiatives. The FY 2013 Plan also provides 

“a basis for comparing actual program results with the established performance goals” by comparing FY 2012 

results to FY 2012 targets for each performance indicator, except for Universal and Public Services and Other 

Obligations. See Id. 2803(a)(5). Finally, for three of the four performance goals, the FY 2012 Plan describes the 

objective measurement systems used to verify and validate measured values.8

The FY 2012 Plan did not satisfy the requirements of 39 U.S.C. 2803(a)(6) with respect to the Corporate Responsibility 

performance goal because the Postal Service did not describe the means used to verify and validate measured 

values for this goal.

FY 2012 Annual Performance Report

The FY 2012 Report satisfies the requirements in 39 U.S.C. 2804 for each performance goal except for Corporate 

Responsibility. The Postal Service did not include targets or results for the Universal and Public Services and Other 

Obligations performance indicator, which supports the Corporate Responsibility performance goal.

The Postal Service partially met the performance goals of Provide High-Quality Service and Generate Net Income. 

In those cases, the Postal Service must explain why it did not meet the performance goal and describe plans and 

schedules for achieving the performance goal. 39 U.S.C. 2804(d)(3). In response to CHIR No. 6, the Postal Service 

explained why the performance goals were not met as well as its plans and schedules for achieving the goals. 

However, it did not provide this information in the FY 2012 Report. In cases where a performance goal has not been 

met, Annual Performance Reports should explain why the goal was not met and what action the Postal Service 

recommends for achieving the performance goal in future years. See Id.

8 For Provide High-Quality Service, an outside entity measures First-Class Mail service performance independently and objectively via the External FirstClass Mail measurement system. Combined Report at 35. The Postal Service also operates, through a third party, a customer experience measurement 

survey that provides an ongoing assessment of attributes defined by customers as critical to their experiences. Id. at 36. For Generate Net Income, the 

Postal Service develops financial information according to generally accepted accounting principles and industry best practices. Id. Financial systems 

are subject to review by the Commission, the USPS Office of Inspector General, and the Government Accountability Office. Id. For Improve Workplace 

and Workforce, the Postal Service collects and reports safety data according to standard requirements of OSHA. Id. at 37. The Postal Service measures 

employee engagement using the VOE survey. Id. A third-party vendor tabulates the results and reports them back to the Postal Service in summary 

form. Id.

 POSTAL REGULATORY COMMISSION 37
Finally, the FY 2012 Report includes summary findings of program evaluations completed during FY 2011. Table 

V-1 provides program evaluation measures and metrics. Response to CHIR No. 6, question 6. Additional program 

evaluation analysis is provided throughout the FY 2012 Report. Id.

Analysis of Performance Goals 

and Strategic Change Initiatives

The FY 2012 Report and FY 2013 Plan set forth four performance goals: Provide High-Quality Service, Generate 

Net Income, Improve Workplace and Workforce, and Corporate Responsibility. Response to CHIR No. 6, question 2. 

To evaluate its progress towards achieving the performance goals, the Postal Service established 10 performance 

indicators, which are described in more detail below. For 9 of the 10 performance indicators, the Postal Service set 

annual targets for FY 2013 and published them in the FY 2013 Plan.

The FY 2012 Report provides results against FY 2012 targets and serves as a baseline for establishing FY 2013 

targets. Table V-1 lists each performance indicator currently used by the Postal Service to evaluate performance 

toward achieving its four performance goals.

Table V–1—Comparison of Results with Targets for Performance Goals

Performance Goals Performance Indicator 2010 

Actual

2011 

Actual

2012 

Target

2012 

Actual

2013 

Target

Provide High-Quality Service Single-Piece First-Class 

Mail Overnight 96.36% 96.23% 96.65% 96.48% 96.70%

Single-Piece First-Class 

Mail 2 Days 93.71% 93.34% 94.15% 94.84% 95.10%

Single-Piece First-Class 

Mail 3 Days 92.44% 91.87% 92.85% 92.29% 95.00%

Customer Experience 

Measurement—Residential 86.44% 87.17% N/A1 88.36% N/A1

Customer Experience 

Measurement—Small/Medium 

Business

81.83% 82.95% N/A1 84.07% N/A1

Generate Net Income Operating Loss ($ billions) N/A (2.7) (3.0) (2.5) (2.1)

Deliveries per Work Hour N/A 39.9 42.2 41.0 42.9

Improve Workplace 

and Workforce

OSHA Illness and 

Injury Rate 5.49 5.67 5.72 5.44 1% below SPLY

Voice of the 

Employee Survey 62.3 64.7 64.9 64.7 TBD

Corporate Responsibility Universal and Public Services and 

Other Obligations N/A N/A N/A N/A N/A

Note: N/A means not applicable.

Source: Combined Report at 34.

1 Plan/targets are not set as actual survey response percentages. Internally, as part of the National Performance Assessment, 

they are computed as an index of survey questions.

38 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER V
FY 2012 Changes

In FY 2012, the Postal Service made several changes to its performance goals, performance indicators, and strategic 

initiatives. In FY 2011, the Postal Service set forth three performance goals: Improve Service, Improve Financial 

Performance, and Improve Safety and Employee Engagement. 2011 ACD at 45. In FY 2012, the Postal Service 

renamed these performance goals as Provide High-Quality Service, Generate Net Income, and Improve Workplace 

and Workforce. Combined Report at 33. It also added Corporate Responsibility as a fourth performance goal. Id.

The FY 2012 Report and FY 2013 Plan contain three new performance indicators that support the performance 

goals. Customer Experience Measurement-Residential and Customer Experience Measurement-Small/Medium 

Business are two new performance indicators supporting the Provide High-Quality Service performance goal. Id. at 

34. Universal and Public Services and Other Obligations is a new performance indicator supporting the Corporate 

Responsibility performance goal, though no targets or results are provided. Id. at 33.

The Postal Service also replaced its “strategic initiatives” with “strategic change initiatives” that are designed to 

close the gap between revenue and cost over the next 5 years. Id. at 38. The FY 2012 Report and FY 2013 Plan 

establish 10 additional performance indicators to evaluate progress towards these strategic change initiatives. Id. 

These performance indicators are discussed below under Strategic Change Initiatives.

Performance Goal 1: Provide High-Quality Service

Postal Service’s Filing

The five performance indicators that support Provide High-Quality Service are: Single-Piece First-Class Mail 

Overnight, Single-Piece First-Class Mail 2 Days, Single-Piece First-Class Mail 3 Days, Customer Experience 

Measurement—Residential, and Customer Experience Measurement—Small/Medium Business. The Postal 

Service uses Single-Piece First-Class Mail service performance as a model for service performance reporting and 

management because it is one of the most widely used mail categories familiar to consumers, small organizations, 

and larger commercial firms. Combined Report at 35. Single-Piece First-Class Mail uses almost all elements of the 

Postal Service operating chain, from collection boxes and retail counters to final delivery. Id. The Postal Service 

states that “[Single-Piece First-Class Mail] has been traditionally used to represent service, especially since 

customers use it and expect bills, statements, payments, business communication and personal correspondence 

to arrive on time.” Id.

In FY 2012, the service performance score of 94.84 percent for Single-Piece First-Class Mail 2 Days exceeded the 

FY 2012 target of 94.15 percent. However, service performance scores for Single-Piece First-Class Mail Overnight 

and Single-Piece First-Class Mail 3 Days fell slightly below FY 2012 targets. The Postal Service explains that the 

one contributing factor to missing the targets was the peak season, a time when increased volumes compete for 

capacity on transportation. Response to CHIR No. 6, question 4. It states that winter weather during the same 

period made it difficult to achieve service targets in several areas throughout the country. Id. The Postal Service 

notes that it implemented service standard changes and 46 plant consolidations in July 2012 that created variations 

in processes and networks, which the Postal Service quickly brought under control. Id.

 POSTAL REGULATORY COMMISSION 39
In FY 2012, the Postal Service added Customer Experience Measurement—Residential and Customer Experience 

Measurement—Small/Medium Business as two additional performance indicators under Provide High-Quality 

Service. Combined Report at 34. The Postal Service explains that it operates, through a third party, the nation’s 

largest customer experience measurement survey. Id. at 36. It reports that in FY 2012, response rates were 15.2 

percent for residential customers and 8.5 percent for small/medium business customers. Id. It notes that the 

surveys provide an ongoing evaluation of attributes that customers believe are critical to their experiences. Id.

In FY 2012, customer experience scores for both Residential and Small/Medium Business improved over FY 2011 

scores. Id. The Postal Service identified “contact” experience as a key opportunity for improvement. Id. In FY 2012, 

it launched a Customer Experience Essentials program that engaged and provided resources and guidance to all 

employees who interact with customers. Id. The program focuses on four basic principles: telephone courtesy, 

friendly and courteous behavior, delivery accuracy, and informing customers that their business is appreciated. Id.

For a more detailed discussion of Single-Piece First-Class Mail and Customer Experience Measurement performance, 

please see Chapter VI, infra, on Service Performance.

Commission Analysis

The Postal Service partially met the performance goal of Provide High-Quality Service. All three service performance 

scores for FY 2012 improved over FY 2011 results. FY 2013 targets are also higher than FY 2012 targets. These 

factors indicate that the Postal Service is meeting its goal of Provide High-Quality Service in some areas.

In the FY 2011 ACD, the Commission recommended that the Postal Service expand the number of performance 

indicators to include service performance scores for other classes of market dominant mail, including Standard 

Mail. 2011 ACD at 57. The Postal Service responded that it does measure service performance for all market 

dominant products, and detailed descriptions of measurement systems and quarterly performance reports are 

available on the Postal Service website9

 for the following products: Single-Piece First-Class Mail, Presort First-Class 

Mail, Single-Piece First-Class Mail International, Standard Mail, Periodicals, Package Services, and Special Services. 

Combined Report at 35. The Postal Service states that the FY 2012 Report and FY 2013 Plan provide a link to 

publicly-available performance reports for all market dominant products rather than reporting the information 

twice. Postal Service Reply Comments at 19.

The Commission notes that in addition to providing a link to performance reports for market dominant products, 

the Postal Service introduced two new performance indicators for the Provide High-Quality Service goal. 

Nonetheless, the Postal Service’s performance goal should reflect its commitment to providing high quality service 

to all products. In future years, the Postal Service should include other market dominant products as performance 

indicators to facilitate comparisons in Annual Performance Reports and Plans.

9 See http://about.usps.com/what-we-are-doing/service-performance/welcome.htm.

40 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER V
Performance Goal 2: Generate Net Income

Postal Service’s Filing

The Postal Service established Operating Loss and Deliveries per Work Hour (DPWH) as performance indicators for 

the Generate Net Income performance goal. In FY 2012, the Postal Service had a net operating loss of $2.4 billion, 

which was $0.5 billion lower than the FY 2012 target operating loss of $3 billion. Id. at 34. Operating loss excludes 

the expense impact of Workers’ Compensation discount rate changes and actuarial revaluations, as well as the 

Postal Service RHBF payments. Id. at 34 n.3. For FY 2013, the target is a loss of $2.1 billion. Id. at 34.

In FY 2012, DPWH of 41 deliveries did not meet the FY 2012 target of 42.2 deliveries.10 The Postal Service explains 

that one reason for not achieving the target was that it planned for very aggressive cost reduction plans. Response 

to CHIR No. 6, question 5. However, the plans changed because network and delivery consolidations took place on a 

slower schedule than originally planned. Id. Also, additional workload was based on higher-than-planned volumes.

In FY 2013, the target DPWH is 42.9. Combined Report at 34. The Postal Service notes that this target is aggressive. 

Response to CHIR No. 6, question 5. It states that to meet the target, the Postal Service has begun implementing 

network consolidations, delivery unit consolidations, the POStPlan, and centralized business deliveries. Id.

Commission Analysis

The Postal Service partially met its performance goal. The FY 2012 DPWH of 41.0 did not meet the target of 42.2; 

however, the operating loss was less than in FY 2011. Nevertheless, revenues from FY 2007 to FY 2012 have 

declined from a high of approximately $75 billion in FY 2007 to approximately $65 billion in FY 2012. The Postal 

Service recorded a loss of $15.9 billion in FY 2012. For a more detailed discussion of the Postal Service’s current 

financial condition, see Chapter IV on the Postal Service Financial Condition.

In the FY 2011 ACD, the Commission recommended against replacing Total Factor Productivity (TFP) with DPWH 

as a performance indicator because DPWH does not recognize major workload components, such as collecting, 

processing, transporting, and sequencing of mail for delivery. 2011 ACD at 57-58. In both the FY 2012 Report and 

FY 2013 Plan, the Postal Service responds that although TFP is not currently used as a performance indicator, it 

remains a measure of long-term productivity trends. Combined Report at 36. It states that TFP recognizes both 

mail volume and delivery points and weights the volume of various postal products to account for variations in 

work content due to certain factors. Id. at 37. These factors include size, weight, mailer preparation levels, and 

mode of transportation. Id. TFP thus allows consistent comparisons among postal products. Id. The Commission 

recommends that the Postal Service continue to use TFP as a measure of efficiency.

10 Id. DPWH is an efficiency measure comparing the total number of deliveries of all types with the total number of workhours used in all employee 

categories. 2011 ACD at 47. The total number of deliveries is calculated by multiplying the number of delivery points by the number of delivery days. 

Id. This number is then divided by the total number of workhours used in all employee categories, including managers and executives. Id. The result is 

the number of annual deliveries completed per workhour used. Id.

 POSTAL REGULATORY COMMISSION 41
In the FY 2011 ACD, the Commission also recommended reporting the RHBF obligations and Workers’ Compensation 

Liability Adjustment as part of its operating expenses to include in the financial performance goal. The FY 2012 

Report and FY 2013 Plan would have presented more meaningful and useful information if the Postal Service had also 

reported the RHBF obligations and Workers’ Compensation Liability Adjustment as part of its operating expenses. 

Performance Goal 3: Improve Workplace and Workforce

Postal Service’s Filing

The Postal Service relies on two performance indicators to evaluate progress towards its performance goal of 

Improve Workplace and Workforce. It uses the Occupational Safety and Health Administration (OSHA) Illness and 

Injury Rate to measure improvements in safety. The OSHA Illness and Injury Rate is calculated by multiplying the 

total number of OSHA injuries and illnesses by 200,000 hours, which represents 100 employees working 2,000 

hours per year. Combined Report at 34 n. 4. That number is then divided by the number of exposure hours worked 

by all employees. Id.

In FY 2012, the OSHA Illness and Injury Rate of 5.44 was better than the FY 2012 target of 5.72. Id. at 34. The target 

for FY 2013 is 1 percentage point below the 2012 result, which is a slight improvement. Id.

The Postal Service tracks employee engagement and workplace concerns using the Voice of the Employee (VOE) 

Survey, a way for employees to confidentially express their opinions about the work environment. Id. at 37. Key 

questions from the VOE Survey are used to create an index to track progress on employee-centered initiatives 

and assess national trends. Id. The performance indicator is the VOE Survey score, which is the average percent of 

employees responding favorably to eight questions from the VOE Index. 2011 ACD at 48. These questions address 

the following issues: Strategic Direction, Trust, Contribution to Postal Service Growth, Communication, Diversity 

and Respect, Commitment, Personal Safety, and Work Effort and Quality. Combined Report at 37.

In FY 2012, the VOE Survey score of 64.7 did not meet the FY 2012 target of 64.9. Combined Report at 34. The FY 

2013 target has not yet been determined.

Commission Analysis

The Postal Service partially met this performance goal. The FY 2012 VOE Survey Score was the same as the FY 2011 

score, which demonstrates that the Postal Service is not declining in this area.

The FY 2012 Report and FY 2013 Plan include more information on the VOE Survey Score than the OSHA Illness and 

Injury Rate. Combined Report at 37. Both the VOE Survey Score and the OSHA Illness and Injury Rate are important 

performance indicators measuring progress towards the Improve Workplace and Workforce performance goal. In 

the FY 2013 Report and FY 2014 Plan, the Commission recommends expanding upon the sections that discuss the 

OSHA Illness and Injury Rate.

42 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER V
Performance Goal 4: Corporate Responsibility

Corporate Responsibility is a new performance goal that was introduced in FY 2012. The Postal Service established 

Universal and Public Services and Other Obligations as a performance indicator supporting this goal. Combined 

Report at 33. However, it did not provide targets or results for this performance indicator. Because the Postal Service 

did not include targets and results for its performance indicator it cannot be found to have met its performance goal.

In the FY 2013 ACR, the Corporate Responsibility performance goal should be expressed in an “objective, quantifiable, 

and measurable form[.]” See 39 U.S.C. 2803(a)(2). The Postal Service may use an alternative form if it determines that 

expressing the Corporate Responsibility performance goal in an objective, quantifiable, and measurable form is not 

feasible. See Id. 2803(b). The alternative form must describe a minimally effective and successful program and state 

why it is infeasible or impractical to express the Corporate Responsibility performance goal in any other form. Id.

Strategic Change Initiatives

Postal Service’s Filing

In FY 2010 and FY 2011, Annual Performance Plans contained nine strategic initiatives to help clarify the connection 

between performance goals and the actions necessary to achieve them. 2011 ACD at 49. However, the FY 2013 Plan 

replaced the “strategic initiatives” with “strategic change initiatives” designed to close the gap between revenue 

and cost over the next 5 years. Combined Report at 38. The Postal Service explains that the portfolio of strategic 

change initiatives is dynamic and will change as priorities and resources require, and as programs are completed 

or adjusted. Id.

The strategic change initiatives are organized into three categories: Infrastructure and Operations Optimization, 

Revenue Generation Programs, and Workplace and Workforce Initiatives. Table V-2 displays the FY 2013 strategic 

change initiatives by category.

Table V–2—FY 2013 Strategic Change Initiatives

Infrastructure and Operations Optimization Revenue Generation Programs Workplace and Workforce Initiatives

Mail processing and transportation Shipping growth Talent management and development

Delivery Transaction mail preservation Employee engagement

Retail access Marketing mail growth Dispute resolution

Facilities management and disposal Global growth Total labor cost

Financial and information systems Digital and hybrid mail growth Workforce optimization

Product visibility Pricing optimization

Sustainability Increasing sales force effectiveness

Supply chain integration Customer experience

Commercial mail acceptance transformation

Ongoing legislative and regulatory agenda

Source: Combined Report at 38.

 POSTAL REGULATORY COMMISSION 43
The Postal Service explains that the strategic change initiatives differ from the strategic initiatives established 

in previous years because they better reflect the Postal Service’s current strategic goals. Response to CHIR No. 

6, question 7. It contends, however, that the content covered by the strategic change initiatives is substantially 

similar to the strategic initiatives established in past years. Id. Table V-3 lists the FY 2010 and FY 2011 strategic 

initiatives and the corresponding FY 2012 strategic change initiatives.

To measure the performance of the strategic change initiatives, the Postal Service developed 10 cross-portfolio 

performance indicators. Each performance indicator includes targets and results for FY 2012, as well as the FY 

2012 variance. The performance indicators are listed in Table V-4.

The Postal Service states that FY 2013 targets for the cross-portfolio performance indicators are currently being 

compiled. Response to CHIR No. 6, question 8. It notes that the FY 2013 targets for the cross-portfolio performance 

indicators may differ from the current FY 2012 targets. Id.

Commission Analysis

The strategic initiatives facilitate the Commission’s review of performance goals under 39 U.S.C. 3653(d). The 

Commission reviews the strategic initiatives as part of its evaluation of whether the Postal Service met the 

performance goals established in the Annual Performance Report and Plan.

Table V–3—Comparison of Strategic Initiatives with Strategic Change Initiatives

FY 2010 and FY 2011

Strategic Initiatives

Correlated FY 2012

Strategic Change Initiatives

1. Intelligent Mail Infrastructure and Operations Optimization: 

Product visibility, Commercial mail acceptance transformation

2. Flats Sequencing System Infrastructure and Operations Optimization: 

Mail processing and transportation 

3. Expand Access Infrastructure and Operations Optimization: 

Retail access 

4. Optimize Network Infrastructure and Operations Optimization: 

Mail processing and transportation, Facilities management and disposal

5. Flexible Workforce

Workplace and Workforce Initiatives: 

Talent management and development, Employee engagement, 

Total labor cost, Workforce optimization

6. Reduce Energy Use Infrastructure and Operations Optimization: 

Sustainability

7. Reduce Delivery Costs Infrastructure and Operations Optimization: 

Delivery

8. Expand Products, Services, and Features

Revenue Generation Programs: 

Shipping growth, Transaction mail preservation, Marketing mail growth, 

Global growth, Digital and hybrid mail growth, Customer experience

9. Address Legislative Requirements for Funding Infrastructure and Operations Optimization: 

Ongoing legislative and regulatory agenda

Source: Response to CHIR No. 6, question 7.

44 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER V
In the FY 2011 ACD, the Commission directed that the FY 2012 Report and FY 2013 Plan “contain information on 

strategic initiatives similar in the level of detail to that provided in the FY 2010 Comprehensive Statement.” 2011 

ACD at 58. The Commission asked the Postal Service to provide the performance indicators used to measure 

progress in meeting targets. Id. It also asked for the FY 2012 targets, FY 2012 results, and FY 2013 targets. Id.

As described above, the Postal Service revamped “strategic initiatives” from past years by replacing them with 

“strategic change initiatives.” The Public Representative critiques the Postal Service’s presentation of strategic 

change initiatives. PR Comments at 16. He asserts that it is difficult to determine which performance goals the 

strategic initiatives relate to because the lists of initiatives are not tied to the performance goals. Id. He also argues 

that the strategic change initiatives lack performance indicators to measure progress towards accomplishing the 

performance goals. Id.

The Postal Service responds that a relationship does exist between the strategic change initiatives and the 

performance goals. Postal Service Reply Comments at 21. It notes that the inter-related nature of the strategic 

change initiatives means that more than one initiative may relate to more than one performance goal. Id. The 

Postal Service contends that the Public Representative is improperly imposing the requirements of 39 U.S.C. 2803 

and 2804 on the strategic change initiatives, which are not provided as part of the FY 2012 Report and FY 2013 

Plan. Id. Rather, they are provided as part of a broader strategic plan to achieve these goals. Id.

The strategic initiatives were originally designed “to help clarify the connection between performance goals and 

the actions necessary to achieve them.” 2011 ACD at 49. Although they do not directly support the performance 

goals, they are part of the FY 2012 Report and FY 2013 Plan. The Commission reviews the strategic change 

initiatives as part of its evaluation of whether the Postal Service met the performance goals established in the 

Annual Performance Report and Plan. Id. at 58.

Table V–4—Cross-Portfolio Performance Indicators

Description Planned Actual FY 2012 Variance

Total revenue ($) $935,718,028 $813,556,920 $(122,162,108)

Total cost savings ($) $581,000,000 $346,338,000 $(234,662,000)

Total work hours reduced (hours) 6,000,000 1,940,200 (4,059,800)

Total headcount reduced (FTEs) 67,080 29,390 (37,690)

Total facility square feet reduced (sq. ft.) 2,200,000 3,308,811 1,108,811 

Commercial mail in Full Service (%) 48% 45% (3%)

IMb adoption rate (%) 80% 81% 1%

Package scanning rate (%) 94% 94% 0%

Overall customer experience score (%) 82% 79% (3%)

Legislative Impact ($b) 0 0 0 

Source: Combined Report at 39.

 POSTAL REGULATORY COMMISSION 45
The Commission finds that the Postal Service has met the requirements of 39 U.S.C. 2803 and 2804 with respect 

to the strategic change initiatives. The Postal Service established 10 cross-portfolio performance indicators that 

support the strategic change initiatives. Each performance indicator has FY 2012 targets and results, as well as the 

FY 2012 variance. FY 2013 targets are currently being compiled. Response to CHIR No. 6, question 8. To ensure 

compliance with statutory requirements, the FY 2013 Report and FY 2014 Plan should contain FY 2013 targets, FY 

2013 results, and FY 2014 targets for each strategic change initiative performance indicator.

The Commission finds that the quality of information provided about the strategic change initiatives improved 

over the FY 2011 Report and FY 2012 Plan. The Commission appreciates that the Postal Service provided a chart 

linking FY 2010 and FY 2011 strategic initiatives with FY 2012 strategic change initiatives. Response to CHIR No. 6, 

question 7. Future Annual Performance Reports and Plans should provide explanations for any deletions.

46 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER V
Chapter VI 

Service Performance

Introduction

39 U.S.C. 3652(a)(2)(B)(i) requires the Postal Service to report on each market dominant product’s “level of service 

(described in terms of speed of delivery and reliability).” The Commission evaluates whether each product meets 

its standard for level of service. On an annual basis, the Commission compares a product’s on-time delivery with 

delivery goals established by the Postal Service. For Special Services, the Commission evaluates performance data 

from metrics developed by the Postal Service applicable to each product.

During FY 2012, service performance results for most market dominant products showed improvement toward 

meeting annual on-time targets. Most First-Class Mail products continued to meet or exceed their annual service 

performance targets. Special Services products, with the exception of Address Management Services, met or 

exceeded annual service performance targets. Package Services products, with the exception of Bound Printed 

Matter Flats, either approached or exceeded annual service performance targets. While most Standard Mail 

products did not meet or exceed annual on-time targets, service performance improved throughout the fiscal year.

The Postal Service attributes most of these gains to its Work-in-Process diagnostic tools which permit tracking 

and systemwide troubleshooting using information gathered through Intelligent Mail barcodes (IMb). Library 

Reference USPS-FY12-29 at 8, 13.

A notable exception to on-time delivery performance improvement has been in Periodicals, which has not met 

service performance targets. The on-time performance percentage has declined from last year. It is too early to tell 

if the decline in on-time delivery performance is due to a new, not fully tested measurement system, or an actual 

decline in service performance.1

Many challenges still face the Postal Service in developing reliable measurement systems. For example, the Postal 

Service systems do not yet provide service reporting by product for large percentages of Standard Mail because of 

the inability to identify Standard Mail pieces by product. The Postal Service says it is taking steps to address this 

problem.2 The Postal Service is expected to discuss its progress in identifying Standard Mail pieces by product in its 

next Annual Compliance Report to the Commission.

1 The Postal Service began measuring Periodicals service performance using the iMAPS system in the first quarter of FY 2012. Library Reference USPSFY12-29 at 15-16. 2 Response to CHIR No. 5, question 29. Further, the Postal Service will require piece-level detail on its electronic mailing documentation beginning July 

2013. DMM Advisory issued November 30, 2012.

 POSTAL REGULATORY COMMISSION 47
Measurement Systems

In FY 2012, the Postal Service used a variety of measurement systems to measure service performance for each 

market dominant product. Table VI-1 identifies the different systems used to measure service performance for 

each type of mail reported in the Postal Service’s Annual Service Performance Report, filed as Postal Service Library 

Reference USPS-FY12-29.

External First-Class Measurement System (EXFC)

EXFC is a sampling system managed by an independent contractor, International Business Machines Corporation 

(IBM). Delivery performance is measured from the street collection box to the delivery mailbox. When evaluating 

delivery performance, test mailers record the time they place First-Class Mail in the collection box. Those test 

mailpieces are sent to a nationwide panel of receivers who record when the mailpiece was delivered to their 

mailbox.3

 Actual transit time is then compared against First-Class Mail service standards. EXFC provides quarterly 

service performance measurement scores at both the area and district level.

Intelligent Mail Accuracy and Performance Systems (iMAPS)

iMAPS provides an end-to-end service performance measurement by using documented mail arrival time at a 

designated postal facility to start a measurement clock, and an IMb scan by an external, third-party reporter to 

stop the clock. The measurement involves two distinct steps. The Postal Service obtains processing times based 

on IMb scans reported through the Seamless Acceptance and Service Performance (SASP) system. SASP captures 

data from all Full-Service Intelligent Mail. This is combined with a last mile factor. The last mile factor is developed 

through scans by third-party reporters upon receipt of the mail. Service performance is measured by comparing 

the overall transit time to the service standards to determine the percent of mail delivered on time.

3 2009 ACD at 49.

Table VI–1—Market Dominant Service Performance Measurement Systems

Single-Piece Presort

Letters Flats Parcels Letters Flats Parcels

First-Class Mail EXFC EXFC PTS iMAPS Proxy (EXFC) PTS

Periodicals iMAPS iMAPS

Standard Mail iMAPS iMAPS PTS

Package

Services PTS iMAPS PTS

International Mail IMMS IMMS

Special Services Custom designed internally based measurement systems

Source: USPS. Service Performance Measurement. October 2007 at 6.

48 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VI
Product Tracking System (PTS)

For use with parcels, PTS is an internal measurement system used by the Postal Service, which measures transit 

time from the time of mailing until the time of delivery. Measurements are based on Delivery Confirmation scans. 

Actual transit time is compared against service standards for the market dominant parcel product.

International Mail Measurement System (IMMS)

IMMS measures the domestic leg of transit time for international mail. IMMS is based on a system similar to EXFC. 

The system measures the time between the domestic collection point and the outbound International Service 

Center (ISC) for outbound letters and between the inbound ISC and the domestic delivery point for inbound letters.

Intelligent Mail Barcode Developments

The Postal Service expects mailer participation in the Full-Service Intelligent Mail barcode system to continue to 

increase.4

 The largest increase in Full-Service IMb participation for First-Class Mail and Standard Mail products 

occurred at the end of FY 2011. Since that time, IMb adoption has slowed. Figure VI-1 shows the increase in the 

total number of pieces with a Full-Service IMb.

4 Full-Service IMb mailpieces are uniquely identifiable, which permits end-to-end tracking of mailpieces.

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2011-Q3

Pieces (Millions)

First-Class (incl. Presort, Flats) Standard Mail

2011-Q4 2012-Q1 2012-Q2 2012-Q3 2012-Q4

Source: USPS Reports on Full-Service IMb.

Figure VI–1—Total Pieces Measured by Intelligent Mail

 POSTAL REGULATORY COMMISSION 49
In July 2012, new service standards went into effect as a result of the Postal Service’s network consolidation 

initiative that shifted significant volumes from 1 and 2 day service to 3-5 day service. First-Class Mail service 

performance measurement systems were modified to account for the new service standards. Compilation of data 

using the new systems began in Quarter 4.

The volume of measurable First-Class Mail within the 3-5 day delivery standard increased almost four-fold since the 

fourth quarter of FY 2011. According to the Postal Service, the increase in measured mail pieces allows the Postal 

Service to identify processing bottlenecks, and effectively address regional and district processing issues, thereby 

increasing general service performance. Figure VI-2 shows the number of Full-Service IMb pieces in measurement 

by delivery day standard for First-Class Mail Presorted Letters/Postcards.

The volume of Full-Service IMb mail also continues to increase for most Standard Mail products. In FY 2012, the 

Postal Service saw significant increases in measured mail volume, especially for Letters, Carrier Route, and Flats 

products. Figure VI-3 shows the percentages of mail volume in measurement for each Standard Mail product by 

quarter in FY 2012. Pieces (Millions)

Overnight Two-Day Three-to-Five-Day

-

500 

1,000 

1,500 

2,000 

2,500 

2011-Q1 2011-Q2 2011-Q3 2011-Q4 2012-Q1 2012-Q2 2012-Q3 2012-Q4

Source: USPS Quarterly Service Performance Reports.

Figure VI–2—First-Class Mail Presorted Letters/Postcards Pieces in Measurement

50 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VI
The Postal Service has made progress in increasing Full-Service IMb mailer participation. FY 2012 is the first year 

in which the Postal Service was able to provide product level reporting for most market dominant products based 

on data obtained from all four quarters of a fiscal year. However, the Commission is concerned about the low 

level of participation for certain Standard Mail categories, Package Services (especially Bound Printed Matter and 

Bound Printed Flats) and Periodicals (Within County and Outside County). Low levels of Full-Service IMb adoption 

cause absences in performance measurement results, or coverage gaps, which then cause unreliable service 

performance measurements.

First-Class Mail

As seen in Table VI-2, Single-Piece Letters/Postcards and Presorted Letters/Postcards, which comprise more than 94 

percent of First-Class Mail, met or exceeded annual on-time service performance targets. Flats, Parcels, Outbound 

Single-Piece First-Class Mail International, and Inbound Letter Post, which comprise the remainder of First-Class 

Mail, did not meet annual on-time service performance targets.

Q1 Q2 Q3

Source: Response to CHIR No. 8, question 13.

-

200,000,000 

400,000,000 

600,000,000 

800,000,000 

1,000,000,000 

1,200,000,000 

Carrier Route Letters Flats

Pieces

Q4

Figure VI–3—Measured Mail Pieces - Standard Mail Products

 POSTAL REGULATORY COMMISSION 51
Single-Piece Letters/Postcards

Service performance for Single-Piece Letters/Postcards is measured using the EXFC system. Single-Piece Letters/

Postcards annual performance exceeded the on-time delivery targets for the overnight, 2-day, and 3-5 day mail. 

The scores surpass FY 2010 and FY 2011 annual results. Service performance for this product has continuously 

increased each year.

Presorted Letters/Postcards

Service performance for Presorted Letters/Postcards is measured using the iMAPS system. Presorted Letters/

Postcards annual performance exceeded the on-time delivery targets for the overnight, 2-day, and 3-5 day mail.

Flats

Service performance for single-piece flats, which comprises 70 percent of First-Class Mail Flats, is measured using 

the EXFC performance measurement system. The single-piece flats performance score is used as a proxy for 

presorted flats. FY 2012 is the third consecutive year that the First-Class Mail Flats product has not met on-time 

delivery service performance targets for overnight, 2-day, or 3-5 day mail.

The Postal Service asserts that quarterly scores showed improvement during FY 2012. It projects continued 

Table VI–2—FY 2012 Domestic First-Class Mail Service Performance

First-Class Mail Target Percentage On-Time

Single-Piece Letters/Postcards

Overnight 96.65 97.0 

2-Day 94.15 95.6 

3-5 Day 92.85 93.2 

Presort Letters/Postcards

Overnight 96.65 96.9 

2-Day 94.15 95.9 

3-5 Day 92.85 95.4 

Flats

Overnight 96.65 89.8 

2-Day 94.15 85.0 

3-5 Day 92.85 80.0 

Parcels

Overnight 96.65 89.8 

2-Day 94.15 85.8 

3-5 Day 92.85 88.4 

Source: USPS-FY12-29 at 4.

52 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VI
improvement for subsequent quarters as the Postal Service’s Work-In-Process diagnostic tools find and correct 

the issues contributing to the product performing below targeted service performance. Library Reference USPSFY12-29 at 8. Table VI-3 shows quarterly performance for FY 2012.

The Postal Service notes that in consultation with the external service performance contractors, it will assess the 

need for proxy data for presorted flats quarterly and that when sufficient IMb volumes are available, the use of the 

proxy will be re-evaluated. The Postal Service also mentions its continuing efforts to encourage “the adoption of 

Full-Service Intelligent Mail service for letters and flats for all mailers, including small volume mailers.” Response 

to CHIR No. 5, question 29.

Parcels

Service performance for Parcels is measured using the Postal Service’s internal PTS. Annual performance for FirstClass Mail Parcels did not meet on-time service performance targets for overnight, 2-day, or 3-5 day delivery. A 

review of quarterly scores shown in Table VI-4 shows improvements in service performance for Parcels over the year.

Outbound Single-Piece First-Class Mail 

International and Inbound Letter Post

Service performance for Outbound Single-Piece First-Class Mail International and Inbound Letter Post is measured 

using the IMMS. Letter-shaped mailpieces are measured using a system similar to EXFC. International flats and 

parcels are reported using proxies derived from the flats and parcels domestic counterparts. As shown in Table VI5, Outbound Single-Piece First-Class Mail International and Inbound Letter Post did not meet their annual on-time 

service performance targets.

Table VI–3—FY 2012 On-Time Service Performance for First-Class Mail Flats

On-time Service 

Performance (%) Quarter 1 Quarter 2 Quarter 3 Quarter 4

Overnight 88.4 90.0 90.9 89.8

2-Day 81.4 84.9 85.9 87.9

3-5 day 74.9 79.5 83.5 81.7

Source: USPS Quarterly Service Performance Report. Quarter 4.

Table VI–4—FY 2012 On-Time Service Performance for First-Class Mail Parcels

On-time Service 

Performance (%) Quarter 1 Quarter 2 Quarter 3 Quarter 4

Overnight 86.0 89.7 92.4 92.2

2-Day 78.7 85.7 90.2 91.0

3-5 Day 82.4 88.7 91.7 90.5

Source: USPS Quarterly Service Performance Report. Quarter 4.

 POSTAL REGULATORY COMMISSION 53
Commission Findings for First-Class Mail

The Commission finds that the Postal Service met its service performance targets for the majority of First-Class 

Mail products. For First-Class Mail Flats and Parcels the Postal Service did not meets its goals. However, service 

performance improved during the fiscal year. The Postal Service should plan for corrective action necessary to 

improve the service performance of both International First-Class Mail products.

Standard Mail

As shown in Table VI-6, two Standard Mail products met or exceeded service targets and four did not.

In FY 2012, the Postal Service was unable to evaluate Standard Mail product service performance for a large 

percentage of letter and flat shaped Standard Mail as required by statute. Fifty-seven percent of measurable 

Standard Mail letters and 70 percent of Full-Service Intelligent Mail flats were not reportable by product and were 

reported as “mixed product” categories. Library Reference USPS-FY12-29 at 11.

The Postal Service explains that identification of Standard Mail products is based on information supplied by 

mailers. Mailers are not always required to provide the detailed data that enables service performance reporting 

at the product level.5

 In such cases, mail cannot be placed into specific product categories and is instead reported 

as either Mixed Product Standard Letters or Mixed Product Standard Flats.

5 Notably, the current electronic documentation requirements do not allow mailers using Postal Wizard or the Intelligent Mail Range Record (IMR) type 

documentation to provide the exact product category for each mail piece. Therefore, the flat-shaped Standard Mail pieces without product category 

information identified in iMAPS are included in the Mixed Flats group for the performance reporting purposes.

Table VI–5—FY 2012 International First-Class Mail Service Performance 

First-Class Mail Target Percentage On-Time

Outbound Single-Piece First-Class Mail International

Combined (Overnight, 2-Day, 3-5 Day) 94.0 91.5

Inbound Letter Post

Combined (Overnight, 2-Day, 3-5 Day) 94.0 90.5

Source: USPS-FY12-29 at 4.

Table VI–6—On-Time Service Performance for Standard Mail Products

Standard Mail Target FY 20111 FY 2012

High Density and Saturation Letters 90.0 86.9 87.2

High Density and Saturation Flats/Parcels 90.0 76.6 90.8

Carrier Route 90.0 50.1 70.6

Letters 90.0 71.3 80.7

Flats 90.0 59.9 70.0

Parcels 90.0 N/A 98.9

1 The Postal Service began reporting service performance results for Standard Mail in the last quarter of FY 2011

Source: USPS-FY12-29 at 10 and USPS-FY11-29 at 33.

54 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VI
There exists a large volume of Standard Mail categorized as “mixed product flats” or “mixed product letters.” 

Volume that is not identified by product hinders proper service performance measurement for individual Standard 

Mail products. In addressing this issue, the Postal Service emphasizes its efforts to work with the mailing community 

to revise mail entry documentation requirements. Response to CHIR No. 5, question 29. Specifically, the Postal 

Service established a deadline for adopting piece-level documentation, and the current method, which does not 

require the information, is being eliminated. Id.

Figure VI-4 shows the recent decline in Standard Mail Flats not identifiable by product and falling into a 

mixed category.

Letter and Flat-Shaped Standard Mail Products

Service performance for all letter-shaped, and for non-saturation flat-shaped, Standard Mail is measured using the 

iMAPS system. FY 2012 was the first year all four quarters of data from the Full-Service Intelligent Mail system were 

used for service performance measurement. See Figure VI-5.

A variation of the iMAPS system is used for measuring destination delivery unit entered saturation flat-shaped 

Standard Mail. Service performance for this mail is measured by identifying major weekly saturation mailings 

within the delivery unit to begin measurement. The carrier ends measurement with a scan upon completion of all 

deliveries on a route. These measurements are compared against the mailer requested in-home window. Library 

Reference USPS-FY12-29 at 9.

-

200,000,000 

400,000,000 

600,000,000 

800,000,000 

1,000,000,000 

1,200,000,000 

1,400,000,000 

1,600,000,000 

Mixed Letters Mixed Flats

Pieces

Q1 Q2 Q3

Source: Response to CHIR No. 8, question 13.

Q4

Figure VI–4—Measured Mail Pieces—Mixed Product Categories

 POSTAL REGULATORY COMMISSION 55
The Postal Service asserts that performance results in FY 2012 showed steady improvement. It explains that the 

use of diagnostic tools as well as timely start-the-clock scans will continue to drive the improvement of service 

performance for the products below target. Library Reference USPS-FY12-29 at 13.

Parcels

Service performance for Parcels is measured using an internal Delivery Confirmation-based system. Table VI-7 

shows that the Parcels overall service performance results is based solely on three quarters of data for one metric 

of Destination Entry 2-day Parcels.

0

10

20

30

40

50

60

70

80

90

100

Carrier Route Letters Flats Mixed Product

Letters 

Mixed Product

Flats

Qtr 1 Qtr 2 Qtr 3 Qtr 4

Percent on Time

Source: FY 2012 Standard Mail Quarterly Performance Reports.

Figure VI–5—FY 2012 Quarterly Service Performance Results

Table VI–7—FY 2012 Available Data for On-Time Service Performance of Standard Mail Parcels

On-time Service Performance (%) Quarter 1 Quarter 2 Quarter 3 Quarter 4 Annual

Destination Entry 2-Day N/A 98.9 99.2 99.1 98.9

Destination Entry 3-4 Day

Destination Entry 5-10 Day

End-to-End 3-5 Day

End-to-End 6-10 Day

End-to-End 11-22 Day

Source: FY 2012 Quarter 4 Quarterly Performance Reports.

56 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VI
Commission Findings for Standard Mail

The Commission notes the improvements in Standard Mail measurements that have occurred in FY 2012. Over 

the year, the volume of mail in measurement appears to have increased. However, there are still significant gaps in 

reporting that need to be filled. This is apparent upon review of the quarterly data which aggregate to the annual 

service performance reports. Some segments within the Standard Mail products report no data at all.

The large volume of Standard Mail categorized as “mixed product flats” or “mixed product letters” is a continuing 

concern. The volume within the mixed product categories has been high and has hindered proper service 

performance measurement for individual products. It is encouraging that measured mix product volumes, 

especially for mixed product flats, have declined significantly in FY 2012. The effort to properly categorize Standard 

Mail products should improve the accuracy of service performance measurements.

The majority of Standard Mail did not meet service performance targets in FY 2012. However, service performance 

improved over the fiscal year. As the Postal Service continues to increase participation in Full-Service IMb and 

improve identification of mail pieces the Commission expects further improvements in service performance 

reporting. No further action is required at this time.

Although the reported Parcels performance surpasses the annual service performance goal, the result was based 

entirely on Destination Entry 2-day Parcels. The Postal Service must take steps to ensure Parcels reporting is more 

representative of the entire product.

Periodicals

Service performance for Periodicals is measured using the iMAPS system. Approximately 12 percent of all 

Periodicals were included in measurement for FY 2012. 2012 ACR at 14. As shown in Table VI-8, on-time service 

performance for Within County Periodicals and Outside County Periodicals is significantly below annual service 

performance goals.

An all Periodicals measurement is used as a proxy for both the Within County Periodicals and Outside County Periodicals 

product measurements. The Postal Service explains that data are currently not available to identify significant portions 

of Periodicals by product. Furthermore, the small size of Within County Periodicals mailers makes it less likely that 

they will make the transition to barcoding or mail preparation systems that allow individual product identification.6

6 Response to CHIR No. 9, question 28, Library Reference USPS-FY12-29 at 14-15.

Table VI–8—FY 2012 On-Time Service Performance for Periodical Products

On-Time Service Performance (%) FY2012 Annual Target

Outside County 68.7 91.0

Within County 68.7 91.0

Source: USPS-FY12-29 at 14.

 POSTAL REGULATORY COMMISSION 57
In the first quarter of FY 2012, the Postal Service transitioned away from using the previous measurement systems 

based on Red Tag and Del-Trak.7

 As a consequence, carrier route bundles which bypass automation may not be 

measured.8

As shown in Figure VI-6, on-time service performance improved from quarter 1 to quarter 4 of FY 2012.

Commission Findings for Periodicals

Neither Periodicals product met its service target for FY 2012. However, service performance improved throughout 

the fiscal year. The Periodicals Mail Study, Joint Report of the United States Postal Service and Postal Regulatory 

Commission, released in September 2011, identified several operational changes designed to increase efficiency. 

The Postal Service implemented many of these recommended changes in FY 2012. As these changes take effect 

and the Postal Service continues to use its diagnostic tool to identify service issues, service performance should 

improve further in FY 2013.

7 Library Reference USPS-FY12-29 at 15. The Red Tag Monitoring Service is operated by the not-for-profit Red Tag News Publication Association to 

monitor service for association members. The Del-Trak System is operated by Time, Inc. 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 to stop-the-clock. The transit time for 

each of the tested publications is compared against the service standards for Periodicals. Data from the two external systems are reviewed, combined 

and weighted by an independent contractor. 8 Library Reference USPS-FY12-29 at 15-16.

0

10

20

30

40

50

60

70

80

90

Quarter 1 Quarter 2 Quarter 3 Quarter 4

Percent on Time

Figure VI–6—Quarterly Periodicals Service Performance

Source: USPS Quarterly Service Performance Reports.

58 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VI
Package Services

The Bound Printed Matter Parcels and Media Mail/Library Mail products within Package Services met or exceeded 

annual on-time service performance targets. Single-Piece Parcel Post,9

 Bound Printed Matter Flats, and Inbound 

Surface Parcel Posts (at UPU rates) products within Package Services did not. Package Services is comprised mostly 

of parcels, but also includes some catalogs and other bound printed items too heavy to be sent as Standard Mail. 

As shown in Table VI-9, service performance for all products improved in FY 2012.

Single-Piece Parcel Post (Alaska Bypass Service)

Service performance for Single-Piece Parcel Post is measured using the internal PTS system, which is based on 

Delivery Confirmation scans. Figure VI-7 compares service performance from FY 2010 through FY 2012.

9 Single-Piece Parcel Post has been re-classified as a competitive product. The remaining volume in the market dominant category is now called Alaska 

Bypass Service.

Table VI–9—On-Time Service Performance for Package Services Products

On-time Service Performance (%) FY 2011 FY 2012 Target

Single-Piece Parcel Post 81.8 86.8 90.0

Bound Printed Matter Flats 42.1 54.3 90.0

Bound Printed Matter Parcels 83.2 94.4 90.0

Media Mail/Library Mail 87.5 92.7 90.0

Inbound Surface Parcel Post (at UPU rates) 81.8 86.8 90.0

Source: USPS-FY12-29 at 19 and USPS-FY11-29 at 23.

50

55

60

65

70

75

80

85

90

95

100

FY 2010 FY 2011 FY 2012

Percent on Time

Figure VI–7—Single-Piece Parcel Post Annual Comparison

Source: USPS-FY10-29, USPS-FY11-29, and USPS-FY12-29.

 POSTAL REGULATORY COMMISSION 59
Inbound Surface Parcel Post (at UPU rates)

Inbound Surface Parcel Post (at UPU rates) consists of items weighing up to 70 pounds originating in other 

countries and transported to the United States. Only the domestic leg of this international product is evaluated. 

Service Performance is estimated using Single-Piece Parcel Post service performance as a proxy. In FY 2012, SinglePiece Parcel Post was transferred to the competitive product list where service performance measurement is 

not required. Consequently, this proxy will no longer be valid in FY 2013. This product did not meet its service 

performance target in FY 2012. As seen in Figure VI-8 service performance improved throughout the year.

Bound Printed Matter Flats

Service performance for Bound Printed Matter Flats is measured using the iMAPS system. Neither the Destination 

Entry nor the end-to-end components of this product met the on-time service performance goal for FY 2012. For 

the end-to-end component, Table VI-10 shows the Postal Service reported only first quarter results.10

10 Quarterly Service Performance Report, FY 2012, Quarter 4, Issued February 8, 2013.

72

74

76

78

80

82

84

86

88

90

92

94

Qtr 1 Qtr 2 Qtr 3 Qtr 4

Percent on Time

Figure VI–8—FY 2012 Inbound Surface Parcel Post 

(at UPU rates) Quarterly Service Performance

Source: FY 2012 Package Services Quarterly Performance Reports.

Table VI–10—FY 2012 On-Time Service Performance for Destination Entry

and End-to-End Components of Bound Printed Matter Flats

On-time Service 

Performance (%)

Quarter 1 Quarter 2 Quarter 3 Quarter 4 FY 2012 

Annual Target

Destination Entry 41.7 60.7 49.2 67.2 55.2 90.0

End-to-End 24.1 24.1 90.0

Source: USPS Quarterly Service Performance Report. Quarter 4.

60 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VI
Bound Printed Matter Parcels

Bound Printed Matter Parcels is a commercial product used by businesses to send books, directories, or large 

catalogs too heavy or rigid to qualify as Bound Printed Matter Flats. Service performance for Bound Printed Matter 

Parcels is measured using the Postal Service’s internal PTS system. In FY 2012, Bound Printed Matter Parcels 

exceeded the annual target of 90 percent on-time delivery.

Media Mail/Library Mail

Media Mail/Library Mail is a content restricted product. By law, its content is restricted to books, noncommercial 

films, computer-readable media, and similar items that typically have educational, cultural, scientific or 

informational value. The product is used by businesses and by the general public to send books and eligible media 

or other permitted items either for business, personal, educational, or literary purposes.11 Service performance 

for Media Mail/Library Mail is measured using the Postal Service’s PTS system. On-time service performance for 

Media Mail and Library Mail was 92.7 percent in FY 2012, which exceeded the annual target.

Commission Findings for Package Services

Single-Piece Parcel Post did not meet on-time service performance goals in FY 2012, however, it has shown steady 

improvement over the years. The majority of this product was transferred to the competitive product list in FY 2012. 

The Commission is concerned that the performance measurement and results for Bound Printed Matter Flats are 

not improving. Results remain far from the annual target, and limited volume in measurement continues to hinder 

end-to-end measurement. The Postal Service should work with mailers to increase measured volume and utilize 

diagnostics to increase performance results.

With Alaska Bypass Service replacing Single-Piece Parcel Post on the market dominant product list, the Postal 

Service must propose use of an appropriate measurement system on proxy for Inbound Surface Parcel Post (at UPU 

rates) for service performance measurement in FY 2013.

Special Services

In FY 2012, all but one special service met or exceeded the annual service performance targets.12 Address List 

Services, which measures the number of days between a customer’s request for address list service and transmission 

of the corrected address information to the customer, did not meet its annual target. The Postal Services explains 

that “the failure to meet the target was due to a delay in processing by the responsible Address Management 

System field offices.”13 Table VI-11 illustrates that most results in FY 2012 remained above annual targets.

11 Quarterly Service Performance Report, FY 2012, Quarter 1, February 16, 2012. 12 Library Reference USPS-FY12-29 identifies the Special Service’s where the Postal Service provides service performance reporting (at 21-3), and the 

Special Service’s that have been granted a semi-permanent exception from reporting (at 25-6). 13 The Postal Services implemented retraining efforts to communicate the importance of timely entry of information into the tracking system. 2012 ACR 

at 26.

 POSTAL REGULATORY COMMISSION 61
Participant Comments

National Postal Policy Council (NPPC) contends that the service performance report does not clearly illuminate 

whether service quality has improved or whether the apparent improvement in service quality is reflective of 

changes to service standards due to the first phase of the Postal Service’s network realignment. Furthermore, 

NPPC does not agree with the Postal Service’s contention that customers care more about consistency of service 

than speed. NPPC members care both about consistency and speed of delivery. Finally, NPPC suggests that the 

Commission address the implications of reduced service standards on the price cap for First-Class Mail. NPPC 

Comments at 11-13.

The Public Representative attributes improvements in service performance scores to the relaxation of delivery 

standards due to network realignment and to the Postal Service’s use of new service performance diagnostic tools. 

The Public Representative suggests that the Commission inquire into the omission of end-to-end Bound Printed 

Matter data after the first quarter of FY 2012. Public Representative Comments at 20-25.

Valpak contends the Commission should be determining service performance compliance with respect to both 

speed of delivery and reliability. However, Valpak notes the absence of reporting reliability and states this is 

surprising since the Postal Service contends that users of First-Class Mail consider reliability to be more important 

than speed. See Docket No. 2012-1, USPS-SRT-4 at 6-7. Valpak suggests potential improvements in service 

performance reporting, such as the Postal Service reporting comparable speed of delivery data from prior years, 

to provide a ready comparison of service performance trends. Valpak also suggests reporting the average days to 

delivery and the percentage of late mail.

Finally, Valpak comments on the large percentage of Standard Mail that is reported in a mixed category and not 

by individual products as required by statute. Valpak contends that this limits the available performance data for 

individual products within Standard Mail. Valpak Direct Marketing Systems, Inc. and Valpak Dealers’ Association, 

Inc. Reply Comments on the United States Postal Service FY 2012 Annual Compliance Report at 44-53.

Table VI–11—On-Time Service Performance for Special Services Products

Special Services Target FY 2010 FY 2011 FY 2012

Ancillary Services 90.0 93.0 93.4 93.4

International Ancillary Services 90.0 99.2 99.6 99.6

Address Management Services 90.0 100.0 93.3 83.3

Confirm 90.0 99.6 99.7 98.8

International Business Reply Mail Service — — — NR1

Money Orders 90.0 95.4 97.2 99.2

Post Office Box Service 90.0 94.3 93.1 92.6

Stamp Fulfillment Services — N/A2 N/A2 96.7

1 NR indicates not reported.

2 N/A indicates measurement results were not yet available.

Source: USPS-FY12-29 at 23 and 2011 ACD at 79.

62 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VI
Commission Analysis

The Commission will monitor the effects of the Postal Service’s network realignment on service performance. 

However, data at this time are too limited to draw any meaningful conclusions.

Whether customers place more emphasis on speed of delivery or reliability of service varies depending on their 

needs. At this time, service performance measurements annually report the percentage of on-time delivery. Ontime delivery is informative as to both speed of delivery and reliability of service, with greater emphasis on speed 

of delivery. The Postal Service could increase emphasis on reliability of service by reporting tail-of-the-mail, the 

percentage of mail being delivered 1, 2, or 3 days late, in its annual report to the Commission.

Customer Access

Introduction

The Postal Service reports on customer access to market dominant postal services both to provide insight into 

customer satisfaction and because of the effect customer access has on the level of service provided. See 39 U.S.C. 

3652(a)(2). The Postal Service provides information on the number and type of post offices, including suspended 

post offices, the number of residential and business delivery points, and the number of collection boxes. A 

customer’s average wait time in line is provided to evaluate the time a customer must wait to receive retail services. 

Additionally, the Postal Service supplements its reporting with information on alternative access channels.

Maintaining adequate customer access is important notwithstanding volume declines and changes in mailer 

behavior.14 Over the years, the Postal Service has reduced its retail network by removing collection boxes and other 

collection points, and either closing postal retail facilities or reducing hours of operation. Access to postal services, 

however, is being supplemented with the addition of alternative marketing channels.

Retail Facilities

Table VI-12 provides the number of operational retail postal facilities by type for FY 2010 through FY 2012. The 

aggregate number of Postal Service retail facilities closed in FY 2012 is less than in FY 2011. Closings of Classified 

Stations, Branches and Annexes decreased but the number of Post Office closings increased.

14 One of the Postal Service’s FY 2011 strategic initiatives was to expand postal access by means other than a postal retail facility.

Table VI–12—Postal Service Operational Retail Facilities

Factility Type FY 2012 FY 2011 FY 2010

FY 2012 

Change from 

FY 2011

FY 2011 

Change from 

FY 2010

Post Offices 26,755 26,927 27,077 (172) (150)

Clasified Stations & Branches and Carrier Annexes 5,102 5,219 5,451 (117) (232)

Total Facilities 31,857 32,146 32,528 (289) (382)

Note: Does not Include Offices Under Suspension.

Source: USPS 2012 Annual Report to Congress, at 23.

 POSTAL REGULATORY COMMISSION 63
On May 25, 2012, the Postal Service requested an Advisory Opinion from the Commission on POStPlan, a proposal 

to realign the hours of operation at approximately 17,700 of its more than 32,000 postal retail locations to more 

closely reflect workload at these offices.15 Under POStPlan, the Postal Service reviewed the workload at EAS Level 

1616 and lower post offices to determine whether: (1) the office will be upgraded to EAS Level 18 or above; (2) 

window hours will be realigned to reflect actual workload; or (3) the post office will undergo a discontinuance 

study.17 The Commission issued its Advisory Opinion on the POStPlan on August 23, 2012. In summary, the 

Commission found that the POStPlan’s objective of achieving cost savings with limited reductions in access and 

service is consistent with public policy. It concluded that if implemented properly, the POStPlan should help 

balance service and cost savings in a manner consistent with the law. To further enhance the implementation 

of the POStPlan, the Commission’s Advisory Opinion provided recommendations concerning access, community 

input, revenue, and staffing.

During hearings held on the proposal, the Postal Service testified that post offices will continue to provide the 

same services they provide today. Specifically, access to post office boxes will remain unchanged, collection boxes 

at post offices will remain in place, and Saturday hours will not be affected.

As a result of POStPlan, the hours of operation at nearly 13,000 post offices nationwide are being reduced to 6, 

4, or 2 hours per weekday. In a few locations, hours of operation will increase. Table VI-13 shows the number of 

offices subject to POStPlan. Although POStPlan may reduce retail service and customer convenience at certain 

post offices by reducing weekday hours of operation, the Postal Service plans to maintain access to postal services 

in the following ways:

 Post offices will continue to provide the same services they provide today;

 Access to post office boxes will remain unchanged;

 Collection boxes at post offices will remain in place;

 Saturday hours will not be affected; and

 Post offices in the most remote and isolated locations will remain open at least 6 hours each weekday.

15 Docket No. N2012-2, United States Postal Service Request for an Advisory Opinion on Changes in the Nature of Postal Services, May 25, 2012, at 1 

(Request). 16 Post Offices are categorized by an EAS designation. The EAS designation reflects the Executive and Administrative Pay Schedule of the Postmaster 

assigned to the post office. 17 Request at 2.

Table VI–13—Change in Hours of Operation Under POStPlan

Number of Offices Percent of Total

Increase 73 0.4%

No Change 4,752 27.0%

Decrease 12,801 72.6%

Total 17,626 100.0%

Source: Docket No. N2012-2, Library Reference USPS-LR-N2012-2/1.

64 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VI
Post Office Suspensions

Postal Service data shown in Table VI-14 indicate that 211 offices were under suspension at the end of FY 2012. 

Twenty-two offices which had been under suspension were subsequently reopened.

The Commission has expressed concern about the duration of time offices remain under suspension without being 

reopened or being formally discontinued.18 Table VI-14 indicates that over 90 percent of the offices suspended 

in FY 2012 are involved in the discontinuance process. This is in contrast with offices under suspension prior 

to FY 2012 where only 45 percent were involved in the discontinuance process. The Postal Service’s recently 

revised discontinuance procedures and the advent of the POStPlan with its emphasis on keeping offices open with 

reduced operating hours may impact the number of extended suspensions.

Table VI-15 shows a breakdown of the 211 offices under suspension by the cause of the suspension. Postal Service 

Handbook PO-101 specifies certain circumstances that may justify a suspension as including, but not limited to:

 A natural disaster;

 Termination of a lease or rental agreement when suitable alternate quarters are not available in the 

community, especially when the termination is sudden or unexpected;

 Lack of qualified personnel to run the office;

 Irreparable damage when no suitable alternate quarters are available in the community;

 Severe damage to, or destruction of, the office;

 Challenge to the sanctity of the mail; and

 Lack of adequate measures to safeguard the office or its revenues.19

As shown in Table VI-15, the leading cause of suspensions is lease terminations which account for 44 percent of 

the total. Lack of qualified personnel is the second leading cause at 22 percent.

Table VI-16 shows the number of offices under suspension by date of suspension. There are offices which have been 

under suspension since 1984, and more than 25 percent of the total number of offices under suspension at the end 

of FY 2012 have been suspended for more than 2 years. When a post office has been suspended for such an extended 

period of time, it could be seen as a de facto closing that did not provide for the required community notices.

18 See Docket No. PI2010-1, Investigation of Suspended Post Offices. 19 USPS Handbook PO-101, January 2012.

Table VI–14—Number and Discontinuance Status of Suspended Offices

Time Period Reopened

Not in 

Discontinuance 

Process

In Discontinuance 

Process – Pre-Final 

Determination

Final 

Determination 

Issue Subtotal Total

Under Suspension Prior to FY 2012 1 47 34 5 86 87

Suspended in FY 2012 21 9 91 25 125 146

Under Suspension EOY FY 2012 22 56 125 30 211 233

Source: USPS-FY12-46.

 POSTAL REGULATORY COMMISSION 65
Table VI–16—Number of Suspended Offices 

by Fiscal Year

FY of Suspension Number of Offices Suspended

1984 1

1986 1

1988 2

1991 1

1992 1

1994 1

1999 1

2001 2

2002 2

2003 3

2004 3

2005 2

2006 2

2007 5

2008 3

2009 13

2010 14

2011 30

2012 124

Grand Total 211

Source: Response to CHIR No. 2, question 1, USPS-FY12-38.

Table VI–15—Number of Offices Under Suspension

Suspension Reason

Number of 

Offices

Percentage 

of Total

Lease Expiration/Termination 92 43.6%

Lack of Qualified Personnel 47 22.3%

Health/Safety 41 19.4%

Natural Disasters 12 5.7%

Other 7 3.3%

No Data 12 5.7%

Grand Total 211 100.0%

Source: USPS-FY12-46.

66 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VI
Delivery Points

Table VI-17 provides the number of residential and business delivery points by delivery type for FY 2009 through 

FY 2012. The change in the number of delivery points in FY 2010, FY 2011, and FY 2012 is also shown. The total 

number of delivery points continues to grow, increasing by 654,560 from FY 2011 to FY 2012. The growth in 

delivery points in FY 2012 is the result of an increase in residential delivery points. While business delivery points 

continued to decrease, the rate of decrease was lower in FY 2012 than in FY 2011. Table VI-18 shows the average 

number of pieces delivered per delivery point. For FY 2012, the average pieces per delivery point is 1,051. In FY 

2000, the Postal Service reported there were on average 1,529 pieces per delivery point.20

20 USPS Annual Report to Congress, 2001 at 46-47.

Table VI–17—Postal Service Delivery Point Statistics

Delivery Points FY 2012 FY 2011

FY 2012 

Difference 

from

FY 2011 FY 2010

FY 2011 

Change from

FY 2010 FY 2009

FY 2010 

Change 

from

FY 2009

Residential Delivery Points

City Delivery 81,040,591 80,792,112 248,479 80,531,231 260,881 80,187,505 343,726 

Rural 39,449,400 39,067,740 381,660 38,638,280 429,460 38,264,946 373,334 

PO Box 15,994,508 15,891,349 103,159 15,739,698 151,651 15,601,883 137,815 

Highway Contract 2,678,508 2,639,061 39,447 2,607,138 31,923 2,576,166 30,972 

Total Residential Delivery 139,163,007 138,390,262 772,745 137,516,347 873,915 136,630,500 885,847 

Business Delivery Points

City Delivery 7,525,979 7,487,332 38,647 7,457,500 29,832 7,483,461 (25,961)

Rural 1,493,644 1,468,861 24,783 1,453,292 15,569 1,439,266 14,026 

PO Box 3,889,964 4,072,664 (182,700) 4,355,674 (283,010) 4,489,688 (134,014)

Highway Contract 73,957 72,872 1,085 72,648 224 72,966 (318)

Total Business Delivery 12,983,544 13,101,729 (118,185) 13,339,114 (237,385) 13,485,381 (146,267)

Total Delivery Points 152,146,551 151,491,991 654,560 150,855,461 636,530 150,115,881 739,580 

Source: USPS 2012 Annual Report to Congress at 23.

Table VI–18—Annual Pieces Per Delivery Point

FY 2012 FY 2011 FY 2010 FY 2009

No. of Pieces (Millions) 159,859 168,297 170,859 176,744 

Pieces/Delivery Point 1,051 1,111 1,133 1,177 

Source: USPS 2012 Annual Report to Congress at 23.

 POSTAL REGULATORY COMMISSION 67
Wait Time in Line

Tables VI-19, VI-20, and VI-21 illustrate wait time in line experiences at postal retail facilities. To provide insight 

into customer experiences at its retail outlets, the Postal Service, through the Retail Customer Experience (RCE) 

program, hires private “mystery shoppers” who test customer experiences at approximately 8,400 of its larger 

retail outlets. Table VI-21 shows the average wait time in line by administrative area for FY 2011 and FY 2012 and 

by fiscal quarter for FY 2012. Wait time in line decreased in FY 2012 for every administrative area except the Pacific 

area where it increased by less than 9 seconds.

The Postal Service also uses its Customer Experience Measurement (CEM) survey to gauge customer perception 

of wait time in line. Customer average wait time in line based on the CEM survey question is shown in Table VI19. Wait time in line is broken down by small/medium Business customers and Residential customers for FY 2010 

through FY 2012.

One measure derived in part from mystery shoppers is a wait time in line score combined with a service standard 

of “Five Minutes or Less.” The goal for FY 2012 for wait time in line was 88 percent of customers waiting 5 minutes 

or less.21 The Postal Service reports that final results for FY 2012 produced a national wait time in line score of 88 

percent, which meets the target and reflects an improvement over the prior year by 1.1 percentage points. The FY 

2012 goal for the overall retail experience of 92.7, was exceeded by 0.1 percentage points. Table VI-20 shows the 

“Overall Retail Experience” goals and actual for FY 2012.

The Public Representative questions the large discrepancy between wait time in line presented by the Postal Service 

in its ACR, and wait time in line calculated in Library Reference USPS-FY12-38. Public Representative Comments at 

58-60; Public Representative Reply Comments at 34-5. He calculates an average wait time in line of 3.9 minutes 

compared to the Postal Service’s 2 minutes 34 seconds. The Public Representative offers suggestions to improve 

wait time in line reporting by the inclusion of additional questions in the CEM survey. Public Representative 

Comments at 60.

21 Id.

Table VI–19—Average Wait Time in Line

Small/Medium Business Residential

Wait Time In Line FY 2012 FY 2011 FY 2010 FY 2012 FY 2011 FY 2010

Less than 1 minute 18% 18% 17% 19% 19% 18%

1-3 minutes 31% 29% 28% 32% 31% 29%

4-5 minutes 23% 23% 23% 24% 24% 23%

Subtotal 5 minutes or less 72% 70% 68% 75% 73% 70%

6–10 minutes 16% 17% 17% 15% 15% 16%

11–15 minutes 7% 7% 8% 6% 6% 7%

16 minutes or more 5% 6% 7% 5% 5% 7%

Total 100% 100% 100% 100% 100% 100%

Source: USPS-FY12-38, USPS-FY11-38 and USPS-FY10-38.

68 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VI
The Postal Service explains that wait time in line data are obtained from the mystery shopper program, and not the 

CEM survey.22 It explains that CEM separately asks questions about customers’ impressions of their visits, but this 

information is not used in calculating wait time in line. The Postal Service states that the cost of the survey would 

increase if questions were added, as suggested by the Public Representative, and response rates would decrease. 

Reply Comments of the United States Postal Service at 22-23.

The Commission accepts the Postal Service’s approach to measuring wait time in line. Obtaining data from the 

mystery shopper program provides a measured time. Data from the CEM survey provides a customer’s impression 

of service, which is also useful.

Collection Points

Collection points are an important access channel for single-piece First-Class Mail. Collection points are defined 

locations where a customer drops off mail for collection by the Postal Service. These can include collection boxes, 

mailchutes, firm pickups, Automated Postal Center (APC) drops, lobby drops, and mail collection racks. All collection 

points are required to be entered in the Collection Point Management System (CPMS) by the responsible district. 

Data contained in the CPMS database include collection point address, location-type (i.e., Business, Residential, 

Post Office Lobby, etc.), box type (standard, jumbo, snorkel, etc.), days of the week the point is accessed and the 

times (including the final collection time) it is accessed.

Table VI-22 shows the number of collection points by location-type, and separately in Table VI-23, the percent of 

total collection points for the three most numerous locations, business districts, residential areas and at post offices. 

The rate of decline in collection points slowed in FY 2012. As Table VI-23 illustrates, the share of total collection 

points outside and inside post office lobbies has continued to grow relative to collection points in business and 

residential areas. The Postal Service has indicated to the Commission that it was Postal Service policy to relocate 

collection boxes that were located outside discontinued post offices.23 With the advent of POStPlan, there may be 

fewer closed offices and collection boxes at Postal Service retail facilities will continue to be an important access 

point for customers.

22 USPS Reply Comments at 22. 23 2011 ACD at 86.

Table VI–20—Overall Retail Experience

FY 2012 

Goal FY 2012 Actual

Overall Retail Experience1 92.7 92.8

Wait Time in Line (Pct. Waiting 5 min or less) 88.0% 88.0%

1 Overall Retail Experience Score is calculated from mystery shopper results: 40 percent (wait time in line score) 

+ 15 percent (HAZMAT score) + 20 percent (image score) +25 percent (promotion and merchandizing score)

Source: USPS 2012 Annual Report to Congress at 47.

 POSTAL REGULATORY COMMISSION 69
Table VI–21—FY 2012 Wait Time in Line

Area Fiscal Quarter/

Year

Average Retail Customer 

Experience Wait Time

FY 2012 FY 2011

Capital Metro

Quarter 1 2:38

Quarter 2 2:43

Quarter 3 2:08

Quarter 4 1:56

Fiscal Year 2:22 2:40

Eastern

Quarter 1 2:44

Quarter 2 2:41

Quarter 3 2:09

Quarter 4 2:01

Fiscal Year 2:24 2:26

Great Lakes

Quarter 1 1:58

Quarter 2 2:26

Quarter 3 1:42

Quarter 4 1:43

Fiscal Year 1:57 2:05

Northeast

Quarter 1 2:34

Quarter 2 2:33

Quarter 3 2:13

Quarter 4 2:11

Fiscal Year 2:23 2:35

Pacific

Quarter 1 3:47

Quarter 2 3:57

Quarter 3 2:13

Quarter 4 2:38

Fiscal Year 3:25 3:16

Southern

Quarter 1 2:53

Quarter 2 3:07

Quarter 3 2:15

Quarter 4 1:54

Fiscal Year 2:33 3:03

Western

Quarter 1 3:20

Quarter 2 3:22

Quarter 3 2:34

Quarter 4 2:31

Fiscal Year 2:58 3:07

National

Quarter 1 2:51

Quarter 2 2:58

Quarter 3 2:19

Quarter 4 2:08

Fiscal Year 2:34 2:45

Source: USPS-FY12-33.

70 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VI
The Greeting Card Association observes that in the preface to Library Reference USPS-FY12-33, the Postal Service 

states that its CPMS does not currently have the capability of tracking the number of collection boxes added during 

a specific fiscal year.24 The Postal Service has stated that it is in the process of adding this function to the CPMS and 

anticipates being able to provide this information for FY 2014.25 The Commission encourages the Postal Service to 

add the collection box measurement function to the CPMS.

Alternative Access

In addition to providing postal products and services at postal retail counters, the Postal Service has continued to 

expand postal access through additional marketing channels. For FY 2012, just over 39 percent of retail revenue 

was generated through means other than a postal retail counter. Table VI-24 identifies the FY 2012 revenue each 

retail channel generated, the share of total retail revenue each contributed and the percent change from revenue 

provided in FY 2011. The Postal Service had set a goal for FY 2011 of 35 percent of revenues to be generated 

24 GCA Comments at 1. 25 Library Reference USPS-FY12-33.

Table VI–22—Number of Collection Points by Location-Type

Year Change in 

Number

Percent 

Change

Change in 

Number

Percent 

Change

Location Type 2012 2011 2010 2006 2012-2006 2012-2011

Business 82,142 83,587 87,391 108,418 (26,276) -24.2% (1,445) -1.7%

Residential 41,019 41,513 43,342 61,038 (20,019) -32.8% (494) -1.2%

Post Office Outside 45,167 45,632 47,579 53,665 (8,498) -15.8% (465) -1.0%

Post Office Lobby 39,236 39,175 39,636 37,110 2,126 5.7% 61 0.2%

Customer Lobby 3,817 3,920 2,729 4,057 (240) -5.9% (103) -2.6%

Other 3,795 3,772 4,357 3,191 604 18.9% 23 0.6%

Contract Station 938 952 873 948 (10) -1.1% (14) -1.5%

Mail Room 749 787 782 807 (58) -7.2% (38) -4.8%

Customer Dock 262 264 337 464 (202) -43.5% (2) -0.8%

Airport 152 143 138 152 - 0.0% 9 6.3%

Goverment Building 275 263 233 68 207 304.4% 12 4.6%

Approved Shipper 99 66 0 0 99 33 50.0%

Grand Total 217,651 220,074 227,397 269,918 (52,267) -19.4% (2,423) -1.1%

Source: USPS-FY12-45.

Table VI–23—Percent of Total Collection Points by Fiscal Year

Location Type 2012 2011 2010 2006

Business 37.7% 38.0% 38.4% 40.2%

Residential 18.8% 18.9% 19.1% 22.6%

Post Office (combined) 38.8% 38.5% 38.4% 33.6%

Source: USPS-FY12-45.

 POSTAL REGULATORY COMMISSION 71
from alternative marketing channels. This goal has been exceeded in FY 2012 where, as shown in Table VI-24, the 

percent of total retail revenue generated from alternative channels was 39.1 percent.

PC postage and digital postage meters allow customers who mail frequently to print postage and shipping labels. 

The proportion of revenue generated by PC postage has increased by over 66 percent from FY 2010 to FY 2012.

The share of revenues derived from APCs located in post office lobbies in larger facilities has declined from 3.3 

percent in FY 2010 to 2.8 percent in FY 2012. The number of APCs has remained relatively steady since 2006. 

Table VI-25 shows the number of APCs for selected years. Postal Service surveys indicate 83 percent of residential 

customers and 83 percent of small/medium business customers find that a “self service mailing and shipping 

center is easy to use.” Customer comments also included requests for more APCs and 24/7 access. In response to 

these comments, the Postal Service states it plans to add an additional 264 APCs by early 2013.26

26 USPS 2012 Annual Report to Congress at 47.

Table VI–24—Retail Revenue by Channel

Services

FY 2012 

Revenue

($ Millions)

FY 2012 

Share of 

Total Retail 

Revenue

FY 2012 

Share 

Difference 

from

FY 2011

FY 2011 

Revenue

($ Millions)

FY 2011 

Share of 

Total Retail 

Revenue

FY 2010 

Revenue

($ Millions)

FY 2010 

Share of 

Total Retail 

Revenue

Post Offices (WIR) $10,627 60.9% -3.6% $10,940 64.5% $12,133 69.3%

PC Postage $3,604 20.7% 4.1% $2,799 16.5% $2,180 12.4%

Stamps Only Sales by Retail 

Partners $1,226 7.0% 0.2% $1,155 6.8% $1,143 6.5%

Automated Postal Centers (kiosks) $497 2.8% -0.4% $544 3.2% $579 3.3%

Stamps by Mail/Phone/Fax $517 3.0% 0.0% $517 3.0% $509 2.9%

Contract Postal Units $376 2.2% -0.4% $434 2.6% $454 2.6%

Click-N-Ship $484 2.8% 0.1% $462 2.7% $423 2.4%

Other $119 0.7% 0.1% $103 0.6% $94 0.5%

Total Retail Revenue $17,450 100.0% $16,954 100.0% $17,515 100.0%

Source: CHIR No.2, question 5.

Table VI–25—Number of Automated 

Postal Centers

Fiscal Year Number of APCs

2012 2,132

2011 2,143

2010 2,142

2006 2,164

Source: USPS-FY12-45 and 2011 ACD.

72 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VI
Data provided by the Postal Service in this docket appear to indicate that many APCs currently in service are nearing 

the end of their service lives.27 Thus, although the Postal Service has stated plans to add additional APCs beyond the 

264 noted above, it will need to replace currently operational APCs nearing the end of their service lives. 

Contract Postal Units (CPUs) and Community Post Offices (CPOs) offer a range of postal services other than just 

stamps. CPUs are usually located in a store or place of business and operated by a contractor who accepts mail 

from the public, sells postage and supplies and provides selected Special Services (e.g., Postal Money orders or 

Registered Mail). Community Post Offices provide services in a community where no independent post office 

exists.28 As shown on Table VI-26, the number of CPOs/CPUs declined significantly from FY 2011 levels as has their 

share of total retail revenues as indicated on Table VI-24.

Village Post Offices (VPOs) will provide a limited range of services that include the sale of First-Class Mail stamps, 

offer priority flat mail products, deliver to P.O. boxes and accept mail. VPOs are part of the Postal Service’s “Approved 

Provider Network”—retail outlets for postal products and services that also include CPUs, Approved Shippers, 

stamps on consignment locations and CPOs.29 VPOs were originally introduced as part of the Postal Service’s Retail 

Access Optimization Initiative, which was a Postal Service proposal in 2011 to reduce the number of post offices 

in operation nationwide. VPOs are being located in community businesses, town halls or government centers. By 

being located at businesses and other places that customers already frequent, VPOs, the Postal Service contends, 

will offer Postal Service customers time-saving convenience and in many instances longer hours of operation than 

regular Post Offices. At the end of FY 2011, there were nine VPOs in operation. As of mid-December, 2012, there 

were 103 VPOs in operation. Over one-half of these were located in three states, Indiana, Kentucky, and Michigan. 

The Postal Service has stated that it intends to open a total of 400 Village Post Offices in FY 2013.30 VPOs are limited 

substitutes for full service postal retail facilities.31

27 USPS Responses to CHIR No. 4, question 14. 28 USPS Pub. 32, January 2013, at 45. 29 USPS.com, Village Post Office fact sheet, February 1, 2013. 30 United States Postal Service FY 2012 Annual Compliance Report, December 28, 2012, at 36. 31 PRC Op. N2011-1 at 111.

Table VI–26—Number of Contract Postal Units

Office Type

Total at Start 

of FY 2012

Total at End 

of FY 2012 Net Change

Contract Postal Units (CPU) 2,513 2,196 (317)

Community Post Offices (CPO) 452 403 (49)

Total Contract Units 2,965 2,599 (366)

Source: USPS-FY12-45 and USPS-FY12-46.

 POSTAL REGULATORY COMMISSION 73
Customer Experience

Introduction

For market dominant products, 39 U.S.C. 3652(a)(2)(B)(ii) requires the Postal Service to report “the degree of 

customer satisfaction with the service provided.” In FY 2011, the Postal Service implemented a new Customer 

Experience Measurement (CEM) system for measuring customer experience and satisfaction. 2011 ACR at 11. 

CEM measures customer experience with market dominant products by asking survey participants to rate product 

satisfaction using a six-point scale: Very Satisfied, Mostly Satisfied, Somewhat Satisfied, Somewhat Dissatisfied, 

Mostly Dissatisfied, and Very Dissatisfied. Id. Reporting is segregated based on the type of customer: Residential, 

Small/Medium Business, and Large Business. The Postal Service aggregates Very/Mostly Satisfied in reporting to 

the Commission. Many of the more detailed results of the CEM are not reported to the Commission.

Customer Experience Measurement Results

Residential Customers

Approximately 300,000 residential (retail) customers participated in the CEM survey. Most residential customers 

responded positively to their postal experience in FY 2012. For example, 89 percent of respondents replied “Very 

Satisfied” or “Mostly Satisfied” when asked, “How satisfied are you with the Postal Service?” Respondents also 

expressed satisfaction with issues such as collection box locations, USPS tracking, and letter carriers. Table VI-27 

illustrates that in FY 2012 residential customers remain generally satisfied with each market dominant product.

Table VI–27—CEM Results for Residential Customers

Residential Percent Rated Very/Mostly Satisfied

Mail Products and Services FY 2010 FY 2011 FY 2012

First-Class Mail 93.7 94.2 94.7

Single-Piece International 85.9 86.6 87.5

Standard Mail 83.3 84.1 84.8

Periodicals 86.1 87 88

Single-Piece Parcel Post 88.2 89.2 89.3

Media Mail 87.6 88.4 89.1

Bound Printed Matter 85.4 86.2 87.2

Library Mail 86.7 87 87.9

Source: USPS-FY12-29 at 34 and 2011 ACD at 90.

74 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VI
Small/Medium Business Customers

The Postal Service received more than 310,000 survey responses from small/medium-sized businesses.32 Eightyfour percent of respondents were very or mostly satisfied with the Postal Service. For example, 80 percent of 

respondents answered they were very or most likely to recommend the Postal Service to others. Almost 90 percent 

of respondents strongly agree or somewhat agree when asked “Are your post office clerks friendly/courteous?” 

Small and medium-sized businesses were relatively neutral, however, when asked about the reliability of the Postal 

Service’s scheduled pickup.33 Table VI-28 illustrates an increase in satisfaction by small/medium-sized businesses 

for each market dominant product.

Large Business Customers

The Postal Service collected more than 3,000 survey responses from large businesses. Participating businesses had 

from 100 to more than 1,000 employees. Sixty-four percent of responses came from businesses with 100 to 500 

employees. The National Postal Policy Council notes that these businesses are “less satisfied with market dominant 

products than are either residential or small business customers.” NPPC Comments at 13. Specifically, it points to 

the decrease in satisfaction with First-Class Mail. Responses from large businesses were generally positive despite 

the eroding satisfaction for First-Class Mail. Respondents overwhelming answered very satisfied or mostly satisfied 

to questions about general satisfaction with postal experiences.34 Large businesses were asked several questions 

regarding business relationships, postal contacts, knowledge of contact, timeliness of delivery, speed of responses, 

and courtesy. Similar to FY 2011, responses were generally positive with 79 percent very or mostly satisfied with 

postal services. Table VI-29 illustrates large businesses satisfaction with market dominant mailing products.

32 Sixty percent of businesses employ 1 to 4 persons. 33 Twenty-five percent of responses to scheduled pickup were neutral, somewhat disagree, or strongly disagree. 34 Seventy-eight percent of responses were very or most satisfied when asked “How satisfied are you with your most recent postal experience?”

Table VI–28—CEM Results for Small/Medium Business Customers

Small/Medium Businesses Percent

Rated Very/Mostly Satisfied

Mail Products and Services FY 2010 FY 2011 FY 2012

First-Class Mail 92.4 93.0 93.3

Single-Piece International 83.2 84.0 84.9

Standard Mail 85.9 87.0 87.9

Periodicals 83.8 85.1 86.1

Single-Piece Parcel Post 87.0 88.0 88.9

Media Mail 86.4 87.1 88.2

Bound Printed Matter 83.4 85.0 85.9

Library Mail 84.9 86.0 87.1

Source: USPS-FY12-29 at 34 and 2011 ACD at 90.

 POSTAL REGULATORY COMMISSION 75
Commission Analysis

In order for the Postal Service to maintain its customer base, it should continue to study the results of its new CEM 

tool to enhance customer experience.

Table VI–29—CEM Results for Large Business Customers

Large Businesses Percent

 Rated Very/Mostly Satisfied 

Mail Products and Services FY 2010 FY 2011 FY 2012

First-Class Mail 90.2 92.1 91.2

Single-Piece International 86.3 89.2 87.4

Standard Mail 84.5 85.6 85.7

Periodicals 82.8 84.3 84.9

Single-Piece Parcel Post 84.6 87.5 87.1

Media Mail 85.6 86.7 85.9

Bound Printed Matter 82.4 84.1 83.5

Library Mail 85.1 86.8 87

Source: USPS-FY12-29 at 34 and 2011 ACD at 90.

76 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VI
Chapter VII

Market Dominant Products

Introduction

This chapter presents the Commission’s analysis, by class, of relevant financial data for each market dominant 

product, NSA, international product, incentive program, and market test.

In the financial analysis section for each class, the Commission evaluates the relationship of revenue to attributable 

cost for each product. This evaluation is focused on cost coverage, which is a relative measure, and contribution, 

an absolute measure. Section 3622 identifies 9 objectives and 14 factors that the Postal Service must balance 

when setting prices. One objective the Postal Service must consider is revenue adequacy, and another factor it 

must take into account is the requirement that each class of mail or type of mail service bear its direct and indirect 

postal costs when setting prices.

As the Postal Service, Congress and stakeholders evaluate solutions for the Postal Service’s deteriorating financial 

situation, it is imperative to understand issues that contribute to the Postal Service’s financial difficulties. These 

include the financial impact of loss making products and services. In FY 2012, 62.5 percent of the Postal Service 

operating deficit was due to products that generated insufficient revenues to cover their attributable costs.1

 These 

products also made no contribution towards the institutional costs of the Postal Service.

The PAEA grants the Postal Service expanded pricing flexibility while providing mailers stability and predictability 

via an inflation-based price cap. The informed and rational use of that pricing flexibility is an essential component of 

any long-term strategy to restore the Postal Service to profitability. The Postal Service must use its pricing flexibility 

to adjust prices for loss making products or risk the long-term sustainability of the postal system. In FY 2012, the 

Postal Service implemented one market dominant price increase, Docket No. R2011-2, as well as several pricing 

incentives. In some classes, the Postal Service leveraged its pricing flexibility to increase unit contribution. In other 

instances, such as Periodicals, the Postal Service did not fully leverage its pricing flexibility to maximize contribution.

Attributable (direct and indirect) costs accounted for only about 50 percent of total Postal Service costs in FY 2012. 

Adjusting prices to cover attributable costs is an important goal for the short-term operation of the Postal Service. 

Yet, the losses from some market dominant products have persisted for the five years since full implementation 

of the PAEA. The Postal Service has lost $7.5 billion from these market dominant products since FY 2008. These 

losses account for the majority of the Postal Service’s operating loss over this period. For these reasons, product 

cost coverage and plans to bring loss-making products to full cost coverage are an important consideration.

1 In FY 2012, loss-making products accounted for a $1.5 billion loss. The Postal Service operating deficit was $2.4 billion. 1.5/2.4 is 62.5 percent.

 POSTAL REGULATORY COMMISSION 77
The principal findings for FY 2012 are summarized below:

 Nine market dominant products and services generated insufficient revenues to cover their attributable 

costs. The total loss from these products is $1.473 billion. This represents the amount necessary to reach 100 

percent cost coverage; increasing the revenue from these products to cover the loss would still not result in 

any contribution towards the 40 percent of Postal Service costs categorized as institutional costs.

 Two classes of mail failed to cover their attributable cost: Periodicals ($670 million) and Package Services 

($38 million).

 Two products accounted for $1.17 billion of the loss: Standard Flats ($528 million) and Outside County 

Periodicals ($642 million).

Each class section also contains a discussion of worksharing and other pricing issues. Methodological issues 

affecting the development of estimates of worksharing-related cost avoidances are addressed, the resulting cost 

avoidances are compared with the corresponding discounts, and the discounts and other pricing relationships are 

analyzed for consistency with the applicable statutory provisions.

The workshare findings for FY 2012 are summarized below:

 40 workshare discounts exceeded avoided costs.

 22 discounts qualified for a statutory exception.

 16 discounts did not satisfy 39 U.S.C 3622(e)(2)

 The Commission is unable to determine if two discounts are consistent with section 3622(e) due to 

shortcomings in the underlying cost data.

In addition to presenting the principal findings, this introduction also includes the following: a discussion of FY 

2012 rulemakings, the price cap, the basis for year-to-year comparisons in this chapter, and the relationship of the 

timing of the market dominant price adjustment and setting of worksharing discounts.

Rulemakings

The Commission calculates worksharing passthroughs using methodologies approved by the Commission prior to 

the filing of the ACR. In September, the Postal Service filed a petition to initiate proceedings to consider alternate 

methodologies, some of which affect cost models used for calculating cost avoidances.2

 Although this rulemaking 

was approved on February 14, 2013, it was not completed prior to the Postal Service filing its ACR. Thus, for the 

sake of consistency, analysis in the Commission’s ACD reflects only methodologies approved prior to the filing of 

the ACR. The Commission emphasized this point in the last ACD, when it reiterated that the ACR should reflect 

approved methodologies in accordance with 39 C.F.R. 3050.10. 2011 ACD at 10.

2 Docket No. RM2012-8, Petition of the United States Postal Service Requesting Initiation of a Proceeding to Consider Proposed Changes in Analytical 

Principles (Proposals Eight and Nine) September 28, 2012. The methodologies contained in Proposal Nine relate to the cost avoidance models for FirstClass, Standard Mail, and Periodicals Flats.

78 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
Price Cap

In its ACDs, the Commission conducts a post-implementation review of the price cap. In accordance with the 

Commission’s rules, when the Postal Service files a notice of market dominant price adjustments, it uses historical 

billing determinants to measure compliance with the applicable price cap. The Commission reviews the price 

adjustments on that basis and this is referred to as a pre-implementation review. However, the pre-implementation 

review does not account for the effect of price changes on billing determinants, i.e., mailers’ response to changes 

in price. For this reason, the Commission conducts a post-implementation review in the ACD.

The price adjustments from Docket No. R2011-2 took effect April 17, 2011, and were in effect until January 22, 

2012. The post-implementation review of these prices is contained in Appendix A of this report.

Year-to-Year Comparisons

In this chapter, the Commission uses figures from past ACDs for year-to-year comparisons, which do not reflect 

any post-ACD revisions to figures in the Revenue, Pieces, and Weight Report (RPW). Because compliance analysis 

is based on current RPW figures rather than after-the-fact revisions, using previous ACDs for comparison purposes 

provides consistency and an easy-to-find reference point. Chapter IV contains an overview of the Postal Service’s 

finances, whereas this chapter provides a more detailed analysis by product.

Timing of Pricing Adjustments and Worksharing Cost Avoidances

On October 18, 2011, the Postal Service updated its schedule of planned price changes and informed the mailing 

community that it planned to adjust market dominant prices in January of each year. This means the Postal Service 

provides notice of price adjustments for the upcoming year in October. On October 18, 2011, the Postal Service 

also filed a notice of market dominant price adjustment. The worksharing discounts in that price adjustment were 

developed using the most recent fiscal year data at the time, FY 2010 data. Thus, the worksharing discounts in 

effect in FY 2012 were developed using avoided cost data from 2 fiscal years earlier.

This shift in price adjustment timing has a noticeable effect on the accuracy of the information available for 

developing worksharing discounts. Both pricing flexibility and predictability are important goals of the PAEA, and 

the availability of current costing information is important to both market dominant pricing adjustments and the 

ACD process. In the FY 2012 ACD, the Commission has reviewed the results of a pricing adjustment that utilized 

out-of-date costing data for the setting of worksharing discounts. This lack of synchronization between the costs 

used to support the most recent price adjustment and the costs used in the most recent ACR ensures that some 

workshare discounts will not comply with the section 3622(e) requirements.

The Commission addressed this issue in the 2011 ACD at 18-19.3

 The issue persists in this ACD. Many worksharing 

discounts approved in Docket No. R2012-3 were based on 100 percent of the FY 2011 cost avoidances. When the 

discounts in effect in FY 2012 are compared to cost avoidances estimated for FY 2012, 40 discounts exceed avoided 

cost, leading to passthroughs of over 100 percent.

3 The Commission also addressed this issue in its Section 701 Report, Analysis of the Postal Accountability and Enhancement Act of 2006, September 22, 

2011. See pp. 37-40.

 POSTAL REGULATORY COMMISSION 79
While many of these passthroughs can be justified using statutory exemptions, some cannot. For several discounts, 

the Postal Service cites changes in avoided cost between FY 2011 and FY 2012 as the reason the discount exceeds 

100 percent. If the Postal Service used FY 2012 avoided cost data when setting Docket No. R2013-1 prices, the 

disconnect between costs and prices would not be as severe. However, the Postal Service did not have FY 2012 

avoided cost data when it developed Docket No. R2013-1 prices.

The timing of pricing adjustments is not a statutory exemption for passthroughs over 100 percent. The Public 

Representative commented that cost avoidances in future years can be projected in advance of the ACR in the 

Postal Service’s price adjustment filing.4

First-Class Mail

Introduction

First-Class Mail consists of six products: (1) Single-Piece Letters/Postcards, (2) Presort Letters/Postcards, (3) Flats, 

(4) Parcels, (5) Outbound Single-Piece First-Class Mail International, and (6) Inbound Single-Piece First-Class Mail 

International. The class had a volume of 69.6 billion pieces in FY 2012. First-Class Mail accounts for 44 percent of 

all Postal Service volume and 62.6 percent of all contributions toward institutional costs. Volume decreased by 5.3 

percent and contribution decreased by 3.6 percent in FY 2012.

The principal FY 2012 findings for First-Class Mail are:

 With the exception of First-Class Mail Parcels, all domestic First-Class Mail products covered their 

attributable costs. 

 Nine worksharing discounts exceeded avoided cost, and were not properly justified under section 3622(e). 

 Five of the nine discounts that were excessive and not properly justified were appropriately re-aligned in 

Docket No. R2013-1.

 The Postal Service must either properly align the four excessive discounts that remain in the next market 

dominant price adjustment, or adequately support an applicable statutory exception.

Financial Analysis

The FY 2012 First-Class Mail cost coverage was 202.9 percent. As Table VII-1 shows, total First-Class Mail FY 2012 

revenue was $30.4 billion, which covered its attributable cost of $15.0 billion and contributed $15.4 billion to 

institutional cost. Cost coverage for First-Class Mail increased from 199.0 percent in FY 2011 to 202.9 percent in FY 

2012 due to a decrease in unit cost. Despite the increase in cost coverage, contribution decreased by approximately 

$572 million owing mostly to the continued loss of First-Class Mail volume. Thus, despite efficiency improvements 

indicated by the decrease in unit attributable cost and the Postal Service’s use of virtually all its price cap authority, 

the contribution from First-Class Mail continues to decline. As noted in Chapter IV, this continued loss of volume 

reduces contribution and constrains the Postal Service’s ability to cover its fixed costs.

4 The Public Representative provides an analysis of rate elements associated with passthroughs of over 100 percent in the past five ACDs. The Public 

Representative showed that the year-to-year changes for many of these avoided costs are predictable. PR Comments at 41-49.

80 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
For FY 2012, unit attributable costs for First-Class Mail overall decreased by 2.1 percent. Compared with FY 2011, 

the unit attributable cost for Single-Piece Letters/Postcards decreased 1.1 percent; the unit cost for Presort 

Letters/Postcards increased 4.3 percent; the unit cost for Flats increased 0.2 percent; and the unit cost for Parcels 

increased 22.6 percent. The atypical unit cost increase for Parcels primarily reflects a change in the definition of 

Parcels rather than a sudden shift in Parcel cost behavior. 

The cost coverage of Parcels fell from 110.0 percent in FY 2011 to 98.5 percent in FY 2012. The Postal Service 

attributes the decline to the transfer of commercial First-Class Mail Parcels to the competitive product list. After 

that transfer, only the retail component of Parcels remained. The retail component has a lower cost coverage than 

the commercial component. On January 27, 2013, prices for First-Class Mail Parcels increased by an average of 5 

percent. While this should improve the cost coverage of Parcels, the Postal Service should ensure that this product 

covers its attributable cost through cost reductions and future rate adjustments. 

Comments

The National Postal Policy Council (NPPC) and Pitney Bowes express concerns about the high cost coverage for 

commercial bulk First-Class Letters. NPPC Comments at 2. NPPC asserts that the relative contribution of Presort is 

Table VII–1—First-Class Mail Fiscal Year 2012 Volume, 

Revenue, Cost Contribution, and Cost Coverage by Product

Volume

(000)

Revenue

($ 000)

Attributable 

Cost 

($ 000)

Contribution 

to Institutional 

Cost

($ 000)

Revenue 

Per Piece 

(Cents)

Cost Per 

Piece 

(Cents)

Unit 

Contribution

(Cents)

Cost 

Coverage

Single-Piece Letters 22,755,205 10,593,185 6,276,049 4,317,136 46.55 27.58 18.97 168.8%

Single-Piece Cards 1,158,305 370,622 297,063 73,559 32.00 25.65 6.35 124.8%

Total Single-Piece 

Letters and Cards 23,913,510 10,963,807 6,573,112 4,390,695 45.85 27.49 18.36 166.8%

Presort Letters 40,145,476 14,620,312 4,976,815 9,643,497 36.42 12.40 24.02 293.8%

Presort Cards 2,588,140 608,767 214,785 393,982 23.52 8.30 15.22 283.4%

Total Presort 

Letters and Cards 42,733,616 15,229,079 5,191,600 10,037,479 35.64 12.15 23.49 293.3%

Single-Piece Flats 1,407,190 2,115,529 1,284,282 831,247 150.34 91.27 59.07 164.7%

Presort Flats 641,986 557,631 506,763 50,868 86.86 78.94 7.92 110.0%

Total Flats 2,049,176 2,673,160 1,791,045 882,115 130.45 87.40 43.05 149.3%

 Parcels 293,413 649,499 659,147 (9,648) 221.36 224.65 (3.29) 98.5%

Total Domestic 

First-Class Mail 68,989,715 29,515,545 14,214,904 15,300,641 42.78 20.60 22.18 207.6%

Total International 

First-Class Mail 649,854 917,923 783,764 134,158 141.25 120.61 20.64 117.1%

Total FirstClass Mail 69,639,569 30,433,468 14,998,668 15,434,799 43.70 21.54 22.16 202.9%

Source: PRC-ACR2012-L1.

 POSTAL REGULATORY COMMISSION 81
too high compared with Single-Piece. Id. NPPC acknowledges that the cost coverage of the Presort Letters/Postcards 

product declined slightly from FY 2011, but notes that the unit contribution from Presort mail rose to an all-time 

high of $0.233. Id. NPPC asserts that the overpricing of commercial bulk First-Class Letters has led to the erosion 

of volume for that category. Id at 3. NPPC and Pitney Bowes contend that the Postal Service is unlikely to stem the 

volume losses as long as it continues to give Presort Letters/Postcards large price increases. Id.; Pitney Comments 

at 2. Pitney Bowes contends that the Postal Service “has not used its pricing flexibility to constrain price increases 

on its most profitable products as it should have.” Id. at 2. It alleges that pricing to preserve and encourage the 

growth of First-Class Mail Presort Letters will create a more equitable price schedule and will improve the Postal 

Service’s financial position. Id. NPPC urges the Postal Service to consider smaller increases, or even reductions, in 

Presort prices. NPPC Comments at 4. 

Market dominant mailers have the protection of a price cap to shield them from excessive price increases. One 

objective of section 3622 is to allow the Postal Service pricing flexibility. Because the CPI cap is applied at the class 

level rather than the product level, it gives the Postal Service the ability to apply non-uniform price adjustments 

within a class. In the past, the Postal Service has often used its pricing flexibility in ways that benefit mailers of 

the Presort Letters/Postcards product. For example, in FY 2012 the Postal Service offered a free second ounce for 

all presort letters up to 2 ounces. Additionally, the 2012 Mobile Commerce and Personalization Program provided 

a discount to mailers that included a two-dimensional mobile barcode inside or on the mailpiece. These pricing 

strategies have the effect of mitigating price increases. Further, the information provided in the comments and 

reply comments is insufficient to justify a finding that the different price increases applied to categories of mail 

within First Class is unreasonable.

Worksharing

The following nine worksharing discounts exceeded the cost that worksharing avoids: (1) Qualified Business Reply 

Mail (QBRM) Letters; (2) QBRM Cards; (3) Mixed AADC Automation Letters; (4) AADC Automation Letters; (5) 

Mixed AADC Automation Cards; (6) 5-Digit Automation Cards; (7) ADC Automation Flats; (8) 3-Digit Automation 

Flats; and (9) 5-Digit Automation Flats. The calculations that form the basis of these avoided-cost passthroughs 

employ the accepted cost methodology. Below, the Commission discusses passthroughs that were above 100 

percent in the order listed above.

82 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
QBRM

The discounts for QBRM Letters and Cards passthrough is 129.4 percent of avoided cost. See Tables VII-2 and VII-3. 

In Docket No. RM2012-2, the Commission approved a change in the method used to estimate the avoided cost 

underlying the passthrough calculations for these discounts. When the Postal Service set the discounts that were 

in effect in FY 2012, that proceeding was still pending. The change in methodology was expected to increase the 

estimate of avoided costs. Although the Postal Service reduced the discounts from 2.3 cents to 2.2 cents, the 

reduction was not enough to prevent the passthroughs from exceeding the avoided cost estimate. 

The Postal Service justifies the excessive QBRM Letters and Cards discounts by citing section 3622(e)(2)(B), which 

allows excessive passthroughs if they are necessary to avoid rate shock. However, the Postal Service does not 

explain the nature or extent of the rate shock a higher passthrough would avoid. Its use of the “rate shock” 

exception is therefore not sufficiently supported. The Commission finds that the discounts for QBRM Letters and 

Cards exceeded the amount of costs avoided and were not justified by any of the statutory exceptions. However, 

the Postal Service’s price change in Docket No. R2013-1 aligns the discounts with avoided cost, therefore, no further 

action is required with respect to these discounts. 

Automation Letters

The Postal Service calculates the following passthroughs of avoided costs for automation letters: Mixed AADC, 

102.2 percent and AADC, 115.4 percent.

Table VII—2—First-Class Mail Letters, Workshare Discounts and Benchmarks

Type of Worksharing

(Benchmark)

FY 2012

Year-End Discount

(cents)

Unit Cost Avoidance

(cents) Passthrough

First-Class Mail Automation Letters

Barcoding & Presorting

Automation Mixed AADC Letters

 (Metered Letters) 4.6 4.5 102.2%

Automation AADC Letters

 (Automation Mixed AADC Letters) 3.0 2.6 115.4%

Automation 3-Digit Letters

 (Automation AADC Letters) 0.0 0.6 0.0%

Automation 5-Digit Letters

 (Automation 3-Digit Letters) 2.4 2.5 96.0%

First-Class Mail Non-automation Letters

 Presorting

Non-automation Presort Letters

 (Metered Letters) 2.6 6.3 41.3%

Qualified Business Reply Mail

Barcoding

QBRM

 (Handwritten Reply Mail) 2.2 1.7 129.4%

Source: PRC-ACR2012-LR2.

 POSTAL REGULATORY COMMISSION 83
In Order No. 536, the Commission suspended the evaluation of the automation Mixed AADC letter discount 

with regard to section 39 U.S.C. 3622(e) pending the outcome of Docket No. RM2010-13, which determined the 

appropriate base or reference group for calculating the costs avoided by worksharing. That docket was resolved in 

FY 2012.5

 In Docket No. R2013-1, the Postal Service proposed, and the Commission approved, a 20 percent increase 

in the discount for this presort level that resulted in a passthrough below 100 percent of the most recently reported 

cost avoidance estimate. At the time, FY 2011 avoided cost estimates were the most recent available. A decrease 

in avoided costs from 5.9 cents to 4.5 cents between FY 2011 and FY 2012 caused the FY 2012 passthroughs for 

Mixed AADC Letters to exceed 100 percent.

The Postal Service justifies the excessive Mixed AADC Automation Letters passthrough by citing section 3622(e)(2)

(D), which allows excessive passthroughs in order to not “impede the efficient operations of the Postal Service.” 39 

U.S.C. 3622(e)(2)(D). The Postal Service contends that the cost avoidance estimates are unsettled and therefore, 

it would be inefficient to make significant changes to the discount to reflect them.6

 In its Response to CHIR No. 

3, question 2, the Postal Service claims that aligning the discount with avoided cost would impede the efficient 

management of the postal business as a whole. It asserts that adjusting the discount up and down based on avoided 

cost, would cause large year-to-year fluctuations in the amounts of volume sorted to the presort levels associated 

with the discount and could possibly even drive portions of the presort market out of business. However, the 

Postal Service does not explain what aspects of its operations would be impeded, nor in what way they would be 

impeded, if discounts were to be adjusted to restore 100 percent passthroughs. Its use of the “efficient operations” 

exception is therefore not sufficiently supported.

The Postal Service justifies the excessive AADC automation letters discounts by citing section 3622(e)(2)(B), which 

allows excessive passthroughs if they are necessary to mitigate rate shock. However, the Postal Service does not 

explain the nature or extent of the rate shock a higher passthrough would avoid. Its use of the “rate shock” 

exception is therefore not sufficiently supported. 

The Commission finds that the Postal Service has not demonstrated that the excessive discounts for Mixed AADC 

Automation Letters and AADC Automation Letters qualify for the exceptions cited. With respect to the discount 

for AADC Automation Letters, the Commission recognizes that the Postal Service’s reduction of the discount 

in Docket No. R2013-1 realigns the discount with avoided cost. Therefore, no further action is required. With 

regard to the discount for Mixed AADC Automation Letters, the Postal Service must either align the discount 

with avoided costs when it files its next general market-dominant price adjustment, or adequately support an 

applicable statutory exception.

Pitney Bowes is concerned that the Postal Service fails to passthrough the full workshare-related costs avoided 

in the discounts for First-Class Presort letters. Pitney Comments at 5. It argues that passing through less than 100 

percent of avoided cost causes productive inefficiency, reduces social welfare, and results in excessive prices for 

Presort Letters. Id.

5 See Docket No. RM2010-13, Order Resolving Technical Issues Concerning the Calculation of Workshare Discounts, April 20, 2012 (Order No. 1320). 6 2012 ACR at 10-11.

84 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
Additionally, Pitney Bowes asserts that the estimate of avoided costs for Automation 5-Digit letters is understated. 

Id. at 5-6. In Docket No. R2012-3, the Postal Service set the price for AADC Presorted letters equal to 3-Digit 

Presorted letters. On July 12, 2012, Pitney Bowes filed a petition to initiate an informal rulemaking to examine the 

proper benchmark for 5-Digit presort. In its petition, Pitney Bowes argues that since there is no longer either a 

requirement or a reward for presorting First-Class letters to the 3-Digit level, the rationale for using 3-Digit presort 

as the benchmark for calculating the cost avoided by presorting to the 5-Digit level needs to be re-examined. It 

suggests that logical candidates for a new benchmark for the Automation 5-Digit Letter category are either an 

AADC Automation Letter piece, or a hybrid of an AADC Automation Letter Piece and a 3-Digit Letter piece. The 

Commission established Docket No. RM2012-6 to consider this matter. That proceeding is pending.

Pitney Bowes also suggests that the method used by the Postal Service to make modeled costs for Presort Letters 

consistent with Cost and Revenue Analysis (CRA) costs can be improved. Id. at 6. It notes that its preliminary analysis 

reveals that the ratio of CRA-to-modeled costs remains substantially higher for non-incoming secondary costs than 

for incoming secondary costs. Therefore, it asserts the use of a uniform CRA adjustment factor is inaccurate. Id. It 

asserts that a more accurate CRA adjustment would increase workshare cost avoidances substantially, and further 

reduce the passthroughs currently exhibited by First-Class Mail Automation Letters. Id. 

In Docket No. RM2010-13, the Commission noted that there are six specific operations through which some 

portion of workshared letters flow, and that, in theory, calculating a separate adjustment factor for each one 

might improve the accuracy of the CRA adjustment process. The Commission was concerned, however, that data 

may not be sufficiently reliable to implement adjustment factors specific to individual operations. As the costs 

are disaggregated more finely, the accuracy and reliability of the adjustment factors—which are partially based 

on sampled data—may deteriorate. The Commission was also concerned that Pitney Bowes did not adequately 

explain why the incoming secondary operation should be the only one to receive an adjustment factor specific to 

it. Since that docket, there have been no additional data or analysis developed to allay the Commission’s concerns.7

Automation Cards

As shown in Table VII-3, the Postal Service calculates the following passthroughs of avoided costs for automation 

cards: Mixed AADC Automation Cards, 227.3 percent, and 5-Digit Automation Cards, 116.7 percent. The Postal 

Service justifies these discounts by citing section 3622(e)(2)(B), which allows excessive passthroughs if they are 

necessary to avoid rate shock. 

With respect to the discount for Mixed AADC Automation Cards, the Postal Service contends that the cost avoidance 

associated with the discount has fallen quickly in the recent past and that changing the discount rapidly enough 

to match these reductions in the cost avoidance would lead to rate shock. The cost avoidance decreased from 2.7 

cents in FY 2010 to 1.9 cents in FY 2011 to 1.1 cents in FY 2012. In Docket No. R2013-1, the Postal Service reduced 

the discount from 2.5 cents to 2.3 cents. In its Response to CHIR No. 3, question 1, the Postal Service discusses 

the magnitude of the price increases that would have to take effect to align this workshare discount with avoided 

7 See Order No. 1320 at 53-55.

 POSTAL REGULATORY COMMISSION 85
cost, but it does not discuss any economic damage or disruption to business plans that would result from such a 

change. The Postal Service asserts that it intends to continue to phase out over time the portion of the discount 

above avoided costs. 

With respect to the discount for 5-Digit Automation Cards, the Postal Service has not described the nature or 

extent of the rate shock that would occur if rates were to be adjusted to equal avoided costs. 

The Commission finds that the Postal Service has not demonstrated that the excessive discounts for Mixed AADC 

Automation Cards and 5-Digit Automation Cards qualifies for the exceptions cited. With regard to the discount 

for Mixed AADC Automation Cards, the Postal Service must either align the discount with avoided costs when it 

files its next general market-dominant price adjustment, or adequately support an applicable statuatory exception. 

With respect to the discount for 5-Digit Automation Cards, the Commission recognizes that the Postal Service’s 

reduction of the discount in Docket No. R2013-1 realigns the discount with avoided cost. Therefore, no further 

action is required. 

Automation Flats

The passthrough for First-Class Automation ADC Flats is 158.7 percent. The Postal Service justifies this passthrough 

by citing the “rate shock” exception authorized by section 3622(e)(2)(B). The Postal Service notes that it has been 

steadily reducing this passthrough and it intends to continue to reduce it until the discount equals its avoided 

costs. In its Response to CHIR No. 3, question 1, the Postal Service discusses the magnitude of the price increases 

that would have to take effect to align this workshare discount with avoided cost, but it does not explain the nature 

or extent of the rate shock a higher passthrough would avoid. 

Table VII—3—First-Class Mail Cards

Workshare Discounts and Benchmarks

Type of Worksharing

(Benchmark)

FY 2012

Year-End 

Discount

(cents)

Unit Cost 

Avoidance

(cents)

Passthrough

First-Class Mail Automation Cards

Barcoding & Presorting

Automation Mixed AADC Cards

 (Non-automation Presort Cards) 2.5 1.1 227.3%

Automation AADC Cards

 (Automation Mixed AADC Cards) 1.1 1.3 84.6%

Automation 3-Digit Cards

 (Automation AADC Cards) 0.1 0.3 33.3%

Automation 5-Digit Cards

 (Automation 3-Digit Cards) 1.4 1.2 116.7%

Qualified Business Reply Mail

Barcoding

QBRM

 (Handwritten Reply Cards) 2.2 1.7 129.4%

Source: PRC-ACR2012-LR2.

86 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
Table VII—4—First-Class Mail Flats 

Workshare Discounts and Benchmarks

Type of Worksharing

(Benchmark)

FY 2012

Year-End 

Discount 

(cents)

Unit Cost 

Avoidance 

(cents)

Passthrough

First-Class Mail Automation Flats

Barcoding & Presorting

Automation ADC Flats

 (Automation Mixed ADC Flats) 10.0 6.3 158.7%

Automation 3-Digit Flats

 (Automation ADC Flats) 5.6 5.4 103.7%

Automation 5-Digit Flats

 (Automation 3-Digit Flats) 17.4 14.3 121.7%

Source: PRC-ACR2012-LR2.

The Commission finds that the Postal Service has not demonstrated that the excessive discount for Automation 

ADC Flats qualifies for the exception cited. Accordingly, the Postal Service must either align the discount 

with avoided cost when it files its next general market dominant price adjustment, or adequately support an 

applicable statutory exception.

The passthrough for 3-Digit Automation Flats is 103.7 percent. The Postal Service does not offer justification for 

the excessive passthrough. The Commission finds that the Postal Service has not demonstrated that this discount 

qualifies for any of the exceptions authorized by section 3622(e)(2). In Docket No. R2013-1, the discount was 

realigned with avoided cost. Therefore, no further action is required. 

The First-Class Mail Automation Flats passthrough for 5-Digit Automation Flats is 121.7 percent. In Docket No. 

R2013-1, the approved rates resulted in a 100 percent passthrough of avoided cost for 5 Digit Automation Flats. 

However, the avoided cost calculation relied on FY 2011 costs. Based on the FY 2012 cost avoidance calculated 

in the FY 2012 ACR, the passthrough exceeds 100 percent. The Postal Service justifies this passthrough with the 

“rate shock” and “efficient operations” exceptions authorized by sections 3622(e)(2)(B) and (D). In its Response to 

CHIR No. 3, question 1, the Postal Service discusses the magnitude of the price increases that would have to take 

effect to align this workshare discount with avoided cost, but it does not discuss any economic damage or disruption 

to business plans that would result from such a change. Additionally, in its Response to CHIR No. 3, question 2, the 

Postal Service claims that aligning the discount with avoided cost would impede the efficient management of the 

postal business as a whole. It asserts that adjusting the discount up and down based on avoided cost, would cause 

large year-to-year fluctuations in the amounts of volume sorted to the presort levels associated with the discount 

and could possibly even drive portions of the presort market out of business. The Postal Service does not describe 

what aspects of its operations would be impeded if discounts were adjusted to equal avoided costs, nor does it 

describe the nature or the amount of rate shock that would result if discounts were reduced to equal avoided costs. 

 POSTAL REGULATORY COMMISSION 87
The Commission finds that the Postal Service has not demonstrated that this discount qualifies for any of the 

exceptions authorized by section 3622(e)(2). Therefore, the Postal Service must either align the discount with 

avoided cost when it files its next general market dominant price adjustment, or adequately support an applicable 

statutory exception. 

Pitney Bowes contends that these passthroughs are based on inaccurate cost avoidance estimates. It notes that 

under the Postal Service’s proposed changes to the flats cost avoidance model in Docket No. RM2012-8, these 

passthroughs are much closer to 100 percent. Pitney Bowes urges the Commission to use the RM2012-8 flats cost 

model in making its compliance determination. Pitney Bowes Comments at 7.

Additionally, Pitney Bowes suggests that the CRA appears to overstate the cost of First-Class Mail Presort Flats, 

thereby understating the cost difference between Single-Piece and Presort Flats. Pitney Bowes urges the Postal 

Service to review the accuracy of First-Class Mail Presort Flats cost data and propose improved costing methods 

for use in future Annual Compliance Reports. Id.

Incentive Program

There was one incentive program in effect in FY 2012 that applied to First-Class Mail, the 2012 Mobile Commerce 

and Personalization Program. The primary goal of the promotion was to generate awareness of ways in which 

mobile technology can be integrated into mail campaigns. The program provided a discount on the eligible postage 

for commercial First-Class Mail and Standard Mail letters, postcards, and flats that included a two-dimensional 

mobile barcode inside or on the mailpiece. To qualify for the incentive, the mobile barcode was required to point 

to a mobile-optimized website that either facilitated mobile commerce or was personalized to the recipient. The 

program was in effect from July 1, 2012, to August 31, 2012. The Postal Service paid over $1.7 million in rebates for 

229 million qualifying First-Class Mail pieces. 

Periodicals

Introduction

The Periodicals class includes publications such as magazines, newspapers, journals, and newsletters. Eligibility 

criteria include a minimum amount of editorial (non-advertising) content.8

 This requirement establishes the 

Periodicals class as one with educational, cultural, scientific, and informational (ECSI) value. Periodicals is a 

preferred class of mail and receives several statutory discounts as identified in 39 U.S.C. 3626, such as a five 

percent discount for non-profit and classroom publications.

The Periodicals class is comprised of two products: Within County and Outside County. The Within County product 

is typically used by smaller circulation weekly newspapers for distribution within the county of publication. Pricing 

mainly reflects the number of pieces in a mailing, presort level, and total weight. The Outside County product 

consists of publications with a wide variety of circulation sizes, distribution patterns, and frequencies. Pricing is 

8 See Domestic Mail Manual: 707.4.0, Basic Eligibilty Standards; 707.6.0, Qualification Categories; and 707.4.13, Advertising Standards.

88 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
based not only on number of pieces and weight, but also on other elements such as how it is prepared (bundles, 

type of container), entry point, machinability, and automation capability.

The profiles of the two Periodicals products differ significantly in terms of volume and revenue. In FY 2012, 

approximately 631 million copies of Periodicals were mailed at Within County prices, and generated approximately 

$66 million in revenue for the Postal Service. In contrast, during the same year, 6.11 billion copies of Periodicals 

were mailed at Outside County prices, and generated approximately $1.66 billion in revenue for the Postal Service. 

The Postal Service filed several methodological changes to the Periodicals mail processing worksharing cost model 

prior to filing its FY 2012 ACR. In Docket No. RM2012-8, filed September 28, 2012, the Postal Service proposed 

changes to the Periodicals model, including the addition of allied operations. Those changes were approved by the 

Commission in Order No. 1656 on February 14, 2013.

As discussed below, in FY 2012, Periodicals unit costs increased and revenue per piece declined. The Postal Service 

should review its Periodicals operational strategy to assess what cost savings initiatives are working, and how 

they can be improved. The current Periodicals pricing structure was implemented in FY 2007. In the past 5 years, 

the Postal Service has not substantially changed worksharing discounts, sack, bundle or pallet charges. The Postal 

Service should also review its pricing strategy to determine how to incentivize additional mailings that can be 

efficiently processed by current or planned operations. The Postal Service should also take the initiative to work 

closely with Periodicals mailers to pursue solutions to challenges relating to Periodicals.

The principal FY 2012 findings for Periodicals are:

 Within County attributable costs exceeded revenues by $28 million, resulting in a cost coverage of 

70.5 percent.

 Outside County attributable costs exceeded revenues by $642 million, resulting in a cost coverage of 

72.2 percent.

 The Postal Service should leverage its pricing flexibility to incent more efficient mailer preparation to 

ameliorate losses from Periodicals.

 The rates for Periodicals did not satisfy 39 U.S.C. 3622(c)(2).

 In response to the Commission’s FY 2011 ACD, the Postal Service listed nine cost savings changes designed 

to lower the cost of processing Periodicals. The Postal Service says that it has been unable to assess the 

success of these initiatives. In FY 2012 the unit attributable cost of Periodicals increased 3.7 percent to 36.5 

cents per piece.

 Eleven workshare discounts exceed avoided costs, but are not inconsistent with the statute due to the ECSI 

exception in 39 U.S.C. 3622(e)(2)(C).

 The per piece revenue for Periodicals decreased slightly in FY 2012, even as the Postal Service implemented 

a price increase. The Postal Service should revisit its “across the board” approach to Periodicals pricing.

 Prices were in compliance with the preferred rate requirements identified in 39 U.S.C. 3626.

 The Postal Service needs to take the initiative to identify and implement solutions to Periodicals’ worsening 

net revenue results. The Postal Service has not used its pricing tools to incent efficient Periodicals mailings 

that reduce costs and increase net revenue.

 POSTAL REGULATORY COMMISSION 89
Financial Analysis

Background

Table VII-5 provides relevant financial data for Within County, Outside County, and the Periodicals class as a whole. 

It contains volume, revenue, attributable costs, contribution to institutional costs, and cost coverage for each 

Periodicals product in FY 2012.

Table VII-5 shows that Periodicals continue to make a negative contribution to institutional costs and continue to 

have cost coverage below 100 percent.

Table VII–5—Periodicals Mail Volume, Revenue, and Cost by Product FY 2012

Product Volume 

(000)

Revenue 

($000)

Attributable 

Cost 

($000)

Contribution to 

Institutional Costs 

($000)

Revenue 

Per Piece 

(Cents)

Cost Per 

Piece 

(Cents)

Unit 

Contribution 

(Cents)

Cost 

Coverage

Within County 631,286 67,269 95,398 (28,129) 10.6558 15.1117 (4.4559) 70.51%

Outside County 6,110,064 1,664,217 2,306,204 (641,987) 27.2373 37.7443 (10.5070) 72.16%

Total 6,741,351 1,731,486 2,401,602 (670,116) 25.68 35.62 (9.9404) 72.10%

Source: PRC-ACR2012-LR1.

Note: numbers in this section may not add due to rounding.

Comments on Compliance with Title 39

Commenters primarily address one issue: whether Periodicals prices were in compliance with title 39 in FY 2012 

and whether the Commission should find the Periodicals class out of compliance for FY 2012 and order above cap 

price increases.

Valpak notes that the Postal Service losses related to Periodicals increased by 10 percent from FY 2011 to FY 2012. 

In FY 2012, the loss in contribution from Periodicals is $670 million, the largest loss since passage of PAEA. Valpak 

further notes that the Postal Service has lost $3.4 billion from Periodicals since the enactment of PAEA in FY 2007. 

Valpak argues that in FY 2012, prices for the Periodicals class were out of compliance with title 39. Specifically, 

Valpak contends that the FY 2012 prices violated section 3622(c)(2), section 101(d), section 101(a), section 3622(b)

(5), and section 403(c). Valpak Initial Comments at 129.

Valpak advances four arguments for why the Commission must make a finding of noncompliance and take remedial 

action of increasing Periodicals prices. Id. First, the “Commission cannot and should not assume that Congress 

wanted Periodicals to be subsidized indefinitely and irrespective of the amount of the losses.” Id. at 130. Second, 

the Postal Service pricing flexibility is limited by the CPI cap, but the Commission’s authority to order remedies for 

noncompliance is not limited by the CPI cap. Id. at 131. Third, the Postal Service reports that it has implemented 

the cost savings strategies outlined in the Periodicals Mail Study, yet costs are still increasing faster than inflation. 

As such, Valpak states, the “Commission cannot reasonably rely on future additional cost savings to justify again 

90 2012 Annual compliance dete
failing to make a finding of noncompliance.” Id. at 132. Fourth, the Commission’s concerns regarding the impact 

of above-CPI price increases on Periodicals mailers do not justify inaction. Valpak states “if the Commission does 

not act now to start resolving Periodicals and begin moving toward compliance, the Commission is helping to 

guarantee that the PAEA ratemaking system is a failure, incapable of achieving the objectives and factors set forth 

in PAEA.” Id. at 132.

Valpak urges the Commission to find the FY 2012 prices for Periodicals out of compliance with title 39 and that it 

order Periodicals prices to be “increased in the range of CPI plus 5.0 percent annually, until Periodicals revenue 

exceeds costs and makes some contribution to institutional costs (e.g., 105 percent cost coverage).” Id. at 134.

The Public Representative also notes the decline in Periodicals cost coverage from FY 2011 to FY 2012, which 

occurred in “spite of the Postal Service’s claim that it has taken steps recommended in the Periodicals Mail Study 

to improve cost coverage.” PR Comments at 26. The Public Representative requests the Commission direct the 

Postal Service to investigate and report on how Periodicals costs increased despite the cost savings initiatives. 

The Public Representative states that “to enable it to carry out its regulatory functions, the Commission should be 

informed by the Postal Service why the implementation of so many cost-saving measures resulted in an additional 

$60 million in negative contribution from Periodicals, the worst level since passage of the PAEA.” Id. at 27.

Time urges the Commission to reject Valpak’s argument that “it is time for the Commission to take punitive action 

against Periodicals mailers for failing to cover their costs again.” Time Reply Comments at 1-2. Time addresses 

each of the four rationales provided by Valpak. First, Time notes that while Periodicals cost coverage has declined 

under the PAEA, the Periodicals class failed to cover its costs for the ten years immediately preceding adoption 

of the PAEA. Time states “in view of the history of Periodicals class, of which Congress was fully aware, there are 

no grounds at all for thinking that the mere duration of its continuing difficulties outstrips anything that Congress 

might have thought possible.” Id. at 4. Second, Time states that the Postal Service has leveraged its pricing flexibility 

to the maximum extent possible. The Postal Service’s inability to increase prices within the constraints of PAEA is 

“evidence of absence of grounds for a finding of noncompliance.” Id. at 6. Third, Time states that the Postal Service 

is still in the process of implementing cost savings programs for Periodicals, and thus postal management has 

not yet fully brought to bear changes which could improve Periodicals cost coverage. Id. at 8. Time also appends 

comments by James O’Brien which discuss Periodicals costs savings programs. Fourth, Time states that Valpak has 

provided no evidence that the above-CPI cap increases will not harm Periodicals mailers. Id. at 8-9.

Time also addresses Valpak’s argument that the Postal Service has discriminated against mailers in classes other than 

Periodicals by forcing them to cross-subsidize Periodicals. Time states that “there is no reason to believe that any 

non-Periodicals mailer has paid a penny more in postage than it would if Periodicals had been profitable.” Id. at 9.

Magazine Publishers of America, Inc. and the Alliance of Nonprofit Mailers (“MPA/ANM” Joint Comments) also 

urge the Commission to reject Valpak’s argument that Periodicals prices were out of compliance with title 39 in 

FY 2012. MPA/ANM note that the Public Representative’s request that the Postal Service further investigate and 

 POSTAL REGULATORY COMSS
report on Periodicals cost is “not an unreasonable request.” MPA/ANM Reply Comments at 2. MPA/ANM state 

that the Commission needs to “confront directly the elephant in the living room of Periodicals mail pricing: while 

the cap has ensured rate predictability and stability, it has not yet forced the Postal Service to rein in the out-ofcontrol level of Periodicals costs despite large investments in automation equipment by the Postal Service, and 

large increases in worksharing by periodical publishers and their mail service providers.” Id. at 2.

Regarding Valpak’s argument that Periodicals prices were out of compliance with title 39, MPA/ANM discuss 

sections 3622(c)(2), 3622(b)(5), 403(c), 101(a), and 101(d). Concerning 3622(c)(2), MPA/ANM state that “for 

Periodicals mail, the CPI cap of 39 U.S.C. 3622(d) trumps the attributable cost floor of 39 U.S.C. 3622(c)(2).” Id. at 3. 

MPA/ANM further stated that “like the other ‘factors’ and ‘objectives’ of sections 3622(b) and (c), section 3622(c)

(2) is subordinate to the ‘out-of-bound’ lines’ established by the CPI-based cap on class prices (3622(d)).” Id. at 

3. MPA/ANM state that 39 U.S.C. 3622(c)(2) does “not, without more, make Periodicals mail out of ‘compliance 

with’ the Act as a whole.” Id. at 4. Regarding Valpak’s argument that Periodicals prices were out of compliance 

with section 3622(b)(5), MPA/ANM state that the “CPI-based price cap of section 3622(d) outweighs all of the 

objectives and factors combined.” Id. at 7.

MPA/ANM reject Valpak’s contention that Periodicals prices were out of compliance with section 403(c), arguing 

that the discrimination and preferences covered by 403(c) are “limited to price or services differences among 

mailers and services that are ‘like’ or similarly situated – a concept that is generally considered to be limited to 

ratepayers within the same rate class.” Id. at 7. MPA/ANM state that the differences in cost coverage between 

classes of mail are “governed by the rate reasonableness provisions of Section 3622, not the antidiscrimination 

provision of Section 403(c).” Id. at 8.

Concerning Valpak’s contention that Periodicals prices were out of compliance with section 101(a) and 101(d), 

MPA/ANM state that these “general policy desiderata are incorporated by reference into pricing in the catch-all 

‘factor’ of section 3622(c)(14). Like section 3622(c)(2), section 3622(c)(14)—and, through it, section 101(a) and 

101(d)—are subordinate to the CPI cap on class-average price increases imposed by section 3622(d).” Id. at 8.

In its Reply Comments, the Postal Service “concurs” with Valpak and urges the Commission to find Periodicals out 

of compliance and “finally determine what its remedial powers are.” Postal Service Reply Comments at 4. The 

Postal Service states that the cost coverage of Periodicals fell to 72.1 percent in FY 2012, and to defer the issue 

until 2016 “would be irresponsible.” In response to the Public Representative’s criticism that it failed to quantify 

the costs savings that have accrued from the efficiency measures implemented for Periodicals, the Postal Service 

contends that “it is impossible to isolate the cost-saving effects of a single efficiency measure when there are so 

many variables at play in flats processing.” Id. at 5.

Commission Analysis

In FY 2012, the cost coverage for Periodicals continued to decline. Periodicals revenue covered 72.1 percent of 

the $2.4 billion in attributable cost incurred by the class in FY 2012. This resulted in a negative contribution to 

92 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
institutional costs of $670 million. In the FY 2011 ACD, the Commission requested that the Postal Service continue 

the examination of Periodicals costs begun in the Periodicals Mail Study9

 and provide additional information on its 

progress in reducing Periodicals costs in FY 2012. While the Postal Service did not provide this information in its 

initial FY 2012 ACR, it discussed, but did not quantify the impact of the programs implemented in FY 2011 and FY 

2012 to reduce Periodicals costs in response to CHIR Nos. 1 and 5.

In its response to CHIR No. 1, question 1, it states that it did not perform any analysis to isolate the cost savings 

resulting from the above initiatives because it may not be possible to isolate the cost savings from individual 

initiatives. The Postal Service also referred to its response to Question 7(b) of CHIR No. 1 in Docket No. ACR2011, 

filed on February 8, 2011. In that response, the Postal Service noted that its cost models are not designed to isolate 

reductions in manual handling costs, particularly given the fact that mail volumes, mail processing operations, mail 

classifications, and equipment sets change from year to year. The Postal Service added that while manual handling 

costs are captured in IOCS tallies and in the flats costs models (to the extent that the data is available in inputs that 

the models rely upon), the costs cannot be separated out.

Table VII-6 summarizes the financial results for Periodicals since the enactment of the PAEA.

Table VII–6— Periodicals Historical Financial Results

(Millions)

Year Volume Revenue Cost Cost Coverage Contribution

2007 8,795 $2,188 $2,636 83.01% $(448)

2008 8,605 $2,295 $2,732 84.00% $(437)

2009 7,953 $2,038 $2,680 76.04% $(642)

2010 7,269 $1,879 $2,490 75.46% $(611)

2011 7,077 $1,821 $2,430 74.94% $(609)

2012 6,741 $1,732 $2,402 72.10% $(670)

 $(3,417)

Source: PRC-ACR2012-LR4. 

Since the enactment of the PAEA the cost coverage for Periodicals has declined from 84.0 percent to 72.1 percent. 

Table VII-7 details the unit cost, revenue, and contribution for Periodicals over the same time frame.

9 Periodicals Mail Study, Joint Report of the United States Postal Service and Postal Regulatory Commission, September 2011 (Periodicals Mail Study).

 POSTAL REGULATORY COMMISSION 93
Table VII—7—Periodicals Unit Cost, Revenue, and Contribution 

FY 2007—FY2012

Year Cost/Piece Revenue/Piece Contribution/Piece

2007 $0.2997 $0.2488 $(0.051)

2008 $0.3175 $0.2667 $(0.051)

2009 $0.3370 $0.2563 $(0.081)

2010 $0.3425 $0.2585 $(0.084)

2011 $0.3434 $0.2573 $(0.086)

2012 $0.3562 $0.2568 $(0.099)

Source: PRC-ACR2012-LR4.

In FY 2012, the average contribution per piece for Periodicals was negative 9.9 cents per piece, an increase of 

almost 15 percent over FY 2011. The cost coverage for Periodicals suffered both from increasing costs and slightly 

decreasing revenues. In FY 2012, the unit cost of Periodicals increased 3.7 percent to 35.6 cents. Per piece revenue 

for Periodicals decreased by 0.05 cents per piece to 25.68 cents. The decline in unit revenue in FY 2012 occurred 

despite the price increase of Docket No. R2012-3.

The decline in unit revenue was driven, in part, by an ongoing decline in advertising pounds and an increase in 

mailer worksharing.10 The ongoing decline in advertising pounds increases the editorial percentage of Periodicals, 

which increased from 63.6 percent in FY 2011 to 64.7 percent in FY 2012. In market dominant price adjustments 

from Docket No. R2009-2 to Docket No. R2012-3, the Postal Service has pursued an “across the board” price 

increase strategy, aimed at “limiting the price increases for individual publications.”11 The Postal Service has many 

pricing tools at its disposal in Periodicals to incentivize efficient mailings and increase revenue.

In response to CHIR No. 3 question 6, the Postal Service provided USPS-FY12-NP33, referred to as the Periodicals 

“publication database” in the Periodicals Mail Study.

12 The Commission has developed an analysis of this database 

that replicates the information detailed on pages 23-30 of the Periodicals Mail Study for FY 2012, using the same 

methodology as the Joint Study updated for FY 2012. Most of the analysis and conclusions presented at that time 

remain accurate. One notable difference between FY 2009 and FY 2012 is that no Periodicals publication title 

covered its cost in FY 2012.13

10 Outside County Advertising ounces per piece declined 0.13 ounces, from 2.53 to 2.40, from FY 2011 to FY 2012. In FY 2012 62.96 percent of Outside 

County Periodicals were mailed at Carrier Route prices, and increase from 61.02 percent in FY 2011. 11 Docket No. R2009-2, United States Postal Service Notice of Market Dominant Price Adjustment (February 10, 2009) at 19. Docket No. R2011-2, United 

States Postal Service Notice of Market Dominant Price Adjustment (January 13, 2011) at 19. Docket No. R2012-3, United States Postal Service Notice of 

Market Dominant Price Adjustment (October 18 2011) at 23 and 24. 12 Periodicals Mail Study at 23-30. 13 PRC-ACR2012-NP-LR2.

94 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
This database is a valuable tool for assessing mailer usage of the postal network and should be leveraged by 

the Postal Service to improve both cost and service. The database uses unique mailer identification numbers 

to mask mailer identities. The identification numbers provided in USPS-FY12-NP33 are not crosswalked with 

the identification numbers used in the analysis of the FY 2009 database. Analyzing changes in Periodical mailer 

behavior between FY 2009 and FY 2012 could help further an understanding of the causes of declining revenue 

per piece over that period.

The Postal Service has stated that its recent goal for Periodicals pricing is to ensure that most Periodicals publications 

achieve near-CPI price increases.14 The current Periodicals pricing structure was implemented in FY 2007. In the 

past five years, the Postal Service has not substantially changed worksharing discounts, or sack, bundle, or pallet 

charges. The Publication database is a valuable tool for both measuring and projecting the distribution of price 

increases. It is also a valuable tool for analyzing the opportunity to incentivize mailers to prepare mail that can 

be efficiently processed by the Postal Service. The Postal Service should leverage this database in future years to 

achieve both increased contribution and reasonable distribution of price increases by publication.

According to the Postal Service in response to CHIR No. 5 question 24, mail processing, delivery, and transportation 

unit costs for Periodicals increased in FY 2012. Table VII-8 details Periodicals unit mail processing costs from FY 

2010 to FY 2012 by functional area.

Table VII–8—Periodicals OC Flats Mail Processing Cost 2010—2012

(cents per piece)

2010 2011 2012

% Change

2010 to 2012

Plant Manual Processing 1.19 1.20 1.21 2%

NONMods 5.10 4.71 4.89 -4%

Plant Mechanized Processing 3.48 4.80 5.22 50%

Bundle Processing 2.60 2.51 2.45 -6%

Plant Allied 4.34 4.10 4.30 -1%

Other Allied 1.91 1.81 1.83 -4%

Total 18.62 19.12 19.92 7%

Source: PRC-ACR2012-LR4.

From FY 2010 to FY 2012, unit mail processing costs increased by 7 percent. This was driven by a large increase 

in “Plant Mechanized Processing” which is calculated using the Automated Flats Sorting Machine (AFSM), flats 

prep, Upgraded Flats Sorting Machine (UFSM), and Flats Sequencing System (FSS) cost pools. In response to CHIR 

No. 5, question 24, the Postal Service attributes the increase in mail processing cost to the FSS, stating “FSS raised 

costs for these three products as compared with FY 2010 costs,” referring to Periodicals, Standard Mail Flats and 

Standard Carrier Route. The Postal Service also states “long-term initiatives often mean additional costs (capital 

and additional operating costs) have been incurred while the associated savings take longer to realize.” 

14 Docket No. R2011-2, United States Postal Service Notice of Market Dominant Price Adjustment, January 13, 2011, at 19.

 POSTAL REGULATORY COMMISSION 95
The increase in Periodicals mechanized processing costs is notable when evaluated in conjunction with mailing 

trends. From FY 2010 to FY 2012, the percentage of Periodicals volume presorted to Carrier Route increased from 

59 percent to 63 percent. Similarly, mailer use of pallets, as opposed to sacks, has also increased. All things being 

equal, these improvements in mailer preparation and worksharing should decrease the cost of Postal Service 

processing. The increase in Postal Service processing cost highlights the importance of the Postal Service identifying 

and incentivizing mail that it can efficiently process. The ongoing decline in AFSM productivity also contributed to 

the increase in mechanized processing costs. AFSM Incoming Secondary productivity declined 7.1 percent from FY 

2011 to FY 2012, and has declined 17.7 percent since FY 2008.15

In FY 2011, the Postal Service eliminated “Hot2C” practices, as discussed in the Periodicals Mail Study.

16 The goal of 

ending this practice was to reduce manual handlings and the unit manual mail processing cost. From FY 2010 to FY 

2012, the unit plant manual processing cost increased by two percent. In response to CHIR No. 5, the Postal Service 

stated “[w]ith the interplay of other programs and initiatives...and value declines, it is not feasible to isolate the 

effect of the elimination of Hot2C practices on manual processing.”

One functional processing section where unit costs have steadily decreased from FY 2010 to FY 2012 is “Bundle 

Processing,” which is calculated using Automated Package Processing System (APPS), Small Parcel Bundle Sorter 

(SBPS), Automated Parcel Bundle Sorter (APBS), and Pouching cost pools. The Postal Service has recently deployed 

APBS as part of its “Flats Strategy.” With the automated machines, SPBS/APBS productivity improved by 4.4 percent 

from FY 2011 to FY 2012.

As in FY 2011, Valpak’s concerns about cost coverage lead it to conclude that the Commission should make a 

finding of noncompliance for Periodicals prices for FY 2012.

Despite the demonstrated cost coverage concerns raised by Valpak, the Commission does not find the rates and 

fees for the Periodicals class to be out of compliance at this time.

The Commission agrees with the Postal Service that the Periodicals class did not meet the “requirement that each 

class of mail or type of mail service bear the direct and indirect postal costs attributable to each class or type of 

mail service.” 39 U.S.C. 3622(c)(2). The Postal Service has outlined substantial initiatives it has implemented to 

address the high costs of processing and delivering Periodicals, following some of the recommendations from the 

Periodicals Mail Study. The Commission recognizes that operational changes implemented by the Postal Service in 

FY 2011 and FY 2012 will take time to achieve measurable results. Moreover, the Postal Service still has access to 

pricing tools to incent efficient mailings that reduce costs and increase net revenue. However, it must take further 

action now to address this situation. The Postal Service needs to take the initiative to identify and implement 

solutions to Periodicals’ worsening net revenue results.

15 See CHIR No. 5, question 23. 16 Hot2C, also known as Hot Periodicals or Hot Pubs, was an unofficial practice that took place in many processing facilities and delivery units to create 

awareness of selected publications. This practice resulted in selected publications receiving expedited mail processing via manual processing.

96 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
The FY 2012 results for Periodicals highlight the importance of achieving measurable progress, and achieving 

it quickly. While the Postal Service eliminated the “Hot2C” program encouraging manual mail processing of 

Periodicals in FY 2011, manual processing costs continued to increase. Further, the Postal Service has not developed 

the information needed to assess and enhance the success of its cost savings initiatives. Generally, cost savings 

programs or initiatives target one or more specific activities to produce cost savings. These programs should have 

specific measurable targets by which the benefits of the program can be evaluated. The Postal Service did not 

achieve higher Periodicals revenue per piece in FY 2012 despite its pricing flexibility and a price increase. At this 

juncture, it does not appear that the strategy of “across the board” price increases for Periodicals allows the Postal 

Service to take advantage of its opportunities to increase revenues from Periodicals.

The cost saving programs implemented by the Postal Service can be enhanced through use of the Postal Service’s 

pricing flexibility. There is sufficient room within the price cap to apply different rate increases to different products 

and rate categories. As discussed in the worksharing section, the Postal Service has not used its pricing flexibility to 

incentivize more efficient mailer preparation. The Postal Service should be able to phase in substantial changes to 

workshare discounts to align them better with the avoided costs. Bundle and container prices could also be altered 

to better reflect costs experienced by the Postal Service. The Commission appreciates the concerns raised by all 

the parties in this matter.

In the Periodicals Mail Study, the Commission committed to work with the Postal Service to improve the cost 

coverage of Periodicals. In FY 2012, the Postal Service was unable to decrease unit cost, or increase unit revenue. 

While the initiatives implemented by the Postal Service were not sufficient to prevent increases in Periodicals costs 

in FY 2012, the Commission remains optimistic that, with Postal Service and industry support, these initiatives can 

be leveraged to achieve measurable results.

The Postal Service must pursue the considerable opportunities identified in FY 2012 to reduce the costs of handling 

flats. The Commission is open to further dialogue in FY 2013 to assist the Postal Service in making progress in 

reducing Periodicals costs, and measuring that progress.

Worksharing Discounts

One Within County passthrough exceeded 100 percent in FY 2012: High Density. Additionally, ten Outside County 

passthroughs, identified in Table VII-9, exceeded 100 percent.

Discounts that exceed avoided costs are permissible if a statutory exception applies. See 39 U.S.C. 3622(e). The 

Postal Service justifies the Periodicals discounts that exceeded 100 percent on the basis of section 3622(e)(2)

(C), which authorizes workshare discounts greater than avoided cost if provided in connection with a subclass 

that consists exclusively of mail matter with ECSI value. 2012 ACR at 28. In FY 2012, one Periodicals worksharing 

discount, the pre-barcoding of Nonmachinable Automation MADC Flats was 45 times the avoided cost. As recently 

as FY 2009, this discount was under 100 percent of the avoided cost. Periodicals operations have changed since FY 

2009. Specifically, the UFSM that was used in FY 2009 to sort non-machinable flats was not used in many facilities 

 POSTAL REGULATORY COMMISSION 97
in FY 2012. This has eroded the value of incentivizing mailers to prebarcode non-machinable flats. This example 

highlights how the Postal Service has not updated Periodicals prices to reflect current operational reality. 

Comments on Worksharing Discounts

Time comments that the Carrier Route passthrough was 71.3 percent in FY 2012. Both Time and MPA/ANM note 

the increase in the percentage of Periodicals presorted to Carrier Route since the enactment of the PAEA. Time 

asserts that the combination of high Carrier Route volume and low Carrier Route passthrough “should make 

carrier route mail a significant contributor to cost coverage improvement.” Time Reply Comments at A-2. In the 

“Mailflow Optimization Matrix” (“MOP”) presented by Time in the O’Brien appendix, Periodicals pricing signals 

are discussed. Specific recommendations include 16 pricing changes within the current pricing structure and 19 

price changes within a new pricing structure. Changes within the current structure include increasing the discount 

between 5-digit and carrier route. Changes within a new pricing structure include creating FSS piece, bundle and 

container prices (cost based).

Commission Analysis

The Periodicals class qualifies for ECSI consideration; therefore, the Commission finds that the Outside County 

discounts that exceed avoided costs are consistent with section 3622(e). Nine categories that had passthroughs 

Type of Worksharing Within Country Discount Avoided Cost Passthrough

 High Density 1.6 1.6 101.1%

Type of Worksharing Outside County Discount Avoided Cost Passthrough Presorting (dollars/piece)

Machinable Non-automation 5D Flats 10.0 9.2 108.7%

High Density 3.1 1.6 193.8%

Machinable Automation 5D Flats 8.7 8.3 104.8%

Non-machinable Non-auto ADC Flats 11.8 9.7 121.6%

Non-machinable Non-auto 3D/SCF Flats 7.6 2.0 380.0%

Non-machinable Automation 3D/SCF 

Flats

6.2 0.7 885.7%

Barcoding (dollars/piece)

Non-machinable Automation MADC Flats 4.5 0.1 4500.0%

Presorting Automation Letters 

(dollars/piece)

ADC Automation Letter 4.0 2.1 190.5%

3-Digit Automation Letter 2.1 0.4 525.0%

5-Digit Automation Letter 6.2 2.0 310.0%

Source: PRC-ACR2012-LR4.

Table VII–9—Periodicals Workshare Discounts Exceeding Avoided Costs in FY 2012

98 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
greater than 100 percent in Docket No. R2011-2 still have passthroughs greater than 100 percent with the prices 

recently approved in Docket No. R2013-1.17 See Docket No. R2013-1, PRC-LR-2. While the Postal Service justifies 

worksharing discounts of over 100 percent in Periodicals, citing 39 U.S.C 3622(e)(2)(C), other factors and objectives 

highlight the importance of sending efficient pricing signals. As discussed above, the Postal Service has not fully 

leveraged its pricing flexibility to maximize the contribution from Periodicals. In FY 2012, one Periodicals discount 

was 45 times larger than the avoided cost. Better aligning discounts with avoided cost would allow mailers and the 

Postal Service to maximize efficiency.

With regard to the carrier route passthrough focused on by Time, Table VII-10 details the passthrough for 5-Digit 

Machinable Automation pieces and or Basic Carrier Route pieces since FY 2008.

Table VII—10—Carrier Route and 5-Digit Automation Passthroughs

FY 2008 FY 2009 FY 2010 FY 2011 FY2012

CR Basic 88.15% 71.52% 71.05% 69.48% 71.33%

5-Digit Automation 61.37% 96.63% 102.38% 106.17% 104.82%

Source: Dockets Nos. ACR2008—ACR2012, Periodicals Library References.

The 9.8 cent differential between 5-Digit and Carrier Route has remained unchanged since FY 2008. The Periodicals 

Mail Study found that Carrier Route presorted pieces were among “the rate elements that provide the most 

contribution per piece.”18 The Periodicals rate elements provide the Postal Service with pricing flexibility. The Postal 

Service has the option to incent Carrier Route presorted pieces to achieve more profitable mail in Periodicals.

As a higher percentage of Periodicals volume is processed on the FSS, Periodicals mail will have two sets of avoided 

costs; one set of avoided costs for mail processed in an FSS environment and another set of avoided costs for mail 

processed in facilities without the FSS. In FY 2012, 18.8 percent of all flats were processed on the FSS. The modeled 

mail processing cost for Carrier Route Periodicals increased to 2.1 cents per piece in FY 2012 due to Carrier Route 

mail processed on the FSS. In FY 2012, 17.3 percent of Carrier Route Periodicals were estimated to have been 

processed on the FSS. The data required to obtain census level data regarding the class and presort level of the 

mail processed on the FSS was not available in FY 2012. The cost of FSS processing was 12.1 cents per piece in FY 

2012. Carrier Route should retain significant value to the Postal Service in non-FSS zones. Carrier Route mail will 

continue to avoid expensive mechanical sorting operations in non-FSS zones.

The Postal Service has stated “it has no plans to adjust its Periodicals price schedules to differentiate between 

FSS and non-FSS zones.”19 The Postal Service may find it advantageous to reconsider. Utilizing FSS zone pricing 

would allow the Postal Service to efficiently incentivize Carrier Route mail where the FSS is not available, and 

17 Tables displaying the full range of discounts, avoided costs, and passthroughs for Within County and Outside County Periodicals, as well as prices, 

bottom-up costs, and price-cost ratios for bundles, sacks, and pallets, appear in the tables at the end of this section. 18 Periodicals Mails Study at 26. 19 Docket No. RM2012-2, Reply Comments of the Postal Service Regarding Proposal Eighteen (February 23, 2012), at 6.

 POSTAL REGULATORY COMMISSION 99
prevent counterproductive presorting of the mail where the FSS is available. The FSS requires very different mail 

preparation characteristics to maximize its operational potential, and the Postal Service should fully explore pricing 

to encourage mailer preparation that allows cost minimization. In a price cap environment, pricing to maximize 

efficiency and contribution is particularly important.

While the Postal Service does not incentivize FSS prepared mail with a price signal, it does have pallet, bundle, 

and piece presort options for Periodicals. In FY 2012, 2.6 percent of all Periodicals pallets were FSS facility or 

FSS scheme, 1.9 percent of all Periodicals bundles were prepared as FSS bundles, and 4.3 percent of Periodicals 

volume were presorted for processing directly on the FSS. The percent of Periodicals pieces prepared for efficient 

FSS entry was greater than for Standard mail.20 The adoption of FSS entry options by Periodicals mailers highlights 

the benefit of a price structure that sends efficient pricing signals to mailers. Periodicals mailers pay for each pallet 

and bundle. The ability to prepare mailings for the FSS, instead of a Carrier Route, provides both the mailer and 

the Postal Service savings. Efficient pricing signals would help the Postal Service maximize the benefit of its FSS 

investment. The Commission recommends the Postal Service leverage its pricing flexibility to improve Periodicals 

pricing options and worksharing passthroughs to incent more efficient mailer preparation and increase contribution 

from Periodicals.

Price-Cost Ratios for Bundles and Containers

Discrete pricing for Outside County bundles, sacks and pallets was introduced in Docket No. R2006-1. The prices, 

bottom-up costs, and ratios of price to bottom-up cost for each combination of item, presort level, and entry 

level are shown in the tables at the end of this section. These price-cost ratios can be thought of as similar to 

worksharing discounts, in the sense that they provide incentives for cost-reducing mail preparation behavior. Unlike 

worksharing discounts they do not explicitly relate discounts to the costs avoided by greater mailer preparation. 

Price-cost ratios are used to describe how much of a cost is recognized in a given price element. The price-cost 

ratios for bundles, sacks, and pallets are significantly below 100 percent. Price-cost ratios range from a low of 7.2 

percent for a mixed ADC pallet entered at the Origin Network Distribution Center (ONDC), to a high of 64.3 percent 

for a 5-Digit pallet entered at the ONDC.

Comments

No commenter specifically discussed the pricing of Periodicals sacks, pallets, and bundles for FY 2012. The 

IDEAlliance’s Mail Flow Optimization Matrix (MOP) provided by Time presented several future pricing ideas, such 

as aligning container prices with cost avoidances and creating pallet pricing for FSS zones.

Commission Analysis

In the most recent market dominant price adjustment, Docket No. R2013-1, the Postal Service used its pricing 

flexibility to increase the prices of pallets, on average, by 2.8 percent. The Postal Service increased sacks, on 

20 In FY 2012, 0.19 percent of Standard Mail Flats and Standard Carrier Route pallets were prepared as FSS pallets. 0.09 percent of Standard Mail Flats and 

Standard Carrier Route bundles were prepared as FSS bundles. 0.29 percent of Standard Mail Flats and Standard Carrier Route volumes were prepared 

as FSS presorted pieces.

100 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
average, by 2.3 percent. This means that the gap between sack price-cost ratios and pallet price-cost ratios will 

grow in FY 2013.

In FY 2007, when the current Periodicals rate design was implemented, 24.7 percent of Periodicals were mailed 

in sacks. By FY 2012, that number had declined to 14.5 percent. In FY 2007, 16.9 percent of Periodicals sacks 

were entered at the Destination Bulk Mail Center (DBMC) or further downstream. In FY 2012, 20.5 percent of 

Periodicals sacks were entered at the Destination Network Distribution Center (DNDC) or further downstream. 

Although the Postal Service has not substantially altered the price relationship between sack and pallet charges 

during this period, mailers have nevertheless responded to the nominal price signals. This suggests that stronger 

price signals will induce even more efficient mailer behavior. Because the Postal Service has not substantially 

changed the passthroughs for bundle, sack, and pallet prices since FY 2007, it may not be reasonable to change 

prices to maximize efficiency in one price adjustment. For this reason, the Postal Service should work with mailers 

to determine where best to begin increasing incentives to achieve efficiency gains as large as possible without a 

substantial adverse effect on mailers. The Postal Service should work with mailers to identify and incentivize mail 

that can be efficiently processed by current Postal Service operations.

The Commission recommends the Postal Service leverage its pricing flexibility to improve Periodicals bundle and 

container pricing to incent more efficient mailer preparation and increase contribution from Periodicals.

Table VII–11-Within County Passthroughs, FY 2012

Type of Worksharing Discount Avoided Costs Passthrough

 Presorting (dollars / piece) 

3-Digit Presort 1.2 3.6 33.2%

5-Digit Presort 1.3 12.2 10.6%

CR Basic 4.7 16.9 27.9%

High Density 1.6 1.6 101.1%

Saturation 1.4 4.1 33.8%

3-Digit Automation Letter 1.0 1.5 66.7%

5-Digit Automation Letter 0.2 2.0 10.0%

Barcoding (dollars/piece)

Basic Automation Flats 1.6 6.3 25.4%

3-Digit Automation Flats 1.2 6.2 19.4%

5-Digit Automation Flats 0.6 2.9 20.6%

Dropship (dollars/piece)

DDU Dropship 0.8 1.2 65.9%

Source: PRC-ACR2012-LR4.

 POSTAL REGULATORY COMMISSION 101
Table—VII-12-Outside County Passthroughs, FY 2012

Type of Worksharing Discount Avoided Costs Passthrough

Pre-sorting (dollars/piece)

Machinable Non-automation ADC Flats 3.5 5.4 64.8%

Machinable Non-automation 3D/SCF Flats 1.7 4.0 42.5%

Machinable Non-automation 5D Flats 10.0 9.2 108.7%

CR Basic 10.7 15.0 71.3%

High Density 3.1 1.6 193.8%

Saturation 2.0 4.1 48.8%

Machinable Automation ADC Flats 2.7 4.7 57.4%

Machinable Automation 3D/SCF Flats 1.5 3.5 42.9%

Machinable Automation 5D Flats 8.7 8.3 104.8%

Non-machinable Non-auto ADC Flats 11.8 9.7 121.6%

Non-machinable Non-auto 3D/SCF Flats 7.6 2.0 380.0%

Non-machinable Non-auto 5D Flats 12.0 14.1 85.1%

Non-machinable Automation ADC Flats 9.8 11.4 86.0%

Non-machinable Automation 3D/SCF Flats 6.2 0.7 885.7%

Non-machinable Automation 5D Flats 11.0 14.0 78.6%

Pre-barcoding (dollars/piece)

Machinable Automation MADC Flats 3.2 3.3 97.0%

Non-machinable Automation MADC Flats 4.5 0.1 4500.0%

Presorting Automation Letters (dollars/piece)

ADC Automation Letter 4.0 2.1 190.5%

3-Digit Automation Letter 2.1 0.4 525.0%

5-Digit Automation Letter 6.2 2.0 310.0%

Source: PRC-ACR2012-LR4.

102 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
Table VII–14—Outside County Sack Price/Cost Ratios, FY 2012

Sack Level Entry Point Price ($) Bottom-up Cost ($) Price as Percent 

of Cost

Mixed ADC

ONDC 0.437

OSCF 0.437 2.759 15.8%

OADC 0.437 2.250 19.4%

ADC

OSCF 2.092 6.430 32.5%

OADC 2.092 6.266 33.4%

ONDC 2.092 5.52 37.9%

DNDC 1.457 4.113 35.4%

DADC 0.833 2.25 37.0%

3-D/SCF

OSCF 2.186 6.893 31.7%

OADC 2.186 6.572 33.3%

ONDC 2.186 5.735 38.1%

DNDC 1.562 4.237 36.9%

DADC 1.249 4.000 31.2%

DSCF 0.833 2.250 37.0%

5-D/CR

OSCF 2.810 8.699 32.3%

OADC 2.810 7.996 35.1%

ONDC 2.810 7.207 39.0%

DNDC 2.082 5.757 36.2%

DADC 1.770 4.947 35.8%

DSCF 1.353 3.744 36.1%

DDU 0.937 2.509 37.3%

Source: PRC-ACR2012-LR4.

Table VII–13—Outside County Bundle Price/Cost Ratios, FY 2012 

Container Level Bundle Level Price ($) Bottom-up Cost ($) Price as Percent of Cost

Mixed ADC

MADC 0.079 0.210 37.6%

ADC 0.208 0.558 37.3%

3-D/SCF 0.276 0.752 36.7%

5-D 0.285 0.819 34.8%

Firm Bundle 0.185 0.973 19.0%

ADC

ADC 0.115 0.317 36.3%

3-D/SCF 0.190 0.512 37.1%

5-D 0.206 0.568 36.3%

CR 0.325 0.794 40.9%

Firm Bundle 0.154 0.779 19.8%

3-D/SCF 

3-D/SCF 0.129 0.315 41.0%

5-D 0.150 0.358 41.9%

CR 0.288 0.570 50.5%

Firm Bundle 0.142 0.565 25.1%

5-D/CR 

5-D 0.145 0.315 46.0%

CR 0.152 0.296 51.4%

Firm Bundle 0.079 0.306 25.8%

Source: PRC-ACR2012-LR4.

 POSTAL REGULATORY COMMISSION 103
Table VII–15— Outside County Pallet Price/Cost Ratios, FY 2012

Pallet Level Entry Point Price ($) Bottom-up Cost ($) Price as Percent 

of Cost

Mixed ADC

ONDC 3.365 46.647 7.2%

OADC 3.365 26.378 12.8%

OSCF 3.365 46.000 7.3%

ADC

OSCF 33.375 70.756 47.2%

OADC 33.375 63.318 52.7%

ONDC 33.375 55.306 60.3%

DNDC 23.127 46.647 49.6%

DADC 12.803 26.378 48.5%

3-D/SCF

OSCF 39.505 84.136 47.0%

OADC 39.505 78.161 50.5%

ONDC 39.505 64.918 37.9%

DNDC 24.572 51.028 41.9%

DADC 21.372 45.665 46.8%

DSCF 11.460 25.142 45.6%

5-D/CR

OSCF 50.875 104.413 48.7%

OADC 50.875 91.310 55.7%

ONDC 50.875 79.108 64.3%

DNDC 32.936 66.258 49.7%

DADC 31.180 63.615 49.0%

DSCF 21.062 42.728 49.3%

DDU 1.652 3.203 51.6%

Source: PRC-ACR2012-LR4.

104 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
Standard Mail

Introduction

Standard Mail is a market dominant class that consists of six products: (1) Letters; (2) Flats; (3) Parcels; (4) Carrier 

Route; (5) High Density and Saturation Letters; and (6) High Density and Saturation Flats/Parcels. In FY 2012 

Standard Mail volume was 79.8 billion pieces, a decrease of 4.9 billion pieces from the 84.7 billion pieces in FY 

2011. Despite the decrease in volume, Standard Mail accounted for 50.3 percent of total mail volume, and 22.7 

percent of total contribution to institutional costs. Standard Mail’s contribution as a share of total contribution has 

decreased from 23.4 percent in FY 2011.

The principal FY 2012 findings for Standard Mail are:

 Standard Mail contributed $5.5 billion to institutional costs.

 Standard Mail Flats had an 80.9 percent cost coverage, 1.4 percentage points higher than FY 2011, but 

resulting in a $528 million loss.

 Standard Mail Parcels had an 85.5 percent cost coverage, 0.1 percentage points higher than FY 2011, resulting 

in a $49.0 million loss.

 Sixteen workshare discounts exceeded avoided costs.

 Four discounts were properly justified under section 3622(e).

 Six commercial discounts were not properly justified under section 3622(e).

 Four nonprofit discounts were not properly justified under section 3622(e).

 The Commission was unable to evaluate whether one commercial discount and one nonprofit discount were 

consistent with the statute.

Financial Analysis

In FY 2012, the total revenue for Standard Mail was $16.7 billion, which covered its attributable costs of $11.2 

billion, and resulted in a 149.0 percent cost coverage (see Table VII-16). Standard Mail contributed $5.5 billion to 

institutional costs, a 4.4 percent decrease from FY 2011.

The overall cost coverage for Standard Mail increased slightly to 149.0 percent from 147.6 percent in FY 2011. 

Standard Mail volume decreased 5.8 percent, or nearly five billion pieces. Unit revenue and unit cost decreased 

from FY 2011 by 0.1 cents and 0.2 cents, respectively. Despite a 0.1 cent increase in unit contribution, the decrease 

in volume resulted in Standard Mail contributing $252 million less to institutional costs compared to FY 2011.

 POSTAL REGULATORY COMMISSION 105
Figure VII–1 demonstrates the decreased contribution provided by Standard Mail in FY 2012.

Table VII–16—Standard Mail Fiscal Year 2012 Volume, 

Revenue, Cost Contribution, and Cost Coverage by Product 

Volume 

(000)

Revenue 

($000)

Attributable 

Cost 

($000)

Contribution 

to Institutional 

Cost 

($000)

Revenue 

Per Piece 

(Cents)

Cost Per 

Piece 

(Cents)

Unit 

Contribution

(Cents)

Cost 

Coverage

High Density & 

Saturation Letters 5,563,559 770,882 346,973 423,908 13.86 6.24 7.62 222.2%

High Density & 

Saturation Flats & Parcels 11,770,275 1,955,823 900,140 1,055,683 16.62 7.65 8.97 217.3%

Carrier Route 9,119,946 2,249,836 1,720,605 529,231 24.67 18.87 5.80 130.8%

Letters 47,102,691 9,213,404 5,149,404 4,064,000 19.56 10.93 8.63 178.9%

Flats 5,939,635 2,233,730 2,761,670 (527,940) 37.61 46.50 -8.89 80.9%

Parcels 303,559 288,894 337,853 (48,959) 95.17 111.30 -16.13 85.5%

Inbound Intl. Negotiated 

Serv. Agreement Mail 1,345 702 148 554 52.21 11.01 41.19 474.0%

Total Standard Mail 79,801,009 16,713,271 11,216,793 5,496,477 20.94 14.06 6.89 149.0%

Source: PRC-ACR2012-LR1.

20.8 20.6

17.4 17.3 17.8

16.7

13.2 13.2

12.2 11.8 12.1

11.2

7.6 7.4

5.2 5.5 5.7 5.5

0

5

10

15

20

25

2007 2008 2009 2010 2011 2012

Billions

Fiscal Year

Revenue Attributable Cost Contribution

Source: 2007 ACD at 87, 2008, ACD at 59, 2009 ACD at 83, 2010 ACD at 102, 2011 ACD at 111, and Table VII-16.

Figure VII–1—Standard Mail Trends

106 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
Standard Mail as a class contributed $5.5 billion to institutional costs, but two products within the class did not 

cover attributable costs. Figure VII–2 shows the unit contribution of each Standard Mail product for FY 2011 and 

FY 2012. Figure VII–2 also demonstrates the increased unit contribution from Flats, High Density and Saturation 

Letters and High Density and Saturation Flats and Parcels compared to FY 2011 and the reduced contribution of 

the remaining products.

8.9

-9.5

-15.2

7.5

8.8

6.3

8.6

-8.9

-16.1

7.6

9.0

5.8

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

Letters Flats Parcels High Density and 

Saturation Letters

High Density and 

Saturation

Flats and Parcels 

Carrier Route

Cents

FY 2011 FY 2012

Fiscal Year

Source: 2011 ACD at 112, and Table VII-16.

Figure VII–2—Unit Contribution by Standard Mail Product FY 2011 and FY 2012

It is noteworthy that contribution decreased by $252 million. As in the case of First-Class Mail, the loss in volume 

accounts for much of the decreased contribution. In particular, the volume of Standard Letters decreased by 3.6 

billion resulting in a reduction of about $425 million in contribution. As noted elsewhere, this impedes the ability 

of the Postal Service to cover its fixed costs.

Standard Mail Letters

In FY 2012, Standard Mail Letters had a cost coverage of 178.9 percent, and contributed $4.1 billion to institutional 

costs. This was a $425 million decrease in contribution compared to FY 2011. On a unit basis, the Letters product 

contributed 8.6 cents to the institutional costs of the Postal Service, a 2.5 percent decrease from FY 2011. Letter 

revenue per piece increased by 1.5 percent, while attributable cost per piece increased by 4.8 percent. Letter 

volume decreased by 7.1 percent, 3.6 billion pieces, compared with FY 2011.

 POSTAL REGULATORY COMMISSION 107
Standard Mail Flats

Cost coverage for Standard Mail Flats was 80.9 percent in FY 2012, a slight increase from its 79.5 percent cost 

coverage in FY 2011. Prior to FY 2012 the cost coverage on Flats decreased consistently each fiscal year since 2008, 

as shown in Table VII-17. Similarly, the difference in unit contribution between Standard Mail Flats and Standard Mail 

Letters, and Carrier Route increased from FY 2008 to FY 2011. The difference decreased in FY 2012. See Figure VII-3.

Table VII–17—Standard Mail Flats’ Cost Coverage and Contribution FY 2008—FY 2012

2008 2009 2010 2011 2012 Total

Cost Coverage 94.4% 82.3% 81.8% 79.5% 80.9% —

Contribution ($217.83) ($615.57) ($576.99) ($643.19) ($527.94) ($2,581.53)

Source: 2008 ACD at 59, 2009 ACD at 83, 2010 ACD at 102, 2011 ACD at 112, and Table VII-16.

9.0

8.1

8.6 8.9 8.6

7.7

7.1 7.1

6.3 5.8

-2.2

-7.9 -8.2

-9.5 -8.9

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

2008 2009 2010 2011 2012

Cents

Fiscal Year

Letters Carrier Route Flats

Source: PRC-ACD2012-LR3.

Figure VII–3—Unit Contribution for Standard Mail Letters, Flats, and Carrier Route

108 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
In FY 2012, unit revenues for Standard Mail Flats increased by 0.8 cents, while unit attributable costs increased by 

0.2 cents. See Figure-VII–4.

36.8 37.6

46.3 46.5

-9.5 -8.9

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

2011 2012

Cents

Unit Revenue Unit Attributable Cost Unit Contribution

Source: 2011 ACD at 114, and Table VII-16.

Figure VII–4—Standard Mail Flats Unit Revenue, 

Unit Attributable Cost and Unit Contribution for FY 2011 and FY 2012

In the FY 2010 ACD, the Commission determined that Standard Mail Flats prices in effect in FY 2010 did not comply 

with section 101(d) of title 39. Pursuant to section 3653(c), the Commission directed the Postal Service to increase 

the cost coverage of the Standard Mail Flats product through a combination of cost reductions and above-average 

price adjustments, consistent with the price cap requirements, until such time that revenues exceed attributable 

costs. 2010 ACD at 106. In addition, the Postal Service was directed to provide in its next ACR and market dominant 

price adjustment the following information: (1) a description of operational changes designed to reduce flats costs 

in the previous fiscal year and an estimation of the financial effect of such changes; (2) a description of all costing 

methodology or measurement improvements made in the previous fiscal year and estimated financial effects of 

such changes; (3) a statement summarizing the historical and current fiscal year subsidy of the Flats product; and, 

(4) the estimated timeline for phasing out the subsidy. Id. at 107.

The Postal Service appealed the Commission’s FY 2010 ACD findings and directive to the United States Court of 

Appeals for the District of Columbia Circuit. On April 17, 2012, the United States Court of Appeals for the District 

of Columbia Circuit issued an opinion in United States Postal Service v. Postal Regulatory Commission, 676 F.3d 

 POSTAL REGULATORY COMMISSION 109
1105 (D.C. Cir. 2012). In its opinion, the Court rejected the Postal Service’s contention that the Commission acted 

outside of the scope of its statutory authority by considering the general standards of section 101(d) in an annual 

compliance determination “at least in extreme circumstances”. Id. at 1108. The Court remanded the case to the 

Commission “for a definition of the circumstances that trigger section 101(d)’s failsafe protection, and for an 

explanation of why the particular remedy imposed here is appropriate to ameliorate that extremity....” Id. at 1110. 

In response, the Commission issued Order No. 1427 clarifying that its analysis of the circumstances that would 

trigger section 101(d) depended on the totality of circumstances. Order No. 1427. at 4.

The Commission identified the following specific factors which, in the case of Standard Mail Flats, triggered section 

101(d)’s protections: a significant and growing cost coverage shortfall, the duration of the shortfall over a significant 

period, evidence the shortfall is likely to increase further, a significant adverse impact on users of other products, 

failure of the Postal Service to address the shortfall and the failure of the Postal Service to take remedial steps. 

The Commission also stated that an extreme case may not apply if price increases would be counterproductive 

under the price cap or if cost reductions were not feasible. Id. at 9. The Commission affirmed that Flats present an 

“extreme case.” The Commission explained further that additional factors could emerge in other cases that would 

support a finding of extreme circumstances requiring remedial action. Id. at 10. In addition, the Commission stated 

that it “does not interpret section 101(d) to require ‘only 100% cost coverage, and nothing short of 100%’ to satisfy 

the fair and equitable cost apportionment standard, provided an adequate explanation for a failure to improve 

cost coverages is offered.” Id. at 14.

While the court case was pending, in its FY 2011 ACD, the Commission found that the rates and fees for Standard 

Mail Flats remained out of compliance and that Standard Mail prices continued to reflect an unfair and inequitable 

apportionment of the costs of postal operations to all Standard Mail users. 2011 ACD at 118-119. Shortly after 

the close of FY 2011, the Postal Service filed notice with the Commission announcing an above average increase 

of 2.209 percent for Standard Mail Flats. The Commission explained in its FY 2011 ACD that “[o]rdinarily, the 

Commission would consider the Postal Service’s subsequent filing.” However, because of the pendency of the 

litigation regarding the FY 2010 ACD, the Commission held action in this area in abeyance pending receipt of the 

Court’s decision and did not require further remedial action. Id. at 16 and 119.

On September 21, 2012, the Commission issued an order confirming termination of the stay it had previously 

granted pending resolution of the Postal Service’s appeal. The Commission directed that as part of its FY 2012 ACR 

the Postal Service should respond to the specific remedy adopted by the FY 2010 ACD.

Postal Service Response to ACD Directive

In its FY 2012 ACR, the Postal Service presents a three-year schedule of above-CPI price increases for the Flats 

product. FY 2012 ACR at 19. The Postal Service plans to increase Standard Flats prices by CPI multiplied by 1.05 

in 2014, 2015 and 2016. The Postal Service notes two caveats regarding reasons why the schedule may not be 

achievable. First, it contends that the schedule is speculative, because it relies on numerous assumptions about 

future conditions. Second, it notes that only the Postal Service’s Governors have the authority to change the prices 

of postal products and the Governors have not yet approved these proposed changes. Id. at 16.

110 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
The Postal Service contends that above-CPI price increases for the Flats product could impair the Postal Service’s 

ability to enhance its revenue and contribution in the long run. It asserts that due to the rapid decline of Flats 

volume, using more of the Postal Service’s limited cap-based pricing authority on higher than average increases 

for Flats could have a negative impact on contribution from Standard Mail in the future. Id. at 17-18. To support 

its claims, the Postal Service presents seven models prepared by Christensen Associates estimating contribution 

impacts for Standard Mail Flats and all other mail for different scenarios. See Library Reference USPS-FY12-43.

The Christensen Associates Report discusses the scenarios presented in the models and concludes that the models 

demonstrate that the relative volume trends for Standard Mail Flats and other Standard Mail can have a substantial 

effect on the total contribution obtained from Standard Mail under a given set of price increases. Specifically, it 

suggests that “more measured paces of price increases for Flats can provide greater contribution, compared to 

large near‐term price increases above the cap, when the autonomous trend in Flats features a sharper decrease

than that for other Standard Mail.” Scenario Analysis for Standard Mail Contribution at 9.

In its FY 2012 ACR filing, the Postal Service was not responsive to the Commission’s FY 2010 ACD directive. It did 

not provide: (1) a description of operational changes designed to reduce flats costs and an estimate of the financial 

effect of such changes; (2) a description of all costing methodology or measurement improvements made in the 

previous fiscal year and an estimate of the financial effects of such changes; or (3) a statement summarizing the 

historical and fiscal year subsidy of the Flats product; and (4) an estimated timeline for phasing out this subsidy.

However in its response to CHIR No. 1, question 1, the Postal Service identified eight steps designed to make 

the processing of Standard Mail Flats more efficient: (1) FSS Scorecard; (2) moving mail up the ladder21 ; (3) mail 

preparation; (4) mail entry; (5) bundle operation; (6) Service Performance Diagnostics Tool; (7) visibility; and (8) 

other future enhancements. For a discussion of each of these initiatives, refer to the Postal Service’s response to 

CHIR No. 1, question 1.

The Postal Service did not provide the financial effect of the operational changes identified above. In its response 

to CHIR No. 1, question 1, it states that it did not perform any analysis to isolate the cost savings resulting from the 

above initiatives because it may not be possible to isolate the cost savings from individual initiatives. The Postal 

Service also referred to its response to CHIR No. 1, question 7(b), in Docket No. ACR2011, filed on February 8, 2011. 

In that response, the Postal Service noted that its cost models are not designed to isolate reductions in manual 

handling costs, particularly given the fact that mail volumes, mail processing operations, mail classifications, and 

equipment sets change from year to year. The Postal Service added that while manual handling costs are captured 

in IOCS tallies and in the flats cost models (to the extent that the data are available in inputs that the models rely 

upon), the costs cannot be separated out.

In response to CHIR No. 2, question 2, the Postal Service identified three costing methodology changes that 

affected Standard Mail Flats costs in FY 2012: (1) Proposal Two, Docket No. RM2012-5; (2) Proposal Five, Docket 

21 The Postal Service explains that “moving mail up the ladder” refers to the aim of increased processing on automated equipment and the corresponding 

decrease of manual processing. Id. at 4.

 POSTAL REGULATORY COMMISSION 111
No. RM2012-5; and (3) Proposal Seven, Docket No. RM2012-7. The three modifications added $6.4 million in 

attributable cost to Standard Mail Flats.

Additionally, the Postal Service provided the historical and current fiscal year subsidy of the Flats product. However, 

the Postal Service did not provide a timeline for phasing out the subsidy because it contends that it is difficult to 

predict when the shortfall for Standard Mail Flats will be phased out. The Postal Service notes that “given the 

product’s low cost coverage and the limitations of the price cap system, the shortfall is unlikely to be eliminated by 

the end of 2016.” CHIR No. 1, question 2(c).

Comments

Comments generally address four areas: (1) the Christensen Associates Standard Mail Risk Analysis; (2) the Valpak 

Contribution Model; (3) the intra-class cross-subsidy; and (4) recommendations for Commission action.

The Christensen Associates Standard Mail Risk Analysis (Christensen Analysis) 

Christensen Associates presents seven models to illustrate its risk analysis. Each of the models uses own‐price

elasticity of ‐0.6 for Standard Mail Flats and ‐0.4 for all other Standard Mail. These values assume that Flat

demand is somewhat more price elastic than other Standard Mail products. Each model represents a hypothetical 

price change scenario constrained by an assumed price cap and computes the contribution for Standard Mail in 

response to price-induced volume changes. The scenarios also explore the effect of hypothetical price changes 

on contribution using different assumptions about the variability of cost. Some of the scenarios assume the same 

secular volume trend for Flats and other categories of Standard Mail, while others explore the possibility that the 

volume for Flats and all other Standard Mail trend independently, with Flats volume having a more significant 

downward trend.

The Public Representative, Valpak, Pitney Bowes, and the American Catalog Mailers Association (ACMA) critique 

the Christensen Analysis presented by the Postal Service. The Public Representative recommends the use of more 

realistic price elasticity assumptions, an above-average limited price-cap increase for a longer period of time, 

and the correction of certain methodological inaccuracies. PR Comments at 33-39. Valpak expresses concern 

that the Christensen Analysis hypothesizes possibilities which support the Postal Service’s existing pricing choices 

but ignores the certainty of losses from Standard Flats. Valpak Comments at 63. Valpak uses the Christensen 

model’s assumptions to demonstrate that greater contribution could be obtained by imposing more aggressive 

price increases on Standard Flats. Id. at 59-80. The Public Representative reaches a similar conclusion by changing 

the price elasticity assumptions in the model to the Postal Service’s own econometric elasticity results for both 

Standard Flats and All Other Standard Mail. PR Comments at 35-36. Pitney Bowes also contends that the use of 

more accurate assumptions reveals that “smaller price increases on the higher-contribution products – offset by 

larger increases on lower-contribution products – improves Postal Service finances.“ Pitney Bowes Comments at 3.

ACMA argues that there is a high likelihood that the Christensen Analysis understates the risks of adverse impacts 

from large rate increases for Standard Mail Flats. It suggests that the price-elasticity of demand for Flats assumed 

112 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
in the Christensen model should be higher in absolute value. It also contends that the models should be adjusted 

to reflect a lower volume elasticity of attributable cost to account for the presence of excess capacity. ACMA 

provides a cost index that purports to show that the cost of excess capacity is being attributed to Flats. It suggests 

that long-run marginal cost, developed during a period of excess capacity is excessive and is not a valid measure 

of the resources that are absorbed by the products in question. ACMA Comments at 18. ACMA notes that the 

Christensen Analysis does not discuss the possibility of a multiplier. ACMA asserts that an increase in catalog 

volume would be expected to cause an increase in parcels and First-Class letters. Id. at 19-21.

Valpak and the Public Representative criticize ACMA’s proposed cost index as well as its assertions that the 

Christensen model understates the negative effects of increasing prices for Standard Flats. Valpak Reply Comments 

at 4-7, 12-16; PR Reply Comments at 23-25, 27-31. Valpak contends that ACMA’s argument about the higher priceelasticity of demand for Flats is not supported by any data. Valpak Reply Comments at 4-6. Valpak also expresses 

reservations regarding ACMA’s multiplier effect argument. Id. at 6-7. First, Valpak notes that the vast majority 

of parcels are still delivered by FedEx and UPS. Id. It contends that any package fulfillment benefit from catalog 

purchases, primarily benefits FedEx and UPS. Second, Valpak expresses doubts that any significant First-Class letter 

volume is generated, as most catalog transactions are done electronically. Id.

Valpak Contribution Model

Valpak offers its own Standard Mail contribution model to demonstrate the inadequacy of the Postal Service’s 

rationale for failing to implement meaningful above-average price increases for Standard Mail Flats. Valpak 

Comments at 80-107.

The Valpak model computes the maximum “allowable revenue” by increasing last year’s total revenue for Standard 

Mail by the CPI price cap. For each product, it provides a schedule showing the additional contribution per dollar 

of this allowable revenue that can be expected to result from a unit price increase. To compute the change in 

contribution from a unit price increase, the model uses the elasticity estimates submitted by the Postal Service 

on January 22, 2013. Unlike the Christensen model, the Valpak model does not incorporate estimates of secular 

volume trends.

The Valpak model allows the user to compare the schedules for all the Standard Mail products. To derive the prices 

that maximize contribution, marginal price increases are given to products that yield the greatest contribution per 

dollar of allowable revenue until some other product offers more contribution from a marginal increase in price. At 

the optimal combination of price increases, the additional contribution per dollar of allowable revenue from each 

product should be equal at the margin.

Valpak reports that by applying this procedure, the Valpak model shows that contribution would be maximized 

if Standard Flats prices are increased by approximately 4 percent and Standard Parcels prices are increased by 

approximately 8 percent. Id. at 101.

 POSTAL REGULATORY COMMISSION 113
The Postal Service and ACMA both question the value of Valpak’s contribution model. The Postal Service contends 

that Valpak’s Standard Mail contribution model is not a useful tool for determining optimal Standard Mail prices 

because it does not take into account the autonomous volume decline of Standard Mail Flats. Postal Service 

Reply Comments at 5-14. In addition, the Postal Service objects to Valpak’s assumption that the aggregate price 

elasticities from the Postal Service’s market dominant demand equations are applicable to each Standard Mail 

product within the aggregate. Id. ACMA asserts that, due largely to the attribution of excess capacity costs, an 

unknown proportion of reported costs are not volume variable, and therefore are unsuitable for evaluating cost 

coverages in the Valpak model. ACMA Reply Comments at 5-7. ACMA also notes that the Valpak model does not 

include exogenous volume trends, omits cross elasticities and relies on commercial elasticities, using the same 

elasticity for commercial and nonprofit Letters and Flats. Id. at 3-12.

Intra-class Cross-subsidy

Valpak also argues that the Postal Service is giving unreasonable preference to mailers who use Flats, as opposed 

to mailers such as Valpak that send letters. Valpak Comments at 117. It contends that the Postal Service is picking 

winners and losers among advertisers, thereby creating an unlevel playing field. Id.

As it did in the FY 2011 ACR proceeding, ACMA challenges the premise that the Standard Mail Flats product 

is suitable for a cross-subsidy test. ACMA Comments at 2-5. It argues that the Standard Flats product is not 

aligned with markets or the way mailers of catalogs use Standard Flats in conjunction with other Standard Mail 

products, such as Carrier Route or High Density flats categories. Id. at 3-4. The Direct Marketing Association (DMA) 

expresses similar sentiments. It urges the Commission to examine Standard Mail Flats as the residual part of a 

larger Carrier Route mailing. DMA Comments at 1-2. DMA also insists that the Commission must base any pricing 

recommendations or directives for FY 2013 on a complete understanding and incorporation of the Postal Service’s 

accelerated cost cutting efforts. Id.

Recommendations for Commission Action

Valpak and the Public Representative assert that the Postal Service is not doing enough to eliminate the subsidy. 

Valpak contends that the steps that the Postal Service has taken are inadequate. Id. at 39. It claims that if the 

Postal Service does not pick up the pace of improvement in cost coverage, Flats will not reach full cost coverage 

until FY 2026. Valpak Comments at 39. Valpak recommends annual increases in the range of CPI plus 5 percent. 

Id. at 48. The Public Representative recommends slightly lower increases than Valpak, with above-cap price 

increases of 2-3 percent. PR Comments at 38-39. Additionally, the Public Representative asserts that it is unlikely 

that cost improvements identified by the Postal Service in this year’s ACR will eliminate the shortfall. Id. The Public 

Representative recommends that the Commission require the Postal Service to make a greater effort to reduce the 

costs of Standard Flats and report the effect of those efforts in next year’s ACR. PR Comments at 32.

The Postal Service does not believe that the criticisms or alternative pricing scenarios offered by the Public 

Representative and Valpak meaningfully undercut the Postal Service’s arguments against mechanically raising 

Standard Mail Flats prices above the cap. Postal Service Reply Comments at 6. The Postal Service “urges the 

114 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
Commission to leave its FY 2010 ACD order unchanged, and to allow the Postal Service to proceed with its proposed 

three-year schedule of above-average price increases.” Id.

ACMA argues that among the “totality of circumstances” that the Commission is obligated to consider in determining 

compliance of Standard Mail Flats are other circumstances, such as the costs of excess capacity, the likelihood that 

the Christensen Analysis understates the risks of adverse impacts from large rate increases for Standard Mail Flats, 

and the value and cultural significance of catalogues. ACMA Comments at 24-25.

Valpak opposes ACMA’s critique of the evaluation of Standard Flats as a product, ACMA’s assertions that excess 

capacity is responsible for Standard Flats’ low cost coverage, ACMA’s attempt to use short-run marginal costs as a 

justification for not raising Standard Flats prices, and ACMA’s claims that the value of catalogue mailings warrant 

recognition in postal rates. Valpak Reply Comments at 7-11, 17-33.

PostCom suggests that organic changes within the industry favor taking a wait-and-see approach to Flats prices. 

PostCom Comments at 2. It states that due to improvements in price, co-mailing, and co-palletization a substantial 

portion of Flats volume (including catalogs) has migrated to Carrier Route. Id. The current proposed prices are 

expected to continue that shift. Id. at 1-3. It states that regardless of whether a worksharing relationship between 

Flats and Carrier Route exists, the three factors enumerated above will drive volume away from Flats to Carrier 

Route pieces. Id. at 4. It recommends that the Commission direct the Postal Service to track this migration, study 

its causes and effects, and only take action once a clearer picture of mailing patterns emerges. Id. at 4-5.

Commission Analysis

In its review of Standard Flats, the Commission first considers the factors that it identified as creating an “extreme 

case” triggering section 101(d)’s protections in the FY 2010 ACD. Next, the Commission discusses other relevant 

factors raised by commenters.

While a significant cost coverage shortfall still exists in FY 2012, it is not growing. The above-average price increase 

for Flats in Docket No. R2012-3, a below CPI-U increase in unit cost and a significant drop in volume resulted in a 

reduction in contribution loss compared with FY 2011. Although losses from Standard Mail Flats are continuing, 

the amount of loss incurred in FY 2012 is less than the FY 2011 loss.

There is no evidence that the cost coverage shortfall is likely to grow. The Postal Service plans to adjust prices for 

Flats slightly above CPI through 2016. If the Postal Service can keep cost increases from outpacing price increases, 

the shortfall will decrease. There is reason to believe that the Postal Service can contain costs. The unit costs of 

Flats increased at or below CPI since FY 2010. In FY 2012, unit cost increased by 0.5 percent, well below the 

change in CPI-U .22

However, the Commission remains concerned about the adverse impact on users of other products. Below cost 

rates for Flats may give a competitive advantage to users of Flats over other retailers. The unit contribution gap 

22 The CPI-U for FY 2012 is 2.07 percent.

 POSTAL REGULATORY COMMISSION 115
between Letters and Flats, and between Carrier Route and Flats have decreased from FY 2011. The gaps between 

Letters and Flats decreased from 18.3 cents in FY 2011 to 17.5 cents in FY 2012. Similarly, the gap between Carrier 

Route and Flats decreased from 15.8 cents in FY 2011 to 14.7 cents in FY 2012.

In response to the Commission’s FY 2010 directive, the Postal Service has taken steps to address the cost coverage 

shortfall. In FY 2012, the Postal Service made improvements with regard to cost and revenue. Nonetheless, several 

commenters argue that the Postal Service has not done enough to curb the shortfall and that the steps it has taken 

are inadequate to close the cost coverage gap in a reasonable time. The Commission finds that the steps taken 

thus far have been helpful but it is concerned that the Postal Service has not quantified the cost savings from 

operational changes designed to reduce Flats costs.23 Consequently, the Commission cannot properly assess the 

likely rate of improvement in the cost coverage shortfall.

It is apparent that the Postal Service has taken remedial steps to address the cost coverage shortfall. If implemented, 

the schedule of price increases presented by the Postal Service coupled with cost changes below CPI-U would 

ensure continued improvement.

ACMA asserts that due to excess capacity, the Postal Service’s long-run marginal cost of Flats overstate the 

resources that are used by Flats. However, it has not offered a comprehensive analysis to quantify the impact of 

excess capacity on Flats attributable cost. As it explained in the FY 2010 ACD, the Commission finds that short-run 

marginal cost is not an appropriate basis for evaluating the adequacy of product revenues.24

The Commission reviewed the Christensen Analysis and the Valpak model. These models rely on assumptions 

about the own‐price elasticity of demand of Standard Mail products. The usefulness of both models would be

significantly improved if estimates of own‐price elasticity of demand were available by product. Given the serious

implications of the pricing of Standard Mail Flats, the Commission recommends that the Postal Service derive 

elasticity estimates to provide for a more realistic assessment of the impact of price changes on contribution.

Some commenters suggest that the Commission should consider the possible effect of price changes for Flats on the 

volume of other products. In particular, they assert the Commission should take into account that Carrier Route and 

Flats are complements and that catalogs, which are often sent as Flats, have a multiplier effect. While the Commission 

is mindful of the possible relationship between Flats and other products, there is insufficient information to identify 

with any reliability what types of mail can be deemed “responsible” for other items in the mailstream.

The commenters also express divergent views as to what steps the Commission should take regarding Standard 

Mail Flats. In response, the Postal Service asserts “some degree of contribution risk is created by raising Flats prices 

too quickly in the near-term” and urges the Commission to “leave its FY 2010 ACD order unchanged, and to allow 

the Postal Service to proceed with its proposed three-year schedule of above-average price increases.” Postal 

Service Reply Comments at 6. The Commission finds that the Postal Service has begun to make progress towards 

addressing the issues raised by the Commission in the FY 2010 ACD. The approach advocated by the Postal Service 

does not require changes to the Commission’s FY 2010 ACD directive.

23 Generally, cost savings programs or initiatives target one or more specific activities to produce cost savings. These programs should have specific 

measurable targets by which the benefits of the program can be evaluated. 24 2010 ACD at 92-93.

116 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
Standard Mail Parcels

The Parcels product did not produce sufficient revenues to cover its attributable costs in FY 2012. The Parcels 

product had an 85.5 percent cost coverage and had a net loss of $49.0 million. This is $62.7 million less than the 

FY 2011 loss of $111.7 million, primarily due to the transfer of a portion of the Parcels product to the competitive 

product list. Unit contribution decreased from negative 15.2 cents in FY 2011 to negative 16.1 cents in FY 2012. 

Both unit attributable costs and unit revenues increased, 6.4 percent and 6.5 percent, respectively.

In Docket No. R2013-1, the Postal Service proposed and the Commission approved an above-average increase of 

3.081 percent. This is the fifth consecutive above-average price increase for the Parcels product.

In Docket No. MC2010-36, the Postal Service requested to change the name of the Standard Mail Not FlatMachinable/Parcels product to Standard Parcels, and to divide it into two categories: Marketing Parcels and 

Fulfillment Parcels. Additionally, the Postal Service requested a transfer of the market dominant commercial 

Standard Mail Fulfillment Parcels to the competitive product list in the Mail Classification Schedule (MCS). These 

changes became effective on January 22, 2012 and are discussed further in Chapter VIII.

In FY 2012, the revenue generated from Standard Mail Parcels was not sufficient to recover the attributable cost of 

the product or make a contribution to institutional costs. The Commission finds that the Postal Service’s approach 

to ending the intra-class cross-subsidy is appropriate and it should continue using its pricing flexibility to do so. The 

Commission also encourages the Postal Service to reduce Parcels costs to close the cost coverage gap.

High Density and Saturations Letters

In FY 2012, the High Density and Saturation Letters product had a cost coverage of 222.2 percent, and contributed 

7.6 cents per piece to institutional costs. The product contributed a total of $423.9 million to institutional costs, 

with commercial pieces contributing $412.7 million and nonprofit pieces contributing $11.3 million.

Valpak argues that the pricing of the High Density and Saturation Letters product is arbitrary and capricious, in 

violation of 39 U.S.C. 3622; fails to apportion the costs of Standard Mail fairly in violation of 39 U.S.C. 101(d); and 

unfairly discriminates against High Density/Saturation Letters, in violation of 39 U.S.C. 403(c). Valpak Comments 

at 121-122. Valpak urges the Commission to find High Density/Saturation Letter pricing illegal, and to enter a 

remedial order to roll back the January 27, 2013 price increases for this product. Id. at 120.

Valpak contends that there is no rational basis for the Postal Service’s pricing decisions regarding the High Density 

and Saturation Letters product. It asserts that the Postal Service’s pricing is not cost-based because the unit 

revenue of the High Density and Saturation Letters product increased more since FY 2008 than that of Flats and 

High Density and Saturation Flats and Parcels even though the High Density and Saturation Letters product is the 

only Standard Mail product that had a unit cost decrease over the same period. Id. at 111-113. Valpak also asserts 

that the pricing of the High Density and Saturation Letters product is neither demand-based nor an attempt by 

the Postal Service to equalize cost coverages for the Standard Mail products. Id. at 107-111, 114-115. To support 

 POSTAL REGULATORY COMMISSION 117
its assertions, Valpak notes that the Postal Service gave high elasticity products such as the High Density and 

Saturation Letters product higher increases than low elasticity products. Id. Valpak also contends that differences 

in cost coverage between Standard Mail products cannot be explained by content of the mail since all Standard 

Mail products are primarily used for advertising. Id. at 115.

The Commission examined cost coverages, unit costs, unit revenues, unit contributions and other relevant 

information for the Standard Mail products. The Postal Service is accorded pricing flexibility under title 39. Pricing 

of market dominant products under the PAEA is guided by various objectives and factors. Postal Service pricing is 

not limited to a cost based or demand based approach. In the past, the Postal Service has used its pricing flexibility 

to offer incentives to mailers of High Density and Saturation Letters. For example, in FY 2012, the Postal Service 

offered mailers of this product discounts on incremental volume through its Saturation and High Density Mail 

Incentive Program. Incentives of this kind have the effect of mitigating price increases. The Commission finds that 

the pricing of High Density and Saturation Letters is reasonable.

High Density and Saturation Flats and Parcels

Revenues for the High Density and Saturation Flats/Parcels product exceeded its attributable costs, which resulted 

in cost coverage of 217.3 percent in FY 2012. The product as a whole contributed $1.1 billion to the institutional cost 

of the Postal Service. Table VII-18 shows the volume and contribution distribution of High Density and Saturation 

Flats and High Density and Saturation Parcels.

Table VII–18—FY 2012 High Density and Saturation Flats and Parcels 

Volume and Contribution by Shape (000)

Flats Parcels Total

Volume 11,769,382 893 11,770,275 

Contribution $1,055,830 $(148) $1,055,683 

Source: PRC-ACR2012-LR1.

Table VII-18 shows that Flats comprise more than 99 percent of the product contributing $1.1 billion. In contrast, 

the Parcel portion shows a loss of $148 thousand.

In Docket No. R2013-1, the Postal Service proposed and the Commission approved below average price increases 

for the High Density and Saturation Flats/Parcels product. See PRC-R2013-1-LR6.

Carrier Route

In FY 2012, revenues from the Standard Mail Carrier Route product (which includes letters, flats, and parcels) 

exceeded the product’s attributable costs with a cost coverage of 130.8 percent. The Carrier Route product 

contributed $529 million toward the Postal Service’s institutional costs. In FY 2012 unit attributable costs increased 

by 7.3 percent, while unit revenues increased by 3.4 percent. The nonprofit component of the Carrier Route 

product did not cover its attributable costs, which resulted in a negative contribution of $19.2 million.

118 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
Worksharing

Table VII-19 shows the passthroughs by shape for dropship Carrier Route, High Density, and Saturation categories. 

All of the passthroughs are less than 100 percent.

Table VII—19—Standard Mail Carrier Route, High Density, and Saturation by Shape 

(Commercial and Nonprofit) Workshare Discounts and Benchmarks

Type of Worksharing (Benchmark)

Year-End Discount 

(cents)

Unit Cost 

Avoidance 

(cents)

Passthrough

Presorting (cents/piece)

High Density Letters1 (Carrier Route Letters) 7.2 27.4 26.3%

High Density Flats1 (Carrier Route Flats) 4.7 5.4 87.0%

High Density Parcels1 (Carrier Route Parcels) 13.9 141.0 9.9%

DropShip (cents/pound)

DNDC Letters (Origin Letters) 16.1 28.4 56.7%

DSCF Letters (Origin Letters) 20.9 35.5 58.9%

DNDC Flats (Origin Flats) 16.1 20.6 78.2%

DSCF Flats (Origin Flats) 20.9 23.6 88.6%

DDU Flats (Origin Flats) 25.2 28.3 89.0%

DNDC Parcels (Origin Parcels) 22.4 151.3 14.8%

DSCF Parcels (Origin Parcels) 46.2 199.7 23.1%

DDU Parcels (Origin Parcels) 64.1 219.6 29.2%

1 For this category, the discount for commercial and nonprofit differs. For the nonprofit discount and passthrough, 

see Table VII-23.

Source: PRC-ACR2012-LR3.

Table VII-20, Table VII-21, and Table VII-22 show the passthroughs for the remaining products: Letters, Flats, and 

Parcels. The discounts for twelve workshare categories exceed avoided cost. In its discussion of discounts that 

exceed avoided costs, the Commission follows the order of the tables as closely as practicable. Accordingly, the 

Commission first discusses Letters, then Flats, and finally the Parcels product.

Some nonprofit workshare discounts differ from the corresponding commercial workshare discounts. This is 

discussed in the subsection below entitled Commercial and Nonprofit Workshare discounts.

 POSTAL REGULATORY COMMISSION 119
Table VII—20—Standard Mail Letters and Flats (Commercial and Nonprofit)

Presorting/Barcoding Workshare Discounts and Benchmarks

Type of Worksharing (Benchmark) Year-End Discount

(cents)

Unit Cost Avoidance

(cents) Passthrough

Standard Mail Letters

Standard Mail Automation Letters

Presorting (cents/piece)

Automation AADC Letters

(Automation Mixed AADC Letters) 1.6 2.1 76.2%

Automation 3-Digit Letters

(Automation AADC Letters) 0.2 0.4 50.0%

Automation 5-Digit Letters

(Automation 3-Digit Letters) 1.8 2.0 90.0%

 Barcoding (cents/piece)

Automation Mixed AADC Letters

(Non-automation Machinable Mixed ADC Letters) 0.3 (0.3) -100.0%

 Standard Mail Non-automation Letters

Presorting (cents/piece)

Non-automation AADC Machinable Letters

(Non-automation Mixed AADC Machinable Letters) 1.6 1.8 88.9%

Non-automation ADC Non-machinable Letters

(Non-automation Mixed ADC Non-machinable Letters) 9.7 8.0 121.3%

Non-automation 3-Digit Non-machinable Letters

(Non-automation ADC Non-machinable Letters) 3.9 2.7 144.4%

Non-automation 5-Digit Non-machinable Letters

(Non-automation 3-Digit Non-machinable Letters) 9.3 7.7 120.8%

Standard Mail Flats

Standard Mail Automation Flats

Presorting (dollars/piece)

Automation ADC Flats

(Automation Mixed ADC Flats) 1.0 2.2 45.5%

Automation 3-Digit Flats

(Automation ADC Flats) 5.6 5.9 94.9%

Automation 5-Digit Flats1

(Automation 3-Digit Flats) 8.5 8.7 97.7%

 Barcoding (cents/piece)

Automation ADC Flats

(Automation Mixed ADC Flats) 5.7 4.5 126.7%

 Standard Mail—Non-automation Flats

Presorting (cents/piece)

Non-automation ADC Flats

(Non-automation Mixed ADC Flats) 3.3 5.9 55.9%

Non-automation 3-Digit Flats1

(Non-automation ADC Flats) 5.8 6.1 95.1%

Non-automation 5-Digit Flats1

(Non-automation 3-Digit Flats) 8.2 5.8 141.4%

Source: PRC-ACR2012-LR3.

1 For this category, the discount for commercial and nonprofit differs. For the nonprofit discount and passthrough, see Table VII-23.

120 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
Table VII—21—Standard Mail Parcels (Commercial and Nonprofit) 

Presorting/Barcoding Workshare Discounts and Benchmarks

Type of Worksharing (Benchmark) Year-End Discount 

(cents)

Unit Cost Avoidance 

(cents) Passthrough

Nonprofit Standard Mail Parcels1

Presorting (cents/piece)

NDC Machinable Parcels

(Mixed NDC Machinable Parcels) 36.9 53.6 68.8%

5-Digit Machinable Parcels

(NDC Machinable Parcels) 25.0 55.0 45.5%

NDC Irregular Parcels

(Mixed NDC Irregular Parcels) 36.9 15.2 242.8%

SCF Irregular Parcels

(NDC Irregular Parcels) 34.4 34.6 99.4%

5-Digit Irregular Parcels

(SCF Irregular Parcels) 2.5 46.5 5.4%

 Pre-barcoding (cents/piece)2

Mixed NDC Machinable Barcoded Parcels3

(Mixed NDC Machinable Non-barcoded Parcels) 6.4 3.9 164.1%

Mixed NDC Irregular Barcoded Parcels3

(Mixed NDC Irregular Non-barcoded Parcels) 6.4 3.9 164.1%

Standard Mail Marketing Parcels

Presorting (cents/piece)

NDC Marketing Parcels4

(Mixed NDC Marketing Parcels) 41.5 30.8 134.7%

SCF Marketing Parcels4

(NDC Marketing Parcels) 37.2 27.5 135.3%

5-Digit Marketing Parcels4

(SCF Marketing Parcels) 2.4 45.4 5.3%

 Barcoding (cents/piece)2

Mixed NDC Barcoded Marketing Parcels3

(Mixed NDC Non-barcoded Marketing Parcels) 6.4 3.9 164.1%

Source: PRC-ACR2012-LR3.

1 On January 22, 2012, the Postal Service transferred Commercial Standard Mail parcels to the Competitive Product list.

2 The Postal Service charges a surcharge for non-barcoded pieces.

3 The Postal Service Standard Mail Parcel mail processing cost model does not estimate costs separately for barcoded and 

non-barcoded pieces. The Postal Service uses a barcoding avoidable cost for BPM as a proxy. See Table VII-27, barcoding 

workshare discounts.

4 For this category, the discount for commercial and nonprofit differ. For the nonprofit discount and passthrough, see Table VII-23.

 POSTAL REGULATORY COMMISSION 121
Table VII—22—Standard Mail Letters, Flats, and Parcels 

Dropship Discounts and Benchmarks

Type of Worksharing (Benchmark)

Year-End 

Discount 

(cents)

Unit Cost 

Avoidance 

(cents)

Passthrough

Standard Mail Letters

Drop Ship (cents/pound)

DNDC Letters (Origin Letters) 16.1 28.4 56.7%

DSCF Letters (Origin Letters) 20.9 35.5 58.9%

Standard Mail Flats

Drop Ship (cents/pound)

DNDC Flats (Origin Flats) 16.1 20.6 78.2%

DSCF Flats (Origin Flats) 20.9 23.6 88.6%

Standard Mail Machinable Parcels

Drop Ship (cents/pound)

DNDC Machinable Parcels (Origin Machinable Parcels) 22.4 151.3 14.8%

DSCF Machinable Parcels (Origin Machinable Parcels) 46.2 199.7 23.1%

DDU Machinable Parcels (Origin Machinable Parcels) 64.1 219.6 29.2%

Standard Mail Marketing Parcels

Drop Ship (cents/pound)

DNDC Marketing Parcels (Origin Marketing Parcels) 22.4 151.3 14.8%

DSCF Marketing Parcels (Origin Marketing Parcels) 46.2 199.7 23.1%

DDU Marketing Parcels (Origin Marketing Parcels) 64.1 219.6 29.2%

Standard Mail Irregular Parcels

Drop Ship (cents/pound)

DNDC Irregular Parcels (Origin Irregular Parcels) 22.4 151.3 14.8%

DSCF Irregular Parcels (Origin Irregular Parcels) 46.2 199.7 23.1%

DDU Irregular Parcels (Origin Irregular Parcels) 64.1 219.6 29.2%

Source: PRC-ACR2012-LR3.

Letters

Four discounts for Standard Mail Letters exceeded avoided cost in FY 2012: (1) non-automation ADC non-machinable 

letters; (2) non-automation 3-Digit non-machinable letters; (3) non-automation 5-Digit non-machinable letters; 

and (4) automation mixed AADC letters.

The Postal Service justifies the first three of these passthroughs by citing the exception granted in 39 U.S.C. 3622(e)

(2)(B). The Postal Service notes that it intends to reduce these discounts until the discounts equal their avoided 

costs. It does not explain the nature or extent of the rate shock higher passthroughs would cause. The Commission 

finds that the Postal Service has not demonstrated that these excessive discounts qualify for the exception cited. 

Accordingly, the Postal Service should either align the discounts with avoided cost when it files its next general 

market dominant price adjustment, or adequately support an applicable statutory exception.

122 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
One worksharing category is problematic; the passthrough for automation mixed AADC letters is negative. The 

negative avoided cost differential (-0.3¢) is the result of the Postal Service’s estimated cost for an automation 

mixed AADC letter exceeding the estimated cost for a non-automation machinable mixed AADC letter. Automation 

mixed AADC letters should be less costly than non-automation machinable mixed AADC letters. Thus, the Postal 

Service concludes that the costs are anomalous. 2012 ACR at 21 The Commission agrees. For this reason, the 

Commission cannot determine whether the discount is consistent with section 3622(e).

In several previous ACDs, the avoided cost estimate between automation and non-automation mixed AADC 

machinable letters was negative. However, the Commission approved a modified version of Proposal Nine in 

Docket No. RM2011-5, that more accurately reflects avoided cost which resulted in a positive estimate for this 

avoided cost in FY 2011. However, in FY 2012, the avoided cost estimate is once again negative. The Postal Service 

explains that this anomalous result stems from updating the model approved in Docket No. RM2012-2 Proposal 

17 with FY 2012 productivity estimates. Response to CHIR No.4, question 6. The Postal Service explains that ISS 

productivities increased by 112 percent, thereby reducing the cost of applying a barcode to a mixed ADC nonautomation machinable piece, while at the same time Outgoing BCS secondary productivity dropped 30 percent, 

thereby increasing the cost of sorting automation mixed AADC pieces. 2012 ACR at 21. The Postal Service should 

reexamine the anomaly to better understand the costs associated with these workshare categories.

Flats

Two discounts for Standard Mail Flats exceeded their avoided cost in FY 2012: the pre-barcoding discount for 

automation mixed ADC flats and the presort discount for 5-Digit non-automation flats.

The Postal Service justifies the excessive pre-barcoding discount for automation mixed ADC flats under section 

3622(e)(2)(D), i.e., a reduction would impede operational efficiency. In previous ACRs the Postal Service explained 

that the excessive discount is necessary to encourage pre-barcoding of flats as a way to support the implementation 

of the Flats Sequencing System (FSS) program. Since the Postal Service’s deployment of FSS machines has just been 

completed, there continues to be a need for a pre-barcoding incentive. In FY 2011, the Postal Service reduced 

the discount by 0.5 cents. In Docket No. R2013-1, the Postal Service proposed and the Commission approved 

an additional 0.2 cent reduction of the discount. The Postal Service notes its intention to continue to phase this 

discount out over time. 2012 ACR at 22. The Commission finds the pricing of this discount justified.

In Docket No. R2012-3, the presort discount for 5-Digit non-automation flats was set at its avoided cost. However, 

a decrease in avoided costs between FY 2011 and FY 2012 caused the passthroughs to exceed 100 percent. 

In Docket No. R2013-1, the discount was again set at its estimated FY 2011 avoided costs. However, the cost 

avoidance in FY 2012 decreased by two cents from its FY 2011 estimate. The Postal Service justifies the excessive 

discount under section 3622(e)(2)(B), i.e., rate shock. It contends that moving the discount in line with the cost 

avoidance immediately could lead to rate shock. Additionally, the Postal Service alleges that a further reduction in 

the discount is inadvisable given that the significant one-year reduction in the cost avoidance could be temporary.

 POSTAL REGULATORY COMMISSION 123
Section 3622(e) requires that workshare discounts not exceed avoided costs, unless they qualify for at least one of 

the exceptions in that section. The Postal Service does not quantify the impact of any rate shock. By not quantifying 

the impact of any rate shock, the Postal Service is not adequately supporting the exception. The Commission finds 

that the Postal Service has not demonstrated that this presort discount for 5-Digit non automation flats qualifies for 

any of the exceptions authorized by section 3622(e)(2). Therefore, the appropriate action is for the Postal Service 

to either align the discount with avoided costs when it files its next general market dominant price adjustment, or 

adequately support an applicable exception.

Parcels

Six worksharing discounts for Standard Mail Parcels exceeded their avoided costs in FY 2012. The following three 

presort discounts exceeded avoided costs: (1) NDC Irregular Parcels25 , 36.9 cents; (2) NDC Marketing Parcels, 41.5 

cents; and (3) SCF Marketing Parcels, 37.2 cents. In addition, the following three pre-barcoding discounts exceeded 

their avoided costs: (1) Mixed NDC Machinable Barcoded Parcels, 6.4 cents; (2) Mixed NDC Irregular Barcoded 

Parcels, 6.4 cents; and (3) Mixed NDC Barcoded Marketing Parcels, 6.4 cents.

The Postal Service justifies the passthrough of the three presort discounts by citing the exception granted in 39 

U.S.C. 3622(e)(2)(B). However, it has not described the nature or extent of the rate shock that would occur if rates 

were to be adjusted to equal avoided costs. The Commission finds that the Postal Service has not demonstrated 

that the excessive discounts for NDC Irregular Parcels, NDC Marketing Parcels and SCF Marketing Parcels qualified 

for the exception cited. The appropriate action is for the Postal Service to either align these discounts with avoided 

costs when it files its next general market dominant price adjustment, or adequately support an applicable 

statutory exception.

The Postal Service justifies the barcoding discounts in excess of estimated avoided cost on the basis of efficient 

operations, citing section 3622(e)(2)(D). Specifically, the Postal Service wants to promote a fully pre-barcoded 

incoming parcel mailstream which would allow the elimination of keying stations on parcel sorters, thereby 

increasing the efficiency of postal operations. 2012 ACR at 24. The Postal Service applies a surcharge to all Standard 

Mail Parcels that do not bear a correct barcode. The Postal Service notes it has plans to soon require barcodes on 

all ground parcels. The Commission finds that for FY 2012, the pricing of the pre-barcoding discounts for Standard 

Mail Parcels is justified.

Standard Nonprofit Mail

39 U.S.C. 3626(a)(6) requires nonprofit prices to be set in relation to their commercial counterparts regardless 

of nonprofits’ independent costs. In Docket No. R2012-3, nonprofit prices were set to yield per-piece average 

revenues that were 60 percent of commercial per piece average revenues at the class level. The Commission 

calculates that in FY 2012, the actual per piece revenue from Standard Mail nonprofit pieces was 58.97 percent of 

Standard Mail commercial per piece revenue.

25 For this category, the discount applies only to nonprofit. Its commercial counterpart was moved to the Competitive Product List. See Docket No. 

MC2010-36.

124 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
The prices approved in Docket No. R2013-1 are expected to produce average per piece revenue for nonprofit mail 

equal to 60 percent of the average per-piece revenue for commercial mail. No action, therefore, is warranted.

Commercial and Nonprofit Workshare Discounts

The Commission’s review of the Postal Service’s annual rate adjustment filed as Docket No. R2013-1 noted that 

some proposed worksharing discounts for nonprofit Standard Mail differed from their Commercial Standard Mail 

counterparts. In Order No. 1541, the Commission directed the Postal Service either to provide justification as to 

why it views the different discount levels of Standard Mail consistent with 39 U.S.C. 403(c) and not contrary to the 

decision in National Easter Seal Society26 or to revise the discounts to make them consistent.

The Postal Service responded by proposing new discounts that narrowed the gap between the two discounts 

slightly. It justified the remaining discrepancy by explaining that the varying presort discounts arose from the 

complex task of designing rates that comply with the 60 percent commercial revenue per piece benchmark set 

forth in 39 U.S.C. 3626(a)(6). It stated that occasionally, compliance with the 60 percent benchmark precluded it 

from making nonprofit presort discounts identical to commercial presort discounts without setting the nonprofit 

base rate higher than would be most efficient or otherwise preferable from a policy perspective.27 The Commission 

accepted the Postal Service’s rationale in Order No. 1573, determining that in the circumstances of that proceeding, 

the justification provided was reasonable. It also directed the Postal Service to identify when nonprofit discounts 

differ from commercial discounts in the future and justify those differences accordingly. Order No. 1573 at 8.

The Association of Nonprofit Mailers (ANM) submitted comments in this docket regarding the legal sufficiency 

of the Postal Service’s justification and the Commission’s acceptance of that justification in Order No. 1573. The 

Commission’s analysis of ANM’s comments are discussed in detail in Chapter III of this report. With respect to 

compliance with 39 U.S.C. 3622(e), the Commission determines that the finding for these nonprofit discounts is 

identical to its finding for commercial discounts. Where nonprofit discounts differ from commercial discounts the 

passthroughs are reflected in Table VII-23.

26 National Easter Seal Society v. USPS, 656 F. 2d 754 (D.C. Cir. 1981). 27 Docket No. R2013-1, United States Postal Service Response to Order No. 1541, November 26, 2012 (Response) at 7.

 POSTAL REGULATORY COMMISSION 125
Table VII—23—Standard Mail Nonprofit 

Workshare Discounts and Benchmarks

Type of Worksharing (Benchmark)

Year-End

Commercial Discount 

(cents)

Year-End Nonprofit 

Discount 

(cents)

Unit Cost 

Avoidance 

(cents)

Nonprofit

Passthrough

Standard Mail Letters

Barcoding (cents/piece)

Automation Mixed AADC Letters

(Non-automation Machinable Mixed ADC Letters) 0.3 0.6 (0.3) -200.0%

Standard Mail Flats

Presorting (cents/piece)

Automation 5-Digit Flats 

(Automation 3-Digit Flats) 8.5 7.6 8.7 87.4%

Non-automation 3-Digit Flats 

(Non-automation ADC Flats) 5.8 4.8 6.1 78.7%

Non-automation 5-Digit Flats 

(Non-automation 3-Digit Flats) 8.2 8.1 5.8 139.7%

Standard Mail Marketing Parcels

Presorting (cents/piece)

NDC Marketing Parcels 

(Mixed NDC Marketing Parcels) 41.5 37.6 30.8 122.1%

SCF Marketing Parcels 

(NDC Marketing Parcels) 37.2 34.4 27.5 125.1%

5-Digit Marketing Parcels 

(SCF Marketing Parcels) 2.4 2.2 45.4 4.8%

Standard Mail High Density and Saturation Letters

 Barcoding (cents/piece)

High Density Letters (Carrier Route Letters) 7.2 6.9 27.4 25.2%

Standard Mail High Density and Saturation Flats/Parcels

Presorting (cents/piece)

High Density Flats (Carrier Route Flats) 4.7 4.5 5.4 83.3%

High Density Parcels (Carrier Route Parcels) 13.9 17.4 141.0 12.3%

Source: PRC-ACR2012-LR3.

Standard Mail Incentive Programs

There were two Standard Mail Incentive programs in effect during FY 2012: (1) the Saturation and High Density 

Mail Incentive Program; and (2) the 2012 Mobile Commerce and Personalization Promotion Program.

The Saturation and High Density Mail Incentive Program began on January 1, 2011, and ended on December 

31, 2012. The program was designed to encourage increased mail usage from existing direct mail customers by 

providing a discount on incremental volume. The Postal Service gave $7.2 million in rebates to 336 customers. 

Rebate earners mailed 1.5 billion pieces of Saturation and High Density letter and flat mail pieces during the 

program period, which represented approximately 9 percent of total Saturation and High Density letter and flat 

volume over the same time period.

126 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
The 2012 Mobile Commerce and Personalization Program was in effect from July 1, 2012, to August 31, 2012. The 

primary goal of the promotion was to generate awareness of ways in which mobile technology can be integrated 

into mail campaigns. The program provided a discount on the eligible postage for commercial First-Class Mail 

and Standard Mail letters, postcards and flats that included a two-dimensional mobile barcode inside or on the 

mailpiece. The mobile barcode was required to point to a mobile-optimized website that either facilitated mobile 

commerce or was personalized to the recipient. The Postal Service paid out $13.2 million in rebates for 3.17 billion 

Standard Mail pieces.

Package Services

Intoduction

The Package Services class consists of five products: (1) Single-Piece Parcel Post; (2) Bound Printed Matter (BPM) 

Flats; (3) Bound Printed Matter (BPM) Parcels; (4) Media Mail/Library Mail; and (5) Inbound Surface Parcel Post (at 

UPU rates).28 These products have common characteristics, including that they are not sealed against inspection 

and do not receive preferential handling or transportation. Generally, this class consists of parcels containing 

merchandise, although heavier catalogs and directories may also be mailed within the Package Services class. In 

FY 2012, 645.2 million pieces were mailed as Package Services. This accounts for less than one-half of one percent 

of total domestic market dominant mail volume.29

The principal FY 2012 findings for Package Services are:

 The attributable costs for the Package Services class, as a whole, exceeded revenues by $38.0 million, 

resulting in a cost coverage of 97.7 percent.

 Single-Piece Parcel Post revenues did not cover attributable costs by $65.9 million, resulting in a cost 

coverage of 92.2 percent.

 Media Mail/Library Mail revenues did not cover attributable costs by $55.5 million, resulting in a cost 

coverage of 85.3 percent.

 Four worksharing discounts exceeded avoided costs.

 Two of these discounts were properly justified under section 3622(e).

 Two of these discounts were not properly justified under section 3622(e).

Financial Analysis

Table VII-24 displays the FY 2012 financial performance for the Package Services class. Table VII-24 shows that 

the Package Services class had a cost coverage of 97.7 percent. Although the revenues for Package Services failed 

to cover attributable costs for the fourth consecutive year, the cost coverage for Package Services improved 3.4 

percentage points over FY 2011. Figure VII-5 shows that the unit loss for Package Services is shrinking.

28 The Inbound Surface Parcel Post (at UPU rates) product is discussed in the Market Dominant International Mail Section. 29 See Library Reference PRC-ACR2012-NP-LR1.

 POSTAL REGULATORY COMMISSION 127
Table VII–24—Fiscal Year 2012 Volume, Revenue, Cost and Cost Coverage for Package Services

Volume

(000)

Revenue

($ 000)

Attributable 

Cost 

($ 000)

Contribution 

to Institutional 

Cost

($ 000)

Revenue per 

Piece

 (Cents)

Cost per 

Piece

(Cents)

Unit

Contribution 

(Cents)

Cost 

Coverage

Single-Piece 

Parcel Post 70,970.777 774,437.727 840,358.984 (65,921.257) 1,091.206 1,184.092 (92.885) 92.2%

Inbound 

Surface Parcel 

Post (at UPU 

Rates) 1

1,114.928 20,908.212 11,593.897 9,314.315 1,875.297 1,039.879 835.419 180.3%

Bound Printed 

Matter Flats 230,521.640 186,886.940 138,301.818 48,585.122 81.071 59.995 21.076 135.1%

Bound Printed 

Matter Parcels 243,307.816 306,650.521 281,152.111 25,498.410 126.034 115.554 10.480 109.1%

Media and 

Library Mail 100,421.982 321,245.741 376,769.966 (55,524.225) 319.896 375.187 (55.291) 85.3%

Inbound 

International 

NSA Mail Intl1

8.024 17.890 3.267 14.623

Total 645,230.239 1,610,147.031 1,648,180.043 (38,033.012) 249.546 254.441 (5.894) 97.7%

Source: PRC-ACR2012--LR1.

1 Inbound Surface Parcel Post (at UPU rates) and Inbound International NSA Mail are discussed in the Market Dominant International Mail Section. Cents

-50

0

50

100

150

200

250

300

Fiscal Year

FY 2010 FY 2011 FY 2012

Unit Revenue Unit Cost Unit Loss

Source: PRC-ACR2012-LR5

Figure VII–5—Package Services Financial Performance

128 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
BPM Flats, BPM Parcels, and Inbound Surface Parcel Post (at UPU rates) were the only Package Services products 

with revenues exceeding attributable costs in FY 2012. The remaining two products, Single Piece Parcel Post and 

Media Mail/Library Mail, had an overall negative contribution of $121.4 million.

Single-Piece Parcel Post

The FY 2012 cost coverage for Single-Piece Parcel Post was 92.2 percent, a 2.9 percentage point increase from FY 

2011. This is the sixth consecutive year that Single-Piece Parcel Post did not generate sufficient revenues to cover 

attributable costs. Unit attributable costs increased by 14.7 cents and unit revenues increased by 47.5 cents, which 

led to an increase in contribution of 32.7 cents per piece from FY 2011 to FY 2012. Despite this improvement, 

Single-Piece Parcel Post’s contribution remained negative. In FY 2012, Single-Piece Parcel Post’s contribution was 

negative $65.9 million. 

During FY 2012, the Commission conditionally approved the Postal Service’s request to: (1) remove Single-Piece 

Parcel Post from the market dominant product list; (2) add a similar product, Parcel Post, to the competitive 

product list; and (3) leave the Alaska Bypass Service30 subcategory of Single-Piece Parcel Post on the market 

dominant product list as a Package Services product offering.31 On January 27, 2013, Single-Piece Parcel Post was 

removed from the market dominant product list.32 Contemporaneously, Alaska Bypass Service was added to the 

market dominant product list as a Package Services product offering.33

BPM Flats

In FY 2012, BPM Flats had a cost coverage of 135.1 percent and contributed $48.6 million toward the Postal 

Service’s institutional costs. Compared to FY 2011, unit revenues decreased by 0.4 cents, while unit attributable 

costs increased by 10.2 cents, which led to a decline in contribution of 10.6 cents per piece. Nevertheless, the 

revenues for BPM Flats continue to cover attributable costs each year. 

BPM Parcels

In FY 2012, BPM Parcels had a cost coverage of 109.1 percent and contributed $25.5 million toward the Postal 

Service’s institutional costs. Cost coverage for BPM Parcels improved 10.3 percentage points from FY 2011. This is 

the first year since FY 2009 that the revenues for BPM Parcels covered attributable costs.

Media Mail/Library Mail

In FY 2012, Media Mail/Library Mail had a cost coverage of 85.3 percent, an 8.1 percentage point increase from FY 

2011. This is the sixth consecutive year that Media Mail/Library Mail did not generate sufficient revenues to cover 

attributable costs. 

30 Alaska Bypass Service allows shippers to send shrink-wrapped pallets of goods within Alaska from designated “hub points” to designated “bush points.” 31 Docket No. MC2012-13, Order No. 1411, Order Conditionally Granting Request to Transfer Parcel Post to the Competitive Product List, July 20, 2012. 

The approval was conditioned on the Postal Service filing a competitive rate adjustment demonstrating that Parcel Post rates satisfied section 3633(a)

(2). Id. at 13. 32 See Docket No. CP2013-3, Order No. 1536, Order Approving Changes in Rates of General Applicability for Competitive Products, November 8, 2012 at 16. 33 Docket No. R2013-1, Order on Price Adjustments for Market Dominant Products and Related Mail Classification Changes, November 16, 2012 at 69 

(Order No. 1541). 

 POSTAL REGULATORY COMMISSION 129
In Response to CHIR No. 5, question 26, the Postal Service explains that revenues for Media Mail/Library Mail 

continue to fail to cover attributable costs primarily due to price cap constraints.34 In addition, the Postal Service 

asserts that changes to the mail mix over the last five years may have contributed to unit costs increases that 

outpace inflation. Response to CHIR No. 5, question 26. The Postal Service states that the mail mix changes may 

indicate a decline in the percentage of Media Mail/Library Mail volume derived from large-volume shippers and 

an increase in the percentage derived from small-volume shippers, including internet sellers. ld. The Postal Service 

also suggests that the Media Mail/Library Mail pricing structure does not allow for corresponding increases in unit 

revenues to counter these mail mix changes.35 ld.

Commission Analysis. 

The Package Services class as a whole, as well as Single-Piece Parcel Post and Media Mail/Library Mail individually, 

did not cover attributable costs or make a contribution to institutional costs. Although the attributable costs for 

Package Services continue to exceed revenues, the Commission observes that the cost coverages for the two 

products that failed to cover attributable costs in FY 2012, improved over FY 2011. In addition, the changes made 

to the Single-Piece Parcel Post product should allow the Package Services class as a whole to improve cost coverage 

in upcoming fiscal years and make a contribution to institutional costs. 

The Single-Piece Parcel Post product was eliminated from this class effective January 27, 2013. As a result of the 

recent transfer, the Commission directs the Postal Service to report FY 2013 revenue, volume, and attributable costs 

data for Single-Piece Parcel Post for the period of October 1, 2012 to January 26, 2013 in its FY 201 ACR. Similarly, 

the Commission directs the Postal Service to report revenue, volume, and attributable cost data for the Alaska 

Bypass Service product for the period of January 27, 2013 to September 30, 2013 in its FY 2013 ACR.

With respect to Media Mail/Library Mail, the Postal Service’s most recent price adjustments indicate that the 

Postal Service is attempting to increase the cost coverage of Media Mail/Library Mail by proposing above average 

price increases subject to the constraints of the annual price cap.36 In addition, the Postal Service states that 

its cost saving initiatives, like Network Rationalization,37 will help to reduce the product’s unit costs, leading to 

improved cost coverage. See Response to CHIR No. 5, question 26. 

The Postal Service should continue pricing Media Mail/Library Mail in a way that improves cost coverage. In 

addition, the Commission directs the Postal Service to discuss the effects of its Network Rationalization on Media 

Mail/Library Mail’s unit costs in its FY 2013 ACR. 

34 Responses of the United States Postal Service to Questions 1-5, 17, 19-21, 23-26, 28-30, and 32-36 of Chairman’s Information Request No. 5, February 

6, 2013 (Response to CHIR No. 5). 35 Media Mail/Library Mail has a statutory restriction that requires its rates to not vary with distance. See 39 U.S.C. 3683. Generally, parcel products have 

prices that are based on zone (distance transported) and weight. 36 See Docket No. R2011-2, Order No. 675, Order Revising Postal Service Market Dominant Price Adjustments, February 16, 2011; Docket No. R2012-3, 

Order No. 987, Order on Price Adjustments for Market Dominant Products and Related Mail Classification Changes, November 22, 2011; Order No. 

1541. The approved rate increases went into effect on April 17, 2011, January 22, 2012, and January 27, 2013, respectively. 37 See Docket No. N2012-1, Advisory Opinion on Mail Processing Network Rationalization Service Changes, September 28, 2012 (Network Rationalization).

130 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
Worksharing

Three Package Services products offered workshare discounts in FY 2012: Media Mail/Library Mail, BPM Flats, and 

BPM Parcels. 

Media Mail/Library Mail 

There were six discounts offered for Media Mail/Library Mail in FY 2012. Table VII-25 shows the FY 2012 discounts, 

avoided costs, and passthroughs for Media Mail/Library Mail.

Table VII–25—Media/Library Mail 

Workshare Discounts and Benchmarks

Type of Worksharing (Benchmark)

FY 2012

Year-End 

Discount 

(cents)

Unit Cost 

Avoidance 

(cents)

Passthrough1

Media Mail

Presorting (cents/piece)

Basic (Single-Piece) 40.00 30.00 133.3%

5-Digit (Basic) 34.00 67.00 50.7%

Barcoding (cents/piece)

Single-Piece Barcoded 3.00 3.90 76.9%

Library Mail

Presorting (cents/piece)

Basic (Single-Piece) 38.00 30.00 126.7%

5-Digit (Basic) 33.00 67.00 49.3%

Barcoding (cents/piece)

Single-Piece Barcoded 

(Single-Piece Non-barcoded) 3.00 3.90 76.9%

Source: PRC-ACR2012-LR5.

1 The calculated passthroughs are based on rounded unit avoided costs.

The Basic presort discount for both Media Mail and Library Mail exceeded avoided costs in FY 2012. In FY 2011, 

these discounts were 83.0 percent and 78.7 percent, respectively. The Postal Service notes that the significant 

passthrough increase is a result of the new cost avoidance calculation methodology approved in Order No. 1153.38

Nonetheless, the Postal Service justifies these passthroughs under section 3622(e)(2)(C) since Media Mail and 

Library Mail are products consisting exclusively of mail matter of educational, cultural, scientific, or informational 

value (ECSI). The Postal Service explains that it plans to move the discounts toward their new unit cost avoidances 

over time.

38 See Docket No. RM2012-1, Order No. 1153, Order Concerning Analytical Principles for Periodic Reporting (Proposals Nine Through Fifteen), January 20, 

2012, at 14-15 .

 POSTAL REGULATORY COMMISSION 131
BPM Flats and BPM Parcels

In FY 2012, there were 15 discounts offered for BPM Flats and 15 discounts for BPM Parcels. Table VII-26 and Table 

VII-27 show the FY 2012 discounts, avoided costs, and passthroughs for BPM Flats and BPM Parcels, respectively.

Table VII–26—Bound Printed Matter Flats Workshare Discounts and Benchmarks

Type of Worksharing

(Benchmark)

FY 2012

Year-End 

Discount 

(cents)

Unit Cost Avoidance 

(cents) Passthrough3

Presorting (cents/piece)1

Basic Flats (Single-Piece Flats) 34.4 See Note 1 N/A

Carrier Route Flats (Basic Flats) 9.8 15.1 64.9%

Presorting (cents/pound)1 

Basic, Carrier Route Flats (Single-Piece Flats)

Zones 1 & 2 4.1 See Note1 N/A

Zone 3 5.5 See Note1 N/A

Zone4 5.3 See Note1 N/A

Zone 5 6.0 See Note1 N/A

Zone 6 6.2 See Note1 N/A

Zone 7 6.2 See Note1 N/A

Zone 8 7.0 See Note1 N/A

Barcoding (cents/piece)2

Single-Piece Automation Flats

(Single-Piece Non-automaion Flats) 3.0 See Note2 N/A

Basic, Automation Flats 

Basic, Non-automation Flats 3.0 See Note2 N/A

Carrier Route Automation Flats 

(Carrier Route Non-automation Flats) 3.0 See Note2 N/A

Drop Ship (cents/piece)

Basic, Carrier Route DNDC Flats 

Basic, Origin Flats) 17.4 14.1 123.4%

Basic, Carrier Route DNDC Flats 

(Basic, Origin Flats) 61.5 64.8 94.9%

Basic, Carrier Route DDU Flats 

(Basic, Origin Flats) 76.2 79.1 96.3%

Source: PRC-ACR2012-LR5.

1 The BPM cost model does not estimate cost differences between single piece and presorted BPM. Single-piece BPM 

is a residual category with low volume and adequate data are not available. Previously, rate differences between 

single-piece and presorted BPM were based on an assumption that unit mail processing costs for single piece BPM 

were twice that of presorted BPM. See Docket No. R2006-1, USPS-T-38, p. 8. 2 Separate estimates of barcoding cost savings are not available for BPM Flats. Based on the cost savings for BPM 

Parcels, the barcoding discount for BPM Flats implies a passthrough of 76.9%.

3 The calculated passthroughs are based on rounded unit avoided costs.

132 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
Table VII–27—Bound Printed Matter Parcels Workshare Discounts and Benchmarks

Type of Worksharing

(Benchmark)

FY 2012

Year-End 

Discount 

(cents)

Unit Cost 

Avoidance 

(cents)

Passthrough2

Presorting (cents/piece)1

Basic Parcels (Single-Piece Parcels) 60.0 See Note1 N/A

Carrier Route Parcels (Single-Piece Parcels) 9.8 15.1 64.9%

Presorting (cents/pound)1

Basic, Carrier Route Parcels (Single-Piece Parcels)

Zones 1 & 2 4.4 See Note1 N/A

Zone 3 5.0 See Note1 N/A

Zone 4 4.9 See Note1 N/A

Zone 5 4.4 See Note1 N/A

Zone 6 4.3 See Note1 N/A

Zone 7 2.7 See Note1 N/A

Zone 8 2.0 See Note1 N/A

Barcoding (cents/piece)

Single-Piece Barcoded Parcels (Single-Piece Non-barcoded Parcels) 3.0 3.9 76.9%

Basic Barcoded Parcels (Single-Piece Non-barcoded Parcels) 3.0 3.9 76.9%

Carrier Route Barcoded Parcels (Single-Piece Non-barcoded Parcels) 3.0 3.9 76.9%

Drop Ship (cents/piece)

Basic, Carrier Route DNDC Parcels (Basic, Origin Parcels) 17.4 14.1 123.4%

Basic, Carrier Route DSCF Parcels (Basic, Origin Parcels) 61.6 64.8 95.1%

Basic, Carrier Route DDU Parcels (Basic, Origin Parcels) 76.2 79.1 96.3%

Source: PRC-ACR2012-LR5.

1 The BPM cost model does not estimate cost differences between single-piece and presorted BPM. Single-piece BPM is a residual 

category with low volume and adequate data are not available. Previously, rate differences between single-piece and presorted BPM 

were based on an assumption that unit mail processing costs for single piece BPM were twice that of presorted BPM. See Docket 

No. R2006-1, USPS-T-38, p. 8.

2 The calculated passthroughs are based on rounded unit avoided costs.

The Destination Network Distribution Center (DNDC) dropship discount for both BPM Flats and Parcels exceeds 

unit avoided costs. In Docket No. R2012-3, the DNDC dropship discounts for both BPM Flats and BPM Parcels 

reflected a 100 percent passthrough of unit avoided costs.39 Since then, the unit avoided costs for the DNDC 

dropship discount for BPM Flats and BPM Parcels decreased, resulting in a 123.4 percent passthrough. See Tables 

VII-26 and VII-27. The Postal Service plans to reduce the discounts in its next price adjustment and over time to 

return the passthroughs to 100 percent. FY 2012 ACR at 30.

39 See Docket No. R2012-3, Library Reference PRC-R2012-3-LR-4, Compliance Calculations for Package Services, Excel file “R2013-4 Package Services 

Worksharing.xlsx,” which shows that the DNDC dropship discount and unit avoided costs were 17.4 cents for both BPM Flats and BPM Parcels.

 POSTAL REGULATORY COMMISSION 133
The Postal Service recognizes that its most recent price adjustment, approved by the Commission on November 16, 

2012, reduced the discounts from 17.4 cents to 17.0 cents, consistent with the FY 2011 avoided costs.40 However, 

the Postal Service explains that the reduced discount is still greater than the newly calculated FY 2012 avoided cost 

of 14.1 cents. The Postal Service asserts that, as a general matter, it should not be expected to match discounts to 

cost avoidances that are not available at the time that the discounts are set.41 Id., question 4.

The Postal Service claims the statutory exception in section 3622(e)(2)(B) applies to the FY 2012 DNDC dropship 

discounts for both BPM Flats and BPM Parcels. The Postal Service asserts that in its most recent price adjustment, 

if it had known that the cost avoidance was 14.1 cents in FY 2012, it still would not have immediately reduced the 

discounts from 17.4 cents to 14.1 cents because that would have resulted in rate shock. The Postal Service notes 

that reducing the discounts to 14.1 cents would have resulted in over 35 percent in reductions in discounts in a 

two-year span (FY 2012 compared to FY 2010). 

The Postal Service states that it will reduce the FY 2012 discounts in its next price adjustment, and over time, 

return these passthroughs to 100 percent or below, while avoiding any drastic changes that could cause rate shock.

Comments

Comments were filed by the Public Representative.42 No other party filed comments concerning Package Services 

workshare discounts. The Public Representative addresses the Postal Service’s argument that it should not be 

expected to match discounts to cost avoidances that are not available at the time that the discounts are set. He 

asserts that the Commission should not accept the Postal Service’s argument as a rationale for avoided costs 

being greater than workshare discounts. PR Comments at 40-48. The Public Representative recommends that the 

Commission request that the Postal Service forecast avoided costs for BPM dropship rate categories in the next 

price adjustment to ensure that the passthroughs for these categories move closer to 100 percent. ld. at 49.

Commission analysis

Section 3622(e)(2) requires the Commission to ensure workshare discounts do not exceed estimated avoided costs 

unless justified by a statutory exception. For FY 2012, the Commission concludes that, with the exception of the 

Basic presort discounts for Media Mail and Library Mail, as well as the DNDC dropship discounts for BPM Flats and 

BPM Parcels, Package Services workshare discounts did not exceed estimated avoided costs.

With respect to the Basic presort discounts for Media Mail and Library Mail, the Commission concludes that these 

discounts are justified pursuant to section 3622(e)(2)(C) since the Media Mail/Library Mail product qualifies for 

ECSI exemption. To the extent practicable, the Postal Service should align these discounts with their avoided costs 

in its next price adjustment filing. 

With respect to the DNDC dropship discounts for BPM Flats and BPM Parcels, the Commission does not accept 

40 Docket No. R2013-1, United States Postal Service Notice of Market-Dominant Price Adjustment, October 11, 2012 at 53; Order No. 1541 at 70. 41 Responses of the United States Postal Service to Questions 1-13 of Chairman’s Information Request No. 3, January 22, 2013 (Response to CHIR No. 3). 42 Public Representative Comments, February 1, 2013 (PR Comments)

134 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
the Postal Service’s justification pursuant to section 3622(e)(2)(B) for the discounts’ excessive passthroughs. The 

Postal Service contends that lowering the discounts to equal avoided costs and thereby increasing the rates for 

dropshipping would result in a 35 percent increase in these rates over a two-year period. However, the Postal 

Service provides no support for how the rate increase would adversely affect mailers. For this reason, the 

Commission concludes that the Postal Service has not adequately supported the statutory exception it claims. 

The Postal Service should either align the discounts with avoided cost in the next price adjustment or adequately 

support an applicable statutory exception.

Special Services

Introduction

The Special Services class consists of twelve products, including Ancillary Services, eight domestic “stand-alone” 

products, and three international products. Although it is comprised of several services, Ancillary Services is 

classified as a single product. The three international Special Services products are discussed in the Market Dominant 

International Products section of the ACD. The nine domestic Special Services products are discussed herein.

The principal FY 2012 findings for Special Services are:

 Special Services contributed $494.5 million toward institutional costs, the third highest contribution among 

all market dominant mail classes; and 

 The attributable costs for Stamp Fulfillment Services continue to exceed revenues.

Financial Analysis

In FY 2012, the Special Services class, including international products, generated $2.3 billion in revenue and 

incurred $1.8 billion in attributable costs.43 The Special Services class had an aggregate cost coverage of 126.9 

percent. Table VII-28 provides financial information for each of the individual Special Services products.

43 For a discussion of international Special Services, see 2012 ACD at 67.

 POSTAL REGULATORY COMMISSION 135
Table VII–28 — Market Dominant Special Services 

Fiscal Year 2012 Volume, Cost, Revenue, and Cost Coverage by Product

Market Dominant 

Special Services

Units 

(000)

Total 

Revenue 

($000)

Attributable 

Cost 

($000)

Contribution 

to 

Institutional 

Cost 

($000)

Unit 

Revenue 

(Cents)

Unit Cost 

(Cents)

Unit 

Contribution

(Cents)

Cost 

Coverage

Domestic Special Services

Ancillary Services Product

Certified Mail 227,054.884 662,806.445 601,868.964 60,937.481 291.915 265.076 26.838 110.1%

Collect-on-Delivery 702.552 5,926.666 3,603.916 2,322.750 843.591 512.975 330.616 164.5%

Insurance 30,115.142 108,509.675 96,968.545 11,541.130 360.316 321.993 38.323 111.9%

Registered Mail 2,415.040 39,477.066 30,226.123 9,250.943 1,634.634 1,251.579 383.055 130.6%

Stamped Envelopes 16,584.487 6,388.716 10,195.771 — — — 259.6%

Stamped Cards1 — 2,117.462 731.090 1,386.372 — — — 289.6%

Other Ancillary Services2 2,017,035.241 696,600.567 547,851.664 148,748.903 34.536 27.161 7.375 127.2%

Total Ancillary Services — 1,532,022.368 1,287,639.019 244,383.349 — — — 119.0%

Stand-Alone Products

Address Management 

Services 2,404.299 15,863.591 7,715.973 8,147.618 659.801 320.924 338.877 205.6%

Caller Service1 92,490.305 27,045.440 65,444.865 — — — 342.0%

Change of Address Credit 

Card Auth.1 — 13,082.453 1,386.993 11,695.460 — — — 943.2%

Confirm Service — 843.100 337.143 505.957 — — — 250.1%

Customized Postage — 900.000 77.252 822.748 — — — 1165.0%

Money Orders3 108,841.460 165,092.887 110,473.570 54,619.317 151.682 101.500 50.182 149.4%

Post Office Box Service1 481,566.624 377,073.383 104,493.241 — — — 127.7%

Stamp Fulfillment Services4 3,298.493 5,566.808 (2,268.315) — — — 59.3%

Total Stand-Alone Services — 773,137.453 529,676.562 243,460.891 — — — 146.1%

Total Domestic 

Special Services — 2,305,159.821 1,817,315.581 487,444.240 — — — 126.9%

International Special 

Services5 — 29,435.201 22,763.479 6,671.722 — — — 129.3%

Total Special Services — 2,334,595.022 1,840,079.059 494,515.963 — — — 126.9%

Source: PRC-ACR2012-LR1.

1 Library Reference USPS-FY12-1 dated January 10, 2013. See also Response to CHIR No. 10, question 3. 2 The FY 2012 ACR did not isolate costs for Other Ancillary Services. However, the Postal Service erroneously included Package Intercept revenue 

of $102,086. This table does not include Package Intercept revenues.

3 Money Order float of $1.2 million is not included in the revenue. Response to CHIR No. 1, question 9.

4 Response to CHIR No. 1, question 12. See also Library Reference USPS-FY12-1. 5 International Special Services are discussed in the International Mail section.

136 2012 Anual co
Cost Model Changes

In Order No. 1153, the Commission approved incorporating retail window-related costs and mail processing 

costs into several Special Services cost models.44 These updates allow disaggregation of attributable costs where 

volumes are too small to accurately calculate CRA costs. Id. at 16. The updated cost models affect: Caller Service; 

Certificate of Mailing; Correction of Mailing List; Periodical Application; Post Office Box Key and Lock; Restricted 

Delivery; Signature Confirmation; and Zip Coding of Mailing List.45

In Docket No. RM2012-5, the Postal Service proposed updates to how costs are allocated in the In Office Cost 

System (IOCS) for the following Special Services: (1) Inbound Registered Mail, (2) Collect on Delivery (COD), (3) 

Certified Mail, (4) Insurance, and (5) Signature Confirmation.46 The Commission approved the proposed update, 

finding that it more accurately reflected the processing of International Inbound Registered Mail and corrected 

inconsistencies for the COD, Certified Mail, Insurance, and Confirm Services.47

Ancillary Services

The Ancillary Services product is comprised of 22 services, many of which may be used only in conjunction with 

other mail services.48 As shown in Table VII-28 above, in FY 2012 the Ancillary Services product earned $1.5 billion 

in revenue and incurred $1.3 billion in attributable costs. Ancillary Services contributed $244.4 million toward the 

institutional costs of the Postal Service and had a cost coverage of 119.0 percent. 2012 ACR at 31. Revenue for 

some Ancillary Services is allocated back to the underlying mail class. For those Ancillary Services, revenue is not 

included in the Ancillary Services product calculation of cost coverage.49

As shown in Table VII-28 above, the Postal Service reports revenue and attributable costs for six Ancillary Services: 

Certified Mail, Collect-on-Delivery, Insurance, Registered Mail, Stamped Cards, and Stamped Envelopes. The Postal 

Service reports aggregated revenue and attributable costs for five Ancillary Services—Delivery Confirmation, 

Restricted Delivery, Return Receipt for Merchandise, and Signature Confirmation—as “Other Ancillary Services.” 

In FY 2012, the aggregated category and each of the six individually-reported Ancillary Services had a positive cost 

coverage and thus contributed toward institutional costs. 

44 Docket No. RM2012-1, Order Concerning Analytical Principles for Periodic Reporting (Proposals Nine through Fifteen), January 20, 2012 (Order No. 1153). 45 Docket No. RM2012-1, USPS-LR-RM2012-1/NP1 46 Docket No. RM2012-5, Petition of the United States Postal Service for the Initiation of a Proceeding to Consider Proposed Changes in Analytical 

Principles (Proposals One through Five), June 26, 2012. 47 Docket No. RM2012-5, Order On Analytical Principles Used in Periodic Reporting, September 10, 2012, at 9-10 (Order No. 1462). 48 The domestic Ancillary Services product includes the following services: (1) Address Correction Service; (2) Applications and Mailing Permits; (3) 

Business Reply Mail; (4) Bulk Parcel Return Service; (5) Certified Mail; (6) Certificate of Mailing; (7) Collect on Delivery; (8) Delivery Confirmation; (9) 

Insurance; (10) Merchandise Return Service; (11) Parcel Airlift; (12) Registered Mail; (13) Return Receipt; (14) Return Receipt for Merchandise; (15) 

Restricted Delivery; (16) Shipper-Paid Forwarding; (17) Signature Confirmation; (18) Special Handling; (19) Stamped Envelopes; (20) Stamped Cards; 

(21) Premium Stamped Stationery; and (22) Premium Stamped Cards. In Docket No. MC2013-28, the Commission approved the Postal Service’s request 

to change “Delivery Confirmation” service to “USPS Tracking” service. See Docket No. MC2013-28, Order Approving Minor Classification Changes 

Related to Certain Ancillary Services, January 24, 2013 (Order No. 1631). 49 The services for which the Postal Service reports revenue for the underlying mail product are: (1) Address Correction Services; (2) Applications and 

Mailing Permits; (3) Business Reply Mail; (4) Bulk Parcel Return Service; (5) Certificate of Mailing; (6) Merchandise Return Service; (7) Parcel Airlift; (8) 

Return Receipt for Merchandise; (9) Shipper-Paid Forwarding; and (10) Special Handling.

 POSTAL REGULATORY COMMISSION 137
While most of the ancillary services have a recent history of continuous positive contributions, COD has been 

problematic. The Postal Service has previously explained that due to relatively low volume, COD has few tallies 

reported in the IOCS, resulting in year-to-year variability.50 In FY 2010, COD had a cost coverage of 79.1 percent. In 

the FY 2010 ACD, the Commission proposed that the Postal Service consider using a moving average to calculate 

COD attributable costs or investigate an alternative sampling methodology. 2010 ACD at 125. In FY 2011, COD had a 

cost coverage of 152.7 percent. Id. at 137. The Postal Service indicated that it was continuing to use its same costing 

methodology as it had previously.51 As Table VII-26 shows, COD cost coverage has varied substantially over time.

-

 20%

 40%

 60%

 80% 

100% 

120% 

140% 

160% 

180% 

0

200

400

600

800

1000

1200

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Cents

Fiscal Year

Unit Revenue Unit Cost Cost Coverage

Source: 2001—2006 CRA reports, 2007—2011 ACD reports, and Table VII-28.

Figure VII–6—Collect on Delivery, Unit Revenue, Unit Cost, and Cost Coverage Comparison

FY 2001—2012

In Docket No. R2012-3, the Postal Service increased COD prices by 2.8 percent. In FY 2012, the unit cost for COD 

declined 3.9 percent from the unit cost reported in FY 2011. Although COD volumes continued to decline in FY 

2012, the rate increase and the decline in unit cost resulted in an increase in unit contribution. In FY 2012, COD 

revenues were $5.9 million and attributable costs were $3.6 million, resulting in COD contributing $2.3 million 

toward institutional costs. The FY 2012 cost coverage of 164.5 percent marks an increase of 11.8 percentage 

points over the FY 2011 cost coverage. Although the Postal Service continues to use its existing methodology 

for determining the attributable costs for COD, for two consecutive years, COD has had a positive cost coverage. 

Therefore, the Commission does not recommend changing the COD cost attribution methodology at this time.

50 Docket No. ACR2010, Response of the United States Postal Service to Questions 1-31 of Chairman’s Information Request No. 1, question 10, January 

24, 2011. 51 Docket No. ACR2011, Responses of the United States Postal Service to Questions 1, 3-6, 8-27, and 39-42 of Chairman’s Information Request No. 1, 

question 19, January 27, 2012.

138 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
Stand-Alone Special Services

The eight products that comprise the stand-alone Special Services are: Address Management Services, Caller Service 

and Reserve Number, Change-of-Address Credit Card Authentication, Confirm Service, Customized Postage, Money 

Orders, Post Office Box Service, and Stamp Fulfillment Services. Only one product, Stamp Fulfillment Services, did 

not generate enough revenue to cover its attributable costs. Each of the other stand-alone Special Services made 

positive contributions to institutional costs.

Address Management Services

Address Management Services (AMS) consists of 35 services that enable bulk business mailers to better manage 

the quality of their mailing lists.52 In FY 2012, AMS generated $15.9 million in revenue and had attributable costs 

of $7.7 million. 2012 ACR at 31. This represents a revenue and cost decline of 3.5 percent and 23.8 percent, 

respectively, from FY 2011.53 As a result, the FY 2012 cost coverage for the AMS product was 205.6 percent, which 

is 43.2 percentage points higher than the FY 2011 cost coverage.

Caller Service

The Caller Service product is a premium service that allows eligible customers to have properly addressed mail 

delivered through a post office call window or loading dock.

In Docket No. RM2012-1, the Postal Service updated several cost models to incorporate a Waiting Time Adjustment 

Factor and a Miscellaneous Factor to Caller Service. The Postal Service indicated that the two factors were not 

available when the models were first developed. The Commission approved the Postal Service’s proposed changes 

to the caller service cost model. Order No. 1153 at 18.

In FY 2012, Caller Service earned $92.5 million in revenue and incurred $27.0 million in attributable costs. The 

product contributed $65.4 million toward institutional costs and had a cost coverage of 342.0 percent, which was 

10.3 percentage points higher than the FY 2011 cost coverage of 331.7 percent.

52 The following is a list of the AMS services: (1) Advance Notification & Tracking System; (2) Address Sequencing; (3) Address Element Correction II 

Service; (4) Address Information System Viewer; (5) Carrier Route Information System (CRIS); (6) Coding Accuracy Support System Certification (CASS); 

(7) Change-of-Address Customer Confirmation Letter Reprint; (8) Change-of-Address Information for Election Boards & Registration Commissions; (9) 

City State; (10) Computerized Delivery Sequence (CDS); (11) Correction of Address Lists; (12) Delivery Statistics; (13) Domestic Mail Manual (DMM) 

Labeling List; (14) Delivery Point Validation (DPV) System; (15) Delivery Sequence File – 2nd Generation Service; (16) enhanced Line of Travel (eLOT) 

Service; (17) Five-Digit Zip; (18) Locatable Address Conversion Service (LACS Link); (19) Manifest Analysis and Certification (MAC) Batch System 

Certification; (20) MAC Gold System Certification; (21) MAC System Certification; (22) Multiline Accuracy Support System (MASS) Certification; (23) 

National Change of Address (NCOA) Service; (24) NCOA Link Service – Address Not Known Service Option; (25) Official National Zone Charts; (26) 

Periodicals Accuracy, Grading and Evaluation (PAGE) System Certification; (27) Presort Accuracy, Validation, and Evaluation (PAVE) System Certification; 

(28) Postal Explorer CD-ROM; (29) Residential Delivery Indicator (RDI) Service; (30) Z4Change; (31) Z4INFO; (32) ZIP + 4 Service; (33) ZIPMove; (34) ZIP 

Code Sortation of Address Lists; and (35) 99 Percent Accurate Method. In addition, the Postal Service offers three no fee services: (1) Zone Analysis 

Program (ZAP); (2) Barcode Certification; and (3) ZIPSPLIT. See Response to CHIR No. 4, question 8. 53 Compare 2012 ACR at 31 with 2011 ACD at 137.

 POSTAL REGULATORY COMMISSION 139
Change-of-Address Credit Card Authentication

The Change-of-Address Credit Card Authentication product allows customers to file change-of-address requests 

online and over the telephone.54 The Postal Service charges a $1 fee to verify the customer’s identity. An outside 

vendor manages the change-of-address program.

In FY 2012, the Postal Service processed 13.1 million online and telephone Change-of-Address Authentication 

applications, generating $13.1 million in revenue while incurring $1.4 million in attributable costs.55 However, the 

Postal Service retained only a portion of the revenue, the remainder of which was paid to the outside vendor who 

manages the program. Id. The Postal Service provided a non-public library reference that shows the contractor 

related attributable costs that the Postal Service incurred for this product in FY 2012.56 Based on a review of the 

non-public library reference, the Commission finds that the Postal Service’s revenue for the Change-of-Address 

Credit Card Authentication product exceeded its attributable costs in FY 2012.

The Postal Service characterizes the payments to the vendor as profit sharing. The Commission believes that the 

payment is more appropriately treated as an attributable cost. In the FY 2013 ACR, the Postal Service should record 

the payments to the vendor as part of the attributable costs.

Confirm Service

Confirm Service permits subscribing customers to obtain electronic information regarding when and where mail 

pieces undergo barcode scans in mail processing operations. In FY 2012, Confirm Service generated revenues of 

$0.8 million and incurred attributable costs of $0.3 million. 2012 ACR at 31. The contribution to institutional costs 

was $0.5 million and the cost coverage was 250.1 percent. Id.

Confirm Service will end when existing customers’ subscriptions expire.57 The Postal Service expects that other 

tracking services, such as the Intelligent Mail barcode (IMb) will replace Confirm Service.58 A similar service will 

become a feature of mail classes that use an IMb barcode containing a registered Mailer Identification (MID) code.59

Customized Postage

The Customized Postage product authorizes vendors to produce stamps bearing customer-selected images. In 

FY 2012, Customized Postage generated $900,000 in revenue and incurred costs of $77,252. Compared with 

FY 2011, revenues have remained constant while costs increased 54.5 percent from the $50,000 reported in 

54 In Docket No. R2013-1, the Postal Service proposed to change the name of Change-of-Address Credit Card Authentication to Credit Card Authentication. 

Docket No. R2013-1, United States Postal Service Notice of Market-Dominant Price Adjustment, October 11, 2012, Attachment A at 119 (Notice). The 

Postal Service indicated that the change would expand the credit card authentication fee so that it applies to all credit card authentications, rather than 

just change-of-address applications. Notice at 55. The Commission approved this classification change. Docket No. R2013-1, Order on Price Adjustments 

for Market Dominant Products and Related Mail Classification Changes, November 16, 2012, (Order No. 1541) at 79. 55 2012 ACR at 31; See also Response to CHIR No. 10, question 3. 56 Library Reference USPS-FY11-NP26, filename “COACredit Card 2012.xls.” 57 Docket No. MC2013-38, Order Approving Request to Remove Confirm Service from the Market Dominant Product List, February 19, 2013 

(Order No. 1664). 58 See https://ribbs.usps.gov/confirm/documents/tech_guides/IMb_Tracing_User_Guide.pdf. 59 “The Mailer Identifier (MID) is a field within the Intelligent Mail barcode that is used to identify mailers. The Postal Service assigns MIDs to mail 

owners, mailing agents, or other service providers that request them.” See https://ribbs.usps.gov/index.cfm?page=intellmailmailidapp.

140 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
FY 2011.60 The Postal Service explains that the cost increase is due to an additional employee working on the 

product.61 The Customized Postage product contributed $822,748 toward institutional costs and had a cost 

coverage of 1,165 percent.62

Money Orders

Money Orders enable customers to purchase an instrument for the payment of a specified sum of money. A 

customer may purchase a money order up to a maximum value of $1,000.

In FY 2012, Money Orders generated $165.1 million in revenue, had attributable costs of $110.5 million, and 

contributed $54.6 million toward institutional costs.63 In FY 2012, Money Orders had a cost coverage of 149.4 

percent, an increase of 9.5 percentage points from FY 2011. Comparing FY 2011 with FY 2012, Money Orders 

revenue increased by 1.5 percent while attributable costs decreased 5.0 percent.

Post Office Box Service

Post Office Box Service provides customers with a locked receptacle for the receipt of mail during specified hours 

of access. Market dominant Post Office Boxes are available in five different sizes and are assigned to one of eight 

fee groups (1-7 and E), seven of which are priced according to the market value of the postal facility.64 The fee 

group and box size determine the price that a customer must pay to rent a post office box on a 3-month or semiannual basis. 

In January 2012, Post Office Box Service at approximately 6,800 service locations was transferred from the market 

dominant product list to the competitive product list.65 As a result, revenue and costs for market dominant Post 

Office Box Service decreased substantially. For FY 2012, revenues for the market dominant Post Office Box Service 

were $481.6 million while attributable costs were $377.1 million. In FY 2012, Post Office Box Service contributed 

$104.5 million toward institutional costs and had a cost coverage of 127.7 percent. FY 2012 ACR at 31.

Stamp Fullfillment Services

The Stamp Fulfillment Services (SFS) product provides for the fulfillment of stamp orders placed by mail, phone, 

fax, or online to the Stamp Fulfillment Services Center (Services Center) in Kansas City, Missouri.66 Among other 

tasks, the Services Center handles orders for stamps and Philatelic Sales. 

Because SFS had a cost coverage of 53.1 percent in the FY 2010 ACD, the Commission recommended that the Postal 

Service develop a plan to improve the cost coverage. FY 2010 ACD at 129. In FY 2011, the cost coverage improved 

60 See 2010 ACD at 124; 2011 ACD at 140 61 Response to CHIR No. 7, question 7. 62 Library Reference USPS-FY12-1, filename “Rev_USPS-FY12-1.zip.” 63 2012 ACR at 31. This revenue figure includes $1.2 million in money order float. Response to CHIR No. 1, question 9. 64 Fee group E is offered free-of-charge to customers in areas where the Postal Service does not provide carrier delivery. 65 See Docket No. MC2011-25, Order Approving Request to Transfer Additional Post Office Box Service Locations to the Competitive Product List, July 29, 

2011 (Order No. 780) (approving transfer); Docket No. CP2012-2, Order Approving Changes in Rates of General Applicability for Competitive Products, 

December 21, 2011 (Order No. 1062) (approving rate changes effective January 22, 2012) 66 SFS was added to the Mail Classification Schedule Product List in 2010. See Docket No. MC2009-19, Order Accepting Product Descriptions and 

Approving Addition of Stamp Fulfillment Services to the Mail Classification Schedule Product Lists, July 13, 2010 (Order No. 487).

 POSTAL REGULATORY COMMISSION 141
to 59.7 percent. In the FY 2011 ACR, the Postal Service reported that due to a particularly large price increase that 

it implemented in January 2012, it expected the cost coverage of the SFS product to improve significantly. 2011 

ACR at 47.

On January 22, 2012, SFS rates increased. For orders mailed to domestic destinations, the handling fee increased 

to $1.25 for orders up to $50.00 and to $1.75 for orders greater than $50.00. For orders mailed to non-domestic 

destinations, the handling fee increased to $6.25 for orders up to $50.00 and to $6.75 for orders greater 

than $50.00.67

In FY 2012, SFS generated $3.3 million in revenue and incurred $5.6 million in attributable costs. By comparison, 

in FY 2011, SFS generated $3.1 million in revenue and incurred $5.2 million in attributable costs. 2011 ACD at 142. 

For FY 2012, SFS had a negative contribution of $2.3 million to the Postal Service’s institutional costs and a cost 

coverage of 59.3 percent, which is 0.4 percentage points lower than the FY 2011 cost coverage. 

The Postal Service asserts that had the price increase been in effect for the full year, the cost coverage would have 

improved relative to FY 2011. 2012 ACR at 32. The Postal Service indicates that it will “continue to attempt to move 

the cost coverage toward 100 percent through price adjustments as appropriate based on future circumstances.”68

On the other hand, the Postal Service “questions the value of fully covering costs” for this product when keeping its 

fees low “encourages centralized ordering of stamps (including many that are used for philatelic purposes rather 

than to purchase postal services), thereby reducing retail purchases of stamps.” Id. 

The SFS product provides shipping and handling services to fulfill customers’ orders for products such as stamps 

and philatelic items. The revenues attributable to the SFS product are the fees that the Postal Service collects 

for fulfilling customer orders. The attributable costs are the costs associated with performing the shipping and 

handling work that goes into completing those orders. The costs associated with the sale of stamps at other 

venues, such as post office windows, are viewed as part of the costs of the products on which the postage is used.

The costs and revenues associated with the SFS product do not entirely capture the value that the Services Center 

adds to the Postal Service, and to other Postal Service products. Although SFS does not cover its attributable costs, 

by providing a mechanism for the centralized ordering of stamps, it reduces the costs associated with the retail 

purchases of stamps. Thus, it promotes the objectives of reducing costs and increasing efficiency. See 39 U.S.C. 

3622(b)(1) and (c)(12).

The Commission has concerns with the methodology the Postal Service proposes to use to calculate the attributable 

costs for products whose orders are fulfilled at the Services Center. To calculate the attributable costs for the 

Philatelic Sales product, the work papers use total employee hours at the Services Center and attribute a fraction 

of those hours to Philatelic Sales.69 To calculate attributable costs for the SFS product, the work papers appear to 

67 Docket No. R2012-3, Library Reference PRC-R2012-3-LR-5, filename “PRC-R2012-3-LR5.xls.” 68 Response to CHIR No. 3, question 11. 69 Library Reference USPS-FY12-28, filename “StFS Philatelic2012.xlsx,” tab “Philatelic Handling,” columns D through F.

142 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
use total employee work hours at the Service Center.70 Thus, the calculation of attributable costs for SFS appears 

to double count employee work hours that have already been attributed to Philatelic Sales.71 The Postal Service’s 

attributable cost methodology for the SFS product should only reflect SFS-related work hours. The Postal Service 

should provide an updated methodology for calculating the attributable costs of products handled by the Services 

Center in a rulemaking proceeding to change analytical principles prior to incorporating it into the FY 2013 ACR. The 

updated methodology should describe how the costs, revenues, and volumes are attributed to Stamp Fulfillment 

Services, Philatelic Services, and any other products handled at the Services Center. 

Market Dominant International Products 

Introduction

Market dominant international mail consists of eight products: Outbound Single-Piece First-Class Mail International, 

Inbound Single-Piece First-Class Mail International (at UPU rates), Inbound Surface Parcel Post (at UPU rates), 

International Ancillary Services, International Reply Coupon Service, International Business Reply Mail Service 

and two products consisting of Negotiated Service Agreements, the Canada Post United States Postal Service 

Contractual Bilateral Agreement for Inbound Market Dominant Services and Inbound Market Dominant MultiService Agreements with Foreign Postal Operators 1. 

The Postal Service establishes rates and fees of general applicability for Outbound Single-Piece First Class Mail 

International, outbound services within the International Ancillary Services product, International Reply Coupon 

Service, and International Business Reply Mail Service pursuant to the provisions of 39 U.S.C. § 3622.72 For 

Inbound Single-Piece First-Class Mail International (at UPU rates), Inbound Surface Parcel Post (at UPU rates), 

inbound services within the International Ancillary Services product, and Inbound Reply Coupon Service, rates 

are determined by international agreement through the Universal Postal Union (UPU).73 The Postal Service also 

establishes rates and fees for inbound international mail through Negotiated Service Agreements (NSAs) with 

foreign postal operators. 

The principal findings for FY 2012 for market dominant international mail are:74

 Revenues exceeded attributable costs for all market dominant international products, including negotiated 

service agreements, by $152.0 million;

 Revenues for Inbound Single-Piece First-Class Mail (at UPU rates) did not cover attributable costs by 

$65.3 million, but the Postal Service should continue to negotiate additional compensatory bilateral or 

multilateral agreements; 

70 Library Reference USPS-FY12-28, filename “StFS2012.xlsx,” tab”Handling_LR,” column D. 71 Response to CHIR No. 10, question 2. 72 Rates and fees of general applicability in effect during FY 2012 for market dominant international mail products were announced in two separate Postal 

Service Notices. See Docket No. R2011-2, United States Postal Service Notice of Market-Dominant Price Adjustment, January 13, 2011 (implemented 

April 17, 2011); Docket No. R2012-3, United States Postal Service Notice of Market Dominant Price Adjustment, October 18, 2011 (implemented 

January 22, 2012) 73 The Universal Postal Union is a United Nations technical agency through which international treaties governing the exchange of international mail, 

including the rates, are negotiated among its 192 members. The United States is a member of the UPU. 74 Unless stated otherwise, the Commission analyzes revenues and expenses for international mail products developed according to the “booked” 

accounting method. The use of booked revenues and expenses ensures that the Commission’s financial analyses are consistent with the Postal Service’s 

audited financial statements.

 POSTAL REGULATORY COMMISSION 143
 Revenues for two inbound international products consisting of negotiated service agreements did not cover 

attributable costs. However, no action is recommended by the Commission given that negotiated rates for 

each NSA within each product improved the net financial position of the Postal Service compared to the UPU 

rates and therefore comply with 39 U.S.C. § 3622(c)(10). 

The section below presents a financial analysis of market dominant international mail products featuring rates and 

fees of general applicability. This section is followed by a discussion of the quality of service link to terminal dues 

and market dominant international products consisting of NSAs.

Market Dominant International Products 

With Rates of General Applicability

Outbound Single-Piece First-Class Mail International (FCMI), Inbound Surface Parcel Post (at UPU rates) and 

International Ancillary Services all had an increase in contribution over FY 2011. For Inbound Single Piece FirstClass Mail (at UPU rates), revenues remained below attributable costs, and the loss increased in FY 2012 compared 

to FY 2011. Each of these products is discussed below.

Outbound Single-Piece First-Class Mail International

Outbound Single-Piece First-Class Mail International generated $227.0 million in contribution, the largest amount 

of all market dominant international products. This represents an 8.3 percent increase over FY 2011. The cost 

coverage also increased by 4.0 percentage points, from 147.8 percent to 151.8 percent. 

The improved FY 2012 financial results for Outbound Single-Piece First-Class Mail International as a whole reflect 

an increase in revenue that resulted from both higher rates and increased volume, and a decrease in attributable 

costs for Outbound FCMI to Canada. This improvement stands in marked contrast to FY 2011, when outbound 

FCMI to Canada reported a loss. 2011 ACR at 144. The resulting increase in contribution from Outbound FCMI to 

Canada offset the decrease in contribution from Outbound FCMI to all other countries in FY 2012. 

Inbound Single-Piece First-Class Mail International (at UPU Rates)

Inbound Single-Piece First-Class Mail International consists of inbound letterpost sent from foreign postal 

operators for delivery in the United States.75 Foreign postal operators remunerate the Postal Service for the 

delivery of inbound letterpost at UPU terminal dues rates or negotiated rates established in bilateral or multilateral 

agreements. For FY 2012, the reported loss for Inbound Single-Piece First-Class Mail (at UPU rates) was $65.3 

million, almost double the loss of $33.0 million in FY 2011. The cost coverage also decreased to 67.3 percent in FY 

2012 from 79.0 percent in FY 2011.

75 The term “letterpost” refers to international mail that is not classified as Parcel Post or Express Mail (EMS). Also known as LC/AO mail (i.e., letters and 

cards, and all other, including flats and small packets), letterpost consists of mail similar to domestic First-Class Mail, Periodicals, Standard Mail, Bound 

Printed Matter, and Media/Library Mail, weighing up to 4.4 pounds (2.0 kilograms).

144 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
The Postal Service states that the decrease in contribution and cost coverage between FY 2012 and FY 2011 

resulted from cost increases.76 The Postal Service also notes that the slower pace of revenue growth compared to 

cost increases occurred in both Target and Transition system countries, although the “shortfall for the much larger 

Target Country category was responsible for most of the impact.”77 Increases in international mail processing costs 

and weight per piece were important contributing factors, as well as a change in the accepted methodology of 

calculating mail processing costs.78

More generally, the Postal Service observes that the failure of Inbound Single-Piece First-Class Mail International 

revenue to cover attributable costs “stems from the product’s unique pricing regime.” 2012 ACR at 9. Prices are 

set “according to a [UPU] terminal dues formula [that] is based upon a percentage of the one-ounce retail SinglePiece First-Class Mail price,” instead of actual Postal Service costs. Id. That formula is renegotiated in the UPU once 

every four years. Thus, the Postal Service “does not independently determine the prices [paid by foreign postal 

operators] for delivering foreign origin mail” in the United States. Id.

The Commission recognizes that the current UPU formula used to derive terminal dues rates is not compensatory 

for inbound letterpost entering the United States. Moreover, UPU terminal dues rates set according to the current 

formula will remain in effect through 2013. As a result, the current terminal dues formula will continue to adversely 

affect the financial performance of Inbound Single-Piece First Class Mail International (at non-UPU rates) in the 

immediate future. 

During the past several years the United States has played an active role in the UPU seeking ways to develop 

a more compensatory terminal dues formula for inbound letterpost. In this regard, negotiations to revise the 

formula were concluded in 2012, resulting in the adoption of a new formula to calculate terminal dues that will 

improve the cost coverage for inbound letterpost starting in Calendar Year (CY) 2014.

Pursuant to the UPU Convention, the Postal Service (or any postal operator) may negotiate bilateral (or multilateral) 

rate agreements with other postal operators as an alternative to the UPU terminal dues rates for some or all of its 

inbound letterpost. In recent years, the Postal Service has pursued this option to negotiate bilateral agreements 

with Canada Post, Post NL (Netherlands), the China Post Group, Hongkong Post, Singapore Post and Australia Post. 

These agreements were effective in FY 2012. 

The Commission commends the Postal Service for its “strategy of negotiating bilateral agreements with some of 

its larger exchange partners to improve total inbound cost coverage.” 2012 ACR at 9. A small number of exchange 

76 Responses of the United States Postal Service to Questions 1-2 and 4-24 of Chairman’s Information Request No. 4, January 25, 2013, question 9 

(Response to CHIR No. 4). 77 The target system refers to the UPU terminal dues system in which rates paid for the delivery of letterpost are generally based on 70% of the delivering 

postal operator’s domestic rate for a 20 gram (or 1 oz.) letter. The per item/per kilogram rates are bound by minimum and maximum rates set by 

the UPU. In the target system, terminal dues payments are linked to quality of service provided in the country of destination. Primarily industrialized 

countries are part of the UPU target system. The transition system refers to the UPU terminal dues system in which terminal dues rates are set on a 

per kilogram basis using the global worldwide average weight of a letterpost item, as established by the UPU. Terminal dues in the transition system 

are not linked to quality of service. Primarily developing countries are part of the UPU transition system. 78 Id.; see also Docket No. RM2012-5, Petition of the United States Postal Service for the Initiation of a Proceeding to Consider Proposed Changes in 

Analytical Principles (Proposals One Through Five), June 26, 2012, at 9.

 POSTAL REGULATORY COMMISSION 145
partners account for a large fraction of inbound international mail. The Commission recommends that the Postal 

Service continue efforts to negotiate additional compensatory bilateral (or multilateral) agreements with foreign 

postal operators, particularly its largest exchange partners.

Inbound Surface Parcel Post (at UPU Rates)

During FY 2012, revenues from Inbound Surface Parcel Post (at UPU rates) exceeded attributable costs by $9.3 

million, resulting in a cost coverage of 180.3 percent. Although contribution for Inbound Surface Parcel Post (at 

UPU rates) increased compared to FY 2011, the cost coverage decreased, reflecting decreased unit revenues.

International Ancillary Services

For FY 2012, revenues from International Ancillary Services exceeded attributable costs by $6.7 million, resulting 

in a cost coverage of 129.5 percent.79 By contrast, in FY 2011 International Ancillary Services reported a loss of 

$6.1 million, and a cost coverage of 84.3 percent. The improvement in contribution and cost coverage for the 

International Ancillary Services product follows from an improvement in the financial performance of Inbound 

International Registered Mail service. For FY 2012, Inbound Registered Mail costs exceeded revenues by $0.8 

million—a significantly smaller loss than the $13.9 million loss reported in FY 2011. The improved financial 

performance of Inbound Registered Mail service is largely attributable to a reduction in mail processing costs 

associated with the implementation of a change in the accepted methodology for calculating such costs. Response 

to CHIR No. 4, question 10.

The Commission understands that revenues received by the Postal Service for handling Inbound Registered Mail 

are constrained by fixed rates of reimbursement established pursuant to the UPU Convention. These rates are 

renegotiated by UPU member countries once every four years. In this regard, the Commission notes that a minimal 

increase in the reimbursement rate for handling Inbound Registered Mail was adopted by the UPU in 2012, to 

become effective in CY 2014. The Postal Service should request the Department of State to continue to work within 

the UPU to ensure a more compensatory increase in rates for Inbound Registered Mail. 

International Reply Coupon Service and International Business Reply Mail Service

International Reply Coupon Service permits a mailer of outbound letterpost to prepay the postage for a reply by 

purchasing reply coupons from the Postal Service that are exchangeable for postage stamps issued by foreign postal 

operators located in member countries of the UPU. International Business Reply Mail Service allows a business 

mailer to include envelopes or cards within its outbound mail that can be deposited with and returned by foreign 

postal operators through the Postal Service to the business mailer in the United States without the prepayment 

of postage. Instead, postage and fees for these returned inbound letterpost items are paid upon delivery by the 

business mailer. 

For FY 2012, International Reply Coupon Service and International Business Reply Mail Service generated a small 

79 The International Ancillary Services product consists of the following special services: Certificate of Mailing, Registered Mail, Inbound Registered Mail, 

Return Receipt, Inbound Return Receipt, Restricted Delivery, Inbound Restricted Delivery, and Customs Clearance and Delivery Fee (Inbound).

146 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
amount of revenue for the Postal Service. As discussed in the FY 2011 ACD, the Postal Service does not separately 

report costs for either service. 2011 ACR at 147. Rather, such cost data are included in the costs reported for 

Inbound Single-Piece First-Class Mail International, i.e., Inbound Air LC/AO. Id.

In the FY 2011 ACD, the Commission requested that the Postal Service report on the feasibility of providing 

separately reported costs for International Reply Coupon Service and International Business Reply Mail Service. Id. 

The Postal Service did not directly respond to the Commission’s request. Nevertheless, in its most recent notice 

of a market dominant price adjustment, the Postal Service proposed to eliminate outbound International Reply 

Coupon Service, effective in FY 2013.80 The Commission approved the Postal Service’s request.81

Given the absence of separately reported costs for International Reply Coupon Service and International Business 

Reply Mail Service, the Commission is unable to evaluate the FY 2012 financial performance of these two products. 

The Commission directs that, with elimination of outbound International Reply Coupon Service, the Postal Service 

report on the feasibility of providing separately reported costs for International Business Reply Mail Service in the 

FY 2013 ACR.

Quality of Service Link to Terminal Dues

Revenues for the delivery of inbound letterpost are derived from terminal dues payments. Under the UPU’s Quality 

Link Measurement System (QLMS), such payments are adjusted for the quality of service provided in the country 

of destination for inbound letterpost coming from other countries participating in the system. The Unipost External 

Measurement (UNEX) system, managed by the International Post Corporation, measures the service performance 

of letterpost delivered in some participating countries, including the Postal Service.82 Quality of service for some 

postal operators is also measured by the UPU’s Global Monitoring System (GMS).83

As an incentive for participating in the system, the Postal Service receives an automatic 2.5 percent increase 

in its terminal dues payments from other participating postal operators. The Postal Service is also eligible for 

an additional 2.5 percent bonus payment if service performance achieves the UPU established annual quality 

of service performance target. For the Postal Service, the FY 2012 target remained at 88 percent for inbound 

letterpost delivered within the domestic overnight, two-day, and three-day service standards for First-Class Mail. 

As discussed above, terminal dues payments from UPU-member countries to the Postal Service for delivering 

inbound letterpost did not cover attributable costs during FY 2012. This reflects in part the fact that the Postal 

Service’s on-time service performance scores did not meet the UPU quality of service target for calendar year 

80 Docket No. R2013-1, United States Postal Service Notice of Market-Dominant Price Adjustment, October 11, 2012, at 55. Although eliminating 

outbound International Reply Coupon Service, inbound Reply Coupon Service will continue to be offered as a service obligation of member countries of 

the UPU. 81 See Docket No. R2013-1, Order No. 1541, Order on Price Adjustments for Market Dominant Products and Related Mail Classification Changes, 

November 16, 2012. 82 Located in Brussels, Belgium, the International Post Corporation works on behalf of numerous postal administrations, including the Postal Service, to 

improve service quality, promote cooperation and interoperability, and provide intelligence about postal and related markets. For more information, 

see www.ipc.be. 83 http://www.upu.int/en/activities/global-monitoring-system/gms-description.html

 POSTAL REGULATORY COMMISSION 147
2011.84 As a result, the Postal Service had to forego additional revenue, albeit small, as it also incurred penalties 

during CY 2011, which includes the first quarter of FY 2012 (October-December 2011). 

The Postal Service explains that the CY 2011 results were adversely affected by large inbound volume flows from 

developing countries that do not link their terminal dues payments to service performance. Many of these countries 

do not follow the usual preparation requirements established for participants in the Quality Link Measurement 

System.85 Because of these circumstances, the Postal Service presents an alternative report for CY 2011 ontime service performance scores based upon an extract from the UPU GMS. The alternative report excludes the 

inbound volumes primarily from developing countries that do not follow the QLMS preparation requirements. 

These alternative on-time service performance scores, which are relied upon by the UPU to determine quality of 

service link bonus payments and penalties to the Postal Service, show an improvement over the CY 2011 scores 

based upon UNEX and GMS results. 

Preliminary service performance scores from the UNEX system for January through September 2012 generally 

show an overall improvement in the monthly on-time performance scores compared to the same monthly scores 

reported in CY 2011. Response to CHIR No. 1, question 5 (nonpublic). This improvement is also reflected in the 

CY 2012 year-to-date on-time performance score, which compares favorably to the CY 2011 annual score. These 

scores suggest that for CY 2012, service performance is improving, although not enough to meet the UPU quality 

of service target for calendar year 2012.

The Postal Service also states that domestic service standards changed effective July 1, 2012. Response to CHIR 

No. 5, question 2(b). It adds that these changes “have not yet been reflected in the UPU QLMS measurement 

performance metrics,” which require UPU approval. Id. In April 2013, the UPU Postal Operations Council meets 

to consider whether or not to include the service standard changes in the QLMS. The Postal Service points out 

that because actual service is still being measured against the older, more stringent domestic service standards, 

measured service performance will be adversely affected. Id. As a result, service performance trended upward 

from January to June, and dropped thereafter. Id.

The Commission observes that if the UPU includes the new service standards in the QLMS performance measurement 

metrics, and measurement is based only upon inbound volumes from countries following the QLMS preparation 

requirements, measured service performance scores may improve in future years.

Market Dominant International Products 

Consisting of Negotiated Service Agreements

The Postal Service reports financial results for two inbound international products that are comprised of Negotiated 

Service Agreements. The Canada Post–United States Postal Service Contractual Bilateral Agreement for Inbound 

84 Responses of the United States Postal Service to Questions 1-9 and 12-15 of Chairman’s Information Request No. 1, January 14, 2013, question 5. The 

information was filed under seal in USPS-FY12-NP31. 85 Responses of the United States Postal Service to Questions 1-5, 17, 19-21, 23-26, 28-30, and 32-36 of Chairman’s Information Request No. 5, February 

6, 2013, question 2(a) (Response to CHIR No. 5).

148 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
Market Dominant Services and the Inbound Market Dominant Multi-Service Agreements with Foreign Postal 

Operators 1 products are included on the market dominant product list. In addition, the Postal Service reports 

financial results for inbound Global Direct Entry with Foreign Postal Administrations. Both inbound international 

products and Global Direct Entry with Foreign Postal Administrations contain rates for inbound letterpost that 

are established through negotiated agreements with foreign postal operators as an alternative to UPU terminal 

dues rates. 

For FY 2012, the Commission concludes the inbound international negotiated service agreements that comprise 

the two inbound international products satisfy the requirements of section 3622(c)(10). Each product, as well as 

inbound Global Direct Entry with Foreign Postal Administrations, is discussed below. 

Canada Post–United States Postal Service Contractual 

Bilateral Agreement for Inbound Market Dominant Services

Revenues from terminal dues rates negotiated pursuant to the Canada Post–United States Postal Service Contractual 

Bilateral Agreement did not cover attributable costs during FY 2012. These results represent a reversal of the financial 

performance reported for FY 2011, when inbound letterpost revenue from Canada exceeded attributable costs. 

The Postal Service points out that the bilateral agreement with Canada Post was in effect for all of FY 2011, but only 

for Quarter 1 (October-December 2011) of FY 2012. For Quarters 2-4 (January-September 2012), inbound letterpost 

from Canada entered pursuant to a renegotiated bilateral agreement, and the financial results were reported as 

part of the Inbound Market Dominant Multi Service Agreements with Foreign Postal Operators 1 product. The Postal 

Service states that a consistent year-to-year comparison between FY 2011 and FY 2012 would include financial 

results for all four quarters of FY 2012 for inbound letterpost from Canada reported by both products.86

While combining the financial result of the two bilateral agreements would permit a consistent fiscal year 

comparison, the Commission’s task is to review the performance of each NSA separately for compliance with 

section 3622(c)(10).87 For the first quarter of FY 2012, revenues for the Canada Post Bilateral Agreement did not 

exceed attributable costs. Because the agreement expired, thereby terminating the product, there is no need for 

action. For FY 2012, Quarters 2—4, available data suggest that the cost coverage for the bilateral agreement with 

Canada Post exceeds the cost coverage that would be obtained using UPU Target System rates. This shows that 

the bilateral agreement with Canada Post improves the net financial position of the Postal Service, and thereby 

conforms with the requirements of section 3622 (c)(10).

Inbound Market Dominant Multi-Service Agreements with Foreign Postal Operators 1

This inbound international product is comprised of seven negotiated service agreements with six foreign postal 

operators: China Post Group, Canada Post Corporation, Post NL (Netherlands), Singapore Post, Australia Post 

86 Responses of the United States Postal Service to Question 1-6 and 8-13 of Chairman’s Information Request No. 8, February 15, 2013, question 1 

(Response to CHIR No. 8). 87 Analysis of the financial results for the renegotiated Canada Post bilateral agreement, reported as part of the Inbound Market Dominant Multi-Service 

Agreements product, is included in the next section.

 POSTAL REGULATORY COMMISSION 149
Corporation, and Hongkong Post. For FY 2012, revenues from terminal dues rates negotiated pursuant to these 

bilateral agreements did not cover attributable costs for the product as a whole. Moreover, revenues for six of the 

seven bilateral agreements did not cover their respective attributable costs, including the Post NL and a Hongkong 

Post agreement. 

In its request seeking Commission approval of the Post NL agreement and the Hongkong Post agreement, the 

Postal Service maintained that the negotiated rates established pursuant to these agreements would result in 

an improvement over the “default” UPU terminal dues rates that would otherwise be applicable to inbound 

letterpost from Post NL and Hongkong Post. For FY 2012, the Postal Service claims that the “contract-specific 

rate for both the NL Post and Hongkong Post bilateral agreements are providing above-UPU cost coverage for the 

actual volumes exchanged.” Response to CHIR No. 8, question 2. In a further response to a CHIR, the Postal Service 

provides additional financial data to support its claim.88 A Commission analysis of the other bilateral agreements 

for which revenues did not cover their respective attributable costs shows that these agreements also improve the 

net financial position of the Postal Service in conformance with the requirements of section 3622 (c)(10).

Global Direct Entry with Foreign Postal Administrations

Global Direct Entry with Foreign Postal Administrations consists of “arrangements” with eight foreign postal 

operators. These arrangements permit such operators to enter inbound letterpost bearing the indicia of the 

respective domestic mail classes directly with the Postal Service for delivery in the U.S. The inbound letterpost is 

entered at negotiated rates.

The Postal Service notes that these largely informal arrangements predate Commission regulation of market 

dominant products pursuant to the PAEA.89 Consequently, these arrangements are not included on the market 

dominant product list. Nevertheless, these arrangements are treated as a product for purposes of analysis.

During FY 2012, inbound letterpost items were received from the postal operators of only five countries: Belgium, 

France, Germany, Singapore, and Switzerland. Id. Based upon the FY 2012 financial results provided for these 

five foreign postal operators, revenues exceeded attributable costs for Global Direct Entry Contracts with Foreign 

Postal Administrations as a whole, thereby making a contribution to the institutional costs of the Postal Service.

In the FY 2011 ACD, the Commission recommended that the Postal Service act promptly to add all bilateral 

arrangements for global direct entry of inbound letterpost to the market dominant product list as part of the Mail 

Classification Schedule (MCS). The Postal Service did not formally respond to the Commission’s recommendation. 

In its most recent notice of market dominant price adjustment, the Postal Service proposed a 0.1 cent per piece 

handling charge applicable to foreign-origin inbound direct entry of single-piece First-Class Mail, subject to the 

terms of an authorization agreement. Response to CHIR No. 4, question 4. The Commission approved the Postal 

Service’s classification change. Order No. 1541 at 13–14.

88 Responses of the United States Postal Service to Questions 1-3 of Chairman’s Information Request No. 10, March 1, 2012, question 1. 89 Response to CHIR No. 5, question 4. The Postal Service states that, “Except for Deutsche Post DHL and Swiss Post, these arrangements were entered 

into informally.” Id.

150 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
The Commission observes that approval of this change effectively brings inbound direct entry of letterpost by 

foreign postal operators into the MCS. The Postal Service states that it “plans to continue its efforts to formalize 

these arrangements by entering into authorization arrangements with foreign postal operators.” Response to CHIR 

No. 5, question 4. 

Market Tests 

Four market dominant market tests were in effect during FY 2012: Alternate Postage Payment Method for Greeting 

Cards, Every Door Direct Mail–Retail (EDDM-R), First-Class Tracer, and Mail Works Guarantee. Section 3641 

authorizes the Postal Service to conduct market tests of experimental products. A product may not be tested, 

however, unless it satisfies each of the following conditions:

1. the product is significantly different from all products offered by the Postal Service within the two-year 

period preceding the start of the test (section 3641(b)(1));

2. the product will not result in undue market disruption, especially for small business concerns (section 

3641(b)(2)); and 

3. the product is correctly characterized as either market dominant or competitive (section 3641(b)(3)).

In addition, market tests of experimental products may not exceed 24 months (section 3641(d)), or annually exceed 

$10 million in revenue (section 3641(e)). The Commission may exempt a market test from the $10 million revenue 

limitation for certain market tests up to a $50 million annual revenue limit (section 3641(e)(2)).90

None of the market dominant market tests in effect during FY 2012 exceeded 24 months in duration. With the 

exception of EDDM-R, the revenues of the market dominant market tests were within the applicable statutory 

revenue limits.

Alternate Postage Payment Method for Greeting Cards

In Docket No. MT2011-1, the Commission authorized the Postal Service’s request to conduct a 24-month market test 

for Alternate Postage Payment Method for Greeting Cards.91 This product enables individuals to mail greeting cards 

without affixing postage. The Commission also granted the Postal Service an exemption from the $10 million revenue 

limitation for this experimental market test. The Alternate Postage Payment Method for Greeting Cards market test 

began on or about January 1, 2011. For FY 2012, the Postal Service reports a volume of 3,623,487 Greeting Cards 

sold using the Alternate Postage Payment Method. The total revenue for Alternate Postage Payment Method in FY 

2012 was $1,739,274. For FY 2012, the Postal Service reported $215,404 in information technology costs.

90 Section 3641(g) mandates an annual adjustment in the dollar limits based on the change in CPI. The Commission expects to issue regulations for this 

calculation in FY 2013. 91 See Docket No. MT2011-1, Order No. 1577, Order Granting Motion Concerning Market Test, December 13, 2012.

 POSTAL REGULATORY COMMISSION 151
Every Door Direct Mail-Retail (EDDM-R)

In Docket No. MT2011-3, the Commission approved the EDDM-R market test on March 1, 2011.92 EDDM R is 

restricted to locally-entered and locally-paid mail and must be delivered to every household on a delivery route. 

Participants are limited to sending 5,000 pieces per post office, per day. In order to make mail more accessible to 

small and medium businesses, the market test does not require a mailer to acquire a permit or pay mailing fees. 

The market test also instituted simplified qualification and preparations requirements. Pieces were priced using 

the Standard Mail Commercial Saturation Flats pricing schedules. In Order No. 1164, the Commission granted 

the Postal Service an exemption from the $10 million limitation, allowing a $50 million annual limitation.93 In 

Docket No. MC2012-31, the Postal Service requested to add EDDM-R to the market dominant product list.94 On 

September 7, 2012 the Commission approved the Postal Service’s request.95 In FY 2012, the Postal Service reports 

that 450 million pieces were sent under EDDM-R. The Postal Service also reports that the revenue for EDDM-R was 

$65,304,052 and the attributable cost was $31,861,054, resulting in $33,442,998 in contribution to institutional 

costs. The Commission finds that the revenue for EDDM-R in FY 2012 exceeds the limitation in 3641(e)(2). As the 

Postal Service has concluded this market test, no action is required. 

First-Class Tracer

In Docket No. MT2012-1, the Commission approved the First-Class Tracer (Tracer) market test on December 9, 

2011.96 This product provides customers with a three-step process to track the transportation and processing of 

single-piece First-Class Mail. First, the mailer affixes the Tracer barcode label to a single piece of First-Class Mail. 

Second, the mail is scanned and sorted by existing mail processing equipment. Third, the customer keeps a portion 

of the label that consists of a tracing number and a QR97 code, which enables them to go to the USPS.com website 

and check the status of the respective piece of First-Class Mail either by entering the tracing number at the Track 

and Confirm section of USPS.com, or by scanning the QR code with a mobile device. For FY 2012, the Postal Service 

reports a volume of 1,972 pieces sold. The total revenue for First-Class Tracer in FY 2012 was $3,692. For FY 2012, 

the Postal Service reported $7,000 in product development costs. 

Mail Works Guarantee

In Docket No. MT2011-4, the Commission authorized the Mail Works Guarantee market test on May 15, 2011. For 

this market test, the Postal Service and each participant jointly develop a unique set of metrics to measure the 

effectiveness of a particular direct mail campaign. The Postal Service plans to provide assistance to the mailer in 

developing its direct mail and in benchmarking and measuring the test metric. The Postal Service offers a postage 

92 See Docket No. MT2011-3, Order No. 687, Order Approving Market Test of Experimental Product–Marketing Mail Made Easy, March 1, 2011. 93 See Docket No. MT2011-3, Order No. 1164, Order Granting Request for Exemption from Annual Revenue Limitation, January 23, 2012. 94 See Docket No. MC2012-31, Request of the United States Postal Service to Add Every Door Direct Mail–Retail to the Mail Classification Schedule, July 

10, 2012. 95 See Docket No. MC2012-31, Order No. 1460, Order Approving Addition of Postal Services to the Mail Classification Schedule Product Lists, September 

7, 2012. 96 See Docket No. MT2012-1, Order No. 1035, Order Approving Market Test of First-Class Tracer, December 9, 2011. 97 QR code (abbreviated from Quick Response Code) is the trademark for a type of matrix barcode (or two-dimensional bar code). Smartphone users can 

install an app with a QR-code scanner that can read a displayed code and convert it to a URL directing the smartphone’s browser to the website of a 

company, store, or product associated with that code providing specific information.

152 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
back guarantee up to $250,000 per participant if a campaign fails to achieve the pre-established metric, as verified 

by the Postal Service. The market test began on June 14, 2011. In FY 2012, no customers committed to using 

the mail in a way that would qualify for the Mail Works Guarantee market test. The Postal Service reports that 

it incurred some minimal costs in contacting potential customers.98 However, it did not quantify these costs. The 

Postal Service contends that it was not practical to track these costs.

Commission Analysis

 The Commission supports efforts by the Postal Service to develop new products. Market tests allow the Postal 

Service to experiment with product ideas and to gather data needed to support a permanent change in mail 

classification. EDDM-R is a positive example of a market test that has been successful by producing substantial 

new revenue and has become a new permanent offering. Based on FY 2012, the results for the Alternate Postage 

Payment Method for Greeting Cards suggests a similar revenue opportunity for the Postal Service. 

Market Dominant Negotiated Service Agreements

Negotiated service agreements (NSAs) are contracts between a specific mailer and the Postal Service that provide 

the mailer with discounts (rebates) designed to encourage higher mail volumes and contribution. The Commission 

bases its review of market dominant NSAs on their performance during “contract years,” i.e., 12-month periods 

measured from the time that the contract was first implemented. In FY 2012, the Postal Service had one domestic 

market dominant NSA in effect. Contract year 1 of the NSA with Discover Financial Services (Docket Nos. R2011-3 

and MC2011-19) ran from April 1, 2011 through March 31, 2012. The Postal Service was authorized to implement 

an agreement with Valassis (Docket Nos. R2012-8 and MC2012-14) during FY 2012. No volume was mailed pursuant 

to the Valassis agreement in FY 2012. 2012 ACR at 32.

When requesting approval of the Discover Financial Services (Discover) NSA, the Postal Service stated the “objective 

of this multi-class market dominant agreement is to maintain the total contribution the Postal Service receives 

from DFS First Class and Standard postage[,] and to provide an incentive for net contribution to grow beyond 

that.”99 Pursuant to the agreement, Discover receives rebates on “qualifying mail”100 if its total revenue exceeds the 

agreed upon revenue threshold.101 In contract year 1, the revenue threshold was $263.7 million, which Discover 

exceeded by $7.2 million.102 The Discover NSA provides Discover with a rebate of a portion of the price increase 

during the contract year on eligible volume (75 percent of the price increase for First-Class Mail and 37.5 percent 

of the price increase for Standard Mail). Table VII-29 details the rebate calculation for contract year 1.

98 See Response to CHIR No. 12, question 1. 99 Docket Nos. MC2011-19 and R2011-3, Notice of the United States Postal Service of Filing of Contract and Supporting Data and Request to Add 

Discover Financial Services Negotiated Service Agreement to the Market-Dominant Product List, January 14, 2011, at 2 (Docket Nos. MC2011-19 and 

R2011-3, Notice). 100 Discover earns rebates on all Intelligent Mail Barcodes (IMb) mail pursuant to the agreement. Mail that qualifies for other promotions, such as the 

mobile barcode promotion, or is not prebarcoded with an IMb does not qualify for rebates pursuant to the NSA. 101 The NSA has a threshold adjustment mechanism aimed at maintaining Discover’s First-Class Mail revenue. In contract year 1, Discover generated over 

$400,000 more First-Class revenue than in the baseline period. Consequently, the threshold adjustment was not activated. 102 The rebate threshold is 110 percent of the Discover revenue for the year prior to the agreement. The baseline revenue was $248.8 million. However, 

revenue from the 2010 Summer Sale was not included, bringing the eligible baseline revenue to $239.7 million. $239.7 million times 1.1 is $263.7.

 POSTAL REGULATORY COMMISSION 153
Table VII–29—Calculation of Contract Year 1 Rebate

First Class Standard Total

Eligible Volume 200,235,004 893,490,495 1,093,725,499 

Rebate Per Piece $0.013 $0.003

Total Rebate $2,571,996 $3,051,958 $5,623,954

Source: PRC-ACR2012-LR6.

As detailed in the table, Discover received rebates of $5,623,954 in contract year 1 on 1.094 billion pieces qualifying 

for the rebate. 

Because the NSA is targeted at maintaining or increasing the overall contribution from Discover’s volume, it is 

informative to evaluate how volume, revenue, and contribution changed from the baseline period to the contract 

year 1 period. Table VII-30 compares the total revenue and contribution generated by Discover in the baseline and 

contract year 1 periods. Table VII-31 details the volume breakdown between First-Class Mail and Standard Mail 

during those same periods.

Table VII–30—Discover Total Revenue and Contribution

Total Revenue Total Contribution

FY 2010 $194,903,075 $105,945,888

Baseline $248,765,974 $134,769,988 

Contract Year 1 Before Rebate $270,905,476 $147,855,818 

Contract Year 1 After Rebate $265,281,522 $142,231,865 

Note: Baseline and Contract Year 1 Revenue and Contribution do not include Promotion and Summer Sale discounts 

Source: PRC-ACR2012-LR6.

Table VII–31—Discover Total First-Class and Standard Volume and Revenue

First Class Standard Total

Volume Revenue Volume Revenue Volume Revenue

FY 2010 224,761,744 78,265,348 604,769,202 116,637,727 829,530,964 194,903,075

Baseline 225,319,325 $81,533,029 840,100,963 $167,277,025 1,065,420,288 $248,810,053 

Contract Year 1 228,518,630 $81,961,772 920,182,042 $188,943,703 1,148,700,672 $270,905,476 

Note: Baseline and Contract Year 1 Volume figures include all mail, including non-qualifying discounted volume.

Source: PRC-ACR2012-LR6.

154 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
When the Postal Service proposed the Discover NSA, it used the FY 2010 Discover volume as an estimated 

baseline. In FY 2010, Discover mailed 225 million pieces of First-Class Mail and 605 million pieces of Standard 

Mail, for a total of 830 million pieces. In the baseline period used for calculating the rebate threshold of 

February 1, 2010 through January 31, 2011, Discover increased its First-Class Mail volume to 225 million 

and Standard Mail volume to 840 million, for a total of 1.065 billion pieces. In the 4 months between the 

beginning of FY 2010 and the beginning of the actual baseline period (February 1, 2010), Discover increased its 

volume by 236 million pieces. Discover further increased its volume by 83.2 million pieces in contract year 1.

Table VII–32—Discover Estimated and Actual Volumes

Discover FY 

2010 Volume

Postal Service Projection of 

Contract Year 1 Volume

Discover Pre-implementation 

Volume—Feb. 2010 to Jan. 2011

Contract Year 1 Volume—

Apr. 2011 to Mar. 2012

[1] [2] [3] [4]

First Class 224,761,744 202,285,570 225,319,325 228,518,630

Standard - Low 604,769,202 661,214,328 840,100,963 920,182,042

Standard - High N/A 681,373,301 N/A N/A 

Total 829,530,946 863,499,897 to 883,658,871 1,065,420,288 1,148,700,672

Source: PRC-ACR2012-LR6.

Table VII–33—Postal Service Estimate of Net Contribution

YR 1 Projected 

Volume 

YR 1 Actual 

Volume

W/O 

Incentives 

(Before Rates) 

With Incentives 

(After Rates) Incremental Unit Rev/Pc.

Unit Cost/

Pc.

Unit 

Contrib.

Total 

Contribution Earned Rebate Net USPS Value

First Class 202,285,570 228,518,630 26,233,060 $0.359 $0.119 $0.240 $6,299,228 $2,571,996 $3,727,233

Standard Mail 661,214,328 920,182,042 258,967,714 $0.205 $0.104 $0.101 $26,168,197 $3,051,958 $23,116,239

(Low Volume 

Estimate)

Total 863,499,898 1,148,700,672 $32,467,425 $5,623,954 $26,843,472

Standard Mail 681,373,301 920,182,042 238,808,741 $0.205 $0.104 $0.101 $24,131,171 $3,051,958 $21,079,213

(High Volume 

Estimate)

Total 883,658,871 1,148,700,672 $30,430,399 $5,623,954 $24,806,446

Source: PRC-ACR2012-LR6.

 POSTAL REGULATORY COMMISSION 155
Postal Service Calculation of Net Financial Benefit

In Docket No. R2011-3, the Postal Service estimated the agreement would generate an increase of $2 to $15 million 

in contribution over the 3-year span of the agreement using its methodology. Docket Nos. MC2011-19 and R2011-

3, Notice at 5. The Postal Service provided estimates of Discover contract year 1 volumes as part of its Docket No. 

R2011-3 filing. Table VII-32 details the Discover FY 2010 volume, the Postal Service’s estimate of Discover contract 

year 1 volume at the time of proposal, the actual baseline volume, and Discover’s contract year 1 volume

In its 2012 ACR, the Postal Service estimates that the Discover NSA resulted in a net contribution increase of 

between $24.8 million and $26.8 million. It calculates net contribution by comparing contract year 1 actual results 

(column 4 above) with Postal Service projected year 1 volume (column 2 above). Table VII-33 details the Postal 

Service estimate of net contribution.

The Postal Service’s net contribution method assumes that all volume greater than the projected contract year 

1 volume is due to the rebate. For First-Class Mail this amounted to 26.3 million pieces. The unit contribution of 

Discover’s First-Class letters is, on average, 24.0 cents per piece. Thus, the 26.3 million pieces had a contribution of 

$6.3 million. The First-Class rebate was $2.5 million. The Postal Service estimates the net value after the First-Class 

rebate was $3.7 million.

For Standard Mail, the Postal Service develops two alternative assumptions, Standard Mail – Low and Standard 

Mail – High. The Postal Service estimates that between 238 million and 258 million pieces of Standard Mail are 

due to the rebate. The unit contribution of Discover’s Standard letters is, on average, 10.1 cents per piece. Thus, 

the 238 to 258 million incremental pieces had a contribution of $24.1 million to $26.1 million. The Standard Mail 

rebate was $3.1 million. The Postal Service estimates the net value after the Standard Mail rebate was $21.1 to 

$23.1 million.

The Postal Service combines its net value calculations for First-Class and Standard Mail and estimates that the 

Discover NSA increased net contribution by between $24.8 million and $26.8 million in contract year 1.

Commission Analysis

When proposing the NSA, the Postal Service used Discover’s FY 2010 volume to develop a projection of what 

Discover would mail without an agreement. This projection is contained in Table VII-32, column 2. The Postal 

Service estimated that, without a rebate, Discover would increase its overall volume from 829 million to between 

863 and 884 million pieces in contract year 1. The Postal Service uses the projected volume of between 863 and 

884 million pieces as the starting point to measure the volume incentivized by the rebates. The Postal Service 

calculation assumes that all of the variation in volume between the projected year and contract year 1 was caused 

by the rebate.

As shown in Table VII-32 column 3, Discover increased its volume by 236 million pieces in the 4 months between 

the proposal and implementation of the NSA, to 1.065 billion pieces. Discover’s pre-implementation volume was 

156 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
between 182 and 212 million pieces higher than the Postal Service’s projection of contract year 1 volume before 

the rebates took effect. Discover further increased its volume over the actual baseline by 83 million pieces in 

contract year 1, to 1.149 billion pieces.

The Postal Service assumes that between 265 million and 285 million pieces were incentivized by the rebate. 

Discover’s volume increased by 83.2 million in contract year 1. The majority of the volume that the Postal Service 

assumes was incentivized by the rebate was being mailed by Discover before the rebates were being offered. Because 

the Postal Service method does not use quantitative factors to estimate the response to the rebate, the Commission 

does not find the Postal Service method should be used to evaluate the net financial benefit of the agreement.

The Commission uses the accepted methodology to isolate the impact of the NSA rebates on Postal Service 

finances. The purpose of the Commission methodology is to estimate mailer response to a lower price using 

quantitative inputs. The accepted methodology incorporates the contract year 1 rebated volume, the marginal 

rebate, and the Standard Regular and First-Class own-price elasticities.103 The Commission recognizes that the 

elasticity of individual mailers may differ from that of the class as a whole. The Commission methodology uses 

class elasticities because they are the only available elasticity estimates at this time.

In contract year 1, 200.2 million First-Class Mail pieces qualified for the marginal rebate of 1.3 cents per piece.104

Using the 2012 First-Class elasticity of -0.392, 2.8 million pieces were incentivized by the rebate. The Postal Service 

gained $0.6 million in contribution from these pieces. 

In contract year 1, 893 million Standard pieces qualified for a 0.3 cent rebate.105 Using the 2012 Standard elasticity 

of -0.437, 6.5 million pieces were incentivized by the rebate. The Postal Service gained $0.7 million in contribution 

from these pieces. Under the accepted methodology, roughly 9.3 million incremental pieces can be attributed 

directly to the rebates. Using the Commission’s accepted methodology, the estimated increase in contribution 

from incentivized volume in contract year 1 of the Discover NSA is about $1.3 million. However, since the Postal 

Service paid rebates of $2.5 million for First-Class Mail volumes and $3.1 million for Standard Mail volumes, the 

estimated net benefit to the Postal Service of the NSA with Discover in contract year 1 was a negative $4,337,569.106

The Postal Service estimates that 26.2 million First-Class pieces were incentivized by the rebate. This implies that 

Discover would need to have an elasticity of -3.8 to be incentivized to mail 26.2 million pieces by a marginal 

rebate of 1.3 cents. This is roughly 10 times the own-price elasticity of the class. The Postal Service estimates that 

over 238 million Standard Mail pieces were incentivized by the rebate. This implies that Discover would need an 

103 The Postal Service’s estimates of elasticity reflect subclasses, rather than products, that were used prior to the PAEA. Standard Regular includes 

the following commercial Standard Mail products: Letters, Flats, and NFMs/Parcels. ECR refers to Enhanced Carrier Route. It includes the following 

commercial products: Carrier Route, High Density and Saturation Letters, and High Density and Saturation Flats and Parcels. The accepted methodology 

was developed in Docket No. MC2004-3. The 2012 Standard Mail Regular elasticity is -0.437 and the First-Class elasticity is -0.392, as provided in 

the attachment to the January 20, 2013 letter from Andrew German. The Postal Service provides its estimates of price elasticity pursuant to the 

Commission’s Periodic Data Reporting Rules. 104 See Table VII-29, eligible First-Class volume. 105 See Table VII-29, eligible Standard volume. 106 The formula for estimating the incremental volume incentivized by a rebate is (Eligible Volume x (1-Revenue Per Piece/(Revenue Per Piece-Marginal 

Rebate))Own-Price Elasticity). The incentivized volume is multiplied by the contribution per piece of the incentivized volume to calculate the increase in 

contribution due to the incentivized volume

 POSTAL REGULATORY COMMISSION 157
elasticity of -18.5 to be incentivized to mail 238 million pieces by a marginal rebate of 0.3 cents, roughly 42 times 

the own-price elasticity of the class.

Table VII-34 below shows the net effect on the contribution to institutional costs of the Discover NSA for contract 

year 1 given the actual rebates paid.

Table VII–34—Summary of NSA Net Effect on Contribution 

(Thousands)

FY 2012

Discover $(4,338)

Source: PRC-ACR2012-LR6.

Section 3622(c)(10) of title 39 requires that special classifications improve the net financial position of the Postal 

Service or improve operational performance, while not causing competitive harm. The Discover NSA, under the 

approach employed by the Commission, is estimated to have had a negative effect on the net financial position 

of the Postal Service in FY 2012. When approving the NSA, the Commission noted that the NSA was unlikely 

to improve the Postal Service’s net financial position using the approved methodology. See Order No. 694 at 

14-15. However, the Commission stated that “allowing this negotiated service agreement to proceed will allow 

management to enhance its knowledge of potential tools to slow the overall declining trend for First-Class Mail 

volume.” Id. at 15. The Postal Service did not make any statements regarding the value of any insight it may have 

gained from this NSA in its ACR.

The Commission finds that, under the existing methodology, the Discover NSA would have satisfied section 3622(c)

(10) if the total rebate was less than $1.3 million in contract year 1. The agreement implemented by the Postal 

Service was designed to pay rebates for all of Discover’s qualifying volume, and in contract year 1 the rebate was 

greater than the contribution incentivized by the agreement. As implemented by the Postal Service, the contract 

year 1 results of the NSA are inconsistent with section 3622(c)(10). As noted by the Commission in Order No. 

694, “the agreement may be canceled by either party should experience prove to be at odds with the parties’ 

expectations.” Id. at 16. The NSA is scheduled to remain in effect for 3 years, and could be profitable for the Postal 

Service in year 2, which concludes March 31, 2013. If the Postal Service is not realizing a net benefit due to the 

agreement or the insights gained by its implementation by that time, the Commission recommends that the Postal 

Service re-evaluate the benefits and costs of continuing the NSA.

158 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VII
Chapter VIII 

Competitive Products

Introduction

In this chapter, the Commission reviews competitive products, including competitive negotiated service agreements, 

to determine whether any rates or fees in effect during FY 2012 were not in compliance with 39 U.S.C. 3633, which:

 Prohibits subsidization of competitive products by market dominant products – section 3633(a)(1);

 Requires that each competitive product cover its attributable costs – section 3633(a)(2); and

 Requires that, collectively, competitive products cover an appropriate share of the Postal Service’s 

institutional costs – section 3633(a)(3).

The Commission also includes an analysis of competitive market tests and the Competitive Products Fund at the 

end of this chapter.

The principal FY 2012 findings for competitive products are:

 Revenues for competitive products, as a whole, exceeded the incremental costs of competitive products. 

Thus, market dominant products did not subsidize competitive products during FY 2012, satisfying section 

3633(a)(1).

 Revenues for the following four products did not cover attributable costs and thus, did not comply with 

section 3633(a)(2): Global Plus 2B, Global Plus 2C, Inbound Air Parcels Post (at non-UPU rates), and Inbound 

International Expedited Services 3. The Commission orders the Postal Service to take corrective action. 

 Competitive products, collectively, satisfied the Commission’s 5.5 percent minimum contribution regulatory 

requirement. As a result, competitive products complied with section 3633(a)(3) during FY 2012.

The list of competitive products for FY 2012 is shown in Table VIII-1.

 POSTAL REGULATORY COMMISSION 159
Table VIII–1—FY 2012 Competitive 

Domestic and International Products

DOMESTIC

Express Mail

Priority Mail

Parcel Select 

Parcel Return Service

First-Class Package Service

Address Enhancement Service

Competitive Ancillary Services

Greeting Cards and Stationery

Premium Forwarding Service

Post Office Box Service

Shipping and Mailing Supplies

Domestic Competitive NSA Products1

INTERNATIONAL

Outbound International Expedited Services

Outbound Priority Mail International

Inbound Air Parcel Post (at UPU rates)

International Priority Airlift (IPA)

International Surface Airlift (ISAL)

International Direct Sacks M-Bags

International Ancillary Services

International Money Transfer Service - Inbound

International Money Transfer Service - Outbound

International Competitive NSA Products2

Source: 39 CFR 3020 subpart A, App. A.

1 See Library Reference, USPS-FY2012-NP27 for a complete list of FY 

2012 domestic competitive NSAs.

2 See Library Reference, USPS-FY2012-NP2 for a complete list of FY 

2012 international competitive NSAs.

160 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VIII
Table VIII-2 contains FY 2012 revenue, cost, and volume for several groupings of competitive products. 

In FY 2012, competitive products, as a whole, generated $11.4 billion in revenue and incurred $8.4 billion in 

attributable costs, resulting in a contribution of $3.0 billion. Competitive products’ share of total contribution has 

grown from 6 percent in FY 2008 to 13 percent in FY 2012, demonstrating the growing importance of competitive 

products to the Postal Service. 

Cross-Subsidy Provision: Section 3633(a)(1)

In Order No. 399, the Commission approved the Postal Service’s hybrid incremental cost methodology.1 Under 

this methodology, the Postal Service aggregates the following three cost categories: (1) incremental costs for 

domestic competitive mail; (2) attributable costs for international competitive products;2

 and (3) competitive 

group specific costs.3

For FY 2012, the hybrid incremental cost methodology produced an incremental cost for competitive products 

of $8.5 billion. The total revenues for competitive products in FY 2012 were $11.4 billion. See Table VIII-2. 

1 See Docket No. RM2010-4, Order Accepting Analytical Principles Used in Periodic Reporting (Proposals Twenty-Two through Twenty-Five), January 27, 

2010, at 2-5 (Order No. 399). 2 Order No. 399 established that in lieu of incremental costs, international competitive mail would use attributable costs because incremental costs are 

not available for international products. Id. at 5. 3 The Public Representative also concluded that competitive products revenues exceed the FY 2012 hybrid incremental costs. PR Comments at 50-51.

Table VIII–2—Fiscal Year 2012 Volume, Revenue, Cost and Cost Coverage

Selected Competitive Products and Competitive Product Groupings

Volume

(000)

Revenue

($000)

Attributable 

Cost

($000)

Contribution 

($000)

Revenue 

per Piece 

(Cents)

Cost per 

Piece 

(Cents)

Contribution 

per Piece 

(Cents)

Cost 

Coverage

Competitive Products

Express Mail 39,823.055 801,560.870 467,226.544 334,334.326 2,012.806 1,173.256 839.550 171.6%

Priority Mail 824,201.977 5,939,725.959 4,545,341.193 1,394,384.766 720.664 551.484 169.180 130.7%

Parcel Select and 

Parcel Return Service 984,202.117 1,456,216.417 1,105,766.568 350,449.849 147.959 112.352 35.608 131.7%

First-Class Package 

Service 411,423.642 875,653.893 766,718.621 108,935.272 212.835 186.357 26.478 114.2%

Competitive 

International Mail 273,525.370 1,837,316.673 1,216,597.730 620,718.943 671.717 444.784 226.933 151.0%

Competitive Domestic 

Services1 504,824.107 273,118.070 231,706.037 184.8%

Competitive 

International Services2 10,577.100 8,390.526 2,186.574 126.1%

Total Competitive 

Mail and Service 2,533,176.161 11,425,875.019 8,383,159.253 3,042,715.766 451.049 330.935 120.115 136.3%

Source: PRC-ACR2012-NP-LR1.

1 Competitive Domestic Services include the following 6 products: Address Enhancement Service; Competitive Ancillary Services; Greeting Cards and 

Stationery; Post Office Box Service; Premium Forwarding Service; and Shipping and Mailing Supplies. 

2 Competitive International Services include the following 3 products: International Ancillary Services; International Money Transfer Service - Inbound; and 

International Money Transfer Service-Outbound. 

 POSTAL REGULATORY COMMISSION 161
Accordingly, revenues from competitive products exceeded the FY 2012 hybrid incremental costs. Consequently, 

the Commission finds that revenues from market dominant products did not subsidize competitive products, 

satisfying section 3633(a)(1).

Product Cost Coverage Provision: Section 3633(a)(2)

Section 3633(a)(2) requires the revenues for each competitive product to cover attributable costs. Below, the 

Commission separately discusses the FY 2012 financial performance for the following: domestic competitive 

products; domestic competitive negotiated service agreements; international competitive products; and 

international competitive negotiated service agreements.

Domestic Competitive Products 

In FY 2012, there were 11 domestic competitive products. Those products were: (1) Express Mail; (2) Priority Mail; 

(3) Parcel Select; (4) Parcel Return Service; (5) First-Class Package Service;4

 (6) Address Enhancement Service; (7) 

Competitive Ancillary Services; (8) Greeting Cards and Stationery; (9) Premium Forwarding Service; (10) Post Office 

Box Service; and (11) Shipping and Mailing Supplies.

Of the 11 domestic competitive products, there was one product that the Commission previously noted could 

potentially not comply with section 3633(a)(2) in FY 2012. On August 16, 2010, the Postal Service requested to 

transfer the market dominant commercial Standard Mail Parcels to the competitive product list as a “lightweight” 

subcategory of the Parcel Select product. See Docket No. MC2010-36. An important issue arose during the 

proceeding—rates for the Standard Mail Parcels being transferred did not cover attributable costs and would have 

caused the Parcel Select product to not cover its attributable costs as required by 39 U.S.C. 3633(a)(2).

In Order No. 689, the Commission conditionally granted the Postal Service’s request to transfer commercial 

Standard Mail Parcels to the competitive product list with the stipulation that the Postal Service must file a notice 

of competitive price adjustment for Parcel Select rates, including Lightweight Parcel Select parcels, demonstrating 

that such rates satisfy 39 U.S.C. 3633(a) and 39 C.F.R. part 3015.

On November 22, 2011, the Postal Service filed a notice with the Commission concerning changes in rates of 

general applicability for competitive products. In Order No. 1062, the Commission determined that the Postal 

Service met the conditions outlined in Order No. 689 concerning the transfer of commercial Standard Mail Parcels 

from the market dominant product list to the competitive product list as a lightweight subcategory of the Parcel 

Select product. These changes became effective on January 22, 2012.

The Commission reviewed the revenue and attributable costs for Parcel Select in FY 2012. See PRC-ACR2012-

NP-LR1. The Commission finds that in FY 2012, the Parcel Select product generated sufficient revenue to cover 

attributable costs.

4 First-Class Package Service was the only new domestic competitive product offered in FY 2012. See Docket No. MC2011-22, Order Adding Lightweight 

Commercial Parcels to the Competitive Product List, April 6, 2011 (Order No. 710). See also Docket No. MC2011-29, Order Approving Proposed 

Classification Change, October 11, 2011 (Order No. 903) (renaming the product First-Class Package Service). 

162 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VIII
Along with the Parcel Select Product, the remaining 10 domestic competitive products generated sufficient 

revenue to cover attributable costs. Collectively, all domestic competitive products generated $9.6 billion in 

revenue, and incurred $7.2 billion in cost. Thus, domestic competitive products had a contribution of $2.4 billion. 

The Commission finds that all domestic competitive products complied with section 3633(a)(2).

While the Commission finds that each domestic competitive product complied with section 3633(a)(2), the 

Commission is concerned about the financial reporting of two competitive offerings: Package Intercept Service, a 

service offering under the Competitive Ancillary Services product; and competitive Post Office Box service. Each 

offering is discussed below. 

The Commission has two concerns with the financial reporting for Package Intercept Service.5

 First, the Postal 

Service’s accounting systems did not identify costs for Package Intercept Service in FY 2012. See Response to 

CHIR No. 5, question 10. Instead, the Postal Service provided an estimate of Package Intercept Service’s unit 

attributable costs. ld. Second, although Package Intercept Service is a competitive service, the Postal Service 

reported its revenues and volumes with the market dominant Special Services class. The Commission directs the 

Postal Service to ensure that its accounting systems capture costs for Package Intercept Service in FY 2013. In 

addition, the Commission directs the Postal Service to file a methodology for estimating the attributable costs of 

Package Intercept Service in a rulemaking proceeding prior to incorporating the methodology in its FY 2013 ACR. 

The Commission also directs the Postal Service to report revenues, volumes, and attributable cost data for Package 

Intercept Service with the Competitive Ancillary Services product.

The methodology that the Postal Service used to develop attributable costs for the enhanced services for the 

competitive Post Office Box service also requires review. The Postal Service reports these costs in two line items: (1) 

handling of third-party carrier packages; and (2) information technology costs.6

 With respect to the handling costs, 

the Postal Service’s workpapers indicate that it relied on an October 2011 operational study of 49 service locations 

to estimate the number of packages handled in FY 2012. ld. The Postal Service explains that it plans to update this 

estimate for FY 2013 by counting packages during a representative period at a sample of post offices that offer this 

service. Id. The Postal Service further indicates that in the future, after the Product Tracking System is upgraded, it 

will identify third-party carrier packages, where possible, by scanning the third-party carrier labels. Id.

With respect to the information technology costs, the Postal Service provides a total estimate for the information 

technology costs, but does not show how it was developed. An adequate explanation of how information 

technology costs are developed must be included in the Postal Service’s costing methodology.

The Commission directs the Postal Service to develop a costing methodology that adequately measures the 

attributable costs of the enhanced services for the competitive Post Office Box service. The Commission also directs 

the Postal Service to file the proposed methodology in a rulemaking proceeding prior to including the methodology 

in any future competitive rate adjustment for competitive Post Office Box service or in its FY 2013 ACR.

5 The Postal Service began offering Package Intercept Service on January 22, 2012. 6 See USPS-FY2012-NP26, Excel file “Competitive and Market Dominant P. O. Box Attributable Costs 2012.xlsx,” tab ‘Comp. & MD PO Box Costs. See also

Response to CHIR No. 8, question 7. 

 POSTAL REGULATORY COMMISSION 163
Domestic Competitive Negotiated Service Agreements 

In FY 2012, there were 63 domestic competitive NSAs. Commission regulations require that the Postal Service file 

data with the Commission allowing for the evaluation of each competitive NSA for compliance with section 3633. 

See 39 C.F.R. 3050.21(g)(2). With the exception of the First-Class Package Service NSAs, the Postal Service provided 

total volume, revenue, and cost data for each domestic competitive NSA that was in effect during FY 2012.

The Postal Service noted that First-Class Package Service contracts paid published, not discounted, prices, and that 

the sole purpose of the contracts was to allow partners to use the PC Postage payment method during a time when 

this payment method was not authorized for First-Class Package Service rates. Response to CHIR No. 8, question 

10. The Postal Service further explained that as of January 27, 2013, PC Postage is now an authorized payment 

method for First-Class Package Service, and thus, contracts are no longer required. ld.

For those reasons, the Postal Service did not track First-Class Package Service NSAs and, instead, included the 

financial data for First-Class Package Service NSAs with the First-Class Package Service product. ld. In lieu of 

providing contract-specific financial data for the First-Class Package Service NSAs, the Postal Service filed a nonpublic library reference that developed an FY 2012 unit cost and unit revenue estimate representative of First-Class 

Package Service NSAs. ld.

The Commission recognizes the unique position of First-Class Package Service NSAs and understands the Postal 

Service’s rationale for reporting the financial data with the First-Class Package Service product. However, the 

Commission must review each NSA to determine compliance with section 3633(a)(2). Therefore, in future ACRs, 

the Commission directs the Postal Service to separately report the financial data for each First-Class Package 

Service NSA. In addition, the Commission urges the Postal Service to review each First-Class Package Service NSA 

and determine if the contract is no longer required. For contracts that are no longer necessary, the Commission 

directs the Postal Service to file a request to remove the contracts from the competitive product list.

Pursuant to section 3633(a)(2), each domestic competitive NSA product must cover its attributable costs. The 

Commission finds that each domestic competitive NSA for which the Postal Service filed contract-specific data 

covered its attributable costs and complied with the statutory requirements of section 3633(a)(2). Since the Postal 

Service did not file contract-specific data for the First-Class Package Service NSAs, the Commission cannot make a 

definitive finding pursuant to section 3633(a)(2) for these NSAs. Since each First-Class Package Service NSA paid 

published prices and those prices were found to satisfy section 3633(a)(2) in FY 2012, it is likely that each First-Class 

Package Service NSA also satisfied section 3633(a)(2) in FY 2012.

164 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VIII
Competitive International Products with Rates of General Applicability

Competitive international mail consists of nine products featuring rates and fees of general applicability.7 These 

products are: (1) Outbound International Expedited Services, (2) Outbound Priority Mail International, (3) Inbound 

Air Parcel Post (at UPU rates), (4) International Priority Airmail (IPA), (5) International Surface Airlift (ISAL), 

(6) International Direct Sacks-M-Bags, (7) International Money Transfer Service—Outbound, (8) International 

Money Transfer Service—Inbound, and (9) International Ancillary Services.8

For FY 2012, the Commission concludes that each of the above-referenced competitive international mail products, 

with the exception of the International Money Transfer Service-Inbound (IMTS-Inbound) product, satisfies section 

3633(a)(2).9

 Additional information is necessary to permit the Commission to determine whether the IMTS-Inbound 

product satisfies section 3633(a)(2). 

International Money Transfer Service-Inbound

For FY 2012, the Postal Service only presents revenue for the IMTS-Inbound product in the International Cost and 

Revenue Analysis (ICRA) report.10 The Postal Service states that no costs (volume variable or product specific) were 

reported because there were no foreign origin “tallies” in FY 2012. As a result, “all volume variable and product 

specific costs were attributed to IMTS-Outbound.” Response to CHIR No. 4, question 11(a). 

The absence of FY 2012 cost data for the IMTS-Inbound product is problematic. It precludes the Commission for 

the first time from evaluating the IMTS-Inbound product for consistency with section 3633(a)(2). 

With respect to volumes (transactions), the Postal Service states that “volume data for the overall Inbound IMTS 

product is not available.” Response to CHIR No. 4, question 11(b)-(c). The Postal Service adds that this condition exists 

because there is “no method for retrieving inbound IMTS product information from the non-POS-enabled offices.”11

Transaction data were not provided in FY 2011 either. Such data are necessary to calculate unit revenues and costs, 

which permit the Commission to evaluate and compare the year-to-year financial performance of a product. 

7 Rates and fees of general applicability in effect during FY 2012 for competitive international mail products were established pursuant to Order No. 603. 

See Docket No. CP2011-26, Order No. 603, Order Approving Changes in Rates of General Applicability for Competitive Products, December 2, 2010 

(implemented January 11, 2011); Docket No. CP2012-2, Order No. 1062, Order Approving Changes in Rates of General Applicability for Competitive 

Products, December 21, 2011 (implemented January 22, 2012). 8 The competitive International Ancillary Services product consists of the following services: Certificate of Mailing, Registered Mail, Return Receipt, 

Restricted Delivery, Insurance, and Customs Clearance and Delivery Fee (Inbound). 9 Unless stated otherwise, this section analyzes revenues and expenses for international mail products developed according to the “booked” accounting 

method. The use of booked revenues and expenses ensures that the Commission’s financial analyses are consistent with the Postal Service’s audited 

financial statements. The Postal Service also reports “imputed” revenues, presented in the FY 2012 ICRA. Imputed revenues differ from booked 

revenues reported in the Postal Service’s financial statements and the Revenue, Pieces and Weight (RPW) report. 10 USPS-FY12-NP2 (non-public), Excel file Reports (Booked).xls, worksheet tab A Pages (c), at page A-2. The ICRA report presents revenues, costs, and 

volumes for each of the Postal Service’s outbound and inbound international mail products. 11 Id. The Postal Service relies on a retail point-of-service (POS) system, consisting of terminals and associated software, at many of its larger, high-traffic 

post offices. Known as POS ONE, the system is designed to automate and simplify retail window service transactions, such as the weighing and rating of 

parcels, and record transactional data on products and services sold. However, POS ONE is not operational in numerous, generally smaller, post offices, 

i.e., “non-POS-enabled” offices.

 POSTAL REGULATORY COMMISSION 165
In the FY 2011 ACD, the Commission directed the Postal Service “to provide IMTS-Inbound transaction volumes 

based upon the POS system as presented in Proposal Eleven.”12 Proposal Eleven represents the established 

methodology for reporting of IMTS-Outbound and IMTS-Inbound financial results, including the provision of IMTSInbound transactions.13 The Commission also directed the Postal Service to estimate IMTS-Inbound transactions 

through other means if such volumes could not be estimated as described in Proposal Eleven. FY 2011 ACD at 158. 

The Postal Service does not address this aspect of the Commission’s directive. Even though non-POS-enabled 

offices do not report IMTS-Inbound transactions, the Postal Service is reimbursed by foreign postal administrations 

for the cost of paying-out and processing foreign origin money orders cashed (or electronic transfers accessed) at 

post offices in the United States. The Postal Service does not explain whether such revenues could be used as a 

basis for estimating inbound transaction volumes.

The Commission directs the Postal Service to report on the feasibility of a special study designed to estimate the 

transaction volume and attributable costs of the IMTS-Inbound product within 90 days. The Postal Service is to 

report on estimating IMTS-Inbound transaction volumes based upon the POS system as presented in Proposal 

Eleven. As stated in the FY 2011 ACD, if the Postal Service “no longer believes that Proposal Eleven is feasible, it 

should propose a modification by following accepted procedures, i.e., initiating a rulemaking proceeding.” Id. The 

Postal Service shall also report on the feasibility of using revenues received from foreign postal operators as a basis 

for estimating IMTS-Inbound transaction volumes within 90 days.

Competitive International Products 

Consisting of Negotiated Service Agreements

Competitive international mail also includes a number of products with rates and fees established pursuant to one 

or more NSAs—negotiated contracts between the Postal Service and a qualifying mailer or foreign postal operator 

that govern outbound or inbound international mail. Such contractual agreements often require a minimum 

volume and/or revenue commitment by mailers or foreign postal operators in exchange for reduced rates from 

the Postal Service. 

In general, each international NSA is classified as a separate competitive product.14 The Commission must evaluate 

each international NSA for its consistency with section 3633(a)(2), which requires that the revenues for each 

product cover its attributable costs.

In some cases, international NSAs that exhibit similar cost or market characteristics may be grouped together 

into a single product under one category. The grouping of functionally equivalent NSAs was permitted to 

address administrative concerns involving product reporting and classification on the competitive (and market 

dominant) product lists. Such functionally equivalent international NSAs are collectively evaluated as a product for 

12 FY 2011 ACD at 158. See also Docket No. RM2011-5, Petition of the United States Postal Service Requesting Initiation of a Proceeding to Consider 

Proposed Changes in Analytic Principles (Proposals Nine – Twelve), December 20, 2010, Proposal Eleven; Docket No. RM2011-5, Response of the 

United States Postal Service to CHIR No. 1, question 1. 13 Docket No. RM2011-5, Order No. 724, Order Concerning Analytical Principles for Periodic Reporting (Proposals Ten Through Twelve), at 6. 14 Docket No. RM2007-1, Order No. 43, Order Establishing Ratemaking Regulations for Market Dominant and Competitive Products, October 29, 2007, at 

57 and 75.

166 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VIII
consistency with section 3633(a)(2). The Commission’s grouping of functionally equivalent NSAs, at the behest of 

the Postal Service, was done with the express understanding that each NSA within a product grouping must cover 

its attributable costs.15

To that end, the draft Mail Classification Schedule specifically requires that the revenue for each international 

NSA grouped under the following categories covers its attributable costs: Inbound International Expedited 

Services, Inbound Direct Entry Contracts with Customers, Inbound Direct Entry Contracts with Foreign Postal 

Administrations, and International Business Reply Service Competitive Contracts.16 Similarly, Governors’ Decisions 

for products established under the following categories authorize management to enter into NSAs for which the 

negotiated prices will generate sufficient revenues to cover attributable costs: Inbound Air Parcel Post (at non-UPU 

rates), Inbound Surface Parcel Post (at non-UPU rates), and Inbound Competitive Multi-Service Agreements with 

Foreign Postal Operators 1.17 Thus, the Commission also separately evaluates each functionally equivalent NSA 

within a product for consistency with section 3633(a)(2). 

The Postal Service reports volume, revenue and cost data on each international NSA. For FY 2012, the Postal 

Service provides such data on 383 international NSAs, of which 362 apply to outbound mail and 21 apply to 

inbound mail.18 The financial results for competitive outbound international and inbound international products 

that consist of international contracts are discussed separately below.

Competitive Outbound International Products Consisting of Negotiated Service Agreements

Competitive outbound international products with negotiated rates are classified on the competitive product list 

as shown in Table VIII-3, which presents the products by category. In some cases, the category is the name of the 

product; in others, a different name is given to one or more products under the same heading.

For FY 2012, the Postal Service reports financial results for outbound NSAs in the following products: Global Direct 

Contracts, GEPS 3, GEPS—NPR 2, GEPS—NPR 3, Global Plus Contracts 1B, 1C, 2B, 2C, and GREPS 1. Based upon 

the data provided, 360 of the 362 outbound international contracts generated sufficient revenues to cover their 

attributable costs. Of the two NSAs that did not generate sufficient revenue to cover their attributable costs, one is 

included in the Global Plus 2B product and the other in the Global Plus 2C product. For each product, attributable 

costs exceed revenues. As a result of the losses incurred by these NSAs, both the Global Plus 2B and Global Plus 2C 

products failed to satisfy section 3633(a)(2).

15 See, e.g., Docket Nos. CP2011-34, CP2011-35, CP2011-36, CP2011-37 and CP2011-38, Order No. 601, Order Approving Five Additional Global Expedited 

Package Services 3 Negotiated Service Agreements, December 1, 2010, at 5. See also Notice of United States Postal Service of Filing Functionally 

Equivalent Inbound Competitive Multi-Service Agreement with a Foreign Postal Operator, November 30, 2012 at 2. 16 See draft Mail Classification Schedule 2515.6 (Inbound International Expedited Services), 2515.4 (Inbound Direct Entry Contracts with Customers), 

2515.5 (Inbound Direct Entry Contracts with Foreign Postal Administrations) and 2515.3 (International Business Reply Service Competitive Contracts). 17 See Docket Nos. MC2009-24 and CP2009-28, Request of the United States Postal Service to Add Royal Mail Inbound Air Parcel Post Agreement to the 

Competitive Products List and Notice of Filing (Under Seal) Contract and Enabling Governors’ Decision, April 21, 2009; Docket Nos. MC2009-8 and 

CP2009-9, Request of United States Postal Service to Add Canada Post—United States Postal Service Contractual Bilateral Agreement for Inbound 

Competitive Services to the Competitive Product List, and Notice of Filing (Under Seal) the Enabling Governors’ Decision and Agreement, November 

13, 2008; Docket Nos. MC2010-34 and CP2010-95, Request of United States Postal Service to Add Inbound Competitive Multi-Service Agreements with 

Foreign Postal Operators to the Competitive Product List, and Notice of Filing (Under Seal) of Enabling Governors’ Decision and Negotiated Service 

Agreement, August 13, 2010. 18 The Postal Service also reports financial results for multiple NSAs in a single line item entry in the GEPS – NPR2 and GEPS – NPR3 products, respectively. 

Response to CHIR No. 5, question 5. The Commission cannot determine how many NSAs are in these two line item entries for purposes of reporting the 

number of NSAs in effect during FY 2012. However, the financial results of these two entries are included in the totals of their respective products.

 POSTAL REGULATORY COMMISSION 167
The Commission concludes that all other competitive outbound international products consisting of NSAs provided 

contribution to the institutional costs of the Postal Service and therefore satisfy section 3633(a)(2). 

Global Plus 2B and Global Plus 2C

NSAs within the Global Plus 2B and Global Plus 2C products provide volume-based rates to Postal Qualified 

Wholesalers (PQWs) and other high-volume mailers that market mailing services to their end-use customers 

who ship mail and articles via any combination of the following: International Priority Airmail (IPA), International 

Surface Air Lift (ISAL), Global Bulk Economy (GBE), Global Direct (GD), Global Express Guaranteed (GXG), Express 

Mail International (EMI), Priority Mail International (PMI), Commercial ePackets (CeP), and International Business 

Reply Service (IBRS). One service offering within Global Direct is outbound AdmailTM to Canada.

The Global Plus 2B and 2C products each consist of two NSAs. One NSA in each product did not generate sufficient 

revenue to cover attributable costs. For the Global Plus 2B product, that NSA was the subject of Docket No.CP2011-

41.19 For the Global Plus 2C product, the NSA was the subject of Docket No. CP2012-10.20 Each of these NSAs 

caused attributable costs to exceed revenues for its respective product.21

The FY 2012 financial results for the Global Plus 2B and 2C products continue to generate insufficient revenue to 

cover attributable cost. In the FY 2011 ACD, the Commission found that the Global Plus 2A product did not comply 

19 See Docket Nos. MC2011-8, CP2011-41 and CP2011-42, Request of the United States Postal Service to Add Global Plus 2B to the Competitive Products 

List and Notice of Filing Two Functionally Equivalent Global Plus 2B Contracts Negotiated Service Agreements and application for Non-Public Treatment 

of Materials Filed Under Seal, December 9, 2010. 20 See Docket Nos. MC2012-5, CP2012-10, and CP2012-11, Request of the United States Postal Service to Add Global Plus 2C to the Competitive Products 

List and Notice of Filing Two Functionally Equivalent Global Plus 2C Contracts Negotiated Service Agreements and Application for Non-Public Treatment 

of Materials Filed Under Seal, December 30, 2011. 21 Under the imputed method, revenues for both the Global Plus 2B and 2C products cover attributable costs. See Library Reference USPS USPS-FY12-

NP2, Excel file Reports .xls (Revised 1-14-13).

Table VIII–3—FY 2012 Competitive Outbound 

International Products Grouped by Category

Category Product

Global Bulk Economy Contracts (Same)

Global Direct Contracts (Same)

Global Expedited Package Services Contracts GEPS 3

GEPS 4

Global Expedited Package Services—Non-Published Rates GEPS—NPR 2

GEPS—NPR 3

Global Plus Contracts

Global Plus 1B

Global Plus 1C

Global Plus 2B

Global Plus 2C

Global Reseller Expedited Package Services Contracts GREPS 1

Source: 39 CFR 3020 subpart A, App. A.

168 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VIII
with section 3633(a)(2).22 Moreover, an NSA with the same commercial mailer in each of the three products—

Global Plus 2A, 2B and 2C—has failed to cover its attributable costs.23

When the Postal Service initially filed with the Commission the NSAs that are the subject of Docket Nos. CP2011-41 

and CP2012-10, the Postal Service claimed that each NSA would generate sufficient revenues to cover attributable 

costs, consistent with section 3633(a)(2). Based upon analysis of the Postal Service’s financial models (filed under 

seal) that estimate the revenues and costs, the Commission preliminarily found that each NSA should cover 

its attributable costs and otherwise comport with the statutory provisions applicable to rates for competitive 

products. In light of the FY 2011 and FY 2012 reported results, the Commission concludes that the Postal Service’s 

estimated financial results cannot be presumed to be sufficiently accurate for prospective purposes.

For the Global Plus 2B and 2C products during FY 2012, the Postal Service explains that attributable costs exceeded 

revenues for outbound AdmailTM to Canada.24 The Postal Service observes that the rate schedules of Canada 

Post applicable to outbound AdmailTM “have detailed structures...that are not able to be explicitly considered 

in estimating...costs.” Id. As such, the Postal Service states its cost model is “oversimplified” and therefore the 

evaluation of outbound AdmailTM costs is “less accurate than would otherwise have resulted from a detailed 

analysis of mail tendered.” Id. The Postal Service “plans to investigate options for obtaining better data or refining 

the calculations.” Id.

The Postal Service has an obligation to negotiate compensatory rates for NSAs and, if necessary, reject NSAs that 

are not likely to be compensatory at the outset. Moreover, the Postal Service has the option of cancelling existing 

NSAs when they are not compensatory. 

The Commission finds that the Global Plus 2B and Global Plus 2C products did not comply with section 3633(a)(2). 

In addition, the Commission notes that in FY 2011, the predecessor agreement to Global Plus 2B with the same 

mailer, Global Plus 2A, also failed to cover attributable costs. The insufficiency of the Postal Service’s estimates calls 

into question the basis of the Commission’s recent approval of the Global Plus 2C NSA in Docket No. CP2013-38, 

the successor to the NSA in Docket No. CP2012-10. 

The Commission concludes that the Postal Service must report within 90 days on whether the NSA that is the 

subject of Docket No. CP2013-38 complies with section 3633(a)(2). The Postal Service’s report shall consist of the 

FY 2013 monthly financial results based upon the financial model previously provided to the Commission with its 

Notice in Docket No. CP2013-38, updated for actual volumes. The Commission also directs the Postal Service to 

22 2011 ACD at 160. In that fiscal year, the Global Plus 2A product consisted of two NSAs and both reported a loss in contribution. One NSA was the 

predecessor to the NSA that was the subject of Docket No. CP2011-41. See Library Reference USPS-FY11-NP2, Excel file NSA Summary (Booked).xls, 

worksheet tab Summary. 23 It should also be noted that in FY 2011, the Global Plus 2B product also consisted of two NSAs, one of which was the NSA that was the subject 

of Docket No. CP2011-41. That NSA also reported a loss, although the Global Plus 2B product generated sufficient revenue as a whole to cover 

attributable costs. 24 Response to CHIR No. 8, question 5. Addressed and Unaddressed AdmailTM is a direct mail marketing service of Canada Post for commercial mailers that 

market products and services to new and existing customers. http://www.canadapost.ca/business/prodserv/mdm/advisor/en/default.asp Global Direct 

(GD) service from the Postal Service offers customers a price for mail acceptance within the United States and transportation to a foreign country for 

direct entry with the foreign postal operator.

 POSTAL REGULATORY COMMISSION 169
modify its financial model for Global Plus NSAs to more accurately develop costs, or increase the contingency factor 

to accommodate costs that cannot be modeled, in order to ensure that negotiated prices can generate sufficient 

revenues to exceed attributable costs. The Postal Service report shall describe the modifications implemented with 

respect to the financial model for Global Plus NSAs, and any other modifications in rates or service requirements 

likely to affect whether the NSA is in compliance with section 3633(a)(2). 

Competitive Inbound International Products Consisting of Negotiated Service Agreements

Like competitive outbound international products, competitive inbound international products featuring 

negotiated rates are classified on the competitive product list under categories. Table VIII-4 below shows the 10 

competitive inbound international products organized by category. As with competitive outbound international 

products, sometimes the category is also the name of the competitive inbound international product.

For FY 2012, the Postal Service reports financial results for the above referenced inbound products presented in 

Table VIII-4, except Inbound Direct Entry Contracts with Customers. Inbound Air Parcel Post (at non-UPU rates) and 

the Inbound International Expedited Services 3 product reported revenues that did not cover attributable costs. As 

a result, both failed to comply with section 3633(a)(2). 

Of the nine competitive inbound international products reporting financial results, the Postal Service separately 

reports financial results for the 21 NSAs within those nine products. In 19 of 21 NSAs reported revenues covered 

attributable costs, and two did not. 

One of these NSAs, concluded with the China Post Group, comprises the Inbound International Expedited Services 

3 product. The other, also with the China Post Group, is part of the Inbound Competitive Multi-Service Agreements 

with Foreign Postal Operators 1 product. The Commission also reviews the China Post Group NSA within the 

Table VIII–4—FY 2012 Competitive Inbound International Products 

Grouped by Category

Category Product

Inbound International Expedited Services

Inbound International Expedited Services 2

Inbound International Expedited Services 3

Inbound International Expedited Services 4

Inbound Air Parcel Post (at non-UPU rates) Royal Mail Group Inbound Air Parcel Post Agreement

Inbound Surface Parcel Post (at non-UPU rates) Canada Post-United States Postal Service Contractual 

Bilateral Agreement for Inbound Competitive Services

Inbound Competitive Multi-Service Agreements with 

Foreign Postal Operators 1

(Same)

Inbound Direct Entry Contracts with Customers (Same)

Inbound Direct Entry Contracts with Foreign Postal 

Administrations

Inbound Direct Entry Contracts with Foreign Postal 

Administrations 1

International Business Reply Service Competitive Contracts IBRS 1

IBRS 3

Source: 39 CFR 3020 subpart A, App. A.

170 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VIII
Inbound Competitive Multi-Service Agreements with Foreign Postal Operators 1 product for consistency with 

section 3633(a)(2).25

Inbound International Expedited Services 3

The Inbound International Expedited Services 3 product consists of a bilateral agreement with the China Post Group 

and constitutes a separate product on the competitive product list.26 For FY 2012, attributable costs exceeded 

revenues for inbound Express Mail Service (EMS) from China. 

The Postal Service notes that for FY 2012, the bilateral agreement with the China Post Group was in effect only 

for Quarter 1 (October-December 2011) of FY 2012. In that quarter, the Postal Service reports that attributable 

costs exceeded revenue for inbound EMS from China. Financial results for Quarters 2–4 were reported as part 

of the Inbound Competitive Multi-Service Agreements with Foreign Postal Operators 1 product pursuant to a 

renegotiated bilateral agreement with China. For Quarters 2–4, reported revenues also did not cover attributable 

costs for inbound EMS from China. For the entire fiscal year period, the Postal Service states that revenues 

decreased between FY 2011 and FY 2012 primarily because of changes in the average weight of an EMS item. 

Response to CHIR No. 7, question 2(a)-(b).

The Postal Service suggests that a more complete and more up-to-date comparison of the financial results for 

inbound EMS from China between FY 2011 and FY 2012 would include all four quarters of FY 2012. Combining two 

products for purposes of analysis, even if the NSAs are with one shipper, is inconsistent with the Commission’s task 

to evaluate each product for compliance with section 3633(a)(2). In this regard, the Commission reviews the FY 

2012 financial results of the Inbound International Expedited Service 3 product separately from the results of the 

renegotiated China Post Group NSA, which is part of the Inbound Competitive Multi-Service Agreements product. 

With respect to the Inbound International Expedited Service 3 product, the Commission concludes that revenues 

during the first quarter of FY 2012 did not exceed attributable costs. Additionally, the China Post Group NSA revenues 

did not exceed attributable costs for the portion of FY 2012 that it was in effect (Quarters 2–4). Thus, these NSAs 

were not in compliance with section 3633(a)(2). These results call into question the basis of the Commission’s 

recent approval of the NSA in Docket No. CP2013-23, the successor to the China Post Group NSA. 

The Commission concludes that the Postal Service must report within 90 days on whether the successor China 

Post Group NSA that is the subject of Docket No. CP2013-23 complies with section 3633(a)(2). The Postal Service’s 

report shall consist of the FY 2013 monthly financial results based upon the financial model previously provided to 

the Commission with its Notice in Docket No. CP2013-23, updated for actual volumes. The Commission also directs 

the Postal Service to modify its financial model for the China Post Group NSA to more accurately develop costs, or 

increase the contingency factor to accommodate costs that cannot be modeled, in order to ensure that negotiated 

25 See footnote 15, infra. 26 See Docket Nos. MC2010-13 and CP2010-12, Request to Add Inbound Expedited Services 1 to the Competitive Product List, and Notice of United States 

Postal Service of Filing China Post Group—United States Postal Service Contractual Bilateral Agreement (Under Seal), November 20, 2009. In approving 

the Postal Service’s request, the Commission designated the new product Inbound International Expedited Services 3. See Docket Nos. MC2010-13 and 

CP 2010-12, Order No. 365, Order Adding Inbound International Expedited Services 3 to the Competitive Product List, December 22, 2009, at 1.

 POSTAL REGULATORY COMMISSION 171
prices can generate sufficient revenues to exceed attributable costs. The Postal Service report shall describe the 

modifications implemented with respect to the financial model for China Post Group, and any other modifications 

in rates or service requirements likely to affect whether the NSA is in compliance with section 3633(a)(2). 

Inbound Air Parcel Post (at non-UPU rates)

Under the heading Inbound Air Parcel Post (at non-UPU rates), the Postal Service reports financial results for 

inbound air parcels entered pursuant to the Royal Mail Inbound Air Parcel Post Agreement, which is classified as a 

product on the competitive product list. The Postal Service also reports financial results collectively from several 

other European postal operators that are parties to the Agreement for the Delivery of Day-Certain Cross-Border 

Parcels (EPG agreement). Pursuant to the EPG Agreement, which became effective prior to the PAEA,27 the Postal 

Service subsequently concluded separate bilateral agreements for the entry of inbound air parcels with postal 

operators from Belgium, Denmark, Germany, Finland, Sweden, Switzerland, Slovakia, and Slovenia. 2012 ACR at 

41- 42. These agreements are not included on the competitive product list. Id. at 42.

For FY 2012, the Postal Service reports a loss of $912,000 for Inbound Air Parcel Post (at non-UPU rates).28 Revenues 

from inbound air parcels entered pursuant to the bilateral agreement with Royal Mail covered attributable costs. 

As a result, the loss is caused solely by the financial results for inbound air parcels from EPG members. The Postal 

Service states that “inbound rates for EPG air parcels tendered by [EPG-member] posts have not been changed.” 

2012 ACR at 42. The Postal Service states it is reviewing its obligations under the bilateral agreements with EPGmember countries “to determine if they continue to be in the best interests of the Postal Service.” Id. In this 

regard, the Postal Service appears to be giving consideration to the rates applicable to outbound air parcels to EPG 

member countries that increase overall contribution to the Postal Service. Id.

Current rates applicable to inbound air parcels from EPG member countries have not changed, in some cases for 

many years, and in FY 2012 revenues failed to cover attributable costs. Such inbound air parcel rates appear to be 

inconsistent with a statutory policy, which requires the United States to “promote and encourage unrestricted and 

undistorted competition in the provision of international postal services and other international delivery services.” 

39 U.S.C. 407(a)(2). The Commission considers this situation unacceptable. The continued entry of inbound air 

parcels at rates that do not cover costs means that domestic mailers are subsidizing the entry of such parcels in 

competition with private companies engaged in international delivery services.

The Commission concludes that Inbound Air Parcel Post (at non-UPU rates) does not comply with of sections 

407(a)(2) and 3633(a)(2). The Postal Service is directed to file a report within 90 days regarding its plans to improve 

the financial results for Inbound Air Parcel Post (at non-UPU rates) and its plans to add EPG bilateral agreements 

to the competitive product list. 

27 The Postal Service entered into the EPG Agreement on October 17, 2006. 28 Id. at 41. In the imputed version of the ICRA, the Postal Service reports an increase in contribution from Inbound Air Parcel Post (at non-UPU rates). 

Response to CHIR No. 8, question 3.

172 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VIII
Appropriate Contribution Provision: Section 3633(a)(3)

Section 3633(a)(3) requires that the Commission ensure that all competitive products collectively cover an 

appropriate share of the institutional costs of the Postal Service. In implementing section 3633(a)(3), the 

Commission determined that if competitive products contribute at least 5.5 percent toward the Postal Service’s 

institutional costs, then competitive products, as a whole, cover an appropriate share of the Postal Service’s total 

institutional costs. See 39 C.F.R. 3015.7(c).

In FY 2012, the Postal Service reported that total institutional costs were $40.6 billion. Therefore, in order to 

comply with section 3633(a)(3) for FY 2012, competitive products must contribute at least $2.2 billion toward the 

Postal Service’s institutional costs. As Table VIII-2 shows, in FY 2012, the total competitive products contribution 

was $3.0 billion, which exceeds the $2.2 billion minimum contribution requirement.29 Therefore, the Commission 

finds that in FY 2012, competitive products satisfied section 3633(a)(3) by covering an appropriate share of the 

Postal Service’s institutional costs.

Section 3633(b) requires that the Commission review the minimum contribution requirement every five years and 

determine whether the contribution requirement should be retained in its current form, modified, or eliminated. 

In FY 2012, the Commission conducted its first review pursuant to section 3633(b). In Order No. 1449, the 

Commission reaffirmed that the appropriate share of institutional costs to be borne by competitive products is 5.5 

percent, subject to future revision, if necessary.30

Competitive Market Tests

Section 3641 authorizes the Postal Service to conduct market tests of experimental products. A market test may 

not be conducted, however, unless each of the following conditions are satisfied:

 The product is significantly different from all products offered by the Postal Service within the two-year 

period preceding the start of the test (section 3641(b)(1));

 The product will not result in an unfair or inappropriate competitive advantage for the Postal Service or 

mailers, especially with regard to small business concerns (section 3641(b)(2)); and

 The product is correctly characterized as either market dominant or competitive (section 3641(b)(3)).

In addition, market tests of experimental products may not exceed 24 months (section 3641(d)), or exceed $10 

million in annual revenue (section 3641(e)). The Commission may exempt a market test from the $10 million 

revenue limitation for certain market tests up to a $50 million annual revenue limit (section 3641(e)(2)).

The Gift Cards test was the only competitive market test in effect during FY 2012. Under the market test, customers 

may purchase two types of gift cards: fixed and variable.31 Fixed gift cards are available in amounts of $25 or $50. 

29 The Public Representative also concluded that the Postal Service complied with section 3633(a)(3) in FY 2012. See PR Comments at 52. 30 Docket No. RM2012-3, Order Reviewing Competitive Products’ Appropriate Share Contribution to Institutional Costs, August 23, 2012 at 24-25 (Order 

No. 1449). 31 Docket No. MT2011-2, Order Authorizing Gift Card Market Test, April 28, 2011 (Order No. 721).

 POSTAL REGULATORY COMMISSION 173
Variable gift cards are available in amounts ranging from $25 to $100. 

In FY 2012, the Gift Cards market test earned $1,080,020 in revenue and incurred $278,645 in total costs. 2012 ACR 

at 45. Thus, the Gifts Cards market test provided a contribution of $801,375 in FY 2012. The Commission finds that 

the Gift Cards market test complied with the requirements of sections 3641 and 3633 in FY 2012.

Competitive Products Fund

The Competitive Products Fund was created by 39 U.S.C. 2011 as part of the PAEA to serve as a repository for 

competitive products’ revenues, returns on investments, and other amounts directly related to the competitive 

products enterprise. It is a revolving fund and can be used for the payment of expenses attributable to competitive 

products, capital expenditures on behalf of competitive products, and for contribution to the Postal Service’s 

institutional costs.

The Postal Service has filed all of the competitive products financial statements required by 39 C.F.R. 3060.21 

through 3060.24 and 3060.30 as Library Reference USPS-FY12-39.

The Postal Service reported the Competitive Products Fund balance on September 30, 2012 as $1,057 million.32

Table VIII-5 shows the income and fund balance data for competitive products for FY 2008 through FY 2012.33

Unlike prior years, the Postal Service did not file its FY 2012 Federal income tax statement by January 15, 2013, 

pursuant to 39 C.F.R. 3060.41. Instead, the calculation of income tax is included in its Competitive Products’ 

32 Monthly Statement of the Public Debt of the United States, September 30, 2012, at 10, Table 3, http://www.treasurydirect.gov/govt/reports/pd/

mspd/2012/opdm092012.pdf and National Trial Balance, September, 2012 (FY2012), November 15, 2012. 33 Competitive products’ share of institutional costs and income tax is determined after the closing of accounting records at the end of each fiscal year. In 

other words, the Competitive Products Fund balance at the end of FY 2012 should be the same as the cumulative Competitive Products Fund balance 

at the end of FY 2011. There is an unexplained difference in the balance reported for FY 2012 on the Postal Service National Trial Balance and the 

calculated cumulative balance reported as Net Income (Loss) After Tax on the Postal Service Proposed Competitive Products Income Statements, filed 

in this and prior ACR proceedings as Library References USPS-FY-12-39;USPS-FY-11-39; USPS-FY-10-39; USPS-FY-09-39.

Table VIII–5— FY 2012 Competitive Products Income and 

Fund Balance after Payment of Income Tax1

Fiscal Year

Investment 

Interest Income 

($000)

Pretax Income 

After 5.5% 

Contribution 

($000)

Income 

Tax 

($000)

Net Income 

After Tax

($000)

Balance in 

Competitive 

Products Fund 

($000)

2008 – 14,385 (4,935) 9,450 9,450 

2009 2 368,228 (128,880) 239,348 248,798 

2010 198 550,785 (192,775) 358,010 606,808 

2011 290 691,131 (241,896) 449,235 1,056,043 

2012 516 808,560 (282,996) 525,564 1,581,607 

Source: Library References USPS-FY12-39, USPS-FY11-39, USPS-FY10-39, USPS-FY09-39.

1 Corrections have been made to amounts reported in prior year Annual Compliance Determinations to 

reconcile to Competitive Products Fund Reporting materials filed annually by the Postal Service.

174 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VIII
Income Statement, a report required by rule 3060.21. In addition, the Competitive Products Fund held within the 

U.S. Treasury was not listed in Table III-Detail of Treasury Securities Outstanding, January 31, 2013, of the Monthly 

Statement of Public Debt. 

In its response to CHIR No. 8, question 8, the Postal Service states that on October 12, 2012, the balance of the 

Competitive Products Fund was transferred to the Postal Service Fund “as a prepayment of competitive products’ 

shares of future years’ institutional costs” and that the Competitive Products Fund’s zero balance was likely the 

reason why the account was not listed on the Monthly Statement of Public Debt. Response to CHIR No. 8, question 

8. The Postal Service also notes that it will meet the requirements of section 2011(a)(2) by transferring funds from 

the Postal Service Fund to the Competitive Products Fund as necessary. Id.

In response to CHIR No. 8, question 9, the Postal Service states that despite the zero balance of the Competitive 

Products Fund, it made the annual Federal Income Tax transfer in accordance with 39 U.S.C. 3634. The FY 2012 

Competitive Products Income Statement shows that total net income from competitive products before tax was 

$808.6 million. The assumed Federal Income Tax on these earnings was $283 million. The Postal Service states 

that on January 10, 2013, it transferred $525.6 million representing Net Income After Tax from the Postal Service 

Fund to the Competitive Products Fund. Response to CHIR No. 8, question 9. The Postal Service reports that on 

January 11, 2013, it again transferred the balance of the Competitive Products Fund to the Postal Service Fund as 

a prepayment of competitive products’ shares of future years’ institutional costs. Id.

Commission Analysis

The Postal Service Fund is available to the Postal Service “to carry out the purposes, functions, and powers 

authorized” [by title 39] (other than any of the purposes, functions, or powers for which the Competitive Products 

Fund is available.)” 39 U.S.C. 2003(a). More specifically, pursuant to 39 U.S.C. 2003(e)(1), the Postal Service Fund 

may be used for (1) the payment of expenses incurred by the Postal Service in carrying out its functions, except 

for those purposes, functions or powers for which the Competitive Products Fund is available; (2) expenses of the 

Postal Regulatory Commission; and (3) the expenses of the Office of the Inspector General. Pursuant to section 

2011(a)(2), the Competitive Products Fund is available for the payment of costs attributable to competitive 

products and all other costs incurred by the Postal Service, to the extent allocable to competitive products. Lastly, 

section 3634(b) requires that the annual Federal Income Tax be transferred from the Competitive Products Fund 

to the Postal Service Fund on or before January 15 of the subsequent fiscal year. 

During FY 2012 (and later), the Postal Service transferred amounts from the Postal Service Fund to the Competitive 

Products Fund. These transfers create issues of first impression related to whether such transfers are consistent 

with title 39. See 39 U.S.C. 2011(h)(2)(C)(ii) and 39 C.F.R. 3060.42. Because the issues are not ones of compliance, 

the Commission will, in the near future, initiate a proceeding pursuant to section 2011(h)(2)(C)(ii) to review the 

transfer of amounts from the Postal Service Fund to the Competitive Products Fund, the use of amounts from the 

Competitive Products Fund to prepay competitive products’ shares of future years’ institutional costs, and the 

accounting and transfer of the assumed Federal Income Tax for FY 2011 and FY 2012. This will give interested 

persons, including the Secretary of the Treasury, an opportunity to comment on these issues.

 POSTAL REGULATORY COMMISSION 175
176 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER VIII
Chapter IX 

Nonpostal Services

Introduction

In December 2012, the Commission approved language proposed by the Postal Service describing its authorized 

nonpostal products and pricing to be included in the Mail Classification Schedule.1

 The Commission approved 

language for two market dominant nonpostal products and nine competitive nonpostal products. Order No. 1575 

at 4. The two market dominant products are: (1) Alliances with the Private Sector to Defray Cost of Key Postal 

Functions; and (2) Philatelic Sales. ld. The nine competitive products are: (1) Advertising; (2) Licensing of Intellectual 

Property other than Officially Licensed Retail Products (OLRP); (3) Mail Service Promotion; (4) Officially Licensed 

Retail Products (OLRP); (5) Passport Photo Service; (6) Photocopying Service; (7) Rental, Leasing, Licensing or other 

Non-Sale Disposition of Tangible Property; (8) Training Facilities and Related Services; and (9) USPS Electronic 

Postmark (EPM) Program. Id. Descriptions of each product have been added to the Mail Classification Schedule. Id.

FY 2012 Financial Analysis

39 C.F.R. 3050.21(i) requires that the Postal Service report revenues, volumes, and expenses for nonpostal services. 

In its FY 2012 ACR, the Postal Service reported financial data for the two market dominant nonpostal products in 

the public portion of its report. 2012 ACR at 46. The Postal Service reported financial data for the competitive 

nonpostal products in a non-public annex.2

As Table IX-1 shows, in FY 2012, nonpostal services generated $167.1 million in revenue and incurred $39.1 million 

in expenses, which resulted in a net income of $128.0 million. Although nonpostal services generated a net income 

of $128.0 million in FY 2012, that figure represents a nine percent decrease compared to FY 2011. The Postal 

Service should work to maximize the net income of nonpostal services moving forward.

1 See Docket No. MC2010-24, Order Approving Mail Classification Schedule Descriptions and Prices for Nonpostal Service Products, December 11, 2012 

(Order No. 1575). See also Docket No. MC2010-24, Response of United States Postal Service to Order No. 1575 that Provided Details of, and Requested 

Responses Regarding, MCS Language for Nonpostal Services, December 26, 2012 and Docket No. MC2008-1 (Phase IIR), Order Resolving Issues on 

Remand, April 30, 2012 (Order No. 1326). 2 See Library Reference USPS-FY12-NP27, 2012 Competitive NSA and Nonpostal Materials.

 POSTAL REGULATORY COMMISSION 177
The nonpublic financial data show that one product, the EPM Program,3

 failed to generate sufficient revenues to 

cover expenses. See Library Reference USPS-FY12-NP27. For the second consecutive year, the EPM Program was not 

active and had no vendors. ld. However, there were expenses associated with maintaining the EPM Program, primarily 

third-party contract expenses. ld. In FY 2013, the Postal Service permanently discontinued the EPM Program. See

Response to CHIR No. 5, question 11. The Commission expects the Postal Service to report any expenses associated 

with maintaining or closing (terminating) the EPM Program in FY 2013 as part of its FY 2013 ACR.

The Postal Service’s elimination of the EPM Program demonstrates that the Postal Service is making an effort 

to eliminate nonpostal services that do not generate net income.4

 The Commission encourages this practice. 

However, as discussed above, since the overall net income for nonpostal services decreased compared to FY 2011, 

the Commission encourages the Postal Service to find ways to maximize the net incomes from the 10 nonpostal 

services that it currently offers in FY 2013.

Future Financial Reporting

In the FY 2011 ACD, the Commission directed the Postal Service to separate nonpostal services from postal services 

in the CRA, RPW, and billing determinants filed with its ACR. See 2011 ACD at 168. However, this year’s ACR 

continued to include Philatelic Sales workhours in the methodology it used to develop the attributable costs for 

the Stamp Fulfillment Services product. The Commission directs the Postal Service to separate Philatelic Sales data 

from Stamp Fulfillment Services data in its FY 2013 ACR.5

For FY 2012, the Commission only required the Postal Service to report revenues, volumes, and expenses for 

nonpostal services in its ACR. See 39 C.F.R. 3050.21(i). However, now that the Commission has approved the Postal 

Service’s proposed MCS language for nonpostal services, “the Commission also may issue a notice of proposed 

rulemaking requesting comments on appropriate regulations for nonpostal products and, upon review of the 

comments, may propose additional rules for nonpostal products.” Order No. 1575 at 6. 

3 The EPM Program allows vendors to provide their customers with Postal Service-authorized timestamps for the purpose of substantiating at a later 

time that the original form of the electronic information presented for time-stamping has not been altered. See Order No. 1575, Appendix B at 13. 4 This is the second consecutive fiscal year where the Postal Service noted that it has discontinued nonpostal services that were inactive. See Library 

Reference, USPS-FY11-NP27. 5 This issue is further addressed in Chapter VII’s discussion of market dominant Special Services. 

Table IX–1—FY 2012 Volume, Revenue, 

Expense, and Net Income Nonpostal Services

Nonpostal Services Volume Revenue Expense Net Income

Market Dominant Nonpostal Services

Alliances with the Private Sector to 

Defray Costs of Key Postal Functions NA $44,956,099 $4,678,334 $40,277,765

Philatelic Sales 263,169 $10,647,495 $6,523,854 $4,123,641

Total Market Dominant Nonpostal Services 263,169 $55,603,594 $11,202,188 $44,401,406

Competitive Nonpostal Services 18,008,023 $111,502,032 $27,923,134 $83,578,898

Total Nonpostal Services 18,271,192 $167,105,626 $39,125,322 $127,980,304

Source: USPS-FY12-NP27.

178 2012 ANNUAL COMPLIANCE DETERMINATION—CHAPTER IX
Appendix A 

Empirical Review of Price Cap Application

When the Postal Service adjusts Market Dominant prices, the Commission reviews the proposed set of prices 

for consistency with title 39. The Commission’s rules for modern rate regulation require the use of a backwardweighted volume index (Laspeyres index) for the pre-implementation review of proposed price adjustments for 

consistency with 39 U.S.C. 3622(d), the statutory price cap. This index is used to calculate the percentage change 

in prices for each class by using the most recently available historical billing determinants to weight the percentage 

change of each price cell. The price cap rules further instruct the Postal Service to make reasonable adjustments 

to the billing determinants to account for classification changes such as the addition, elimination, or redefinition 

of price categories. See 39 C.F.R. 3010.23. At the time the rules were proposed, several parties expressed concern 

that this approach might not accurately reflect the actual change in prices. The Commission took note of these 

concerns and stated its intent to monitor the effectiveness of the rules.1

As part of the monitoring process, the Commission included in the FY 2009 ACD and the FY 2010 ACD reviews of the 

Docket No. R2008-1 and Docket No. R2009-2 price adjustments. These “Appendix A” reviews consist of a comparison 

of the percentage change in prices for each class weighted using two different sets of billing determinants. The first 

of these was the historical billing determinants used in the Commission’s pre-implementation review (a Laspeyres 

index), and the second was the billing determinants from the first full year that the prices had been in effect (a 

forward-weighted, or Paasche, index).

Billing determinants can be thought of as a market basket of purchased postal services. In the Docket No. R2011-

2 price adjustments, the CPI cap was applied to the market basket of services purchased in FY 2010. If mailers 

purchased the exact same services in the full year that the new prices were in effect, then the new prices would 

produce the projected increases consistent with the price cap. However, factors including the price changes may 

affect the quantity and mix of purchased services, thus the market basket changes as a result of the new prices 

and other factors. This analysis uses billing determinants that represent the market basket of purchased services 

at the new prices.

This year, the Commission performs a similar post-implementation review of the Docket No. R2011-2 price 

adjustment. Unlike the previous price adjustments, the Docket No. R2011-2 adjustment was not in effect for an 

1 See Docket No. RM2007-1, Order No. 26, Order Proposing Regulations to Establish a System of Ratemaking, August 15, 2007, at 33-36.

 POSTAL REGULATORY COMMISSION 179
entire fiscal year.2

 Therefore, the volumes of the three quarters following the implementation of R2011-2 prices 

(FY2011 Q3 through FY2012 Q1) are used to weight the prices instead of fiscal year volumes. In Docket No. R2011-

2 the price cap was 1.741 percent.

Table A-1 presents a comparison of the average price increase for each class from the pre-implementation review 

with those developed using actual volumes sent at the Docket No. R2011-2 prices.

The analysis using the forward-weighted index shows that all classes except for Package Services exceeded the 

price cap. The range of price increases using the forward-weighted index was 1.697 to 1.875. At the high end, the 

First-Class increase was 0.134 percent greater than the CPI cap.

The Docket No. R2011-2 price adjustment included several classification changes, including adjustments to parcel 

pricing structures in several classes. In FY 2012, several types of parcels were moved from the Market Dominant 

Product List to the Competitive Product List. Changes in overall volume levels for parcels further complicate the 

analysis. See Docket No. RM2007-1, Order No. 26, Order Proposing Regulations to Establish a System of Ratemaking, 

August 15, 2007, at 33-36.

It appears the differences shown above primarily reflect continuing patterns of volume shifts within each class. For 

example, in the pre-implementation volume index, First-Class Mail Single Piece Letters and Cards accounted for 

about 44 percent of First-Class Mail revenue, compared to about 34 percent of post-implementation revenue. FirstClass Mail automation letters account for 44 percent of the pre-implementation revenue and about 54 percent of 

the post-implementation revenue for the class. Therefore, using the volumes mailed at Docket No. R2011-2 prices 

as weights, the price increase for automation letters (1.785 percent) accounts for a larger share of the class average 

increase than it did in the pre-implementation calculation. Similarly, the price increase for single-piece letters (0.36 

percent) accounts for a smaller share than it did in the original calculation. Because single-piece and automation 

2 Billing determinants are divided between before and after the implementation date of the Docket No. R2011-2 prices. The Docket No. R2011-2 

price adjustment was implemented on April 17, 2011. The R2012-3 adjustment was implemented on January 22, 2012. It is not possible to divide FY 

2011 Q3 and FY 2012 Q2 billing determinants between the periods where Docket No. R2011-2 prices were not in effect. A few minor issues with the 

international billing determinants were resolved as discussed in PRC-ACR2012-LR6.

Table A–1—Percentage Increase in Price by Class

Class

Pre-implementation at 

Proxy Volumes

%

Volumes at 

R2011-2 Prices

%

Difference

%

Percent Exceeded 

Price Cap

%

First-Class Mail 1.738 1.875 0.137 0.134

Standard Mail 1.739 1.788 0.049 0.047

Periodicals 1.741 1.762 0.021 0.021

Package Services 1.740 1.697 -0.043 N/A

Special Services 1.739 1.776 0.037 0.035

Source: PRC-ACR2012-LR6.

180 2012 ANNUAL COMPLIANCE DETERMINATION—APPENDIX A
letters combined make up the majority of First-Class Mail volumes, these volume changes are the primary reason 

that the average increase is higher when the actual volumes at Docket No. R2011-2 prices are used.

Several unique features of the Docket No. R2011-2 price increase makes it difficult to analyze using a forwardweighted (Paasche) index. First, the prices were not in effect for a full year. This means that seasonal volume 

patterns may impact the index calculation. Second, the price increase implementation did not line up with fiscal 

quarters, making the precise measurement of volume mailed at Docket No. R2011-2 prices imprecise. Third, 

the Docket No. R2011-2 price increase was the first in nearly two years, and major classification changes were 

made. These classification changes mean that the identification of the proper pre-implementation and postimplementation price categories lacks precision.

The forward-weighted (Paasche) index highlights that, for a given price adjustment, the actual price increase 

experienced by individual mailers may not perfectly align with the average price increase for the class as calculated 

prior to implementation. The Postal Service has flexibility within the price cap to implement differential price 

changes within each class of mail. The forward-weighted (Paasche) index is a valuable tool for assessing how 

mailer post-implementation experience may differ from pre-implementation experience.

 POSTAL REGULATORY COMMISSION 181
182 2012 ANNUAL COMPLIANCE DETERMINATION—APPENDIX A
Appendix B 

Financial Results Under 

Previous Classification

This appendix presents Postal Service financial results for FY 2012 using the mail classification system in place 

prior to the passage of the PAEA. Prior to the PAEA, mail classes were subdivided into subclasses, and the financial 

reports reflected that organization. The PAEA uses the term product, defined as “a postal service with a distinct 

cost or market characteristic for which a rate or rates are, or may reasonably be applied.” 39 U.S.C. 102(6). Within 

classes, the Postal Service reports data by product, not by subclass. To facilitate historical comparisons, Table B-1 

presents volumes, revenues, attributable costs, and contribution to institutional cost using the former classification 

scheme of subclasses.

 POSTAL REGULATORY COMMISSION 183
Table B–1—Fiscal Year 2012 Volume, Revenue, Cost and 

Cost Coverage by Class Previous Classification (Subclasses)

Volume

(000)

Revenue

($000)

Attributable

Cost

($000)

Contribution to

Institutional

Cost

($000)

Rev./Pc.

(Cents)

Cost/Pc.

(Cents)

Contribution 

to

Institutional

Cost/Pc.

(Cents)

Cost

Coverage

Competitive Mail

Express Mail 39,823 801,561 467,227 334,334 2,012.806 1,173.256 839.550 171.6%

Priority Mail 824,202 5,939,726 4,545,341 1,394,385 720.664 551.484 169.180 130.7%

Parcel Select and Parcel 

Return Service (PRS) 984,202 1,456,216 1,105,767 350,450 147.959 112.352 35.608 131.7%

First-Class Package 

Service 411,424 875,654 766,719 108,935 212.835 186.357 26.478 114.2%

Competitive 

International Mail 273,525 1,837,317 1,216,598 620,719 671.717 444.784 226.933 151.0%

Competitive 

Domestic Services 504,824 273,118 231,706 184.8%

Competitive 

International Services 10,577 8,391 2,187 126.1%

Total Competitive 

Mail and Services 2,533,176 11,425,875 8,383,159 3,042,716 451.049 330.935 120.115 136.3%

Market 

Dominant Mail

First-Class Mail

Letters, Flats & Parcels 65,243,270 28,536,156 13,703,057 14,833,099 43.738 21.003 22.735 208.2%

Cards 3,746,446 979,389 511,848 467,541 26.142 13.662 12.480 191.3%

Standard Mail

Regular 42,341,738 10,226,597 5,514,146 4,712,451 24.153 13.023 11.130 185.5%

Nonprofit 11,004,146 1,509,431 2,734,781 (1,225,350) 13.717 24.852 (11.135) 55.2%

Regular 

and Nonprofit 53,345,884 11,736,028 8,248,927 3,487,101 22.000 15.463 6.537 142.3%

Enhanced Carrier 

Route (ECR) 24,350,847 4,750,192 2,739,450 2,010,742 19.507 11.250 8.257 173.4%

Nonprofit ECR 2,102,934 226,349 228,268 (1,919) 10.763 10.855 (0.091) 99.2%

ECR and NECR 26,453,780 4,976,541 2,967,718 2,008,822 18.812 11.219 7.594 167.7%

Periodicals

Within County 631,286 67,269 95,398 (28,129) 10.656 15.112 (4.456) 70.5%

Outside County 6,110,064 1,664,217 2,306,204 (641,987) 27.237 37.744 (10.507) 72.2%

Package Services

Single-Piece Parcel Post 70,971 774,438 840,359 (65,921) 1,091.206 1,184.092 (92.885) 92.2%

Bound Printed Matter 473,829 493,537 419,454 74,084 104.159 88.524 15.635 117.7%

Media Mail 93,771 301,412 321.434 

Library Rate 6,651 19,834 298.213 

Media and 

Library Mail 100,422 321,246 376,770 (55,524) 319.896 375.187 (55.291) 85.3%

U.S. Postal Service Mail 440,452 

Free Mail 56,952 39,586 (39,586) 69.507 

Market Dominant 

International Mail 652,322 939,551 795,510 144,041 144.032 121.950 22.081 118.1%

Total Market 

Dominant Mail 157,325,678 50,488,371 30,304,830 20,183,541 32.092 19.262 12.829 166.6%

184 2012 ANNUAL COMPLIANCE DETERMINATION—APPENDIX B
Table B–1—Fiscal Year 2012 Volume, Revenue, Cost and 

Cost Coverage by Class Previous Classification (Subclasses)—Continued

Volume

(000)

Revenue

($000)

Attributable

Cost

($000)

Contribution to

Institutional

Cost

($000)

Rev./Pc.

(Cents)

Cost/Pc.

(Cents)

Contribution 

to

Institutional

Cost/Pc.

(Cents)

Cost

Coverage

Market Dominant 

Services

Certified Mail 662,806 601,869 60,937 110.1%

COD 5,927 3,604 2,323 164.5%

Insurance 108,510 96,969 11,541 111.9%

Registered Mail 39,477 30,226 9,251 130.6%

Stamped Envelopes 16,584 6,389 10,196 259.6%

Stamped Cards 2,117 731 1,386 289.6%

Money Orders 165,093 110,474 54,619 149.4%

Post Office Box Service 481,567 377,073 104,493 127.7%

Caller Service 92,490 27,045 65,445 

Other Special Services 730,588 562,936 167,652 129.8%

International Services 29,435 22,763 6,672 

Other Income 927,529 927,529 

Total Mail 

and Services 159,858,854 65,176,370 40,528,068 24,648,302 40.771 25.352 15.419 160.8%

Institutional Costs 40,625,129 

Appropriations: 

Revenue Forgone 46,204 

Investment Income 24,657 

Total Revenues 65,247,231 

Total Costs 81,153,198 

Net Income (Loss) (15,905,966)

Source: Library Reference PRC-ACR2012-LR1

 POSTAL REGULATORY COMMISSION 185
186 2012 ANNUAL COMPLIANCE DETERMINATION—APPENDIX B
Appendix C

Methodology Changes and 

Management Operating Data System

Introduction

In FY 2012, the Postal Service filed five petitions to change analytical principles relating to its periodic reports.1 A 

summary of the proposed changes to the analytical principles, and the Commission’s analysis are discussed below. 

This appendix contains three parts: (1) a summary of the methodological changes, (2) a list of analytical principle 

changes the Postal Service is expected to undertake and (3) a discussion of the Postal Service’s Management 

Operating Data System (MODS).

Methodology Changes

RM2012-1 Proposal Nine: Change in Method of Distributing the Domestic 

Transportation Costs of Foreign Origin (Inbound) Letter Post Mail

The Postal Service proposed to change the current method for distributing the domestic transportation costs 

of inbound letter post to countries and the country group reporting categories presented in the International 

Cost and Revenue Analysis (ICRA) report. In the past, the method for distributing the domestic transportation 

costs (Cost Segment 14) of inbound letter post was based upon the number of pieces entered from each country 

or country group. Under Proposal Nine, domestic transportation costs would be distributed based upon weight. 

The Postal Service believes that distributing the domestic transportation costs of inbound letter post based upon 

weight offers the following advantages over the previous methodology:

 It would be consistent with the distribution of such costs for U.S. origin (outbound) letter post, which has 

been presented in the ICRA report by country or country group; and

 Distributing domestic transportation costs based upon weight recognizes the significant variation in weight 

per piece across countries and country groups. 

 The Postal Service noted in its analysis submitted with Proposal Nine, that the most significant impact was a 

reduction in the cost of inbound letter post from Canada “because, on average, this mail is significantly less per 

piece than inbound mail from the rest of the world.”2

 

1 In FY 2012, all proposes to change analytical principles to periodic report proposals initiated were completed prior to the Postal Service’s FY 2012 ACR 

filing except for Proposal Nine in Docket No. RM2012-8. Proposal Nine was approved on February 14, 2013. See Order 1656. 2 Petition of the United States Postal Service Requesting Initiation of a Proceeding to Consider Proposed Changes in Analytical Principles (Proposals Nine 

– Fifteen), November 1, 2011 (Petition) at 4. 

 POSTAL REGULATORY COMMISSION 187
The Commission approved Proposal Nine because it represents an improvement over the previous method by 

providing a more accurate distribution of transportation costs for inbound letter post. See Order No. 1153. The 

Postal Service implemented this change in the FY 2012 ACR. 

RM2012-1 Proposal Twelve3: Modification of the 

Standard Mail Presort Letters Mail Processing Cost Model

The Postal Service proposed to disaggregate the avoided cost estimates for nonautomation machinable Mixed 

Automated Area Distribution Center (MAADC) and Automated Area Distribution Center (AADC) presort Standard 

Mail letters as directed in the 2010 Annual Compliance Determination. To integrate the distinction between 

nonautomation machinable MAADC and AADC presort letters, the Postal Service created a separate mail flow 

model for each presort level.4

 The Postal Service also proposed removing MODS data used to calculate piggyback 

factors for mail processing bar code sorters since these machines are now retired and the piggybank factors are 

no longer needed.

The Commission approved Proposal Twelve. See Order 1153. The Postal Service implemented it in the FY 2012 

ACR. Although the Commission approved this proposal, it expressed concerns about the potential implications of 

Proposal Seventeen (letter automation productivity changes) filed in Docket No. RM2012-2. In previous Annual 

Compliance Reports (ACR) and rate adjustments, the avoided costs estimate for nonautomation machinable 

MAADC and AADC presort letters was the same because they were averaged together. Therefore, no passthrough 

had been calculated for each separate discount and each discount could not be assessed individually. With the 

approval of Proposal Twelve, separate passthroughs can be calculated.

RM2012-1 Proposal Thirteen: Development of a 

New Mail Processing Cost Model for Media Mail/Library Mail

The Postal Service presented new mail processing cost models for Media Mail and Library Mail in response to the 

Commission’s directive in Docket No. RM2011-5. With Order No. 724 in Docket No. RM2011-5, the Commission 

directed the Postal Service to revise its mail processing cost model to utilize the cost pool classification method 

established in Docket No. R2006-1 for First-Class Mail letters. See Docket No. RM2011-5, Proposal Twelve.

Previously, the Media Mail/Library Mail cost pools were grouped into two categories: workshare proportional or 

workshare fixed. Under Proposal Thirteen, the cost pools would be grouped into three categories. These are: (1) 

parcel sorting cost pools classified as workshare proportional; (2) Forwarding/Accepting/Customer service cost 

pools classified as workshare fixed; and (3) the remaining cost pools (mainly allied, support, and unexpected costs) 

are piggybacked (distributed) in the ratio of the proportional and fixed cost pools.

3 Docket No. RM2012-1 proposal numbers are not listed consecutively here because the Commission discussed Proposals Ten and Eleven in the FY 2011 

ACD. FY 2011 ACD at 182. 

The Commission’s rules require the Postal Service’s ACR to use the established methodology at the time of filing. For proposals still pending before the 

Commission at the time of filing an ACR, the Postal Service typically provides two versions of its ACR cost models, the established methodology and 

the recently proposed methodology. However, for Proposals Ten and Eleven, the Postal Service stated that it was unable to provide both versions, and 

incorporated only the proposed methodologies in its 2011 ACR filings. The Commission made a limited exception to its rules in this case because the 

proposals were minor. 4 The MADDC cost model treats outgoing ISS as the first operation. The ADDC cost model treats incoming ISS as the first operation.

188 2012 ANNUAL COMPLIANCE DETERMINATION—APPENDIX C
Because the proposal creates consistency between parcel cost models and more accurate unit costs, the 

Commission approved Proposal Thirteen. See Order 1153. The Postal Service implemented it in the FY 2012 ACR. 

RM2012-1 Proposal Fourteen: Changes in Special Services Cost Models

The Postal Service proposed to modify and update the cost models of a number of Special Services by including 

costs associated with mail processing and certain retail window-related activities. It proposed to update cost 

models for the following: Caller Service; Certificate of Mailing; Correction of Mailing List; Periodical Application; 

P.O. Box Key and Lock; Restricted Delivery; Signature Confirmation; and Zip Coding of Mailing List. To be consistent 

with the existing CRA methodology, the Postal Service proposed updating each of these cost models to include the 

Waiting Time Adjustment Factor,5

 the Miscellaneous Factor6 for window-related activities, and the Miscellaneous 

Factor for mail processing-related activities.

The Postal Service’s data systems do not provide sufficient detail to accurately develop the attributable cost for 

each of the Special Services. To facilitate analysis, the Postal Service estimates the attributable cost of each service 

using a cost model that builds up a CRA-type cost. The previous models did not include waiting time cost, windowrelated cost, or related mail processing cost. The Postal Service reports that these Special Services cost models are 

needed to disaggregate costs for analysis, since the product volumes and costs are too small for the CRA model to 

accurately develop them. It explains that these cost models are used to supplement the cost information provided 

in the Cost and Revenue Analysis (CRA) report. 

The Commission approved Proposal Fourteen because, without these costs, the models would not produce a cost 

comparable to the attributable costs reported for certain ancillary services and would improperly understate the 

costs of such services. See Order 1153. The Postal Service implemented this change in the FY 2012 ACR. 

RM2012-1 Proposal Fifteen: Proposed Changes in 

Cost Models Related to Return Receipt Service

The Postal Service proposed to modify and update four7 cost models related to Return Receipt service to better 

reflect current postal operations. This proposal updates each Return Receipt cost model to incorporate costs that 

were currently reported in the CRA report, but were not identified in each cost model. 

Return Receipt provides the sender with proof that the mailpiece was delivered. Since Return Receipt is generally 

purchased with Certified Mail, the Postal Service proposed measuring the transaction time associated with a 

Return Receipt by comparing the transaction time difference for a Certified Mail purchase both with, and without, 

a Return Receipt. After completing the study, the Postal Service estimated the window acceptance time for a 

Return Receipt to be 0.64 minutes. In addition to the acceptance and delivery transaction times, the Postal Service 

observed that a clearing clerk reviews the Green Card after it is brought back to the station by carriers and before 

5 The Waiting Time Adjustment Factor reflects the time a postal clerk waits for the customer at the front of the line to walk to the counter. 6 “The Miscellaneous Factors adjust the transaction costs to allocate clerks’ clocking-in and clocking-out time, taking personal breaks, moving 

equipment, and similar activities.” Petition at 19. 7 Currently, there are four Return Receipt cost models: (1) the traditional Return Receipt (PS Form 3811-the “Green Card”); (2) electronic Return Receipt 

(eRR); (3) Return Receipt after Mailing; and (4) Return Receipt for Merchandise. Except for Return Receipt for Merchandise, Return Receipt is a Special 

Service that can be purchased for Express Mail or in combination with another special service such as Certified Mail.

 POSTAL REGULATORY COMMISSION 189
it is mailed back to the customer. With this updated information, the Postal Service revised the traditional Green 

Card cost model and each of the other three Return Receipt cost models. Specific updates to these three models 

are discussed below.

Electronic Return Receipt (eRR) provides proof of delivery via an e-mail with the delivery date, time, and a digital 

image of the signature from the mailpiece. No printed Return Receipt Green Card is sent to the customer. Printing 

costs for the Green Card were inadvertently included in the existing cost model. Also, the Postal Service proposed 

adding a Waiting Time Adjustment Factor and the Miscellaneous Factor (window overhead) to the window 

activity costs.

Return Receipt after Mailing provides the sender with a return receipt showing the date of delivery and the name 

of the person or organization that received the item, but not an actual signature. The Postal Service proposed 

adding to the cost model the Waiting Time Adjustment Factor and the Miscellaneous Factor (window overhead).

Return Receipt for Merchandise (PS Form 3804) provides the sender with a mailing receipt and a Green Card. 

After delivery, the Green Card is returned through the mail to the sender. When the model was initially developed, 

the costs included only one label – the mailing receipt. As a result, the Postal Service proposed to include the 

material costs for a Green Card into the model. In addition, the Postal Service reviewed the time needed to collect 

a customer’s signature and found that it was less than what was originally estimated. The Postal Service proposed 

to update the cost model to reflect the new information. The overall impact of the update is a net decrease in the 

unit cost for Return Receipt for Merchandise.

Because the proposed updates to the Return Receipt cost models reflect current postal operations, which should 

be incorporated into the Postal Services costing procedures, the Commission approved Proposal Fifteen. The Postal 

Service implemented this change in the FY 2012 ACR. See Order 1153. A Commission review of the individual 

Return Receipt cost models also found that the Postal Service had not previously included costs for the Waiting 

Time Adjustment Factor or the Miscellaneous Factor (window overhead). Because the study was not based on 

a probability sample, the Commission encouraged the Postal Service to strive in the future to base estimates on 

probability samples when the budget permits, and to consider the efficacy of using judgment samples only when 

there are insufficient funds to support a proper sample.

RM2012-2 Proposal Sixteen: Productivity 

Measurement for Flats Sequencing System

The Postal Service introduced a new method for measuring the productivity of Flats Sequencing System (FSS) 

operations based upon Management Operating Data System (MODS) data. Since the FSS was fully deployed in 

FY 2011, the Postal Service proposed to incorporate FSS data into its flats mail processing cost models. Data on 

the productivity of the two major FSS components: Stand-Alone Mail Prep (MODS operation 530) and the FSS 

sorter (MODS operation 538) would be used. The numerator of this productivity measurement would consist of 

the first-pass sort machine count of Total Pieces Fed (TPF) in the FSS sort operation (MODS operation 538). The 

190 2012 ANNUAL COMPLIANCE DETERMINATION—APPENDIX C
denominator of this productivity measurement would consist of the sum of the FSS work hours logged for the prep 

operation (operation 530) and the sorting operation (operation 538). Unlike other productivity measurements 

(TPF per hour), the FSS productivity also includes the prep work hours in the denominator.

Because the proposal better aligns the flats cost models with operations in the new FSS environment, the 

Commission approved Proposal Sixteen. See Order 1383. The Postal Service implemented this change in the FY 

2012 ACR. 

RM2012-2 Proposal Seventeen: Consolidated MODS 

Operation Groups for Letter Automation Productivities

The Postal Service proposed to consolidate MODS operation groups associated with the productivity calculations 

for the DBCS/DIOSS automated letter image reading and sorting operations. This change responds to changes in 

the definition of certain MODS operations. The Postal Service explained that the changes to MODS operations 

definitions were put in place “to promote more accurate use of a streamlined set of operation numbers.”8

 The 

Postal Service further explained: “Since it is costly to have employees re-clock promptly for every change of work 

activity that may be represented by a distinct MODS operation number, in practice there is a tradeoff between 

MODS data granularity and accuracy.”9

In Proposal Seventeen, the Input Subsystem (ISS) and Output Subsystem (OSS) were merged into specific Incoming 

and Outgoing Barcode Sorting (BCS) operation groups. The Postal Service explained that these consolidations 

were appropriate because the machines use multimode processing, which merge the ISS/OCR (Optical Character 

Recognition) and OSS functions. This proposal also modified the First-Class Mail and Standard Mail letter mailflow 

models that used the previously disaggregated ISS and OSS productivity data, to now use the consolidated BCS 

operation groups. 

Because the proposal modifies the productivities to better align with operational realities, the Commission 

approved Proposal Seventeen. The Postal Service implemented it in the FY 2012 ACR. See Order 1383. 

RM2012-2 Proposal Eighteen: Four Modifications to the Flats Cost Models

Proposal Eighteen included four distinct modifications to the flats cost models, each is discussed below. 

Proposal Eighteen (Modification One)

Modification One incorporates FSS processing costs into the First-Class Mail, Standard Mail, and Periodicals flats 

cost models. In appended comments to Time Inc.’s submission, Halstein Stralberg suggested a modification to 

reclassify the Network Distribution (NDC) FSS cost pool as piece-related sorting. The Postal Service did not oppose 

this change to their Modification One proposal.

8 Petition of the United States Postal Service Requesting Initiation of a Proceeding to Consider Proposed Changes in Analytical Principles (Proposals 

Sixteen -- Twenty), November 30, 2011 at 5. 9 Responses of the United States Postal Service to Questions 1-9 of CHIR No. 1, question 7, January 10, 2012.

 POSTAL REGULATORY COMMISSION 191
The Commission approved proposed Modification One to include FSS cost in the flats cost models for First-Class 

Mail, Standard Mail, and Periodicals. Because the FSS is used to sort mail, it is sensible to treat the cost pool as 

piece-related. Therefore, the Commission also approved Stralberg’s proposal. See Order 1383. Concerns about the 

use of proxy data were resolved when the Postal Service replaced most of the proxy data with operational data in 

the FY 2011 ACR.

As a first step, the Commission found that the Postal Service’s overall approach of incorporating FSS-specific 

data into the flats mail processing cost models is appropriate. The Commission expressed concern related to the 

discrepancy between the FSS TPF and TPH, which indicates a relatively low acceptance rate. The Postal Service 

believes the TPF and TPH difference is a short-run problem and should improve over time. The Commission 

encouraged the Postal Service to monitor the data and to make improvements as necessary so that the mailflow 

models accurately reflect the actual FSS operations. 

Proposal Eighteen (Modification Two)

Modification Two corrects an anomalous difference in costs between Mixed Area Distribution Center (MADC) 

automation flats and Area Distribution Center (ADC) automation flats in the First-Class Mail, the Standard Mail, 

and Periodicals flats cost models. At the time of the Proposal, the costs of MADC presorted flats were estimated 

to be less than the costs of ADC flats that receive more mailer presorting. Modification Two was approved by the 

Commission because it mitigates the effect of including single-piece mail in the downflow densities. The proposed 

change is also consistent with the methodology for First-Class Mail letters approved in Docket No. RM2011-5. 

Proposal Eighteen, Modification Two was approved by the Commission and implemented in the FY 2012 ACR. See 

Order 1383.

Proposal Eighteen (Modification Three)

Modification Three corrects an error in the calculation of the cost of mechanized ADC pallet bundle sortation in the 

Periodicals flats cost models. Previous versions of the Periodicals flat worksharing cost avoidance models included 

an error in the calculation of the ADC pallet mechanized bundle sortation in the flats cost models. The Postal 

Service provided a corrected cell reference as part of Modification Three.

Because the proposal corrected a calculation error, the Commission approved Proposal Eighteen, Modification 

Three. See Order 1383. The Postal Service implemented it in the FY 2012 ACR. 

Proposal Eighteen (Modification Four)

Modification Four modifies the Periodicals flats cost model to include an estimate for the costs of bundles entered 

on MADC pallets. The Postal Service proposed to use destination-entered ADC pallets as a proxy for origin-entered 

MADC pallets because no data are currently available for MADC pallets. As further rationale for the use of this 

proxy, the Postal Service stated that bundles entered on MADC pallets will be processed in the same operations 

as bundles entered on ADC pallets.

192 2012 ANNUAL COMPLIANCE DETERMINATION—APPENDIX C
Because use of the ADC proxy is appropriate at this juncture as Mixed ADC pallets are likely to be processed in 

a similar manner as an ADC pallet,10 the Commission approved Proposal Eighteen, Modification Four. See Order 

1383. The Postal Service implemented it in the FY 2012 ACR. 

RM2012-2 Proposal Nineteen: Modification of the 

First-Class Mail Presort Letters Mail Processing Cost Model

The Postal Service proposed to develop separate cost estimates for the nonautomation machinable MAADC and 

AADC First-Class Mail presort letters. This proposed methodological change is consistent with Proposal Twelve, 

presented in Docket No. RM2012-1, in which the Postal Service disaggregated the cost estimates for nonautomation 

machinable MAADC and AADC Standard Mail presort letters. The Commission approved this proposal because it 

paralleled the recent modification to the Standard Mail presort letters cost model approved by the Commission in 

Order No. 1153.11 See Order 1383. The Postal Service implemented it the FY 2012 ACR. 

RM2012-2 Proposal Twenty: Modification 

of the Business Reply Mail Cost Model

The Postal Service proposed to update data in the Qualified Business Reply Model (QBRM) avoidable cost model 

and update and revise the productivity estimates used in the BRM fee cost studies. In the FY 2011 ACD, the 

Commission reiterated its concern that the QBRM avoided costs may be understated. The Postal Service asserts 

that the decrease in the QBRM worksharing-related savings estimate is due to the improvement of the Remote 

Computer Read finalization rate.

The Commission observed that the history of the QBRM cost avoidance model shows that the Postal Service has 

varied the number of processing operations and whether manual sortation should be incorporated. Based on the 

Postal Service’s response to CHIR No. 3, question 4 and its reply comments in Docket RM2012-2, the Commission 

concluded that the current cost avoidance model should be modified to include all applicable processing operations 

and manual sortation. 

The Commission also approved the continued use of the current QBRM cost avoidance model with a modification 

that includes manual sortation but advised the Postal Service to refine the model to include all the processing 

steps that replies to low volume recipients incur. Additionally, the Commission approved the updated model for 

calculating QBRM fees because it better reflects operational reality and uses the most recent available data. See 

Order 1383. The Postal Service implemented Proposal Twenty in the FY 2012 ACR.

10 “The operational flow provided by the Postal Service in this docket indicates that a Mixed ADC pallet will be opened and worked at an Origin ADC. This 

is a rational approach that leads to an estimated cost for Mixed ADC pallets entered at an Origin ADC that is lower than the estimated cost for Mixed 

ADC pallets entered at Origin SCFs. The Postal Service should ensure that this operational flow reflects reality as the Postal Service gains experience 

with real world processing of Periodicals Mixed ADC pallets.” See Order 1383 at 19. 11 See Docket No. RM2012-1, Proposal Twelve.

 POSTAL REGULATORY COMMISSION 193
RM2012-5: Proposal One: Elimination of Separate Delivery Costs 

for Carrier Route Letters, Flats, and Parcels

The Postal Service proposed to end the separate, shape-based reporting of unit delivery costs within Standard Mail 

Carrier Route in the Cost and Revenue Analysis (CRA) report. In the 2011 ACD, the Commission suggested the “Postal 

Service may elect to initiate a rulemaking ...[to] aggregate Carrier Route letter cost data with Carrier Route flat data” 

to improve the reliability of Carrier Route unit letter delivery costs.12 The proposed FY 2012 aggregated unit delivery 

cost would be the sum of the piggybacked, direct and indirect, city and rural carrier in-office and delivery costs, 

divided by the sum of Standard Carrier Route letters, flats, and parcels. This would be the same as a volume-weighted 

average of the unit delivery costs of Carrier Route mail by shape. Because the unit delivery costs for Carrier Route 

letters and parcels exhibit similar year-to-year volatility and because Carrier Route letters and parcels represent only 

1 percent of the volume, it’s expected that using the weighted average should eliminate the year-to-year volatility 

and produce unit delivery costs more representative of the entire carrier route category. For these reasons, the 

Commission approved Proposal One. See Order 1462. The Postal Service implemented it in its FY 2012 ACR. 

RM2012-5: Proposal Two: Calculation of City Carrier 

Scanning Costs for All Non-Accountable Delivery Scans 

The Postal Service proposed to extend an existing costing methodology to: (1) the costs of USPS Tracking Barcode 

delivery scans performed by city carriers during street activities (cost segment 7); and (2) the costs of all nonaccountable delivery scans performed by city carriers during street activities. This new USPS Tracking Barcode 

system allows the Postal Service to track the flow of parcels to the point of delivery. The Postal Service proposed 

to extend the existing methodology for calculating city carrier street scanning costs to all non-accountable delivery 

scans performed by the carriers on the street. The proposed methodology for developing the costs of scans 

performed by city carriers using the USPS Tracking Barcode establishes the foundation for accurately capturing the 

costs of scanning parcels and the costs of other non-accountable delivery scans that may occur in the future. The 

previous methodology had not properly assigned scanning costs to the products which incur them. This proposal 

rectified this issue and is expected to produce more accurate costs. For these reasons, the Commission approved 

Proposal Two and the Postal Service implemented it in the FY 2012 ACR. See Order 1462. 

RM2012-5: Proposal Three: Changes in IOCS Encirclement Rules 

The Postal Service proposed to update encirclement rules13 for Inbound International Registered Mail and for 

certain other extra services to reflect changes in operations and to correct inconsistencies. For Collect on Delivery 

(COD), Certified, Insured, and Signature Confirmation Extra Services, encirclement would be added for certain mail 

processing and window operations. Because the proposal more accurately reflects the processing of International 

Inbound Registered Mail, the Commission approved Proposal Three and the Postal Service implemented it in the 

FY 2012 ACR. See Order 1462.

12 2011 ACD at 121. 13 “In the [IOCS], encirclement is the process of assigning the cost of handling a mailpiece with an Extra Service to the Extra Service rather than the host 

mailpiece. Encirclement is warranted when an Extra Service is the primary reason that an employee has to handle a mailpiece.” Petition of the United 

States Postal Service Requesting Initiation of a Proceeding to Consider Proposed Changes in Analytical Principles (Proposals One – Five), June 26, 

2012 at 7.

194 2012 ANNUAL COMPLIANCE DETERMINATION—APPENDIX C
RM2012-5: Proposal Four: Changes in IOCS Reporting Codes 

The Postal Service proposed to: (1) streamline In-Office Cost System (IOCS) activity codes by eliminating codes that 

were no longer used for costing; (2) combine the operation codes for Outgoing Primary Distribution and Outgoing 

Secondary Distribution into one code; (3) add a code for Managed Mail Distribution; and (4) add new activity codes 

for Parcel Select Lightweight and revise the codes for First-Class Mail parcels and irregular parcels and pieces. 

The Commission agreed with the Postal Service that the activity codes to be eliminated were more detailed than 

needed, and were not currently used in the CRA. The Commission also found that these changes did not have any 

impact on the calculation of cost distribution keys in the IOCS. The Commission also concurred with the Postal 

Service that combining the Outgoing Primary and Outgoing Secondary distribution codes into a single Outgoing 

Distribution in the IOCS should not have an impact on the costs of products. For these reasons, the Commission 

approved Proposal Four and the Postal Service implemented it in the FY 2012 ACR. See Order 1462.

RM2012-5: Proposal Five: Changes to the Methodology 

of Distributin Costs Incurred by Vehicle Service Drivers

The Postal Service proposed to create a new distribution key for allocating the attributable costs of Vehicle 

Service Drivers (VSD) (cost segment 8). The new distribution key is derived from a new statistical subsystem of 

the Transportation Cost System (TRACS) called TRACS-VSD. The Postal Service has developed a sampling frame 

that enables the development of a continuous statistical system similar to the TRACS highway subsystem. Like the 

TRACS statistical system, TRACS-VSD will produce quarterly distribution keys to distribute VSD costs. Similar to the 

TRACS statistical system, the TRACS-VSD subsystem is a stratified multistage sampling system. The Commission 

concluded that the new methodology reflected the appropriate relative use of VSD transportation by different 

products. The Commission found that the VSD distribution key, calculated using the new methodology, is a 

significant improvement over the use of a proxy distribution key. For these reasons, the Commission approved 

Proposal Five and the Postal Service implemented it in the FY 2012 ACR. See Order 1462.

RM2012-7 Proposal Six: Use of the Foreign Postal Settlement System for 

Reporting of Inbound International Revenue, Pieces and Weight in the 

International Cost and Revenue Analysis

The Postal Service proposed to use the Foreign Postal Settlement (FPS) system as the sole source for the reporting 

of inbound international revenue, pieces, and weight in the International Cost and Revenue Analysis (ICRA) report. 

The FPS system compiles volume and weight data on inbound mail from actual transaction billing documents and 

electronic messaging provided by foreign postal administrations.

The Commission agreed with the Postal Service that this proposal would improve consistency among the Imputed 

and Booked versions of the ICRA, the RPW, and the Postal Service’s financial statements. Convergence of the 

imputed and booked revenue had not been achieved at the time of the 2012 ACR filing. Revenue was not the same 

as the revenue in the FY 2012 RPW report. The Postal Service stated FY 2012 is a “transition year to integrate the 

first full year of FPS data as used in RPW into the ICRA.”14 The Commission approved Proposal Six. See Order 1516.

14 Responses of the United States Postal Service to Questions 1-10 of Chairman’s Information Request No. 1, September 21, 2012.

 POSTAL REGULATORY COMMISSION 195
RM2012-7 Proposal Seven: Use of Actual Cubic-Foot Measurements 

of Parcels in the Transportation Cost System Highway Subsystem

The Postal Service proposed to replace the current, study-based parcel densities in the Transportation Cost System 

(TRACS) Highway Subsystem with parcel dimensional data now regularly captured in TRACS-Highway tests. Under 

the proposed methodology, the estimated cubic measurements of sampled parcels would be replaced with actual 

parcel dimensional measurements. Beginning in Quarter 1 of FY 2012, the TRACS-Highway Subsystem began 

utilizing actual, measured length, width, and height information for parcel-shaped pieces. As a result, the cubicfoot component of the cubic-foot-miles distribution key for parcels can be determined directly from the product of 

the three dimensions. These direct measurements eliminated the need for density study information and periodic 

study updates for parcels. For the subset of parcels identified as irregular in shape, the Origin-Destination System 

and Revenue, Pieces, and Weight factor of 0.785 would be applied.15 For the small portion of sampled parcels 

without useable dimensional information, a smoothed, composite, four-quarter density ratio would be developed, 

by major mail category, to convert sampled weight measures to cubic-foot measures. Because the proposal would 

improve the accuracy of costs, the Commission approved Proposal Seven and the Postal Service implemented it in 

the FY 2012 ACR. See Order 1516.

RM2012-8 Proposal Eight: Incorporation of the Lightweight 

Parcel Select Price Categories into the Parcel Select/Parcel 

Return Service Mail Processing Cost Model

The Postal Service proposed to move the machinable and irregular cost worksheets contained in the Standard Mail 

parcel mail processing cost model to the Parcel Select/Parcel Return Service mail processing cost model and relabel 

the worksheets as “Lightweight Parcel Select.” In Docket No. MC2010-36, the Commission conditionally approved 

the transfer of the commercial Standard Mail machinable and irregular parcels from the market dominant product 

list to the competitive product list as “Lightweight Parcel Select.” Therefore, the Postal Service reasoned that 

costs reported for FY 2012 should reflect the incorporation of Lightweight Parcel Select into Parcel Select. The 

Postal Service also proposed using the cost estimates generated by the Parcel Select and Lightweight Parcel Select 

models to de-average the estimates of mail processing cost by shape for all Parcel Select mailpieces in the FY 2012 

Annual Compliance Report.

Because the change to the cost model reflects the transfer of Lightweight Parcel Select to Parcel Select, the 

Commission approved Proposal Eight and the Postal Service implemented it in the FY 2012 ACR. See Order 1567.

15 The derivation and use of the 0.785 factor is described in Docket No. R2006-1, Direct Testimony of Thomas M. Scherer on Behalf of the United States 

Postal Service, USPS-T-33, May 3, 2006, at 21-26.

196 2012 ANNUAL COMPLIANCE DETERMINATION—APPENDIX C
RM2012-8 Proposal Nine: Modification to First-Class Mail, 

Standard Mail, and Periodicals Flats Cost Models

In Proposal Nine, the Postal Service proposed to make eight distinct modifications to the Periodicals Flats Model 

and apply four of those modifications to First-Class Mail and Standard Mail Flats Models. Where Proposal Nine 

affects materials filed in this Report, the Postal Service has generally prepared two versions of the materials, one 

incorporating the proposal and one not incorporating it.

Proposal Nine’s eight modifications are discussed below.

Modifications One and Two are corrections to the Flats models. Modification One removes the ability to isolate 

(via toggle switches) the effect of individual changes proposed in Docket No. RM2012-2. It renames a tab in the 

spreadsheet and does not change any calculations within the models. This modification affects the First-Class 

Mail, Standard Mail, and Periodicals Flats Models. The Commission accepted this modification, as it improved the 

organization of the Flats Models. Modification Two corrects what the Postal Service describes as “cell referencing 

errors” in the Periodicals cost model. With Modification Two, the Postal Service corrected cell references that 

incorporate bundle-related FSS costs. The Commission accepted Modification Two as it harmonized the cell 

reference with the source explanation.

Modification Three modifies the modeled mail flow used to estimate the number of rejects for the Automated 

Flats Sorting Machine (AFSM 100). This affects the Flats Models for First-Class Mail, Standard Mail, and Periodicals 

Mail, making reject rates more consistent with those reported in the MODS data. The Postal Service proposed 

to account for more sources of rejects in the Flats Models and to adjust automation reject rates to make them 

consistent with MODS data. The data suggest that the existing model overstates the AFSM 100 and FSS acceptance 

rates.16 The Commission found that this modification better reflected current operations, thus improving the 

accuracy of the current cost models’ estimates. However, since less than 5 percent of First-Class flats volume17

and 17 percent of Standard Mail and Periodicals flats volume were sorted on an FSS18 the Commission notes that 

the impact of this modification on worksharing cost avoidances may need to be reviewed as the flats processing 

operations evolve to optimize use of the FSS.

Modification Four accounts for changes in allied operations resulting from the introduction of the AFSM 100 and 

FSS and only applies to the Periodicals cost model. The Postal Service incorporated additional allied operations into 

the Periodicals model and updated the volume of mail flowing between piece-sorting operations. The previous 

methodology for Periodicals allied flows was designed before deployment of the current generation of flats sorting 

machines, the AFSM 100 and FSS. The newer technologies have additional allied activities between processing 

operations and have changed the percentage of volumes that flow between processing operations. Thus, the 

16 At the time, the accept rate for the FSS was 98.16 percent. With the acceptance of Modification Three, it became 89.39 percent. See Library Reference 

USPS-LR-RM2012-8/1, Excel file “FCM.Prsrt.Flats.1023.xls,” sheet “ACCEPT RATES,” cells G24 and K24. 17 Library Reference USPS-LR-RM2012-8/1, Excel file “FCM.Prsrt.Flats.1023.xls,” sheet “COVERAGE FACTORS”, cell L77. 18 Library Reference USPS-LR-RM2012-8/1, Excel file “PER.OC.Flats.0915.xls”, sheet “FSS Parameters”, cell L6; id., Excel file “Std.Flats.MP.0915.xls”, sheet 

“COVERAGE FACTORS”, cell L77. 9.7 percent of non-HD and Saturation flat-shaped volume was processed on the FSS in FY 2011. 16.8 percent of non-HD 

and Saturation flat-shaped volume was processed on the FSS in FY 2012.

 POSTAL REGULATORY COMMISSION 197
Postal Service believes this modification aligns the Periodical cost model with current operations. The updating of 

volume flows between operations included in Modification Four increased modeled allied piece-handling costs. 

The increase in allied operation costs had two impacts. First, it caused the CRA adjustment factor to decrease. 

Second, that decrease in turn led to a decrease in the total adjusted modeled costs for direct piece operations, as 

well as for bundle- and container-related costs. 

The Commission approved Modification Four because the updated allied flows improve the accuracy of the 

modeled Periodicals piece cost.

In Modification Five, the Postal Service proposed to use cost data to calculate FSS coverage factors. Previous 

versions of the First-Class Mail, Standard Mail, and Periodicals Flats Models assumed that FSS coverage factors 

were the same for First-Class Mail, Standard Mail, and Periodicals. However, the Postal Service states that this 

coverage factor does vary by class. Therefore, the Postal Service proposed to use cost estimates to distribute 

MODS FSS TPF to each class and generate class-specific coverage factors as the ratio of distributed MODS FSS TPF 

to eligible Revenue, Pieces, and Weight volume. 

The Commission approved Modification Five, as it was an improvement over the previous methodology which 

assumed that coverage factors were identical for each class of mail. However, until volume data are available, the 

Commission believes the use of cost data is a reasonable proxy to calculate class—specific coverage factors. Once 

IMb utilization is sufficient, the Postal Service should file a petition to update the Flats Models.

In Modification Six, the Postal Service proposed to remove the costs of sorting mail to post office boxes from all 

three Flats Models and designate these costs as “non-modeled.” This revision pertains to the CRA adjustment 

factor which contains a proportional component and a fixed per-piece component. The proportional component 

relates to the degree of worksharing and is sometimes referred to as workshare-related. The per-piece component 

reflects mail processing costs that do not vary with the degree of worksharing. Based on the record, the Commission 

approved Modification Six because the costs of sorting mail to post office boxes are properly treated as nonmodeled or non-worksharing-related cost. The Commission found that the extent to which a piece is workshared 

does not appear to affect the cost of distributing it to a post office box.

Modifications Seven and Eight involve the cross-docking matrix19 used to estimate container costs in the Periodicals 

model. In Modification Seven, the Postal Service proposed to update the method used to develop the cross-docking 

matrix. With Modification Eight, the Postal Service proposed to simplify the matrix and concurrent cost estimation. 

In Modification Seven, the Postal Service proposed to use FY 2012 Q1 transportation route data instead of survey 

data to develop the cross-docking estimates. Where specific route information was not available, the Postal 

Service proposed to use labeling lists and parent facility assumptions. Further, the Postal Service smoothed the 

handlings to avoid anomalous results in sparsely populated matrix cells. The Commission approved Modification 

Seven because it relies on more current information and can be updated.

19 A matrix used to calculate container costs by container type, presort level and entry point.

198 2012 ANNUAL COMPLIANCE DETERMINATION—APPENDIX C
Modification Eight uses the results of Modification Seven to simplify the development of costs by type of container 

and entry facility for Periodicals. Modification eight proposed to use a simplified matrix of handling occurrences 

and handling costs to determine the total handling cost for containers. This simplified matrix identifies six types 

of container costs and determines the occurrence for each type of handling for each type of container. The 

Commission approved Modification Eight because it significantly reduced the complexity of the Periodicals Flats 

Model and did not materially impact the results of the container calculations. 

The Commission accepted the eight modifications in Proposal Nine after the FY 2012 ACR was filed. Thus, the 

Postal Service’s filings reflect the previous methodology and the proposed methodology. See Order 1656.

List of Commissions Directed Undertakings That May Result 

in Future Analytical Principle Changes 

 With Alaska Bypass Service replacing Single-Piece Parcel Post on the market dominant product list, the Postal 

Service must propose use of an appropriate proxy for Inbound Surface Parcel Post (at UPU rates) for service 

performance measurement in FY 2013. See Chapter VI at 61.

 Given the serious implications of the pricing of Standard Mail Flats, the Postal Service should derive elasticity 

estimates to provide for a more realistic assessment of the impact of price changes on contribution. See 

Chapter VII at 116.

 Regarding the negative passthrough for Standard automation mixed AADC letters, the Postal Service should 

reexamine the anomaly to better understand the costs associated with these workshare categories. See 

Chapter VII at 123.

 The Postal Service should provide an updated methodology for calculating the attributable costs of 

products handled by the Services Center in a rulemaking proceeding to change analytical principles prior to 

incorporating it into the FY 2013 ACR. The updated methodology should describe how the costs, revenues, 

and volumes are attributed to Stamp Fulfillment Services, Philatelic Services, and any other products handled 

at the Services Center. See Chapter VII at 143.

 With elimination of outbound International Reply Coupon Service, the Postal Service must report on the 

feasibility of providing separately reported costs for International Business Reply Mail Service in the FY 2013 

ACR. See Chapter VII at 147.

 The Postal Service must file a methodology for estimating the attributable costs of Package Intercept Service in 

a rulemaking proceeding prior to incorporating the methodology in its FY 2013 ACR. See Chapter VIII at 163.

 The Postal Service must develop a costing methodology that adequately measures the attributable costs of 

the enhanced services for the competitive Post Office Box service. The Commission also directs the Postal 

Service to file the proposed methodology in a rulemaking proceeding prior to including the methodology 

in any future competitive rate adjustment for competitive Post Office Box service or in its FY 2013 ACR. See 

Chapter VIII at 163.

 POSTAL REGULATORY COMMISSION 199
 The Postal Service must report on the feasibility of a special study designed to estimate the transaction 

volume and attributable costs of the IMTS-Inbound product within 90 days. The Postal Service is to report on 

estimating IMTS-Inbound transaction volumes based upon the POS system as presented in Proposal Eleven. 

The Postal Service shall also report on the feasibility of using revenues received from foreign postal operators 

as a basis for estimating IMTS-Inbound transaction volumes within 90 days. See Chapter VIII at 166.

 The Postal Service must modify its financial model for Global Plus and China Post Group NSAs to more 

accurately develop costs, or increase the contingency factor to accommodate costs that cannot be modeled, 

in order to ensure that negotiated prices can generate sufficient revenues to exceed attributable costs. See 

Chapter VIII at 164-172.

Management Operating Data System (MODS)

The accuracy of cost estimates depends on the accuracy of MODS data. Errors in the MODS data translate into 

miscalculations of cost avoidances in the workshare models. Section 3652(a)(1) requires the Commission to 

prescribe the methods used to measure all quantities that the Postal Service reports to the Commission to support 

the Commission’s determinations of compliance with the PAEA’s standards. Applied to workshare discounts, the 

Commission’s section 3652(a)(1) duty is to prescribe the methods of measuring the costs avoided by worksharing. 20

In its FY 2012 ACR, the Postal Service noted an anomalous avoided cost relationship between Standard Mail 

machinable Mixed AADC presorted letters and automation Mixed AADC presorted letters. The FY 2012 cost 

avoidance is calculated at negative 0.3 cents. “Intuitively, this does not make sense – pre-barcoding a mailpiece 

should result in lower processing costs than not pre-barcoding the mailpiece, all else equal.” United States Postal 

Service FY 2012 Annual Compliance Report at 21. It attributed this anomalous cost relationship to a large increase 

(112 percent) in the MODS ISS productivity as well to a large decrease (30 percent) in the MODS Outgoing BCS 

secondary productivity.21

Between FY 2010 and FY 2012, the “MODS Group 8 – Outgoing BCS Secondary” productivity22 decreased from 

10,103 pieces per hour to 6,119 pieces per hour.23 No other MODS productivity value used in the letter cost 

avoidance models decreased to this extent, over the same time period.24 The Commission reviewed the MODS 

daily-tour data file to gain further insight as to the possible causes of this apparent anomaly and its effect on 

workshare discounts.

20 Order No. 536, Order Adopting Analytical Principles Regarding Workshare Discount Methodology, Docket No. RM2009-3, September 14, 2010 at 19. 21 The large increase in ISS productivities reduced the cost of applying a barcode to a Mixed ADC Nonautomation Machinable piece, and the large 

decrease in the Outgoing BCS secondary productivity increased the cost of sorting Automation Mixed AADC pieces. United States Postal Service FY 

2012 Annual Compliance Report at 21. 22 Productivity is calculated as the Total Pieces Fed divided by the work hours logged in related grouped MODS operations. This mail processing ratio is a 

pieces-per-work hour measure used to calculate the avoided costs on which discounts are based. 23 Generally, depending on the particular MODS input, TPH mailflow and cost avoidance model, a large decrease in a MODS productivity input to the 

workshare models may increase the model/unit cost and a large increase in the MODS productivity input may decrease the model/unit cost. This 

numeric effect of a MODS productivity input on the unit costs in the workshare cost worksheets becomes apparent when the values listed in the 

“PRODUCTIVITY” worksheet change. The columns titled ‘Pieces Per Hour’ in the letter cost worksheets utilize the MODS productivity inputs from the 

‘PRODUCTIVITY’ worksheet in arriving at the workshare model cost calculations. See USPS-FY12-10. 24 See USPS-FY10-23, YRscrub2010.xls, USPS-FY11-23, YRscrub2011.xls, and USPS-FY12-23, YRscrub2012.xls.

200 2012 ANNUAL COMPLIANCE DETERMINATION—APPENDIX C
This review shows that work hour errors25 appear to be rapidly increasing from year-to-year in a single MODS 

operation code (892- DBCS or DIOSS, Secondary Outgoing). Most of the data used in the calculation of the 

Outgoing BCS Secondary productivity ratio is captured in this operation code. Some work hour ‘errors’ logged in 

code 892 may be valid26 if the related volume is recorded in an adjacent MODS tour.27 Even if these observations 

are eliminated, a substantial number of daily-tour work hour errors remain in the aggregated MODS data used to 

calculate the productivity of letter sorting operations. 

As shown in Table C-1, nearly 70,000 work hours in FY 2012 were logged to operation 892 without volumes 

recorded in the same tour or the adjacent tour. The Commission is concerned that these types of errors appear 

to be increasing. The Commission evaluated the type and magnitude of these work hour errors aggregated for 

the Outgoing BCS Secondary productivity calculation. It developed a programming algorithm28 to search and 

eliminate work hour “errors” logged to an operation code on one tour at the facility, if the adjacent tour had any 

piece handlings recorded in that same operation.29 This algorithm was developed because, according to the Postal 

Service, “tabulations of anomalous observations in tour-level data are not generally valid indicators of MODS 

data quality.”30 According to the Postal Service, “in high-frequency MODS data, anomalous observations may arise 

due to minor timing issues involving the volume and work hour measurement systems. In many such cases, the 

25 This review focused on work hour observations that are erroneous because they are not associated with any piece handlings (no tour volume). Because 

the End-of-Run (webEOR) data automatically feeds the machine counts directly into the MODS system, the automated volumes in MODS are assumed 

to be correct. The other significant type of MODS error is piece handlings (volume) associated with zero work hours. This type of error in operation 892 

was also assessed using the same logic algorithm and found little change between FY 2010 and FY 2012. 26 Postal Service Response to CHIR No. 4, question 21. 27 It appears the Postal Service, is referring to “timing issues” when the piece handling data fed by the WebEOR system and work hours data fed by the 

TACS system may appear in the MODS system as having been incurred on adjacent MODS tours on the same MODS day and in adjacent tours on the 

previous MODS day or next MODS day. Also, in the past, the Postal Service explained that: “Some workhours for an operation may be recorded in a 

tour adjacent to the tour in which the associated workload is recorded.” See Docket No. N2012-1, Institutional Response of the United States Postal 

Service to Public Representative Interrogatory PR/USPS-4, April 19, 2012. 28 Using SAS 9.3, the programming algorithm searched possible/logical adjacent tours using the MODS day tour shift order, MODS date, previous MODS 

date/adjacent tour and next MODS date/adjacent tour to identify and eliminate possible ‘good’ hours logged in a tour that had some volume recorded 

(in the same operation code) in the adjacent tour. 29 The reasonableness of the values in the adjacent tours was not assessed. 30 Postal Service Response to CHIR No. 4, question 21.

Table C–1—MODS Operation Code 892–DBCS or DIOSS, Secondary Work Hour Status

Fiscal Year Total Work Hours

Work Hours

No Same Tour Volume 

Recorded

Percent of 

Total

Work Hour Errors

No Same or Adjacent 

Tour Volume Recorded

Percent of 

Total

2010 386,180 69,278 17.9% 37,591 9.7%

2011 370,652 81,563 22.0% 47,599 12.8%

2012 370,216 116,157 31.4% 69,604 18.8%

Note: Possible valid work hour ‘errors’ (eliminated by the algorithm) is the difference between the no tour volume work hour 

columns.

Source: MODS FY 2010 (Docket No. N2012-1, LR-48), MODS FY 2011 (Docket No. N2012-1, LR-86) and MODS 

FY 2012 (USPS-FY12-NP31, Nonpublic Materials Provided in Response to Chairman’s Information Request No.1, 

January 14, 2013).

 POSTAL REGULATORY COMMISSION 201
anomalous data will be valid.”31 The Commission found that for a portion of the work hours logged to operation 

892 (without volume recorded in the same tour), this may be the case because the adjacent tour did have volume 

recorded. However, a larger portion of work hours logged to operation 892 without accompanying volume does 

not appear to be valid (approximately 19 percent of all operation 892 work hours in FY 2012 had no same tour 

volume or adjacent tour volume recorded in MODS). When errors increase in the MODS data used for pricing and 

costing, it undermines confidence in the validity of those model results. 

It is unclear from the Postal Service’s response to CHIR No. 4, question 23, to what extent erroneous work hour 

observations logged in operation 892 occur because field personnel erroneously believe that operation 891 (DBCS 

or DIOSS, Primary Outgoing) and operation 892 (DBCS or DIOSS, Secondary Outgoing) are combined for pricing and 

costing purposes (so that work hours erroneously clocked into one or the other operation would be correct when 

aggregated).32 However, MODS operations 891 and 892 are not combined in the same MODS productivity group 

and map to two different MODS productivity inputs used in the letter workshare models.33

Based on the Commission’s review of the MODS data file, it is apparent that the facilities recording many of the 

erroneous work hour observations in operation 892 also record MODS mail processing data in operation 891 on 

the same tour and date. This raises questions as to whether these facilities are significant sources of erroneously 

low Outgoing BCS Secondary productivity values arising from a lack of piece handlings associated with positive 

work hours in operation 892. The Postal Service notes that to some extent, work hours logged to operation 892 

(without accompanying volume) are offset by MODS data where hours are understated.34 It is not clear to the 

Commission to what extent, or how, the work hours are offset. 

A recent USPS Office of Inspector General (OIG) MODS audit report35 found that the MODS data examined did not 

support all of the assumptions Postal Service finance personnel used in aggregating facility observations at the 

productivity group level. The OIG recommended that the Postal Service focus its corrective actions on those mail 

processing facilities creating the most significant number of MODS errors.36 For the work hour errors logged in 

Operation 892, the FY 2012 MODS daily-tour data file shows a large number of work hour errors being recorded by 

a small subset of facilities. The Commission agrees with the OIG that the Postal Service should focus on that subset 

in developing plans to improve the accuracy of MODS data. 

To prevent anomalous cost relationships in the future, the Postal Service plans to study the effect of de-averaging 

the productivity data for Multi-mode and the Barcode Sorting (BCS) modes of the letter automation machines 

31 Id. 32 See the Productivity Group and Cost Pool discussion in: United States Postal Service Office of Inspector General, Management Operating Data System 

Audit Report, Report Number CRR-AR-12-002, December 13, 2011 at 6-7. 33 Postal Service Response to CHIR No. 4, question 16, ChIR4.Q16.xls, ‘USPS-FY12-23 MODS Code to MODS Operation Group Map.’ Operation 891 maps to 

the ‘Outgoing BCS Primary’ productivity group and operation 892 maps to the ‘Outgoing BCS Secondary’ productivity group. 34 Responses of The United States Postal Service to Questions 5-7 of Chairman’s Information Request No. 9, March 8, 2013, (Postal Service Response to 

CHIR No. 9), question 5. 35 United States Postal Service Office of Inspector General, Management Operating Data System Audit Report, Report Number CRR-AR-12-002, December 

13, 2011 at 7. 36 Id. at 2.

202 2012 ANNUAL COMPLIANCE DETERMINATION—APPENDIX C
and review the relationships of downflow operations to evaluate whether enhancements can be made.37 The 

Postal Service asserts that: “While errors in workhours need not lead to biases in productivities per se, particularly 

when the errors can be aggregated (or, equivalently, averaged) over large numbers of observations, the Postal 

Service recognizes that some forms of misclocking may lead to bias (not necessarily downward bias) in measured 

productivities.”38 From the quantity of work hour errors in operation 892, the Postal Service should demonstrate 

how aggregating work hour errors in operation 892 does not lead to bias. 

In general, identifying and eliminating the sources of non-sample error in the MODS data will result in more 

accurate cost avoidance estimates. More accurate MODS data would also provide a more reliable guide to the 

Postal Service as it plans the reconfiguration of its mail processing network and evaluates its effects. Providing 

the MODS data and changes in the MODS operational definitions annually will increase transparency related to 

Postal Service procedures and assumptions for data directly used in costing and pricing. In the next ACR filing, 

the Commission would like a report on what alternative methods for calculating productivity measures the Postal 

Service has considered. It also directs the Postal Service to provide a more thorough assessment of the effect of 

non-sample error on the Outgoing BCS Secondary and Primary productivities as well as efforts taken to reduce nonsample error in the MODS. Validity of the Outgoing BCS Secondary productivity estimate in light of the increasing 

aggregated daily-tour work hour errors in operation 892 should be demonstrated by the Postal Service in its next 

ACR filing. 

37 Responses of The United States Postal Service to Questions 1-2 and 4-24 of Chairman’s Information Request No. 4, January 25, 2013 (Postal Service 

Response to CHIR No. 4), question 6. 38 Postal Service Response to CHIR No. 9, question 5.

 POSTAL REGULATORY COMMISSION 203
204 2012 ANNUAL COMPLIANCE DETERMINATION—APPENDIX C
Appendix D 

Financial Results Under 

Current Classification

This appendix presents Postal Service financial results for FY 2012 using the mail classification system in place 

since the passage of the PAEA. Prior to the PAEA, mail classes were subdivided into subclasses, and the financial 

reports reflected that organization. The PAEA uses the term product, defined as “a postal service with a distinct 

costs or market characteristic for which a rate or rates are, or may reasonably be applied.” 39 U.S.C. 102(6). 

Within classes, the Postal Service reports data by product, not by subclass. To facilitate historical comparisons, 

Table D-1 presents volumes, revenues, attributable costs, and contribution to institutional cost using the current 

classification scheme.

 POSTAL REGULATORY COMMISSION 205
Table D–1—Fiscal Year 2012 Volume, Revenue, Cost 

and Cost Coverage by Class Current Classification (Products)

Volume

(000)

Revenue

($000)

Attributable

Cost

($000)

Contribution to

Institutional

Cost

($000)

Rev./Pc.

(Cents)

Cost/Pc.

(Cents)

Contribution to

Institutional

Cost/Pc.

(Cents)

Cost

Coverage

Competitive Mail

Express Mail 39,823 801,561 467,227 334,334 2,012.806 1,173.256 839.550 171.6%

Priority Mail 824,202 5,939,726 4,545,341 1,394,385 720.664 551.484 169.180 130.7%

Parcel Select and 

Parcel Return Service (PRS) 984,202 1,456,216 1,105,767 350,450 147.959 112.352 35.608 131.7%

First-Class Package Service 411,424 875,654 766,719 108,935 212.835 186.357 26.478 114.2%

Competitive 

International Mail 273,525 1,837,317 1,216,598 620,719 671.717 444.784 226.933 151.0%

Competitive Domestic 

Services 504,824 273,118 231,706 184.8%

Competitive International 

Services 10,577 8,391 2,187 126.1%

Total Competitive Mail 

and Services 2,533,176.161 11,425,875 8,383,159 3,042,716 451.049 330.935 120.115 136.3%

Market Dominant Mail

First-Class Mail

Single-Piece Letters and 

Cards 23,913,510.21 10,963,807 6,573,112 4,390,695 45.848 27.487 18.361 166.8%

Presort Letters and Cards 42,733,615.90 15,229,079 5,191,600 10,037,479 35.637 12.149 23.488 293.3%

Flats 2,049,176.33 2,673,160 1,791,045 882,115 130.450 87.403 43.047 149.3%

Parcels 293,412.83 649,499 659,147 (9,648) 221.360 224.648 (3.288) 98.5%

Outbound Single-Piece 

Mail Intl 263,547.71 665,500 438,548 226,952 252.516 166.402 86.114 151.8%

Inbound Single-Piece 

Mail Intl 386,306.51 252,423 345,217 (92,794) 73.1%

Standard Mail

High Density & 

Saturation Letters 5,563,559 770,882 346,973 423,908 13.856 6.237 7.619 222.2%

High Density & 

Saturation Flats & Parcels 11,770,275 1,955,823 900,140 1,055,683 16.617 7.648 8.969 217.3%

Carrier Route 9,119,946 2,249,836 1,720,605 529,231 24.669 18.866 5.803 130.8%

Letters 47,102,691 9,213,404 5,149,404 4,064,000 19.560 10.932 8.628 178.9%

Flats 5,939,635 2,233,730 2,761,670 (527,940) 37.607 46.496 (8.888) 80.9%

Not Flat-Machinables 

and Parcels 303,559 288,894 337,853 (48,959) 95.169 111.297 (16.128) 85.5%

Inbound NSA Mail Intl 1,345 702 148 554 

Periodicals

Within County 631,286 67,269 95,398 (28,129) 10.656 15.112 (4.456) 70.5%

Outside County 6,110,064 1,664,217 2,306,204 (641,987) 27.237 37.744 (10.507) 72.2%

Package Services

Single-Piece Parcel Post 70,971 774,438 840,359 (65,921) 1,091.206 1,184.092 (92.885) 92.2%

Inbound Surface Parcel Post 

(at UPU Rates) 1,115 20,908 11,594 9,314 1,875.297 1,039.879 835.419 180.3%

Bound Printed Matter Flats 230,522 186,887 138,302 48,585 81.071 59.995 21.076 135.1%

Bound Printed Matter Parcels 243,308 306,651 281,152 25,498 126.034 115.554 10.480 109.1%

Media and Library Mail 100,422 321,246 376,770 (55,524) 319.896 375.187 (55.291) 85.3%

Inbound NSA Mail Intl 8 18 3 15 

U.S. Postal Service Mail 440,452 

Free Mail 56,952 39,586 (39,586) 69.507 

Total Market Dominant Mail 157,325,678 50,488,371 30,304,829.905 20,183,541 32.092 19.262 12.829 166.6%

206 2012 ANNUAL COMPLIANCE DETERMINATION—APPENDIX D
Table D–1—Fiscal Year 2012 Volume, Revenue, Cost 

and Cost Coverage by Class Current Classification—Continued

Volume

(000)

Revenue

($000)

Attributable

Cost

($000)

Contribution to

Institutional

Cost

($000)

Rev./Pc.

(Cents)

Cost/

Pc.

(Cents)

Contribution to

Institutional

Cost/Pc.

(Cents)

Cost

Coverage

Market Dominant Services

Ancillary Services

Certified Mail 662,806 601,869 60,937 110.1%

COD 5,927 3,604 2,323 164.5%

Insurance 108,510 96,969 11,541 111.9%

Registered Mail 39,477 30,226 9,251 130.6%

Stamped Envelopes 16,584 6,389 10,196 259.6%

Stamped Cards 2,117 731 1,386 289.6%

Other Ancillary Services 696,601 547,852 148,749 127.2%

Money Orders 165,093 110,474 54,619 149.4%

Post Office Box Service 481,567 377,073 104,493 127.7%

Caller Service 92,490 27,045 65,445 

Other Special Services 33,988 15,084 18,903 

International Services 29,435 22,763 6,672 129.3%

Other Income 927,529 927,529 

Total Mail and Services 159,858,854 65,176,370 40,528,068 24,648,302 40.771 25.352 15.419 160.8%

Institutional Costs 40,625,129 

Appropriations: Revenue 

Forgone 46,204 

Investment Income 24,657 

Total Revenues 65,247,231 

Total Costs 81,153,198 

Net Income (Loss) (15,905,966)

Source: Library Reference PRC-ACR2012-LR1

 POSTAL REGULATORY COMMISSION 207
208 2012 ANNUAL COMPLIANCE DETERMINATION—APPENDIX D
Appendix E 

Abbreviations and Acronyms

Long Version Abbreviation/Acronym

Address Management Services AMS

Alliance of Nonprofit Mailers ANM

American Business Media ABM

American Catalog Mailer Association ACMA

Annual Compliance Determination ACD

Annual Compliance Report ACR

FY 2012 Annual Performance Plan FY 2012 Plan

FY 2013 Annual Performance Plan FY 2013 Plan

FY 2011 Annual Performance Report FY 2011 Report

FY 2012 Annual Performance Report FY 2012 Report

Area Distribution Center ADC

Automated Area Distribution Center AADC

Automated Postal Center APC

Bound Printed Matter BPM

Bulk Metered Mail BMM

Chairman’s Information Request CHIR

Collect on Delivery COD

Collection Point Management System CPMS

2010 Comprehensive Statement on Postal Operations FY 2010 Comprehensive Statement

Consumer Price Index CPI

Consumer Price Index for all urban consumers CPI-U

Community Post Offices CPOs

Cost and Revenue Analysis CRA

Critical Entry Times CET

Customer Experience Measurement CEM

Customer Supplier Agreements CSAs

Deliveries per Work Hour DPWH

Delivery Bar Code Sorter DBCS

Delivery Point Sequence DPS

Destination Sectional Center Facilities DSCF

Destination Area Distribution Center DADC

Destination Delivery Unit DDU

Destination Bulk Mail Center DBMC

Destination Network Delivery Center DNDC

 POSTAL REGULATORY COMMISSION 209
Long Version Abbreviation/Acronym

Direct Marketing Association, Inc. DMA

Educational, cultural, scientific or informational [value] ECSI

Every Door Direct Mail EDDM

Express Mail Service EMS

External First-Class Measurement System EXFC

Federal Employee Retirement System FERS

First-Class Mail International FCMI

Flats Sequencing System FSS

Foreign Post Settlement FPS

Global Bulk Economy GBE

Global Direct GD

Global Expedited Package Services GEPS

Global Expedited Package Service Non-published Rates 2 GEPS—NPR 2

Global Reseller Expedited Package Services 1 GREPS 1

Gross Domestic Product GDP

Integrated Financial Plan IFP

Intelligent Mail Barcode IMb

Intelligent Mail Accuracy and Performance System iMAPS

International Cost and Revenue Analysis ICRA

International Mail Measurement System IMMS

International Money Transfer Service – Outbound IMTS-Outbound

International Priority Airmail IPA

International Service Center ISC

International Surface Airlift ISAL

In-Office Cost System IOCS

Mailer Identification MID

Mixed Area Distribution Center MADC

National Association of Presort Mailers NAPM

National Postal Policy Council NPPC

Negotiated Service Agreement NSA

Network Distribution Center NDC

Not-Flat Machinables NFMs

Office of Personnel Management OPM

Officially Licensed Retail Products OLRP

Occupational Safety and Health Administration OSHA

Origin Area Distribution Center OADC

Origin Bulk Mail Center OBMC

Origin Network Distribution Center ONDC

Origin Sectional Center Facility OSCF

Parcel Shippers Association PSA

Point of Service POS

Post Office Box PO Box

Postal Accountability and Enhancement Act PAEA

Postal Qualified Wholesalers PQW

210 2012 ANNUAL COMPLIANCE DETERMINATION—APPENDIX E
Long Version Abbreviation/Acronym

Product Tracking System PTS

Qualified Business Reply Mail QBRM

Quality Link Measurement System QLMS

Postal Service Retirement Health Benefits Fund RHBF

Retail Access Optimization Initiative RAOI

Revenue, Pieces, and Weights RPW

Sectional Center Facility SCF

Securities and Exchange Commission SEC

Stamp Fulfillment Services SFS

Total Factor Productivity TFP

Universal Postal Union UPU

Village Post Offices VPO

Voice of the Employee VOE

 POSTAL REGULATORY COMMISSION 211
212 2012 ANNUAL COMPLIANCE DETERMINATION—APPENDIX E
Appendix F 

Commenters–2012 Annual Compliance 

Determination

Commenter Comment Citation Citation Short Form

American Catalog Mailers Association Initial Comments of the American Catalog Mailers 

Association (ACMA)

ACMA Comments

February 1, 2013

American Catalog Mailers Association Reply Comments of the American Catalog Mailers 

Association (ACMA)

ACMA Reply Comments

February 15, 2013

American Catalog Mailers Association Surreply Comments of the American Catalog Mailers 

Association (ACMA)

ACMA Reply Comments

February 20, 2013

Alliance of Nonprofit Mailers Comments of Alliance of Nonprofit Mailers ANM Comments

February 1, 2013

Alliance of Nonprofit Mailers Comments of Alliance of Nonprofit Mailers ANM Comments

February 4, 2013

Alliance of Nonprofit Mailers Errata Notice of Alliance of Nonprofit Mailers ANM Errata Notice

February 4, 2013

Direct Marketing Association Comments of the Direct Marketing Association, 

Responding to Commission Order No. 1609

DMA Comments

February 1, 2013

Greeting Card Association Comments of the Greeting Card Association GCA Comments

February 1, 2013

Comments of Mark Jamison Follow-up Comments to Chairman’s Information 

Request 5, questions 34 and 35

Comments of Mark Jamison

February 7, 2013

Magazine Publishers of America, Inc., and 

Alliance of Nonprofit Mailers

Reply Comments of Magazine Publishers of America, 

Inc., and Alliance of Nonprofit Mailers

MPA et al. Reply 

Comments

February 15, 2013

National Postal Policy Council Comments of the National Postal Policy Council NPPC Comments

February 1, 2013

Pitney Bowes, Inc Comments of Pitney Bowes Inc. PB Comments

February 1, 2013

Public Representative Public Representative Comments PR Comments

February 1, 2013

 POSTAL REGULATORY COMMISSION 213
 POSTAL REGULATORY COMMISSION 214

Commenter Comment Citation Citation Short Form

Public Representative Public Representative Reply Comments PR Reply Comments

February 19, 2013

Public Representative Public Representative Motion for Leave to File Reply 

Comments One Business Day Late 

PR Reply Comments

February 19, 2013

Public Representative Public Representative Response to Surreply Comments 

of the American Catalog Mailers Association 

PR Surreply Comments

February 27, 2013

Public Representative

Public Representative Notice of Errata to Public 

Representative Response to Surreply Comments of the 

American Catalog Mailers Association 

PR Notice of Errata to 

Surreply Comments

February 28, 2013

Time Inc. Reply Comments of Time Inc. on USPS FY 2012 

Annual Compliance Report

Time Reply Comments

February 15, 2013

Time Inc. Erratum to Reply Comments of Time Inc. on USPS FY 

2012 Annual Compliance Report

Time Erratum Reply 

Comments

February 15, 2013

United States Postal Service Reply Comments of the United States Postal Service Postal Service Reply 

Comments

February 15, 2013

Valpak Direct Marketing Systems, Inc. and 

Valpak Dealers’ Association, Inc.

Valpak Direct Marketing Systems, Inc. and Valpak 

Dealers’ Association, Inc. Initial Comments on 

the United States Postal Service FY 2012 Annual 

Compliance Report

Valpak Initial Comments

February 1, 2013

Valpak Direct Marketing Systems, Inc. and 

Valpak Dealers’ Association, Inc.

Valpak Direct Marketing Systems, Inc. and Valpak 

Dealers’ Association, Inc. Reply Comments on 

the United States Postal Service FY 2012 Annual 

Compliance Report

Valpak Reply Comments

February 15, 2013
215 2012 ANNUAL COMPLIANCE DETERMINATION

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