POSTAL REGULATORY COMMISSION

FISCAL YEAR 2014

Annual Report 

to the President 

and Congress

Postal Regulatory Commission

Submitted 1/5/2015 3:55:58 PM

Filing ID: 91124

Accepted 1/5/2015

TABLE OF CONTENTS | i

Table of Contents

Chairman’s Message.......................................................................................................... v

Chapter I. Year in Review..................................................................................................... 1

Chapter II. About the Commission...................................................................................... 5

Staff and Office Structure.................................................................................................. 9

Commission’s Mission and Strategic Plan....................................................................... 10

Office of Public Affairs and Government Relations......................................................... 11

Office of the Secretary and Administration .................................................................... 14

Public Representative Program....................................................................................... 17

Chapter III. Effectiveness of Commission Rules to Achieve PAEA Objectives.................... 19

Market Dominant Cases.................................................................................................. 21

Notice of Increase for Rates of General Applicability................................................ 21

Notice of Exigent Price Increase................................................................................ 23

PHI Negotiated Service Agreement........................................................................... 27

Alternate Postage Payment....................................................................................... 27

Round-Trip Mailer..................................................................................................... 27

Annual Compliance Determination ........................................................................... 28

Review of Postal Service Performance Reports ........................................................ 29

Standard Mail Load Leveling ..................................................................................... 30

Market Dominant Rulemakings ...................................................................................... 30

Clarifying Price Cap Calculations............................................................................... 30

Market Test Rulemakings.......................................................................................... 31

Price Elasticities and Internet Diversion.................................................................... 32

Form and Content of Postal Service Reports to the Commission ............................. 32

Competitive Products ..................................................................................................... 34

Changes in Rates of General Applicability................................................................. 34

Changes in Rates Not of General Applicability: NSAs................................................ 36

Chapter IV. Universal Service Obligation and Postal Monopoly ........................................ 39

Background..................................................................................................................... 39

Estimated Cost of the USO.............................................................................................. 40

Element A: Cost of Providing Services to All Areas of the Nation ............................. 40

Element B: Estimated Revenue Not Received........................................................... 42

Element C: Other Public Services or Activities.......................................................... 44

Value of the Postal Monopoly......................................................................................... 47

Chapter V. Other Proceedings and Actions........................................................................ 51

Rulemaking on Nature of Service Proceedings............................................................... 51

Post Office Closing Appeals............................................................................................. 52

Court Appeals ................................................................................................................. 52

Application of Price Cap Rules .................................................................................. 52

GameFly Complaint................................................................................................... 53

Commission Review of Post Office Closing Appeals.................................................. 53

ACD Directive on Standard Mail Rates...................................................................... 54

Research Projects...................................................................................................... 54

Commission’s Role in International Postal Policy............................................................ 55
ii | ANNUAL REPORT

Acronyms

ACD Annual Compliance Determination

ACR Annual Compliance Report

C.F.R. Code of Federal Regulations

CPI consumer price index

DSCF destination sectional center facility

FY Fiscal Year

GEPS Global Expedited Package Service

IMb Intelligent Mail barcode

NPR non-published rates

NSA negotiated service agreement

PAEA Postal Accountability and Enhancement Act

RHBF Postal Service Retirement Health Benefits Fund

U.S.C. United States Code

UPU Universal Postal Union

USO Universal Service Obligation
MISSION | iii

POSTAL REGULATORY COMMISSION

Mission Statement

Ensure transparency and accountability of the 

United States Postal Service and foster a vital 

and efficient universal mail system.

Guiding Principles

The Commission is committed to 

and operates by the principles of:

OPENNESS

•	 Public participation

INTEGRITY

•	 Fairness and impartiality

•	 Timely and rigorous analysis

MERIT

•	 Commitment to excellence

•	 Collegiality and multi-disciplinary 

approaches

ADAPTABILITY

•	 Proactive response to the rapidly 

changing postal environment
iv | ANNUAL REPORT
CHAIRMAN'S MESSAGE | v

Chairman’s Message

JANUARY 2015

On behalf of the Postal Regulatory Commission, I submit the 

Commission’s 2014 Annual Report to the President and Congress. It 

describes Commission activities of the last fiscal year and the extent to

which regulations are achieving the objectives set forth by the Postal 

Accountability and Enhancement Act of 2006.

This report is available on the Commission’s website, www.prc.gov. I 

invite members of the public to send comments to improve the report to:

Ann Fisher

Director, Public Affairs and Government Relations

Postal Regulatory Commission

901 New York Avenue NW

Suite 200

Washington, DC 20268

Phone: (202) 789-6800

Fax: (202) 789-6891

Email: PRC-PAGR@prc.gov

The Commission looks forward to building on its Fiscal Year 2014 

accomplishments and continuing to fulfill its mission in the most

efficient and effective manner possible.

Respectfully,

Robert G. Taub

Acting Chairman

CHAPTER 1 | 1

Chapter I. Year in Review

The Postal Regulatory Commission made the following significant

accomplishments in Fiscal Year (FY) 2014. All of the Commission’s 

activities supported its mission: to ensure transparency and 

accountability of Postal Service operations and foster a vital and efficient

universal mail system.

1. The Commission published four major reports in FY 2014:

•	 Annual Report to the President and Congress (Annual Report), 

describing the Commission’s accomplishments and activities as 

the regulator of the U.S. Postal Service

•	 Annual Compliance Determination (ACD), reviewing the Postal 

Service’s compliance with pricing and service standards

•	 Analysis of Postal Service Financial Results and 10-K Statement 

for Fiscal Year 2013, providing an in-depth analysis of the 

Postal Service’s financial health

•	 Review of Postal Service FY 2013 Performance Report and FY 

2014 Performance Plan, evaluating whether the Postal Service 

met its performance goals as required under Title 39 of the 

United States Code (U.S.C.), section 3653(d)

The Analysis of Postal Service Financial Results and 10-K Statement and 

the Review of Postal Service FY 2013 Performance Report and FY 2014 

Performance Plan are new publications introduced in FY 2014. Their 

contents used to be included as chapters in the ACD, but the Commission 

decided to create separate, more detailed reports to provide a more 

comprehensive review of the Postal Service’s finances and performance

goals.

2. The Commission expeditiously presided over the following major 

proceedings during the first half of the year, completing its review

in 90 days: 

•	 A rate adjustment due to extraordinary or exceptional 

circumstances (commonly known as the “exigency case”)

•	 A Nature of Service case regarding service changes associated 

with Standard Mail load leveling
2 | ANNUAL REPORT

3. The Commission considered seven postal rate price adjustment requests by the 

Postal Service for Market Dominant and Competitive products.

4. The Commission reviewed 17 Postal Service proposals to revise costing 

methodologies.

5. The Commission approved 83 negotiated service agreements (NSAs) (76 

Competitive, 7 Market Dominant). 

6. The Commission reviewed five proposed changes to the Market Dominant and

Competitive products lists in the Mail Classification Schedule. These included the 

addition of a Gift Cards price category, a proposal for private address forwarding, 

the transfer of Inbound Surface Parcel Post, and Mail Classification Schedule

changes for Priority Mail Express International, Restricted Delivery, and Pickup 

On Demand. 

7. The Commission evaluated several complaint cases filed against the Postal

Service:

•	 The first complaint, filed by the American Postal Workers Union, alleges that

the Postal Service is not complying with Market Dominant service standard 

regulations in violation of Title 39 of the U.S.C. This complaint is under 

review. 

•	 The second complaint concerned a change in retail hours in the San 

Francisco District. The Commission dismissed this complaint on July 28, 

2014.

•	 The Commission also resumed consideration of an appropriate remedy in 

a complaint proceeding in which it had previously found that the Postal 

Service engaged in unlawful discrimination against a DVD mailer. In FY 

2013, the mailer successfully challenged on appeal the appropriateness of 

the Commission’s original remedy, which the appellate court remanded for 

further investigation by the Commission. At the conclusion of the remand 

proceeding, the Commission prescribed a revised rate for round-trip DVD 

mail designed to remedy undue discrimination by the Postal Service. The 

revised rate was upheld on appeal; therefore, the complaint case was closed.

8. The Commission conducted several rulemaking proceedings. It published 

proposed rules regarding the treatment of rate incentives and de minimis rate 

increases under the price cap. It adopted three final rules that:

•	 Streamline advisory opinions on nationwide changes in postal services 

requested by the Postal Service under 39 U.S.C. § 3661

•	 Clarify rate incentives and de minimis rate increases under the price cap

•	 Implement regulations for market tests of experimental products
CHAPTER 1 | 3

9. In other proceedings, the Commission:

•	 Established three dockets to evaluate improvements in measurements 

of price elasticities and Internet diversion; the scope of public service or 

activity cost reporting in the Annual Report; examined and reviewed a 

Postal Service request to conduct a market test of an experimental product, 

Customized Delivery

•	 Considered a Postal Service request to extend and expand the Metro Post 

market test

•	 Issued an order granting a Postal Service petition to eliminate a periodic 

reporting rule requiring an alternative format Cost and Revenue Analysis

report

•	 Issued three requests for proposals for studies on inframarginal costs, 

terminal dues, and Postal Service Parcel products

•	 Reviewed four Post Office closing appeals

•	 Completed a study of the savings to the Postal Service for reducing the 

delivery of mail from 6 days to 5 days while maintaining Six-Day Delivery for 

package service

•	 Completed a study of unit avoidable costs that underlie worksharing 

discounts

•	 Responded to nearly 10,000 inquiries, questions, suggestions, complaints, 

and comments from the general public, primarily involving undelivered, 

delayed, misdelivered, and missing mail

•	 Proceeded with a major modernization of the external website to ensure 

the content of Commission and Postal Service operations is accessible and 

transparent to all stakeholders

10. With respect to international postal responsibilities, the Commission:

•	 Evaluated 54 Universal Postal Union (UPU) proposals to amend the UPU Acts 

in accordance with 39 U.S.C. § 407(c)(1)

•	 Continued its active role in the UPU Letters and Parcels Remuneration 

Groups on international letter mail and parcel delivery rates by chairing the 

UPU Regulatory Issues Project Group on behalf of the U.S. government

•	 Furthered its long-standing commitment to building solid working 

relationships with other postal regulators in promoting a high-quality, 

affordable universal service network for citizens worldwide

•	 Continued collaboration on international postal issues with other 

government agencies such as the Department of State through its Federal 

Advisory Committee on International Postal and Delivery Services
4 | ANNUAL REPORT
CHAPTER 2 | 5

Chapter II. About the Commission

The Commission is an independent establishment of the executive branch 

of the United States Government. It has exercised regulatory oversight 

over the Postal Service since its creation by the Postal Reorganization Act 

of 1970, with expanded responsibilities under the Postal Accountability 

and Enhancement Act (PAEA) of 2006. It has five commissioners, each

appointed by the president, by and with the advice and consent of the 

Senate, for a term of 6 years. After the expiration of his or her term, a 

commissioner may continue to serve for up to 1 year or until a successor is 

confirmed. No more than three members of the Commission may be from

one political party.
6 | ANNUAL REPORT

Robert G. Taub, Acting Chairman

Mr. Taub was designated acting chairman by President 

Barack Obama on December 4, 2014. He was sworn in 

as a commissioner in October 2011; his term expires 

on October 14, 2016. The Commission elected him vice 

chairman for calendar year 2013. His previous 30 years of 

public service include special assistant to Secretary of the 

Army John McHugh; chief of staff to U.S. Representative 

John McHugh; 12 years in senior positions on the 

House of Representatives’ Committee on Oversight & 

Government Reform, including staff director of its former 

Postal Service Subcommittee; senior policy analyst with 

the U.S. Government Accountability Office; and staff

member for three members of Congress, a member of 

the British Parliament, and state and county officials in

upstate New York.

Mark D. Acton, Vice Chairman

Mr. Acton was appointed as a commissioner on August 3, 

2006; his term expires on October 14, 2016. He served 

as Commission vice chairman from 2007 to 2008, 2011 

to 2012, and 2014 to 2015, and as special assistant 

to former Postal Rate Commission Chairman George 

Omas. His other positions have included staff director 

of the Republican National Committee Counsel’s Office;

deputy to the chairman of the 2004 Republican National 

Convention; special assistant to the Republican National 

Committee chief counsel and Counsel’s Office government

relations officer and redistricting coordinator; executive

director, Republican National Convention, Committee on 

Permanent Organization, and deputy executive director, 

Committee on Rules; and executive director of the 

Republican National Committee Redistricting Task Force.
CHAPTER 2 | 7

Ruth Y. Goldway, Commissioner

Ms. Goldway was appointed as a commissioner on April 

7, 1998, and in her third term was designated chairman 

by President Barack Obama on August 6, 2009. That term 

expired on November 22, 2014. Beginning in 1999, she 

served on the State Department delegation to the UPU. 

She served as vice chairman for calendar year 2001. Her 

previous positions include manager of public affairs for 

the Getty Trust; director of public affairs, California State 

University, Los Angeles; council member and mayor, 

City of Santa Monica, California; founder and former 

chairperson, Santa Monica Pier Restoration Corporation; 

assistant director of the California Department of 

Consumer Affairs; and co-founder of Women in Logistics 

and Delivery Services.

Tony L. Hammond, Commissioner

Mr. Hammond was reappointed commissioner and sworn 

in on December 11, 2014. His term expires October 

14, 2018. He was first appointed as a commissioner on

August 15, 2002. He served as the Commission’s vice 

chairman from 2003 to 2005, and again from 2009 to 

2010. On May 1, 2012, he was sworn in for a third term as 

a commissioner; that term expired on October 14, 2013. 

Before joining the Commission, Mr. Hammond was the 

owner and managing member of T. Hammond Company, 

LLC; senior consultant to Forbes 2000, Incorporated; 

senior vice president of FL&S, a direct marketing firm;

director of campaign operations for the Republican 

National Committee; executive director and finance

director of the Missouri Republican Party; and served 

10 years on the staff of former U.S. Representative Gene 

Taylor (R-MO).
8 | ANNUAL REPORT

Nanci E. Langley, Commissioner

Ms. Langley was reappointed as commissioner and sworn 

in on December 11, 2014. Her term expires November 

22, 2018. She was first appointed as a commissioner on

June 6, 2008; that term expired on November 22, 2013. 

She served as Commission vice chairman from 2008 to 

2009, and all of 2012. Her previous positions include 

director of public affairs and government relations at 

the Commission; 17 years as a senior adviser to Senator 

Daniel K. Akaka (D-HI), including 9 years as a deputy 

staff director on the U.S. Senate Committee on Homeland 

Security and Governmental Affairs Federal Workforce 

and Government Management Subcommittee; and 

communications director to former U.S. Senator Spark M. 

Matsunaga (D-HI). She is an elected fellow of the National 

Academy of Public Administration.
CHAPTER 2 | 9

Staff and Office Structure

Commission staff has expertise in law, economics, finance, statistics, and cost

accounting. 

The Commission is organized into four operating offices:

•	 Accountability and Compliance. The Office of Accountability and Compliance is

responsible for technical analysis and formulating policy recommendations for the 

Commission in domestic and international matters. 

•	 General Counsel. The Office of the General Counsel provides legal assistance

on matters involving the Commission’s responsibilities, defends Commission 

decisions before the courts, manages the formal complaint process, and ensures 

the Commission fulfills its statutory responsibilities.

•	 Public Affairs and Government Relations. The Office of Public Affairs and

Government Relations facilitates prompt and responsive communications with the 

public, Congress, Federal agencies, the Postal Service, and media.

•	 Secretary and Administration. The Office of Secretary and Administration

records the Commission’s official actions; manages the Commission’s records,

human resources, budget and accounting, and information technology; and 

provides other support services. 

The Commission maintains an independent Office of the Inspector General. It conducts,

supervises, and coordinates audits and investigations relating to Commission programs 

and operations, and identifies and reports fraud and abuse in these programs and

operations.

Robert Taub, Ruth Goldway, Mark Acton
10 | ANNUAL REPORT

Figure II-1. Organizational Structure 

Tony Hammond

Commissioner

Mark Acton

Vice Chairman

Robert Taub

Acting Chairman

Ruth Goldway

Commissioner

Nanci Langley 

Commissioner

Office of Public 

Affairs & Government

Relations

Ann Fisher

Jack Callender

Office of the 

Inspector General

Office of Secretary

& Administration

Shoshana Grove

Assistant 

Secretary

Office of the 

General Counsel 

David Trissell

Deputy General 

Counsel

Deputy General 

Counsel

Office of 

Accountability 

& Compliance

Margaret Cigno

Deputy 

Director

* 39 U.S.C. § 505: The PRC shall designate an Officer of the Commission in all public 

proceedings who shall represent the interests of the general public.

* Public Representative

Commission’s Mission and Strategic Plan

The Commission’s mission is to ensure transparency and accountability of the Postal 

Service and foster a vital and efficient universal mail system.

The Commission’s Strategic Plan outlines its strategic goals, implementation 

approaches, and accountability plans for 2012 to 2016. Each quarter, the 

commissioners meet with agency office heads to gauge progress toward meeting

these goals and carrying out the Commission’s mission, and to ascertain where 

challenges might exist and the plan to address them. Each office head is responsible

for presenting commissioners with an updated action plan for discussion. As the 

Commission’s principal executive officer, the chairman may then use these action

plans to implement the Strategic Plan.

The Strategic Plan can be viewed or downloaded on the Commission’s website, 

www.prc.gov.
CHAPTER 2 | 11

Office of Public Affairs and Government Relations

The Commission’s Office of Public Affairs and Government Relations is the primary

office providing assistance to the general public. It supports public outreach and

education, complaint processing, and media relations, and liaises with Congress, 

presidential administrations, the Postal Service, and other government agencies. 

It informs and advises commissioners and Commission staff on legislative issues 

and policies related to the Commission and the Postal Service, and coordinates the 

preparation of Congressional testimony and responses to Congressional inquiries 

concerning Commission policies and activities. 

Another of its critical functions is to answer inquiries, questions, suggestions, 

and comments from the public, business owners, government bodies, and other 

stakeholders.

Comments and Inquiries

INQUIRIES BY SOURCE

During FY 2014, the Office of Public Affairs and Government Relations received 9,677

inquiries, questions, suggestions, and comments, a 114 percent increase over last 

year. Approximately 77 percent of consumer inquiries were submitted online through 

“Contact PRC” on the www.prc.gov website. Of the remaining inquiries, 19 percent 

came by phone and 4 percent by mail. Table II-1 shows the number of inquiries from 

Postal Service stakeholders from FY 2009 to FY 2014.

Ann Fisher
12 | ANNUAL REPORT

Table II-1. Inquiries Submitted to the Office of Public Affairs

and Government Relations

Source/Stakeholder

Year

FY 2014 FY 2013 FY 2012 FY 2011 FY 2010 FY 2009

Consumer 8,919 4,058 5,227 4,663 12,971 1,241

Business owner 482 224 67 81 1,300 0

Postal employee 151 92 250 427 2,978 55

Media 54 48 94 132 152 85

Federal/state/local govt. 47 72 214 223 129 97

Mailer 21 16 18 53 595 310

Postal organization 3 6 6 69 45 12

TOTAL 9,677 4,516 5,876 5,648 18,170 1,800

The office met with the Postal Service Office of Consumer and Industry Contact in

May and August 2014 to discuss the complaint resolution process. Commission 

Order No. 195 directs that the Postal Service must respond within 45 days to rate 

and service inquiries forwarded to its Office of the Consumer Advocate. In FY 2014,

the Commission forwarded 760 such inquiries. The order also requires the Postal 

Service to file a monthly report summarizing the general nature of these inquiries. The

reports are available on the Commission’s website.

INQUIRIES BY LOCATION

The Postal Service’s geographic landscape is divided into seven Area offices and 67

District offices. In FY 2014, the number of comments and inquiries received was

consistent with previous years. Table II-2 shows the FY 2014 breakdown by Area 

office, top issues raised, and total number received.

Table II-2. Comments and Inquiries by Area Office

Area Office Top Issues Total Received 

Missing Undelivered Delayed Rudeness Misdelivered FY 2014*

Northeast 164 383 173 79 170 1,510

Southern 115 190 208 58 212 1,297

Capital Metro 115 164 140 36 140 1,039

Eastern 100 181 164 36 139 1,022

Pacific 106 160 136 33 142 963

Western 79 131 138 37 125 934

Great Lakes 58 189 169 28 93 871

*Totals may be lower due to missing, unavailable, or unknown information.
CHAPTER 2 | 13

INQUIRIES BY ISSUE

As in past years, the predominant types of inquiries the Commission received from 

business owners were undelivered mail (mail not being delivered), delayed mail (mail 

not being picked up by the carrier, or being delivered late in the day or after close of 

business), and return-to-sender (mail being returned to the sender in error). Of the 

151 inquiries from Postal Service employees, 49 reported concerns with delayed mail, 

specifically in areas with plant consolidations.

Service continues to be the highest inquiry category. The Commission received 

8,053 inquiries regarding delivery service. There were 685 service-related inquiries 

regarding the carrier not making an initial attempt to deliver a package; 671 reports 

of mail not being delivered to residences; 624 reports of mail being misdelivered 

or delivered to nearby addresses; 1,099 reports of packages delayed or missing in 

the mail; and 255 reports of mail not being forwarded. There were 480 inquiries 

regarding employee behavior, including 378 reports of rudeness by Postal Service 

employees. In Quarter 2, there was an increase in undelivered mail due to weatherrelated suspensions in service. Table II-3 shows inquiries categorized by issue for 

FY 2014.

Table II-3. Comments and Inquiries by Issue

Issue FY 2014 FY 2013 FY 2012 FY 2011 FY 2010 FY 2009

Undelivered mail 1,651 520 137 107 71 16

Delayed mail 1,513 469 94 89 39 24

Misdelivered mail 1,192 393 76 51 52 15

Missing mail 1,023 601 211 159 129 38

Return-to-sender 410 139 64 47 22 8

Rudeness 378 207 43 21 22 8

Modernized Website

In FY 2014, the Commission continued its effort to audit and modernize its external 

website to ensure the content of Commission and Postal Service operations is 

accessible and transparent to all stakeholders. The project is expected to be completed 

in early 2015. The site’s main features will include:

•	 A “Consumer Assistance” button to make it easier for the general public to locate 

information

•	 An “Active Cases” section with all the open cases before the Commission

•	 A “How to Participate” tab that provides consumers with information about how 

to participate in Commission hearings and other activities

•	 Intuitive menu options that simplify the manner in which stakeholders access 

information

•	 Improved access to documents
14 | ANNUAL REPORT

Office of the Secretary and Administration

The Office of the Secretary and Administration provides financial and records

management, organizational support, planning, and human capital resources to 

ensure that the Commission has the physical, financial, information technology, and

human capital infrastructures needed to accomplish its mission. Administrative staff 

identifies and proposes process improvements, implements strategic plans, and

provides support to ensure the success of the Commission’s mission.

The Commission is committed to enhancing a system that fosters recruitment, 

development, and retention of a talented, skilled, diverse, and adaptable workforce as 

part of its Human Capital Plan within the 2012–2016 Strategic Plan. In line with the 

president’s guidance, the Commission continued to support its Flexible Work Program 

to include alternate work schedules and telework opportunities. During FY 2014, 66 

percent of those eligible participated. Furthermore, there were no accidents, on-thejob injuries, or resultant lost workdays in FY 2014. 

Employee Engagement

In FY 2014, the Commission again participated in the Federal Employee Viewpoint 

Survey. The Commission is committed to developing strategic action plans based on 

the survey results.

The Commission’s response rate (66 percent) was higher than the government-wide 

rate (59 percent). Compared with responses in six indices from staff at other small 

Federal agencies, Commission staff had a higher degree of satisfaction and a more 

positive view of their work and office environment. Table II-4 shows these results.

Table II-4. FY 2014 Federal Employee Viewpoint Survey Scores

Index Commission Response (%) All Small Agencies’ Response (%)

Leadership and Knowledge Management 71 59

Results-Oriented Performance Culture 62 56

Talent Management 64 59

Employee Engagement 69 65

Diversity and Inclusion 62 58

Global Satisfaction 61 59

Over the last several years, the Commission has successfully managed a rapidly 

increasing workload within a challenging budgetary climate. In response to these 

challenges, it has designed programs for training and professional development 

directed at employee engagement and retention.
CHAPTER 2 | 15

Training

This year, the Commission ensured that 

employees were in compliance with 

mandatory training requirements in 

areas such as cybersecurity, the Hatch 

Act, ethics, and travel card usage.

Equal Employment 

Opportunity

During FY 2014, the Commission had no 

formal Equal Employment Opportunity 

complaint filings. To sustain its

commitment to maintain a diverse and 

competent workforce, the Commission 

requires all staff to complete annual 

training about Equal Employment 

Opportunity and the Notification and

Federal Employee Antidiscrimination and 

Retaliation Act of 2002.

Diversity

In FY 2014, the Commission continued 

its commitment to support initiatives 

to recruit, develop, and retain a skilled, 

high-achieving, and diverse workforce. 

Women and minorities account for 66 

percent and 35 percent of the workforce, 

respectively. Women fill 41 percent of

the Commission’s executive positions; 

minorities fill 8 percent.

The Commission provides internship 

opportunities to aid the recruitment 

and development of professionals with 

diverse backgrounds. It will continue 

to monitor and offer opportunities to 

increase diversity, including the use of 

formal recruitment channels such as local 

universities, veterans’ groups, and other 

organizations and groups that target 

under-represented populations.

Transparency and Open 

Government

The Commission continued its 

commitment to transparency, 

accountability, and its compliance with 

the Freedom of Information Act. In FY 

2014, it enhanced network, website, and 

security measures, receiving a favorable 

review in the Department of Justice’s FY 

2014 Assessment of Agency Progress.

As part of its mission of ensuring 

transparency, accountability, and 

openness, the Commission continued 

to provide live audiocasts of hearings, 

technical conferences, and public 

meetings. These are available on the 

Commission’s website, www.prc.gov. 

Budget and Finance

The Commission’s appropriation of 

$14,152,000 was obligated to maintain 

staffing levels of 75 full-time employees

and for operating expenses. This figure

includes the 2 percent across-the-board 

cut for all Federal agencies for FY 2014 

required by the Office of Management

and Budget. The Commission’s FY 

2014 budget is set up so the majority 

of funds are allocated to staff pay and 

benefits ($10,587,145). A significantly

smaller amount ($3,564,855) is used for 

operating expenses.

Figure II-2 shows the Commission’s FY 

2014 budget expenditures. Rent includes 

commercial office space, and “other

expenses” includes consulting services, 

office supplies, information technology,

and printing.
16 | ANNUAL REPORT

Figure II-2. The Commission’s Annual 

Budget Expenditures

 Pay and Benefits

 Rent

 Other Expenses

13%

75%

12%

FY 14 Budgeted 

Adjustment

In response to the 2009 presidential 

memorandum regarding government 

contracting, and in line with Executive 

Order 13576, “Delivering an Efficient,

Effective, and Accountable Government” 

(2011), the Commission continued 

to improve its contracting policy and 

standard operating procedures, resulting 

in increased accountability and cost 

savings. The Commission continues 

to work within budget, improving 

accounting and contracting processes so 

they are more cost-effective and efficient.

Furthermore, the Commission has 

successfully partnered with women and 

minority-owned businesses. 

Information Technology

Improvements to the Commission’s 

docket infrastructure are nearly 

complete. The new system will optimize 

public access and ease of use, and 

maintain the integrity of Commission 

records. Building on last year’s 

infrastructure update, the Commission 

converted employees to virtual desktops 

and upgraded phone and Internet 

systems. These initiatives have increased 

the Commission’s cybersecurity posture 

and are providing employees a smooth 

work interface. The Commission is 

also on schedule to launch its new 

website in early FY 2015. It will be 

more user-focused and -friendly, and 

address accessibility issues. All of these 

information technology improvements 

continue the Commission’s commitment 

to openness and transparency. 

Dockets and Records 

Management

In FY 2014, the Dockets section 

completed a thorough review of internal 

and external access to protected 

materials. All internal users were notified

of new procedures governing access to 

these materials.

Records management team members 

have continued to receive training under 

the guidance of the National Archives and 

Records Administration, which approved 

a revised Commission records schedule. 

During a records management evaluation 

in FY 2014, the Commission received 

good ratings and sound guidance for 

proceeding with and expanding its 

records management program. In 

consultation with the National Archives 

and Records Administration, the 

Commission completed a comprehensive 

inventory of its records and began 

updating key material such as file plans

and a records management manual.
CHAPTER 2 | 17

Public Representative 

Program

The Commission is one of the few 

regulatory agencies that is required by 

statute to designate an “officer of the

Commission” to represent the interests 

of the general public in all public 

proceedings. These officers are known as

public representatives. The Commission’s 

Public Representative program provides 

public representatives with relevant 

training, resource assistance, and 

strategic feedback to maximize their 

role of representing the interests of the 

general public on issues ranging from 

Post Office closings to the Postal Service

Nature of Service changes.

This fiscal year, public representatives

filed comments in nearly 150 dockets.

These comments were carefully reasoned 

analyses and cogent arguments, and 

covered issues such as: 

•	 The continued importance of 

traditional post in rural and remote 

areas, despite the expansion of the 

Internet (CP2013-75/MC2013-57)

•	 The legitimacy and longevity of an 

exigency rate increase (R2013-11)

•	 The examination of a proposed Load 

Leveling Plan (N2014-1)

•	 The potential economic benefit to

welcoming innovative product ideas 

that originate outside the Postal 

Service (MC2013-60)

The Commission often cites the public 

representatives’ comments in its final

orders, a reflection of the important role

that these individuals play in Commission 

deliberations.

CHAPTER 3 | 19

Chapter III. Effectiveness of 

Commission Rules to Achieve 

PAEA Objectives

Summary

The Commission is required by 39 U.S.C. § 3651 to submit an annual 

report to the president and the Congress that includes an analysis of “the 

extent to which regulations are achieving the objectives under sections 

3622 and 3633” of the PAEA. 

The objectives applicable to Market Dominant products are:

1. Maximize incentives to reduce costs and increase efficiency

2. Create predictability and stability in rates

3. Maintain high-quality service standards established under section 

3691

4. Allow the Postal Service pricing flexibility

5. Assure adequate revenues, including retained earnings, to maintain 

financial stability

6. Reduce the administrative burden and increase the transparency of 

the ratemaking process

7. Enhance mail security and deter terrorism

8. Establish and maintain a just and reasonable schedule for rates 

and classifications; however, the objective under this paragraph

shall not be construed to prohibit the Postal Service from making 

changes of unequal magnitude within, between, or among classes of 

mail

9. Allocate the total institutional costs of the Postal Service 

appropriately between Market Dominant and Competitive products
20 | ANNUAL REPORT

Section 3622(b) establishes a tension 

between the restrictions of an inflationbased price cap on Market Dominant 

rate increases and the objective that the 

Postal Service must be self-sufficient and

maintain financial stability. Furthermore,

though the PAEA provides incentives 

via the price cap to reduce costs and 

increase efficiency, it also imposes new

personnel-related expenses requiring the 

pre-funding of future healthcare costs for 

Postal Service retirees.

For Competitive products, the 

requirements of section 3633 are:

1. Prohibit the subsidization of 

Competitive products by Market 

Dominant products

2. Ensure that each Competitive 

product covers its attributable costs

3. Ensure that all Competitive 

products collectively cover what 

the Commission determines to 

be an appropriate share of the 

institutional costs of the Postal 

Service

The Commission’s rules for applying the 

price cap and the application of those 

rules help to achieve several objectives 

of the PAEA. Enforcing the limitation 

that rates for each class of mail do not 

exceed inflation, for example, incentivizes

the Postal Service to reduce costs and 

increase efficiency (objective 1). This

year the Commission issued an advisory 

report on a Postal Service proposal to 

increase efficiency through load leveling.

The Commission also applies the price 

cap at the class level. Within each class, 

there are very few restrictions on the 

prices the Postal Service sets. This helps 

advance pricing flexibility (objective 4).

The Commission’s rules for reviewing 

market tests and NSAs facilitate Postal 

Service implementation of these 

innovative uses of pricing flexibility.

Refining the rules to clarify how the

price cap is applied to a greater variety 

of potential circumstances and pricing 

innovations increases the transparency 

of the ratemaking process (objective 6) 

and the predictability of rates (objective 

2). By balancing the tension between 

these objectives, the Commission’s rules 

and procedures help maintain a just 

and reasonable schedule for rates and 

classifications (objective 8).

This year the Commission approved, 

with modification, the first application

of a rate increase in excess of the 

consumer price index (CPI) price cap 

due to extraordinary or exceptional 

circumstances (i.e., an exigent rate 

increase). The Commission found that 

a temporary increase above the price 

cap was necessary due to the negative 

financial impact of the Great Recession.

Facilitating a rate increase to offset this 

impact helps assure adequate revenues 

to maintain financial stability (objective

5). The Commission’s development of 

rules for market tests, and the review and 

approval of NSAs, also helped achieve this 

objective.

Each year, the Commission analyzes 

the Postal Service’s rates and service 

and reports its findings in the ACD. In

FY 2014, it issued separate, expanded 

reports that focused on the Postal 

Service’s financial results and its

Performance Plan under sections 2803 

and 2804 of the PAEA. Publishing the 

information in these reports reduced 

the administrative burden and increased 

the transparency of the ratemaking 

process (objective 6). By reviewing 
CHAPTER 3 | 21

the Postal Service’s Performance 

Plan and service performance, the 

Commission helps to maintain highquality service standards (objective 3). 

Furthermore, the Commission’s rules 

for reviewing potential changes to the 

methods underlying the development 

of data the Postal Service reports 

help ensure accuracy and reliability. 

Accurate, reliable cost estimates are 

essential to appropriately allocating 

the total institutional costs of the Postal 

Service between Market Dominant and 

Competitive products (objective 9). 

This year, the Commission sponsored a 

study by CMPW Partnership to examine 

the behavior of institutional costs. An 

improved understanding of these costs 

will also help to achieve the objective.

The Commission did not develop any 

rules or review any cases in FY 2014 

with a direct effect on mail security or 

terrorism (objective 7).

The remainder of this chapter discusses 

how individual cases in FY 2014 relate to 

relevant objectives.

Market Dominant Cases

During FY 2014, the Commission 

approved Postal Service requests 

for changes in postal rates and 

classifications. The Commission also

approved price reductions associated 

with promotional rates. This year, 

the Postal Service requested a rate 

increase in excess of the annual CPI 

limitation, as allowed where necessary 

under extraordinary or exceptional 

circumstances. The Commission 

approved this request, but modified it

by limiting the duration of the above-CPI 

rates. The Commission also approved 

the implementation of several new rates 

and adopted modifications to the rules

governing the application of the price 

cap.

Notice of Increase for Rates 

of General Applicability

In FY 2014, the allowable annual increase 

for rates of general applicability under 

the CPI for all urban consumers price 

cap was 1.696 percent.1 The Postal 

Service proposed increasing prices for 

rate categories of each class of mail by 

different percentages, exercising its 

pricing flexibility while staying within the

overall class-level price cap.2

To advance the objectives of allowing 

pricing flexibility and assuring adequate

revenue, Commission rules in Title 

39 of the Code of Federal Regulations 

(C.F.R.), section 3010.23, allow the 

calculation of the CPI rate cap to include 

price reductions associated with rate 

incentives.3 This gives the Postal Service 

an incentive to use promotions to 

maintain or increase volume. 

The Commission approved all eight 

rate promotions and one incentive 

filed with the Postal Service’s notice

of price adjustment.4 Five of the 

eight promotions were included in 

the price cap calculation: Branded 

Color Mobile Technology; Emerging 

1 Docket No. R2013-10, Notice of Market Dominant Price 

Adjustment, September 26, 2013, at 2 (Order No. 1842). 2 Id. at 5. 3 Docket No. RM2013-2, Order Adopting Final Rules for 

Determining and Applying the Maximum Amount of Rate 

Adjustments, July 23, 2013, at 3 (Order No. 1786); see also

Docket No. RM2014-3, Order Adopting Final Rules on the 

Treatment of Rate Incentives and De Minimis Rate Increases 

for Price Cap Purposes, June 3, 2014 (Order No. 2086). 4 Docket No. R2013-10, Order on Price Adjustments for Market 

Dominant Products and Related Mail Classification Changes, 

November 21, 2013, at 53-61, 75-77 (Order No. 1890).
22 | ANNUAL REPORT

Technology Featuring NFC [near field

communication]; Mail Drives Mobile 

Commerce; Earned Value Reply Mail; 

and Mail and Digital Personalization.5

The Postal Service chose not to include 

the other three promotions (Premium 

Advertising, Color Print in First-Class 

Mail Transactions, and the Every Door 

Direct Mail Coupon program) or the 

Saturation and High-Density incentive in 

the price cap calculation.

The PAEA gives the Postal Service broad 

discretion in the use of pricing flexibility,

subject to only a few restrictions. It limits 

the Postal Service’s pricing flexibility in

objective, quantitative, and mandatory 

terms in three areas:

1. Prices for each class are capped at 

CPI [section 3622(d)].

2. Workshare discounts are limited to 

avoided costs [section 3622(e)].

3. Preferred category revenues are 

restricted to specified percentages

of corresponding regular-rate 

category revenues (section 3626).6

As it does for each Market Dominant rate 

adjustment, the Commission evaluated 

the Postal Service’s proposal for 

compliance with these restrictions.

The Commission found that, absent plans 

to require certain mail to comply with 

Full-Service Intelligent Mail barcode 

(IMb) requirements, the planned 

5 The Postal Service proposed to exclude Branded Color Mobile 

Technology, Mail and Digital Personalization, and Earned 

Value Reply Mail volumes and rates, as well as the effects of 

discontinuing eligibility of First-Class Mail for the Emerging 

Technology Featuring NFC promotion from the price cap 

calculation. Consistent with previous practice and to ensure 

that the Postal Service is held accountable for future price 

cap effects of termination of the promotions, the Commission 

found that they must be included in the price cap calculation. 

Id. at 57-61. 6 Docket No. RM2009-3, Order Adopting Analytical Principles 

Regarding Workshare Discount Methodology, September 14, 

2010, at 18 (Order No. 536).

rates did not violate the price cap.7

However, the Postal Service’s proposal to 

implement Full-Service IMb requirements 

in conjunction with rate increases 

would violate the price cap limitation 

for First-Class Mail, Standard Mail, and 

Periodicals.8 The Commission concluded 

that the Full-Service IMb requirements 

constituted a classification change

resulting in the deletion or redefinition

of rate cells, and that the effects must be 

included in the price cap calculation.

The simultaneous implementation of 

these changes would have caused rates 

to increase by more than the CPI rate 

authority of 1.696 percent.9

 Therefore, 

the Postal Service could not implement 

the Full-Service IMb requirements 

contemporaneously with the proposed 

rates without adjusting the rates to 

comply with the price cap. The Postal 

Service elected to defer implementation 

of these IMb requirements until after 

2014.10

The Commission also determined 

that the unequal commercial and 

nonprofit discounts for Standard Mail

5-digit Automation flats violated the

requirement that disparities between 

these discounts must be justified by a

statutory exception.11 On remand, the 

Postal Service equalized the commercial 

and nonprofit discounts by decreasing

the commercial discount to 9 cents12; 

the modified discount raised the average

price increase of the Standard Mail Flats 

product to 2.078 percent.13

7 Order No. 1890 at 1-2. 8 Id. at 2. 9 Id. 10 Docket No. R2013-10, Response of the United States Postal 

Service to Order No. 1890, November 29, 2012, at 2 (Postal 

Service Response to Order No. 1890). 11 Order No. 1890 at 2-3. 12 Postal Service Response to Order No. 1890 at 2. 13 Id. at 4.
CHAPTER 3 | 23

The Postal Service’s pricing flexibility

is also subject to restrictions on 

workshare discounts—reduced rates 

for mail prepared or entered to avoid 

certain activities the Postal Service 

would otherwise have to perform. These 

discounts are based on estimates of costs 

that the Postal Service avoids because 

mailers perform the activity.

The Commission, informed by 39 U.S.C. 

3622(e)(2), ensures that workshare 

discounts do not exceed the costs the 

Postal Service avoids unless an exception 

is met. This provision effectively 

limits the Postal Service’s ability to set 

worksharing discounts that exceed 100 

percent of avoided costs, except where 

unusual circumstances justify it. Those 

exceptions are: 

•	 The discount is associated with a 

new Postal Service or workshare 

initiative and will be phased out over 

time.

•	 It is necessary to avoid rate shock 

and will be phased out over time.

•	 The discount is provided in 

connection with subclasses of mail 

exclusively of educational, cultural, 

scientific, or informational value.

•	 Reduction or elimination of the 

discount would impede the efficient

operation of the Postal Service.

•	 If reducing the discount would lead 

to volume losses large enough to 

reduce aggregate contribution from 

the discounted categories.

•	 If reducing the discount would result 

in further rate increases for mailers 

not able to take advantage of the 

discount.

To date, Commission rules have been 

effective in balancing the Postal Service’s 

pricing flexibility with the statutory

requirements for worksharing discounts. 

The Commission has accomplished 

this by adjusting discounts, reviewing 

the Postal Service’s justification for its

exceptions, or, in some cases, initiating 

rulemakings intended to clarify 

worksharing relationships.

Notice of Exigent Price 

Increase

On September 26, 2013, the Postal 

Service filed a request for a rate

adjustment due to extraordinary 

or exceptional circumstances in 

accordance with 39 U.S.C. § 3622(d)

(1)(E).14 It proposed a rate increase of 

approximately 4.3 percent above the 

CPI price cap for Market Dominant 

products.15 The Postal Service filed

testimony of three witnesses who 

explained why the request satisfied the

requirements of the statute and relevant 

regulations.

On September 30, 2013, the Commission 

issued an order providing public notice 

of the request, setting a procedural 

schedule, inviting comments and reply 

comments from interested persons, and 

appointing a public representative.16

To clarify the Docket No. R2010-4R 

Request, the presiding officer issued

12 information requests. Technical 

conferences with the Postal Service’s 

witnesses were held on October 24, 

October 31, and November 1, 2013;17

14 Docket No. R2010-4R, Renewed Exigent Request of the United 

States Postal Service in Response to Commission Order No. 

1059, September 26, 2013 (Docket No. R2010-4R Request). 15 Id. at 1-2. 16 Docket No. R2013-11, Notice and Order Concerning Exigent 

Request, September 30, 2013 (Order No. 1847). 17 Id. at 7-8, Attachment.
24 | ANNUAL REPORT

the Commission conducted a public 

hearing on November 19 and 20, during 

which it questioned the Postal Service’s 

witnesses.18 Following the hearing, the 

Commission received 17 comments and 

11 reply comments.

On December 24, 2013, the Commission 

issued Order No. 1926, which found that 

mail volume declined by 25.3 billion 

pieces due to the Great Recession.19 The 

Commission concluded that the Postal 

Service was entitled to collect $2.8 

billion in 2014 after-rates contribution 

to compensate for the contribution 

lost as a result of this decline.20 It also 

found that the Postal Service met its 

18 Id. at 6-7, Attachment. 19 Docket No. R2013-11, Order Granting Exigent Price Increase, 

December 24, 2013, at 2 (Order No. 1926). 20 Id.

burden to show the rate adjustment was 

reasonable, equitable, and necessary in 

accordance with the requirements of 39 

U.S.C. § 3622(d)(1)(E).21 The Commission 

held that the increased rates could not 

be collected indefinitely and directed

the Postal Service to present a plan to 

treat the increased rates as a surcharge, 

to be removed when it had collected the 

amount the Commission allowed.22 To 

ensure this amount is monitored and to 

prevent over-collection, the Commission 

ordered the Postal Service to file

quarterly revenue collection reports and 

submit a plan to remove the surcharge 

when the lost contribution is recovered.23

21 Id. at 3. 22 Id. at 170. 23 Id. at 185.
CHAPTER 3 | 25

Figures III-1 through III-4 illustrate how the Postal Service used pricing flexibility in

the FY 2013 rate adjustments and the addition of the exigent surcharge. The green 

lines represent the overall percentage available at the class level under the CPI for 

all urban consumers rate cap. The Postal Service exercised its pricing flexibility by

applying different percentage increases to products while staying within the overall 

class-level price cap; the blue columns represent these increases. The red columns 

represent the exigent surcharge, which is in addition to the rate increases under the 

price cap.

Figure III-1. First-Class Mail

1.1%

4.3%

Single Piece 

Letters & Cards

1.6%

4.4%

Presort 

Letters & Cards

1.2%

4.6%

Flats

6.3%

4.3%

Parcels

7.4%

2.4%

First-Class Mail 

International

0%

2%

4%

6%

8%

10%

12%

 R2013-11

 R2013-10

 Price Cap

CPI Price Cap 

1.696%

Percent Change

Figure III-2. Periodicals

0%

1%

2%

3%

4%

5%

6%

7%

 R2013-11

 R2013-10

 Price Cap

CPI Price Cap 

1.696%

Outside County

1.7%

4.1%

Within County

1.7%

4.3%

Percent Change
26 | ANNUAL REPORT

Figure III-3. Standard Mail

 R2013-11

 R2013-10

 Price Cap

CPI Price Cap 

1.696%

0%

1%

2%

3%

4%

5%

5%

7%

Percent Change

1.6%

4.3%

Letters Flats

1.8%

4.3%

Parcels

1.8%

4.3%

High-Density 

& Saturation 

Letters

1.3%

4.2%

High-Density 

& Saturation 

Flats & Parcels

1.1%

4.3%

Carrier 

Route

1.7%

4.3%

Figure III-4. Package Services

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

Percent Change

2.4%

4.2%

0.3%

4.6%

1.7%

4.5%

2.1%

4.3%

-1.6%

Alaska Bypass 

Service

Bound Printed 

Matter 

Flats

Bound Printed 

Matter 

Parcels

Library & 

Media Mail

International 

Inbound Surface 

Parcels

 R2013-11

 R2013-10

 Price Cap

CPI Price Cap 

1.696%

On January 23, 2014, the Postal Service 

petitioned the United States Court of 

Appeals for the District of Columbia 

Circuit for review of Order No. 1926.24

The same day, a coalition of 17 mailers 

and mailing-related associations also 

petitioned for review of the order. 

24 Case No. 14-1010, United States Postal Service v. Postal 

Regulatory Commission, January 23, 2014.

On September 9, 2014, a three-judge 

panel held oral arguments on the 

petitions for review, which are still 

pending before the court.25

25 See United States Court of Appeals for the District of Columbia 

Circuit’s current oral argument calendar, Case No. 14-1009, 

Alliance of Nonprofit Mailers v. PRC, September 9, 2014.
CHAPTER 3 | 27

PHI Negotiated Service 

Agreement

On June 19, 2014, the Commission 

approved the addition of the PHI 

Acquisitions, Inc. NSA to the Market 

Dominant product list.26 An example 

of the Postal Service exercising pricing 

flexibility afforded by the PAEA, it is

designed to generate additional revenue 

that will help maintain financial stability.

The NSA went into effect on July 1, 2014, 

and will end in 5 years.27 It is designed to 

increase the total contribution the Postal 

Service receives from PHI Standard Mail 

Carrier Route flats by offering rebates on

any volume of that product that exceeds a 

negotiated threshold specified in the NSA.

In the first year of the agreement, eligible

volume up to 10 percent above the 

quarterly threshold receives a 10 percent 

rebate from published rates; eligible 

volume between 10.01 percent and 18 

percent receives a 15 percent rebate; and 

eligible volume more than 18 percent 

receives a 20 percent rebate.28 In each 

subsequent year of the agreement, the 

quarterly thresholds are adjusted based 

on PHI’s volume of Standard Mail Carrier 

Route flats in the previous year.

Based on its review, the Commission 

concluded that the NSA was consistent 

with the relevant statutory criteria and 

regulatory requirements of 39 U.S.C. § 

3622(c)(10) and 39 C.F.R. § 3010.40(a) 

and (b).

26 Docket Nos. MC2014-21 and R2014-6, Order Adding PHI 

Acquisitions, Inc. Negotiated Service Agreement to the Market 

Dominant Product List, June 19, 2014 (Order No. 2097). 27 Id. at 4. 28 Id. at 44.

Alternate Postage Payment

The Commission approved the 

Postal Service’s proposal to add 

Alternate Postage Payment, formerly 

an experimental product, as a new, 

permanent price category within 

First-Class Mail, Single-Piece Letters/

Postcards.29 The classification and the

price adjustment allow mailers to prepay 

postage, eliminating the need to affix a

stamp to First-Class Mail, Single-Piece 

Letters/Postcards. Customers need only 

address the mail piece and drop it in a 

collection box,30 an easy process that 

is thought will make customers more 

likely to mail greeting cards and other 

correspondence.

The Commission found the proposal 

consistent with the PAEA’s objectives 

and factors.31 The new price categories 

demonstrate mailing flexibility, and

Alternate Postage Payment is expected 

to enhance the Postal Service’s financial

position and help to cover First-Class 

Mail attributable costs.32

Round-Trip Mailer

On July 26, 2013, the Postal Service filed

a request to add a new product, RoundTrip Mailer, to the Competitive product 

list.33 Submitted in response to the 

Commission’s order on remand in Docket 

No. C2009-1R, the request features 

equalized rates for letter-shaped and 

flat-shaped round-trip DVD mail.34 This 

29 Docket No. R2014-1, Notice of Market Dominant Price 

Adjustment for Alternate Postage Payment Method, December 

20, 2013 (Order No. 1917). 30 Id. at 6. 31 See 39 U.S.C. § 3622(b)(4). 32 See 39 U.S.C. §§ 3622(b)(5), 3622(c)(1) and (2). 33 Docket No. C2009-1R, Request of the United States Postal 

Service Under Section 3642 to Create Round-Trip Mailer 

Product, July 26, 2013, at 2 (Docket No. C2009-1R Request). 34 See Order No. 1763, Docket No. C2009-1R, Order on Remand, 

June 26, 2013.
28 | ANNUAL REPORT

product would replace the existing FirstClass Mail Round-Trip Mailer options 

on the Market Dominant product list. 

The PAEA provides pricing flexibility to

transfer products of a competitive nature 

from the Market Dominant product list 

to the Competitive product list if the 

Commission determines that certain 

criteria have been met.

The Commission established proceedings 

in Docket Nos. MC2013-57 and 

CP2014-75 to consider the request35

and has received comments and sworn 

statements addressing issues it raised. 

The Commission is reviewing the request 

to ensure it complies with 39 U.S.C. § 

3642 and the Commission’s regulations 

at 39 C.F.R. § 3020.30 et seq. As of the end 

of FY 2014, the request is pending before 

the Commission.

Annual Compliance 

Determination

The ACD is an important tool for 

enhancing transparency and ensuring the 

Postal Service complies with statutory 

pricing and service policies. Pursuant 

to the PAEA and regulations adopted by 

the Commission, the Postal Service has 

90 days after the close of the fiscal year

to collect, audit, and submit its Annual 

Compliance Report (ACR), which provides 

important data for the Commission’s 

ACD. The Commission then has 90 days 

to solicit comments from the public, 

evaluate the data, and prepare the ACD.

On March 27, 2014, the Commission 

issued its FY 2013 ACD. The seventh ACD 

since the PAEA was enacted, it differed 

from its predecessors in that it focused 

35 Docket Nos. C2009-1R, MC2013-57, and CP2013-75, Notice 

and Order on Request to Add Round-Trip Mailer Product to 

Competitive Product List, July 30, 2013 (Order No. 1794).

exclusively on 39 U.S.C. § 3653(b)(1) and 

(b)(2), which require the Commission 

to determine whether any rates and fees 

in effect during FY 2013 were not in 

compliance with applicable provisions 

in chapter 36 of the statute, and whether 

the Postal Service met its service 

standards in effect during FY 2013.

To further enhance transparency, the 

Commission issued two additional 

reports during FY 2014: Analysis of 

Postal Service Financial Results and 10-K 

Statement and the Review of Postal Service 

FY 2013 Performance Report and FY 2014 

Performance Plan. The content of these 

reports used to be included in the ACD, 

but the Commission decided to separate 

them to provide a more comprehensive 

review of the Postal Service’s finances

and performance goals.

In the FY 2013 ACD, the Commission 

recognized Postal Service improvement 

in several important areas. It observed 

that Competitive products achieved a 

higher overall cost coverage and provided 

a larger contribution to institutional 

costs than in FY 2012. The Commission 

also noted that the Periodicals class 

and the Standard Mail Flats product 

reduced losses and improved cost 

coverage compared with FY 2012. These 

improvements are responsive to the 

Commission’s recommendations and 

directives to improve the financial results

of these products.36 In addition, the 

Commission found that through Postal 

Service efforts, an increasing number of 

mail pieces used the Full-Service IMb. The 

Commission has consistently encouraged 

increased use of the Full-Service IMb 

as a means of producing a more robust 

service performance measurement.

36 See, e.g., 2010 ACD at 94 and 106-07.
CHAPTER 3 | 29

In reviewing Market Dominant products 

for compliance with the statutory pricing 

policies, the Commission found 18 of 42 

workshare discounts did not comply with 

the requirement of 39 U.S.C. § 3622(e) 

that price discounts not exceed costs 

avoided. The Commission also identified

nine Market Dominant products that 

did not generate sufficient revenues to

cover their attributable costs. Of those 

products, Standard Mail Flats, and Within 

County and Outside County Periodicals, 

were of recurring concern.

For Standard Mail Flats, the Commission 

determined that Postal Service progress 

toward addressing issues raised in 

previous ACDs warranted no further 

remedial action. For Periodicals, the 

Commission instructed the Postal Service 

to provide a detailed analysis of progress 

made toward improving cost coverage 

in its FY 2014 ACR. This analysis will 

include an examination of how pricing 

flexibility was used to improve efficiency

and the progress toward and impact of 

implementing the operational strategies 

outlined in the Periodicals Mail Study.37

Though Competitive products as a whole 

generated a profit, the Commission

identified four products that did not

cover their attributable costs and, 

therefore, were not in compliance with 39 

U.S.C. § 3633(a)(2): Parcel Return Service 

Contract 4, International Priority Airmail, 

Inbound Air Parcel Post (at non-UPU 

rates), and International Money Transfer 

Service-Outbound. The Commission 

directed the Postal Service to take 

corrective actions.

With respect to FY 2013 service 

performance, the Commission found 

37 Periodicals Mail Study, Joint Report of the United States Postal 

Service and the Postal Regulatory Commission, September 

2011.

that the Postal Service met its targets 

for First-Class Mail, Single Piece 

Letters/Postcards. Despite significant

improvement during the year, however, 

a majority of Market Dominant products 

did not meet their annual targets. 

The Commission also observed that 

comparison of FY 2013 reported service 

performance with prior years was 

complicated by the Postal Service’s 

implementation of new service standards 

for several classes of mail during the year.

Review of Postal Service 

Performance Reports 

On July 7, 2014, the Commission 

issued its Review of Postal Service FY 

2013 Performance Report and FY 2014 

Performance Plan. This report evaluated 

whether the Postal Service had met 

the performance goals in its FY 2013 

Performance Report and reviewed the 

initiatives and targets established in the 

FY 2014 Performance Plan. In previous 

years, the Commission included this 

report as a chapter in its ACD; in FY 2014, 

it produced an expanded, stand-alone 

report to provide a more comprehensive 

review of the Postal Service’s 

performance goals.

The Commission concluded that the 

Postal Service partially met the Service, 

Financial Results, and Workplace 

Environment performance goals, but 

did not meet the Customer Service goal. 

It found that the FY 2013 Performance 

Report and FY 2014 Performance Plan

satisfied all applicable statutory and

regulatory filing requirements for each

performance goal except for covering 

each program activity set forth in the 

Postal Service budget. The Commission 

also provided recommendations for the 
30 | ANNUAL REPORT

FY 2014 Performance Report and FY 2015 

Performance Plan, such as suggesting 

that the Postal Service explore why a 

significant percentage of large business

survey respondents did not meet its 

definition of “large business.”

Standard Mail Load Leveling

In its Docket No. N2014-1, the 

Commission issued its Advisory Opinion 

on the Postal Service’s proposed 

destination sectional center facility 

(DSCF)38 Standard Mail Load Leveling 

Plan on March 26, 2014.39 The Postal 

Service proposed that plan to facilitate 

workload equalization throughout 

the week for processing and delivery 

of DSCF-entered Standard Mail. Load 

leveling would be accomplished by 

changing the 3-day service standard to 4 

days for DSCF Standard Mail entered after 

critical entry times on Thursdays and 

before them on Saturdays.

The Commission found that the Postal 

Service’s DSCF Load Leveling Plan 

may provide a means of leveling DSCF 

Standard Mail daily delivery volumes. 

However, limited testing appeared to 

be inconclusive regarding the plan’s 

nationwide effects.40 The Commission, 

observing that the plan needed further 

development, recommended the Postal 

Service take certain actions before 

proceeding, including:

•	 Performing a cost-benefit analysis at

the national level to ensure the plan 

is cost effective while providing the 

anticipated benefits41

38 A DSCF is a mail processing facility where final sortation of mail 

occurs before it is dispatched to the delivery unit. 39 Docket No. N2014-1, Advisory Opinion on Service Changes 

Associated with Standard Mail Load Leveling, March 26, 2014 

(Docket No. N2014-1 Advisory Opinion). 40 Id. at 1, 22, 30. 41 Id. at 1-2, 31-36, 38.

•	 Assessing the plan’s impact 

on volume and co-mailing/copalletization activities42

•	 Performing additional field

testing because the results of the 

limited field testing may not be

representative at the national level43

•	 Further analysis of the plan’s effect 

on service performance44

•	 Conducting more extensive customer 

outreach to obtain a clearer 

understanding of mailers’ questions 

and concerns45

Market Dominant 

Rulemakings 

There were four key FY 2014 Market 

Dominant rulemakings.

Clarifying Price Cap 

Calculations

The Commission finalized rule changes

relating to the price cap on June 3, 2014.46

The changes clarify the rules for rate 

decreases, the treatment of deleting 

rate cells for which no alternative rate 

is available, and allow for de minimis

rate increases without triggering a full 

price cap proceeding. These rules are 

intended to increase transparency in 

the ratemaking process and ensure 

predictability, stability, and a just and 

reasonable rate schedule.

The rule changes reflect efforts for

clarifying the treatment of a rate 

decrease by means of a Type 1-C rate 

42 Id. at 2, 27-29, 31-38. 43 Id. at 1-2, 31-38. 44 Id. at 53. 45 Id. at 50-52. 46 See Order No. 2086.
CHAPTER 3 | 31

adjustment—an adjustment to a rate of 

general applicability that contains only 

a decrease. The Postal Service is not 

required to calculate an annual limitation 

for this type of adjustment, but it must 

choose whether or not it will generate 

unused rate adjustment authority at the 

time of filing.47

The Commission defined a “rate of

general applicability” to help mailers 

better understand which promotions and 

incentives may be included in the price 

cap calculations.48 In the proceeding, 

the Commission provided a detailed 

discussion of the definition’s application

to international mail, volume-based 

incentives, niche classifications, rates

that require “ministerial approval” by 

the Postal Service, and particular rates 

identified by the parties. The Commission

found that the proposed definition

accurately summarized its previous 

treatment of rates proposed by the Postal 

Service. In order to clarify the application 

of the definition for international mail,

the Commission modified it to include

references to the International Mail 

Manual and foreign postal operators.49

A previous Commission rule, 39 C.F.R. § 

3010.23(d), required the Postal Service 

to make reasonable adjustments to its 

billing determinants when it proposed 

a classification change that introduced,

deleted, or redefined a rate cell. Under

the new rule, if a classification change

deletes a rate cell for which an alternate 

rate cell is not available, the billing 

determinants should be adjusted to 

zero.50 If the Postal Service does not do 

so, it must explain how it proposes to 

treat the rate cell.

47 Id. at 5. See 39 C.F.R. §§ 3010.6(b), 3010.20(e), 3010.23(b)(2), 

and 3010.27. 48 Id. at 12-27. See 39 C.F.R. § 3010.1(g). 49 Id. at 15-16. See 39 C.F.R. § 3010.1(g). 50 Id. at 29. See 39 C.F.R. § 3010.23(d)(4).

The Commission established a de 

minimis rate increase threshold of 0.001 

percent.51 Under the new rules, if the 

Postal Service wishes to increase rates 

by less than 0.001 percent, it may do 

so without triggering a full price cap 

proceeding.

These rule changes were designed 

to clarify the Commission’s existing 

rules and to provide transparency and 

simplicity for the mail community.

Market Test Rulemakings

On August 28, 2014,52 the Commission 

issued final regulations that established

new procedures for Postal Service 

requests to conduct market tests of 

experimental products in accordance 

with 39 U.S.C. § 3641. Taking effect on 

October 14, 2014, the regulations balance 

the Commission’s oversight authority 

for market tests with the Postal Service’s 

need for flexibility to test new product

ideas. The regulations also reflect the

lessons learned from past market tests.

The new rules provide increased clarity 

for the Postal Service, mailers, and the 

public regarding how such market tests 

are to be conducted and evaluated under 

the law. The rules offer the Postal Service 

the flexibility to conduct market tests

of experimental products and to gain 

valuable experience from them, but also 

include safeguards to avoid disruptions 

to the commercial marketplace. The 

rules also discuss the elements the 

Postal Service must include in a market 

test proposal, the Commission’s review 

process, the revenue and time limitations, 

the data to be collected from a test, 

51 Id. at 32-34. See 39 C.F.R. § 3010.30. 52 Docket No. RM2013-5, Order Adopting Final Rules for Market 

Tests of Experimental Products, August 28, 2014 (Order No. 

2173).
32 | ANNUAL REPORT

and the mechanisms by which the 

Postal Service can seek to change tests 

or transition experimental products 

to permanent products. With such 

clearly defined procedures, the rules

will facilitate the Postal Service’s use of 

pricing flexibility and ensure adequate

transparency of market tests.

Price Elasticities and Internet 

Diversion

On May 2, 2014, the National Postal 

Policy Council, along with seven other 

parties, filed a petition requesting the

Commission to “initiate and conduct a 

proceeding to review and improve the 

econometric volume demand model 

and associated factors relating to 

price elasticity estimates and Internet 

diversion used by the Commission and 

Postal Service.”53 Petitioners claim that 

the “econometric volume demand model 

prepared by the Postal Service materially 

understates the true price elasticities of 

demand for major postal products.”54

On May 9, 2014, the Postal Service 

responded to the petition,55 claiming it 

would serve no useful purpose. It also 

stated that the petition facts had already 

been addressed, that approval of demand 

elasticities were outside the scope of the 

Commission’s authority, and the petition 

could interfere with another Commission 

docket now before the Court of Appeals.56

53 Docket No. RM2014-5, Petition to Improve Econometric 

Demand Equations for Market Dominant Products and Related 

Estimates of Price Elasticities and Internet Diversion, May 2, 

2014, at 1 (Petition); National Postal Policy Council, Association 

for Mail Electronic Enhancement, Association of Marketing 

Service Providers, GrayHair Software, Inc., Greeting Card 

Association, International Digital Enterprise Alliance, Inc., 

Major Mailers Association, and National Association of Presort 

Mailers (Petitioners). 54 Petition at 2. 55 Docket No. RM2014-5, Answer of the United States Postal 

Service in Opposition to Petition to Initiate a Proceeding 

Regarding Postal Demand Analysis, May 9, 2014 (Postal Service 

Answer). 56 See Postal Service Answer.

Petitioners responded to the Postal 

Service’s answer on May 19, 2014.57

After deliberating the petitioners’ 

claims, the Commission found reason to 

“explore areas of possible improvement 

in demand analysis and forecasting” 

and initiated Docket No. RM2014-5.58

In addition, Order No. 2117 scheduled 

a technical conference, appointed a 

public representative to act on behalf of 

the interests of the general public, and 

invited interested persons to comment on 

an alternate method attached to the order 

and matters raised at the conference.59

Following the technical conference 

on August 13, 2014, the Commission 

received six comments from interested 

persons. The docket is still pending.

Form and Content of Postal 

Service Reports to the 

Commission

The Commission’s periodic reporting 

rules allow the Commission and the 

public to review changes to analytical 

principles before the Postal Service 

applies these principles to estimate 

its financial results in its ACR.60,61 The 

Commission’s rules approach analytical 

issues through a process that is intended 

57 Reply in Support of Petition, May 19, 2014 (Petitioners’ Reply). 58 Docket No. RM2014-5, Notice and Order Scheduling Technical 

Conference, July 9, 2014, at 5 (Order No. 2117); id. at 4. 59 Id. at 6; Lyudmila Y. Bzhilyanskaya, Margaret M. Cigno, and 

Edward S. Pearsall, “A Branching AIDS Model for Estimating 

U.S. Postal Price Elasticities.” (Attachment A). The Commission 

emphasizes that the views expressed in Attachment A are 

those of its authors and have not been reviewed or endorsed 

by the Commission or any commissioner. Id. at 5. 60 Docket No. RM2008-4, Notice of Final Rule Prescribing Form 

and Content of Periodic Reports, April 16, 2009, at 19. See 39 

C.F.R. § 3050.11, Proposals to change an accepted analytical 

principle applied in the Postal Service’s annual periodic reports 

to the Commission (Order No. 203). 61 The Commission’s rulemaking proceedings conform to the 

Administrative Procedure Act’s “notice and comment” 

requirements. This means that the Commission issues a 

notice (or advance notice) of a proposed rulemaking, invites 

public comments, and issues a final rulemaking following 

consideration of comments.
CHAPTER 3 | 33

to be highly flexible and vary according

to the complexity of the proposed 

change and the level of documentation 

supporting it.62

In anticipation of filing its FY 2014 ACR,

the Postal Service sought consideration 

of 18 proposals that were primarily 

improvements to its estimation 

methodologies and a minor change in 

the format of its section 3652 report. 

These were filed between August 2013

and June 2014. The proposals led 

to a series of rulemakings to change 

accepted analytical principles applied 

to the financial data used in the Postal

Service’s FY 2013 ACR. Because most of 

these proposed changes are expected 

to improve the quality, accuracy, and 

completeness of the financial data or data

analysis, the Commission approved them. 

It also made additional recommendations 

and requests for information for several 

proposals, and partially denied a portion 

of a proposal that did not show improved 

accuracy.

Commission Rule 3050.11(b)(1) 

requires the Postal Service to show 

the calculations it uses to develop the 

proposed changes and the impact of the 

analytical changes on individual products. 

For two FY 2014 proposals, the Postal 

Service did not provide this information 

with its initial filing, and the Commission

directed it to provide supporting 

materials with future proposals or in the 

next ACR, as appropriate.63

Five of the proposed changes in analytical 

principles the Postal Service initiated 

responded to directives from the FY 2013 

ACD. Three of these proposals responded 

to directives the Commission issued 

62 Docket No. RM2008-4, Notice of Proposed Rulemaking 

Prescribing Form and Content of Periodic Reports, August 22, 

2008, at 31 (Order No. 104). 63 Docket No. RM2014-4, Order on Analytical Principles Used in 

Periodical Reporting (Proposals One and Two), June 25, 2014, 

at 6, 9 (Order No. 2101).

because certain Competitive products 

did not satisfy the section 3633(a)

(2) requirement to cover attributable 

costs.64 Another Commission-directed 

undertaking provided additional 

explanation of the development of 

attributable costs for the Competitive 

P.O. Box Service enhanced services.65

The Postal Service also responded to 

the Commission directive requiring an 

updated methodology for calculating the 

attributable costs of products handled by 

the Services Center.66

The remainder of the proposals included 

initiatives designed to improve the 

calculation of transportation costs, 

handling costs, and worksharing savings 

associated with destination entry 

discounts.67 The proposals affected a 

variety of products, including Parcel 

Return Service, Competitive P.O. Boxes, 

Philatelic Sales, USPS Tracking (née 

Delivery Confirmation), and several

international products, including NSAs. 

In addition, the Commission approved a 

proposal to eliminate the requirement for 

the Postal Service to provide an alternate 

format Cost and Revenue Analysis report, 

designed to facilitate comparisons 

with pre-PAEA classifications. The

usefulness of this as an analytical tool has 

substantially diminished and is no longer 

relevant.

64 Parcel Return Service Full Network NSA, International Priority 

Airmail, and Global Plus 2B and 2C products did not cover their 

attributable costs. 65 The Commission noted that the Postal Service did not show 

how it developed the total estimate for the information 

technology costs. FY 2012 ACD at 163; 39 C.F.R. § 3050.11(b)

(1). If the notice of proceeding or petition proposes that a 

specific alternative analytical principle should be followed, it 

should include the data, analysis, and documentation on which 

the proposal is based. 66 The Commission directive stated that 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. FY 2012 ACD at 143. 67 Destination entry discounts are worksharing discounts 

provided for dropshipping, when mailers enter mail at 

downstream facilities that are close to the delivery destination.
34 | ANNUAL REPORT

Competitive Products

The Commission reviews Competitive 

product prices to ensure compliance with 

three statutory criteria:68

1. 39 U.S.C. § 3633(a)(1). Competitive 

products must not be crosssubsidized by Market Dominant 

products. The Commission uses 

incremental costs to test whether 

Competitive products are being 

cross-subsidized; there is no crosssubsidy where the Commission 

finds that Competitive product

revenues as a whole are equal to or 

exceed total incremental costs.

2. 39 U.S.C. § 3633(a)(2). Each 

Competitive product must cover 

its attributable costs. In the ACD 

and in response to a Postal Service 

notice of change in Competitive 

product prices, the Commission 

reviews whether revenues for 

each Competitive product exceed 

its attributable costs to determine 

compliance with this objective.

3. 39 U.S.C. § 3633(a)(3). This 

requires Competitive products to 

collectively cover an appropriate 

share of institutional costs. A recent 

Commission review determined 

that contribution from Competitive 

products as a whole must be at least 

5.5 percent of the Postal Service’s 

total institutional costs.69

Within the constraints of these statutory 

criteria, Commission rules provide 

flexibility to the Postal Service to set

prices for Competitive products.70 For 

Competitive products featuring rates 

68 39 U.S.C. §§ 3633(a)(1), 3633(a)(2), and 3633(a)(3). 69 Docket No. RM2012-3, Order Reviewing Competitive Products’ 

Appropriate Share Contribution to Institutional Costs, August 

23, 2012 (Order No. 1449). 70 See 39 C.F.R. § 3015.

“of general applicability” (i.e., products 

available to the general mailing public), 

the Commission completes its review 

within 30 days. For Competitive 

products featuring rates “not of general 

applicability” (i.e., products with rates 

offered only to specific mailers), the

Commission completes its review within 

15 days.

Changes in Rates of General 

Applicability

During FY 2014, the Commission 

reviewed price changes for Competitive 

products featuring prices of general 

applicability in four docketed 

proceedings.

Annual price change for Competitive 

products. On November 13, 2013, the 

Postal Service filed notice of its annual

change in prices of general applicability 

for several domestic and international 

Competitive products.71 It also proposed 

changes to the Mail Classification Schedule

related to some of these products.72

On December 12, 2013, the Commission 

determined that the Postal Service’s 

proposed price changes satisfied 39 U.S.C.

§ 3633(a) for all but the International 

Direct Sacks-Airmail M-bags (Airmail 

M-bags) product. The new prices and 

classification changes went into effect on

January 26, 2014.

71 Docket No. CP2014-5, Notice of the United States Postal 

Service of Changes in Rates of General Applicability for 

Competitive Products Established in Governors’ Decision No. 

13-2, November 13, 2013. Order No. 1903, Order Approving 

Changes in Rates of General Applicability for Competitive 

Products, December 12, 2013. 72 The Postal Service’s notice identified price changes for the 

following Competitive products: Priority Mail Express, Priority 

Mail, Parcel Select Service, Parcel Return Service, First-Class 

Package Service, Standard Post, Domestic Extra Services, 

International Expedited Services, Priority Mail International, 

International Priority Airmail, International Surface Air Lift, 

International Direct Sacks-Airmail M-bags, First-Class Package 

International Service, and International Special Services.
CHAPTER 3 | 35

For Airmail M-bags, the Commission 

found that revenue from the proposed 

prices did not cover the product’s costs. 

Recognizing the product’s history of 

covering costs, however, the Commission 

allowed the proposed prices to take 

effect. In addition, the decline in revenue, 

pieces, and pounds supported the Postal 

Service’s suggestion that cost or revenue 

data for the Airmail M-bag product may 

be anomalous.73 The Commission also 

directed the Postal Service to provide 

no later than May 26, 2014, a report 

addressing statistical issues resulting 

in prices that cannot cover costs.74 The 

Postal Service’s report, filed on May

23, 2014, determined that Airmail 

M-bag volumes were under-reported 

and presented revised financial results

showing that the product was expected to 

cover costs.75

Standard Post price change. On February 

14, 2014, the Postal Service proposed 

to add a new price category, Limited 

Overland Routes, to the Standard 

Post product.76 It proposed this 

category in response to the Standard 

Post classification and price changes

implemented on January 26, 2014, 

which had a disproportionate impact 

on certain Standard Post mailers in 

Alaska who often send heavier-thanaverage Standard Post pieces within 

Zones 1-5. The Limited Overland Routes 

price category applies only to pieces 

delivered to or from ZIP Codes in Alaska 

73 Docket No. CP2014-5, Order Approving Changes in Rates of 

General Applicability for Competitive Products, December 12, 

2013, at 12 (Order No. 1903). 74 Id. at 13. 75 Docket No. CP2014-5, Notice of the United States Postal 

Service of Filing of Response to Request in Order No. 1903 

for Report Concerning Airmail M-bags Cost Coverage, May 

23, 2014. The report was filed under seal. Order No. 1903, 

Order Approving Changes in Rates of General Applicability for 

Competitive Products, December 12, 2013. 76 Docket No. CP2014-27, Order Approving Changes in Rates of 

General Applicability for Standard Post, March 7, 2014 (Order 

No. 2012).

not connected by overland routes; 

therefore, it will affect only a small, 

discrete number of designated ZIP Codes 

with low volume.77 The proposed prices 

for this category were set equal to the 

Standard Post prices on January 27, 2013, 

the effective date of the omnibus price 

change.

On March 7, 2014, the Commission 

approved the new price category; based 

upon the proposed price, it determined 

the Standard Post product should 

continue to avoid cross-subsidization by 

Market Dominant products and cover its 

attributable costs as required by 39 U.S.C. 

§ 3633(a).78 The prices became effective 

on March 20, 2014.79

Priority Mail price change. On July 1, 

2014, the Postal Service filed price

changes for the Priority Mail product.80 As 

proposed, the Priority Mail Retail average 

price increase was 1.7 percent. For 

Commercial Base and Commercial Plus, 

the Postal Service proposed average price 

decreases of 0.9 percent and 2.3 percent, 

respectively.81 The overall average price 

change for Priority Mail was 0 percent. 

According to the Postal Service, price 

decreases were focused on ground zones 

(Zones 1-4) and heavier weights (6-20 

pounds) within the Priority Mail product 

in order to enhance its position in the 6- 

to 20-pound market for parcels relying on 

ground transportation.82 There were no 

classification changes.

77 Id. at 2. 78 Id. at 4. 79 Id. at 1. 80 Docket No. CP2014-55, Notice of the United States Postal 

Service of Changes in Rates of General Applicability for 

Competitive Products Established in Governors’ Decision No. 

14-3, July 1, 2014. Order No. 2156, Order Approving Changes 

in Rates of General Applicability for Priority Mail, August 15, 

2014 (Order No. 2156). 81 Decision of the Governors of the United States Postal Service 

on Changes in Rates of General Applicability for Competitive 

Products, June 18, 2014, at 1 (Governors’ Decision No. 14-03). 82 Id.
36 | ANNUAL REPORT

On August 15, 2014, the Commission approved the changes in rates of general 

applicability for the Priority Mail product.83 The rates became effective on September 

7, 2014.84

Price change for Inbound Air Parcel Post (at UPU rates). Pursuant to UPU regulations, 

the Postal Service (and other UPU member countries) are permitted to implement 

revised rates for inbound air parcels effective January 1 and July 1 of each calendar 

year. The revised rates are derived from UPU formulas. Accordingly, on December 30, 

2013, and June 26, 2014, the Commission approved revised rates for the Inbound Air 

Parcel Post (at UPU rates) product.85 In both instances, the Commission determined 

that the UPU established rates were consistent with the statutory criteria of 39 U.S.C. § 

3633(a).

Changes in Rates Not of General Applicability: NSAs

During FY 2014, the Commission reviewed competitive NSAs in 76 docketed 

proceedings. Table III-1 shows these NSAs, as well as those the Commission approved 

during each of the past six fiscal years.86 These NSAs require prior Commission 

approval for compliance with the statutory criteria.

Table III-1. Competitive NSAs Approved by the Commission

Competitive NSAs FY 2014 FY 2013 FY 2012 FY 2011 FY 2010 FY 2009

Competitive domestic NSAs 40 52 32 13 13 32

Competitive international NSAs 36 29 22 48 111 34

Total competitive NSAs 76 81 54 61 124 66

The Commission completed its review of each competitive NSA in an average of 13.4 

days. Forty of these were Competitive domestic NSAs involving domestic shipping 

services, including Priority Mail Express, Priority Mail, Parcel Select, Parcel Return 

Service, and First-Class Package Service. The Commission determined that the 

negotiated rates for each NSA request complied with 39 U.S.C. § 3633(a).

The remaining 36 were competitive international NSAs. The Commission reviewed 

these products:

Inbound services:

•	 International Business Reply Service Competitive Contracts 1

•	 International Business Reply Service Competitive Contracts 3

•	 Inbound Direct Entry Contracts with Foreign Postal Administrations

83 Order No. 2156. 84 Id. at 1, 13. 85 Docket No. CP2014-14, Order Accepting Price Changes for Inbound Air Parcel Post (at UPU Rates), December 30, 2013 (Order No. 

1936); Docket No. CP2014-52, Order Accepting Price Changes for Inbound Air Parcel Post (at UPU Rates), June 26, 2014 (Order No. 

2102). 86 Specifically, Table III-1 shows approved NSAs that were filed as new products to be added to the Mail Classification Schedule and 

functionally equivalent to a baseline agreement in a previously approved Mail Classification Schedule product.
CHAPTER 3 | 37

•	 Inbound Direct Entry Contracts with Foreign Postal Administrations 1

•	 Inbound International Expedited Services 2

•	 Royal Mail Group Inbound Air Parcel Post Agreement

•	 Inbound Competitive Multi-Service Agreements with Foreign Postal Operators 1

Outbound services:

•	 Global Expedited Package Services 3

•	 Global Plus 1C

•	 Global Plus 2C

•	 Global Reseller Expedited Package Contracts 1

•	 Global Reseller Expedited Package Contracts 2

In addition, non-published rates (NPR) products authorize the Postal Service to 

enter into contracts featuring negotiated rates without prior Commission approval. 

Such NPR contracts must comply with Commission classification and regulatory

requirements, including pre-approved pricing formulas, minimum cost coverage, and 

documentation. The absence of pre-implementation review streamlines the approval 

process, providing the Postal Service with additional flexibility. The Commission has

approved six NPR products since their inception in FY 2011. See Table III-2 below.

•	 Global Expedited Package Services (GEPS) – NPR 1

•	 GEPS – NPR 2

•	 GEPS – NPR 3

•	 GEPS – NPR 4

•	 Priority Mail – NPR

•	 Priority Mail International Regional Rate Boxes – NPR

Table III-2 also shows the number of NPR contracts included in these NPR products.87 

The Priority Mail – NPR product is the only Competitive domestic NPR product 

currently in effect; the other five are Competitive international NPR products.

Table III-2. NPR Contracts Implemented by the Postal Service by Product

NPR Products

NPR Contracts

FY 2014 FY 2013 FY 2012 FY 2011

GEPS–NPR 1, 2, 3, and 4 124 129 141 168

Priority Mail–NPR 1 2 3 3

Priority Mail International Regional Rate Boxes–NPR 0 0 N/A N/A

Total 125 131 144 171

87 For display purposes, Table III-2 lists all four GEPS-NPR products as a single line item.
38 | ANNUAL REPORT
CHAPTER 4 | 39

Chapter IV. Universal Service 

Obligation and Postal Monopoly

Background

In this chapter, the Commission provides its annual estimate of the cost 

of the Universal Service Obligation (USO) and the value of the postal 

monopoly. The USO is the Postal Service’s “obligation to provide postal 

services to bind the Nation together through ... the correspondence of the 

people ... [by providing] prompt, reliable, and efficient services to patrons

in all areas and ... postal services to all communities.”88 The postal 

monopoly refers to the exclusive rights of the Postal Service to carry and 

deliver certain categories of mail and deposit mailable matter in any 

mailbox.89 An estimate of the cost of the USO is required by statute; the 

value of the postal monopoly is not required. The Commission provides 

an estimate of both the cost of the USO and the value of the postal 

monopoly to provide a balanced perspective on the trade-offs between 

the benefits of a monopoly and the costs of the mandates to provide

universal service.

The Commission first estimated the cost of the USO and the value of

the postal monopoly in its 2008 Report on Universal Service and the 

Postal Monopoly.

90 Over time, the Commission has refined its method

of calculating the cost of the USO. In its FY 2011 Annual Report, the 

Commission accepted the basic features of the Postal Service’s method 

to estimate the rural carrier costs of delivering 6 days a week (Six-Day 

Delivery) rather than 5 days a week in the Docket No. N2010-1 Request.91

It also provided a more disaggregated method of developing the cost of 

Six-Day Delivery for city delivery, compared with the method previously 

used.92 In its FY 2012 Annual Report, the Commission added the costs of 

providing Group E Post Office Boxes and losses from Market Dominant

package services to the cost of the USO.

88 39 U.S.C. § 101(a); Report on Universal Postal Service and the Postal Monopoly, December 19, 2008, at 18 

(Report). 89 Report at 10 n.1. 90 Report. 91 Docket No. N2010-1, Request of the United States Postal Service for an Advisory Opinion on Changes in the 

Nature of Postal Services, March 30, 2010 (Docket No. N2010-1 Request). 92 FY 2011 Annual Report to the President and Congress, December 21, 2011, at 41 (FY 2011 Annual Report).
40 | ANNUAL REPORT

In this chapter, the Commission uses the 

same basic methodology to estimate the 

value of the postal monopoly for FY 2013 

as it did in previous years. However, it 

has modified its method of estimating the

costs of maintaining Six-Day Delivery. In 

previous reports, office and street time

from the Rural Mail Count was used to 

update the values provided by the Postal 

Service in Docket No. N2010-1.93 Upon 

further review, the Commission has 

determined that evaluated time should be 

divided into fixed and attributable time,

with savings coming from a reduction 

in fixed delivery time. It also modified

the service-wide factor developed 

by the Postal Service in Docket No. 

N2010-1, based on the Commission’s 

determination that indirect costs were 

slightly lower than those the Postal 

Service estimated.94

Because data for FY 2014 are not yet 

available, the new estimates rely upon 

FY 2013 data.

Estimated Cost of 

the USO

The Commission estimates the cost of the 

USO by calculating the costs the Postal 

Service incurs in providing:

•	 Postal services to areas of the Nation 

where ... the Postal Service either 

would not provide services at all or 

would not provide such services ... if 

the Postal Service were not required 

93 See Docket No. N2010-1 Request. 94 See Docket No. N2010-1, Advisory Opinion on Elimination of 

Saturday Delivery, March 24, 2011, at 67 (Docket No. N2010-1 

Advisory Opinion). Annual values of the postal monopoly for 

previous years may not exactly match the estimates in prior 

annual reports because of changes in assumptions for several 

years of cost estimates and updated coding and spreadsheet 

data.

to provide prompt, reliable, and 

efficient services to patrons in all

areas and all communities ... 

•	 Free or reduced rates for postal 

services as required by 

[U.S.C. Title 39]

•	 Other public services or activities 

which, in the judgment of the 

[Commission], would not otherwise 

have been provided by the Postal 

Service but for the requirements of 

law95

These can be summarized as:

•	 Element A: Cost of Providing Services 

to all Areas of the Nation

•	 Element B: Estimated Revenue Not 

Received

•	 Element C: Other Public Services or 

Activities

Element A: Cost of Providing 

Services to All Areas of the 

Nation

The Commission’s estimate of Element 

A costs is the sum of three components: 

maintaining small Post Offices, the Alaska

Air Subsidy, and Group E Post Office

Boxes. Table IV-1 compares the costs of 

these components from FY 2009 to FY 

2013. Element A costs were relatively 

stable—around $700 million from FY 

2009 to FY 2012—but decreased by 

more than $250 million in FY 2013. This 

decline is mainly due to the decrease 

in the cost of maintaining small Post 

Offices. Specifically, although the number

of small Post Offices did not change

substantially since last year, the cost of 

postmaster salaries distributed to Cost 

95 39 U.S.C. § 3651(b)(1).
CHAPTER 4 | 41

Ascertainment Group classifications K and L declined by $194 million.96 This appears 

to be largely a result of the implementation of POStPlan.

Given recent changes in Postal Service operations, consolidations of delivery 

routes, and the transfer of some package services from the Market Dominant to the 

Competitive product list, future refinements of the cost estimate for Element A may be

appropriate.

Table IV-1. Estimated Cost of Providing Services to All Areas of the 

Nation Required by Title 39 FY 2009 to FY 2013 ($ Millions)

Element A USO Components FY 2013 FY 2012 FY 2011 FY 2010 FY 2009

Maintaining small Post Offices 332 587 583 566 536

Alaska Air Subsidy 114 122 123 118 121

Group E Post Office Box service 31 34 36 30 37

Total 477 743 742 714 694

SMALL POST OFFICES

The Postal Service uses Cost Ascertainment Group classifications A to L to categorize

Post Offices by the amount of revenue they generate. Small Post Offices are those that

fall within the K to L classifications; they have higher unit transaction costs than larger

Post Offices and lower levels of annual revenue.97 The Commission calculates the cost 

of maintaining small Post Offices by determining the savings that would be achieved if

the Post Office activities provided by rural carriers on the street were to replace retail

transactions currently provided by small Post Offices.98 This cost estimate includes the 

fixed portion of salaries, benefits, rents, utilities, and other operating costs.

The Commission uses the FY 2013 Rural Mail Count to obtain the cost of the Post 

Office activities that rural carriers provide on their routes at rural neighborhood

collection box units. In FY 2013, the cost of maintaining small Post Offices was $332

million. Most of the decrease in this cost from FY 2012 is a result of the reduction 

in postmaster salaries and indirect costs distributed to small Post Offices due to the

implementation of POStPlan.

96 Applying the appropriate piggyback factor to this number suggests that the entire decrease is due to the reduction in postmaster 

costs distributed to small Post Offices. 97 Robert Cohen and Charles McBride, “Study on Universal Postal Service and the Postal Monopoly,” Appendix F-3, “Estimates of the 

Current Costs of the USO in the U.S.” at 26, George Mason University School of Public Policy (November 2008) (GMU Study). 98 The Rural Mail Count classifies all remunerable activities of rural carriers as either Post Office or street activities. However, some Post 

Office activities can occur on the street. For example, even though it occurs on the street, parcel acceptance is considered a Post 

Office activity because it can substitute for a customer sending a parcel at a Post Office window.
42 | ANNUAL REPORT

ALASKA AIR SUBSIDY

The Alaska Bypass mail program allows 

businesses in Anchorage and Fairbanks 

to ship food items and other cargo on 

pallets directly to rural customers in 

Alaska.99 It uses commercial airline 

carriers to deliver items in pallets to hub 

airports.100 Smaller airline companies or 

independent pilots (e.g., bush airlines) 

then break down these pallets and deliver 

them to remote bush sites, bypassing the 

Postal Service’s network.101

The Alaska Bypass mail program 

requires the Postal Service to pay for 

air transportation provided by Alaskan 

bush airline carriers. Because this 

payment serves areas that otherwise 

cannot be reached by ground service, the 

Commission considers the payments to 

be a component of Element A costs. This 

is referred to as the Alaska Air Subsidy; it 

is the difference in the cost of flying mail

to remote areas and the average cost of 

highway transportation.102

The calculation of the Alaska Air Subsidy 

treats part of the domestic Alaska air 

transportation cost for parcels as an 

institutional, not an attributable, cost.103

The Commission estimates the cost of 

the subsidy by calculating the amount of 

air transportation costs transferred from 

attributable to institutional costs. The 

99 United States Postal Service Office of Inspector General, 

“Alaska Bypass: Beyond Its Original Purpose,” November 28, 

2011, at 1 (RARC-WP-12-005) (Alaska Bypass mail program). 100 Id. 101 Id. 102 FY 2013 Annual Report at 28. 103 In Docket No. R90-1, the Commission held that the extra cost 

of air transportation of bypass mail carried by air transport 

should be considered an institutional cost because these extra 

costs were universal service costs (i.e., costs incurred only 

because of the Postal Service’s USO). See Docket No. R90-1, 

Opinion and Recommended Decision, January 4, 1991. This 

decision was subsequently affirmed in United Parcel Service, 

Inc. v. United States Postal Service, 184 F.3d 827, at 841-43, 

337 U.S. App. D.C. 247, at 261-63 (D.C. Cir. 1999).

Alaska Air Subsidy has been relatively 

constant over time, hovering between 

$114 and $123 million since FY 2009. It 

was $114 million in FY 2013.

GROUP E POST OFFICE BOXES

Group E Post Office Boxes are offered free

of charge to postal customers who do 

not receive mail delivery. In FY 2012, the 

Commission approved treating the cost of 

these Post Office Boxes as an institutional

cost in order to more equitably distribute 

the cost of the USO. The Commission 

also concluded that this treatment 

was analogous to, and consistent 

with, the treatment of intra-Alaska air 

transportation.104 Consequently, the cost 

of Group E Post Office Boxes, which are

primarily facility-related, has been added 

to the cost of the USO. They cost $37 

million in FY 2009, but this has slowly 

declined (with the exception of FY 2010) 

to the current estimated cost of $31 

million.

Element B: Estimated 

Revenue Not Received

Element B consists of the cost the 

Postal Service incurs in providing free 

or reduced rates for postal services 

required by Title 39 of the U.S.C.105 The 

Commission calculates this cost by 

quantifying the difference in revenue 

between mail that is statutorily required 

to receive a discount and the revenue 

that would have been received if the 

prices for those mail pieces were not 

discounted. The cost of Element B also 

includes the losses on Periodicals. The 

104 Docket No. RM2011-9, Order Concerning Analytical Principles 

Used in Periodic Reporting (Proposal One), June 9, 2011, at 4 

(Order No. 744). 105 See 39 U.S.C. § 3641(b)(1)(B).
CHAPTER 4 | 43

Postal Service provides discounted rates for nonprofit rate categories in Standard

Regular Mail and Standard Enhanced Carrier Route Mail,106 as well as Periodicals, 

Media Mail/Library Mail. In addition, the Postal Service provides free postage for 

blind and disabled persons, as well as free balloting materials under the Uniformed 

and Overseas Citizens Absentee Voting Act. If these discounted rates were not offered, 

the rates for these mail pieces would be higher, resulting in a loss of volume and, 

consequently, lower costs. The Estimated Revenue Not Received is calculated as the 

difference between a higher level of revenue generated at the higher price and a lower 

level of costs incurred by these mail pieces due to the decline in volume associated 

with the higher price. This approach is often referred to as the “net revenue” or 

“profitability” method.

The CPI cap constraint imposed by the PAEA makes it difficult for the Postal Service

to fully recover the cost of Periodicals through rate increases. Therefore, it is assumed 

that, if not for the price cap, the Postal Service would raise Periodical rates to the level 

necessary to cover its attributable costs. The effect on volume would be built into the 

determination of the necessary size of the rate increase, but the net effect would be 

to fully eliminate the loss. Table IV-2 compares the Estimated Revenue Not Received 

from FY 2009 to FY 2013 as a result of discounts on nonprofit mail and losses on

Periodicals.

Table IV-2. Estimated Revenue Not Received, FY 2009 to FY 2013 ($ Millions)

Element B USO Components FY 2013 FY 2012 FY 2011 FY 2010 FY 2009

Nonprofit mail discounts net of costs 1,130 974 1,329 1,284 1,322

Losses on Periodicals 521 670 609 611 642

Total 1,651 1,644 1,938 1,895 1,964

NONPROFIT MAIL DISCOUNTS NET OF COSTS

Although nonprofit mail discounts declined significantly in FY 2012, the USO cost of

these discounts appears to have returned to a higher level, more in line with FY 2009 

to FY 2011.107 The attributable costs of nonprofit products were not readily available

to the Commission this year,108 so it used a different method to develop these costs 

than in previous years. However, in developing the estimate for FY 2013, concerns 

arose about the accuracy of this method. Given these concerns and the absence of 

previously available data, the Commission plans to explore ways to improve the 

accuracy of estimated nonprofit attributable costs in the coming year.

106 The Postal Service also provides discounts to nonprofit Periodicals. However, the losses from all Periodicals are included in the losses 

from Market Dominant products and not included in the estimate of the cost of discounts for nonprofit mail. 107 See the FY 2012 Annual Report at 30 for a discussion of factors that could be responsible for last year’s decline. 108 Docket No. RM2014-2, Order Granting Waiver of Filing FY 2013 Alternate CRA, December 18, 2013 (Order No. 1913).
44 | ANNUAL REPORT

LOSSES ON PERIODICALS

Table IV-2 suggests that the loss on Periodicals has remained relatively constant from 

FY 2009 to FY 2012, ranging from a low of $609 million in FY 2011 to a high of $670 

million in FY 2012, yielding an average annual loss of $633 million. However, the 

loss on Periodicals in FY 2013 was $521 million, the smallest since FY 2008, when 

its revenue was $437 million below attributable cost. Figure IV-1 shows the trend of 

losses and volumes of Periodicals from FY 2009 to FY 2013. The losses have generally 

declined as volumes have decreased by approximately 20 percent during this period. 

In spite of the continued volume decline, losses increased in FY 2012. This was largely 

due to a nearly 4 percent increase in Periodicals unit cost. The unit cost decreased by 

a similar amount in FY 2013, and the losses reverted to the longer-term downward 

trend.

Figure IV-1. Periodicals Losses of Contribution and Volume

 Volume (Right Scale)

 Negative Contribution (Left Scale)

0.3

0.4

0.5

0.6

0.7

0.8

0.9

$ Billions

Billions of Pieces

2009 2010 2011 2012 2013

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

Source: FY 2008 to FY 2013 Annual Reports.

Element C: Other Public Services or Activities

Element C consists of the costs the Postal Service incurs in providing “other public 

services or activities which, in the judgment of the Postal Regulatory Commission, 

would not otherwise have been provided by the Postal Service but for the 

requirements of law.”109 The components of Element C include the cost of maintaining 

Six-Day Delivery and the estimated lost revenue from unzoned rates in Package 

Services mail and First-Class Mail. Other public services or activities may be included 

109 39 U.S.C. § 3651(b)(1)(C).
CHAPTER 4 | 45

in future reports. However, the 

Commission established a Public Inquiry 

docket to consider whether other 

activities the Postal Service performs 

constitute universal service costs, and 

solicited comment on these activities 

and methods by which they might be 

estimated.110

DOCKET NO. PI2014-1

In the FY 2013 Annual Report, the 

Commission noted that the current 

interpretation of Element C may be 

too narrow.111 It explained that a more 

comprehensive interpretation could 

also include the estimated net cost of 

activities such as the Inspection Service 

or the Postal Service Office of Inspector

General, as well as services such as 

the addressing system or emergency 

response activities.112 The Commission 

stated that it would review the issue of 

cost estimate refinements for Element C

in FY 2014.113

To examine these issues, the Commission 

established Docket No. PI2014-1 to 

seek public comment on the universe 

of “other public services or activities” 

that the Commission should include 

under Element C.114 The Postal Service 

submitted an analysis of activities that 

could qualify for reporting under Element 

C.115 Interested persons were asked to 

submit comments on this analysis.116

The Commission received five comments

110 Docket No. PI2014-1, Notice Establishing Docket Concerning 

the Scope of Public Service or Activity Cost Reporting Under 39 

U.S.C. § 3651(B)(1)(C), August 20, 2014. Order No. 2156, Order 

Approving Changes in Rates of General Applicability for Priority 

Mail, August 15, 2014. 111 FY 2013 Annual Report at 31. 112 Id. 113 Id. 114 Docket No. PI2014-1, Notice Establishing Docket Concerning 

the Scope of Public Service or Activity Cost Reporting under 39 

U.S.C. § 3651(b)(1)(C), August 20, 2014 (Order No. 2163). 115 Id. at 2. 116 Id. at 3.

and two reply comments; it is considering 

these to determine which “other public 

services or activities” should be included 

under Element C and how to estimate 

their cost.117

SIX-DAY DELIVERY COST

The cost of maintaining Six-Day Delivery 

is measured as the estimated savings 

that would be achieved by providing 

residential delivery service 5 days a week 

instead of 6 days a week. For FY 2008 

and FY 2009, the cost of Six-Day Delivery 

was based on the Study on Universal 

Postal Service and the Postal Monopoly, 

conducted at the Commission’s request 

by the School of Public Policy at George 

Mason University. Beginning in FY 2010, 

the method of estimating the cost of 

Six-Day Delivery has been updated to 

reflect the Commission’s findings in

Docket No. N2010-1. The main effect 

of these updates is to include the cost 

of additional Postal Service operations 

(e.g., mail processing and transportation) 

incurred by the obligation to provide 

Six-Day Delivery.118 The new method 

also includes other refinements, such

as more accurate wage calculations, 

overhead costs, and more disaggregated 

methods of estimating mail processing, 

transportation, and delivery costs.

The estimated reduction in the fixed costs

of delivery associated with eliminating 

the obligation to provide Six-Day Delivery 

is the primary source of the costs for all 

three components of Six-Day Delivery 

mail distribution and delivery. Table IV-3 

shows the cost of Six-Day Delivery from 

FY 2009 to FY 2013.

117 Id. at 1. 118 The Commission has recalculated the estimated cost of FiveDay Delivery on rural routes from FY 2010 to FY 2012, and 

used the appropriate variables in its FY 2013 estimate. For this 

reason, the Six-Day Delivery cost estimates for these years may 

not match those presented in earlier annual reports.
46 | ANNUAL REPORT

Table IV-3. Other Public Services or Activities that Would Not Be Provided 

Absent the Requirements of Law ($ Millions)

Element C USO Components FY 2013 FY 2012 FY 2011 FY 2010 FY 2009

Six-Day Delivery 2,212 2,240 2,250 2,248 2,080

Unzoned Media Mail/Library Mail rates 70 71 115 98 96

Unzoned First-Class Mail rates 109 117 122 78 81

Total 2,391 2,428 2,487 2,424 2,257

Statements by the Postal Service indicate that if the obligation to deliver 6 days a 

week were lifted, it would discontinue delivery of letters and flats on Saturdays, but

retain Saturday delivery service for parcels.119 This suggests that it may no longer be 

appropriate to assume that the Postal Service would discontinue all Saturday delivery 

service if the obligation to maintain Six-Day Delivery were lifted.

LOST REVENUE FROM UNZONED RATES

Rates for Media Mail/Library Mail are required to be uniform with respect to 

distance.120 The Commission estimates the cost of the distance component by 

assuming that without this constraint, this mail would produce the unit contribution 

of a proxy, Bound Printed Matter, which does not have this restriction. Multiplying the 

unit contribution of Bound Printed Matter by the volume of Media Mail/Library Mail 

produces an estimate of $70 million for the distance component. Table IV-3 shows that 

this cost has been declining in recent years, and that this trend continued in FY 2013. 

As volume declines, so does the cost of the distance obligation. 

The combined costs of Elements A, B, and C comprise the cost of the USO. Table IV-4 

shows the cost of the USO from FY 2009 to FY 2013. From FY 2009 to FY 2011, the 

cost of the USO increased by approximately 5.3 percent. The trend then reversed, 

decreasing by approximately 12.6 percent from FY 2011 to FY 2013. As explained 

above, the most likely explanation for this change is a combination of cost-cutting 

measures and efficiency improvements by the Postal Service, along with volume

reductions in Market Dominant products.

Table IV-4. Estimated Cost of the USO ($ Billions)

Elements A, B, and C FY 2013 FY 2012 FY 2011 FY 2010 FY 2009

Services to all areas of the Nation 0.48 0.74 0.74 0.71 0.69

Estimated revenue not received 1.65 1.64 1.94 1.90 1.96

Other public services or activities 2.39 2.43 2.49 2.42 2.26

Total 4.52 4.81 5.17 5.03 4.91

119 United States Postal Service Form 10-Q, Quarter 3, FY 2014, August 11, 2014, at 30. 120 39 U.S.C. § 3683.
CHAPTER 4 | 47

Value of the Postal 

Monopoly

The Commission updates the combined 

and mailbox monopoly values for 

FY 2013 using the assumptions and 

methodology outlined in the Report 

on Universal Postal Service and the 

Postal Monopoly.

121 The Postal Service 

has a mailbox monopoly that restricts 

the placement of objects in mailboxes 

and a letter monopoly that places 

restrictions on the types of messages 

a competitor may deliver. The value of 

the postal monopoly is an estimate of 

the profit that the Postal Service would

lose if these monopolies were lifted and 

potential competitors were allowed to 

compete with the Postal Service. The 

Commission separately estimates the 

value of the mailbox monopoly, but not 

the letter monopoly, because the United 

States is the only country with a mailbox 

monopoly. Calculating the value of the 

mailbox monopoly separately allows 

the Commission to evaluate this unique 

monopoly on its own.122

The model’s “base case” assumes that a 

potential competitor will “win” or “skim” 

all of the contestable mail on a route if 

the revenue it would earn from these 

mail volumes is greater than the fixed

and attributable costs related to the 

volumes. Generally, mail is considered 

to be contestable if it is dropshipped to 

the processing facility or delivery unit 

closest to its destination, because the 

competitor would need to perform little 

or no mail processing to prepare it for 

delivery. To focus on the most profitable

delivery routes and avoid the need for 

121 Report at 143-52. 122 GMU Study, Appendix, Section IV at 3.

the significant capital to establish a

processing and transportation network, 

the competitor would deliver only local 

and regional mail. 

Even with the monopolies in place, there 

are competitors that deliver material 

(e.g., newspapers’ weekly advertising 

supplements) that might otherwise be 

sent by mail. If the mailbox monopoly 

alone were lifted, mail that is not directed 

to a specific person or address could be

captured by an entrant, but the monopoly 

on the delivery of letters [as defined

in 39 C.F.R. 310.1(a)] would prevent 

the capture of mail that is directed to a 

specific person or address, such as FirstClass Presort Letters/Cards and Standard 

Mail Letters. If the letter monopoly were 

also lifted, this restriction would not 

apply. 

The value of the letter monopoly alone 

(retaining the mailbox monopoly) is 

not estimated. Given the overlap in 

contestable mail and the different 

frequencies of delivery by the competitor, 

a simple subtraction of the value of the 

mailbox monopoly from the value of the 

combined monopoly does not yield the 

value of the letter monopoly. Moreover, 

without access to a designated receptacle, 

it is unlikely that an entrant could 

successfully compete for the delivery of 

mail directed to a specific person.

The key parameters to the estimate 

of the value of the monopoly are 

delivery frequency, the cost of entry 

to competitors, the rates charged 

by competitors, and the volume of 

contestable mail. In the Report on 

Universal Postal Service and the Postal 

Monopoly, three cases with different 

assumptions for the key parameters were 

evaluated. The “base case” assumed the 
48 | ANNUAL REPORT

entrant delivered 3 days a week, while the “low” scenario assumed it delivered 6 days 

a week.123

The model also assumes that a competitor is 10 percent more efficient, but needs

to offer a 10 percent discount to entice customers to switch from the Postal Service. 

Because the competitor’s efficiency advantage is offset by its discount requirement,

reducing delivery frequency is its only means of achieving a delivery cost lower than 

the Postal Service’s lowest delivery cost.124 If a competitor’s revenues from a route 

are greater than the sum of its fixed and attributable costs, it will obtain all of the

contestable mail on that route.

The general method employed to estimate the value of the monopolies is similar to 

the method used for FY 2012. The Commission’s model estimates the value of the 

monopoly as the difference between the Postal Service’s profits before entry and after

entry. This method is often referred to as the “profitability approach.” Table IV-5 shows

both the “base” and the “low” case for FY 2013 and previous years.125 The increase in 

the estimated value of the postal monopoly from FY 2012 is largely due to increases in 

the unit contribution of many of the contestable products. Higher unit contributions 

increase the number of routes the entrant can profitably capture and the amount of

contribution the Postal Service loses when contestable mail is captured.

Table IV-5. Value of the Postal Monopoly ($ Billions)

Type of Monopoly FY 2013 FY 2012 FY 2011 FY 2010 FY 2009

Mailbox monopoly 0.81 0.70 0.91 0.69 0.79

Combined monopolies – base case 3.93 3.28 3.34 3.33 2.93

Combined monopolies – low case 2.40 1.80 1.66 1.55 2.11

The Commission has identified several areas in which it seeks to improve its estimates

of the value of the monopoly. The model currently evaluates entry for each route 

regardless of the extent of route clustering, although an entrant’s fixed costs would

be reduced if it focused on routes in the same cluster or area.126 The model assumes 

that the entrant does not incur mail-processing costs and, therefore, does not 

reflect the cost of sorting to Carrier Routes that would be required for capture mail

presorted to the 5-digit level. The model also does not account for mailers’ switching 

costs or brand loyalty. In addition, bulk parcels, which are Competitive products, are 

considered to be contestable. It may be appropriate to re-examine whether potential 

revenue losses from Competitive products should continue to be included in the value 

of the monopoly. The Commission continues to review these issues internally and in 

collaboration with the Postal Service and others through vehicles such as the PI2014-

1 Docket.

123 If only the mailbox monopoly were lifted, the entrant is assumed to deliver once a week to reduce its costs. This is consistent with 

services provided by existing private delivery companies. Report at 149. 124 According to the GMU Study, this assumption is consistent with experience in countries that have allowed competitive entry where 

competitors deliver mail 3 days a week. 125 In previous annual reports, the estimated value of the combined monopolies that was presented inadvertently reflected the “low” 

scenario assumption of Six-Day Delivery by the entrant. Estimates reflecting both the 3-day and 6-day assumption are presented 

here. Future annual reports will present only the “base case” assumption of 3-day delivery by the entrant. 126 The Commission would need to obtain route-level delivery data with 3-digit ZIP Code flags to account for clustering. Further 

improvements could be made by assuming the entrant could design routes to more efficiently deliver contestable mail; however, this 

would require information about volume delivered to each stop that is not currently available.
National Postal Museum - Smithsonian Institution
50 | ANNUAL REPORT
CHAPTER 5 | 51

Chapter V. Other Proceedings 

and Actions

The Office of the General Counsel supports the Commission in the timely

and efficient resolution of matters falling within practice areas defined

by the PAEA. These include rulemakings, complaints, appeals of Post 

Office closings, review of postal products and services (including market

tests) for consistency with statutory criteria, advisory opinions in Nature 

of Service cases, and related litigation. It also advises the Commission 

on the conduct of agency business in conformance with the Freedom 

of Information Act, the Government in the Sunshine Act, government 

contracting requirements, and other laws.

In FY 2014, the Commission fostered greater transparency and 

speedier resolution of issues. It initiated rulemaking dockets to clarify 

its procedures, resolved appeals of Post Office closing cases, assisted

with litigation of its orders before the Court of Appeals, participated in 

research initiatives to clarify key issues related to its work, and served as 

an adviser on international postal issues. 

Rulemaking on Nature of Service 

Proceedings

The Commission, using comments it solicited on April 10, 2012,127

drafted new proposed rules for Nature of Service proceedings. It 

submitted these rules for public comment in a notice of proposed 

rulemaking on May 31, 2013.128

On May 20, 2014,129 the Commission issued an order adopting the 

amended rules, which address the need to facilitate more timely 

completion of Nature of Service advisory opinions. The previous 

rule under 39 U.S.C. § 3661(c) did not stipulate how many days the 

Commission had to submit an advisory opinion following a Postal 

Service request for review under 39 U.S.C. § 3661(b). Now, with limited 

exceptions, the Commission must provide an advisory opinion within 90 

days of a Postal Service request under 39 U.S.C. § 3661. 

127 See Docket No. RM2012-4, Advance Notice of Proposed Rulemaking on Modern Rules of Procedure for Nature 

of Service Cases Under 39 U.S.C. § 3661, April 10, 2012 (Order No. 1309). 128 See Docket No. RM2012-4, Notice of Proposed Rulemaking Regarding Modern Rules of Procedure for Nature of 

Service Cases Under 39 U.S.C. § 3661, May 31, 2013 (Order No. 1738). 129 See Docket No. RM2012-4, Order Adopting Amended Rules of Procedure for Nature of Service Proceedings 

Under 39 U.S.C. § 3661, May 24, 2014 (Order No. 2080).
52 | ANNUAL REPORT

In response to input from commenters, 

the final rules incorporate minor

modifications, clarifications, and

corrections to the proposed rules. In 

addition to the 90-day timeline and 

expedited procedural schedule, the 

principal changes include:

•	 The establishment of a pre-filing

phase

•	 A limitation on the scope of the 

proceeding to the Postal Service’s 

proposal

•	 The adoption of expedited deadlines 

for filing and responding to motions

•	 Implementation of a mandatory 

technical conference

•	 A limitation on the number of 

interrogatories

•	 Guidelines for the length of briefs 

and reply briefs

Post Office Closing 

Appeals

The Commission issued four decisions 

concerning Post Office closures in

FY 2014. The Postal Service’s final

determination to close Downtown 

Fernandina Beach Station in Fernandina 

Beach, Florida, was remanded 

to the Postal Service for further 

consideration.130 The Postal Service’s 

final determination to close Glenoaks

Station Post Office in Burbank, California,

was affirmed.131 The petitions to review 

the closings of the Climax Post Office in

Climax, Georgia, and Downtown Stamford 

Post Office in Stamford, Connecticut, were

dismissed.132

130 Docket No. A2013-7, Order Remanding Determination, 

November 19, 2013 (Order No. 1880). 131 Docket No. A2013-5, Order Affirming Determination, October 

31, 2013 (Order No. 1866). 132 Docket No. A2013-3, Order Dismissing Appeal Without 

Court Appeals

Application of Price Cap 

Rules

When examining the Postal Service’s 

proposed price adjustments for Market 

Dominant products, the Commission 

found that simultaneous implementation 

of the Full-Service IMb requirement and 

the planned price adjustments would 

cause rates to increase by more than the 

maximum rate adjustment calculated in 

accordance with 39 C.F.R. § 3010.20. It 

determined that implementation of the 

Full-Service IMb requirement changed 

the basic characteristics of the mailing, 

constituting the redefinition of a rate cell.

As such, the proposed price adjustments 

coupled with the IMb requirement for 

First-Class Mail, Standard Mail, and 

Periodicals would violate 39 U.S.C. § 

3622(d).133

In response to the Commission’s 

determination, the Postal Service chose 

to defer implementation of the FullService IMb requirement (for access to 

automation rates) until after 2014.134

However, the Postal Service noted that 

it believed the Commission’s finding

oversteps its authority and improperly 

involves it in the operations of the Postal 

Service.135

On December 20, 2013, the Postal 

Service filed a petition in the United

States District Court of Appeals for the 

Prejudice and Requiring Periodic Status Reports, October 22, 

2013 (Order No. 1852); Docket No. A2014-1, Order Dismissing 

Appeal Without Prejudice and Requiring Periodic Status 

Reports, January 28, 2014 (Order No. 1980). 133 Docket No. R2013-10, Order on Price Adjustments for Market 

Dominant Products and Related Mail Classification Changes, 

November 21, 2013, at 106 (Order No. 1890). 134 Docket No. R2013-10, Response of the United States Postal 

Service to Order No. 1890, November 29, 2012, at 3. 135 Id.
CHAPTER 5 | 53

District of Columbia Circuit for review of 

this matter; briefs and reply briefs have 

been filed with the court.136 The case is 

awaiting final resolution by the court.

GameFly Complaint

The Postal Service appealed three 

Commission orders regarding round-trip 

DVD mailers to the United States Court 

of Appeals for the District of Columbia 

Circuit. 

The first (Order No. 1763, Order on

Remand, June 26, 2013)137 directed 

the Postal Service to equalize rates for 

letter-shaped round-trip DVD mailers 

and flat-shaped round-trip DVD mailers.

The order was issued to comply with 

the decision in GameFly, Inc. v. Postal 

Regulatory Commission, 704 F.3d 145 

(D.C. Cir. 2013). The second (Order No. 

1807, Order on Reconsideration and 

Clarification, August 13, 2013) denied

reconsideration of Order No. 1763, but 

granted a Postal Service Request for 

clarification of the rate cap implications

of that order. The third (Order No. 1828, 

Order Prescribing Remedy, September 4, 

2013) prescribed equalized rate levels for 

Market Dominant letter-shaped and flatshaped round-trip DVD mail. This part of 

the order became effective September 30, 

2013.138

On April 8, 2014, the court issued a 

decision denying the Postal Service’s 

appeal of all three Commission Orders.139

136 Case No. 13-1308, United States Postal Service v. Postal 

Regulatory Commission, December 30, 2013. 137 All three orders were filed in Docket No. C2009-1R. 138 Order No. 1828 at 9. 139 See United States Postal Service v. Postal Regulatory 

Commission, 747 F.3d 906 (D.C. Cir. 2014).

Commission Review of Post 

Office Closing Appeals

On February 14 and 22, 2012, and 

March 23, 2012, petitioners filed three

petitions for review related to appeals 

of Post Office closings in the Court of

Appeals for the District of Columbia 

Circuit. The petitioners alleged that they 

were entitled to judicial review of three 

of the Commission’s Post Office closing

appeal decisions and sought reversal 

and remand of those decisions. The 

Commission filed motions to dismiss the

petitions on the grounds that they were 

not subject to judicial review. The court 

consolidated the three cases on August 

30, 2012, and deferred consideration 

of the issues raised by the motions to 

dismiss to the merits panel.

On July 8, 2014, the court issued its 

opinion and dismissed the three petitions 

for review. The court held that for two 

of the Post Office closings, petitioners

were not entitled to judicial review. For 

the third petition, the court found that 

it did not have jurisdiction to hear the 

case on the grounds that it was moot. 

On August 22, 2014, petitioners filed a

petition for rehearing and rehearing en 

banc. The Commission filed a response

to the rehearing petition on September 

29, 2014. The court denied the rehearing 

petition on October 20, 2014.
54 | ANNUAL REPORT

ACD Directive on Standard 

Mail Rates

On April 25, 2014, Valpak Direct 

Marketing Systems, Inc. and Valpak 

Dealers’ Association, Inc. petitioned 

the Court of Appeals for the District 

of Columbia Circuit to review the 

Commission’s FY 2013 ACD regarding 

Standard Mail rates. Valpak contended 

that the Commission’s order did not 

sufficiently remedy the noncompliance of

Standard Mail Flats pricing.

On September 26, 2014, Valpak filed

a motion requesting that the court 

dismiss its petition; the Commission did 

not oppose this motion, and the court 

dismissed the petition on October 9, 

2014.

Research Projects

The Commission engages in research 

projects to enhance its understanding of 

key economic and policy issues affecting 

the Postal Service. By sponsoring 

analysis and sharing the results of 

these independent investigations with 

the public, the Commission hopes to 

foster a discussion with and among 

postal stakeholders that will lead to 

more informed Commission policies 

and decisions, and greater success in 

achieving the objectives of the PAEA.140

In 2013, the Postal Service announced 

plans to discontinue the delivery of 

letter and flat mail on Saturdays, while

retaining Saturday delivery of parcels. 

The Commission retained Swiss 

Economics to analyze the potential 

impact of this change on Postal Service 

140 These studies solely represent the views of the authors and 

have not been endorsed by the Commission.

operations and finances. The analysis

employed a new approach that applied a 

dynamic model to evaluate the potential 

savings from shorter, parcel-only 

Carrier Routes on Saturdays. A report 

summarizing the methodology and 

results of the analysis is available on the 

Commission’s website, www.prc.gov.

The Commission selected Copenhagen 

Economics to develop an economic 

framework for evaluating the current 

terminal dues system, including 

identifying a methodology for measuring 

market distortion that results from the 

current terminal dues structure. The 

Commission hosted a public briefing by

Copenhagen Economics in early FY 2015, 

after which it published the report on its 

website.

The Commission also hired CMPW 

Partnership to produce three 

deliverables:

•	 A white paper on the role of 

inframarginal costs in pricing and 

product costing

•	 A report describing a methodology 

for estimating inframarginal costs 

for each product and applying 

the methodology to estimate 

the inframarginal costs by cost 

component for FY 2013

•	 A report that examines the aggregate 

ratio of volume variable to total 

accrued cost to determine why it 

appears to remain relatively constant 

over time

The Commission hosted a public briefing

by the authors in early FY 2015, after 

which it published the reports and white 

paper on its website.
CHAPTER 5 | 55

Commission’s Role in 

International Postal 

Policy

Section 407 of Title 39 of the U.S.C. 

mandates that the secretary of 

state is responsible for formulation, 

coordination, and oversight of 

international postal policy, including 

concluding postal treaties such as those 

involving the UPU. Headquartered 

in Bern, Switzerland, the UPU is an 

international treaty organization tasked 

to facilitate high-quality universal mail 

service at affordable rates. The U.S. 

Department of State exercises primary 

authority for foreign postal policy, 

and it requests Commission views on 

whether any treaty, convention, or 

amendment that establishes a rate or 

classification is consistent with the

law’s modern system of ratemaking 

for Market Dominant products. The 

Department of State ensures that relevant 

U.S. positions in the UPU are consistent 

with the Commission’s view unless there 

is a foreign policy or national security 

concern.

In April 2014, the UPU considered 

54 proposals to amend the UPU Acts. 

Five resolutions were also offered 

for consideration. The Commission 

found that none of these proposals 

or resolutions established rates or 

classifications for Market Dominant

products, and communicated its views to 

the secretary of state. The Commission 

also continued its active role in the UPU 

Letters and Parcels Remuneration Groups 

on international letter mail and parcel 

delivery rates, as well as several other 

UPU project groups. It also chaired the 

UPU Regulatory Issues Project Group on 

behalf of the U.S. government.

The Commission worked with Ecuador’s 

postal regulator to organize the 5th 

Postal Regulatory Dialogue in Quito, 

Ecuador. The Postal Regulatory Dialogue 

is an initiative that the Commission 

launched in 2008 for regulators from 

around the world to share information 

and exchange views on best practices in 

postal regulation. Twenty-seven delegates 

representing 11 countries participated 

in this exchange. The Commission also 

remains an active, contributing member 

of the Department of State’s Federal 

Advisory Committee on International 

Postal and Delivery Services and has 

supported government agencies such as 

the Office of the U.S. Trade Representative

in the negotiation of trade agreements on 

postal and express delivery services.
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