Annual Complian

determination repor

Fiscal Year 2010
 POSTAL REGULATORY COMMISSION 1

March 29, 2011

Ruth Y. Goldway

Chairman

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

Determination (ACD) reviewing the performance of the U.S. Postal Service for Fiscal Year (FY) 2010.

This is the fourth annual ACD prepared by the Commission since enactment of the Postal Accountability 

and Enhancement Act (PAEA). Taken together, these reports portray a Postal Service that has made major 

reductions in costs and progress in utilizing flexibilities given it by the PAEA. The Commission approved 

a variety of Postal Service pricing initiatives, including seasonal pricing, designed to spur increased 

First-Class and Standard Mail volume, several experimental product tests, and 127 Negotiated Service 

Agreements, roughly twice as many as last year. Nevertheless, it is clear that the Postal Service is on 

a downward financial path and faces structural problems that have eroded its financial stability and 

placed its ability to fulfill its universal service obligation at risk.

Under the PAEA, price increases for market dominant products are restrained by a CPI price cap. Postal 

management and employees have done a commendable job in effectively adjusting to sudden volume 

declines due to the recent recession. The Postal Service used about the same number of workhours in 

FY 2010 as it did in FY 1977, while delivering 85 percent more volume to almost 50 percent more 

delivery points. First-Class Single-Piece mail service performance has remained steady. 

The PAEA requires, however, that service performance be measured and reported for all market 

dominant products to ensure that the discipline of the CPI price cap system is not offset by deterioration 

in service. The Commission agreed in 2007 to a Postal Service request to mitigate its costs by allowing 

bulk mail to be measured using internal service measurement systems based on the Intelligent Mail 

barcode (IMb) in lieu of an external measurement system. However, persistent data errors, insufficient 

customer IMb usage, and a lack of product specific documentation have impeded PAEA objectives.

Service measurement results for bulk First-Class Mail, Standard Mail, Packages and Periodicals remain 

deficient. Currently, as was true in the first ACD, only the Postal Service external tracking system for 

First-Class Mail Single-Piece products is sufficient to meet the service performance tracking objectives of 

the PAEA. The Postal Service must vigorously address these problems to achieve full compliance with all 

service performance reporting requirements. 

Part of the Postal Service’s financial problem lies in structural pricing imbalances. The Commission 

identified 10 market dominant products and services with revenue that did not cover attributable costs 

in FY 2010, totaling $1.7 billion in negative contribution. For the first time in an ACD, the Commission 

finds rates for a market dominant product, Standard Mail Flats, not in compliance with the statute. The 

Postal Service has repeatedly failed to utilize existing pricing options to address the growing Standard 

Mail intra-class cross subsidy. It is directed to take appropriate action to end the intra-class cross subsidy 
2 2010 An

as soon as practicable. No other product is found to be out of compliance, although the Commission 

finds that the Postal Service should continue using available pricing and costing options to address 

problematic areas. 

Closing its pricing gap, however, will not be sufficient to stem the Postal Service’s financial decline. 

Commission analysis confirms that the Postal Service’s cash flow problem and the primary cause of its 

liquidity crisis is related to an overly ambitious requirement for the Postal Service to prefund its future 

retiree health benefit premiums. Over the past four years, the Postal Service has paid $21.9 billion to 

prefund these benefits. Without the prefunding requirement, the Postal Service would have achieved 

a small net profit over that time. The Postal Service is mandated to make an additional $5.5 billion 

prefunding payment this year.

FY 2010 marked the fourth consecutive fiscal year the Postal Service has posted a net financial loss. The 

$8.5 billion loss for FY 2010 follows losses of $5.4 billion in FY 2007, $2.8 billion in FY 2008, and 

$3.8 billion in FY 2009 and brings the total cumulative losses for the four years to $20.2 billion. During 

this period, the Postal Service increased its debt by nearly $10 billion and is approaching the limit of 

its statutory borrowing authority. The Postal Service is at risk of insolvency and projects in its Integrated 

Financial Plan for FY 2011 that it could end the year with a negative cash balance of $2.7 billion. This 

is the preeminent challenge facing the Postal Service.

The Commission currently is reviewing the operation of the PAEA, as mandated by the Act, to submit a 

report this year recommending to the President and Congress legislation or other ways to improve the 

effectiveness or efficiency of the United States postal laws. We look forward to working with the Postal 

Service and Congress to address the challenges and opportunities that are identified in that report, this 

ACD and through the daily oversight activities of the Commission to promote a healthy viable universal 

mail system for the Nation.

I want to thank Vice Chairman Mark Acton, and Commissioners Langley, Blair, and Hammond for their 

valuable work and contributions to this report. On behalf of my fellow Commissioners, and with great 

gratitude, I acknowledge Commission staff for their unstinting dedication and hard work in compiling this 

report while dealing with a record workload and some of the most challenging issues ever faced by the 

Commission.
 POSTAL REGULATORY COMMISSION 3

TABLE OF CONTENTS

Chapter I — Executive Summary

Princ

Financial and Pricing Results. 

Service Performance. 

Filing Requirement. 

Revisions of Revenue, Pieces, and Weight Report. 

Chapter II — Background

Int

Procedural History  .

Chapter III — Legal Issues

Intr

Commission Analysis. .

Chapter IV — Postal Service Financial Goals

Intr

Overview. .

Liquidity Issues-Continued. .

Financial Reporting Requirements. .

Summary By Product. .

Chapter V — Performance Plans & Program Performance Reports

Intr

Statutory Requirements. .

Performance Indicators. .

Strategic Initiatives. .

Comments. .

Compliance with Report and Plan Requirements. .

Review of Performance Goals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Chapter VI — Service Standard Performance

Intr

Delivery. .

Customer Access. .

Customer Experience. .
4 2010 An

Chapter VII — Market Dominant Products

Intr

First-Class Mail. .

Periodicals. .

Standard Mail. . 

Package Services. . 

Special Services. . 

Market Dominant International Products. . 

Negotiated Service Agreements. . 

Chapter VIII — Competitive Products

Intro

Competitive International Products. . 

Competitive Market Tests. . 

Chapter IX—Nonpostal Services

Intro

FY 2010 Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

Appendix A — Empirical Review of Price Cap Application. . 

Appendix B — Financial Results Under Previous Classification and Comparison of 

Original and Revised Revenue, Pieces, and Weight Figures. . 

Appendix C — Methodology Changes and MODS. . 

Appendix D — Abbreviations and Acronyms. . 

Appendix E — Commenters—2009 Annual Compliance Determination. . 
 POSTAL REGULATORY COMMISSION 5

Chapter I

Executive Summary

This report reviews the Postal Service’s performance in Fiscal Year 2010, fulfilling the Commission’s 

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

based on information the Postal Service is required to provide within 90 days after the close of its most recent 

fiscal year and on comments the Commission received subsequently from the public. 

Principal Findings

In FY 2010, the Postal Service’s financial situation continued to deteriorate. Cumulatively, it has lost over $20 

billion since FY 2007, including $8.5 billion in FY 2010. These continuing losses, which are projected to 

persist in future fiscal years, jeopardize the Postal Service’s ability to provide postal services to the nation as 

required by 39 U.S.C. 101. 

The Postal Service’s financial difficulties stem from two principal causes. First-Class Mail volumes and revenues 

continue to decline, falling by 5.5 billion pieces (or 6.6 percent) from FY 2009. First-Class Mail revenues fell 

by more than $1.8 billion (or 5.2 percent.). These decreases, while less precipitous than FY 2009, continue 

a long-term, persistent decline in First-Class Mail volumes, which since FY 2001 have dropped by 25.7 

billion pieces or more than 25 percent. This mail is particularly susceptible to electronic diversion; thus, the 

downward trend is projected to continue. 

The current structure of the retiree health benefit fund payments imposes a substantial strain on Postal Service 

finances. While the Postal Service made the required $5.5 billion payment for FY 2010, it projects that it will 

have insufficient resources, including borrowing authority, to satisfy all its FY 2011 financial obligations. 

For the first time in a compliance determination, the Commission finds rates for a market dominant product not 

in compliance with the statute. It directs the Postal Service to eliminate the intra-class cross subsidy for Standard 
6 2010 Anu

Mail Flats over time. While a specific timetable is not 

imposed, the Commission expects the Postal Service 

to correct the inequity as promptly as practicable. 

No other rate or service is found to be non-compliant. 

While the Commission does identify certain rate 

and service issues, it finds that actions the Postal 

Service has taken, principally in the most recent price 

adjustment proceeding, obviate the need for further 

remedial action at this time. It is imperative, however, 

that the Postal Service continue its commendable 

efforts to reduce costs and increase efficiency. 

Financial and Pricing Results

Financial

The Postal Service was able to meet all of its 

obligations in FY 2010, ending the year with $1.2 

billion in cash; however, it anticipates a $2.7 billion 

negative cash balance at the end of FY 2011. Also 

Total Factor Productivity increased 2.2 percent, as the 

Postal Service reduced workhours by 75.1 million, 

saving an estimated $3.6 billion.

Factors contributing to the Postal Service’s $8.5 billion 

loss include:

 Ten market dominant products failed to generate 

revenues sufficient to cover attributable costs, 

losing in the aggregate $1.7 billion, including:

– $611 million from Periodicals,

– $577 million from Standard Mail Flats, and 

– $172 million from Standard Mail Parcels/

Not-Flat Machinables;

 Total volume declined by 3.5 percent, or more 

than 6 billion pieces; 

 Total expenses increased by 5.1 percent; 

 Total revenues declined by 1.5 percent; and

 The payment structure of the $5.5 billion payment 

into the Retiree Health Benefit Fund.

Pricing

 The Commission finds that Standard Flats prices 

are not in compliance with the statute, specifically 

section 101(d) which requires a fair and equitable 

apportionment of the cost of postal operations; 

 39 workshare discounts exceeded avoidable 

costs; none requires action at this time; 

 Competitive products, as a whole, made a 

positive contribution to institutional cost, amounting 

to 7.1 percent, which exceeded the required 5.5 

percent share; and 

 Three international competitive products and 

one new, competitive, domestic special services 

product failed to cover attributable cost, with an 

aggregate loss of $74 million.

Service Performance 

 The Commission is concerned with the Postal 

Service’s ability to report service performance 

measurements for market dominant products as 

required by the PAEA by the filing date of the 

FY2011 Annual Compliance Report; and 

 Significant issues continue to hinder the Intelligent 

Mail barcode system from fulfilling its potential 

as a useful component of service performance 

measurement.

Filing Requirement

 Contrary to the Commission’s rules, which require 

that the Postal Service’s Annual Compliance 

Report be submitted based on existing, approved 
 POSTAL REGULATORY COMMISSION 7

costing methodologies, the Postal Service filed 

certain cost avoidance estimates based on 

proposed methodical changes pending before the 

Commission; and 

 Future Annual Compliance Reports must adhere to 

the Commission’s rules as specified in 39 CFR 

part 3050. 

Revisions of Revenue, Pieces, 

and Weight Report

 The Postal Service’s unilateral revisions to FY 2009 

RPW data are based on a methodological change 

not applicable to that year, and the figures relied 

upon in the FY 2009 ACD remain valid.

 Unless expressly authorized otherwise, changes in 

methodology are to be applied prospectively only. 

(See Appendix B for more discussion)
8 2010 Anu
 POSTAL REGULATORY COMMISSION 9

Chapter II

Background

Introduction

Statutory Context

Ongoing, systematic reporting and assessment of the financial and operational performance of the United 

States Postal Service are mandated by two provisions of the Postal Accountability and Enhancement Act of 

2006 (PAEA). The first provision, 39 U.S.C. 3652, requires the Postal Service to file certain annual reports 

with the Commission, including an Annual Compliance Report (ACR). See 39 U.S.C. 3652(a) and (g). The 

second provision, 39 U.S.C. 3653, provides for the Commission’s review of these annual reports, including 

an Annual Compliance Determination (ACD) regarding the compliance or non-compliance of various rates and 

service standards.1 Together, these provisions establish the ACD and the ACR as integrated mechanisms for 

achieving the PAEA’s objective of ongoing accountability, transparency, and oversight.

Timeline and Review of Report

The Postal Service’s ACR is to be filed no later than 90 days after the end of each fiscal year, which ends 

September 30. The Commission’s ACD is to be completed within 90 days after receipt of the ACR. The Postal 

Service filed its 2010 ACR on December 29, 2010. Thus, the Commission’s ACD must be issued no later 

than March 29, 2011.

Focus of the ACR

In accordance with section 3652, the ACR must provide analyses of costs, revenues, rates, and quality 

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

requirements of title 39. Additionally, for market dominant products, the ACR must report product information, 

mail volumes, and measures of quality of service, including speed of delivery, reliability, and degree of 

1 Common abbreviations and acronyms are identified in Appendix D.
10 2010 An

customer satisfaction. For market dominant products 

with workshare discounts, the ACR must report the 

per-item cost avoided by the Postal Service by virtue 

of such discount, the percentage of cost avoided that 

the per-item workshare discount represents, and the 

per-item contribution to institutional costs. 39 U.S.C. 

3652(a) and (b). 

Other Reports

In conjunction with its filing of the ACR, the Postal 

Service must also file its most recent comprehensive 

statement on postal operations, mandated by 39 

U.S.C. 2401(e), and its performance plan and 

program performance reports, mandated by 39 

U.S.C. 2803 and 2804, respectively. See 39 

U.S.C. 3652(g). 

Commission Responsibilities

Under section 3653, the Commission’s corresponding 

responsibilities include providing an opportunity for 

comment on the Postal Service’s submission, making 

a written determination as to whether any rates 

or fees were not in compliance with applicable 

provisions of chapter 36 of title 39 or related 

regulations, and whether any service standards were 

not met. If no instance of non-compliance is found, 

the determination is written accordingly. 39 U.S.C. 

3653 (a) (c). If a determination of non-compliance 

is made, the Commission is directed to take such 

action as it deems appropriate. The Commission is 

also required to evaluate annually whether the Postal 

Service has met the goals established under sections 

2803 and 2804, and may make recommendations 

to the Postal Service related to the protection or 

promotion of public policy objectives of title 39. 39 

U.S.C. 3653(d). 

Procedural History

On December 29, 2010, the Postal Service filed its 

FY 2010 ACR, covering the period October 1, 2009 

through September 30, 2010. In accordance with 

section 3652(g), concurrently the Postal Service also 

filed its FY 2010 Comprehensive Statement on Postal 

Operations.2 The Comprehensive Statement included 

the Postal Service’s 2010 Annual Performance 

Report and 2011 Performance Plan required by the 

Government Performance and Results Act, P.L. 103-62.

The ACR includes an extensive narrative discussion and 

a substantial amount of detailed public and non-public 

information contained in library references. The library 

references include the Cost and Revenue Analysis, the 

International Cost and Revenue Analysis, cost models 

supporting workshare discount analysis, and billing 

determinant information. Library Reference USPS-FY10-9 

serves as a roadmap that summarizes other materials in 

the submission and discusses methodology changes. It 

also includes a section in response to Commission rule 

3050.12 regarding data obsolescence. 

The Postal Service also filed its annual report to the 

Secretary of the Treasury regarding the competitive 

products fund required by section 2011(i) of title 

39 as part of USPS-FY10-39 in conjunction with the 

other Competitive Products Fund materials required to 

comply with 39 CFR 3060.20 through 3060.23.

On January 4, 2011, the Commission issued an 

order providing notice of the Postal Service’s filing, 

establishing Docket No. ACR2010 as a formal 

docket to consider the filing, appointing a Public 

Representative to represent the interests of the general 

public, and providing an opportunity for public 

2 FY2010 Comprehensive Statement on Postal Operations, December 

29, 2010 (Comprehensive Statement). This document was filed as 

Library Reference USPS-FY10-17.
 POSTAL REGULATORY COMMISSION 11

comment.3 It established February 2, 2011, as the 

deadline for comments and February 17, 2011, as 

the deadline for reply comments. 

Methodology Changes

The Postal Service reports that the scope of 

methodologies has been reduced because of its 

heavy reliance on replicating the methodologies most 

recently used by the Commission. It states, however, 

that several methodological changes are reflected 

in the ACR. It identifies and discusses these issues 

in a separate section of the roadmap document 

and in the prefaces to the appended materials. 

Additionally, the Postal Service filed proposals to 

change analytical principles since the filing of the FY 

2009 ACR. It summarizes fourteen proposals and 

proposed changes that were pending resolution as of 

the date of the filing, which have been incorporated 

into the 2010 ACR. Proposals Nine through Twelve 

and Proposals Thirteen and Fourteen are still pending 

before the Commission, having been submitted shortly 

before the FY 2010 ACR on December 20, 2010, 

and December 22, 2010, respectively.

Product Analysis

The Postal Service provides a detailed analysis of 

each market dominant product, including domestic 

negotiated service agreements entered into during 

FY 2010. It also presents information on workshare 

discounts responsive to 39 U.S.C. 3652(b). The 

Postal Service presents a product-by-product analysis 

of competitive products and discusses available 

FY 2010 data regarding conformity with 39 

U.S.C. 3633. Further, the Postal Service provides 

3 See Notice of Postal Service’s Filing of Annual Compliance Report 

and Request for Public Comments, January 5, 2011 (Order No. 

636); see also 76 FR 1471 (January 10, 2011).

information on the two market tests conducted during 

FY 2010, and on nonpostal services. It explains that 

the Commission rule requiring the ACR to include 

information on costs, volumes and revenues regarding 

nonpostal services was not adopted until late in FY 

2009. As a result, the Postal Service states that it has 

attempted to improve its reporting of data in this ACR.

Confidentiality

In FY 2009, the Commission adopted rules governing 

the treatment of commercially sensitive information.4

These rules require the Postal Service to apply for 

non-public treatment when it considers information 

required in periodic reports to be commercially 

sensitive. Its application must specify reasons for 

concluding the particular information is commercially 

sensitive and in need of non-public treatment, 

and describe with particularity the nature of the 

competitive harm that public disclosure is likely to 

cause. Accordingly, the Postal Service accompanied 

its 2010 ACR with an application for non-public 

treatment of certain competitive product information, 

including its supporting rationale.

Requests for Additional Information

On January 14, 2011, the first Chairman’s 

Information Request (CHIR) was issued directing the 

Postal Service to provide additional information to 

clarify estimates in the ACR. Four additional CHIRs 

were issued during the course of this proceeding. The 

Postal Service responded to all information requests. 

In addition, the Postal Service subsequently filed 

supplemental information to support its responses. 

The Commission appreciates the Postal Service’s 

responsiveness to the information requests.

4 See Docket No, RM2008-1, Order No. 225 Final Rule Establishing 

Appropriate Confidentiality Procedures, June 19, 2009.
12 2010 An
 POSTAL REGULATORY COMMISSION 13

Chapter III

Legal Issues 

Introduction

In this year’s ACR, the Postal Service asserts that “[a] significant question regarding the requirements of title 

39 arises with respect to cost coverage shortfalls.” FY 2010 ACR at 7. The Postal Service questions whether 

repeated cost coverage shortfalls can be addressed effectively within the PAEA’s price cap mechanism, given 

the disposition of the recent exigent rate request and concern that efficiency enhancements cannot close the 

coverage gap. Another aspect of the question pertains to the Commission’s interpretation of the term “product” 

as it relates to section 3622(c)(2), which provides, among other things, that each class or type of mail service 

bear the direct and indirect postal costs attributable to it.1

Questions also arise about the role of section 101(d) in non-compliance determinations and the relationship of 

section 3622(c)(2) to the price cap in the statutory pricing hierarchy and related Commission regulations.

The Postal Service’s ability to address cost coverage shortfalls under the PAEA

The Postal Service asserts that its recent exigent rate request included a plan to address systemic cost coverage 

shortfalls, and that the Commission’s denial of that request means the plan is no longer workable.2 Id. at 8. 

1 For ease of discussion, the Commission uses the phrase “attributable cost floor” in lieu of repeating the language in section 3622(c)(2). Commenters 

use the phrase attributable cost floor as shorthand to indicate the pricing standard referred to in section 3622(c)(2). See, e.g., MPA et al. Comments 

at 1, Appendix A passim; PR Reply Comments at 2-3; and MPA et al. Reply Comments at 2, 8. 2 In the FY 2009 ACD, the Commission identified fourteen market dominant products and services that had failed to cover attributable costs; said 

the aggregate loss was $1.7 billion, and found that most of the loss ($1.5 billion) was associated with Periodicals ($642 million), Standard Flats 

($616 million), and Standard NFMs/Parcels ($205 million).
14 2010 An

The Postal Service further states that it has indicated to 

the Commission over the course of the joint effort on 

the Periodicals Study that even with the most optimistic 

enhancements and annual rate increases within the 

statutory cap, it does not foresee that Periodicals, 

Standard Flats, and Standard NFMs/Parcels will 

reach full attributable cost coverage. Id. The Postal 

Service concludes:

...[I]t seems impossible for the Postal Service, 

acting with the powers granted to it and 

within the constraints imposed by title 39, to 

present any realistic plan that would result in 

these products fully covering their attributable 

costs, much less making any contributions to 

institutional costs. Therefore, it seems most 

appropriate for the Commission to determine 

whether it can exercise any of its powers 

to remedy the cost coverage shortfall of the 

products in question. 

Id.

The Postal Service observes that parties commenting 

on last year’s ACR advocated that the Commission 

possesses such powers (citing the Public 

Representative and the Greeting Card Association) 

and says it therefore would be useful for the 

Commission to determine “exactly what the contours 

of its powers are under title 39.” Id. 

Commission Analysis

The Commission disagrees with the Postal Service’s 

conclusion that denial of the exigent rate request 

deprives the Postal Service of any ability to devise 

realistic plans, within statutory constraints, to achieve 

full cost coverage for Periodicals and certain 

underwater products. Moreover, to the extent the 

Postal Service’s reference to “fully covering ... 

attributable costs” means immediately moving certain 

classes or products to full coverage, the Commission 

rejects that point. The Commission’s consistent position 

has been that a statutorily-consistent course of action, 

in some instances, is meaningful progress toward 

improved cost coverage. 

The Commission’s disposition of the exigent request 

does not foreclose the Postal Service’s ability to use 

its pricing flexibility to address intra-class shortfalls 

(as in Standard Mail) or to pursue cost-reduction 

efforts directed at underwater classes or products or 

an overall reduction of overhead costs. While the 

statutory price cap may limit pricing-related progress 

on an annual basis, the Commission does not accept 

the premise that the existence of the price cap thwarts 

the Postal Service’s ability to effectively address the 

pricing issues it identifies. 

In fact, the Postal Service’s pricing approaches for 

Package Services (which is a class that did not cover 

costs in FY 2010) and Standard NFMs/Parcels (a 

product with a reported 77.2 percent cost coverage) 

in Docket No. R2011-2 (filed shortly after this year’s 

ACR) show that pricing flexibility can be usefully 

employed to move some classes and products toward 

improved cost coverage. What is absent on this record 

is a convincing showing that pricing flexibility has 

been applied appropriately for Standard Flats and that 

cost-reduction efforts are receiving adequate, targeted, 

and sustained attention, especially in Periodicals. This 

makes the Postal Service’s failure to utilize that flexibility 

to address Standard Mail Flats cost coverage all the 

more unfounded. The suggestion that the Commission 

explore its options, including piercing the price cap, 

also departs from the Postal Service’s longstanding 

position on the status of the price cap mechanism in the 

statutory pricing hierarchy.3

3 Docket No. RM2007-1, Initial Comments of the United States Postal 

Service (April 6, 2007), at 16; 21-23.
 POSTAL REGULATORY COMMISSION 15

Standard Mail Flats

Pursuant to 39 U.S.C. 3652(a)(1), the Postal Service 

is required, among other things, to “demonstrate 

that all products during such year complied with all 

applicable requirements of [title 39].” In this ACR, the 

Postal Service does not attempt to make that showing, 

simply noting that “the Flats product had a cost 

coverage of 81.6 percent in FY 2010.” FY 2010 

ACR at 31. 

The Postal Service expressly recognizes that pricing 

and efficiency measures need to be taken to ensure 

that the Flats product covers its costs and makes an 

appropriate contribution toward institutional costs. 

Id. It suggests, however, its plans were nullified by 

the Commission’s denial of its exigent rate request. In 

its most recent price adjustment proceeding, Docket 

No. R2011-2, the Postal Service reverted to the 

previous pattern of below-average price increases 

for Flats it followed in the prior two price adjustment 

proceedings under the PAEA. 

In its review of the Postal Service’s ACR, the 

Commission must determine “whether any rates or 

fees in effect for such year (for products individually or 

collectively) were not in compliance with applicable 

provisions of [chapter 36 of title 39] (or regulations 

promulgated thereunder).” Among the provisions of 

chapter 36 is 39 U.S.C. 3622(c)(14), which as 

part of the modern system for regulating rates and 

classes for market dominant products, requires the 

Commission to take into account “the policies of 

this title as well as other factors as the Commission 

determines appropriate.” While many of the section 

3622(c) factors were simply imported from former 39 

U.S.C. 3622(b), section 3622(c)(14) represents a 

synthesis of former section 3622(b) language that the 

Commission’s recommended rates be “in accordance 

with the policies of this title” and section 3622(b)(9) 

that in addition to the eight enumerated factors, the 

Commission could also consider “such other factors 

as the Commission deems appropriate” in making its 

rate recommendations. 

Thus there is symmetry between both the Postal 

Service’s obligations under section 3652 to 

demonstrate that all products complied with 

the applicable provisions of title 39, and the 

Commission’s review under section 3653 which takes 

into account, among other things, the policies of title 

39. Moreover, this reading is consistent with pricing 

under the PAEA which contemplates both ex ante and 

ex post review of prices. 

Postal Service proposed price adjustments are subject 

to ex ante review by the Commission, including 

whether planned price changes are consistent with 

the policies of title 39. Commission determinations 

as to the lawfulness of such planned changes are, 

with notable exceptions, “provisional and subject to 

further review.” See CFR 3010.13(j) and 39 CFR 

3010.44(c). That further, ex post, review occurs in 

the ACD. 

Standard Mail, as a class, covers attributable costs 

and makes a substantial contribution to institutional 

costs. However, FY 2010 ACR results show that the 

Standard Flats product does not cover costs, and 

therefore does not make a contribution to institutional 

costs. FY 2010 ACR at 31. 

Beginning as early as the FY 2008 ACD and 

reiterated in subsequent proceedings, the Commission 

expressed concern that Standard Mail Flats do 

not cover costs and, as a consequence, impose a 

disproportionate institutional cost burden on other 
16 2010 An

Standard Mail products, particularly Letters. FY 

2008 ACD at 61; see also FY 2009 ACD at 86; 

Docket No. R2009-2, Order No. 191 at 52-53, 

and Docket No. R2010-2, Order No. 675 at 31. 

Since FY 2008, that burden has worsened. Flats’ 

contribution per piece was negative 2.2 cents in FY 

2008, growing to negative 8.2 cents in FY 2010. 

In contrast, the FY 2008 per-piece contribution from 

Standard Letters was a positive 9.0 cents and in 

FY 2010 was a positive 8.6 cents.4 Despite the 

Commission’s repeated suggestions that Flats be 

priced above cost (see, e.g., Order 191 at 53), 

the Postal Service has persisted in proposing belowaverage price increases for this product, including in 

its most recent price adjustment proceeding, Docket 

No. R2011-2. 

In this proceeding, three commenters (L.L. Bean, 

Valpak, and the Public Representative) address the 

Postal Service’s repeated below-cost pricing strategy 

for Standard Flats (outside of the exigent case), 

including its most recent proposal in Docket No. 

R2011-2; discuss the ensuing harm, and point out 

the intra-class subsidy. They claim that the intra-class 

subsidy, amounting to $1.4 billion over the last three 

years, including $577 million in FY 2010, violates 

39 U.S.C. 101(d), which provides that postal rates 

“shall be established to apportion the costs of all 

postal operations to all users of the mail on a fair 

and equitable basis.” The Commission agrees and 

concludes that the Standard Flats product is not in 

compliance with this important policy of title 39. 

The Commission does not take this step 

4 An alternate way of viewing the burden is to compare the difference 

in unit contribution. In FY 2008, the difference in unit contribution was 

11.2 cents, growing to 16.8 cents in FY 2010. 

lightly.5 As discussed in Chapter VII, the Postal 

Service is directed, pursuant to section 3653(c), 

to take remedial action as promptly as practicable 

to effectively address the unfair and inequitable 

apportionment of costs.6

Periodicals

The Postal Service reports that Periodicals has not 

been covering its attributable costs, and that cost 

coverage (at 75.5 percent) declined slightly in 

FY 2010.7 FY 2010 ACR at 35. The situation in 

Periodicals is admittedly different from that posed by 

Standard Flats, as both of the products that comprise 

this class also have reported cost coverage shortfalls. 

This means a rebalancing pricing strategy, which 

keeps the overall price cap intact at the class level, is 

not feasible. 

Two commenters (Valpak and the Public 

Representative) assert that a non-compliance 

determination for this class is warranted on the basis 

of the repeated cost coverage shortfall and violation 

of section 101(d). Valpak also invokes instances of 

non-compliance with respect to other statutory pricing 

factors and objectives. 

5 In discussing this product in its FY 2008 ACD, the Commission noted 

that “[t]he lack of a sufficiently high cost coverage directly implicates 

the requirement of section 101(d), which directs the Postal Service 

to apportion the costs of the Postal Service on a fair and equitable 

basis and section 3622(b)(5), which requires that rates must be set to 

ensure adequate revenues to maintain financial stability.” FY 2008 

ACD at 61 (footnote omitted). 6 Although Standard Parcels/NFMs do not cover costs, that product 

is easily distinguishable from standard Flats. In each general price 

adjustment proceeding under the PAEA, the Postal Service has 

proposed substantially above-average price increases Standard 

Parcels/NFMs. See, e.g., Order No. 191 at 43 (16.425 percent 

for Parcels/NFMs compared to 3.781 percent for the class on 

average). Moreover, in Docket No. MC2010-36 the Postal Service 

proposed and the Commission conditionally approved the transfer of 

commercial Standard Parcels to the competitive product list. 7 This percentage and the percentages for the Within County and 

Outside County products that comprise this class are based on the 

Postal Service’s initial filing. Based on revision, these percentages 

changed slightly. 
 POSTAL REGULATORY COMMISSION 17

Time, MPA/ANM/ABP and Condé Nast claim 

that there is no justification for a non-compliance 

determination with respect to Periodicals. Moreover, 

Time and MPA/ANM/ABP challenge the use of 

section 3622(c)(2) as a rationale for non-compliance 

determination. Their positions are based on a reading 

of the statute, legislative history, and recent Order 

No. 536, which they say place the price cap at the 

top of the statutory pricing hierarchy. Time Comments 

at 12-14 and MPA/ANM/ABP Reply Comments at 

2. MPA/ANM/ABP, for example, assert that section 

3622(c)(2) is not an absolute requirement, but one 

of a number of factors and objectives. As such, 

they claim it is subordinate to the price cap and the 

two other quantitative requirements the Commission 

identified in Order No. 536. MPA/ANM/ABP Reply 

Comments at 2. MPA/ANM/ABP also maintain that 

section 101(d) is a policy within chapter 1 of title 39, 

so has no bearing on a determination that is to be 

based on chapter 36 considerations. Id. at 3. 

As discussed in Chapter VII, the Commission concludes 

that the rates for Periodicals do not satisfy section 

3622(c)(2), but it does not find FY 2010 Periodicals 

rates out of compliance with applicable provisions of 

chapter 36 or regulations promulgated thereunder. A 

finding that a product (either individually or collectively) 

fails to satisfy a provision of title 39 does not compel a 

finding of non-compliance. In making its determination, 

the Commission must take into account numerous 

sometimes conflicting considerations. 

The situation in Periodicals is distinguishable from that 

of Standard Flats. First, concerns about Periodicals 

cost coverage existed in the years prior to the PAEA; 

they are not a recent development. Second, unlike 

Standard Mail, Periodicals as a class fails to cover 

costs. While this is a concern, there is no suggestion 

that the Postal Service has ignored its pricing flexibility 

under the PAEA with respect to Periodicals products. 

Lastly, management has not yet fully brought to bear 

efficiency enhancements, network adjustments, and 

related changes which could alter the attributable 

cost picture for Periodicals. The Commission believes 

it is appropriate to allow time for these measures 

to be implemented and take hold. Given these 

considerations, the Commission need not address the 

scope of remedial powers under section 3653. 

Pricing Products Below Cost 

The Postal Service reads Order No. 5368 as 

suggesting that pricing standards apply at the class 

level, not the product level. FY 2010 ACR at 8. It 

states: 

It is not clear to the Postal Service how to 

reconcile this conclusion with the Commission’s 

statements regarding cost coverage shortfalls 

the FY 2009 ACD. If the Commission’s 

statements in [Order No. 536] regarding 

products mean that cost coverage shortfalls 

are acceptable at the product level so long 

as there is full attributable cost coverage and 

appropriate institutional cost contribution at the 

class level, then Commission action to remedy 

product-level cost coverage shortfalls may not 

be necessary.

FY 2010 ACR at 9.

While the Commission rejected the Postal Service’s 

contention that the term “product” is the only 

appropriate level at which pricing standards apply, 

it did not rule out the possibility that certain pricing 

standards would apply at that level. Order No. 536 

at 24-27. In this proceeding, consistent with prior 

8 Order No. 536, Docket No. RM2009-3, Order Adopting Analytical 

Principles Regarding Workshare Discount Methodology, September 

14, 2010. 
18 2010 An

ACDs, the Commission has appropriately applied the 

pricing standard at the product level.

In Order No. 536 the Commission observed that 

the terms the PAEA uses to indicate the level at which 

its various pricing standards apply are non-restrictive 

(“mail,” “service,” “class or type,” “subclass,” and 

“category.”) The Commission noted that many of the 

PAEA’s pricing standards use language that is broad 

enough to include products, but does not restrict the 

application of the pricing standard to products. The 

Commission found this to be true of the ceiling on 

workshare discounts imposed by section 3622(e). 

In explaining why it arrived at that conclusion, 

the Commission discussed the terms used in other 

pricing provisions to indicate the level at which each 

provision should be applied. It noted with respect to 

the language section 3622(c)(2) uses to indicate the 

level at which the attributable cost floor applies:

The attributable cost floor applies to each ‘class 

or type of mail [service].’. While this phrase 

is broad enough to include an individual 

‘product,’ it is not confined to an individual 

product.

Order 536 at 26. 

Order No. 536 also makes the point that section 

3622(c)(2) is similar to section 3622(e) in that it 

uses expansive language to avoid dictating to the 

Commission or the postal community at what level the 

standard should be applied. The level at which those 

two pricing standards should be applied is to be 

determined by the purpose underlying each standard. 

Section 3622 Hierarchy

The Public Representative reasons that the statutory 

price cap and the attributable cost floor provision 

in section 3622(c)(2) are on equal footing. This is 

based on the contention that section 3622(c)(2) is a 

quantitative requirement, notwithstanding its location 

with the cluster of statutory factors the Commission 

identified, in Order No. 536, as qualitative. PR Reply 

Comments at 2-3. Time and MPA/ANM/ABP assert 

that the price cap has primacy over the attributable 

cost floor provision. They point, among other things, 

to language in the PAEA which establishes the price 

cap as a requirement of the modern system of rate 

regulation, and contrast this with the standing the 

PAEA accords the statutory objectives and factors. 

Time Reply Comments at 7-14 and MPA/ANM/ABP 

Reply Comments at 2. 

The focus in this case on section 3622(c)(2)’s 

standing within the statutory pricing hierarchy 

occurs mainly in the context of (i) the Postal Service’s 

suggestion that the Commission explore its remedial 

options, including whether these options include 

piercing the price cap; and (ii) two proposals which 

not only would exceed the Periodicals price cap, but 

exceed it by a significant degree. Valpak proposes 

two successive increases of 16 percent; the Public 

Representative proposes an 8 percent hike. The Public 

Representative’s proposal tracks the Postal Service’s 

Periodicals proposal in the exigent rate filing. 

Section 3622 creates a hierarchy based on 

“requirements,” sections 3622(d) and (e), 

“objectives,” section 3622(b), and “factors,” section 

3622(c).9 With the exception of an exigent rate 

request and use of banked pricing authority, the 

PAEA’s price cap mechanism in section 3622(d)(1)(A) 

takes precedence over the statutory pricing objectives 

and factors in sections 3622(b) and (c), even if some 

of these can be considered quantitative. Therefore, 

to the extent an objective or factor with a quantitative 

9 Other provisions of title 39 would qualify as requirements. See 39 

U.S.C. 3626 and 3627. 
 POSTAL REGULATORY COMMISSION 19

component can be seen as competing with the price 

cap, the price cap has primacy. 

In bills that became the PAEA, the price cap 

was understood as a feature that would focus 

management’s attention on cost control. There is also 

an indication, in the section 708 directive for a joint 

Postal Service/Postal Regulatory Commission study 

of Periodicals costs and efficiency practices, that 

legislators were aware that the attributable cost floor 

provision would pose special challenges for any class 

that had experienced difficulties in satisfying former 

section 3622(b)(3) under the Postal Reorganization 

Act of 1970 (PRA). 

The PAEA, in section 3622(a), required the 

Commission to establish a modern system for 

regulating rates and classes for market dominant 

products within a relatively short time after enactment. 

It further provided, in section 3622(d)(1)(A), that an 

annual limitation [cap] on rates was a requirement of 

that system. With this cap in place, the Commission 

was directed to design the system to achieve certain 

objectives set out in section 3622(b)(1) through (9). 

And, in establishing or revising the cap-based system, 

the Commission was directed to “take into account” 

the factors set out in section 3622(c)(1) through 

(14).10 The Commission understands this directive 

as one which clearly calls for the application of its 

considered judgment. 

The price cap is the signal feature distinguishing the 

modern system from the cost-of-service approach 

under the PRA. Many of the statutory objectives the 

cap-based system is to be designed to achieve, 

and the factors that are to be taken into account, 

10 Section 3622(e) addresses workshare discounts. The Commission has 

incorporated this provision into regulations implementing the modern 

rate regulation system.

are expressed in language similar to the ratemaking 

considerations under the old system, and present 

familiar challenges in terms of achieving an 

appropriate balance; however, none has precisely 

the same standing under the PAEA as they did 

under the PRA. Instead, the objectives and factors, 

including those that can be regarded as quantitative 

operate within the context of the price cap; they are 

not on an equal footing with it. However, giving 

precedence to the price cap does not render the 

attributable cost floor provision inconsequential. It 

advances the section 3622(b)(5) objective of assuring 

adequate revenues to maintain financial stability 

and promotes the recognition of other objectives 

and factors. Consequently, the Commission will 

continue to press for meaningful cost-reduction efforts, 

examination of costs, and use of pricing flexibility to 

promote PAEA policies. 
20 2010 An
 POSTAL REGULATORY COMMISSION 21

Chapter IV 

Postal Service Financial Goals

Introduction

By law, the Postal Service is “to be operated as a basic and fundamental service” whose “basic function is the 

obligation to provide postal services to bind the Nation together through the personal, educational, literary, 

and business correspondence of the people.” 39 U.S.C.101(a). The PAEA established a modern system 

for regulating rates requiring, among other things, that rates be established to “assure adequate revenues, 

including retained earnings, to maintain financial stability.” Declining mail volumes, especially in First-Class, 

and the PAEA mandated pre-funding requirements for the retiree health benefits fund, as currently structured, 

could impede the Postal Service’s ability to meet these requirements of title 39. In this chapter, the Commission 

provides an overview of postal finances and discusses liquidity, the Retiree Health Benefits Fund, the pension 

overfunding issue, class/product revenue and cost data, mail volumes, workhours, and productivity.

Overview

FY 2010 marked the fourth consecutive fiscal year the Postal Service has posted a net financial loss. The 

$8.5 billion loss for FY 2010 follows losses of $5.4 billion in FY 2007, $2.8 billion in FY 2008, and $3.8 

billion in FY 2009 and brings the total cumulative losses for the four years to $20.2 billion. These losses, 

coupled with the expected continued losses in ensuing fiscal years1 threaten the Postal Service’s ability to fulfill 

its statutory mandate. As Table IV-1 shows below, the financial losses over the past four years have severely 

eroded the Postal Service’s retained earnings and have caused an increase in total debt that threatens to reach 

the statutory limit of $15 billion in the near future.

1 The Postal Service’s FY 2011 Integrated Financial Plan at page 2 estimates a loss in FY 2011 of $6.4 billion.
22 2010 An

Liquidity Issues – Continued

In the FY 2008 ACD, the Commission expressed 

concern about the Postal Service’s continuing financial 

decline and the “...very real possibility that the Postal 

Service will not be able to pay some of the large 

year-end payments for the retiree health benefits 

fund and workers compensation. The Commission is 

concerned about the Postal Service’s liquidity in the 

near future.” (Emphasis Added).2

In FY 2009, Congress deferred the required annual 

payment into the Postal Service Retiree Health Benefits 

Fund (RHBF) by $4 billion, allowing the Postal Service 

to finish FY 2009 with a cash balance of $4.1 

billion instead of $78 million. This allowed the Postal 

Service to hold off a cash deficiency crisis in the 

beginning of FY 2010 and to continue to provide 

service consistent with sections 101 and 3622(b)(5) 

of title 39. The Commission noted in the FY 2009 

ACD that the Postal Service was on a financial path 

that would put its section 101 mandates at risk and 

that the Postal Service should, with all the available 

2 Postal Regulatory Commission FY 2008 Annual Compliance 

Determination at 25.

resources under current law, address the sources of 

financial instability sooner rather than later.3

In FY 2010, despite better than expected operating 

results and continued cost reductions, the Postal 

Service continued to experience significant financial 

losses as the economic recovery failed to completely 

restore lost volumes. As the economy improved, 

volumes, particularly in Standard Mail, began 

to increase in the final fiscal quarter of the year. 

However, unit revenues from Standard Mail provide 

less net contribution than First-Class mail, which 

continued to show significant volume declines.4

Consequently, the increases in Standard Mail volume 

were not sufficient to make up for the losses in net 

revenue from First-Class Mail. Despite this, before the 

workers compensation adjustment of $2.5 billion, 

the Postal Service net loss was about $1.8 billion 

less than the initial operating plan. This additional 

net revenue (actual vs. planned) enabled the Postal 

Service to make the full $5.5 billion payment into 

3 Postal Regulatory Commission FY 2009 Annual Compliance 

Determination at 19-20. 4 It takes about three pieces of Standard Mail to recover the net 

revenues from the loss of one First-Class Mail piece.

Table IV–1 

Financial Position of USPS FY 2006–2010 

($ in Millions)

FY

2006

FY

2007

FY

2008

FY

2009

FY

2010

Net Income (Loss) before RHB and Workers Comp Adj. $900 $3,216 $3,211 $(1,051) $(505)

Payments to Retiree Health Benefits Fund - 8,358 5,600 1,400 5,500

Workers Comp Liability Adj. - - 417 1,343 2,500

Net Financial Loss 900 (5,142) (2,806) (3,794) (8,505)

Retained Earnings 6,276 1,134 (1,672) (5,413) (13,873)

Total Debt 2,100 4,200 7,200 10,200 12,000

Source: USPS Financial Statements, FY 2006–2010
 POSTAL REGULATORY COMMISSION 23

the RHBF and also end the year with a cash balance 

of $1.2 billion. Additionally, the Postal Service only 

increased its total debt by $1.8 billion, instead of 

using the full allowable increment of $3 billion. Total 

debt increased to $12 billion. Because of the better 

than expected operating results, the Postal Service 

was able to meet the Section 3622(b)(5) objective, 

i.e., revenue adequacy.5

Total mail volumes continued to decline in FY 2010, 

though at a much slower rate than in FY 2009. Total 

volumes dropped by 3.5 percent, or over six billion 

pieces, in FY 2010, as compared with a 12.7 

percent decline in volume in FY 2009. All but one 

class of market dominant mail experienced continued 

declines. Only Standard Mail volumes, which began 

to improve substantially after the first quarter, showed 

a small increase of 0.1 percent over last year. 

5 For this ACD only, revenue adequacy is viewed as having sufficient 

cash to meet all obligations. In other regulatory arenas and under 

better economic conditions, revenue adequacy might be held to a 

more rigorous standard.

Revenues also were less than last year, declining 

1.5 percent or over $1 billion from last year. FirstClass mail revenues were the primary reason for the 

decline in total revenues, dropping over $1.8 billion 

from last year. Standard Mail revenues were almost 

the same as last year while revenues increased for 

other mailing services6 and Shipping Services which 

include Priority Mail, Express Mail, and Parcel Select.

Total expenses in FY 2010 were 5.1 percent higher 

than last year with the primary contributors to the 

increase being the RHBF payment and a non-cash 

adjustment to the workers compensation liability. Most 

of the other categories of expenses – compensation 

and benefits, transportation, and other expenses 

– showed decreases. Compensation and Benefits 

expenses were reduced by almost $1.8 billion, 

primarily through the reduction of 75 million workhours.

6 Other Mailing Services include Ancillary Services such as Registry, 

Certified, and Insurance along with special services such as Money 

Orders and Post Office Boxes.

Table IV–2 

Mail Volumes 

($ in Millions)

FY 2010 FY 2009

Increase or

(Decrease)

%

Change

First-Class 78,203 83,766 -5,563 -6.6%

Periodicals 7,269 7,901 -632 -8.0%

Standard Mail 82,525 82,448 77 0.1%

Package Services 658 731 -73 -10.0%

Other 499 517 -18 -3.5%

Total Mailing 

Services 169,154 175,363 -6,209 -3.5%

Total Shipping 

Services 1,420 1,381 39 2.8%

Total Mail 170,574 176,744 -6,170 -3.5%

Source: USPS FY 2010 Form 10-K at 14

Table IV–3 

Mail Revenues 

($ in Millions)

FY 2010 FY 2009

Increase or

(Decrease)

%

Change

First-Class 34,026 35,883 -1,857 -5.2%

Periodicals 1,879 2,038 -159 -7.8%

Standard Mail 17,331 17,345 -14 -0.1%

Package Services 1,516 1,684 -168 -10.0%

Other 3,619 2,886 733 25.4%

Total Mailing 

Services 58,371 59,836 -1,465 -2.4%

Total Shipping 

Services 8,681 8,254 427 5.2%

Total Mail 67,052 68,090 -1,038 -1.5%

Source: USPS FY 2010 Form 10-K at 15
24 2010 An

The cost increases for retiree health benefits offset 

the reductions in other expenses. The Postal Service 

made the full $5.5 billion payment in FY 2010 which 

was $4.1 billion higher than the adjusted payment of 

$1.4 billion made in FY 2009.

The large adjustment to workers compensation 

resulted from changes to the discount rates that are 

used to estimate the present value of the workers 

compensation liability. Workers compensation costs 

increased by $1.3 billion over last year. The discount 

rates are based on a market basket of Treasury 

securities with maturities that correspond to the 

expected duration of future cash payments. As interest 

rates on these securities declined during the year, 

adjustments were made to the workers compensation 

discount rates which increased the liability. The 

changes to the liability are charged to the income 

statement as expenses. During FY 2010, the expense 

adjustment due to discount rate changes amounted 

to over $2 billion, while actuarial estimate changes 

accounted for an additional $483 million, amounting 

to a total $2.5 billion adjustment to the workers 

compensation liability. 

While the Postal Service was able to meet all of 

its obligations in FY 2010, its financial challenges 

continue. The Postal Service’s FY 2011 Integrated 

Financial Plan projects that the total financial loss will 

be $6.4 billion. Even with no unexpected adverse 

financial events, the Postal Service estimates that there 

will be insufficient cash to meet all of its financial 

obligations, primarily the required $5.5 billion 

payment into the RHBF. During FY 2011 the Postal 

Service expects that it will use $6.7 billion in net cash 

during the year. With a beginning cash balance of 

$1 billion and available borrowing authority of $3 

billion, the expected cash balance at the end of FY 

2011 is expected to be a negative $2.7 billion.7

The Postal Service has taken several actions over 

the last three years to try to maintain service while 

reducing costs. Reducing workhours by almost 250 

million, renegotiating supply and service contracts, 

adjusting transportation requirements, and adjusting 

city carrier routes with the assistance and support of 

the city letter carriers union, have enabled the Postal 

Service to save over $12 billion in the last three years. 

7 Postal Service FY 2011 Integrated Financial Plan at 6.

Table IV–4— Total Expenses–FY 2010 

($ in Millions)

FY 2010 FY 2009

Change in

Amount

Percent

Change

Compensation & Benefits $52,601 $53,154 $(553) -1.0%

Retiree Health Expenses 7,747 3,390 4,357 128.5%

Transportation 5,878 6,026 (148) -2.5%

Supplies & Services 2,236 2,321 (85) -3.7%

Depreciation and Amortization 2,469 2,270 199 8.8%

Other Expenses 4,495 4,669 (174) -3.7%

Total Operating Expenses $75,426 $71,830 $3,596 5.0%

Interest Expense 156 80 76 95.0%

Total Expenses $75,582 $71,910 $3,672 5.1%
 POSTAL REGULATORY COMMISSION 25

Additionally, the Postal Service has developed a 10-

year action plan which addresses ways to increase 

revenues and control costs over the long run.8

The Postal Service is also reviewing the current 

management structure for opportunities to reduce the 

ranks of management and administrative personnel 

by almost 7,500, saving an annualized estimate of 

over $700 million beginning in FY 2012.9 This is 

in addition to the over 40 million planned workhour 

savings for FY 2011.10 However, while these actions 

will reduce the costs of the Postal Service, they will 

not provide the $4-$5 billion annual cost savings 

necessary to bring the Postal Service long term 

financial solvency and stability. The Postal Service 

stresses that timely Congressional action is needed 

to address the main contributors to the financial and 

liquidity problems; the overfunding of the pension 

obligations and the current method of funding retiree 

health benefits. USPS 10-K at 27-28.

Retiree Health Benefits Fund

The Commission’s majority decision on the Postal 

Service’s exigent rate request, Docket No. R2010-4, 

noted that the primary cause of the liquidity crisis is 

the “overly optimistic RHBF prefunding schedule.”11

In this ACR, the Public Representative reiterates the 

Commission’s comments and notes that because of 

the required payments into the RHBF, operating profits 

have been transformed into significant losses, which 

have had to be financed by using significant amounts 

of debt. Public Representative Comments at 3-4.

8 Ensuring a Viable Postal Service for America: An Action Plan for 

the Future, March 2, 2010. See also http://www.usps.com/

strategicplanning/futurepostalservice.htm 9 USPS Form 10-Q, Quarter 1, FY 2011 at 29. 10 Id. at 23. 11 PRC Order No. 547 at 68.

Valpak has also commented that the funding for 

retiree health benefits needs permanent reform, not 

one-year deferrals, and that the 

“...aggressive funding schedule can be viewed 

as constituting an extraordinary requirement 

insofar as no other federal, state, or local 

government is required to prefund any of their 

retiree health care benefits.” Valpak Comments 

at 17-18.

The Commission extensively discussed the effects 

of the retiree health benefits funding on the Postal 

Service’s liquidity in Order No. 547, denying the 

Postal Service’s request for exigent rate increases. 

The Commission stated that, but for the retiree health 

benefit funding requirements, the Postal Service would 

have had sufficient reserves over the past three years 

to carry the Postal Service through the worst of the 

past recession, with only minimum, if any, reliance 

on long-term debt. Table IV-5, below, is an updated 

version to the Table 5 in Order No. 547 at 77, 

which shows that the Postal Service would have had 

a positive cash balance of over $11 billion by the 

end of FY 2010.

The PAEA requires that information on the funding 

status of the retiree health benefit liability be provided 

every year in the annual USPS Form 10-K statement. 

This information, compiled and developed by the 

Office of Personnel Management (OPM), shows 

the obligations, costs and funding status of the 

RHBF. OPM uses several assumptions regarding the 

future costs of medical benefits, interest rates, and 

demographics to develop the estimates of the funding 

and funding requirements of the RHBF. Over the past 

two years, OPM has altered the methodology to 

include changes, albeit at a much more conservative 

pace, to assumptions regarding medical benefits 
26 2010 An

which were recommended by the Commission in a 

July 30, 2009, report presented to the Subcommittee 

on Federal Workforce, Postal Service, and the 

District of Columbia, Committee on Oversight and 

Government Reform, U.S. House of Representatives. 

That report recommended, among others things, that a 

graduated medical benefits inflation factor rather than 

a static factor be used to estimate the RHBF liability.

Pension and Benefit Funding Issue

The Postal Service Inspector General (OIG) released 

a white paper on January 20, 2010, claiming that 

the Postal Service’s pension liability for Civil Service 

Retirement System (CSRS) employees has been 

overfunded by $75 billion. Subsequent to that report, 

on March 16, 2010, the Postal Service requested 

that the Commission conduct a review of the 

methodology determining the Postal Service’s liability 

for CSRS pensions as determined by OPM pursuant 

to Section 802 of PAEA.

As required by law, the Commission retained 

the services of an independent actuarial firm, the 

Segal Company, to assess OPM’s calculation of 

the Postal Service’s share of the CSRS pension 

assets and liabilities, which included a review of 

the methodology proposed in the OIG white paper. 

Segal met with OPM, the OIG, and the Postal 

Service and conducted reviews of the methodologies 

utilized by all the parties independently.

On June 29, 2010, the Commission issued the 

report prepared by the Segal Company. The report 

suggested that the methodology for determining the 

Postal Service’s share of the CSRS pension fund does 

not follow current private sector accounting standards 

for recognizing pension costs, assets, and liabilities. 

Table IV–5 

Forecasted USPS Cash Flow Without RHBF Payments 

($ in Millions)

FY

2007

FY

2008

FY

2009

FY

2010

Est. FY

2011

Net Income/(Loss) (5,142) (2,806) (3,794) (8,505) (6,400)

Less: Statutory RHBF Payments 8,358 5,600 1,400 5,500 5,500 

Adj. Net Income/(Loss) 3,216 2,794 (2,394) (3,005) (900)

Non-Cash items and Other Cash Flows 2,539 2,367 5,367 5,213 1,000 

Cash Flows from Investing Activities (2,458) (1,938) (1,806) (1,323) 1,300 

Cash Flows from Financing Activities

Increase (decrease) in debt 2,100 0 0 0 0 

Payments for Capital Leases (19) (29) (46) (47) (49)

U.S. government appropriations–expensed (76) (61) (64) (63) (63)

Net Cash (Used) provided by financing activities 2,005 (90) (110) (110) (112)

Net Increase/(Decrease) in Cash 5,302 3,133 1,057 775 1,288 

Cash Balance BOY 997 6,299 9,432 10,489 11,264 

Cash Balance EOY 6,299 9,432 10,489 11,264 12,552 

Debt Outstanding 4,200 4,200 4,200 4,200 4,200

Sources: USPS Annual Reports FY 2007 through FY 2010; USPS FY 2011 Integrated Financial Plan at 6
 POSTAL REGULATORY COMMISSION 27

The report laid out the methodologies that could be 

used based on current practices of accounting and 

actuarial standards. Segal estimated that if the Postal 

Service’s share of the CSRS assets were recalculated 

based on these current practices, the Postal Service’s 

share of the CSRS assets was understated by $50-

$55 billion.

The President’s FY 2012 Budget Proposal would 

change the financing of the RHBF by accelerating 

the provision in PAEA that requires the Postal Service 

to begin paying the normal cost of retiree health 

benefits for current employees in FY 2011 instead of 

FY 2017, and provides that the RHBF would begin 

paying the premiums for current retirees instead of 

being paid by the Postal Service. The proposal 

maintains the current pre-funding payments embodied 

in PAEA but would defer $4 billion of the FY 2011 

payment. The Administration also proposes to return 

the $6.9 billion Federal Employment Retirement 

System (FERS) surplus estimated by OPM to the Postal 

Service over 30 years, with the first payments of 

$550 million payable in FY 2011 and FY 2012.

Additionally, the proposal contains a provision where 

the current “stream of payments” required by the 

PAEA would be adjusted to account for the difference 

between the normal cost of future benefits for 

current employees, which will be paid by the Postal 

Service, and the cost of health benefit premiums for 

current retirees, which will be paid by the RHBF. The 

Commission has estimated that the effect of these 

budget proposals would reduce the Postal Service 

estimated net loss for FY 2011 by $4.6 billion. 

Financial Reporting 

Requirements

Title 39, Section 3654 requires the Postal Service 

to file with the Commission certain reports that 

conform to the Securities and Exchange Commission 

(SEC) regulations.12 The reports to be filed with the 

Commission are the annual Form 10-K, the quarterly 

Form 10-Q and Form 8-K.

The Form 10-K is an annual report which contains 

a comprehensive summary of a company’s 

performance, including the audited financial 

statements. The report also includes information 

regarding the executive compensation policies 

of the company, and detailed information of 

the compensation and benefits packages of all 

senior executive officers. This report is due to the 

Commission within 60 days of the end of the 

reportable fiscal year.

The Form 10-Q is a similar report to the Form 

10-K, but filed on a quarterly basis. The Form 

10-Q provides quarterly financial reports and a 

12 This requirement is also embodied in the Commission’s Rules of 

Practice and Procedure under Section 3050.40. See PRC Order No. 

203, April 16, 2009.

Table IV–6 

Effect of FY 2012 U.S. Budget Proposals on 

USPS FY2011 Finances

$ in Billions

Current FY2011 Net Loss Estimate ($6.40)

Elimination of PAYGO retirement premiums 2.43

Retiree Health Benefits Payment Relief 4.00

Addition of RHB Cost (3.00)

Refund of FERS Surplus 0.55

Difference between Normal Cost and 

Retiree Premiums 0.61

Net effect of FY2012 Budget Proposals 4.59

Revised Estimate of FY2011 Net Loss (1.81)
28 2010 An

management discussion on operations and finances, 

including management’s assessment of the outlook for 

the rest of the year. The Form 10-Q is required to be 

filed with the Commission within 40 days of the end 

of the fiscal quarter.

The Form 8-K is a report which includes major public 

announcements which could materially affect the 

financial status of the Postal Service. This would 

include public releases of financial information within 

a press release, public speech, or presentation by 

operating managers to Congress. It would also 

include any updates of significant events, such as 

resignations, promotions, or retirements of senior 

executive officers, which would affect the financial 

standing of the Postal Service occurring between 

filings of the Form 10-K and/or the Form 10-Q. The 

Form 8-K must be filed within three business days of 

the occurrence of the event.

The Postal Service filed the required FY 2010 Forms 

10-Q in February 2010 (Quarter 1), May 2010 

(Quarter 2), and August 2010 (Quarter 3). All filings 

were within the specified 40-day time frame. The 

Form 10-K for FY 2010 was filed on November 15, 

2010, well within the 60-day filing requirement.

During FY 2010 the Postal Service also filed three 

Form 8-K’s, notifying the Commission of senior 

executive personnel changes and publicly reported 

financial results. They were all filed within the three 

business day time limit.

Summary by Product

Table IV-7 summarizes the Commission’s analysis 

of the financial performance of all products (market 

dominant, competitive, domestic, and international) 

and all negotiated service agreements (NSAs) 

for FY 2010.13 Chapter VII presents the financial 

analysis and performance for each market-dominant 

class, for market-dominant NSAs, and for marketdominant international products. Chapter VIII presents 

the analysis of the financial results for competitive 

products and NSAs. 

Table IV-7 shows the volumes, revenues, attributable 

costs, contribution to institutional costs and cost 

coverages for postal products, reflecting the current 

mail classification. Table B-1 in Appendix B presents 

the same financial information by subclass, reflecting 

the previous mail classification, and thus allowing 

comparison of FY 2010 with financial results from 

previous fiscal years. 

The Revenue, Pieces, and Weight (RPW) system 

and the billing determinants are the main sources 

for volumes and revenues in Table IV-7. Report B 

of the Postal Service’s Cost Model is the source 

of the attributable (variable and product specific) 

costs for domestic mail. The International Cost and 

Revenue Analysis (ICRA) is the source document 

of the attributable costs for international mail.14 As 

in the three previous compliance determinations, 

the Commission has used “booked” revenues and 

expenses in the analysis of the financial results for 

postal products and NSAs. Thus, the revenues and 

expenses used in the Commission’s financial analyses 

13 For a detail presentation of the financial performance, see public 

library reference PRC-ACR2010-LR1 (which covers only marketdominant products and NSAs) and nonpublic library reference 

PRC-ACR2010-NP-LR1 (which covers market-dominant and 

competitive products and NSAs). 14 In the ACR proceeding for FY 2010, as in previous ACR dockets the

volume, revenue, and weight figures submitted by the Postal Service 

were not internally consistent. As documented in Library Reference 

PRC-ACR2010-NP-LR-1, there are instances in the Postal Service’s FY 

2010 CRA where volume revenue and weight figures do not precisely 

match the corresponding figures in the relevant source documents, such 

as the RPW system and the billing determinants. The lack of internally 

consistent figures adds to the difficulty of validating the Postal Service’s 

numbers within the time constraints of the ACR proceedings. 
 POSTAL REGULATORY COMMISSION 29

are consistent with the Postal Service’s audited 

financial statements.

In response to a Commission inquiry, the Postal 

Service stated that effective January 2010, it 

implemented the Foreign Post Settlement (FPS) system 

for international mail. Under the FPS system, revenues 

and expenses will be based on actual inbound 

and outbound international mail volumes, current 

international mail rates, and currency exchange rates 

in effect during the period.15

Table IV-7 shows that in FY 2010, Postal Service 

attributable costs totaled $41.576 billion, or 55.0 

percent of its total costs, leaving $34.006 billion 

of institutional (or overhead) costs to be recovered 

from product revenue contributions. Because of mail 

volume declines and the lack of a market dominant 

price adjustment, the revenue generated from the sale 

of postal products contributed only $25.386 billion 

to the recovery of institutional costs; leaving a loss of 

$8.620 billion. The loss was reduced by $89 million 

of Congressional appropriations and $25 million of 

investment income, leaving the Postal Service with a 

net loss of $8.505 billion for FY 2010.

In FY 2010, four competitive (domestic and 

international) mail products and ten market-dominant 

domestic products and services did not generate 

sufficient revenue to cover their attributable costs 

and thus their contribution to institutional costs was 

negative. The total negative contribution from the 

four competitive products was $74.039 million. 

The competitive products as a group, however, 

contributed more than the required 5.5 percent of 

15 See response to CHIR No. 1, Question 22, January 24, 2011. 

According to the Postal Service, the FPS system will provide 

international mail accounting accruals for use in the Postal Service’s 

audited financial statements and the ICRA. In effect, this replaces the 

“imputed” method previously used to develop revenues and expenses.

institutional costs, generating a net income before tax 

of $550 million.

The total shortfall from the ten market dominant 

products with negative contribution amounted 

to $1.669 billion. Following is the list of market 

dominant products and services with negative 

contributions to institutional costs.

The negative contributions of two of the products, 

Standard Flats and Outside County Periodicals, 

amounted to $1.164 billion or about 70 percent of 

the total shortfall. 

As in previous years, in FY 2010, First–Class Presort 

Mail and Cards was the most successful postal 

product financially. Its volume was the second largest 

– 46.2 billion pieces or 27 percent of total volume. It 

generated the largest amount of revenue – $16.058 

billion or 27 percent of total revenue. It also made the 

largest contribution to institutional costs -- $10.659 

List of Market Dominant Products and Services 

with Respective Negative Contribution to 

Institutional Costs ($ in Millions)

1 First-Class Inbound International SinglePiece Mail (53.208)

2 Standard Flats (576.986)

3 Standard Not Flat-Machinables and Parcels (172.455)

4 Periodicals, Within County (24.194)

5 Periodicals, Outside County (586.810)

6 Package Services, Single-Piece Parcel Post (133.628)

7 Package Services, Bound Printed Matter 

Parcels (26.705)

8 Package Services, Media and Library Mail (89.190)

9 Special Services, Address Management 

Services (3.499)

10 Special Services, Stamp Fulfillment Services (2.710)

Total (1,669.384)

Source: Library Reference PRC-ACR2010-LR1
30 2010 Anal compliance determination Table IV–7—Fiscal Year 2010 Volume , Revenue, Costand Cost Coverage by Class  Current Classification (Products) Volume (000) Revenue ($000) Attributable Cost ($000) Contribution to Institutional Cost ($000) Rev./Pc. (Cents) Cost/Pc. (Cents) Contribution to Institutional Cost/Pc. (Cents) Cost Coverage Competitive Mail Express Mail 42,553 827,898 495,560 332,338 1,945.571 1,164.571 781.000 167.1% Priority Mail 809,471 5,656,639 4,246,634 1,410,005 698.807 524.619 174.189 133.2% Parcel Select and Parcel Return Service (PRS) 296,824 568,756 419,897 148,859 191.614 141.463 50.150 135.5% Competitive International Mail 270,737 1,480,530 967,055 513,475 546.853 357.194 189.658 153.1% Competitive Domestic Services 82,675 135,018 115,681 19,336 163.312 139.923 23.388 116.7% Competitive International Services 1,261 8,267 12,056 (3,790) 655

Total Competitive Mail and Services 1,419,584 8,677,108 6,256,884 2,420,224 611.243 440.755 170.488 138.7%

Market Dominant MailFirst-Class Mail

Single-Piece Letters and Cards 28,584,912 12,815,796 7,775,442 5,040,354 44.834 27.201 17.633 164.8%

Presort Letters and Cards 46,225,386 16,058,305 5,398,847 10,659,458 34.739 11.679 23.060 297.4%Flats 2,483,992 3,122,695 2,147,953 974,741 125.713 86.472 39.241 145.4%Parcels 574,429 1,133,763 1,132,418 1,345 197.372 197.138 0.234 100.1%Outbound Single-Piece Mail Intl 334,404 690,377 362,959 327,418 206.450 108.539 97.911 190.2%Inbound Single-Piece Mail Intl 34 204,587 257,795 (53,208) 79.4%

Standard Mail

High Density & Saturation Letters 5,428,043 741,537 348,528 393,009 13.661 6.421 7.240 212.8%

High Density & Saturation Flats & Parcels 11,363,444 1,853,432 825,827 1,027,605 16.310 7.267 9.043 224.4%Carrier Route 9,473,617 2,240,712 1,567,192 673,520 23.652 16.543 7.109 143.0%Letters 48,508,586 9,294,785 5,127,431 4,167,353 19.161 10.570 8.591 181.3%Flats 7,067,654 2,592,242 3,169,228 (576,986) 36.678 44.841 (8.164) 81.8%Not Flat-Machinables and Parcels 682,403 607,701 780,156 (172,455) 89.053 114.325 (25.272) 77.9%Inbound NSA Mail Intl 1,061 473 150 322

Periodicals

Within County 695,455 74,301 98,495 (24,194) 10.684 14.163 (3.479) 75.4%

Outside County 6,574,014 1,804,533 2,391,343 (586,810) 27.449 36.376 (8.926) 75.5%
 POSTAL REGULATORY COMMISSION 31

Table IV–7—Fiscal Year 2010 Volume, Revenue, Cost and Cost Coverage by Class 

Current Classification (Products)—Continued

Volume

(000)

Revenue

($000)

Attributable

Cost

($000)

Contribution to

Institutional

Cost

($000)

Rev./Pc.

(Cents)

Cost/Pc.

(Cents)

Contribution 

to

Institutional

Cost/Pc.

(Cents)

Cost

Coverage

Package Services

Single-Piece Parcel Post 61,408 615,241 748,869 (133,628) 1,001.885 1,219.490 (217.605) 82.2%

Inbound Surface Parcel Post (at UPU Rates) 1,089 17,029 11,460 5,569 1,563.959 1,052.518 511.441 148.6%Bound Printed Matter Flats 229,752 191,328 129,358 61,970 83.276 56.304 26.972 147.9%

Bound Printed Matter Parcels 244,736 322,544 349,249 (26,705) 131.793 142.705 (10.912) 92.4%

Media and Library Mail 122,322 369,361 458,551 (89,190) 301.958 374.872 (72.914) 80.5%Inbound NSA Mail Intl 48 106 7 99

U.S. Postal Service Mail 431,206Free Mail 67,214 66,303 (66,303) 98.645

Total Market Dominant Mail 169,154,120 54,750,848 33,147,563 21,603,285 32.367 19.596 12.771 165.2%

Market Dominant ServicesAncillary ServicesCertified Mail 268,725 752,429 634,691 117,738 280.000 236.186 43.814 118.6%

COD 834 6,522 8,246 (1,724) 781.562 988.125 (206.563) 79.1%Insurance 39,146 125,567 98,624 26,944 320.764 251.936 68.828 127.3%Registered Mail 2,967 47,806 42,567 5,239 1,611.492 1,434.887 176.604 112.3%Stamped Envelopes 14,029 3,717 10,311 377.4%

Stamped Cards 879 646 233 136.1%Other Ancillary Services 1,605,496 807,076 494,109 312,966 163.3%Money Orders 123,405 183,153 126,339 56,814 148.416 102.378 46.039 145.0%

Post Office Box Service 813,186 674,892 138,295 120.5%

Caller Service 93,921 30,621 63,300

Other Special Services 35,671 29,946 5,726International Services 2,032 28,920 27,402 1,518 105.5%

Other Income 625,262 625,262

Total Mail and Services 170,573,704 66,962,376 41,576,247 25,386,129 39.257 24.374 14.883 161.1%

Institutional Costs 34,005,721

Appropriations: Revenue Forgone 88,877Investment Income 25,326

Total Revenues 67,076,580Total Costs 75,581,968Net Income (Loss) (8,505,388)

Source: Library Reference PRC-ACR2010-LR1
32 2010 An

billion or about 42 percent of the total contribution 

from all mail and services. Its per-piece contribution 

was 23.060 cents, which is about 2.7 times higher 

than the per-piece contribution made by Standard 

Letters. Its cost coverage of 297.4 percent was 

second only to special service Stamped Envelopes. 

It is also interesting to note in Table IV-7 that First-Class 

Flats and Bound Printed Matter (BPM) Flats made 

positive per-piece contributions of 39.241 cents 

and 26.972 cents respectively, whereas Standard 

Flats made a negative per-piece contribution of 

8.164 cents. Table IV-7 also shows that the average 

revenues for First-Class Flats and BPM Flats were 3.4 

and 2.3 times higher, respectively, than Standard 

Flats. These findings point to the chronic underpricing 

of Standard Flats.

Finally, the following breakdown of contributions to 

institutional costs is derived from Table IV-7. In FY 

2010, domestic products accounted for 96.9 percent 

of the total contribution to institutional costs. Of this 

share, 89.4 percent came from market-dominant 

products and 7.5 percent came from competitive 

products. International products accounted for the 

remaining 3.1 percent of the total contribution to 

institutional costs, with 1.1 percent coming from 

market-dominant products and 2.0 percent from 

competitive products.

Figure IV-1 presents the contribution to institutional (or 

overhead) costs by mail class. In FY 2010, First-Class 

Mail paid $17 billion or 67 percent of the Postal 

Service’s overhead. First-Class volume, however, is 

the most adversely affected by Internet technologies 

such as electronic mail, online bill payment and 

presentment, and online banking. In the last 10 

years, First-Class Mail lost 25.7 billion pieces or 

28.5 percent of its volume, in significant part due 

to increased adoption of these technologies. In light 

of this dependency on First-Class Mail, the Postal 

Service is vulnerable to the continued spread and 

improvement of Internet services, which threaten the 

financial sustainability of the Postal Service.

Mail Volumes

Figure IV-2 shows annual mail volume changes for the 

past ten years. While the recent economic recession 

ended in June 2009,16 the effects of the economic 

slowdown and the rate at which mail is migrating 

from traditional postal hard copy services to electronic 

16 2010 Business Cycle Dating Committee, September, 2010, National 

Bureau of Economic Research.

Package Services

$(182)

-0.7%

Periodicals

$(611)

-2.4%

First Class

$16,950

66.8%

Other Mail

$3,717

14.6%

Standard

$5,512

21.7%

First Class

Package Services

Other Mail†

Standard

Periodicals

Figure IV–1—Fiscal Year 2010 

Contribution to Institutional (Overhead) Costs by 

Class (Dollars in Millions)

† Includes Express Mail, Priority Mail, Parcel Select, Parcel Return 

Service, International Competitive Mail, Free Mail, Special Services 

and Other Income.
 POSTAL REGULATORY COMMISSION 33

media continue to negatively impact mail volume. 

Although the rate of decline diminished in 2010, 

total volume continued its downward trend with a 

decrease of 6.2 billion pieces or 3.6 percent from 

2009 to 2010. In the last three years (2008-2010) 

the Postal Service lost 41.7 billion pieces or about 

20 percent of its volume.

During the past decade, the Postal Service experienced 

volume reductions in seven years and volume increases 

in three years. The volume declined at an average 

annual rate of 2.0 percent. In contrast, the mail volume 

grew at an average annual rate of 2.0 percent during 

the 1970’s, 4.9 percent during the 1980’s, and 2.2 

percent during the 1990’s. At the end of FY 2010, 

mail volume was 170.6 billion pieces and stood at 

about the same level as in FY 1993.

The volume increases in FYs 2004, 2005 and 2006 

coincide with the formation of the “housing bubble” 

which generated an unusually high demand for mailbased advertising regarding mortgage financing 

and refinancing and credit card issuance. Figure IV-3 

depicts the growth of total mail volume along with the 

growth of U.S. Gross Domestic Product (GDP) over 

the past 41 years.

From 1970 to 1999, the growth of mail volume closely 

matched the pace of the U.S. economic growth. In fact, 

during the last 30 years of the 20th century, GDP and 

mail volume grew at an average annual rate of 3.1 

percent and 3.0 percent, respectively. Since 2000, 

however, this close relationship of GDP and mail 

volume growth has ceased to exist. During the first 11 

years of the current century, GDP grew at an average 

annual rate of 1.9 percent whereas volume declined at 

an annual rate of 1.5 percent. This created a gap of 

3.4 percentage points between the average changes 

of the two measures. In other words, over the past 11 

years, GDP continued to grow at a rather steady rate, 

with the exception of a 2.7 percent decline in 2009 

due to the economic recession, while mail volume 

stagnated or declined, with the exception of a healthy 

growth of 3.1 percent in FY 2000 and the short period 

of growth in the fiscal years 2004 through 2006. 

Figure IV–2—Total Mail Volume 

Annual Growth Rates 

Fiscal Years 2001–2010

-15

-13

-11

-9

-7

-5

-3

-1

1

3

5

2010200920082007200620052004200320022001

-0.2

-.2.3

-0.3

1.9

2.7

0.6

-0.4

-4.5

-13.7

-3.6

Annual Percent Change

Fiscal Year

Average Annual Growth -2.0%

Figure IV–3—Gross Domestic Product (GDP) 

and Total Mail Volume Growth 

Fiscal Years 1970–2010

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

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

Index (1970=1.00)

Fiscal Year

GDP (Chained to 2005 Dollars)

Total Mail Volume
34 2010 An

In FY 2010, volume declined 3.6 percent whereas 

GDP grew 2.8 percent; this created a record gap of 

6.5 percentage points between the two measures. 

This recent and pronounced divergence between the 

growth patterns in mail volume and GDP is expected 

to continue in the future. The Postal Service cannot 

rely on benefiting significantly from a rebound in the 

economy. Consequently, the Postal Service’s financial 

sustainability is at greater risk than in the past.

First-Class Single-piece Mail 

As shown in Figure IV-4, First-Class single-piece mail 

volume continues its long and progressive decline. 

In FY 2010, First-Class single piece lost 3.4 billion 

pieces, or 10.4 percent of its volume. Over the past 

10 years, the average annual decrease in First-Class 

single-piece volume was 5.8 percent. As a result, 

First-Class single-piece mail lost 24.1 billion pieces or 

about half of its volume over this period.

One of the major contributors to this decline is the 

increasing use of the internet for messaging, online 

bill payment and banking. 

First-Class Presorted Mail

The volume for First-Class presorted mail, the growth 

of which in the past mitigated the volume declines in 

single piece, continues declining with year-over-year 

reductions of 1.6 percent in FY 2008, 7.4 percent in 

FY 2009 and 4.3 percent in FY 2010. The decline 

in presort volume can be attributed to electronic 

presentment of bills and financial statements, and the 

economic slowdown which has adversely affected the 

financial industry. 

Figure IV-5 below shows the annual growth rates for 

total First-Class mail over the past 10 years.

In FY 2010, total First-Class volume decreased 6.8 

percent or 5.5 billion pieces. The volume decline 

continued a downward trend that started in 2002. 

For the past decade, First-Class Mail declined at 

an average annual rate of 2.8 percent. As a result, 

First-Class Mail lost 25.7 billion pieces or about 

one-fourth of its volume over a ten-year period. At the 

end of FY 2010, First-Class volume was 77.9 billion 

Figure IV–4—First-Class Single-Piece Volume 

Annual Growth Rates Fiscal Years 2001–2010

-13

-12

-11

-10

-9

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

2010200920082007200620052004200320022001

-2.7

-3.2

-5.6

-2.9

-3.8 -3.7

-4.3

-9.4

-11.5

-10.4

Annual Percent Change

Fiscal Year

Average Annual Growth -5.8%

Source: Postal Service Revenue, Piece, and Weight (RPW) reports.

-10

-9

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

2010200920082007200620052004200320022001

-1.5 -1.2

-3.3

-1.1

1.0

-0.6

1.0

-4.9

-9.1

-6.8

Annual Percent Change

Fiscal Year

Average Annual Growth -2.8%

Figure IV–5—Total First-Class Mail Volume 

Annual Growth Rates Fiscal Years 2001–2010

Source: Postal Service Revenue, Piece, and Weight (RPW) reports.
 POSTAL REGULATORY COMMISSION 35

pieces, about the same level as in FY 1987, 24 

years ago. 

Most of the First-Class volume losses are due to 

electronic diversion and these pieces are most likely 

permanently gone. The permanent loss of First-Class 

Mail is particularly troubling because revenue from 

this type of mail contributes substantially to the funding 

of the Postal Service’s overhead costs. To compensate 

for the lost contribution of one piece of First-Class 

Mail, Standard Mail must increase by three pieces.

Standard Mail

Standard Mail is the largest class by volume; totaling 

48.4 percent of all mail pieces delivered by the 

Postal Service. Figure IV-6 below presents the annual 

growth rates for Standard Mail during the last 

decade. Signs of economic recovery can be seen 

in the reversal of Standard Mail volume declines in 

FY 2010. Compared to the same period last year, 

it grew 4.6 percent in quarter III and 8.9 percent 

in quarter IV. As a result, Standard Mail volume 

remained essentially flat in FY 2010, with an annual 

increase of 0.1 percent. Standard Mail volume 

of 82.5 billion pieces in 2010 represented 79.7 

percent of its peak of 103.5 billion pieces in 2007, 

a decrease of almost 21 billion pieces. Over the 

past decade Standard Mail volume declined at an 

average annual rate of 0.9 percent. 

Generally, direct mail has been a major contributor 

to the overall revenue growth of the Postal Service. 

Since FY 2005, Standard Mail volume has 

exceeded First-Class Mail volume every year, except 

for FY 2009. However, because of the disparity 

in contribution per piece between First-Class and 

Standard Mail, this long-term volume shift towards 

Standard Mail has unfavorable implications for the 

Postal Service’s finances. 

Periodicals

Figure IV-7 presents the annual percent changes in 

Periodicals volume for the past ten years. In FY 2010, 

Periodicals volume decreased by 9.0 percent. This is 

Figure IV–6— Standard Mail Volume 

Annual Growth Rates Fiscal Years 2001–2010

Source: Postal Service Revenue, Piece, and Weight (RPW) reports.

-20

-15

-10

-5

0

5

10

2010200920082007200620052004200320022001

-0.1

-3.1

3.7

5.5 5.5

1.5 1.0

-4.4

-18.4

0.1

Annual Percent Change

Fiscal Year

Average Annual Growth -0.9%

-10

-9

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

2010200920082007200620052004200320022001

-2.5

-3.9 -3.9

-2.0

-0.7 -0.5

-2.8

-2.2

-7.9

-9.0

Annual Percent Change

Fiscal Year

Average Annual Growth -3.5%

Figure IV–7—Periodicals Volume 

Annual Growth Rates Fiscal Years 2001–2010

Source: Postal Service Revenue, Piece, and Weight (RPW) reports.
36 2010 An

the tenth consecutive annual volume decline and the 

largest ever for Periodicals.

During the past decade, Periodicals volume has 

declined by about one-third. The average annual 

decrease in Periodicals volume was 3.5 percent. It is 

expected that the Periodicals class will continue losing 

volume in the future. 

Package Services

Package Services products face considerable market 

competition from private parcel carriers. At the same 

time, they serve a growing market as consumers 

increasingly use the Internet for shopping online. 

Figure IV-8 below shows the annual percent changes 

in Package Services volume during the past decade. 

The economic recovery helped Package Services 

volume, reducing the volume losses to 1.7 percent 

in FY 2010. For the decade, Package Services 

declined at an average annual rate of 1.7 percent. 

The growth rates presented in Figure IV-8 were 

calculated by aggregating the volumes of four market 

dominant and two competitive products in order 

to maintain continuity with prior years. Table VI-8 

below presents the growth rates for FY 2010 of all 

six products included in the Package Services growth 

rate calculations.

The economic recovery had a significant positive 

impact on Parcel Select volume. In 2010, Parcel 

Select volume increased by 18.5 percent, more than 

offsetting its decline of 10.6 percent in 2009. Parcel 

Return Service (PRS) volume continues its unparalleled 

growth, with year-to-year increases of 44.4 percent 

in 2010 and 44.8 percent in 2009. The significant 

growth is a result of the Postal Service’s successful 

effort to develop partnerships with private parcel 

carriers, to use aggressive pricing, and to leverage 

the first-mile pickup network. In FY 2010, the Postal 

Service expanded PRS partnerships begun in 2009 

with both FedEx and UPS, in addition to continuing a 

long-standing relationship with Newgistics. 

-16

-14

-12

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

2010200920082007200620052004200320022001

-1.1 -1.5

4.8

0.3

2.9

0.8

-3.2

-5.0

-13.0

-1.7

Annual Percent Change

Fiscal Year

Average Annual Growth -1.7%

Figure IV–8— Package Services Volume 

Annual Growth Rates Fiscal Years 2001–2010

Source: Postal Service Revenue, Piece, and Weight (RPW) reports.

Table IV–8 

Package Services Products 

FY 2010 Annual Growth Rates

Percent

Change

Market Dominant Products

Single-Piece Parcel Post -27.3

BPM Flats -3.9

BPM Parcels -10.1

Media and Library Mail -13.6

Market Dominant Products -10.4

Competitive Products

Parcel Select 18.5

Parcel Return Service 44.4

Competitive Products 20.8

All Products -1.7

Source: Postal Service RPW report
 POSTAL REGULATORY COMMISSION 37

Workhours 

In FY 2010, responding to lower mail volumes, the 

Postal Service cut 75.1 million workhours (or 6.2 

percent) saving $3.6 billion in labor costs. This 

workhour decrease was equivalent to a reduction of 

about 42,000 full-time postal employees. Moreover, 

it followed year-over-year reductions of 115.3 million 

workhours in FY 2009 and 50 million workhours in 

FY 2008. Table IV-9 below shows the reduction in 

the Postal Service’s workhours and savings in labor 

compensation by craft in FY 2010.

In FY 2010, there were reductions in the workhours 

of all crafts. As in the previous year, clerks and 

mail handlers experienced the greatest reduction, 

with a decrease of 43.4 million workhours, or 11 

percent. In 2009, the Postal Service consolidated 

carrier routes, eliminating over 11,000 routes, with 

an additional 1,100 routes eliminated in 2010. 

Over the two years, it also reduced the fleet of 

postal-owned vehicles by more than 3,000. The net 

result of these actions was a significant reduction in 

the workhours of both city and rural carriers. City 

carrier and vehicle driver hours decreased by 16.2 

million, or 4.0 percent, and rural carrier hours fell by 

3.9 million, or 2.2 percent. Supervisor workhours 

decreased by 6.9 percent. 

Table IV-10 presents the cumulative change in 

workhours and labor compensation over the past 

10 years.

Over the past decade, the Postal Service eliminated 

453.1 million workhours, or 32.4 percent, and 

saved about $18.4 billion in labor costs. The 

reduced workhours are roughly equivalent to 

253,000 employees. Clerks and mail handlers 

experienced the greatest reduction, losing 319.3 

million workhours, or 61.9 percent. The workhours 

of supervisors and city carriers decreased by 31.7 

percent and by 21.9 percent, respectively. During this 

period, only the workhours of rural carriers increased 

by 4 percent.

Table IV–9—FY 2010 Change in Workhours 

and Labor Compensation by Craft 

($ in Millions)

Workhours Nominal

Compensation

Change Change

Percent 

Change

Supervisors (4.5) -6.9% (246.4)

Clerks & Mail Handlers (43.4) -11.0% (2,099.2)

City Carriers and Vehicle 

Drivers (16.2) -4.0% (767.7)

Rural Carriers (3.9) -2.2% (152.2)

Other Employees (7.0) -3.9% (376.80)

Total (75.1) -6.2% (3,642.3)

Source: USPS Annual Tables, FY 2010 TFP

Table IV–10 

Change in Workhours and and Compensation 

by Craft Over Ten Fiscal Years 2001–2010 

($ in Millions)

Workhours Nominal

Compensation

Change Change

Percent 

Change

Supervisors (23.4) -31.7% (1,117.1)

Clerks & Mail Handlers (319.3) -61.9% (12,536.3)

City Carriers and Vehicle 

Drivers (96.85) -21.9% (3,940.6)

Rural Cariers 7.02 4.0% 137.1 

Other Employees (20.55) -11.1% (981.33)

Total (453.1) -32.4% (18,438.2)

Source: USPS Annual Tables, FY 2010 TFP
38 2010 An

Figure IV-9 depicts the annual number of workhours 

used by the Postal Service over the past 41 years. In 

FY 2010, the Postal Service delivered 170.6 billion 

pieces of mail to 130.4 million delivery points using 

1,183 million workhours, about the same level of 

workhours as in FY 1977 when the volume delivered 

was only 92.3 billion pieces and the number of 

delivery points was 77.1 million. In other words, 

in 2010 the Postal Service was able to deliver 85 

percent more volume to 69 percent more delivery 

points than in 1977, using the same workhours.

Productivity

The Postal Service uses Total Factor Productivity (TFP) 

to measure changes in postal efficiency. TFP measures 

the change in the relationship between outputs 

(workload processed) and inputs (resource usage) 

over a period of time. Workload consists of weighted 

mail volume, miscellaneous output and the expanding 

delivery network. Resources consist of labor, materials 

(including purchased transportation), and deployed 

capital assets. Workload growth minus the growth of 

resources used equals TFP growth.

Figure IV-10 presents the TFP growth over the past 41 

years.

The Postal Service is a labor intensive organization, 

with 77 percent of the value of its inputs consisting 

of labor.17 From 1970 to 1999, the Postal Service 

was unable to restrain the growth of its labor input 

despite heavy capital investments in automation. 

As a result, over this period, TFP growth fluctuated 

between short periods of productivity increases and 

productivity declines, creating a trend of insignificant 

gains in postal efficiency. From FY 1971 through FY 

2000, the Postal Service’s productivity increased 9.3 

percent, resulting in an average annual TFP growth 

of 0.3 percent. By decade, the average annual TFP 

growth rates were: 0.7 percent during the 1970’s; 

0.0 percent during the 1980’s; and 0.2 percent 

during the 1990’s.

17 Source: Postal Service Annual Tables, FY 2010 TFP. The value of 

labor includes all wages and benefits for all employees and retirees, 

including craft employees, professional, administrative, and technical 

personnel.

1100

1200

1300

1400

1500

1600

1700

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

Work Hours (in Millions)

Fiscal Year

Figure IV–9—U.S. Postal Service Work Hours 

Fiscal Years 1970–2010

Source: U SPS Annual Tables, FY 2010 TFP

100

105

110

115

120

125

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

Index (1970=1.00)

Fiscal Year

Average Annual Growth

1970 - 99 = 0.3%

2000 - 10 = 1.1%

Trend 1970-99

Figure IV–10—U.S. Postal Service Total Factor 

Productivity (TFP) Fiscal Years 1970–2010

Source: USPS Annual Tables, FY 2010 TFP
 POSTAL REGULATORY COMMISSION 39

From 2000 to 2010, the Postal Service managed 

to cut its labor force aggressively as its workload 

remained flat or declined. As a result, the Postal 

Service’s efficiency improved dramatically from 2000 

through 2007. During this eight-year period, TFP 

grew at an average annual rate of 1.5 percent, five 

times faster than during the last thirty years of the last 

century. After achieving eight consecutive years of 

productivity increase, the Postal Service registered 

TFP declines of 0.5 percent and 1.0 percent for 

2008 and 2009, respectively. The large drop in 

mail volume in FY 2008 and the record decline 

in FY 2009 made it difficult for the Postal Service 

to achieve productivity growth. In FY 2010, TFP 

increased 2.2 percent. Over the past 11 years, TFP 

grew at an average rate of 1.1 percent annually.

In its 2010 Annual Performance Report and 2011 

Annual Performance Plan, the Postal Service 

announced that it plans to introduce Deliveries-perWork-Hour as a substitute measure of productivity. 

According to the Postal Service, this new efficiency 

measure “compares the number of deliveries of all 

types (city, rural, highway contract route, Post Office 

Box, and Caller Service) with the total number 

of work hours used by all employee categories, 

including all field and headquarters managers, 

executives and officers – even the postmaster 

general.” 

Although the Commission recognizes the Postal 

Service’s authority to choose the performance 

indicators for its programs, it is concerned with the 

proposal to replace TFP with Deliveries-per-Work-Hour 

as a performance indicator.

Deliveries-per-Work Hour does not recognize a major 

workload component, the collection, processing, 

transporting and sequencing for delivery of mail. It 

erroneously considers the servicing of the expanding 

delivery network as the only component of postal 

workload. TFP recognizes both mail volume and 

delivery points as components of the postal workload 

and assigns about 80 percent weight to mail volume 

and 20 percent to delivery points. Moreover, before 

merging mail volume with delivery points to calculate 

workload, TFP weights the volume of various postal 

products to account for variations in work content 

of mail pieces due to factors such as size, weight, 

preparation, and mode of transportation. Weighting 

pieces of mail to reflect their unequal work content 

allows them to be compared on a consistent basis, as 

“apples to apples.”18 Finally, unlike TFP, the Deliveriesper-Work-Hour measure considers workhours (i.e., 

labor) as the only input in postal production ignoring 

capital inputs and materials. 

18 Weighting of mail volume to account for variations in work content is 

crucial to obtaining a balanced measure of productivity, because of 

the accelerating trend away from single piece letter mail with heavy 

workload content toward bulk, presorted mail with light workload 

content.
40 2010 An
 POSTAL REGULATORY COMMISSION 41

Chapter V

Performance Plans & Program 

Performance Reports 

Introduction

The PAEA requires the Commission to review the performance goals established in the Postal Service’s 2010 

Annual Performance Report (Report) and 2011 Annual Performance Plan (Plan). The Commission must evaluate 

whether the Postal Service has met the goals in the Report and Plan. It may also provide recommendations to 

the Postal Service related to protecting or promoting public policy objectives in title 39. 39 U.S.C. 3653(d). 

Overall, the Report and Plan is an improvement over the performance reports and plans the Postal Service has 

provided in past years. Importantly, the Report and Plan adhere more closely to statutory requirements, which 

addresses the Commission’s concerns from the FY 2008 and FY 2009 ACDs. The Plan, however, does not 

cover each program activity set forth in the Postal Service’s budget. See 39 U.S.C. 2803(a). In its analysis, 

the Commission makes suggestions for improving future annual performance reports and plans. 

To facilitate analysis and discussion, this chapter is divided into the following sections: Statutory Requirements, 

Performance Indicators, Strategic Initiatives, Comments, Compliance with Report and Plan Requirements, and 

Review of Performance Goals. 
42 2010 An

Statutory Requirements 

Statutory requirements for the Plan and Report are 

codified in 39 U.S.C. 2803 and 2804.1 Section 

2803(a) requires the Postal Service to “prepare an 

annual performance plan covering each program 

activity set forth in the Postal Service budget....” The 

Plan must:

 Establish performance goals defining the level of 

performance achieved by a program activity;

 Express such goals in an objective, quantifiable, 

and measurable form;

 Describe the operational processes, skills and 

technology, and other resources needed to meet 

these goals;

 Establish performance indicators to measure the 

relevant outputs, service levels, and outcomes of 

each program activity;

 Provide a basis for comparing actual program 

results with established performance goals; and

 Describe the means used to validate measured 

values. 

Sections 2803(b) enables the Postal Service to 

express performance goals for a particular program 

activity in an alternative form if the Postal Service 

determines that it is not feasible to express these 

goals in an objective and quantifiable manner. The 

alternative form must describe “minimally effective”

and “successful” programs. 

Section 2803(c) allows the Postal Service to 

aggregate, disaggregate, or consolidate program 

activities when preparing the Plan. However, 

1 The Postal Service is required to provide the Commission with copies 

of its most recent comprehensive statement under section 2401(e), 

performance plan under section 2803, and program performance 

reports under section 2804. 39 U.S.C. 3652(g). Chapter 28 of title 

39, which includes sections 2803 and 2804, was added pursuant 

to the Government Performance and Results Act of 1993, Pub. L. No. 

103-62, 107 Stat. 285 (1993).

the Postal Service may not omit or minimize the 

significance of any program activity that is a major 

function or operation. Section 2803(d) enables the 

Postal Service to prepare a non-public annex to the 

Plan under certain circumstances. 

39 U.S.C. 2804 codifies requirements for the 

Report. Section 2804(a) requires the Postal Service to 

prepare a report on program performance for each 

fiscal year. Section 2804(b) requires that the Report 

set forth the performance indicators established in the 

Plan, along with the actual performance achieved 

compared to the performance goals. If the Postal 

Service specifies performance goals in an alternative 

form by describing minimally effective and successful 

program activities, it must provide program results 

relating to those categories. 

Section 2804(d) requires the Report to review the 

success of achieving the FY 2010 performance 

goals, evaluate the Plan relative to the performance 

achieved towards the FY 2010 goals, and include 

summary findings of program evaluations. If a 

performance goal has not been met, the Postal 

Service must explain and describe why the goal 

was not met and plans and schedules for achieving 

the goal. If the performance goal is impractical or 

infeasible, the Postal Service must explain why that is 

the case and recommend a course of action. 

The Report and Plan are consolidated into 

one document that is included with the 2010 

Comprehensive Statement on Postal Operations 

(Comprehensive Statement).2 The Postal Service 

submits the Comprehensive Statement to Congress 

each year. 39 U.S.C. 2401(e). Among other things, 

the Comprehensive Statement must address postal 

2 Library Reference USPS-FY10-17.
 POSTAL REGULATORY COMMISSION 43

operations generally, including data on the speed 

and reliability of service provided for the various 

classes of mail and types of mail service, mail 

volume, productivity, trends in postal operations, and 

analyses of how internal and external factors impact 

the Postal Service.3

Performance Indicators

The Report and Plan are part of the Postal Service’s 

annual performance management process. This 

process establishes performance targets and measures 

results from the past fiscal year against those targets. 

The annual performance management process 

focuses on the Postal Service’s three corporate 

strategic goals: Improve Service, Improve Employee 

Engagement, and Improve Financial Performance. 

To evaluate its progress towards achieving these 

goals, the Postal Service developed 10 performance 

indicators, which are described in more detail below. 

The Postal Service has the authority to establish 

3 Products and Services, Operations, Customer Programs, and 

Workforce are discussed in Chapters 2-5 of the Comprehensive 

Statement. 

performance indicators for each program activity in 

the Postal Service’s budget. See 39 U.S.C. 2803(a)

(4). For each performance indicator, the Postal 

Service sets an annual target to allow management 

to focus on near-term priorities and current conditions. 

These targets are published in the Plan, which 

explains how results will be measured and describes 

any indicator or measurement changes from prior 

years. Report and Plan at 1.

The Report provides results against the prior year’s 

targets and serves as a baseline for establishing 

new targets. Once the Postal Service establishes 

annual targets, it deploys resources and assigns 

accountability, implements actions to achieve results, 

and monitors performance against the targets. It also 

makes resource adjustments throughout the year. Id.

Table V-1 shows seven out of the ten performance 

indicators currently used by the Postal Service to 

evaluate performance towards achieving its three 

strategic goals of Improve Service, Improve Employee 

Engagement, and Improve Financial Performance. 

Not shown are performance indicators for Express 

Table V–1—Comparison of Actual and Target Performance for Postal Strategic Goals

Strategic Goal Performance Indicator FY 2008

Actual

FY 2009

Actual

FY 2010

Plan

FY 2010

Actual

FY 2011

Plan

Improve Service

First-Class Single-Piece Mail 

Overnight 96.5% 96.2% 96.6% 96.36% 96.65%

2 Days 94.1% 93.7% 94.1% 93.71% 94.15%

3-5 Days 92.7% 92.2% 92.8% 92.44% 92.85%

Improve Employee 

Engagement

OSHA Illness and Injury Rate 5.74 5.62 5.52 5.49 5.39

Voice of the Employee Survey Rate 63.7 64.0 63.8 62.3 64.5

Improve Financial 

Performance

Total National Revenue ($ billions) $74.9 $68.1 $65.9 $67.1 N/A

Total Factor Productivity (0.5%) (0.9%) 1.2% 2.2% N/A

Operating Income ($ billions) N/A N/A N/A N/A (0.9)

Deliveries per Work Hour N/A N/A N/A N/A 40.4

Source: Report and Plan at 2. Footnotes have been omitted from the original table. 
44 2010 An

Mail, Priority Mail, and Parcel Select, which are 

competitive products that are not publicly reported. 

Table V-1 also lists Operating Income and Deliveries 

per Work Hour (DPWH), two new performance 

indicators for FY 2011. 

For each performance indicator, the Postal Service 

provided actual results for fiscal years 2008, 2009, 

and 2010, as well as targets for fiscal years 2010 

and 2011. Of the 10 performance indicators, 

six support Improve Service, two support Improve 

Employee Engagement, and two support Improve 

Financial Performance. In the discussion that follows, 

each performance indicator is discussed in relation to 

the strategic goal it supports.

Improve Service

The six performance indicators that support Improve 

Service are First-Class Single-Piece Mail Overnight, 

First-Class Single-Piece Mail 2 Days, First-Class SinglePiece Mail 3-5 Days, Express Mail, Priority Mail, 

and Parcel Select. The Postal Service sets targets and 

measures results based on service performance scores 

in these categories. 

In FY 2010, service performance scores for FirstClass Single-Piece Mail fell slightly below national 

targets in all three categories (Overnight, 2 Days, and 

3-5 Days). The Postal Service explains that service 

was affected by unusually severe weather-related 

issues. However, service performance scores in FY 

2010 improved over FY 2009 scores because of an 

increase in process improvements and actionable data 

at all levels of operations. Id. at 3. For a more detailed 

discussion of First-Class Single-Piece Mail performance, 

please see Chapter VI on Service Performance.

The Report and Plan did not list service performance 

scores for Express Mail, Priority Mail, and Parcel 

Select. Because these products are competitive, 

performance targets and results are not publicly 

reported. Id.

The Postal Service measures and reports other 

categories of mailing services, which include Presort 

First-Class Mail and Standard Mail, Periodicals, 

Package Services, and Special Services. While these 

categories also have service standards and goals, the 

Postal Service did not use their service performance 

scores as performance indicators because they 

have not gone through the annual performance 

management process described above. The Postal 

Service states that it may include these other 

categories of mailing services in future performance 

reports and plans once more reliable diagnostic data 

is available. Id. at 4.

Improve Employee Engagement

To evaluate Employee Engagement, the Postal 

Service relies on two performance indicators: the 

Occupational Safety and Health Administration 

(OSHA) illness and injury rate and the Voice of the 

Employee (VOE) survey index.

The OSHA illness and injury rate measures the 

number of injuries and illnesses that occur per 100 

employees. This rate dropped from a high in FY 

2008 of 5.74 to 5.49 in FY 2010. The target for FY 

2011 is 5.39. 

The Postal Service tracks employee engagement using 

an index developed from the VOE survey.4 The survey 

has 33 questions, not including demographic and 

environmental questions. Most of them ask employees 

to evaluate certain statements, such as “My job 

4 Library Reference USPS-FY10-44.
 POSTAL REGULATORY COMMISSION 45

makes good use of my skills and abilities.” For most 

questions, employees choose from five answers, 

ranging from “Strongly Agree” to “Strongly Disagree.”

In other questions, answers range from “Very Good”

to “Very Poor” or “Yes,” “No,” or “Not Sure.” Id.

The Postal Service groups the survey questions into 

eight categories: strategic direction, trust, contribution 

to Postal Service growth, communication, diversity 

and respect, employee commitment, personal safety, 

and work effort and quality.5 The performance 

indicator for the VOE survey is an index score based 

on the average number of favorable employee 

responses to one question from each category. Report 

and Plan at 5.

The Postal Service states that survey results are 

used to identify organizational issues and establish 

improvement strategies.6 In FY 2009, the actual VOE 

survey index score was 64. In FY 2010, the actual 

score was 62.3, falling short of the target by 1.5 

points. The FY 2011 target is 64.5. 

Improve Financial Performance

Currently, the Postal Service measures financial 

performance using total national revenue and total 

factor productivity (TFP) as performance indicators. 

Total national revenue includes all postage, fees, 

and other funds obtained from selling products and 

services. From FY 2008 to FY 2010, total national 

revenue declined from a high of $74.9 billion in 

FY 2008 to a low of $67.1 billion in FY 2010. 

However, actual FY 2010 revenue was higher than 

target by $1.2 billion. Report and Plan at 2. 

5 Response to CHIR No. 4 at 39. 6 http://www.usps.com/strategicplanning/cs09/CSPO_09_103.

htm.

TFP compares outputs, such as deliveries made, with 

resources used, including capital, labor, and materials 

at the corporate level. From FY 2008 to FY 2010, 

TFP improved from a low of (0.5) percent to a high of 

2.2 percent. Id.

FY 2011 Financial Performance Indicator 

Changes 

In FY 2011, the Postal Service plans to change the 

financial performance indicators by discontinuing 

its use of total national revenue and TFP. It proposes 

replacing total national revenue with operating 

income, which is net of total operating revenues 

less total operating expenses. Operating expenses 

include all expenses other than the prefunding of the 

Retiree Health Benefits Fund (RHBF) and adjustments 

to Workers Compensation liabilities that may 

result due to changes in discount rates. The Postal 

Service contends that adding operating income 

as a performance indicator will focus attention on 

the importance of profitability and cash flow within 

management’s control. Id. at 6-7. 

In FY 2010, the Postal Service had an operating loss 

of $0.5 billion. For FY 2011, the target is a loss of 

$0.9 billion. 

The Postal Service proposes to replace TFP with 

DPWH as a financial performance indicator in FY 

2011. DPWH is an efficiency measure comparing 

the total number of deliveries of all types with the 

total number of work hours used in all employee 

categories. It is calculated by multiplying the number 

of delivery points (approximately 151 million) 

by the number of delivery days (303). The result 

(45,753 million deliveries per year) is divided by 

the total number of work hours used in all employee 
46 2010 An

categories, including managers and executives 

(1,134 million).7

In FY 2010, the actual DPWH were 38.6 deliveries. 

In FY 2011, the target is 40.4. The Postal Service 

asserts that increasing DPWH requires increasing 

automation, implementing process improvements in 

all areas, consolidating facilities, and reducing work 

hours. The Postal Service contends that DPWH is 

a better measure of productivity than TFP, which is 

solely an aggregate measure that is not as useful for 

managing and motivating performance. Id.

Strategic Initiatives

In the FY 2008 and FY 2009 ACDs, the Commission 

asked the Postal Service to produce annual 

performance plans and reports adhering more closely 

to the requirements of 39 U.S.C. 2803 and 2804. 

Responding to the Commission’s request, the Postal 

Service introduced and described nine strategic 

initiatives in an appendix to the Comprehensive 

Statement. Comprehensive Statement at 51-53. 

The Postal Service stated that these initiatives “help 

clarify the connection between strategic goals and 

objectives, and the actions necessary to achieve 

them....” Id. at 51. 

Each strategic initiative supports one or more of the 

strategic goals of Improve Service, Improve Employee 

Engagement, and Improve Financial Performance. 

Each initiative also has a results indicator used to 

measure the success of the strategic initiatives in 

meeting their FY 2011 targets. 

7 Report and Plan at 7. To the extent that the Postal Service does not 

deliver to some addresses six days a week, the DPWH calculated 

value would be overstated.

The results indicators differ from the 10 performance 

indicators described above for the Report and Plan. 

The PAEA requires performance plans to establish 

performance indicators to be used in measuring 

or assessing relevant outputs, service levels, and 

outcomes of each program activity in the Postal 

Service’s budget. 39 U.S.C. 2803(a)(4). Strategic 

initiatives and results indicators clarify the connection 

between the performance of individual programs and 

the three strategic goals of Improve Service, Improve 

Employee Engagement, and Improve Financial 

Performance. 

Table V-2 displays the nine strategic initiatives, strategic 

goals supported, results indicators, and FY 2011 

targets. A discussion of each strategic initiative follows.

Intelligent Mail

Intelligent Mail is a strategic initiative measuring 

the percentage of workshared mail containing an 

Intelligent Mail barcode (IMb). The FY 2011 target 

is for 90 percent of workshared mail to have either a 

Full-Service or Basic IMb.8 The Postal Service states 

that the 90 percent target assumed that mailers would 

be required to use IMbs by the end of May 2011 

to receive an automation discount. That assumption 

is no longer valid, and the Postal Service is currently 

reassessing that target.9 Table V-3 displays the 

percentage of Full-Service and Basic IMb-eligible mail 

that is expected to be IMb compliant by the end of FY 

2011, rounded to the nearest tenth of a percent.

The Postal Service reports that as of March 4, 

2011, 37 percent of IMb items are Full-Service IMb 

compliant. This percentage includes both Full-Service 

8 This measure excludes in-county Periodical volumes. Comprehensive 

Statement at 53. 9 Response to CHIR No. 5 at 17.
 POSTAL REGULATORY COMMISSION 47

Table V–2—Strategic Initiatives that Support Strategic Goals

Strategic 

Initiative

Strategic Goals

Supported Results Indicator FY 2011 Target

Intelligent Mail

Service

Employee Engagement 

Financial Performance

Increase the percentage of workshared mail containing an 

IMb. (Full-Service and Basic, excluding Periodicals in-county 

volumes)

90% by end of year

Flats Sequencing

System

Service

Financial Performance

Increase the percentage of flat mail in delivery point 

sequence for delivery zones on FSS that have been in 

operation at least six months.

72%

Expand Access Service

Financial Performance

Expand share of retail revenue generated by means other

than at a postal retail counter. 35%

Optimize

Network

Service

Financial Performance Reduce total interior facility space. Reduce by 2.8 million sq/ft

Flexible

Workforce

Service

Employee Engagement 

Financial Performance

Come in below the Integrated Financial Plan average work 

hour rate. (Bargaining and casual employees, including 

wages, benefits and existing contractual wage increases. 

Excludes current and prefunding payments for retiree health 

benefits.)

$41.69/hour

Reduce

Energy Use Financial Performance Continue progress toward FY 2015 energy reduction goals. On target

Reduce Delivery

Fixed Costs Financial Performance Increase average number of deliveries per route.(combination of city and rural delivery routes) 589 by end of year

Expand Products,

Services, and

Features

Service

Employee Engagement 

Financial Performance

Create new products, services, and features. 15 new

Address

Overfunded

Legacy Costs

Employee Engagement 

Financial Performance Address legacy cost funding issues. All three addressed

Source: Comprehensive Statement at 53

Table V–3—FY 2011 Year End 

IMb Compliance Expectations

Mail Class Full-Service IMb Basic IMb

First-Class Mail 50% 23.5%

Standard Mail 36.5% 20.9%

Periodicals 54.6% 42.1%

Package Services 6.3% 0.7%

Source: Response to CHIR No. 5 at 17.
48 2010 An

and Mixed Service mailings.10 Only three percent of 

Full-Service IMb compliant mail is included in current 

service performance measurements. Id. at 17-18.

The Postal Service plans on taking steps to obtain 

sufficient Full-Service IMb compliant mail in order 

to report service performance results for Standard 

Mail and Presort First-Class Mail in FY 2011. These 

steps include reducing the complexity of customer 

supplier agreements and establishing national 

customer acceptance and critical entry times. 

The Postal Service states that these steps should 

significantly reduce the potential for errors and enable 

an increasing number of mailers and Full-Service 

IMb pieces to be included in FY 2011 service 

performance reports. Id.

Flats Sequencing System

The flats sequencing system (FSS) is a strategic 

initiative that increases the percentage of flat mail in 

delivery point sequence for delivery zones operational 

on the FSS for at least six months. The FY 2011 target 

is 72 percent. Comprehensive Statement at 53. 

The Postal Service explains that this initiative focuses 

on reducing carrier sortation and associated costs 

through automated processing of flat mail into delivery 

sequence. It states that FSS will replicate for flats the 

benefits achieved by letter sequencing, which will 

improve service and financial performance. Id. at 51. 

Expand Access

Expanding postal access is a strategic initiative that 

increases the proportion of retail revenue generated 

10 Mixed Service mailing refers to a situation in which a mailer does not 

want to prepare a tray with fewer than 150 pieces. The mailer may 

include the “overflow” pieces in the next tray level. For example, if 

a mailer has 30 5-digit overflow pieces going to ZIP Code 20260, 

then those pieces may be added to a qualified 3-digit tray (202), 

and the overflow pieces will receive the 5-digit rate. Domestic Mail 

Manual 235.

by means other than a postal retail counter. Id. Two 

examples are self-service kiosks and partnerships with 

companies such as Office Depot. Id. at 26. The FY 

2011 target is 35 percent. 

Optimize Network

Under this strategic initiative, the Postal Service adapts 

physical networks to changes in mail volume, mail 

mix, and customer behavior. The results indicator is to 

reduce total interior facility space, and the FY 2011 

target is a reduction of 2.8 million square feet. The 

Postal Service explains that this strategic initiative 

enables it to take advantage of new technologies 

and improved processes to reduce excess capacity in 

postal plants, post offices, and delivery units. Id. at 52. 

Flexible Workforce

Having a flexible workforce is a strategic initiative 

that addresses labor costs, which compose nearly 

80 percent of the Postal Service’s total expenses. 

Id. at 44. The results indicator for this initiative is 

the average hourly rate for bargaining and casual 

employees, including existing contractual wage 

increases. It excludes the RHBF obligation, which is 

not within management’s control. The FY 2011 target 

is to come in below the FY 2011 Integrated Financial 

Plan average work hour rate of $41.69 per hour. The 

Postal Service plans to reduce work hours and the cost 

of the work hours used.

Reduce Energy Use

The Postal Service proposes to reduce energy use 

each year to meet the FY 2015 energy reduction 

goals set forth in the Strategic Sustainability 

Performance Plan. The Postal Service reports that it 

sets specific targets for the National Performance 

Assessment Energy Index (NPA Index). If the targets 
 POSTAL REGULATORY COMMISSION 49

are achieved, the Postal Service will comply with the 

goals of the Energy Independence Security Act (EISA) 

of 2007. The Postal Service states that “EISA requires 

a 30 percent reduction in facility energy intensity by 

2015...and a 20 percent reduction in petroleumbased fuel consumption in postal owned vehicles by 

2015....” Response to CHIR No. 5 at 20. 

The Postal Services’ NPA Index reduction target is 4.1 

percent. The NPA Index score is based on achieving 

in FY 2011 a 4.5 percent reduction in petroleum 

fuel used in its vehicles and a 3.5 percent reduction 

in its facility electricity usage. Progress against the 

NPA Index is published monthly. While the NPA 

Index reduction target is not included as one of the 

performance indicators in the Plan, it is included 

as a compensable indicator for multiple functional 

managers. Id. at 20-21. 

The results indicator for this strategic initiative is 

the continued progress toward meeting FY 2015 

energy reduction goals. The FY 2011 target is for the 

Postal Service to be on track to meet these energy 

reduction goals. 

Reduce Delivery Fixed Costs

The Postal Service states that delivery is the largest 

cost center and carries the greatest share of fixed 

costs. Thus, it contends that reducing fixed delivery 

costs is critical because of declining volume and 

revenue per delivery point. The results indicator for 

this strategic initiative is to increase the average 

number of deliveries per route for city and rural routes 

combined. The FY 2011 target is 589 deliveries 

per route by the end of the year. Comprehensive 

Statement at 52.

Expand Products, Services, and Features

Under this initiative, the Postal Service will provide 

customers with new mailing and shipping products, 

services, and features to meet their changing needs. 

The results indicator is the number of new products, 

services, and features created. The FY 2011 target 

is 15. Id.

Address Overfunded Legacy Costs

The legacy costs identified are the pension 

overpayments to the Civil Service Retirement System 

and the Federal Employee Retirement System. If these 

overpayments are applied to future RHBF obligations, 

the Postal Service believes that it could return to 

a pay-as-you-go method. If it is unable to obtain 

relief, the Postal Service projects that it may lack 

sufficient funds to make the required RHBF payment 

in September 2011. The results indicator for this 

strategic initiative is “address legacy cost funding 

issues”; the FY 2011 target is “all three addressed.”

Id. at 53.

Comments

In Order No. 636, the Commission solicited 

comments from interested persons concerning 

the Postal Service’s progress in meeting its 

performance goals. Order No. 636 at 6. The Public 

Representative was the only participant to submit 

comments on this matter. He praises the progress 

the Postal Service made towards complying with 39 

U.S.C. 2803 and 2804. PR Comments at 17. 

The Public Representative applauds the Postal Service 

for adding the strategic initiatives and clearly defining 

performance targets for each one. He states that, 

while long overdue, performance targets will provide 

a baseline for future performance plans and reports. 
50 2010 An

However, he cautions that the Postal Service changed 

its financial performance indicators in FY 2011 to 

operating income and DPWH. He contends that, while 

improvements are generally welcome, changes should 

be limited in number to prevent any disruption in the 

continuity of measurement over time. Id.

Compliance with Report and 

Plan Requirements

Responding to a FY 2009 ACD recommendation, 

staff from both the Postal Service and the Commission 

met to discuss methods of improving Postal Service 

reporting relative to the requirements of 39 U.S.C. 

2803 and 2804. The information provided in 

the Report and Plan is an improvement over the 

information provided in past years. By identifying the 

strategic initiatives, the Postal Service responded to 

the Commission’s request to provide more information 

on the performance of individual programs and 

the connection between programs and the three 

strategic goals of Improve Service, Improve Employee 

Engagement, and Improve Financial Performance. 

However, the Plan does not cover each program 

activity set forth in the Postal Service’s operating 

budget. See 39 U.S.C. 2803(a). 

Plan Requirements

In FY 2010, the Plan met almost all statutory 

requirements in section 2803. But the Plan did 

not “[cover] each program activity set forth in the 

Postal Service budget....”11 In the FY 2009 ACD, 

the Commission determined that “the Postal Service 

budget” means “the Postal Service operating budget, 

not some variation of it limited to appropriations.” FY 

11 Id. Program activity means “a specific activity related to the mission of 

the Postal Service[.]” 39 U.S.C. 2801(5).

2009 ACD at 43. The operating budget is part of the 

Postal Service’s FY 2010 Integrated Financial Plan.

Covering each program activity set forth in the Postal 

Service’s operating budget is an essential requirement 

of the Plan. Performance plans must establish 

performance goals and performance indicators to 

measure the performance levels and outcomes of each 

program activity. See 39 U.S.C. 2803(a)(1), (a)(4). 

The Plan met the other requirements of section 2803. 

The Plan established performance goals defining the 

level of performance to be achieved by a program 

activity. Performance goal means “a target level of 

performance expressed as a tangible, measurable 

objective, against which actual achievement shall be 

compared....” 39 U.S.C. 2801(3). The Plan expressed 

performance goals as the targets set for each of the 10 

performance indicators. These targets are expressed in 

“objective, quantifiable, and measurable form[s]” such 

as percentages, rates, and revenue in billions of dollars. 

See 39 U.S.C. 2803(a)(2). 

Performance plans must also establish performance 

indicators, which refer to “a particular value or 

characteristic used to measure output or outcome[.]”

39 U.S.C. 2801(4). The Postal Service has the 

authority to choose its own performance indicators. 

The Plan identified 10 performance indicators to 

measure or assess relevant outputs, service levels, and 

outcomes for each program activity. See 39 U.S.C. 

2803(a)(4). Performance indicators are grouped 

under the strategic goal they support.

The Plan provided “a basis for comparing actual 

program results with the established performance 

goals” by comparing FY 2010 actual to FY 2010 

targets for each performance indicator. See 39 

U.S.C. 2803(a)(5). The Plan also described the 
 POSTAL REGULATORY COMMISSION 51

means used to verify and validate measured values 

by explaining how the Postal Service determines 

actual and target performance results. See 39 U.S.C. 

2803(a)(6). 

The Postal Service also “briefly describe[d] the 

operational processes, skills and technology, and 

the human, capital, information, or other resources 

required to meet the performance goals[.]” See 39 

U.S.C. 2803(a)(3). In future performance plans, the 

Postal Service is requested to provide further detail 

about the resources needed to meet the 

performance goals. 

Report Requirements

The Report complied with requirements in section 

2804. It set forth the 10 performance indicators 

established in the Plan and compared FY 2010 actual 

performance results with FY 2010 targets. See 39 

U.S.C. 2804(b)(1). For each performance indicator, 

the Report reviewed the Postal Service’s success in 

achieving FY 2010 targets and evaluated the Plan 

relative to the performance achieved towards the 

targets in FY 2010. See 39 U.S.C. 2804(d)(1), (d)(2). 

If the Postal Service did not meet a target, it explained 

why and described how it would meet that target in 

FY 2011. See 39 U.S.C. 2804(d)(3). For example, 

the Postal Service explained that First-Class SinglePiece Mail performance fell short of FY 2010 targets 

because of severe weather-related issues. Report 

and Plan at 3. Its plan for improving performance 

includes refining automation and address recognition, 

eliminating unnecessary handling and processing, 

improving visibility, and standardizing the use of 

computerized workforce planning models. Id. at 4. 

The Report also included summary findings of program 

evaluations completed during FY 2010.12

Review of Performance Goals

The PAEA requires the Commission to evaluate 

whether the Postal Service has met the performance 

goals established in the Report and Plan. This 

review involves comparing FY 2010 results for each 

performance indicator against FY 2010 targets. 

The Commission also evaluates the adequacy of 

the performance indicators and makes specific 

recommendations. Each performance goal, or target, 

is discussed below under the strategic goal it supports. 

The Commission may provide recommendations to the 

Postal Service that relate to protecting or promoting 

the public policy objectives in title 39. Specific 

recommendations for each target are listed below. 

In general, the Commission suggests that the Postal 

Service apply consistent terminology throughout the 

Report and Plan. For example, “target” and “plan” are 

used interchangeably. Report and Plan at 3. 

The Postal Service should also clearly define 

“objective.” The Postal Service states that it sets a 

limited number of “high-priority objectives” to advance 

its three strategic goals of Improve Service, Improve 

Employee Engagement, and Improve Financial 

Performance. Id. at 1. It explains that the strategic 

initiatives help “clarify the connection between 

strategic goals and objectives....” Comprehensive 

Statement at 51.

However, the Report and Plan do not clearly state 

whether those objectives are performance indicators, 

targets, or some other measurement. Because the 

12 Program evaluation means “an assessment, through objective 

measurement and systematic analysis, of the manner and extent to 

which Postal Service programs achieve intended objectives.” 39 

U.S.C. 2801(6).
52 2010 An

strategic initiatives are designed to link the strategic 

goals and objectives, understanding these objectives is 

important to the Commission’s analysis. The Commission 

recommends that future performance reports and plans 

identify those objectives unambiguously.13

Improve Service

The Postal Service is progressing towards the targets 

set for First-Class Single-Piece Mail. First-Class SinglePiece Mail service performance scores fell slightly 

below FY 2010 targets, but by no more than 0.4 

percentage points. However, service performance 

scores in FY 2010 improved over FY 2009 scores. 

FY 2011 targets are all slightly higher than those set 

in FY 2010. 

The Commission is concerned, however, about the 

adequacy of the performance indicators that measure 

service improvements. The Postal Service identified 

six performance indicators that support its strategic 

goal of Improve Service. However, these indicators 

are limited to one market dominant product (First-Class 

Single-Piece Mail) and three competitive products 

(Express Mail, Priority Mail, and Parcel Select). 

Performance for those competitive products is not 

publicly reported, but the Postal Service provided 

service performance targets under seal.14

The Commission recognizes that the Postal Service 

may choose its own performance indicators. 

However, its choice provides an incomplete picture 

of the measurement systems used to track service 

performance. Limiting performance indicators to FirstClass Single-Piece Mail, which comprises only 17.9 

percent of total mail volume,15 and three competitive 

13 If “objectives” mean the targets set for each performance indicator, the 

Commission suggests that the Postal Service use “targets” instead of 

“objectives” to be consistent with service performance reporting. 14 Library Reference USPS-FY10-NP32. 15 FY 2009 Annual Revenue, Pieces, and Weight Report.

products fails to recognize that the Postal Service 

offers multiple products and services. 

The Commission recommends that the Postal Service 

expand the performance indicators and establish 

performance goals that include service standard 

performance scores for other classes of market 

dominant mail. The Postal Service should also provide 

a more robust analysis of its competitive products by 

filing under seal both the targets and actual results. 

The changes would not unduly burden the Postal 

Service because it is required to report the service 

performance of all market dominant products. See 39 

CFR 3055.1. Also, the Postal Service currently uses 

service performance measurements to measure the 

speed of delivery and reliability of market dominant 

products.16 Moreover, providing targets and results 

for each market dominant product would meet the 

needs of the public, satisfy reporting requirements, 

and enable the Commission to evaluate the Postal 

Service’s progress in meeting the performance goals 

that support improving service.17

The Commission also recommends that the Postal 

Service add performance indicators to measure 

consumer access to postal services. The Postal 

Service is required to file reports in this area. See 39 

CFR 3055.91. Consumer access to postal services is 

a viable method of evaluating and measuring service 

improvements. 

16 See Chapter VI on Service Performance for further details. 17 Chapter VI contains further discussion on the lack of progress on 

evaluating service performance for those products measured using the 

IMb.
 POSTAL REGULATORY COMMISSION 53

Improve Employee Engagement

The Postal Service met the target set for the OSHA 

illness and injury rate. The Postal Service is governed 

by the Occupational Safety and Health Act of 

1970 (OSH Act), which was passed to prevent 

workers from being seriously harmed or killed at 

work. The OSH Act requires employers to provide 

their employees with working conditions that are 

free of known dangers. OSHA sets and enforces 

protective workplace safety and health standards that 

require each employer, including the Postal Service, 

to provide a place of employment that is free from 

recognized hazards.18

Illness and injury records must be kept by employers, 

and those records are subject to review to ensure 

that employers comply with the OSH Act. OSHA 

can assess penalties to employers for violating safety 

and reporting requirements. Id. In FY 2010, the 

Postal Service paid $478,070 in Civil Penalties 

and $2,090 in Criminal Penalties to OSHA.19 It is 

important to employees that the Postal Service provide 

a safe work environment and reduce the penalties 

assessed by OSHA. 

The Commission finds that the OSHA illness and 

injury rate is an appropriate performance indicator 

for measuring employee engagement. In FY 2010, 

the actual illness and injury rate of 5.49 per 100 

employees improved over the FY 2009 actual and 

the FY 2010 target. The Postal Service plans to 

improve its performance in FY 2011 by setting a 

target of 5.39. Report and Plan at 5. 

The other performance indicator measuring 

employee engagement is the VOE survey index.20

18 http://osha.gov/workers.html. 19 National Trial Balance, September 2010. 20 Library Reference USPS-FY10-44.

The Commission finds that the VOE survey index is 

acceptable. Although the FY 2010 score of 62.3 fell 

slightly short of the target, the Postal Service stated 

that most employees remain positive and have an 

improved understanding of postal strategies. For FY 

2011, the Postal Service increased the target to 

64.5. Id.

Improve Financial Performance

The Postal Service met the targets set for total national 

revenue and TFP. Although revenue declined, total 

national revenue in FY 2010 exceeded the target by 

$1.2 billion. TFP also increased to 2.2 percent, 1 

percentage point above the FY 2010 target. 

However, the Postal Service’s current financial condition 

impedes improvements in financial performance. 

Revenues from FY 2007 to FY 2010 have declined 

from a high of approximately $75 billion in FY 2007 

to a low of approximately $67 billion in FY 2010. 

From FY 2007 to FY 2010, the Postal Service has 

experienced total cumulative losses of $20.2 billion.21

These losses, coupled with projected losses in future 

years, are threatening the Postal Service’s ability to 

meet its mandate under 39 U.S.C 101 and 3622(b)

(5). While the Postal Service was able to meet all of 

its financial obligations in FY 2010, stakeholders are 

concerned that it may not be able to do so in 

FY 2011. 

As described in Chapter IV, the Postal Service is 

continuing to reduce costs. The Postal Service has 

been decreasing work hours, renegotiating supply 

and service contracts, adjusting transportation 

requirements, and revising city carrier routes. In the 

Postal Service’s ten-year plan, the Postal Service 

21 United States Postal Service, 2010 Annual Report at 85.
54 2010 An

proposes to continue to control costs and increase 

revenues over the long run.

As previously mentioned, the Postal Service proposes 

two new financial performance indicators – operating 

income and DPWH. Operating income will replace 

total national revenue as a financial performance 

indicator in FY 2011. The Postal Service uses the 

term “operating income” to mean total operating 

revenues less total operating expenses.22 The Postal 

Service contends that using operating income as 

a performance indicator would enable it to focus 

on improving profitability and cash flow, which are 

directly within management’s control. Id. at 7.

The Commission does not believe that operating 

income alone will provide a complete and accurate 

picture of the Postal Service’s financial performance. 

In the FY 2009 and FY 2010 performance plans, the 

Postal Service used total national revenue and TFP 

as the performance indicators for improving financial 

performance. In the FY 2010 Performance Plan 

discussion, the Postal Service stated that achieving net 

income is “essential to its continued ability to provide 

affordable universal service.” 23

Operating income is a better financial performance 

indicator than total national revenue. However, it 

could potentially be misleading. Operating income 

ignores the financial requirement of $5.5 billion to 

fund future RHBF obligations. It also disregards any 

changes in Workers Compensation liabilities due to 

changes in discount rates. 

While the Commission agrees that the RHBF 

obligation is beyond the Postal Service’s control, the 

22 Operating revenues include all postage, fees, and other funds 

obtained from the sale of products and services. Operating expenses 

include all expenses other than RHBF payments and adjustments to 

Workers Compensation liabilities. Report and Plan at 6. 23 USPS FY 2009 Comprehensive Statement at 61.

Postal Service should nonetheless recognize in its 

performance goals the necessity of generating net 

income or loss. When setting performance goals, 

concentrating on just the “controllable” operating 

income could undermine the goal-setting process. The 

RHBF expenses must be accounted for as an expense 

of the organization. 

In the normal course of financial reporting, the 

Postal Service may report a period’s financial result 

in a manner that accurately represents the financial 

result of the reporting period according to Generally 

Accepted Accounting Principles (GAAP). GAAP 

specifies how a company reports non-recurring or 

extraordinary transactions, but the RHBF payments 

and Workers Compensation liability adjustments are 

not non-recurring or extraordinary. The Postal Service 

may report financial results using “controllable”

operating income, and it may report expenses for 

the RHBF obligation and Workers Compensation 

liability adjustments separately. However, it should 

be understood that these expenses are part of the 

operating expenses of the Postal Service despite the 

lack of control it may have over them. 

The Postal Service also plans to replace TFP 

with DPWH as a measure of productivity. While 

the Commission recognizes the Postal Service’s 

authority to choose the performance indicators, the 

Commission recommends against replacing TFP with 

DPWH as a performance indicator. DPWH does not 

recognize major workload components, including 

collecting, processing, transporting, and sequencing 

of mail for delivery. It considers the servicing of the 

expanding delivery network as the only component of 

postal workload. 
 POSTAL REGULATORY COMMISSION 55

By contrast, TFP recognizes both mail volume 

and delivery points as components of the postal 

workload and assigns about 80 percent weight 

to mail volume and 20 percent to delivery points. 

Moreover, before merging mail volume with 

delivery points to calculate workload, TFP weights 

the volume of various postal products to account 

for variations in work content of mail pieces due 

to factors such as size, weight, preparation, and 

mode of transportation. Weighting pieces of mail 

to reflect their unequal work content allows them 

to be compared on a consistent basis, as “apples 

to apples.”24 Finally, unlike TFP, DPWH considers 

work hours, such as labor, as the only input in postal 

production, ignoring capital inputs and materials. 

The Commission suggests that the Postal Service 

use TFP, rather than the less robust DPWH, as a 

financial performance indicator. In addition, the Postal 

Service must continue to report TFP according to data 

reporting rules. See 39 CFR 3050.60(e). 

Strategic Initiatives

The strategic initiatives facilitate the Commission’s 

review of performance goals under 39 U.S.C. 

3653(d). The Commission reviews the strategic 

initiatives as part of its evaluation of whether the 

Postal Service met the goals established in the 

Report and Plan. As described above, each strategic 

initiative supports one or more of the three strategic 

goals of Improve Service, Improve Employee 

Engagement, and Improve Financial Performance. 

Each initiative also has a results indicator and a FY 

2011 target. 

24 Weighting of mail volume to account for variations in work content is 

crucial to obtaining a balanced measure of productivity because of 

the accelerating trend away from single-piece letter mail with heavy 

workload content toward bulk, presorted mail with light workload 

content.

Strategic initiatives were introduced in FY 2011. 

As such, the Report and Plan have no actual 

performance results to compare to FY 2011 

targets. The Postal Service stated that results will be 

reported in the FY 2011 Comprehensive Statement. 

Comprehensive Statement at 51. 

In future filings, the Commission recommends that the 

Postal Service identify the underlying metrics for the 

Reduce Energy Use strategic initiative. Currently, the 

results indicator is “[c]ontinue progress toward 2015 

energy reduction goals” and the FY 2011 target is 

“On target[.]” Comprehensive Statement at 53. The 

underlying metrics would help explain how much the 

Postal Service should progress to be “on target” to 

meet its FY 2015 energy reduction goals. 

The Postal Service provided some of the underlying 

metrics in its Response to CHIR No. 5. It quantified 

the energy use reductions planned for FY 2011 by 

identifying specific percentage reductions in petroleum 

fuel and facility electricity usage. Response to CHIR 

No. 5 at 20. Incorporating these specific reductions 

into the results indicator and target for the Reduce 

Energy Use strategic initiative would be beneficial. 
56 2010 An
 POSTAL REGULATORY COMMISSION 57

Chapter VI

Service Standard Performance

Introduction

Under the PAEA, the Commission is tasked with reviewing the Postal Service’s quality of service for all market 

dominant products, including speed of delivery, reliability, and the level of customer satisfaction. The review is 

undertaken to ensure that quality of service does not deteriorate under the CPI price cap system because of the 

potential to cut costs by way of service reductions to comply with price cap requirements.

In FY 2010, the Commission issued Order No. 465 which established periodic reporting requirements for 

service performance measurements and customer satisfaction.1 In Order No. 465, the Commission required 

the Postal Service to follow a two step process to achieve full compliance with all reporting requirements by the 

filing date of the FY 2011 ACR. The first step required the Postal Service to seek semi-permanent exceptions 

from service performance reporting as allowed by rule 3055.3. The Postal Service sought and was granted 

multiple semi-permanent exceptions predominantly in the areas of Special Services and negotiated service 

agreements. The second step required the Postal Service to seek waivers from reporting where more time is 

needed to fully develop service performance measurement systems. Consideration of these waivers is pending 

before the Commission.

The semi-permanent exception and waiver process has informed the Commission of the current status of the 

Postal Service’s measurement systems. Based upon the current status, the Commission is concerned with the 

Postal Service’s progress in achieving full compliance with all service performance reporting requirements by 

1 Order Establishing Final Rules Concerning Periodic Reporting of Service Performance Measurements and Customer Satisfaction, May 25, 2010 

(Order No. 465).
58 2010 Anu

the filing date of the FY 2011 ACR. For example, the 

Postal Service does not expect, nor does it have a 

plan, to report service performance for Standard Mail 

by product into the foreseeable future.2

The PAEA requires the Postal Service to measure the 

service performance of each market dominant product 

using measurement systems that are independent of 

or external to the Postal Service. 39 U.S.C. 3691(b)

(1)(D). The Postal Service may seek an exception

to this requirement by requesting approval from the 

Commission to utilize a measurement system under 

the direct control of or internal to the Postal Service. 

39 U.S.C. 3691(b)(2). In November 2008, the 

Commission granted a Postal Service request to 

proceed with development of an internal hybrid 

measurement system based on Intelligent Mail 

barcodes (IMb) to measure service performance for 

many of its products.3

The IMb system and accompanying electronic 

documentation now perform a critical role in 

measuring service performance for the majority of 

mail. The system is continually being updated and 

improved by the Postal Service to enable valuable 

information about mail for the purposes of operations, 

marketing, and finances. However, significant issues 

continue to hinder the IMb system from living up to 

its full potential as a useful component of service 

performance measurement. The Postal Service has 

reported problems with data yield, which is the 

percentage of usable data that may be obtained from 

IMb measurements. Related problems also have been 

reported with obtaining an accurate start-the-clock, 

2 Docket No. RM2011–7, United States Postal Service Request fo

Temporary Waivers from Periodic Reporting of Service Performance 

Measurement, February 3, 2011. 3 Docket No, PI2008–1, Order Concerning Proposals for Interna

Service Standards Measurement Systems, November 25, 2008.

which is the starting time for all service performance 

measurements. Furthermore, the current documentation 

required by the IMb based measurement system does 

not support reporting Standard Mail by product as 

required by the PAEA. Further discussion of the IMb 

based measurement system is found in this chapter in 

the section titled “Bulk Products: First-Class Mail Bulk 

Letters/Postcards and Standard Mail.” 

The remainder of this chapter is divided into three 

sections: Delivery, Customer Access, and Customer

Experience. Delivery discusses speed of delivery and

reliability of service based on Postal Service reported 

performance results. Customer Access discusses 

retail facilities, wait time in line, and collection 

boxes. Customer Experience discusses the Postal 

Service’s transformation from the customer satisfaction 

measurement system to the customer experience 

measurement system.

Delivery

The Postal Service uses several service performance 

measurement systems to measure the speed of 

delivery and reliability of market dominant products. 

The single-piece components of First-Class Mail 

Single-Piece Letters/Postcards and Flats are measured 

using the External First-Class (EXFC) measurement 

system. The bulk components of First-Class Mail 

Letters/Postcards and letter and card shaped 

Standard Mail use an Intelligent Mail barcode (IMb) 

hybrid measurement system. Parcel shaped mail uses 

a Delivery Confirmation based system. International

Mail uses an International Mail Measurement System 

(IMMS). Periodicals Mail uses Red Tag and DelTrak based systems. Finally, Special Services use

measurement systems unique to the service being 

measured. EXFC and IMMS are the only systems that 
 POSTAL REGULATORY COMMISSION 59

are fully operational and considered reliable. Service 

performance results for each product are discussed 

below.4

Single-Piece Products: First-Class Mail SinglePiece Letters/Postcards and Flats

The Postal Service uses the EXFC measurement system 

to measure the service performance of First-Class 

Mail Single-Piece Letters/Postcards and the singlepiece component of First-Class Mail Flats. The EXFC 

measurement system is a destination-based system 

providing quarterly service performance measurement 

scores at both the area and district level. The system 

is managed by an independent contractor, IBM.

Service performance is measured from the street 

collection box or lobby chute to the delivery mailbox. 

Test mailers record the time mailpieces are placed in 

collection boxes or lobby chutes.5 These mailpieces 

are sent to a nationwide panel of receivers. The 

receivers record when mailpieces are delivered to 

their homes or business mailboxes.6 Id.

Service performance measurements record the 

transit-time on the basis of 892 3-digit ZIP Code 

pairs. Quarterly, the Postal Service provides the most 

recent results on its website at the area, district, and 

national level. The annual service performance score 

is provided at the national level. Measurement of 

892 3-digit ZIP Code pairs allows the Postal Service 

to measure virtually all 3-digit ZIP Code areas in the 

4 Quarterly performance reports are located on the Postal Service’s 

website http://www.usps.com/serviceperformance/. 5 Library Reference, USPS-FY10-29, filename: Service Performance 

ACR FY2010. doc 6 IBM uses mail droppers to report the date and time test mailpieces 

are deposited into the mailstream. Mail reporters report on the date 

they receive the mailpieces. Order No. 140, Docket No. PI2008

1, Order Concerning Proposals for Internal Service Standards 

Measurement Systems, November 25, 2008.

United States and its territories, including Guam, 

Puerto Rico and the U.S. Virgin Islands.

The number of EXFC mailpieces sent between 

locations is proportionate to the actual First-Class 

Single-Piece Mail volume estimates from ODIS-RPW

data between origin and destination locations. For 

example, if ODIS-RPW data indicate that 10 percent

of the overnight mail going to Northern Virginia 

originates in Richmond, Virginia, the number of 

EXFC test mailings between these postal areas will 

correspond to that proportion.7

Figure VI-1 provides national level First-Class SinglePiece Mail service performance scores for FY 2007 

through FY 2010.

7 2009 ACR, Responses of the United States Postal Service to 

Questions 1-4, 6-11, and 14-25 of Chairman’s Information Request 

No. 3, February 5, 2010.

Figure VI–1

Comparison of First-Class Single-Piece Mail 

Performance for Overnight, 2-Days and 

3-5-Days Performance FY 2007 through FY 2010 Percent On Time

0%

85%

87%

89%

91%

93%

95%

97%

99%

FY2007 FY2008 FY2009 FY2010

95.6%

92.6%

90.4%

96.5%

94.1%

91.7%

96.1%

93.5%

90.8%

96.4%

93.7%

92.4%

Overnight

2-Days

3-5-Days
60 2010 Anu

The Postal Service’s focus on improving single-piece 

performance has resulted in improvements in the 

overnight, 2-day and 3-to-5-day performance scores 

when compared to prior years.

Table VI-1 provides a comparison of the FY 2010 

actual versus target national service performance for 

First-Class Single-Piece Mail for overnight, 2-days and 

3-5-days. For overnight, 2-days and 3-5-days actual 

performance was slightly below the overnight target 

by 0.2 percentage points, and 0.4 percentage points 

for both the 2-days and 3-5-days performance.

The Commission finds that these small variations from 

targeted service performance scores do not raise 

service performance compliance issues within FirstClass Single-Piece Mail. 

In FY 2010, the Postal Service began reporting 

service performance for letters and cards separately 

from parcels and flats. This facilitates analysis by 

allowing the Postal Service to focus on the service 

performance of each shape of First-Class Mail. Flats 

include Single-Piece and Bulk First-Class Mail flats. 

Bulk First-Class Mail flats are estimated using the proxy 

of single-piece flats because there is insufficient FullService IMb data available. Parcels include singlepiece retail parcels and Bulk First-Class Mail parcels. 

In FY 2010, 97 percent of the parcels were mailed 

at First-Class Mail retail rates. Service performance 

measurement for First-Class Mail retail parcels depends 

on the customer purchased Delivery Confirmation

service and tracking using the internal Product Tracking 

System (PTS). Parcels do not rely upon IMb for service 

performance measurement. Service performance 

comparisons with prior years are not possible because 

of differences in the data makeup caused by the 

separate reporting discussed above.

Table VI-2 shows the First-Class Mail flats and parcels 

service performance results. The Flats and Parcel 

service performance scores all missed their targets 

by greater than five percentage points. The Postal 

Service needs to take steps to improve these service 

performance scores.

International Products: Inbound and 

Outbound First-Class Single-Piece Mail 

International

Both Inbound and Outbound First-Class SinglePiece Mail International are measured using the 

International Mail Measurement System (IMMS). In FY 

2010, the Postal Service reported quarterly service 

performance on a postal administrative area and 

Table VI–1 

FY 2010 National First-Class Single-Piece Mail

Delivered On-Time Overnight 2-Days 3-5 Days

Actual 96.4% 93.7% 92.4%

Target 96.6% 94.1% 92.8%

Difference in

percentage points (0.2) pts (0.4) pts (0.4) pts

Table VI–2 

First-Class Mail Flats and Parcels Service 

Performance

First-Class Service 

Performance National Target

Variance

% Points

Flats

Overnight 90.7% 96.6% (5.9) pts

2-Days 85.1% 94.1% (9.0) pt

3-5-Days 81.6% 92.8% (11.2) pt

Parcels

Overnight 91.2% 96.6% (5.4) pts

2-Days 84.3% 94.1% (9.8) pt

3-5-Days 87.3% 92.8% (5.5) pt

Source: 2010 ACR, Library Reference USPS-FY10-29.
 POSTAL REGULATORY COMMISSION 61

national basis. As required by 39 CFR 3055.20(b), 

the Postal Service provided separate combined scores 

for Inbound First-Class Single-Piece Mail International 

as well as Outbound First-Class Single-Piece Mail 

International. The Postal Service also provided an 

annual composite measurement that incorporates both 

inbound and outbound measurements into one value.

IMMS uses an independent (third-party) external 

sampling system to measure performance for the 

domestic leg of the transit time for Inbound and 

Outbound First-Class Single-Piece Mail International 

letters, postcards, flats and parcels. Inbound FirstClass Single-Piece Mail International measurement 

begins when the mailpiece arrives at the International 

Mail processing center and ends when it is delivered. 

Outbound First-Class Single-Piece Mail International 

is measured from the collection box or mail chute 

to the destinating International Mail Service Center 

(ISC) in the United States. IMMS was designed to 

be similar to the EXFC measurement system. On-time 

service performance is measured using the same set 

of service standards as domestic First-Class SinglePiece Mail because the focus is on the domestic leg 

of transit. Since there is a low proportion of FirstClass Single-Piece Mail International flat and parcel 

volume, and processing is the same for their domestic 

counterparts, the Postal Service relied on their 

domestic counterpart from the EXFC (for flats) and 

Delivery Confirmation (for parcels)

The performance data from letters is combined with 

the flats and parcel proxy data to measure service 

performance for all Inbound and Outbound First-Class 

Single-Piece Mail International. 2010 ACR, Library 

Reference USPS-FY10-29.

Table VI-3 provides the FY 2010 combined inbound/

outbound performance scores for First-Class SinglePiece Mail International as well as the individual 

inbound and outbound performance scores.

A comparison of the FY 2010 actual and FY 

2010 target on-time performance indicates that 

the Postal Service’s actual combined performance 

was 4.6 percentage points lower than its target.8

The combined inbound/outbound delivery service 

performance scores also were below FY 2009 by 

0.3 percentage points and below FY 2008 by 

4.0 percentage points. Inbound overnight, 2-day 

8 The Postal Service did not establish separate performance targets 

for inbound and outbound reporting as required by the PAEA. 

Instead, the service performance target is combined for Inbound and 

Outbound First-Class Single-Piece Mail International.

Table VI-3 

First-Class Single-Piece Mail International 

On-Time Service Performance 

(Inbound and Outbound) 

FY 2010 Actual versus FY 2010 Target

FY 2010 

Actual 

On-time

FY 2010 

Target

FY 2010 

Actual 

Variance 

from Target 

FY 10

Combined In/Outbound 89.4% 94.0% (4.6) pts

Inbound:

Overnight 95.5%

2--day 90.1%

3-to5-day 88.4%

Combined 89.6%

Outbound:

Overnight 94.1%

2-day 89.0%

3-to-5-day 88.2%

Combined 89.3%

Source: 2010 ACR, Library Reference USPS-FY10-29 filename: FY10 

ACR First-Class Mail.xls.
62 2010 Anu

and 3-to-5-day scores for FY 2010 were higher 

than those of FY 2009 by 2.1 percentage points, 

2.9 percentage points and 1.8 percentage points, 

respectively. Outbound overnight and 2-day scores 

for FY 2010 were lower than those of FY 2009 by 

0.8 percentage points and 3.7 percentage points, 

respectively. FY 2010 outbound service performance 

for 3-to-5-days was higher than that of FY 2009 by 

1.8 percentage points.9

The comparison of FY 2010 service performance 

scores with those of FY 2008 indicates that only 

the inbound overnight performance score improved. 

Scores for both 2-day and 3-to-5-day were lower in 

FY 2010 than in FY 2008 by 0.2 percentage points 

and 0.7 percentage points, respectively. Comparing 

FY 2010 with FY 2008 outbound, overnight, 

2-day, and 3-to-5-day performance declined by 2.2 

percentage points, 7.1 percentage points and 3.9 

percentage points, respectively.

The Postal Service contends that the FY 2008 score 

is not comparable with those of FY 2009 and FY 

2010.10 The Postal Service states that in FY 2008, 

Inbound and Outbound First-Class Single-Piece Mail 

9 Service Performance scores for First-Class Single-Piece Mail 

International were unavailable for FY 2007. 2010 ACR, CHIR 3, 

February 7, 2011. 10 2010 ACR, CHIR 5, question 10.

International service performance reporting included 

only letters, not flats or parcels. In FY 2009 and in FY 

2010, the performance scores included letters and 

the proxy scores for domestic parcels and flats.

Contrary to the Postal Service’s assertions, the 

Commission believes that the letter service 

performance comparison is of interest.

Table VI-4 provides additional on-time performance 

for Inbound and Outbound First-Class Single-Piece 

Mail International by shape.

There is a difference in service performance between 

domestic First-Class Mail and international First-Class 

Mail. These comparisons are provided in Table VI-5.

The Postal Service reports that the proportion of 

letters, flats, and parcels for domestic First-Class Mail 

differs from that of international First-Class Mail with 

a higher proportion of flats and parcels in the makeup of international mail than in domestic mail. The 

Postal Service also reports that Inbound and Outbound 

First-Class Single-Piece Mail International are heavily 

weighted to 2-day and 3-5-day mail. Furthermore, a 

higher proportion of international mail is rejected by 

automation equipment and requires manual processing 

when compared to its domestic counterpart.11

11 2010 ACR, CHIR 5, question 10.

Table VI–4 

On-time Performance by Shape

Inbound Outbound

FY 08 FY 09 FY 10 FY 08 FY 09 FY 10

Letters 90.4% 89.2% 90.9% 95.4% 93.4% 90.4%

Flats* -- 83.4% 84.1% -- 84.8% 83.3%

Parcels* -- 84.8% 86.8% -- 84.6% 87.0%

Combined -- 87.8% 89.3% -- 91.7% 89.6%

Source: 2010 ACR, CHIR 5, question 10. 

*Domestic service performance measurement scores are used as proxies because there are no

service measurements for First-Class Single-Piece Mail International flats or parcels. 
 POSTAL REGULATORY COMMISSION 63

For 2-day and 3-to-5--day mail, the Postal Service 

postulates that the differences in domestic versus 

international service performance also may be related 

to address hygiene. In addition, a large proportion of 

inbound mail arrives in sacks and bags that require 

more steps to open, sort and prepare for automation. 

Finally, when International Mail is released from U.S. 

Customs to the Postal Service it is presented as large 

bundles as opposed to being presented as a steady 

stream. Thus, the inbound international mail also may 

experience processing delays due to a large volume of 

mail presented to the Postal Service at one point in time.

A separate measurement system, UNEX, managed 

by the International Post Corporation (IPC), also 

exists to measure the service performance of some 

international mail.12 UNEX measures the time in transit 

of test mail pieces from posting in the origin country 

until delivery in the destination country using Radio 

Frequency Identification (RFID) technology.13 Currently,

12 Located in Brussels, Belgium, the International Post Corporation works 

on behalf of postal administrations to improve service quality, promote 

cooperation and interoperability, and provide intelligence about postal 

and related markets. For more information, please see www.ipc.be. 13 For a more complete description of the UNEX system, see http://

www.ipc.be/en/Services/Technical%20_Platforms/UNEX.aspx.

more than 40 postal administrations are participants 

in the UNEX system. Id.

UNEX provides service performance scores relative to 

a UPU-established annual performance target.14 For 

both CY 2009 and CY 2010, the UPU-established 

target for the U.S. and most industrialized countries 

was 88 percent. UNEX service performance 

scores are used to adjust terminal dues payments15

for inbound letter post from certain foreign postal 

administrations to the Postal Service pursuant to the 

UPU’s quality of service link to terminal dues, which 

are the payments between postal operators for the 

handling and delivery of international mail.16

As discussed previously, IMMS reported that the FY 

2010 service performance of Inbound First-Class 

Single-Piece Mail International improved compared 

14 In response to a Chairman’s Information Request, the Postal Service 

provided (under seal) its UNEX system final and preliminary service 

performance scores for CY 2009 and CY 2010, respectively. 

Response to CHIR No. 1, Question 10(a)-(b). 15 Terminal dues refer to payments made between postal operators for 

the handling and delivery of inbound international letter mail weighing 

up to 4 pounds. 16 A more complete discussion of the quality of service link to terminal 

dues can be found in this Annual Compliance Determination in

the analysis of Market Dominant International Mail Products under

“Quality of Service Link to Terminal Dues.

Table VI–5 

FY 2010 Proportion of Letter, Flats and Parcels in First-Class Single-Piece Mail 

International Measurement Versus Domestic First-Class Single-Piece Mail 

Shape

Share in International 

First-Class Single-Piece 

Mail

Share in Domestic FirstClass Single-Piece Mail

Difference in 

% Points

Letter 71.0% 92.5% (21.5%)

Flat 15.0% 5.9% 9.1%

Parcel 14.0% 1.5% 12.5%

Source: 2010 ACR, CHIR 5, question 10. 

Note: share in Domestic First-Class Single-Piece Mail totals 99.9
64 2010 Anu

to FY 2009. Similarly, the UNEX-reported year-todate (January through November 2010) preliminary 

service performance for CY 2010 also indicates 

improvement relative to the final CY 2009 annual 

service performance. CHIR No. 1, question 19(a)-(b).

As in previous years, however, the Commission 

notes the comparatively higher service performance 

reported by IMMS relative to the UNEX system. The 

UNEX system year-to-date CY 2010 preliminary 

performance score is less than the combined FY 

2010 annual overnight, two-day, and three-to-five-day 

service performance reported by IMMS for inbound 

First-Class Mail International.

This difference in service performance is explained 

in part by the fact that UNEX and IMMS are two 

different systems.17 The statistical design of the UNEX 

system is based upon a calendar year while IMMS 

measures performance on a fiscal year basis. Most 

importantly, however, the “start-the-clock” event for 

measuring service performance differs. Under the 

UNEX system, measurement begins with the first 

RFID “read” of a test piece at the point of entry

with, or transfer to (after customs clearance), the 

Postal Service, whichever is later. Under IMMS, 

measurement begins with the first scan on automated 

mail processing equipment or entry into the remote 

barcoding system, whichever comes first.

In addition, the UNEX system service performance 

scores are based upon results from countries 

participating in the system while IMMS relies on data 

from a predetermined set of countries. Moreover, 

the UNEX system scores are weighted based upon 

inbound volumes from participating countries and 

the population of select U.S. metropolitan areas. By 

17 Response of the United States Postal Service to CHIR No. 2, Question 

2(b), Docket No. ACR2008, February 6, 2009

contrast, IMMS results for inbound mail are based 

upon the average mail volume from International 

Service Centers to destination postal districts.

Despite these differences, both systems reveal

improvement in the service performance for inbound 

First-Class Mail International. The Commission 

encourages the Postal Service to continue efforts to 

improve its on-time service performance. 

Bulk Products: First-Class Mail Bulk Letters/

Postcards and Standard Mail

Bulk First-Class Mail Letters/Postcards and flat shaped 

mail, and Standard Mail are measured using a 

hybrid system based on IMb measurements and a 

composite last mile factor. The two part hybrid system 

first measures the plant processing time from the 

documented entry time in the postal network to the 

final in plant processing scan using Intelligent Mail 

barcodes.18 Then, a last-mile factor is measured, 

which is the duration from the last plant processing 

scan to a third-party reporter scan at the final 

destination. The plant processing time is added to the 

last-mile factor to provide an end-to-end measurement 

of service performance.

Bulk First-Class Mail and Standard Mail service 

performance scores are provided in Table VI-6.

During Quarters 1 through 3, a pilot test for FullService Intelligent Mail served as the data source

for an external contractor to calculate and compile 

necessary reports. The system relied upon a small 

sample of mailers and utilized a start-the-clock proxy 

which was the first scan in the automated distribution 

network. Calculations of service performance and 

the reports were generated from the Intelligent Mail 

18 2010 ACR, Library Reference USPS-FY10-29, filename: 

Service Performance ACR FY2010.doc at 1.
 POSTAL REGULATORY COMMISSION 65

Accuracy and Performance System (iMAPS). Id.

Performance is compared against the First-Class Mail 

service standard to determine the percent delivered 

on time. The Postal Service states that the pilot test 

system is not representative of national performance 

because it represents a small sample of mailers and 

the data are not weighted.19 During the reporting

period, only the scores from 12 participating 

mailers were included in the service performance 

measurement.

In Quarter 4, service performance measurements 

were based on data from the Seamless Acceptance 

and Service Performance (SASP) system, which 

captures data from Full-Service IMb.20 The Postal 

Service had source data from over 500 Full-Service 

IMb mailers. While 40 percent of the Bulk First-Class 

Mail was in the Full-Service IMb format, the Postal 

Service stated that data errors eliminated all but 7 

percent of the mail volume from being included in the 

measurement.21

19 Id. at 2. 20 2010 ACR, Library Reference USPS-FY10-29, 

filename: Service Performance FY10.doc at 2. 21 Id. at 10.

Standard Mail’s service performance (except for 

parcel shaped Standard Mail) also was measured in 

Quarters 1 through 3 using pilot data from the IMb 

system. In Quarter 4, service performance was based 

on live IMb data. In FY 2010, 256 Standard Mail 

users participated in Full-Service IMb.22

Bulk First-Class Mail’s service performance scores 

were all lower than the corresponding targets. 

Standard Mail destination entry was below its target 

by 6.6 percentage points and end-to-end entry was 

31.0 percentage points below target. 

To be measureable, IMb pieces must be entered as 

Full-Service IMb mailpieces. At the conclusion of FY 

2010, 31.1 percent of Standard Mail volume was 

entered as fully compliant with Full-Service and Basic 

IMb. Id. In Quarter 4, 19.15 percent of Full-Service 

IMb Standard Mail was used in evaluating service 

performance. Id. The Postal Service indicated that 

approximately 28 percent of Bulk First-Class Mail 

volume was entered as Full-Service IMb. CHIR 5 

question 11. The Postal Service provided information 

on the estimated usage of Full-Service IMb compliant 

mail as provided in Table VI-7.

At this time, however, the Postal Service indicates 

a low percentage of usable data is currently being 

obtained from the IMb system. To improve the 

percentage of useable data, the Postal Service 

began certifying customers’ electronic documentation 

to ensure compliance with Full-Service IMb data 

requirements. Only data from certified mailers is used 

in the service performance measurement system. Data

errors are identified and the information is shared with 

mailers to facilitate corrections and data inclusion in 

22 Id. Response to CHIR 3, question 12.

Table VI–6 

FY 2010 Bulk Mail On-Time Service Performance 

(Actual vs. Targets)

Mail Class

FY 2010 

Actual

FY 2010 

Targets

2010 Actual 

Variance 

from Target

Presorted First-Class Mail

Overnight 93.4% 96.6% (3.2) pts

2-Day 92.7% 94.1% (1.4) pt

3-to-5-Day 88.2% 92.8% (4.6) pt

Standard Mail

Destination 83.4% 90.0% (6.6) pt

End-to-End 59.0% 90.0% (31.0) pts

Source: 2010 ACR, Library Reference USPS-FY10-29.
66 2010 Anu

the measurement system. The Postal Service describes 

the certification process as follows:

The certification process involves two 

components. The first requires the acceptance 

clerk to physically sample the contents of mail to 

ensure mail is prepared per the requirements of 

Full Service Intelligent Mail. The clerk inspects 

mailpieces, handling units and containers to 

ensure these are prepared using Intelligent 

Mail barcodes, and ensures that the mailer 

submits electronic documentation with Full 

Service mailings. The second component 

involves a comprehensive review of the 

electronic documentation sent to the Postal 

Service by the mailer to ensure accuracy of 

start-the-clock elements.23

As more mailers are certified and adopt the FullService IMb, service performance reports are 

expected to improve. In addition, the Postal Service is 

working with its plants to ensure that capacity issues 

are addressed and that the network is properly sized 

for entry volumes. 2010 ACR, Library Reference 

USPS-FY10-29.

The Postal Service also has indicated that there 

are placard problems. For example, assume that 

all trays in a container are properly prepared with 

a Full-Service IMb. If the container placard has an 

23 2010 ACR, CHIR 3, question 6(b).

error, then none of the barcoded mail in the trays is 

included in the Full-Service IMb measurement system.

The Postal Service responded to Commission questions 

regarding repeated mailer reasons for not participating 

in the Full-Service IMb program. In response to the 

concern that IMb is not useful to mailers, the Postal 

Service stated that it is working to promote Intelligent 

Mail by providing full automation visibility to data 

collected at no additional cost to the mailer. The Postal 

Service believes that by increasing the value of the 

program to mailers more will want to participate.

Regarding mailers’ comments that the start-up costs of 

using Full-Service Intelligent Mail are high in relation 

to the program benefits, the Postal Service comments 

that it is simplifying the requirements by reducing the 

complexity associated with the customer supplier 

agreements (CSAs), streamlining the acceptance of 

mail and providing more information free of charge to 

encourage mailer adoption.

Finally, the Postal Service is training its employees 

to ensure that the Business Mail acceptance and the 

PostalOne! help desk employees can provide more 

support to mailers and mail service providers with FullService IMb mailings.24

In November 2008, the Commission stated that it 

would be necessary to monitor the IMb adoption rates 

to ensure reasonably representative and unbiased 

service performance estimates. Order No. 140 at 15. 

To date, the adoption and successful completion of 

Full-Service IMb testing is limited, as evidenced by the 

limited pilot test data available to evaluate both Bulk 

First-Class Mail and Standard Mail.

The Postal Service must develop methods that 

facilitate mailers’ correct entry of mail containing Full24 2010 ACR, CHIR 3, question 15.

Table VI–7 

FY 2011 Estimated 

Full-Service IMb Mail

Mail Class Full-Service IMb Compliant

First-Class Mail 50.0%

Standard Mail 36.5%

Periodicals 54.6%

Package Services 6.3%

Source: 2010 ACR, CHIR 5, question 12.
 POSTAL REGULATORY COMMISSION 67

Service IMbs and ensure that all possible Full-Service 

IMb mail is included in the measurement system. 

The Commission concludes that given limited data 

availability, IMb service performance measurements 

are not an acceptable representative sampling of Bulk 

First-Class or Standard Mail. The data yield on both 

Bulk First-Class Mail and Standard Mail is minimal 

and must be increased to be useful for measurement 

purposes. Participation rates and compliance must be 

increased and progress reports made on a monthly 

basis to the Commission. The Commission will monitor 

participation rates. Should growth not continue 

during this fiscal year, the Commission may review 

its previous decision to allow the Postal Service to 

proceed with development of an internal IMb based 

hybrid measurement system.

Periodicals

Periodicals service performance is based on 

combined data from two external measurement 

systems, the not-for-profit Red Tag Monitoring 

Service and the Del-Trak System operated by

Time, Inc. Service performance is measured using 

mailer reported entry times to start-the-clock and 

external reporter delivery dates to stop-the-clock.25

The measurement systems include mail entered 

at destination sectional center facilities or area 

distribution centers as well as end-to-end mail. Data

from both external systems are reviewed, combined 

and weighted by an independent contractor.

The combined data include information from 39 

publications ranging in frequency from daily, weekly, 

and monthly. Publication circulation ranges from a 

low of 1,600 to nearly four million. Id. at 17. Red 

25 2010 ACR, Library Reference USPS-FY10-29, filename: Service 

Performance ACR FY2010.doc at 16.

Tag and Del-Trak were not designed to be statistically

valid service performance measurement systems for 

the Postal Service; rather, they were designed to 

meet specific publishers’ needs. While flat-shaped 

Periodicals are measured, there is limited destination 

delivery unit-entered or Within County Periodicals 

in either the Red Tag or the Del-Trak measurement

system. Given the number of seeded pieces, service 

performance measurement scores are deemed 

statistically reliable for each postal administrative area 

with a maximum of +/-1.8 percent at the 95 percent 

confidence level.

The start-the-clock measurement begins when the mail 

is accepted by the Postal Service. However, systems 

are not fully in place to validate when the mail actually 

is given to the Postal Service. Almost half of the data’s 

start-the-clock measure is validated by comparing 

information from the Del-Trak system. Id. at 18

Total Periodicals performance serves as a proxy for 

both Within County and Outside County Periodicals. 

Given the types of publications measured using 

Red Tag and Del-Trak, the majority of the pieces

are Outside County Periodicals. Only a few Within 

County Periodicals mailpieces may be included in the 

measurement because those pieces generally receive 

manual postal processing as opposed to being 

processed on automation equipment.

The Postal Service plans to continue using Red 

Tag and Del-Trak measurement systems throughout

FY 2011. Id. at 19. Periodicals on-time service 

performance was 76.7 percent versus a target of 

91 percent.26 Periodicals FY 2010 annual on-time 

performance improved 3.0 percentage points over FY 

2009 annual performance of 73.7 percent.

26 http://www.prc.gov/prc-pages/mailing/2010/2010qt4.aspx.
68 2010 Anu

A Postal Service initiative for improving Periodicals 

service performance is to increase the mail processed 

on automation equipment. If processed on automation 

equipment, Periodicals could be measured using 

IMb. Currently, a large percentage of Periodicals 

are not processed on automation due in part to its 

downstream entry into the Postal Service network. 

The Postal Service indicates it is working to ensure 

that plant capacity issues are addressed and that 

off-loading is done in a timely manner and that the 

network is sized for the volumes entered.27

If IMb service performance measurement accurately 

reports service performance and can be sufficiently 

representative of the mail entered into the mailstream, 

the Commission finds that the Postal Service should 

transition Periodicals service performance measurement 

to the IMb measurement system environment. This will 

eliminate subjectivity and provide an improved service 

performance measurement.

Package Services

Package Services consists primarily of parcels but 

does include some flats that are too heavy to be 

mailed as Standard Mail. Package Services includes 

Single-Piece Parcel Post, Media Mail, Bound Printed 

Matter Parcels and Bound Printed Matter Flats and 

Inbound Surface Parcel Post (at UPU rates), which are 

mailed by households and commercial mailers.

Delivery Confirmation is used to measure the on-time

service performance for retail package services. In 

FY 2010, service performance measurement systems 

were not in place to measure commercial Package 

Services, including Bound Printed Matter Parcels. 

The importance of Delivery Confirmation cannot

27 2010 ACR, Library Reference USPS-FY10-29, filename: Service 

Performance ACR FY2010.doc at 19-20.

be overestimated as it remains the sole method of 

measuring retail package service performance.

When retail clerks receive parcels including Delivery

Confirmation service, the Delivery Confirmation

barcode is scanned at a point-of-sale terminal or 

with an Intelligent Mail handheld scanning device 

to start-the-clock. At the delivery point or attempted 

delivery, the barcode is scanned again which serves 

to stop-the-clock. The measurement is treated as 

representative of Single-Piece Parcel Post and Media 

Mail/Library Mail. Additionally, the Postal Service 

considers the retail Single-Piece Parcel Post with 

Delivery Confirmation as an acceptable proxy for

Inbound Surface Parcels at UPU rates. Id. at 20-23.

In FY 2010, the Postal Service began reporting 

performance on a product basis. The annual FY 

2010 Package Services service performance scores 

represent retail Package Services. The FY 2010 

Service Performance scores for Package Services are 

provided in Table VI-8.

All performance scores are below the FY 2010 

targets. Single-Piece Parcel Post’s actual performance 

of 80.1 percent is 9.9 percentage points below 

target. Bound Printed Matter Flats performance of 

52.7 percent was 37.3 percentage points below 

target.28 Systems were not in place to measure 

service performance for Bound Printed Matter Parcels. 

Media Mail/Library Mail’s service performance score 

of 87.7 percent is 2.3 percentage points below its 

FY 2010 target. Inbound Surface Parcel Post’s (at 

UPU rates) service performance score of 80.1 percent 

was 9.9 percentage points below target.

In Quarters 1 through 3, Bound Printed Matter Flats 

were not included in the pilot measurement system. 

28 http://www.prc.gov/prc-pages/mailing/2010/2010qt4.aspx.
 POSTAL REGULATORY COMMISSION 69

Quarter 4, FY 2010, was the first quarter that Bound 

Printed Matter Flats service performance measurement 

used the Intelligent Mail Accuracy and Performance 

System (iMAPS). Test mailings were limited to a few 

days during Quarter 429 and the measured volumes 

were entered at either a destination NDC or SCF and

covered most Bound Printed Matter Flats entry points. 

The measurement system used the arrival time at a 

designated facility to start-the-clock and an IMb scan 

by an external third-party reporter to stop-the-clock. A 

limited data sample was available in Quarter 4, but 

due to mailer data errors and problems with postal 

verification, the results may not be considered reliable.30

The Postal Service claims that it set aggressive service 

performance targets for all Package Services products 

and that is why performance was lower than targets. 

Id. at 22. Further, the Postal Service indicates that 

as process improvements are implemented and the 

transformation of BMCs into NDCs is completed,

unnecessary processes will be removed and service 

29 Only 3 percent of total Quarter 4 Bound Printed Matter Flats volume 

qualified for measurement. 2010 ACR, Library Reference USPS-FY10-

29,filename: FY10 ACR Package Services.xls. 30 2010 ACR, Library Reference USPS-FY10-29, filename: Service 

Performance ACR FY10 at 21, and the Commission’s website at 

http://www.prc.gov/prc-pages/mailing/.

performance should improve.31 The Postal Service is 

working to ensure that its plants continue to address 

capacity issues and that off-loading is done in a 

timely manner.

The Commission finds that the Postal Service must 

continue to improve service performance for Package 

Services to bring all products into compliance with 

the Postal Service’s established targets. Process 

improvements also may facilitate improvements in 

performance reporting.

Special Services

In reporting Special Services, the Postal Service 

provided the information shown in Table VI-9.

The Commission previously focused on Return 

Receipt and Post Office Box Service because they 

are relatively high revenue Special Services. Return 

Receipts (green card) overall service performance 

is 91 percent. There were 3,793 seeded green 

return receipts. Of those 83.7 percent were properly 

completed and returned. Nine percent of the green 

cards were returned improperly completed and 7.3 

percent of the seeded green cards did not have a 

31 2010 ACR, Library Reference USPS-FY10-29, filename: Service 

Performance ACR FY10.doc at 24.

Table VI–8 

FY 2010 Annual Performance for Package Services

Package Services

FY 2010

% On-Time

FY 2010 

Target %

Over/

(Under)

Target

Single-Piece Parcel Post 80.1 90.0 (9.9) pts

Bound Printed Matter Flats 52.7 90.0 (37.3) pts

Bound Printed Matter Parcels -- 90.0 --

Media Mail / Library Mail 87.7 90.0 (2.3) pts

Inbound Surface Parcel Post (at UPU rates) 80.1 90.0 (9.9) pts

Source: 2010 ACR, USPS-FY10-29, filename: FY10 ACR Package Services.xls.
70 2010 Anu

signature. The Postal Service indicated that the overall 

Post Office Box Service met its target 94.3 percent or 

4.3 percentage points above target.

In Docket No. RM2010-11, the Commission granted

semi-permanent exceptions for annual and periodic 

reporting of service performance achievements to 

24 special services and three negotiated service 

agreements. The list of semi-permanent exceptions 

follows:

Other Measurement Issues

In FY 2010, the Postal Service made changes to the 

number of days-to-delivery by mail class and by 3-digit 

ZIP Code pairs. A total of 30,148 3-digit ZIP Code 

pairs were upgraded and 8,622 were downgraded.

Table VI–9 

Special Service Performance Reports

Special Services

Annual

Target

% 

Actual

Ancillary Services 90.0 93.0%

Certified MailTM -- 95.0%

Delivery ConfirmationTM -- 97.6

Insurance -- 84.0%

All other Ancillary Services 

combined -- 86.8%

International Ancillary Services 90.0 99.2%

Address List Services 90.0 100%

Confirm® 90.0 100%

Money Orders 90.0 95.4%

Post OfficeTM Box Service 90.0 94.3%

Customized Postage -- --

Stamp Fulfillment Services -- --

Source: 2010 ACR, Library Reference USPS-FY10-29, filename: FY10 

ACR Special Services.xls.

Semi-Permanent Exceptions

Special Services (the following listed products only)

Ancillary Services (the following listed components of 

the product only)

Address Correction Service (hard-copy)

Business Reply Mail

Bulk Parcel Return

Certificate of Mailing

Merchandise Return

Parcel Airlift (PAL)

Restricted Deliver

Shipper Paid Forwarding

Special Handling

Stamped Envelopes

Stamped Cards

Premium Stamped Stationary

Premium Stamped Cards

International Ancillary Services (the following listed 

components of the product only)

International Certificate of Mailing

International Registered Mail (outbound only)

International Return Receipt

International Restricted Deliver

International Insurance (with Inbound Surface Parcel 

Post (at UPU Rates))

Customs Clearance and Delivery Fe

Caller Service

Change of Address Credit Card Authentication

International Reply Coupon Service

International Business Reply Mail Service

Money Orders (sales aspect of this service only)

Negotiated Service Agreements (the following 

products only)

The Bradford Group Negotiated Service Agreement

Life Line Screening Negotiated Service Agreement

Canada Post–United States Postal Service 

Contractual Bilateral Agreement for Inbound Market 

Dominant Service
 POSTAL REGULATORY COMMISSION 71

Overall, the number of 3-digit ZIP Code upgrades 

exceeded the downgrades, which suggests the Postal 

Service is reducing the number of days to delivery 

for more ZIP Code pairs. To be meaningful, the 

information on the number of 3-digit ZIP Code pairs 

upgraded and downgraded must be accompanied by 

the volumes of mail impacted by each. Without volume 

information, the impact of the changes is unknown.

Customer Access

In compliance with 39 CFR section 3055.91, the 

Postal Service is required to provide information 

on consumer access. Customer Access includes 

evaluation of access to retail facilities, the amount of 

time a customer has to wait in line to obtain postal 

services, and the availability of postal collection 

boxes. The number of delivery points also provides 

an indication of access to postal services. Post office 

suspensions are evaluated because of their effect 

on obtaining postal services. Customer access is 

important to the Postal Service if it is to stem losses due 

to volume declines and potential changes in mailer 

behavior.32

32 One of the Postal Services FY 2011 strategic initiatives 

discussed in Chapter V is to expand postal access by means 

Over the years, the Postal Service has changed its 

network by removing collection boxes, closing postal 

facilities and changing operating hours. Increased 

access to postal services, however, appears to be 

growing through alternative marketing channels. With 

plant consolidations and continued postal facility 

closings, it is important that the Postal Service find 

more methods of providing access to postal products 

and services.

Retail Facilities

Table VI-11 provides the number of retail accessible 

postal facilities by type for FY 2007 through FY 

2010. Also, the change in the number of retail 

facilities from prior years is shown.

The Commission observes that the overall number 

of retail facilities has remained relatively stable with 

274 post offices, stations and branches closed in 

FY 2010. However, there is every indication that 

the Postal Service will be downsizing its retail facility 

footprint in the near future.

If and when the Postal Service begins a process to 

close large numbers of retail facilities, it must provide 

accurate information to its customers on the status of 

their postal facilities. The Commission recommends 

that the Postal Service provide adequate notice and 

comment period for affected customers to provide 

input.33 The importance of adequate notice and a 

comment period is vital to customer service, if the 

Postal Service proceeds with future closings.

other than a postal retail facility. 33 Docket No. N2009-1, Advisory Opinion Concerning the

Process for Evaluating Closing Stations and Branches, March 

10, 2010.

Table VI–10 

3-Digit Zip Code Pair Upgrades and 

Downgrades

Mail Class 

Total 

Upgrades

Total 

Downgrades

Total 

Impacted

First Class Mail 874 208 1,082

Standard Mail 11,323 3,371 14,694

Package Services 269 3,349 3,618

Periodicals 17,682 1,694 19,376

Total 30,148 8,622 38,770

Source: 2010 ACR Postal Service response to CHIR 3, question 4.
72 2010 Anu

Delivery Points

Table VI-12 provides the number of residential and 

business delivery points by delivery type for FY 2007 

through FY 2010. The change in the number of 

delivery points in FY 2010 also is shown. The total 

number of delivery points increased by 739,580 in 

FY 2010.

Wait Time In Line

In FY 2009, the Postal Service provided the Wait 

Time In Line measurements that were based on 

information from mystery shopper reporters, who 

recorded the actual time they spent waiting in line for 

service from a postal window clerk. In FY 2010, the 

Postal Service measured Wait Time in Line in the new 

Table VI–11 

Postal Service Retail Factilities

Postal Factilities FY 2010 FY 2009 

FY2010 

Change 

from FY 

2009 FY 2008

FY 2010 

Change 

from FY 

2008 FY 2007

FY 2010 

Change 

from FY 

2007

Post Offices 27,077 27,161 (84) 27,232 (155) 27,276 (199)

Classified Stations, Branches 

and Carrier Annexes 5,451 5,501 (50) 5,509 (58) 5,419 32

Contract Postal Units 2,931 3,037 (106) 3,148 (217) 3,131 (200)

Community Post Offices 763 797 (34) 834 (71) 895 (132)

Total Post Offices 36,222 36,496 (274) 36,723 (501) 36,721 (499)

Source: Annual Report 2010 of the Postal Service at 84.

Table VI–12 

Postal Service Delivery Points

Residential Delivery 

Points FY 2010 FY 2009

FY 2010 

Change 

from FY 

2009 FY 2008

FY 2010 

Change 

from FY 

2008 FY 2007 

FY 2010 

Change 

from FY 

2007 

City Delivery 80,531,231 80,187,505 343,726 79,848,415 682,816 79,470,894 1,060,337

Rural 38,638,280 38,264,946 373,334 37,684,158 954,122 37,022,488 1,615,792 

P.O. Box 15,739,698 15,601,883 137,815 15,639,031 100,667 15,635,480 104,218 

Highway Contract 2,607,138 2,576,166 30,972 2,516,783 90,355 2,473,323 133,815 

Total Residential 

Delivery 137,516,347 136,630,500 885,847 135,688,387 1,827,960 134,602,185 2,914,162 

Business Delivery Point

City Delivery 7,457,500 7,483,461 (25,961) 7,436,965 20,535 7,411,582 45,918

Rural 1,453,292 1,439,266 14,026 1,407,942 45,350 1,360,478 92,814 

P.O. Box 4,355,674 4,489,688 (134,014) 4,587,454 (231,780) 4,548,973 (193,299)

Highway Contract 72,648 72,966 (318) 71,538 1,110 69,304 3,344 

Total Business Delivery 13,339,114 13,485,381 (146,267) 13,503,899 (164,785) 13,390,337 (51,223)

Total Delivery Points 150,855,461 150,115,881 739,580 149,192,286 1,663,175 147,992,522 2,862,939 

Source: Annual Report 2010 of the Postal Service at 84.
 POSTAL REGULATORY COMMISSION 73

Customer Experience Survey.34 Survey participants 

were asked how long they waited in line for a clerk 

during their last visit to a Post Office. The response 

categories were: one to three minutes; four to five 

minutes; six to ten minutes; 11 to 15 minutes; and 16 

or more minutes.

The weighted average Wait Time in Line results for 

customer responses are shown in Table VI-13 and 

reported by small to medium size businesses and 

residential customers.35 Sixty-eight percent of small 

to medium business customers estimated they waited 

five minutes or less, and 70 percent of residential 

customers estimated that they waited five minutes 

or less. In FY 2009, the Postal Service reported 

that 83.8 percent of the reported Wait Time in Line 

scores were less than five minutes. The difference 

between the FY 2010 Wait Time In Line scores of 

34 2010 ACR, Library Reference USPS-FY10-38, question 11 in 

residential and small to medium business surveys. 35 Large business customers were not asked that question.

68 percent and 70 percent and the FY 2009 score 

of 83.8 percent may be the result of the customer’s 

perception of how long he or she waited in line rather 

than a reporter’s actual timing of the wait for service. 

However, it is an important indication of potential 

problem areas.

In response to CHIR No. 3, the Postal Service reported 

that in FY 2010, 85.7 percent of its customers waited 

in line on average 2 minutes and 48 seconds or an 

improvement of 17 seconds over the prior years’ 3 

minutes and 5 seconds for the actual national average 

of 83.8 percent.36 The improvement in Wait Time 

In Line while slight is nevertheless important. The 

Postal Service should continue efforts to decrease 

the length of time customers wait in line for postal 

services. Continued reductions in the amount of time 

spent waiting in line should improve the customers 

perception of doing business with the Postal Service. 

Approximately 30 to 32 percent of customers report 

that they are waiting in line more than five minutes 

for window service. Fourteen to fifteen percent wait 

more than ten minutes. Reduced postal wait times will 

improve the customer’s postal shopping experience and 

potentially draw in more business. 

The Commission would find it helpful if the Postal 

Service were to establish and report national wait 

time in line service performance goals in next year's 

ACR. Goals based upon the Postal Service’s expertise 

in customer service can be used as the benchmark 

for measuring customer satisfaction with this aspect of 

retail service.

36 2009 ACD at 60 and 2010 ACR, CHIR 3, question 3

Table VI–13 

Wait Time In Line 

Weighted Average

Wait Time In Line

Small/Medium

Business Residential

Less than 1 minute 17% 18%

1–3 minutes 28% 29%

4–5 minutes 23% 23%

Subtotal 5 min. or less 68% 70%

6–10 minutes 17% 16%

11–15 minutes 8% 7%

16 minutes or more 7% 7%

Total 100% 100%

Source: CEM surveys question 11 and performance of SAS data 

analysis. Data are based on unweighted tabulations provided

in USPS-FY10-38. See 2010 ACR, CHIR No. 3, question 17. 

Large business customers were not asked this question on their 

version of the CEM survey. 
74 2010 Anu

Collection Boxes

Collection boxes are an access channel for First-Class 

Single-Piece Mail. Table VI-14 provides information 

on the change in the number of collection boxes from 

the beginning through the end of FY 2010 and the 

net difference in the number of collection boxes. The 

information on the number of boxes removed comes 

from the Collection Point Management System.

The Postal Service removed a total of 4,343 

collection boxes in FY 2010 which was down from 

the removal of 24,105 in FY 2009.37 At the end of 

FY 2010, the Postal Service had 170,120 collection 

boxes remaining.

In Docket No. N2009-1, the Commission stated that

the Postal Service must integrate any plans to remove 

collection boxes into its overall post office reduction 

plans to assure continuous and adequate customer 

access to postal services.38 The Commission anticipates 

37 2009 ACD at 60 and 2010 ACR, Response of the United States

Postal Service to the CHIR No. 3, question 2. 38 The Postal Service did not report the number of suspensions at the 

that the Postal Service will address this issue, along 

with consideration of other alternative access channels, 

in future requests for advisory opinions concerning 

processes and procedures used in reducing the number 

of Postal Service retail facilities.

Alternative Access

In addition to providing postal products and services 

at postal retail counters, the Postal Service has 

expanded postal access through additional marketing 

channels. For FY 2010, 30.7 percent of retail 

revenue was generated by means other than a postal 

retail counter. Id. at 25-26.39

Table VI-15 identifies the FY 2010 revenue each retail 

channel generated, the share of total retail revenue 

each contributed and the percent change in revenue 

provided in FY 2010 compared with that of FY 2009.

PC Postage and Online Services

PC Postage and digital postage meters allow 

customers who mail frequently to print postage and 

shipping labels. For FY 2010, the number of active 

participants increased eight percent.

Currently, PC Postage vendors are participating in 

pilot trials to enhance payment options for package 

returns. Another initiative focuses on qualifying PC 

Postage systems for federal government entities, which 

would provide an alternative to using postage meters 

and a competitive service for expedited shipments.

The usps.com website allows customers to purchase 

stamps and philatelic products and order free shipping 

supplies. Also, customers may search and pay for a 

close of FY 2009 in the FY 2009 ACR. In response to Commission 

questions, the Postal Service stated that service had been suspended 

at 248 to 254 post offices as of February 2010. The difference in 

the two values, 248 and 254, may relate to duplicate reporting of a 

few post offices in the 254 value. See 2009 ACD at 58-59. 39 2010 Comprehensive Statement at 25

Table VI–14 

Number of Collection Boxes Removed

Area

FY 2010 End 

of Year

FY 2010 

Beginning of 

Year

Net 

Difference

Capital Metro 14,049 14,111 (62)

Eastern 27,647 28,759 (1,112)

Great Lakes 22,298 22,647 (349)

Northeast 33,258 34,063 (805)

Pacific 20,039 20,349 (310)

Southeast 14,170 15,012 (842)

Southwest 12,018 12,467 (449)

Western 26,641 27,055 (414)

Total 170,120 174,463 (4,343)

Source: 2010 ACR, CHIR No.3, question 2 and CHIR No.5, 

question 15.
 POSTAL REGULATORY COMMISSION 75

P.O. Box as well as manage their P.O. Box accounts 

online. The FY 2010 revenue generated by the 

usps.com website and Click-N-Ship was $423 million 

up from the FY 2009 revenue by 16.2 percent.

Retail Partners and Self-Service

The Postal Service has been selling stamp booklets 

at supermarkets, drug stores, and other commercial 

outlets since the 1980’s. In total, stamps are available 

at 63,000 such locations and in FY 2010 generated 

approximately $1.2 billion which represented 

approximately 14 percent of all stamp booklets sold 

though this channel.

Contract postal units (CPUs) offer a wider range of 

postal services than just stamps and are operated 

by a host retailer. In FY 2010, there were 3,720 

operational CPUs. The CPUs generated revenue of 

$454 million, which was an improvement over FY 

2009’s revenue by 0.3 percent.

In August FY 2010, the Postal Service partnered with 

1,083 Office Depot stores to provide stamps, Express

Mail, Priority Mail and other postal services.

An Automated Postal Center (APC) is a self-service 

kiosk that provides access to common postal services. 

Nationwide, there are approximately 2,500 APCs 

located in postal facilities. APCs generated $579 

million in revenue in FY 2010 – an increase of 

approximately five percent over FY 2009.

Strategic Initiative

The Postal Service has set a goal of expanding 

alternative access to postal products and services 

by 35 percent.40 The Postal Service anticipates 

expanding access in areas where postal customers 

are already shopping and conducting business 

whether online or in person.

40 2010 Comprehensive Statement at 53.

Table VI–15 

Retail Revenue by Channel

Services

FY 2010 

Revenue

($ Millions)

Share of 

Total Retail 

Revenue

FY 2010

Change 

from

FY 2009

Post Offices $12,133 69.3% (4.6%)

PC Postage $2,180 12.4% 17.3%

Stamps only sales by retail partners $1,143 6.5% (1.1%)

Automated Postal Centers (kiosks) $579 3.3% 5.3%

Stamps by Mail/phone/fax $509 2.9% (0.7%)

Contract Postal Units $454 2.6% 0.3%

Usps.com/Click-N-Ship $423 2.4% 16.2%

Other $94 0.5% 13.1%

Total $17,515 100.0% (1.3%)

Source: 2010 Comprehensive Statement at 24.
76 2010 Anu

Post Office Suspensions

In the FY 2010 ACR, the Postal Service stated 

service was suspended at 184 post offices as of the 

beginning of FY 2010.41 By the end of FY 2010, 

the Postal Service stated it had suspended service 

at a total of 229 post offices and 137 stations and 

branches (366 facilities) or an increase of 182 postal 

facilities from the beginning of FY 2010. It is evident 

that some post offices have had service suspended 

for several years.

The Postal Service is continuing to struggle with 

providing accurate data on facilities with suspended 

service. For example, for post offices with service 

suspended for a relatively long period of time, 

the Postal Service was unable to verify the actual 

suspension dates of those facilities.42 The Postal 

Service must make improvements in its suspended 

post office record keeping for its own internal 

purposes and to better inform the Commission of the 

status of these retail facilities.

The Postal Service states that it is currently redesigning 

the retail facilities closure procedures that will 

encompass postal facilities with suspended service, 

and expects that a request for a related advisory 

opinion will occur in the near future. The request will 

be accompanied by a thorough explanation of the 

approach the Postal Service plans to pursue in either 

closing a suspended office, reopening it or replacing 

the facility with some form of expanded alternative 

access. At the time the request is filed, the Postal 

Service will provide a public list of the facilities, 

which will include the suspended offices whose 

41 2010 ACR, CHIR 4, question 27. 42 Id.

discontinuance will be proposed under the new 

procedures.43

The Commission believes that the redesign of the 

facilities closing procedure, which will include 

suspended facilities, is an important step in resolving 

the status of the many retail postal facilities that 

have had service suspended. The Commission 

previously offered many suggestions on Station and 

Branch closing policies and procedures that may be 

applicable to closing all types of retail facilities.44

The Commission hopes that the Postal Service will 

take these recommendations into consideration in 

any related requests for advisory opinions. The 

Commission, in its advisory role, looks forward to 

working with the Postal Service on this issue. 

Customer Experience

The Customer Knowledge Management group in the 

Postal Service Headquarters Consumer Affairs office 

is responsible for conducting surveys to measure 

customer satisfaction with market dominant products. 

In FY 2010, the Postal Service transitioned from a 

Customer Satisfaction Measurement (CSM) system 

administered by The Gallup Organization to a 

Customer Experience Measurement (CEM) system 

prepared by Maritz Research. Due to different

questions and different response categories, the CEM 

survey responses cannot be compared with survey 

responses from the CSM surveys from prior years.

For FY 2010, quarterly surveys were administered 

to residential, small to medium sized businesses, 

and large business customers.45 Participants from 

all 50 states were selected to respond to the CEM 

43 Id. 44 Docket No. N2009-1, Advisory Opinion Concerning the Process for

Evaluating Closing Stations and Branches, March 10, 2010. 45 2010 ACR, USPS-FY10-38, filename: FY10-38 Preface.pdf.
 POSTAL REGULATORY COMMISSION 77

surveys. Demographic characteristics were not used

in selecting respondents for sampling purposes.46

Responses to survey questions are based upon 

self-identified usage of market dominant products. 

Survey candidates for both the residential and the 

small to medium sized businesses are randomly 

selected, without replacement, on a quarterly basis.47

Residential and small to medium sized businesses 

have the option of returning the survey by mail or 

completing it online. Invitations are sent to large 

business customers to participate in the survey. 

Businesses that accept the invitation complete surveys 

online.48

Survey response weights are developed on a monthly, 

quarterly, annual and year-to-date basis. In total, 

over 6.8 million surveys were sent with 0.7 million 

useable surveys returned. The residential customer 

response rate was 14 percent; for both the small to 

medium sized businesses and the large businesses 

the response rates were eight percent. Overall, the 

survey response rate was approximately 10 percent. 

This appears low assuming that the average response 

rate to an online survey is 30 percent.49 Table VI-16 

provides the number of surveys sent to each group of 

respondents and the number of surveys returned.

46 While surveys are not mailed to customers on the basis of specific 

demographic characteristics, the Postal Service does collect select 

demographic data from questions in the surveys. 47 Small and Medium Businesses have fewer than 250 employees at 

one site. Large businesses have more than 250 employees per site. 

2010 ACR, Library Reference USPS-FY10-38. For Large Businesses, 

completion of surveys online has been shown to be the preferable 

method through previous customer research. Id. For simplicity, values 

are rounded to the nearest whole number. 48 For Large Businesses, completion of surveys online has been shown to 

be the preferable method through previous customer research. Id. 49 See Instructional Assessment Resources, http://www.utexas.edu/

academic/ctl/assessment/iar/teaching/gather/method/surveyResponse.php. In a paper on “Measuring Customer Satisfaction: 

More on Corporate Surveys as Practice,” mail survey response rates 

are considered adequate if 50 percent is obtained; 60 percent is 

considered good and 70 percent is very good.

Overall, customer satisfaction with various postal 

services is provided in Table VI-17.

Table VI-18 provides a summary of the strongly agree 

responses for both residential and small to medium 

size businesses.

Reporting the strongly agree responses provides 

insight into the strength of customers’ perception of 

the Postal Service. For both residential and small to 

medium sized businesses, the Postal Service’s tracking 

service is effective 52 to 56 percent of the time.50

Collection Boxes have convenient pickup schedules 

46 to 52 percent of the time and are conveniently 

located 50 to 52 percent of the time. Post Offices 

are conveniently located 64 to 66 percent of the 

time and hours of operation are convenient 51 to 

55 percent of the time. Having enough lines open to 

serve postal customers occurs 30 to 35 percent of the 

time. Twenty-nine to 38 percent of customers report 

there are enough postal self-service alternatives.

The demographic characteristics of residential postal 

survey respondents are as follows: 62 percent of the 

respondents are female and 38 percent are male; 

9 percent are 34 years old or less, 29 percent are 

50 For simplicity, values are rounded to the nearest whole number.

Table VI–16 

Number of Surveys Initiated and Returned 

(Millions)

Survey Type Surveys Sent Surveys Returned

Response 

Rate

Residential 2,562,293 359,340 14%

Small/

Medium 

Businesses

4,150,705 345,384 8%

Large 

Businesses 47,998 3,643 8%

Total 6,760,996 708,367 10%

Source: 2010 ACR, USPS-FY10-38, filename: FY10-38 Preface.pdf.
78 2010 Anu

Table VI–17 

FY 2010 Customer Satisfaction with Market Dominant Products 

(Mailing Services)

Market Dominant 

Products (Mailing 

Services) 

Residential % 

Rated Very/

Mostly Satisfied 

Small-Medium 

Business % Rated 

Very/Mostly 

Satisfied 

Large Business 

% Rated Very/

Mostly Satisfied 

First-Class Mail 93.7 92.4 90.2

Single-Piece International 85.9 83.2 86.3

Standard Mail 83.3 85.9 84.5

Periodicals 86.1 83.8 82.8

Single-Piece Parcel Post 88.2 87.0 84.6

Media Mail 87.6 86.4 85.6

Bound Printed Matter 85.4 83.4 82.4

Library Mail 86.7 84.9 85.1

Source: 2010 ACR, United States Postal Service FY 2010 Annual Compliance Report at 15.

Table VI–18 

Residential and Small/Medium Business Customer CEM Responses 

Percent Who Strongly Agree

FY2010 

Customer Experience Survey Measure Residential Customer

Small-Medium 

Business Customer

Letters/packages consistently delivered when expected 63.1% 55.2%

Mail collection boxes conveniently located 52.3% 50.0%

Mail collection box pickup schedule is convenient 52.3% 45.9%

Post Office location convenient 66.5% 64.3%

Post Office hours of operation convenient 55.1% 50.7%

Post Office has enough lines open to serve customers 34.7% 30.3%

Post Office has enough self-service alternatives 38.2% 29.2%

USPS tracking effective (if purchased) 55.7% 52.0%

Source: Postal Service CEM surveys, FY 2010. Unweighted survey data from 2010 ACR, Library Reference, 

USPS-FY-10-38.
 POSTAL REGULATORY COMMISSION 79

Table VI–19 

Large Business Responses to CEM Survey Questions 5 and 6†

Mail Class 

Mail Services (a)

Very/Mostly 

Satisfied 

Consistently 

Delivered When 

Expected (b)

Strongly Agree 

Postal Service’s 

Tracking 

Effective (if 

purchased) (c)

Strongly Agree

First Class Mail 90.2% 43.9% 49.5%

SP International Mail 86.3% 43.4% 45.7%

Standard Mail 84.5% 48.1% 50.0%

Periodicals 82.8% 44.2% 44.3%

SP Parcel Post 84.6% 46.6% 48.5%

Media Mail 85.6% 45.4% 44.3%

Bound Printed Matter 82.4% 45.0% 44.3%

Library Mail 85.1% 45.9% 44.7%

Source: (a) at 15 of the 2010 ACR, “Customer Satisfaction with Market Dominant Products

Mailing Services FY2010”, large business survey responses weighted at the area level 

to represent the large business population (ChIR.3.Q.17e.ACRFY10.doc). For (b) and 

(c), percents are based on unweighted survey counts for products and services large 

businesses used at survey question 4 (from every business day to less than monthly) filed 

in 2010 ACR, Library Reference USPS-FY10-38, CSM Question Response Counts_

FY10.xls. † Surveys included questions with mulitple parts. 2010 ACR, Library Reference USPS-FY-10-38.

between the ages of 35 and 54 years, and 62 

percent are 55 years or older. The education level 

ranged from having no college education—26 

percent, to some college education—32 percent, and 

4 or more years of college—42 percent. The majority 

of residential respondents receives their mail at home 

and primarily uses the Postal Service to send their 

packages.51

Business information collected on small to medium 

size business respondents identified that 97 percent 

had 100 or fewer employees and 3 percent had 

more than 100 employees; 65 percent used the 

Postal Service to send their packages and 35 percent 

used alternative services. 

51 2010 ACR, Library Reference USPS-FY10-43, filename: 

ChIR.3.Q.17b.ACR.FY10.doc.

Table VI-19 provides a select summary of the 

responses to the CEM survey for large businesses.

Satisfaction with mail service ranges from a low of 

82 percent for Bound Printed Matter to a high of 90 

percent for First-Class Mail.52 Only 43 to 48 percent 

of mail for all mail classes was consistently delivered 

when expected. In addition, only 44 to 50 percent of 

large businesses indicated that Postal Service tracking 

service was effective for all mail classes.

The demographic responses from large businesses 

showed that 77 percent had 500 or fewer employees 

and 32 percent had more than 500. Eighty-one 

percent of the large business respondents were neither 

a mailing house nor a consolidator; 20 percent were. 

Seventy-seven percent of the respondents indicated 

52 For simplicity, percentages are rounded to the nearest integer.
80 2010 Anu

that their personal experiences with the Postal Service 

were either very important or somewhat important in 

determining whether or not to use the Postal Service 

for business purposes.53

The Commission commends the Postal Service for 

developing a new CEM survey. Clearly, the survey 

seeks more information about customer attitudes 

with regard to the Postal Service, its products and 

services. The information gained by the survey allows 

the Postal Service to follow up on actionable items to 

the benefit of both it and its customers. In addition, 

the Postal Service expanded the range of allowable 

customer responses. Rather than just having a 

response of “neither agree nor disagree” the customer 

is given the option of responding to either “somewhat 

agree” or “somewhat disagree.” The additional 

response categories can facilitate the reduction of 

potential bias in survey responses, which allows more 

honest response evaluations.

53 2010 ACR, Library Reference USPS-FY10-43, filename: 

ChIR.3.Q.17b.ACR.FY10.doc.

In the Postal Service’s FY 2011 ACR, the Commission 

recommends that the Postal Service establish FY 

2012 targets for improving customer satisfaction in 

each area measured. Comparing progress in the 

areas of customer satisfaction will allow the Postal 

Service to identify problem areas and recognize those 

areas it may excel in.
 POSTAL REGULATORY COMMISSION 81

Chapter VII

Market Dominant Products

Introduction

This chapter presents the Commission’s analysis, organized by class, of the financial results and rates for each 

market dominant product, market dominant NSAs, market dominant volume incentives, and market dominant 

international products. The financial analysis focuses on cost coverage and pricing issues, including whether 

the class and its products generate adequate revenue to cover attributable costs.

Each class section also contains a discussion of worksharing and other rate issues. Methodological issues 

affecting the development of estimates of worksharing-related cost avoidances are addressed, the resulting cost 

avoidances are compared with the corresponding discounts, and the passthroughs and other rate relationships 

are analyzed for consistency with the applicable statutory provisions.

The major findings for FY 2010 are summarized below:

 The Commission identified 10 products and services which generated insufficient revenues in FY 2010 

to cover attributable costs. The total shortfall from these products is $1.7 billion. This only represents the 

amount necessary to reach 100 percent cost coverage; it would not result in any contribution towards 

institutional costs.

 Two classes of mail fail to cover their attributable cost: Periodicals ($611 million) and Package Services 

($182 million).

 Three products account for $1.4 billion of the loss: Standard Flats ($577 million), Standard NFMs/Parcels 

($172 million), and Outside County Periodicals ($587 million).

 The Commission finds that the FY 2010 rates for Standard Flats do not comply with section 101(d) of title 

39 and directs the Postal Service to take action to eliminate the intra-class cross-subsidy through above 

average price increases and operational efficiency gains. 
82 2010 Anu

 Per-piece revenue from Standard Mail Nonprofit 

pieces was 61.3 percent of Standard Mail 

commercial per-piece revenues. However, the 

price adjustment proposed in Docket No. R2011

2 is expected to produce an average revenue per 

piece that complies with the statute.

 39 workshare discounts exceeded avoided costs.

» 23 discounts qualified for a statutory exception.

» Seven discounts were adjusted to reflect 100 

percent of avoided cost in Docket No. R2011-2

» The Commission is unable to determine if six 

discounts are consistent with section 3622(e) 

because of problems with the underlying costs.

» Two discounts satisfy the statute assuming 

Proposal Nine is approved in Docket No.

RM2011-5.

» The evaluation of one discount has been 

temporarily suspended pending the outcome of 

Docket No. RM2011-13

The Postal Service calculates worksharing 

passthroughs utilizing methodologies that currently 

are under review by the Commission. The Postal 

Service filed two petitions to initiate proceedings to 

consider these methodologies in late December

1

The timing of the Postal Service’s filing did not afford 

the Commission or interested persons sufficient time 

to review the merits of these proposals prior to their 

incorporation into the ACR. Of these proposals, 

Proposal Nine, in particular, has significant impact 

on avoided cost estimates for First-Class Mail and 

Standard Mail letters. The proposal incorporates 

new input data and a new bundle sorting cost 

1 Docket No. RM2011-5, Petition of the Postal Service Requestin

Initiation of a Proceeding to Consider Proposed Analytical Principles 

(Proposals Nine through Twelve), December 20, 2010. See als

Docket No. RM2011-6, Petition of the Postal Service Requesting

Initiation of a Proceeding to Consider Proposed Analytical Principles 

(Proposals Thirteen and Fourteen), December 22, 2010

methodology into the First-Class Mail presort letters 

and Standard Mail presort letters mail processing 

cost models. In response to a Chairman’s Information 

Request, the Postal Service provided the cost 

avoidance estimates which exclude the Proposal Nine 

changes.2 The resulting passthroughs vary significantly 

from the original filing.

Several workshare discounts that exceed avoidable 

cost in FY 2010 were adjusted to achieve 100 

percent passthroughs in Docket No. R2011-2.

However, for some of these discounts, the Postal 

Service relied on avoidable cost estimates from 

Proposal Nine. While the Commission approved 

the rates the Postal Service proposed in Docket No.

R2011-2, it stated that the discounts are subject 

to further review pending consideration of the 

worksharing methodology proposals now before the 

Commission. Assuming approval of Proposal Nine, 

the discounts reflect a 100 percent passthrough of 

avoided costs and comply with section 3622(e). 

The practice of using unapproved analytical methods 

in support of price adjustments and the ACR does 

not follow accepted procedures. The Postal Service’s 

effort to improve costing by making changes in 

analytic principles requires proper vetting by the 

mailing community and the Commission sufficiently in 

advance of filing price adjustments and ACRs.

National Postal Policy Council (NPPC) is concerned 

that the Postal Service imposes costs on mailers without 

considering the price cap ramifications. It distinguishes 

between mail preparation activities for which mailers 

receive a discount, e.g., barcoding, and those 

activities causing mailers to incur “uncompensated 

compliance costs,” e.g., Move Update using 

2 Responses to questions 1 and 10 of Chairman’s Information Request 

No. 1, issued on January 14, 2011.
 POSTAL REGULATORY COMMISSION 83

NCOALink and the submission of mailing statements. 

NPPC Comments at 6-7. It argues that, while changes 

in mail preparation systems and processes may reduce 

the Postal Service’s costs, they “impose new and 

uncompensated costs” on the mailers which, in effect 

“constitute ‘shadow’ rate increases.” Id. at 6-8. 

NPPC suggests that the Commission should initiate 

a rulemaking to require the Postal Service to: (1) 

conduct a cost-benefit analysis when contemplating 

changes in mailing regulations or entry requirements 

to identify and calculate the uncompensated 

“shadow” costs incurred by mailers; and (2) estimate 

the uncompensated costs it imposed on mailers during 

the year due to shadow rate increases. Id. at 9-10.

While the issue NPPC raises has important rate cap 

implications, the Commission is not persuaded at this 

time that a rulemaking focusing on requiring the Postal 

Service to undertake cost-benefit analysis whenever 

it imposes an operational change that may affect 

mailing regulations or entry requirements would be 

productive. Any cost-benefit analysis designed to 

calculate “uncompensated shadow costs” incurred by 

mailers would require accurate, detailed information 

on mailers’ costs.3 Neither the Postal Service nor 

the Commission has access to such information or a 

ready means to obtain it. Moreover, mailers, rightfully, 

may be reluctant to divulge such information. 

FIRST-CLASS MAIL

Introduction

First-Class Mail consists of six products, Single- Piece 

Letters and Cards, Presort Letters and Cards, Flats, 

Parcels, Outbound First-Class Single-Piece Mail 

3 NPPC suggests that the analysis “include not only direct costs, but 

indirect costs and burdens to mailer from the timing of change or 

otherwise.” Id. at 9. See also GCA Reply Comments.

International, and Inbound First-Class Single-Piece 

Mail International. The class had a volume of 78.2 

billion pieces in FY 2010. First-Class Mail accounts 

for 46 percent of total volume and 67 percent of total 

contribution. Both volume and contribution decreased 

from FY 2009 by 6.6 percent and 5.8 percent, 

respectively.

The principle FY 2010 findings for First-Class Mail are:

 The Commission identifies eight worksharing 

discounts that exceed avoided cost. 

» Three comply with the statute

» Two comply with the statute assuming Proposal 

Nine is approved in Docket No. RM2011-

» The Commission is unable to determine if two 

discounts are consistent with the statute because 

of problems with the underlying costs

» The evaluation of one, the automation Mixed 

ADC discount, has been temporarily suspended

pending the outcome of Docket No.

 RM2011-13

 Cost coverage of presort parcels increased 

from a noncompensatory level in FY 2009 to a 

compensatory level.

Financial Analysis

The FY 2010 First-Class Mail cost coverage was 

199.3 percent. As Table VII-1 shows, total First-Class 

Mail FY 2010 revenue was $34.0 billion, which 

covered its attributable cost of $17.1 billion and 

contributed $17.0 billion to institutional cost. FirstClass Mail’s cost coverage decreased from 199.6 

percent in FY 2009 to 199.3 percent in FY 2010. 

With the exception of Presort Letters and Cards, 

increases in unit attributable costs for domestic 

First-Class Mail products are greater than the 

1.685 percent increase in the CPI-U for FY 2010. 
84 2010 Anual compliance determination Table VII–1 — First–Class Mail Fiscal Year 2010 Volume, Revenue, Cost, Contribution, and Cost Coverage by Product Volume (000) Total Revenue ($000) Attributable Cost ($000) Contribution to Institutional Cost ($000) Rev./Pc. (Cents) Cost/Pc. (Cents) Contribution to Institutional Cost/Pc. (Cents) Cost Coverage First–Class Mail: Single–Piece Letters 27,147,918 12,396,772 7,376,828 5,019,943 45.664 27.173 18.491 168.1% Single–Piece Cards 1,436,994 419,024 398,614 20,411 29.160 27.739 1.420 105.1% Total Single–Piece Letters and Cards 28,584,912 12,815,796 7,775,442 5,040,354 44.834 27.201 17.633 164.8% Presort Letters 43,293,821 15,419,328 5,161,839 10,257,489 35.616 11.923 23.693 298.7% Presort Cards 2,931,565 638,977 237,008 401,969 21.796 8.085 13.712 269.6% Total Presort Letters and Cards 46,225,386 16,058,305 5,398,847 10,659,458 

Single–Piece Flats 1,813,480 2,552,309 1,713,013 839,297 140.741 94.460 46.281 149.0%

Presort Flats 54,771 59,336 45,718 13,618 108.335 83.472 24.863 129.8%

Total Flats 2,483,992 3,122,695 2,147,953 974,741 125.713 86.472 39.241 145.4%

Single–Piece Parcels 558,387 1,108,904 1,110,137 (1,233) 198.590 198.811 (0.221) 99.9%

Presort Parcels 16,041 24,859 22,281 2,578 154.968 138.899 16.069 111.6%

Total Parcels 574,429 1,133,763 1,132,418 1,345 197.372 197.138 0.234 100.1%

Total Domestic First–Class Mail 77,868,718 33,130,559 16,454,660 16,675,899 42.547 21.131 21.415 201.3%

Total International First–Class Mail 334,438 894,964 620,754 274,210 267.602 185.611 81.991 144.2%

Total First–Class Mail 78,203,156 34,025,523 17,075,414 16,950,109 43.509 21.835 21.674 199.3%

Source: PRC–ACR 2010–LR 1
 POSTAL REGULATORY COMMISSION 85

Compared with FY 2009 the unit attributable cost 

for single-piece letters and cards increased 3.1 

percent; the unit cost for presort letters and cards 

decreased 0.2 percent; the unit cost for Flats 

increased 14.8 percent; and the unit cost for Parcels 

increased 4.6 percent. For FY 2010, First-Class 

Mail unit attributable cost increased by 1.8 percent 

on average. Each domestic First-Class Mail product 

covers its attributable cost in FY 2010. 

The Postal Service reports that the cost coverage for 

Parcels was 99.9 percent in FY 2010. However, 

the Postal Service’s figure does not include fee 

revenue. When fee revenues are included, Parcels 

cost coverage is 100.1 percent. The Parcels products 

consist of single-piece parcels and presort parcels. 

The cost coverage for single-piece parcels decreased 

from 102.0 percent in FY 2009 to 99.9 percent 

in FY 2010. However, the cost coverage of presort 

parcels has improved for the second year in a row 

(88 percent in FY 2008 and 92 percent in FY 2009) 

reaching 112 percent in FY 2010. The low cost 

coverage of single-piece parcels adversely affects the 

cost coverage for the Parcels product. 

Section 3622(c)(2) requires each class or type of 

mail service to cover its attributable costs and make 

a reasonable contribution to institutional costs. In 

Docket No. R2011-2, the Postal Service proposed

an above average increase of 2.57 percent for 

Parcels. The proposal included a uniform price for 

parcels weighing up to three ounces. The Postal 

Service asserts this will improve cost coverage by 

disincentivizing very light parcels, which are difficult 

to process on parcel sorting equipment. Docket

No. R2011-2, United States Postal Service Notice 

of Market-Dominant Price Adjustment, January 11,

2011, at 15-16. While this should improve the 

cost coverage of Parcels, the Postal Service should 

continue to raise the contribution for Parcels through 

cost reductions and future rate adjustments to satisfy 

this requirement as necessary. The Commission 

notes that the Postal Service has proposed to transfer 

commercial parcels to the Competitive Products List. 

If this is approved, it will be important for the Postal 

Service to account for the transfer in its next price 

adjustment. 

NPPC is concerned that the cost coverage for 

commercial bulk First-Class letters is too high and may 

soon be viewed as no longer “just and reasonable” 

under section 3622(b)(8). NPPC Comments at 4. 

NPPC observes that Presort First-Class letters pay 5.5 

cents more contribution than single-piece letters. It 

argues that the relatively high markup contributes to 

the decline in volume of this product. Additionally, 

NPPC notes that the Postal Service’s Customer 

Experience Measurement (CEM) system survey 

data show that large mailers expressed the least 

satisfaction with First-Class Mail. Id. at 3-4. NPPC 

suggests that the Postal Service believes that it will 

be unable to retain this mail in the future, and in the 

meantime will try to extract the maximum possible 

revenue from those pieces that must remain in the 

system. Id. at 5. Accordingly, NPPC asserts that the 

Commission has authority to prevent the Postal Service 

from exploiting its pricing flexibility. 

At this time the Commission does not find that the cost 

coverage for Presort First-Class letters violates section 

3622(b)(8). The Commission will continue to monitor 

the cost coverages of products to ensure compliance 

with the Act. NPPC has not demonstrated that prices 

are not just and reasonable.
86 2010 Anu

The discussion of international First-Class Mail 

appears in the section on Market Dominant

International Mail at the end of this chapter.

Worksharing 

The following eight worksharing discounts exceeded 

avoided cost: (1) Qualified Business Reply Mail 

(QBRM) Letters; (2) QBRM Cards; (3) Mixed AADC

Automation Letters; (4) Automation AADC Letters; (5)

Automation 3-Digit Letters; (6) 3-Digit Automatio

Cards; (7) ADC Automation Flats; and (8) Automation

3-digit Flats. The avoided cost calculations that form 

the basis of these passthroughs employ the accepted 

methodology and thus in the case of letters and 

cards, do not include the effects of Proposal Nine as 

discussed in the introduction. Below the Commission 

discusses passthroughs above 100 percent in the 

same order as listed above.

QBRM

The discounts for QBRM Letters and Cards 

passthrough 164.3 percent of avoided cost. See

Table VII-2. In Docket No. R2009-2, the Postal

Service passed through 100 percent of the avoided 

costs for both QBRM Letters and Cards. A decrease 

in avoided cost has led to the excessive passthrough. 

In Docket No. R2011-2, the Postal Service argued

that reducing the discounts may undercut the “Reply 

Rides Free” program and retaining the current level 

of discounts would help mitigate the above-average 

price increase experienced by presort mailers. In 

Docket No R2011-2, the Commission questioned the

Postal Service’s attempt to link QBRM and Reply Rides 

Free. However, the Commission reiterated its concerns 

that the current costing methodology underestimates 

the cost avoidance. For this reason, the Commission 

approved the proposed QBRM discount and it urged 

the Postal Service to develop a costing proposal and 

a petition to initiate a rulemaking proceeding as soon 

as practical. Order No. 675 at 14. Accordingly, no 

further action is warranted at this time.

Automation Letters

The Postal Service calculates the following 

passthroughs of avoided costs for automation letters: 

Mixed AADC, 126.1 percent; AADC, 104.

percent; and 3-digit, 150.0 percent.

Citing Order No. 536 the Postal Service states that 

the former single-piece benchmark, Bulk Metered 

Mail, is obsolete and should no longer be used. 

ACR at 51. Although the Postal Service calculates 

a passthrough for Mixed AADC letters, the Postal

Service interprets Order No. 536 to mean that 

the passthrough reported for automation Mixed 

AADC letters based on the BMM benchmark is not

applicable with regard to 39 U.S.C. 3622(e). ACR 

at 53. NPPC supports this interpretation of Order No. 

536. NPPC Reply Comments at 1-5.

APWU claims that the workshare discounts for FirstClass Mail Presort Letters/Cards reported by the 

Postal Service do not comply with the restrictions 

of 39 U.S.C. 3622(e). APWU Comments at 1. It 

contends that even if the BMM is not used as the 

benchmark in this proceeding, there is no reason to 

believe that the use of any other valid benchmark 

would affect costs avoided in such a way as to make 

the current discount for Mixed AADC letters compliant

with the law. Id at 3. APWU contends that the Postal 

Service should be required to justify discounts that 

exceed costs avoided and provide a comprehensive 

plan for phasing out excess discounts overtime. Id.

Additionally, APWU argues that excess capacity in 

the network can result in increased unit costs and 
 POSTAL REGULATORY COMMISSION 87

Table VII–2—First–Class Mail Letters, Flats, and Parcels 

Workshare Discounts and Benchmarks

FY 2010

Type of Worksharing 

(Benchmark)

Year–End 

Discount

(cents)

Unit Cost 

Avoidance

(cents) Passthrough

First–Class Mail Automation Letters

Barcoding & Presorting

Automation Mixed AADC Letter

(Bulk Metered Mail (BMM) Letters) 5.8 4.6 126.1%

Automation AADC Letter

(Automation Mixed AADC Letters) 2.2 2.1 104.8

Automation 3–digit Letters

(Automation AADC Letters) 0.3 0.2 150.0

Automation 5–digit Letters

(Automation 3–digit Letters) 2.2 2.6 84.6%

First–Class Mail Automation Flats

Barcoding & Presorting

Automation ADC Flat

(Automation Mixed ADC Flats) 12.2 4.4 277.3

Automation 3–digit Flats

(Automation ADC Flats) 6.1 5.6 108.9

Automation 5–digit Flats

(Automation 3–digit Flats) 16.2 17.4 93.1%

First–Class Mail Presorted/Business Parcels1

Barcoding & Presorting

Presort 3–digit Parcels

(Presort ADC Parcels) 8.6 55.9 15.4

Presort 5–digit Parcels

(Presort 3–digit Parcels) 13.2 36.0 36.7%

First–Class Mail Nonautomation Letters

Presorting

Nonautomation Presort Letters

(Bulk Metered Mail (BMM) Letters) 2.6 5.1 51.0%

Qualified Business Reply Mail

Barcoding

QBRM2

(Handwritten Reply Mail) 2.3 1.4 164.3%

Source: PRC–ACR2010–LR3.

1 The parcel cost avoidances presented here are different from the ones in the Postal Service’s original filing because the Postal Service inadvertently 

used the wrong cost avoidances from USPS–FY10–11, “FCM flat costs 2010.xls”, tab ’BUNDLE OPS SUMMARY.’ See response of the United

States Postal Service to Chairman’s Information Request No. 5, Question 2.

2 The QBRM cost avoidance presented here is estimated using the USPS methodology. The Commission found in R2006–1 that this underestimated 

avoided costs, but that the alternative on the record overestimated avoided costs.
88 2010 Anu

thus even workshare discounts that are set at 100 

percent of avoided costs exceed the true cost the 

Postal Service is able to avoid. APWU Comments 

at 4. APWU contends that this violates 39 U.S.C. 

3622(e)(4)(C) because mailers who do not utilize the 

discounts are adversely impacted. Id. NPPC states 

that APWU’s excess capacity arguments do not justify 

reductions in worksharing discounts. NPPC Reply 

Comments at 1-5. 

Order No. 536 suspended the evaluation of 

the automation Mixed AADC letter discount with

regard to section 39 U.S.C. 3622(e) pending the 

outcome of Docket No. RM2010-13, which seeks to

determine the appropriate base or reference group 

from which the costs avoided by worksharing are to 

be calculated. 

The Postal Service failed to justify the AADC and

3-digit automation letters discount, and instead in 

both Docket Nos. R2011-2 and ACR 2010, the

Postal Service calculated cost avoidances using an 

unapproved methodology. The Postal Service’s price 

increase in Docket No. R2011-2 aimed to realign

the discounts with avoided cost. However, the Postal 

Service calculated First-Class Mail letters and cards 

cost avoidances assuming approval of methodologies 

and input data introduced in Docket No. RM2011-5,

Proposal Nine. Using this unapproved methodology, 

the discounts passthrough 100 percent of avoided 

cost. The Commission finds that no further action is 

required at this time. The Commission will hold any 

remedial action on these two discounts in abeyance 

until the conclusion of Docket No. RM2011-5

Table VII–3—First–Class Mail Cards 

Workshare Discounts and Benchmarks

Type of Worksharing

(Benchmark)

FY 2010

Year–End 

Discount

(cents)

Unit Cost 

Avoidance

(cents) Passthrough

First–Class Mail Automation Cards

Barcoding & Presorting

Automation Mixed AADC Card

(Nonautomation Presort Cards) 1.5 2.7 55.6%

Automation AADC Card

(Automation Mixed AADC Cards) 1.0 1.1 90.9

Automation 3–digit Cards

(Automation AADC Cards) 0.2 0.1 200.0

Automation 5–digit Cards

(Automation 3–digit Cards) 1.3 1.4 92.9%

Qualified Business Reply Mail

Barcoding

QBRM1

(Handwritten Reply Cards) 2.3 1.4 164.3%

Source: PRC–ACR2010–LR3.

1 The QBRM cost avoidance presented here is estimated using the USPS methodology. The Commission found in R2006–1 that this underestimated 

avoided costs, but that the alternative on the record overestimated avoided costs.
 POSTAL REGULATORY COMMISSION 89

Automation Cards

The discount for 3-Digit Automation Cards has a

passthrough of 200 percent of avoided costs. In 

Docket No. R2009-2, this passthrough was at 100

percent. However, lower avoided costs between 

FY 2008 and FY 2010 caused this passthroughs 

to exceed 100 percent, which renders the discount 

inconsistent with 39 U.S.C. 3622(e). The Postal 

Service’s price change in Docket No. R2011-2

realigns the discount with avoided cost, therefore, no 

further action is required.

Automation Flats

First-Class Mail Automation Flats passthroughs for 

ADC Automation Flats and 3-Digit Automation Flat

are 277.3 percent and 108.9 percent, respectively. 

The Postal Service cites a reduction in cost avoidance 

resulting from FY 2008 methodology changes, as 

explained in Docket No. RM2008-2, Proposal

Eight, as the primary reason ADC and 3-digit flats

passthroughs exceed 100 percent. In Docket No.

R2011-2, the Postal Service argued that setting all 

flats worksharing passthroughs at 100 percent will 

lead to significantly higher rates, which would cause 

rate shock, 39 U.S.C. 3622(e)(2)(B). ACR at 28 and 

29. The Commission found that the planned discounts 

were justified in Docket No. R2011-2. For these

reasons, no further action is required.

The First-Class Mail Incentive Program 

The First-Class Mail Incentive Program ran between 

October 1 and December 31, 2009. Eligible

Mailers received a 20 percent postage rebate on 

qualifying presort letter, flat, and card volumes above 

a predetermined threshold mailed between October 

1, 2009, and December 31, 2009.

The Postal Service reports more than 211 million 

pieces over volume thresholds were mailed by 170 

customers, who earned rebates of $14.6 million. The 

Postal Service estimates that the program generated 

over 142 million new pieces, and caused another 4 

million to migrate from Standard Mail to First-Class 

Mail. In the ACR the Postal Service reported that new 

volume produced approximately $34 million of new 

contribution, net of rebates paid. ACR at 22. 

The Postal Service inadvertently reported an incorrect 

amount of new contribution in the ACR. The Postal 

Service’s revised data collection report filed on 

July 29, 2010, shows that using the Postal Service’s 

methodology, it made $34 million in contribution only 

when treating the contribution from “loyalty volume,” 

as caused by the incentive.4 According to the Postal 

Service’s calculations, the program generated a $19 

million net increase in contribution5 (contribution from 

volume generated by the incentive minus discounts 

awarded to “loyalty volume”). 

To analyze this program, the Commission uses the 

accepted methodology that incorporates elasticities, 

after-rates volume and marginal discounts earned 

to estimate the incremental volume. It shows that the 

Postal Service lost $7 million in contribution from the 

program.6

PERIODICALS 

Introduction 

The Periodicals class includes publications such as 

magazines, newspapers, journals, and newsletters. 

4 Loyalty volume, also referred to as “anyhow volume,” is mail that 

would have been sent without any incentive. 5 First-Class Mail Incentive Program Data Collection Report - Revised

Excel Data Files, 7/29/2010, FCM Incentive Analysis.xls 6 First-Class Mail Incentive Program Data Collection Report - Revise

Excel Data Files, 7/29/2010, FCM Incentive Analysis.PRC.Meth.xl
90 2010 Anu

Eligibility criteria include a minimum amount of 

editorial (non-advertising) content.7 This requirement 

establishes the Periodicals class as one with 

educational, cultural, scientific, and informational 

(ECSI) value provided by Periodicals. Consequently, 

the Periodicals Mail class is a preferred class of mail 

and receives several statutory discounts as identified in 

section 3626 of title 39, United States Code, such as 

a five percent discount for Non-profit and Classroom 

publications.

The Periodicals class is comprised of two products: 

Within County and Outside County. This division 

parallels the structure of the class before enactment 

of the PAEA. The Within County product is typically 

used by smaller circulation weekly newspapers for 

distribution within the county of publication. Pricing 

mainly reflects the number of pieces in a mailing, 

presort level, and total weight. The Outside County 

product consists of publications with a wide variety 

of circulation sizes, distribution patterns, and 

frequencies. Pricing is based not only on number 

of pieces and weight, but also on other elements 

such as bundles, type of container, entry point, 

machinability, and automation capability.

The profiles of the two Periodicals products differ 

significantly in terms of volume and revenue. In 

FY 2010, approximately 695 million copies of 

Periodicals were mailed at Within County prices, 

and generated approximately $73 million in revenue 

for the Postal Service. In contrast, during the same 

year, 6.6 billion copies of Periodicals were mailed at 

Outside County prices, and generated approximately 

$1.8 billion in revenues for the Postal Service. The 

7 See Domestic Mail Manual: 707.4.0, Basic Eligibility Standards;

707.6.0, Qualification Categories; and 707.4.13, Advertising 

Standards.

Postal Service did not propose any methodological 

changes to the Periodicals cost model prior to filing its 

FY 2010 ACR. 

The principle FY 2010 findings are:

 Prices were in compliance with the preferred rate 

requirements identified in Section 3626 of title 39, 

United States Code.

 Within County attributable costs exceeded 

revenues by $24 million, producing a cost 

coverage of 75.4 percent.

 Outside County attributable costs exceeded 

revenues by $587 million, producing a cost 

coverage of 75.5 percent.

 Nine workshare discounts exceeded avoidable 

cost, but need not be adjusted since they qualify for

the ECSI exception under section 3622(e)(2)(C).

 Worksharing passthrough percentages (especially 

carrier route) and price-cost ratios for bundle and 

containers should be moved towards 100 percent 

to provide incentives for efficient mail preparation.

 The Commission agrees with the Postal Service 

that current rates for Periodicals do not satisfy 39 

U.S.C. 3622(c)(2). The Commission recommends 

that the Postal Service pursue the opportunities to 

be explored in the upcoming Periodicals Study to 

reduce the costs of handling flats.

Financial Analysis

Background 

Table VII-4 provides relevant financial data for Within 

County, Outside County, and the Periodicals class as 

a whole. It shows volume, revenue, attributable costs, 

contribution to institutional costs, and cost coverage 

for each Periodical product in FY 2010.
 POSTAL REGULATORY COMMISSION 91

Table VII-4 shows that Periodicals continue to make a 

negative contribution to institutional costs and continue 

to have cost coverage below 100 percent.

Comments on Cost Coverage

MPA/ANM/ABM utilizes two analytic coverage 

methods, or tools, to evaluate cost coverage for 

Outside County Periodicals. One is to use shortrun marginal costs to attribute costs to Periodicals, 

which it considers appropriate in conditions of 

excess capacity. The other begins with the premise 

that Periodicals mailers use other postal products 

and then concludes that the contribution from 

those products should be used in combination with 

Periodicals to asses Periodicals’ cost coverage. MPA 

et al. Comments at 7-13, 15-16, Appendix A, and 

Reply Comments at 5. Conde’ Nast supports these 

approaches. Conde’ Nast Comments at 2. 

Valpak opposes use of short-run marginal costs in 

deriving attributable costs. It claims, among other 

things, that this approach abandons the Commission’s 

40-year practice for a new, untried and untested 

system simply for the benefit of Periodicals cost 

coverage. Valpak Reply Comments at 19-21. 

Valpak disputes the validity of including the 

contribution of complementary products used by 

Periodical mailers when analyzing whether its revenue 

is greater than its attributable costs. It argues that 

every product makes use of other products, and 

to count the contribution made by other classes or 

products would amount to double-counting. Id at 14.

Valpak also raises concerns about the losses generated 

by Periodicals over the last 14 years which amount to 

$4.3 billion. It observes that an average price increase 

of 32 percent would be required to bring Periodicals 

to full cost coverage within one year and 16 percent 

within two years. Valpak Comments at 32. It urges 

the Commission to find that the Postal Service’s pricing 

policies violate section 101(d) and order it to move 

towards cost coverage compliance. Id. at 31.

On behalf of Time, Inc., Halstein Stralberg filed an 

Addendum. The Addendum analyzes the reasons 

Periodicals have failed to contribute to the recovery of 

the Postal Service’s institutional costs. Stralberg offers 

both operational and pricing recommendations to 

improve cost coverage. Stralberg believes substantial 

efficiencies would be gained if the Postal Service 

were to improve its network configuration, and 

make several operational steps it believes would 

reduce manual sorting, such as ending “Hot2C 

lists,” stop making “heroic efforts” when mailers miss 

critical entry times (CETs), and define machinability 

according to the preparation needed for 5-digit 

barcoded flats to be processed on the AFSM 100. 

Time Addendum at 8.

Table VII–4 

Periodicals Fiscal Year 2010 Mail Volume, Revenue, and Cost by Product

Product

Volume

(Millions)

Revenue 

(Millions)

Attributable 

Cost (Millions)

Contribution 

(Millions)

Revenue 

per Piece

Cost Per 

Piece

Unit 

Contribution

Cost 

Coverage

Within County 695.5 $74.3 $98.5 $(24.2) $0.107 $0.142 $(0.035) 75.44%

Outside County 6,574.0 $1,804.5 $2,391.3 $(586.8) $0.274 $0.364 $(0.089) 75.46%

Total 7,269.5 $1,878.8 $2,489.8 $(611.0) $0.258 $0.343 $(0.084) 75.46%

Source: USPS–FY10–1, FY10PublicCRA.xls, and PRC–ACR2010–LR1, 10_Summary_LR1.xlsx
92 2010 Anu

The Public Representative (PR) faults the Postal Service 

for not providing data on 40 Flat Sequencing System 

(FSS) machines in operation. PR Comments at 18-

20. The PR also contends that the annual increase in 

automated flats mail processing productivity was less 

than in the previous years. Id. at 20. Finally, the PR 

contends that the share of flat costs incurred in manual 

sorting operations has been steadily increasing since 

FY2007, and now nearly one-half of flats costs are 

incurred in manual sorting operations. Id. at 21. 

The Postal Service addresses the cost coverage issue 

by first contending that cost coverage is due to many 

factors, not only efficient operations. It states that 

these other factors are responsible for the increase 

in mail processing costs per piece, and maintains 

they were outside of its control. Postal Service Reply 

Comments at 19, 21-23. The Postal Service rebuts 

the notion that there are significant efficiencies that 

could be captured if it were to require mailers to meet 

AFSM100 machinability standards before qualifying 

for a machinable rate. It states that only 4 percent 

of non-carrier route Outside County Flats did not 

receive a mechanized sort on the AFSM100, and 

that approximately 14 percent of Outside County 

Periodicals do not receive mechanized sorts, even if 

they are machinable. Id. at 26. 

The Postal Service responds to the PR’s claim that most 

FSS have been in operation during this last year but 

does not report the costs or productivities of these 

operations. The Postal Service states that even though 

several FSS machines were in operation during the 

year, it was only by the end of the year that most 

were out of the testing phase and able to operate full 

potential. Id. at 2.

The Postal Service next addresses the PR’s concern that 

the share of costs incurred by flats in manual sorting 

operations has steadily increased since FY2007. The 

Postal Service notes that the absolute level of manual 

sorting costs has declined, not increased, since FY 

2007, and it explains that about 75 percent of the 

flats sorted on the UFSM1000 are now being sorted 

on the much more efficient AFSM100. The Postal 

Service speculates that since the AFSM can sort much 

more efficiently than UFSM1000, it may be the case 

that mechanized sorting costs have declined compared 

to manual sorting costs. Id. at 10.

Commission Analysis

Commentors raise several issues. MPA/ANM/

ABM contend that cost coverage should be assessed 

using short-run marginal cost (SRMC) and that the 

contribution from other mail created by Periodicals 

mailers should also be included in that evaluation. 

This latter approach is often referred to as the 

multiplier effect. Time argues that Periodicals cost 

coverage can be improved by cost reductions that 

could be obtained by improving operations and by 

making some strategic pricing changes. The Public 

Representative also discusses the cost of operations 

and Valpak suggests price increases.

Short-Run Marginal Cost Analysis. Sections 3622(c)

(2) and 3633(a) require the Commission to determine 

if annual revenues exceed annual costs. The current 

methodology used to calculate attributable costs has 

evolved over a 40- year period through both PRA rate 

cases and the more recent ACD process. It reflects 

long-run approach to costing. For a business or the 

Postal Service to remain viable, total revenue must 

equal or exceed total cost. To this end, each product’s 

revenue has to exceed its attributable cost plus make 
 POSTAL REGULATORY COMMISSION 93

a reasonable contribution to institutional cost. This 

approach is incorporated into section 3622(c)(2). 

Further, section 3633(a)(2) requires the revenue for 

each competitive product to cover its attributable costs.

Using SRMC to assess the adequacy of revenues, 

i.e., the adequacy of prices, may not result in a set of 

prices that covers average total costs because SRMC 

excludes capacity cost. However, long-run marginal 

cost (LRMC) reflects changes in capacity cost; thus, 

basing prices on LRMC helps ensure that prices 

produce revenues that cover average total cost.8

SRMC may be appropriate for time-limited pricing 

program when there is excess capacity, but it is not 

appropriate for the purposes of assessing annual 

attributable costs. For this reason, short-run marginal 

cost is not an appropriate basis for evaluating the 

adequacy of revenues.

Multiplier Effect. Valpak argues that all products 

create a multiplier effect and that using the 

contribution from other products to assess Periodicals’ 

cost coverage would be double counting. The 

Commission agrees. Each product must be evaluated 

using its own revenues and attributable cost.

Cost Reductions and Price Changes. An important 

issue with respect to Periodicals is the amount of 

cost incurred by the Postal Service in manual mail 

processing operations. Both the Public Representative 

and Time comment that the Postal Service could 

accrue savings by reducing manual flats processing 

operations. The Public Representative contends that 

half of the costs of processing flats occurs in manual 

processing operations. Time argues that the Postal 

Service incurs manual processing costs due to 

8 For a discussion of these concepts, see Kahn, Alfred E., The 

Economics of Regulation: Principles and Institutions, Volume I: 

Principles, pp. 87-89, 1970.

management decisions such as the “Hot Publications” 

program and by providing same-day processing for 

Periodicals that miss the Critical Entry Time (CET) for 

automation processing. The Postal Service states that 

“the majority of pieces worked manually are worked 

manually for reasons that have nothing to do with 

service (Hot 2C) concerns.” Postal Service Reply 

Comments at 26.

The Postal Service provided an analysis of Periodicals 

FY 2010 manual piece and bundle processing costs 

in its Reply Comments. The Postal Service states that 

“[r]elative to the gap between average revenue and 

average attributable costs, manual mail processing 

costs are small.” Id. at 25. The total cost incurred by 

manually processing Periodicals in FY 2010 was over 

$300 million.9

The Postal Service states that not all of the $300 

million incurred in manual mail processing cost 

pools was due to processing activities. Manual mail 

processing cost pools contain costs for activities not 

directly related to processing pieces and bundles, for 

example costs associated with clocking in and out. 

The Postal Service uses IOCS tallies to isolate manual 

processing operation costs from the larger pool of 

manual processing costs. Table VII-5 contains the 

Postal Service’s estimate of manual mail processing 

costs for three specific manual processing cost pools.

The Postal Service is unable to isolate the portion of 

the $188 million incurred due to manual processing 

that is required by nonmachinable pieces, compared 

to the portion of the $188 million incurred in manual 

9 The Periodicals Outside County unit cost for mail processing cost 

pools associated with manual processing was 4.57 cents per RPW 

piece in FY 2010. Reply Comments at 26. The total attributable cost 

for FY 2010 is calculated by multiplying 4.57 cents x 6.5 billion 

Outside County Pieces. This results in a total attributable cost of over 

$300 million.
94 2010 Anu

processing costs due to management decisions such 

as the “Hot Publications” program. There may to be 

an opportunity for significant savings.

A recent United States Postal Service Office of 

Inspector General (OIG) report (No. CRR-AR-11-001) 

recommended elimination of the Hot2C program. The 

OIG Report indicates that management has agreed 

to a target date of April 2011 for issuing guidance 

on the Hot 2C matter. The Commission requests that 

the Postal Service supplement the record with a copy 

of that guidance when issued. The OIG Report also 

indicates the Postal Service will evaluate establishing a 

national CET for Periodicals. Here too, the Commission 

requests that the Postal Service supplement the record 

with a copy of that guidance when issued as well. 

In contrast to the opportunities for cost reductions, 

Valpak contends that Periodicals prices should be 

increased substantially. The Commission recognizes 

that the year to year losses generated by Periodicals 

are a persistent and difficult problem. However, 

the Commission is not persuaded by Valpak that 

it should order prices to be increased beyond the 

statutory cap. Because Outside County Periodicals 

represents 96 percent of the class revenues, the 

Postal Service does not have the same discretion to 

set prices substantially above the price cap that it has 

with respect to products within Standard Mail. Thus 

corrective pricing measures are limited. Further, there 

are other options available to the Postal Service that 

it has not yet fully exercised. One set of options is on 

the costs side and the other is on the pricing side.

On the cost side, the Postal Service can continue to 

pursue the Flats Strategy that it outlines in its Exigency 

Request. This includes ending the Hot2C program. 

Other areas of potential cost reductions will be 

detailed in the forthcoming Periodicals Study Report. 

On the pricing side, as noted in last year’s ACD and i

the sections that follow, there is room for improvement 

in worksharing discounts and in the prices for bundles 

and containers. The Postal Service can create 

additional incentives for mailers to prepare mail more 

efficiently. The extent to which these passthroughs do 

not achieve 100 percent reflects opportunities that the 

Postal Service has not fully utilized.

Given continuing year to year losses, the Postal 

Service states that “the Periodicals class does not 

satisfy 39 U.S.C. 3622(c)(2) of title 39.” ACR at 

35. Recognizing that this is one of 14 factors that 

must be taken into account, the Commission agrees 

and recommends that the Postal Service pursue the 

opportunities explored above and in the Periodicals 

Study to reduce the costs of handling flats.

Table VII–5—Postal Service Estimate of 

FY 2010 Manual Piece and Bundle Processing Cost1

MODS NONMODS MODS

LD43 MANF MANF Total

Piece Handling $31,555,200 $75,601,000 $36,157,000 $143,313,200

Bundle Handling $19,064,600 $21,694,200 $3,994,440 $44,703,200

Manual Processing $50,619,800 $97,295,200 $40,101,400 $188,016,400

1 This table is calculated using figures contained in the Postal Service’s Reply Comments Table 5 at 29. The mail processing unit costs per piece in that 

table are multiplied by the Periodicals Outside County Volume.
 POSTAL REGULATORY COMMISSION 95

Worksharing Discounts

No Within County passthroughs exceeded 100 

percent. Nine Outside County passthroughs, 

identified in Table VII-6 exceeded 100 percent.10

Discounts that exceed avoided costs are permissible

if a statutory exception applies. See 39 U.S.C. 

3622(e). The Postal Service justifies the Periodicals 

discounts that exceeded 100 percent on the basis of 

section 3622(e)(2)(C), which authorizes workshare 

discounts greater than avoided cost if provided in 

connection with a subclass that consists exclusively of 

mail matter with ECSI value. FY 2010 ACR at 61.

Comments

As the Postal Service has prepared for the introduction 

of the FSS, the issues of passthroughs for Carrier 

Route pieces and the Price/Cost Ratios of sacks 

and pallets has come to the fore. Periodicals mailers 

10 Based on information in original filing using FY 2010 cost data and 

R2009-2 prices, as revised by Postal Service Response to CHIR No. 

1, Questions 3, 4 and 7. 

have criticized the Postal Service in recent dockets 

for reducing incentives to Carrier Route pieces. 

Time maintains that only 30 percent of flats will be 

sorted on an FSS, leaving Carrier Route an efficient 

alternative for the majority of its mail. Time Comments, 

Addendum at 12. The Postal Service responds 

that Carrier Route pieces maintain a constant price 

differential with 5-Digit Automation pieces, and

says that if the differential were increased it would 

encourage more preparation than will be necessary 

in an FSS environment. Postal Service Reply 

Comments at 39.

Commission Analysis 

The Periodicals class qualifies for ECSI consideration; 

therefore, the Commission finds that the Outside 

County discounts that exceed avoidable costs are 

consistent with section 3622(e). The same nine 

categories that had passthroughs greater than 

100 percent in Docket No. R2009-2, also hav

passthroughs greater than 100 percent using the prices 

Table VII–6—Outside County Periodicals Workshare Discounts 

Exceeding Avoidable Cost in FY 2010 Using R2009–2 Prices

Type of Worksharing Discount

Avoidable 

Costs Passthrough

Pre–sorting ($ per piece)

Machinable Nonautomation 5D Flats $0.097 $0.093 104.3

Machinable Automation 5D Flats $0.086 $0.084 102.4

Nonmachinable Nonauto 3D/SCF Flats $0.074 $0.046 160.9

Nonmachinable Automation 3D/SCF Flats $0.060 $0.042 142.9

ADC Automation Letter $0.040 $0.016 250.0

3–Digit Automation Letter $0.020 $0.002 1000.0

5–Digit Automation Letter $0.060 $0.019 315.8

Pre–barcoding ($ per piece)

Machinable Automation MADC Flats $0.032 $0.026 123.1

Nonmachinable Automation MADC Flats $0.045 $0.022 204.6

Source: ACR2010–PRC–LR5
96 2010 Anu

recently approved in Docket No. R2011-2; however,

several of these passthroughs were reduced by several 

percentage points.11 See R2011-2, PRC-LR-2.

With regard to carrier route passthroughs, Table VII-7 

first shows that the Postal Service has been increasing 

the incentives for 5-Digit Automation pieces compared

to Basic Carrier Route pieces, and Table VII-8 shows 

that the avoided cost for 5-Digit Automation pieces

has been declining. 

In this ACD, the Commission is assessing whether

current discounts, i.e., the discounts in effect in FY 

2010, comply with the statute. The Postal Service 

shows that the cost avoided in FY 2010 by moving 

mail from Machinable Nonautomation 5-digit Flats 

to Carrier Route Basic is 15.2 cents per piece. Thus, 

the Postal Service’s own cost study shows that carrier 

route mail saves it money in the current operating 

11 Tables displaying the full range of discounts, avoidable costs, and 

passthoughs for Within County and Outside County Periodicals, as 

well as prices, bottoms-up costs, and price-cost ratios for bundles, 

sacks, and pallets, appear in the tables at the end of this section.

environment. Further, the discount is only 10.8 cents 

per piece which means that the Postal Service is 

sorting mail to the carrier route that could be done 

cheaper by another party. If the Postal Service were 

to increase the discount to 15.2 cents, then more 

5-digit mail would be sorted to the carrier route level 

by mailers or third parties who can sort the mail for 

less than 15 cents a piece.12 This is the benefit of 

using 100 percent passthroughs.

The Postal Service contends that carrier route mail 

will have less value in an FSS environment, but there 

are no studies showing how much the avoided 

costs associated with sorting to the carrier route 

level will decrease. Given the studies available, 

increasing the discount for carrier route discount 

would save the Postal Service money. For this reason, 

the Commission recommends that in the future, the 

Postal Service increase the carrier route passthrough 

to incent more efficient mailer preparation. When 

FSS equipment becomes operational then the Postal 

Service’s cost studies should reflect any reduction in 

the value of Carrier Route presort and discounts may 

be adjusted accordingly.

Price-Cost Ratios for Bundles and Containers

Discrete pricing for Outside County bundles, sacks,

and pallets was introduced in Docket No. R2006

1. The prices, bottom-up costs, and ratios of price 

to bottom-up cost for each combination of item, 

presort level, and entry level are shown in the tables 

at the end of this section. These price-cost ratios can 

be thought of similarly to worksharing discounts, 

in the sense that they reflect many incentives for 

12 Similarly, the price for Carrier Route bundles should also reflect 100 

percent of the cost. Using a 100 percent passthrough for Carrier route 

bundles and presort level would incentivize the most efficient mail 

preparation.

Table VII–8—Changes in Avoided Costs for 

Carrier Route and 5 Digit Automation Pieces

Avoided Cost Change

($/piece)

2008–2009 2009–2010

CR Basic $0.03 $0.00 

5 Digit Automation $(0.17) $(0.01

Sources: Docket Nos. ACR2007 – ACR2010, PRC–LR

Table VII–7—Carrier Route and 5–Digit 

Automation Passthroughs Over Time

Passthroughs

2008 2009 2010

CR Basic 88.15% 71.52% 71.05%

5–Digit Automation 61.37% 96.63% 102.38

Sources: Docket Nos. ACR2007–ACR2010, PRC–LR
 POSTAL REGULATORY COMMISSION 97

cost-reducing mail preparation behavior, but unlike 

worksharing discounts they do not explicitly reflect the 

relation of discounts to the costs avoided by greater 

mailer preparation. Price-cost ratios are used to 

describe how much of a cost is recognized in a given 

price element. The price-cost ratios for bundles, sacks, 

and pallets are significantly below 100 percent. 

Price-cost ratios range from a low of 15.8 percent 

for a mixed ADC sack entered at the origin sectional

center facility, to a high of 54.6 percent for a 3-digit 

pallet entered at the origin bulk mail center.

Comments

Time asserts that the Postal Service has increased 

the prices for pallets more than sacks, which it says 

is a sign of an inefficient price structure, since sacks, 

especially origin-entered sacks, are much less efficient 

than destinating pallets. Time Comment Addendum 

at 12. The Postal Service asserts its price structure is 

rational because origin-entered pallets will receive 

a greater price increase than the average price 

increase it proposed in Docket No. R2011-2. Postal

Service Reply Comments at 39.

Commission Analysis

The Commission recommends that the Postal Service 

increase the price/cost ratios of sacks in comparison 

to pallets.13 Table VII-9, shows that the Postal Service 

has proposed relatively small increases in the price/

cost ratio for destinating sacks, while proposing 

relatively large increases in destinating pallets. Using 

incentives to move mail out of sacks and onto pallets 

is an efficient price structure.

Table VII-9 shows that the price/cost ratios for 

destinating pallets have increased between 14.6 

and 18.3 percentage points. In contrast, the price/

cost ratios for destinating sacks have increased 

between 4.9 and 6.3 percentage points. The Postal 

Service has not explained why its price changes tend 

to favor the continued preparation of sacks, while 

discouraging pallet preparation.

13 The Commission notes that the three categories that significantly 

exceeded 100 percent passthrough (with passthroughs of 250 

percent, 315.8 percent, and 1,000 percent) are letter-only 

categories. The volumes associated with these categories account 

for 1.4 percent of the volume in all categories with passthroughs that 

exceed 100 percent, and for less than one-half of one percent of all 

Outside County volume. ACD FY 2010, PRC–ACR2010–LR5

VII–9—Comparison of Price/Cost Ratios of Sacks to Pallets 

Between FY 2008 and R2011–2

Average of Destinating Containers FY2008 FY2009 FY 2010 R2011–2

Percentage Point 

Change Since 

2008

ADC Destinating Sack 30.8% 35.9% 36.5% 37.1% 6.3

3d/SCF Destinating Sack 32.1% 36.1% 36.6% 37.2% 5.10

5–D/CR Destinating Sack 29.9% 34.8% 34.1% 34.6% 4.7

ADC Destinating Pallet 36.0% 49.5% 50.2% 51.0% 15.0

3–D/SCF Destinating Pallet 35.0% 48.2% 48.8% 49.6% 14.6

5–D/CR Destinating Pallet 30.6% 48.5% 48.6% 48.9% 18.3

Sources: Docket Nos. ACR2007–ACR2010, PRC–LR–5, and Docket No. R2011–2, PRC–LR–
98 2010 Anu

Table VII–10—Within County Passthroughs, FY 2010 

Using R2009–2 Prices

Type of Worksharing Discount Avoided Costs Passthrough

Presorting (dollars per piece)

3–Digit Presort $0.012 $0.054 22.2

5–Digit Presort $0.013 $0.139 9.4

CR Basic $0.046 $0.160 28.8%

High Density $0.015 $0.030 50.0

Saturation $0.014 $0.028 50.0%

3–Digit Automation Letter $0.009 $0.010 90.0

5–Digit Automation Letter $0.002 $0.019 10.5

Pre–barcoding (dollars per piece)

Basic Automation Flats $0.016 $0.083 19.3%

3–Digit Automation Flats $0.012 $0.065 18.5

5–Digit Automation Flats $0.006 $0.017 35.3

Dropshipping (dollars per piece)

DDU Dropship $0.008 $0.029 27

Source: PRC–ACR2010–LR5
 POSTAL REGULATORY COMMISSION 99

Table VII–11—Outside County Passthroughs, FY 2010 

Using R2009–2 Prices

Type of Worksharing Discount Avoided Costs Passthrough

Presorting (dollars per piece) %

Machinable Nonautomation ADC Flats $0.035 $0.036 97.2

Machinable Nonautomation 3D/SCF Flats $0.017 $0.035 48.6

Machinable Nonautomation 5D Flats $0.097 $0.093 104.3

CR Basic $0.108 $0.152 71.1%

High Density $0.027 $0.030 90.0

Saturation $0.019 $0.028 67.9%

Machinable Automation ADC Flats $0.026 $0.030 86.7

Machinable Automation 3D/SCF Flats $0.015 $0.033 45.5

Machinable Automation 5D Flats $0.086 $0.084 102.4

Nonmachinable Nonauto ADC Flats $0.115 $0.142 81.0

Nonmachinable Nonauto 3D/SCF Flats $0.074 $0.046 160.9

Nonmachinable Nonauto 5D Flats $0.116 $0.221 52.5

Nonmachinable Automation ADC Flats $0.094 $0.146 64.4

Nonmachinable Automation 3D/SCF Flats $0.060 $0.042 142.9

Nonmachinable Automation 5D Flats $0.107 $0.198 54.0

ADC Automation Letter $0.040 $0.016 250.0

3–Digit Automation Letter $0.020 $0.002 1000.0

5–Digit Automation Letter $0.060 $0.019 315.8

Pre–barcoding

Machinable Automation MADC Flats $0.032 $0.026 123.1

Nonmachinable Automation MADC Flats $0.045 $0.022 204.5

Source: PRC–ACR2010–LR5
100 2010 Anu

Table VII–12—Outside County Bundle Price/ 

Cost Ratios, FY 2010 Using R2009–2 Prices

Container 

Level Bundle Level Price Cost

Price as 

Percent of 

Cost

Mixed ADC (dollars per piece) %

MADC $0.077 $0.185 41.6

ADC $0.201 $0.495 40.6

3–D/SCF $0.267 $0.641 41.7

5–D $0.276 $0.688 40.1

Firm Bundle $0.179 $0.918 19.5%

ADC

ADC $0.111 $0.280 39.6

3–D/SCF $0.183 $0.431 42.5

5–D $0.199 $0.479 41.5

CR $0.314 $0.733 42.8%

Firm Bundle $0.149 $0.733 20.3%

3–D/SCF

3–D/SCF $0.125 $0.278 45.0

5–D $0.145 $0.333 43.5

CR $0.279 $0.565 49.4%

Firm Bundle $0.137 $0.565 24.3%

5–D/CR

5–D $0.140 $0.320 43.8

CR $0.147 $0.320 45.9%

Firm Bundle $0.077 $0.320 24.1%

Source: PRC–ACR2010–LR5

Table VII–13—Outside County Sack Price/ 

Cost Ratios, FY 2010 Using R2009–2 Prices

Sack Level Entry Point Price Cost

Price as 

Percent 

of Cost

Mixed ADC (dollars per piece) %

OSCF $0.42 $2.66 15.8%

OADC $0.42 $2.15 19.5

ADC

OSCF $2.01 $6.11 32.9%

OADC $2.01 $5.95 33.8

OBMC $2.01 $5.24 38.4%

DBMC $1.40 $3.91 35.8

DADC $0.80 $2.15 37.

3–D/SCF

OSCF $2.10 $6.55 32.1%

OADC $2.10 $6.24 33.6

OBMC $2.10 $5.44 38.6%

DBMC $1.50 $4.03 37.2

DADC $1.20 $3.39 35.

DSCF $0.80 $2.15 37.2

5–D/CR

OSCF $2.70 $8.53 31.6%

OADC $2.70 $7.86 34.3

OBMC $2.70 $7.11 38.0%

DBMC $2.00 $5.74 34.8

DADC $1.70 $4.98 34.

DSCF $1.30 $3.84 33.9

DDU $0.90 $2.67 33.

Source: PRC–ACR2010–LR5
 POSTAL REGULATORY COMMISSION 101

Standard Mail

Introduction

The Standard Mail class has six products: Letters; 

Flats; Not-Flat Machinables (NFMs)/Parcels; Carrier 

Route; High Density and Saturation Letters; and High

Density and Saturation Flats/Parcels. Standard Mail

had a volume of 82.5 billion pieces in FY 2010. 

Standard Mail accounts for 48 percent of total 

mail volume and 22 percent of total contribution to 

institutional costs.

The principal FY 2010 findings are:

 Standard Mail contributed $5.5 billion to 

institutional costs.

 The attributable cost of Standard Mail Flats 

exceeded revenues by $577 million, resulting in a 

cost coverage of 82 percent.

 The Commission finds that the prices for Standard 

Mail Flats did not comply with 39 U.S.C 101(d) 

and directs corrective action.

 The attributable cost of Standard Mail NFMs/

Parcels exceeded revenues by $172 million, 

resulting in a cost coverage of 78 percent, but 

the Postal Service is making significant efforts to 

address this problem.

 Sixteen workshare discounts exceeded avoided 

costs. 

» Three discounts were adjusted to reflect 100 

percent of avoided cost in Docket No. R2011-2

» One discount was justified on the basis of rate 

shock,

» Eight discounts were justified as necessary to 

promote efficient operations,

» Because of anomalous costs, the Commission 

is unable to determine if four discounts are 

consistent with section 3622(e).

Table VII–14—Outside County Pallet Price/ 

Cost Ratios, FY 2010 Using R2009-2 Prices

Pallet Level Entry Point Price Cost

Price as 

Percent 

of Cost

ADC (dollars per pallet) %

OSCF $28.00 $66.75 41.9%

OADC $28.00 $59.80 46.9

OBMC $28.00 $52.58 53.3%

DBMC $22.40 $44.28 50.6

DADC $12.40 $24.86 49.

3-D/SCF

OSCF $33.36 $79.01 42.2%

OADC $33.36 $73.42 45.4

OBMC $33.36 $61.19 54.5%

DBMC $23.80 $47.88 49.7

DADC $20.70 $42.39 48.

DSCF $11.10 $23.15 47.9

5-D/CR

OSCF $42.13 $101.75 41.8%

OADC $42.13 $88.50 47.6

OBMC $42.13 $77.27 54.5%

DBMC $31.90 $64.95 49.1

DADC $30.20 $62.01 48.

DSCF $20.40 $42.48 48.0

DDU $1.60 $3.42 46.

Source: PRC–ACR2010–LR5
102 2010 Anu

Table VII–15—Standard Mail 

Fiscal Year 2010 Volume, Revenue, Cost, Contribution, and Cost Coverage by Product

Volume

(000)

Revenue

($000)

Attributable 

Costs

($000)

Contribution 

to Institutional 

Costs

($000)

Rev./Pc.

(Cents)

Cost/Pc.

(Cents)

Contribution 

to Institutional 

Costs/Pc.

(Cents)

Cost

Coverage

Standard Mail:

High Density & Saturation Letters 5,428,043 741,537 348,528 393,009 13.66 6.42 7.24 212.8

High Density & Saturation Flats

& Parcels 11,363,444 1,853,432 825,827 1,027,605 16.31 7.27 9.04 224.4%

Carrier Route 9,473,617 2,240,712 1,567,192 673,520 23.65 16.54 7.11 143.0%

Letters 48,508,586 9,294,785 5,127,431 4,167,353 19.16 10.57 8.59 181.3%

Flats 7,067,654 2,592,242 3,169,228 (576,986) 36.68 44.84 –8.16 81.8%

Not Flat–Machinables and 

Parcels 682,403 607,701 780,156 (172,455) 89.05 114.32 –25.27 77.9%

Inbound Intl. Negotiated Serv. 

Agreement Mail1 1,061 473 150 322 44.56 14.18 30.38 314.3%

Total Standard Mail 82,524,808 17,330,882 11,818,513 5,512,369 21.00 14.32 6.68 146.6%

1 See Docket Nos. CP2008–14 and CP2008–15

Source: PRC––ACR2010– LR4

 Per-piece revenue from Standard Mail Nonprofit 

pieces was 61.3 percent of Standard Mail

commercial per-piece revenues. However, the price 

adjustment proposed in Docket No. R2011-2 i

expected to produce an average revenue per piece 

that complies with the statute.

Financial analysis

The FY 2010 Standard Mail class cost coverage was 

146.6 percent. As Table VII-15 shows, total Standard 

Mail FY 2010 revenue was $17.3 billion, which 

covered its attributable cost of $11.8 billion and 

contributed $5.5 billion to institutional cost. Standard 

Mail Flats and NFMs/Parcels did not generate enough 

revenue to cover their attributable costs, and thus added 

to the institutional cost burden of the Postal Service. 

Standard Mail’s cost coverage increased from 

142.7 percent in FY 2009 to 146.6 percent in FY 

2010. Due to a change in mail mix and a decrease

in the cost of processing letters, Standard Mail 

unit attributable cost decreased by three percent 

in FY 2010. Between FY 2009 and FY 2010, 

Standard Mail volume decreased by less than one 

percent (fewer than 200 million pieces) and revenue 

decreased by less than one percent ($30 million 

decline). As Figure VII-1 demonstrates, the contribution 

from Standard Mail increased in FY 2010, reversing 

a two year trend of contribution declines. 

Figure VII-2 shows the unit contribution of each 

Standard Mail product.

Standard Mail Letters

Standard Mail Letters prices recovered 181.3 percent 

of their attributable costs in FY 2010, an increase 

from the 174.1 percent recovered in FY 2009. On a 

unit basis, Letters contributed 8.6 cents per piece to 

the institutional cost of the Postal Service.
 POSTAL REGULATORY COMMISSION 103

Standard Mail Flats 

Standard Mail Flats continue to present a significant 

concern. Cost coverage for Standard Mail Flats was 

81.6 percent, with a loss of 8.2 cents per piece. As 

Figure VII-3 illustrates, neither commercial flats nor 

nonprofit flats covered their costs, resulting in a cost 

coverage below 100 percent for the whole product.

The FY 2010 cost coverage for Standard Mail Flats 

is 81.6 percent, and the contribution per piece is 

negative 8.2 cents. As shown in Table VII-16, from 

the time that the costs for the Flats Product have been 

separately reported in the CRA, Flats’ revenue has not 

covered its costs.

The Commission stated its concern with the growing 

intra-class cross subsidy in previous ACDs and order

reviewing market dominant price adjustments. In the FY 

2008 ACD, the Commission recommended that th

Postal Service decrease the disparity between Standard 

Mail Flats and Letters in the next Market Dominant Pric

Adjustment or show that market characteristics or other 

non-cost factors justify continued unequal treatment. 

In Docket No. R2009-2, the Commission noted that

the trend of below average increases for Flats in the 

recent price adjustments suggests a possible pattern 

of preference contrary to sections 3622(b) and (c). 

Figure VII–1—Standard Mail Trends

0

5

10

15

20

25

FY2007 FY2008 FY2009 FY2010

$ Billions

20.8

7.4

13.2

20.6

7.6

13.2

5.5

11.8

17.3

12.2

17.4

Revenue Atrtributable Cost Contribution

5.2

Source: 2007 ACD at 87, 2008 ACD at 59, 2009 ACD at 84, a

Table VII-15. Source: Table VII-15. 

Figure VII–2—Unit Contributions of 

Standard Mail Products

-30

-25

-20

-15

-10

-5

0

5

10

15

Carrier 

Route

High 

Density 

and 

Saturation 

Flats 

and Parcels

High 

Density 

and 

Saturation 

Letters

Parcels 

and 

NFMs

Letters Flats

Cents

8.6

-8.2

-25.3

7.2

9.0

7.1

Table VII–16—Standard Mail Flats 

Cost Coverage

2008 2009 2010

Standard Flats 94.4% 82.3% 81.6%

Source: PRC–ACR 2010–LR4
104 2010 Anu

Volume

(000)

Total Revenue

($ 000)

Attributable Cost

($ 000)

Contribution to 

Institutional Cost

($ 000)

Commercial Flats 5,748,778 2,251,965 2,538,901 (286,936)

Nonprofit Flats 1,318,876 340,277 630,327 (290,050)

Total Commercial and Nonprofit 7,067,654 2,592,242 3,169,227 (576,986)

Source: PRC–ACR 2010–LR4

Unit Contribution Cost Coverage

-30

-20

-10

0

10

20

Commercial Nonprot All

-5.0

-8.2

-22.0

Cents

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Commercial Nonprot All

89%

82%

54%

Figure VII–3—Standard Mail Flats

In the FY 2009 ACD, the Commission found that the

financial performance of this product failed to satisfy 

section 3622(c)(2). The Commission also found that 

the cost coverage issue: 

directly implicates the requirement of section 

101(d), which directs the Postal Service to 

apportion the costs of the Postal Service on a 

fair and equitable basis and section 3622(b)(5), 

which requires that rates must be set to ensure 

adequate revenues to maintain financial stability.

FY 2009 ACD at 86. The Commission directed that

the Postal Service devise a plan to improve the cost 

coverage of the Flats product. 

In Docket No. R2010-4, the Postal Service presented

a plan to increase Flats prices and reduce costs that 

was estimated to achieve at least 100 percent cost 

coverage in five years.14 Key elements of that plan 

were: cost reductions, the 5.1 percent proposed 

Docket No. R2010-4 price increase, and increase

for Flats of 2 percent above the change in CPI in the 

next five market dominant price adjustments. The Postal 

Service observed that it “has the flexibility under the 

PAEA to hold the overall increase for the class to CPI 

while combining below CPI increases for, say, Standard 

14 Responses of the United States Postal Service to Questions from the 

Bench at the Hearing for Dr. Kiefer, August 19, 2010, at 20
 POSTAL REGULATORY COMMISSION 105

Mail letters with above CPI increases for Standard Mail 

flats.” Docket No. R2010-4 Tr. 3/419-20.

In the FY 2010 ACR, the Postal Service states:

[w]ith the Commission’s denial of the Postal 

Service’s exigent rate increase request in Docket

No. R2010-4, the Postal Service’s plan for 

bringing the fourteen products to full attributable 

cost coverage is no longer workable. ... 

Therefore, it seems most appropriate for the 

Commission to determine whether it can 

exercise any of its powers to remedy the cost 

coverage shortfall of the products in question.

FY 2010 ACR at 8.15

Comments

ACMA, Valpak, the Public Representative, L.L. 

Bean and the Postal Service submitted comments 

concerning Flats cost coverage, and compliance with 

sections 3622(c)(2), 3622(b)(5), and 101(d).

ACMA states it is “disappointed” in the low cost 

coverage for Flats, but that “no evidence is found here 

that the current prices are out of compliance with the 

ratemaking guidance in title 39.” ACMA Comments 

at 10. It raises concerns regarding the accuracy 

of the costs used to calculate the Flats product cost 

coverage, stating that “the costs are not robust 

enough to support a finding of noncompliance.” Id. at 

13. ACMA concludes that the “Postal Service should 

be given continued freedom to make progress on its 

Flats Strategy and to manage the rates for Standard 

Flats.” Id.

Valpak states that over the past three years, the Flats 

product’s cumulative contribution is negative $1.4 

billion. Further, it contends that “the Postal Service 

has deliberately allowed extensive intra-class subsidy 

15 Product cost coverage shortfall occurs when the product revenue does 

not cover attributable cost. 

of underwater products (e.g., Standard Mail Flats).” 

Valpak Comments at 31. Valpak asks that the 

Commission determine the Postal Service has not used 

its pricing powers in accordance with PAEA, and has 

priced the Flats product in direct contradiction of section 

101(d). Id. Valpak concludes that the Commission 

should “direct the Postal Service to immediately increase 

prices for Standard Flats by 11.0 percent.” Valpak 

Comments (revised February 16, 2011) at 54.

The Public Representative states that in Docket No.

R2010-4, the Postal Service proposed increasing 

Flats prices by 5.1 percent as part of a plan to 

improve the cost coverage of Standard Flats. The 

Public Representative asserts that the Commission 

“should hold the Postal Service to its plan.” Public 

Representative Comments at 5.

L.L. Bean states that “the Postal Service has substantial 

pricing flexibility within Standard Mail to adjust prices 

for below costs products in a manner that would close 

the cost-gap.” L.L. Bean Comments at 7. It concludes 

that “the core regulatory problem with Standard Flats 

is not the cost-coverage differential with Letters, but 

that Flats are priced below costs - resulting in higherthan-necessary rates for all above-costs products 

collectively.” Id. at 6. L.L. Bean advocates that “the 

process of transitioning Standard Flats rates to full cost 

coverage and a reasonable contribution should begin 

now, allowing a graduated and predictable phasing 

toward that objective.” Id. at 7. The alternative, L.L. 

Bean contends, is that a dramatic price increase would 

eventually become necessary, which could cause rate 

shock and would not be predictable for mailers. Id. at 8.

Commission Analysis

The Commission has repeatedly stated that the Postal 

Service should use its intra-class pricing flexibility to 
106 2010 Anu

reduce the cost coverage shortfall of Standard Flats.16

In Docket No. R2010-4, the Postal Service advanced

a “Flats Strategy” designed to eliminate the Flats intraclass cross subsidy. In this proceeding, it summarized 

that document, stating “the Postal Service presented a 

detailed plan for capturing efficiencies for Standard 

Mail Flats that, when combined with consecutive above 

average price increases, would result in full attributable 

cost coverage.” FY 2010 ACR at 8. The Postal Service 

now contends that, given the constraints of the PAEA, it 

is impossible to execute its “Flats Strategy” with respect 

to Standard Mail Flats. FY 2010 ACR at 8. 

Valpak, the Public Representative, and L.L. Bean 

argue that the Postal Service has such pricing and 

operational flexibility. The Commission finds that PAEA 

permits the Postal Service sufficient operational and 

pricing flexibility to allow it to accomplish its long-term 

goals for Standard Mail Flats as advanced in Docke

No. R2010-4. It has simply chosen not to utilize that 

flexibility with respect to Standard Mail Flats. This is 

evidenced by its most recent price adjustment in Docke

No. R2011-2, where the Postal Service utilized its 

pricing flexibility to increase Standard NFM/Parcel 

prices by an average of 11.3 percent in an attempt to 

reduce the cost coverage shortfall for that product. 

As Table VII-17 shows, the preferential price adjustments 

accorded to Flats has led to an increasingly negative 

contribution per piece. Since the contribution of the 

Flats product was first reported in the CRA in FY 2008, 

the negative contribution per piece has grown 279 

percent from negative 2.2 cents per piece in FY 2008 

to negative 8.3 cents in FY 2010.

16 2008 ACD at 91, Order No. 191 Review of Postal Service Notice

of Market Dominant Price Adjustment at 52, 2009 ACD at 84, Orde

No. 675 at 3.

Valpak, the Public Representative, L.L. Bean, and 

Bank of America have stated that the long-running 

contribution shortfall for Standard Mail Flats is an unfair 

and inequitable apportionment of costs in violation of 

39 U.S.C 101(d).17 The Commission agrees. 

The Postal Service has lost $1.4 billion in contribution 

from Standard Mail Flats over the last three years, 

including $577 Million in FY 2010. This reflects 

an unfair and inequitable apportionment of the 

costs of postal operations to all Standard Mail 

users. The Commission has repeatedly encouraged 

the Postal Service to use its pricing flexibility to 

improve cost coverage for Standard Flats. Despite

this encouragement, the Postal Service has failed to 

utilize the pricing flexibility granted to it by the PAEA 

to address this issue, and the negative contribution 

per piece continues to grow. Furthermore, the recently 

approved price changes are unlikely to improve cost 

coverage. For these reasons, the Commission finds 

that the prices in effect in FY 2010 for Standard Flats 

do not comply with section 101(d) of title 39. 

Pursuant to section 3653(c), the Commission directs 

the Postal Service to increase the cost coverage of the 

Standard Mail Flats product through a combination 

of above-average price adjustments, consistent with 

the price cap requirements, and cost reductions until 

such time that the revenues for this product exceed 

attributable costs. 

17 Valpak Initial Comments at 54, Public Representative Comments at 6, 

L. L. Bean Initial Comments at 9, L. L. Bean Reply Comments at 5.

Table VII–17—Standard Mail Flats 

Contribution Per Piece

Contribution Per Piece (Cents)

2008 2009 2010

Standard Flats (2.2) (7.9) (8.3)

Source: PRC–ACR 2010–LR4
 POSTAL REGULATORY COMMISSION 107

As embodied in the Postal Service’s “Flats Strategy,” 

above-CPI increases18 will be necessary to increase 

the cost coverage of the Flats product, and should be 

accompanied by efforts to streamline operations to 

capture efficiency and reduce costs. It is important for 

the Postal Service to control the costs of this product, 

which have increased by more than 15 percent on a 

per piece basis since FY 2008, compared to a CPI-U 

increase of just over 1 percent. The Commission 

expects the Postal Service to design future Flats prices 

that will comply with the factors and objectives of the 

PAEA, including the need to mitigate rate shock and 

to maintain predictable and stable prices. 

In requiring the Postal Service to take remedial action, 

the Commission does not impose a specific deadline. 

However the Postal Service should move as promptly 

as practicable to eliminate this inequity. This process 

must begin with the next market dominant price 

adjustment. The Commission finds that, starting with the 

next Notice of Market Dominant Price Adjustment, th

Postal Service must begin the process of transitioning 

Standard Flats prices to full cost coverage.

Within 90 days of the issuance of the FY 2010 ACD,

the Postal Service shall present a schedule of future 

above-CPI price increases for Standard Mail Flats. 

This schedule shall be updated with each subsequent 

Market Dominant Price Adjustment and ACR until the

revenue of the Flats product exceeds its attributable 

cost. The schedule can take the form of Table VII-18.

Until such time, the Commission requires the Postal 

Service to provide the following information in Annual 

Compliance Reports and Notices of Market Dominant

Price Adjustments to provide increased transparency 

18 See Responses of the United States Postal Service to Questions from 

the Bench at the Hearing for Dr. Kiefer, August 19, 2010, at 21 for

the timeline provided therein. 

concerning the steps the Postal Service is taking to 

eliminate the intra-class cross subsidy with respect to 

Standard Mail Flats.

In subsequent ACRs the Postal Service shall report the 

following information:

 describe all operational changes designed to 

reduce flat costs in the previous fiscal year and 

estimate the financial effects of such changes;

 describe all costing methodology or measurement 

improvements made in the previous fiscal year and 

estimate the financial effects of such changes; 

 a statement summarizing the historical and current 

fiscal year subsidy of the Flats product; and, the 

estimated timeline for phasing out this subsidy.

In subsequent Notices of Market Dominant Price

Adjustments, the Postal Service shall report the 

following information:

 an explanation of how the proposed prices will 

move the Flats cost coverage toward 100 

percent, and

 a statement estimating the effect that the proposed 

prices will have in reducing the subsidy of the Flats 

product.

Standard Mail NFMs and Parcels

The NFMs/Parcels product also did not produce 

sufficient revenues to cover its attributable cost. The 

net loss for the NFMs/Parcels product was $172.5 

million in FY 2010. In Docket No. R2011-2, the

Table VII–18—Scheduled of Planned Standard 

Mail Flats Price Increases

Year

Planned Flats Average Price 

Increase

2012 CPI-U + X Percent

2013 CPI-U + Y Percent

etc.
108 2010 Anu

average price increase for parcels was 11.3 percent, 

well over the class average of 1.740 percent. 

Similarly, in Docket No. R2009-2, the average price

increase for parcels was 16.420 percent, well over 

the class average of 3.759 percent. The Postal 

Service is taking action to address this problem. 

Further, the Commission conditionally approved 

the transfer of certain Standard Mail Parcels to the 

competitive product list in Docket No. MC2010-36,

which will change the make-up of the product. 

In FY 2010, the prices for NFMs/Parcels were 

insufficient to recover its attributable cost or make a 

reasonable contribution to institutional cost. However, 

the Postal Service’s “phasing-in” approach to reducing 

the intra-class subsidy is appropriate. The Commission 

finds that the Postal Service should continue to utilize 

its intra-class pricing flexibility to eliminate the intraclass cross subsidy for this product.

High Density and Saturation Letters

In FY 2010, the High Density and Saturation Letter

product had a cost coverage of 212.8 percent. 

It contributed $393.0 million to the institutional 

cost of the Postal Service. Both the nonprofit and 

commercial components of the High Densit

and Saturation Letters product made a positive 

contribution to institutional cost.

In its comments, Valpak argues that “pricing and cost 

coverage on high density/saturation mail remain too 

high.” Valpak Comments at 65. Valpak states that 

categories with relatively elastic demand should have 

relatively low cost coverages and thus pricing of High 

Density and Saturation products is not optimal. Valpak

Comments at 65.

In Docket No. R2011-2, the Postal Service proposed

below average increases to High Density and

Saturation Letters (0.615 percent) and High Density

and Saturation Flats/Parcels (0.403 percent). The 

Postal Service explained that the below average 

increases were in recognition of the market 

characteristics of these products. 

High Density and Saturation Flats/Parcels

Revenues for the High Density and Saturation Flats

Parcels product exceeded attributable cost which

resulted in cost coverage of 224.4 percent in FY 

2010. The product as a whole contributed $1.0 billion 

to the institutional cost of the Postal Service. Both the 

nonprofit and commercial components of the High 

Density and Saturation Flats/Parcels product covere

their attributable costs. However, the rate categories for 

High Density and Saturation parcels did not cover thei

costs. Table VII-19 shows the volume and contribution 

distribution of High Density and Saturation Flats an

High Density and Saturation Parcels

In Docket No. R2011-2, the Postal Service proposed

above average price increases for High Density an

Saturation Parcels. The Commission finds that the Postal 

Service should continue to utilize its pricing flexibility 

with respect to High Density and Saturation Parcels.

Table VII–19—FY 2010 High Density and Saturation Volume and Contribution by Shape

Flats Parcels Total

Volume 11,363,186,132 258,284 11,363,444,416

Contribution $1,027,834,381 $(229,083) $1,027,605,298

Source: PRC–ACR 2010–LR4
 POSTAL REGULATORY COMMISSION 109

In FY 2010, revenues from the Standard Mail Carrier 

Route Product (which includes letters, flats, and 

parcels) exceeded the product’s attributable costs with 

cost coverage of 143.0 percent. The Carrier Route 

product contributed $674 million toward the Postal 

Service’s institutional costs. The nonprofit component 

of the Carrier Route product failed to cover its 

attributable costs, which resulted in a negative 

contribution of $4.1 million.

Worksharing

In FY 2010, the worksharing passthroughs for 

16 Standard Mail discounts exceeded avoidable 

costs. In Order No. 536, the Commission 

determined it appropriate to de-link High Density

and Saturation prices, removing the passthrough 

relationship between those products. The worksharing 

relationships calculated by the Postal Service and 

analyzed herein pertain to discounts for products as 

affirmed by Commission Order No. 536. 

Table VII-20 shows the presort and dropship 

passthroughs by shape for Carrier Route, High 

Density, and Saturation categories

One worksharing category is problematic; the 

passthrough for High Density Parcels is negative.

Table VII–20—Standard Mail Carrier Route, High Density, and Saturation by Shape 

Workshare Discounts and Benchmarks

Type of Worksharing (Benchmark)

Year–end Discount 

(cents)

Unit Cost 

Avoidance 

(cents) Passthrough

Presorting (dollars/piece)

High Density Letter

(Carrier Route Letters) 6.90 22.50 30.7%

High Density Flat

(Carrier Route Flats) 4.30 5.20 82.7%

High Density Parcel

(Carrier Route Parcels) 12.50 (13.00) –96.2%

Dropship (Dollars/Pound)

DNDC Lette

(Origin Letters) 16.3 25.6 63.7%

DSCF Letter

(Origin Letters) 20.8 30.7 67.8%

DNDC Fla

(Origin Flats) 16.3 23.0 70.9%

DSCF Flat

(Origin Flats) 20.8 26.2 79.4%

DDU Fla

(Origin Flats) 25.3 30.1 84.1%

DNDC Parce

(Origin Parcels) 22.1 89.5 24.7%

DSCF Parcel

(Origin Parcels) 48.0 115.5 41.6%

DDU Parce

(OriginParcels) 62.5 125.9 49.6%

Source: PRC–ACR2010–LR4
110 2010 Anu

The negative avoided cost differential (-13¢) is the 

result of the Postal Service’s estimated cost for a High 

Density parcel exceeding the estimated cost for a

Carrier Route parcel. Logically, High Density Parcels

should be less costly then Carrier Route Parcels. 

Thus the Postal Service concludes that the costs are 

anomalous. The Commission agrees. For this reason, 

the Commission cannot determine whether the 

discount is consistent with section 3622(e). 

Since the 2007 ACD, the Commission has urged

the Postal Service to identify the source of this costing 

anomaly. The Postal Service has not yet reported any 

progress towards identifying the source of or remedy 

for this costing anomaly. The Postal Service should 

work towards developing better cost data to permit 

the calculation of passthroughs as required by 39 

U.S.C. 3622(e) and to gain a better understanding 

of the underlying costs associated with these products. 

Anomalous data of this nature are subject to review in 

the strategic rulemaking Docket No. RM 2011-3

No dropship discounts exceed avoided costs for FY 

2010. See Table VIII-20 and VIII-22

Table VII-21 shows the passthroughs for the remaining 

products Letters, Flats, and NFMs/Parcels. In its 

discussion of discounts that exceed avoidable costs, the 

Commission follows the order of Table VII-21 as closely 

as practicable. Accordingly, the Commission first 

discusses Letters, then Flats, and finally NFMs/Parcels. 

Letters

Four discounts for Standard Mail Letters exceeded 

avoidable cost in FY 2010: non-automation AADC

machinable letters, non-automation Mixed AADC

machinable letter, non-automation 3-digit nonmachinable letters, and non-automation 5-digit nonmachinable letters

The Commission is unable to evaluate the presort 

discount for non-automation AADC machinable letters

(see Table VII-21 note 1), and was unable to do 

so in the FY 2009 ACD. The avoidable cost could

not be calculated because the Postal Service’s letter 

mail processing cost model only estimates costs for 

the combined non-automation machinable AADC

and mixed AADC categories. The Postal Service

should develop the necessary cost data to permit 

a meaningful analysis of this discount. Due to the

anomalous avoided cost estimate, the Commission 

cannot determine whether this discount is consistent 

with section 3622(e).

The avoided cost estimate between automation and 

non-automation Mixed AADC machinable letters

(-0.5¢ -- the discount provided for mailer-applied 

barcodes) was estimated to be negative. The 

Commission is currently reviewing the letter model 

included in Proposal Nine of Docket No. RM2011

5, filed December 20, 2010, which contains

a positive estimate for this avoided cost. If the 

estimated avoided cost for this discount is accurate, 

the passthrough is under 100 percent. However, 

the avoided cost estimate in that model produced 

a passthrough of over 100 percent for Standard 

Mail Automation AADC Letters. The Postal Service

realigned the Automation AADC Letter discount with

the avoided cost estimated using the Proposal Nine 

methodology in Docket No. R2011-2. Due to th

anomalous avoided cost estimate, the Commission 

cannot determine whether the discount is consistent 

with section 3622(e).

The presort discounts for non-automation 3-digit nonmachinable letters (1.7¢), and non-automation 5-digit 

non-machinable letters (10.5¢) exceeded 100 percent 

of the estimated avoided cost. In Docket No. R2009
 POSTAL REGULATORY COMMISSION 111

Table VII–21—Standard Mail Letters, Flats, NFMS, and Parcels (Commercial and Nonprofit) 

Presorting/Pre-barcoding Workshare Discounts and Benchmarks

Type of Worksharing (Benchmark)

Year–end Discount 

(cents)

Unit Cost 

Avoidance 

(cents) Passthrough

Standard Mail Automation Letters 

Presorting (dollars/piece)

Automation AADC Letter

(Automation Mixed AADC Letters) 1.7 1.7 100.0

Automation 3–digit Letters

(Automation AADC Letters) 0.2 0.2 100.0

Automation 5–digit Letters

(Automation 3–digit Letters) 1.8 2.0 90.0%

Pre–barcoding (dollars/piece)

Automation Mixed AADC Letter

(Nonautomation Machinable Mixed ADC Letters) 0.3 (0.5) –60.0

Standard Mail Nonautomation Letters 

Presorting (dollars/piece)

Nonautomation AADC Machinable Letter

(Nonautomation Mixed AADC Machinable Letters) 1.7 0.0 See Note 

Nonautomation ADC Nonmachinable Letter

(Nonautomation Mixed ADC Nonmachinable Letters) 8.7 11.1 78.4

Nonautomation 3–digit Nonmachinable Letters

(Nonautomation ADC Nonmachinable Letters) 4.4 1.7 258.8

Nonautomation 5–digit Nonmachinable Letters

(Nonautomation 3–digit Nonmachinable Letters) 11.7 10.5 111.4%

Standard Mail Flats

Standard Mail Automation Flats

Presorting (dollars/piece)

Automation ADC Flat

(Automation Mixed ADC Flats) 1.0 (0.2) –500.0

Automation 3–digit Flats

(Automation ADC Flats) 6.8 5.6 121.4

Automation 5–digit Flats

(Automation 3–digit Flats) 7.2 12.9 55.8%

Pre–barcoding (dollars/piece)

Automation Mixed ADC Flat

(Nonautomation Mixed ADC Flats) 6.2 2.5 248.0

Standard Mail Flats—Nonautomation

Presorting (dollars/piece)

Nonautomation ADC Flat

(Nonautomation Mixed ADC Flats) 4.9 5.5 89.1

Nonautomation 3–digit Flats

(Nonautomation ADC Flats) 4.5 6.1 73.8

Nonautomation 5–digit Flats

(Nonautomation 3–digit Flats) 9.7 8.2 118.3%
112 2010 Anu

Table VII–21—Standard Mail Letters, Flats, NFMS, and Parcels (Commercial and Nonprofit) 

Presorting/Pre-barcoding Workshare Discounts and Benchmarks (continued)

Type of Worksharing (Benchmark)

Year–end Discount 

(cents)

Unit Cost 

Avoidance 

(cents) Passthrough

Standard Mail Parcels

Presorting (dollars/piece)

NDC Machinable Parcel

(Mixed NDC Machinable Parcels) 40.0 40.2 99.6

5–digit Machinable Parcels

(NDC Machinable Parcels) 43.9 69.8 62.9

NDC Irregular Parcel

(Mixed NDC Irregular Parcels) 47.5 14.4 330.9

SCF Irregular Parcels

(NDC Irregular Parcels) 40.0 34.5 115.8

5–digit Irregular Parcels

(SCF Irregular Parcels) 5.9 45.4 13.0%

Pre–barcoding (dollars/piece)2

Mixed NDC Machinable Barcoded Parcels

(Mixed NDC Machinable Nonbarcoded Parcels) 7.0 3.8 184.2

Mixed NDC Irregular Barcoded Parcels

(Mixed NDC Irregular Nonbarcoded Parcels) 7.0 3.8 184.2

Standard Mail NFMs

Presorting (dollars/piece)

NDC NFMs (Irregular Parcels

(Mixed NDC NFMs (Irregular Parcels)) 51.9 23.7 219.2

SCF NFMs (Irregular Parcels)

(NDC NFMs (Irregular Parcels)) 35.4 27.7 127.7

5–digit NFMs (Irregular Parcels)

(SCF NFMs (Irregular Parcels)) 3.3 45.5 7.2%

Pre–barcoding (dollars/piece)2

Mixed NDC Barcoded NFMs

(Mixed NDC Nonbarcoded NFMs) 7.0 3.8 184.2

Source: PRC–ACR2010–LR4

1 The Postal Service letters mail processing cost model only estimates costs for the combined non–automation machinable AADC and Mixed AAD

categories. 

2 The Postal Service charges a surcharge for nonbarcoded pieces.

3 The Postal Service Standard Mail NFM/Parcel mail processing cost model does not estimate costs separately for pre–barcoded and non–barcoded 

pieces. The Postal Service uses a pre–barcoding avoidable cost for BPM as a proxy. See table VII–27, pre–barcoding workshare discounts.
 POSTAL REGULATORY COMMISSION 113

Table VII–22—Standard Mail Carrier Route Letters, Flats and Parcels (Commercial and Nonprofit) 

Dropship Workshare Discounts and Benchmarks

Type of Worksharing (Benchmark)

Year–end Discount 

(cents)

Unit Cost 

Avoidance 

(cents) Passthrough

Dropship

Standard Mail Letters

Dropship (dollars/pound)

DNDC Lette

(Origin Letters) 16.3 25.6 63.7%

DSCF Letter

(Origin Letters) 20.8 30.7 67.8%

Standard Mail Flats

Dropship (dollars/pound)

DNDC Fla

(Origin Flats) 16.3 23.0 70.9%

DSCF Flat

(Origin Flats) 20.8 26.2 79.4%

Standard Mail Machinable Parcels

Dropship (dollars/pound)

DNDC Machinable Parce

(Origin Machinable Parcels) 21.5 89.5 24.0%

DSCF Machinable Parcel

(Origin Machinable Parcels) 42.4 115.5 36.7%

DDU Machinable Parce

(Origin Machinable Parcels) 62.0 125.9 49.2%

Standard Mail Irregular Parcels, NFMs

Dropship (dollars/pound)

DNDC Irregular Parcels, NF

(Origin Irregular Parcels, NFMs) 21.5 89.5 24.0%

DSCF Irregular Parcels, NFM

(Origin Irregular Parcels, NFMs) 46.6 115.5 40.3%

DDU Irregular Parcels, NF

(Origin Irregular Parcels, NFMs) 70.1 125.9 55.7%

Source: PRC–ACR 2010–LR4
114 2010 Anu

2, each of these passthroughs equaled 100 percent. 

However, a decrease in avoided costs between FY 

2008 and FY 2010 caused these passthroughs to 

exceed 100 percent. The Postal Service adjusted the 

discount for non-automation 5-digit non-machinable 

to reflect 100 percent of avoided cost in prices 

approved in Docket No. R2011-2. Due to t

realignment of this discount with the avoided cost 

in Docket No. R2011-2, the Commission find

these discounts satisfy 39 U.S.C. 3622. The Postal 

Service reduced the passthrough of non-automation 

3-digit non-machinable letters toward a 100 percent 

passthrough, justifying a passthrough over 100 

percent by citing section 3622(e)(2)(b). The Postal 

Service should align the discount for non-automation 

3-digit non-machinable letters with the avoided cost in 

future market dominant price adjustments.

Flats

Four discounts for Standard Mail Flats exceeded 

avoidable cost in FY 2010.The presort discounts for 

Automation Mixed ADC flats, automation ADC flats

automation 3-digit flats, and 5-digit non-automation 

flats exceeded avoided costs. 

In Docket No. R2009-2, each of these passthrough

equaled 100 percent. However, a decrease in 

avoided costs between FY 2008 and FY 2010 

caused these passthroughs to exceed 100 percent. 

Furthermore, the avoided cost estimate for Automation 

ADC flats in FY 2010 was negative 0.2 cents

The negative avoided cost differential (-0.2¢) is the 

result of the Postal Service’s estimated cost for an 

Automation ADC Flat exceeding the estimated cost fo

an Automation Mixed ADC Flat. Logically, Automation

ADC Flats should be less costly then Automatio

Mixed ADC Flats. Thus the Postal Service concludes

that the costs are anomalous. The Commission agrees. 

For this reason, the Commission cannot determine 

whether the discount is consistent with section 

3622(e). The Postal Service should work towards 

developing better cost data to permit the analysis of 

passthroughs as required by 39 U.S.C. 3622(e).

The prices proposed by the Postal Service and 

approved by the Commission in Docket No. R2011

2 adjusted the discounts for Automation 3-Digit flat

(5.6¢) and Nonautomation 5-digit flats (8.2¢) to reflect 

100 percent of avoided cost. The prices proposed by 

the Postal Service and approved by the Commission 

adjusted the discount for Automation Mixed ADC flat

(2.5¢) (the pre-barcoding of flats) to reflect 228 percent 

of avoided cost, a reduction of 20 percent. The Postal 

Service justifies the over 100 percent passthrough for 

Automation Mixed ADC flats under section 3622(e

(2)(D). Postal Service ACR at 56. The Postal Service

believes the excessive discount is necessary to 

encourage pre-barcoding of flats as a way to support 

the implementation of the Flats Sequencing System 

program. For these reasons, the Commission finds the 

discounts satisfy 39 U.S.C. 3622.

NFMs/Parcels

Seven worksharing discounts for Standard Mail NFMs/

Parcels exceeded avoided cost in FY 2010. The 

presort discount for NDC Irregular Parcels (14.4¢), SC

Irregular Parcels (34.5¢), NDC NFMs (Irregular Parcels

(23.7¢), and SCF NFMs (Irregular Parcels) (27.7¢) 

exceeded avoided cost. The Postal Service did not 

specifically estimate the avoided costs of Mixed ND

Machinable Barcoded Parcels, Mixed NDC Irregula

Barcoded Parcels, and Mixed NDC Barcoded NFMs

The Postal Service proposed a new Standard Mail 

Parcel mail processing model in Docket No. RM2010

12. The Commission accepted this model, with
 POSTAL REGULATORY COMMISSION 115

modification, in Order No. 658. The Commission has 

also recently conditionally granted the Postal Service’s 

request to transfer certain commercial Standard Mail 

Parcels to the competitive product list. 

Due to the multiple dockets in FY 2010 and FY

2011 concerning Standard Mail Parcels, PostCom 

submitted comments encouraging the Commission to 

defer action regarding passthroughs in excess of 100 

percent. Postcom Initial Comments at 4.

The Postal Service justifies all seven discounts in 

excess of estimated avoided cost on the basis of 

efficient operations, citing section 3622(e)(2)(D).

Several of the discounts with passthroughs exceeding 

100 percent were increased in the recently approved 

Market Dominant Price Adjustment in Docket No

R2011-2. Given the ongoing transition to the 

NDC network, the Postal Service cites the need

to encourage certain worksharing behaviors by 

offering discounts in excess of 100 percent, citing the 

flexibility provided by section 3622 (e)(2)(A)(ii).

The Commission encourages the Postal Service to 

continue to streamline its parcel operations and 

improve efficiency. Passthroughs that exceed 100 

percent over a significant period of time without 

supporting cost data evidence may require additional 

justification. The Postal Service should closely monitor 

the situation to ensure that its desired objectives are 

achieved by these discounts.

The Postal Service applies a non-barcoded surcharge 

to all Standard Mail NFMs/Parcels that do not bear a 

correct routing barcode. The Postal Service Standard 

Mail NFMs/Parcel mail processing cost model does 

not estimate costs separately for pre-barcoded and 

non-barcoded pieces. As a result, no reliable “cost 

avoidance” is available for the calculation of the 

passthroughs associated with pre-barcoding Standard 

Mail NFMs/Parcels. Although the Postal Service 

provides an estimate of the passthrough based on the 

cost savings for Bound Printed Matter Parcels, better 

costing is necessary to facilitate meaningful analysis 

of these passthroughs. The Postal Service reduced the 

Standard Mail Parcel non-barcoded surcharge in Docke

No R2011-2 from 7.0 cents to 6.4 cents. The Postal 

Service justified this discount in excess of estimated 

avoided cost on the basis of efficient operations, citing 

section 3622(e)(2)(d). The Postal Service should work 

towards reliable cost data for these categories. The 

Commission finds that for FY 2010, the discounts for 

Standard Mail Parcels satisfy 39 U.S.C. 3622. 

Standard Nonprofit Mail

39 U.S.C. 3626(a)(6) requires nonprofit prices to 

be set in relation to their commercial counterparts 

regardless of nonprofits’ independent costs. In Docket

No. R2009-2, Nonprofit prices were set to yield 

per-piece average revenues that were 60 percent of 

commercial per-piece average revenues at the class 

level. The Commission calculates that in FY 2010, 

the actual per-piece revenue from Standard Mail 

Nonprofit pieces was 61.3 percent of Standard Mail 

commercial per-piece revenue. In response to CHIR 

No. 4, the Postal Service re-calculated the Nonprofit 

per-piece revenue incorporating a distribution of fee 

revenues. In future ACDs, the Postal Service should

calculate this ratio using this method. 

The prices approved in Docket No. R2011-2 are

expected to produce average per-piece revenue for 

Nonprofit mail equal to 60 percent of the average 

per-piece revenue for Commercial mail. As such, the 

Commission does not need to take action in regard to 

Nonprofit prices.
116 2010 Anu

Standard Mail Volume Incentive 

Pricing Program

The Postal Service’s 2010 Standard Mail Volume 

Incentive Pricing Program (Incentive Program) was 

designed to increase incremental Standard Mail 

volume and revenue during a typically low volume 

period. As with the previous Incentive Program, 

the Commission and the mailing community have 

supported the Postal Service’s use of its pricing 

flexibility. The Incentive Program offered a 30 percent 

discount on incremental volume above a threshold 

volume tailored to each mailer.

In Order No. 439, the Commission required the 

Postal service to report information necessary to 

evaluate the outcome of the Incentive Program. The 

Postal Service has provided initial data collection 

reports on the 2010 Standard Mail Volume Incentive 

Program on November 2, 2010 and December 29,

2010. These reports contain tentative threshold and 

rebate calculations for eligible Standard Mail users. 

To date, the Postal Service has not filed the data 

needed to evaluate fully the program results. Without 

finalized data as required in Order No. 439, the 

Commission cannot evaluate Docket No. R2011-3

for compliance with section 3622(c)(10).

Package Services

Introduction

Package Service mail consists of the following five 

products: Single-Piece Parcel Post, Bound Printed 

Matter (BPM) Flats, BPM Parcels, Media and Library 

Mail, and Inbound Surface Parcel Post (at UPU 

rates).19 These products have common traits, such 

as: none is sealed against inspection; none receives 

19 Inbound Surface Parcel Post (at UPU rates) is discussed in the Market 

Dominant International Mail Section

preferential handling or transportation; and generally, 

each consists of parcels containing merchandise, 

although heavier catalogs and directories may also be 

mailed as Package Services mail. In FY 2010, 658 

million pieces were mailed as Package Services mail.

This accounts for less than one-half of one-percent of 

total domestic market dominant Mail volume.

The principal FY 2010 findings are:

 The attributable costs for Package Services, as 

a class, exceeded revenues by $182 million 

equating to an 89.3 percent cost coverage.

 Single-Piece Parcel Post revenues did not cover 

attributable costs by $134 million. The Postal 

Service has given Single-Piece Parcel Post above 

average price increases that attempt to address the 

problem.

 Media and Library Mail revenues did not cover 

attributable costs by $89 million. The Postal 

Service has given Media and Library Mail above 

average price increases that attempt to address the 

problem.

 Bound Printed Matter Parcels revenues did not 

cover attributable costs by $27 million. The Postal 

Service has given Bound Printed Matter Parcels 

above average price increases that attempt to 

address the problem.

 Worksharing discounts over 100 percent were 

either justified or aligned with avoided costs in 

Docket No. R2011-2

Financial Analysis

Table VII-23 shows that the Package Services class 

had a cost coverage of 89.3 percent. Figure VII-4 

shows the continuation of unit contribution shifting 

from being slightly positive in FY 2007 and FY 

2008, to slightly negative in FY 2009 and FY 2010.
 POSTAL REGULATORY COMMISSION 117

Inbound Surface Parcel Post (at UPU Rates)20 and 

Bound Printed Matter Flats are the only products 

within the class to have revenues that exceed 

attributable cost in FY 2010. The losses from these 

three products amount to $250 million.

20 See the International Section for a more detailed discussion of 

Inbound Surface Parcel Post (at UPU rates).

Single-Piece Parcel Post

The cost coverage for single-piece Parcel Post was 

82.2 percent, a 9.7 percentage point decrease from 

FY 2009. The 82.2 percent cost coverage results in 

a $134 million loss for the product in FY 2010. This 

is the fourth consecutive year Single-Piece Parcel Post 

has failed to cover its attributable cost.

There was a 29 percent increase in unit attributable 

cost, and unit revenues increased 16 percent. In FY 

2010, the average weight per piece of single-piece 

Parcel Post increased 20 percent, which partially 

explains the increased unit attributable costs and unit 

revenues. 

Bound Printed Matter (BPM) Parcels

The FY 2010 cost coverage for BPM Parcels was 

92.4 percent. In FY 2010, unit attributable costs 

increased by 4 percent, while unit revenues decreased 

by 2.0 percent. The loss was $27 million. This is the 

second consecutive year in which Bound Printed Matter 

Parcels attributable costs have exceeded revenues.

Table VII–23 

Fiscal Year 2010 Volume, Revenue, Cost and Cost Coverage 

Package Services

Volume

(000)

Revenue

($000)

Attributable 

Cost

($000)

Contribution 

to Institutional 

Cost

($000)

Rev./Pc.

(Cents)

Cost/Pc.

(Cents)

Contribution 

to Institutional 

Cost/Pc.

(Cents)

Cost 

Coverage

Single–Piece Parcel Post 61,408.3 615,240.7 748,868.6 (133,627.9) 1,001.9 1,219.5 (217.6) 82.2%

Inbound Surface Parcel Post 

(at UPU Rates) 1,088.8 17,029.0 11,460.2 5,568.8 1,564.0 1,052.5 511.4 148.6%

Bound Printed Matter Flats 229,751.6 191,327.9 129,358.2 61,969.6 83.3 56.3 27.0 147.9%

Bound Printed Matter Parcels 244,735.5 322,544.2 349,249.1 (26,704.9) 131.8 142.7 (10.9) 92.4%

Media and Library Mail 122,322.1 369,361.4 458,551.4 (89,190.0) 302.0 374.9 (72.9) 80.5%

Inbound NSA Mail Intl 48.0 105.6 6.8 105.6 

Total Package Services 658,265.6 1,515,608.8 1,697,494.3 (181,885.5) 230.2 257.9 (27.6) 89.3%

Source: PRC–ACR 2010–LR1

Figure VII–4—Package Services

-50

0

50

100

150

200

250

300

2007 2008 2009 2010

Unit Cost Unit Revenue Unit Contribution

Cents

Fiscal Year
118 2010 Anu

Bound Printed Matter (BPM) Flats 

Bound Printed Matter Flats is the only domestic 

Package Services product that generated sufficient 

revenues to cover attributable costs in FY 2010. It 

contributed $62 million towards institutional cost.

Unit attributable costs increased by 13 percent and 

unit revenues decreased by 4.2 percent, which led 

to a decrease in the contribution per piece of 10.2 

cents from FY 2009 to FY 2010. Overall volume 

decreased by 3.8 percent from FY 2009 to FY 2010 

despite a decrease in prices in Docket No. R2009-2,

which were in effect all of FY 2010.

Media and Library Mail

Despite above-average rate increases in Docket Nos

R2008-1 and R2009-2, Media and Library Mail’s 

attributable costs exceeded its revenue, producing a net 

loss of $89 million, and resulting in a cost coverage of 

80.5 percent. This is the fourth consecutive ACD wher

Media and Library Mail’s attributable costs exceeded 

revenues. Volumes decreased 12.7 percent in FY 

2010. In addition, unit revenues increased by 6.2 

percent in FY 2010, and unit attributable costs rose by 

11.2 percent, which caused the cost coverage to fall 

3.8 percentage points from FY 2009 to FY 2010. 

Comments

No comments were received regarding 

Package Services.

Commission Analysis

Section 3622(c)(2) of the Act requires each class 

or type of mail service to cover its attributable costs 

and make a reasonable contribution to institutional 

costs.21 The Commission finds that the Package 

21 The desirability of rates that recover attributable costs and make 

reasonable contributions to institutional costs is also supported by 

sections 101(d), 3622(b)(1), and 3622(b)(5).

Services Class, as well as single-piece Parcel Post, 

Bound Printed Matter Parcels and Media and Library 

Mail, did not recover attributable costs or make a 

reasonable contribution to institutional costs.

In Docket No. R2011-2, the Postal Service gave

each of the three Package Services products that 

did not cover costs an above average increase. See

Table VII-24. While the resulting increases are not 

sufficient to bring revenues above attributable costs, 

the Postal Service is attempting to resolve the issue 

within the constraints of the annual price increase 

limitation.

In addition to giving below-cost products aboveaverage price increases, the Postal Service believes 

that “[i]mproving operational efficiencies and general 

improvement in the economy are expected to aid the 

Postal Service in returning these products to full cost 

coverage.” Id. at 13.

The Commission directs the Postal Service to continue 

to price Single-Piece Parcel Post, BPM Parcel, 

and Media and Library Mail in a way that moves 

these products to full cost coverage and to explore 

opportunities to achieve efficiencies in the handling of 

this mail.

Table VII–24 

Docket No. R2011-2 Price Increases

Package Services Product

Rate Change 

(%)

FY 2010 

Cost 

Coverage 

(%)

Single-Piece Parcel Post 1.807 82.2

BPM Flats 0.707 147.9

BPM Parcels 1.982 92.4

Media and Library Mail 1.964 80.5

Inbound Surface Parcal Post 1.531 148.6
 POSTAL REGULATORY COMMISSION 119

Worksharing

There are worksharing discounts in the following 

products:

 Media and Library Mail;

 Bound Printed Matter Flats; and

 Bound Printed Matter Parcels.

Tables VII-25, VII-26 and VII-27 present each Package 

Service worksharing discount, its associated cost 

avoidance, and the discount as a percentage of the 

avoided cost (passthrough).

Media and Library Mail. 

On December 20, 2010 the Postal Service filed

Docket No. RM2011-5, which, in part, requested

changes to the Media and Library mail processing 

avoided cost models.22 The Postal Service included 

these proposed methodology changes in its ACR 

filing on December 29, 2010. In response to CHIR

No. 1 question 12, the Postal Service updated mail 

processing avoided cost models using Commission 

approved methodologies.23 The avoided cost figures 

in the tables below incorporate that response and use 

Commission approved methodologies at the time of 

the Postal Service’s filing.

Table VII-25 shows the FY 2010 avoided costs, 

discounts, and passthroughs for Media and Library 

22 Docket No. RM2011-5, Proposal 12 23 Response to CHIR No. 1, January 24, 2011, question 12

Table VII–25 

Media/Library Mail Workshare Discounts and Benchmarks 

FY 2010 

Type of Worksharing 

(Benchmark)

Year–End 

Discount 

(Cents) 

Unit Cost 

Avoidance 

(Cents) Pass–through1

Media Mail

Presorting (cents/piece)

Basic

(Single Piece) 39.0 43.0 90.7%

5–digit

(Basic) 37.0 31.0 119.4%

Pre–barcoding (cents/piece)

Single Piece Barcoded

(Single Piece Non–barcoded) 3.0 4.0 75.0%

Library Mail

Presorting (cents/piece)

Basic

(Single Piece) 37.0 43.0 86.0%

5–digit

(Basic) 35.0 31.0 112.9%

Pre–barcoding (cents/piece)

Single Piece Barcoded

(Single Piece Non–barcoded) 3.0 4.0 75.0%

Source: PRC-ACR2010-LR6

1 The calculated passthroughs are based on rounded unit avoidable costs.
120 2010 Anu

Mail. Five-digit presort discounts for Media Mail and 

Library Mail have exceeded 100 percent of avoided 

costs in FY 2010. However, as seen in Figure VII-5 

the Postal Service has continuously reduced these 

passthroughs by decreasing discounts to align with 

avoided costs in Docket Nos. R2008-1, R2009

2, and R2011-2. The Postal Service justifies these 

passthroughs as mail that is educational, cultural, 

scientific or informational (ECSI) under § 3622(e)

(2)(C) of title 39. The Commission accepts this 

justification for the excessive Media and Library Mail 

5-digit presort discounts. The Commission encourages 

the Postal Service to continue aligning these discounts 

with their avoided costs.

Bound Printed Matter Flats and Parcels 

Table VII-26 and Table VII-27 show FY 2010 yearend discounts, FY 2010 avoidable costs, and 

calculated passthroughs for Bound Printed Matter Flats 

and Bound Printed Matter Parcels, respectively. In 

Docket No. R2009-2 the Commission approved the

Postal Service’s alignment of DDU drop ship discount

for both BPM Flats and Parcels with avoided costs 

resulting in a 100 percent passthrough for DDU dro

ship. Since then, unit avoided costs for DDU dro

ship BPM Flats and Parcels have decreased resulting 

in the passthroughs increasing to 104.3 percent.

Recently, in Docket No. R2011-2 the Postal Service

again aligned these discounts with avoided costs.

Therefore, no further action is necessary at this time.

The passthrough for DNDC Flats increased fro

101.4 percent to 126.2 percent from FY 2009 to 

FY 2010, and the passthrough for DNDC Parcel

increased from 100.5 percent to 125.1 percent.

The change is due a decreases in the avoided costs 

for DNDC dropship Flats and Parcels. In Docket N

R2011-2, the Postal Service aligned these discounts 

with avoided costs; therefore, no additional action is 

necessary at this time.

The remaining BPM Flats and BPM Parcels workshare 

discounts were either at or below their respective 

avoided costs, and therefore satisfy section 3622(e)(2).

Figure VII–5—Media and Library Mail 5-Digit 

Presort Avoided Cost and Discount

10

20

30

40

50

60

2007 2008 2009 2010 2011

Media Mail

Year-End Discount

Library Mail

Year-End Discount Avoided Cost

Cents

Fiscal Year
 POSTAL REGULATORY COMMISSION 121

Table VII–26—Bound Printed Matter Flats 

Workshare Discounts and Benchmarks 

FY 2010 

Type of Worksharing 

(Benchmark)

Year–End Discount 

(Cents) 

Unit Cost Avoidance 

(Cents) Passthrough3

BPM Flats

Presorting (cents/piece)1

Basic Flats

(Single Piece Flats) 35.4 See Note [1] 

Carrier Route Flats

(Basic Flats) 9.8 15.4 63.8%

Presorting (cents/pound)1

Basic, Carrier Route Flats

(Single Piece Flats)

Zones 1&2 5.2 See Note [1]

Zone 3 6.2 See Note [1]

Zone 4 6.0 See Note [1]

Zone 5 6.7 See Note [1]

Zone 6 6.9 See Note [1]

Zone 7 6.8 See Note [1]

Zone 8 7.8 See Note [1]

Pre–barcoding (cents/piece)2

Single Piece Automatable Flats

(Single Piece Nonautomatable Flats) 3.0 See Note [2]

Basic Automatable Flats

(Basic Nonautomatable Flats) 3.0 See Note [2]

Carrier Route Automatable Flats

(Carrier Route Nonautomatable Flats) 3.0 See Note [2]

Drop Ship (cents/piece)

Basic, Carrier Route DNDC Flats/IP

(Basic Origin Flats) 22.0 17.4 126.2%

Basic, Carrier Route DSCF Flat

(Basic Origin Flats) 61.6 63.6 96.8%

Basic, Carrier Route DDU Fla

(Basic Origin Flats) 79.5 76.2 104.3%

Source: PRC–ACR 2010–LR6

1 The BPM cost model does not estimate cost differences between single piece and presorted BPM. Single piece BPM is a residual category with low 

volume and adequate data are not available. Previously, rate differences between single piece and presorted BPM were based on an assumption 

that unit mail processing costs for single piece BPM were twice that of presorted BPM. See Docket No R2006–1, USPS–T–38, p. 8. 2 Separate estimates of pre–barcoding cost savings are not available for BPM flats. Based on the cost savings for BPM Parcels, the pre–barcoding

discount for BPM flats implies a passthrough of 76.5%

3 The calculated passthroughs are based on rounded unit avoidable costs.
122 2010 Anu

Table VII–27—Bound Printed Matter Parcels 

Workshare Discounts and Benchmarks 

FY 2010 

Type of Worksharing 

(Benchmark)

Year–End Discount 

(Cents) 

Unit Cost Avoidance 

(Cents) Passthrough2

BPM Parcels/IPPs

Presorting (cents/piece)1

Basic Parcels/IPPs

(Single Piece Parcels/IPPS) 55.8 See Note [1] 

Carrier Route Parcels/IPPs

(Single Piece Parcels/IPPS) 9.8 15.4 65.3%

Presorting (cents/pound)1

Basic, Carrier Route Parcels/IPPs

(Single Piece Parcels/IPPs)

Zones 1&2 4.6 See Note [1] 

Zone 3 4.5 See Note [1] 

Zone 4 4.5 See Note [1] 

Zone 5 3.9 See Note [1] 

Zone 6 3.8 See Note [1] 

Zone 7 3.0 See Note [1] 

Zone 8 1.4 See Note [1] 

Pre–barcoding (cents/piece)

Single Piece Barcoded Parcels/IPPs

(Single Piece Nonbarcoded Parcels/IPPs) 3.0 3.9 76.5%

Basic Barcoded Parcels/IPPs

(Single Piece Nonbarcoded Parcels/IPPs) 3.0 3.9 76.5%

Carrier Route Barcoded Parcels/IPPs

(Single Piece Nonbarcoded Parcels/IPPs) 3.0 3.9 76.5%

Drop Ship (cents/piece)

Basic, Carrier Route DNDC Parcels/IP

(Basic Origin Parcels/IPPs) 21.8 17.4 125.1%

Basic, Carrier Route DSCF Parcels/IPP

(Basic Origin Parcels/IPPs) 61.6 63.6 96.8%

Basic, Carrier Route DDU Parcels/IP

(Basic Origin Parcels/IPPs) 79.5 76.2 104.3%

Source: PRC–ACR 2010–LR6

1 The BPM cost model does not estimate cost differences between single piece and presorted BPM. Single piece BPM is a residual category with low 

volume and adequate data are not available. Previously, rate differences between single piece and presorted BPM were based on an assumption 

that unit mail processing costs for single piece BPM were twice that of presorted BPM. See Docket No R2006–1, USPS–T–38, p. 8. 2 The calculated passthroughs are based on rounded unit avoidable costs
 POSTAL REGULATORY COMMISSION 123

SPECIAL SERVICES

Introduction

The Special Services class consists of twelve products 

that can be categorized as Ancillary Services, “standalone” Special Services, and International Special 

Services. Ancillary Services is classified as one 

product; stand-alone Special Services consists of eight 

products; and International Special Services consists 

of three products. 

The principal FY 2010 findings are:

 Special Services contributed more than $737.4 

million towards institutional costs, which is the third 

highest contribution among all market dominant 

mail classes; and

 The attributable costs for Address Management 

Services, Stamp Fulfillment Services, and Collecton-Delivery exceed revenue

Financial Analysis

In FY 2010, the Special Service class, including 

international mail services, earned $2.9 billion in 

revenue and incurred $2.2 billion in total attributable 

cost.24 The Special Services class produced a cost 

coverage of 134.0 percent. Table VII-28 displays 

the financial information for the Special Services mail 

categories.

Ancillary Services

The Ancillary Services product consists of 22 

services that may only be used in conjunction with 

other mail services.25 The Ancillary Services product 

24 For a discussion of International Special Services, see Market 

Dominant International section. 25 Domestic Ancillary Services contains (1) Address Correction Servic

(2) Applications and Mailing Permits; (3) Business Reply Mail; (4) Bulk 

Parcel Return Service; (5) Certified Mail; (6) Certificate of Mailing; 

(7) Collect on Delivery; (8) Delivery Confirmation; (9) Insurance

(10) Merchandise Return Service; (11) Parcel Airlift; (12) Registered 

Mail; (13) Return Receipts; (14) Return Receipt for Merchandise; (15) 

earned $1.8 billion in revenue and incurred $1.3 

billion in attributable cost. The product contributed 

$471.7 million towards the institutional cost of the 

Postal Service and had a cost coverage of 136.8 

percent. The Postal Service distributes the revenue 

for some Ancillary Services to their host mail class as 

fee revenue and thus, such revenue is not included 

in the calculation of the cost coverage for Ancillary 

Services.26

Although the Ancillary Services product satisfies the 

applicable provisions of title 39, the revenue for 

Collect-on-Delivery (COD) did not satisfy 39 U.S.C

3622(c)(2), which requires each class of mail or mail 

type to cover its attributable cost and to provide a 

reasonable contribution to institutional costs. The cost 

coverage for COD is 79.1 percent.

In FY 2009, COD was profitable with a cost

coverage of 114.7 percent. However, in FY 2010, 

COD total cost increased by 24 percent, from

$6.6 million to $8.2 million. One explanation for 

the significant increase in attributable cost is IOCS 

sampling problems related to the declining volume of 

COD transactions. Response to CHIR No. 1, question

13. Over the past 10 fiscal years, the volume for 

COD has declined almost 70 percent, from 2.7

million in FY 2001 to 834,000 in FY 2010. Figure 

VII-6 shows the declining volume trend for COD and

suggests that the volume will continue to decline in 

subsequent fiscal years.

Restricted Delivery; (16) Shipper-Paid Forwarding; (17) Signature

Confirmation; (18) Special Handling; (19) Stamped Envelopes; (20) 

Stamped Cards; (21) Premium Stamped Stationery; and (22) Premium 

Stamped Cards. 26 These services are Address Correction Services, Applications and 

Mailing Permits, Business Reply Mail, Bulk Parcel Return Service, 

Certificate of Mailing, Merchandise Return Service, Parcel Airlift, 

Return Receipt for Merchandise, Shipper Paid Forwarding, and 

Special Handling.
124 2010 Anual compliance determination Table VII–28—Market Dominant Special Services Fiscal Year 2010 Volume, Cost, Revenue, and Cost Coverage by Product Market Dominant Special Services Units1 (000) Total Revenue ($000) Attributable Cost ($000) Contribution to Institutional Cost ($000) Unit Revenue (Cents) Unit Cost (Cents) Contribution to Institutional Unit Cost (Cents) Cost Coverage Domestic Special Services Ancillary Services Product Certified Mail 268,724.724 752,429.224 634,691.242 117,737.982 280.00

D 834.483 6,522.005 8,245.738 –1,723.733 781.562 988.125 –206.563 79.10

Insurance 39,146.196 125,567.053 98,623.510 26,943.543 320.764 251.936 68.828 127.32%Registered Mail 2,966.550 47,805.705 42,566.649 5,239.056 1,611.492 1,434.887 176.604 112.31%Stamped Cards 29,302.270 879.068 645.920 233.148 3.000 2.204 0.796 136.10%Stamped Envelopes N/A 14,028.517 3,717.386 10,311.131 377.38%

Other Ancillary Services2 1,605,496.227 807,075.588 494,109.194 312,966.394 50.270 30.776 19.493 163.34%

Total Ancillary Services 1,946,470.450 1,754,307.160 1,282,599.638 471,707.522 90.128 65.894 24.234 136.78%

Stand–Alone ProductsAddress Management Services 423,251.296 18,129.422 21,628.504 –3,499.082 4.283 5.110 –0.827 83.82%Caller Service 179.709 93,920.879 30,621.321 63,299.558 52,262.830 17,039.416 35,223.415 306.72%Change of Address Credit Card Auth. 11,363.461 11,214.161 1,382.702 9,831.459 98.686 12.168 86.518 811.03%Confirm Service N/A 2,658.500 1,105.477 1,553.023 240.48%

Customized Postage 4.000 900.000 50.000 850.000 22,500.000 1,250.000 21,250.000 1800.00%Money Orders 123,404.756 183,152.827 126,338.894 56,813.933 148.416 102.378 46.039 144.97%Post Office Box Service 14,187.477 813,186.449 674,891.906 138,294.543 5,731.720 4,756.955 974.765 120.49%Stamp Fulfillment Services3 3,099,425 3,069.349 5,778.908 –2,709.559 0.099 0.186 –0.087 53.11%

Total Stand–Alone Special Services 3,671,815.699 1,126,231.587 861,797.712 264,433.875 30.672 23.471 7.202 130.68%

Total Domestic Special Services 5,618,286.149 2,880,538.747 2,144,397.350 736,141.397 51.271 38.168 13.103 134.33%

International Special Services4 2,032.108 28,920.002 27,402.399 1,517.603 1,423.153 1,348.472 74.681 105.54%

Total Special Services 5,620,318.257 2,909,458.749 2,171,799.749 737,659.000 1,474.424 1,386.640 87.784 133.97%

Source: PRC–ACR2010–NP–LR11 Units refer to the amount of transactions for each service except for Stamped Envelopes and PO Boxes which refers to the amount of box purchases and box rentals, respectively. 2 The FY 2010 ACR did not isolate costs for Other Ancillary Services3 The Postal Service billing determinants and CRA estimates include the nonpostal Philatelic sales with Stamp Fulfillment Services4 International Special Services are found in the International Mail section
 POSTAL REGULATORY COMMISSION 125

The Postal Service explains that “most of the costs for 

COD total cost are determined from the In-Office Cost

System (IOCS).” Response to CHIR No. 1, question 

13. Further, the Postal Service states that because 

the volume of COD is extremely small, there are

“relatively few [IOCS] tallies where employees are 

found handling COD in any given year.” ld. In FY

2010, the Postal Service states that there were only 

15 clerk and mailhandler tallies. ld. Consequently, 

cost estimates exhibit larger year-to-year variability.27

Figure VII-7 shows unit revenue, unit cost, and cost 

coverage from FY 2001 – FY 2010. Figure VII-7 

clearly shows that COD’s cost coverage is volatile

Further, Figure VII-7 shows that unit revenue per 

transaction increased by 212.0 cents or 37.2 

27 The Coefficient of Variation (CV) measures the variability of a data 

set in relationship to the average value in the data set. A large CV 

(typically greater than 25 percent), indicates that there is a lot of 

dispersion in the data set. The Response to CHIR No. 1, question 13 

indicates that for COD, the CVs are almost 40 percent for mailing

processing (where most of the increases in costs occurred in FY 

2010) and almost 50 percent for window service costs. This is one 

explanation for why the mail processing and window service costs for 

COD tend to vary from year to year

percent between FY 2001 and FY 2010. Over the 

same time period, COD’s unit cost was sporadic with

high peaks in FY 2006 and FY 2010.

In Docket No. R2011-2, the Commission approved

the Postal Service request to increase the prices for 

COD by an average of 4.2 percent. The Postal

Service explains that this increase should help close 

the gap in the cost coverage. Response to CHIR No. 

1, question 13. The Postal Service further notes that 

the sampling next year could result in COD having a

cost coverage that exceeds 100 percent. ld.

The Commission finds that the appropriate action 

is for the Postal Service to consider using a moving 

average for calculating COD attributable cost. 

Alternatively, the Postal Service could investigate 

alternatives to sampling. 

Stand-Alone Special Services

The eight stand-alone Special Services are 

Address Management Services, Caller Service 

and Reserve Number, Change-of-Address Credit 

Figure VII–6—Collect-On-Delivery 

Volume and Trend 

FY 2001–FY 2010

0

500

1000

1500

2000

2500

3000

Volume

2010200920082007200620052004200320022001

Trend

Thousands

Figure VII–7—COD Unit Revenue, 

Unit Cost, and Cost Coverage 

FY 2001–FY 2010

Cents

Unit Cost Unit Revenue Cost Coverage

0

200

400

600

800

1000

1200

2010200920082007200620052004200320022001

Fiscal Year

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6
126 2010 Anu

Card Authentication, Confirm Service, Customized 

Postage, Money Orders, Post Office Boxes, and 

Stamp Fulfillment Services. As separate products, 

each of the eight stand-alone services must 

individually cover its attributable costs. Two products, 

Address Management Services and Stamp Fulfillment 

Services, did not generate enough revenue to cover 

their attributable cost. All other stand-alone special 

services satisfy the applicable provisions of Chapter 

36 of title 39.

For FY 2010, the Postal Service’s CRA report 

included revenue and attributable cost data for each 

stand-alone Special Service, including the three 

stand-alone products added to the market dominant 

product list in FY 2010.28 The Commission requests 

that the Postal Service’s CRA continue to identify cost 

data for each stand-alone Special Services product in 

subsequent ACR filings.

While the CRA isolated revenue and costs for each 

product within the Special Services class, the RPW 

report did not isolate revenues and transactions 

for six products: Address Management Services, 

Customized Postage, Caller Service, Confirm Service, 

Change-of-Address Credit Card Authentication, and 

Stamp Fulfillment Services. To assist in the analysis 

for Special Services, the Postal Service is directed 

to identify revenues and volumes for each Special 

Services product in the RPW.

Address Management Services. Address 

Management Services consists of 34 services that 

enable bulk business mailers to better manage the 

quality of their mailing lists. PRC Order No. 391 

added Address Management Services to the Market 

28 In FY 2010, Address Management Services, Customized Postage, 

and Stamp Fulfillment Services.

dominant product list in FY 2010.29 As a result, this is 

the first time the Postal Service has identified costs for 

the product.30

In FY 2010 Address Management Services 

generated $18.1 million in revenue and incurred 

$21.6 million in attributable cost. Accordingly, the 

product did not generate enough revenue to cover its 

attributable cost and had a negative contribution of 

$3.5 million. The FY 2010 cost coverage for Address 

Management Services is 83.8 percent.

In Docket No. R2010-4, the Postal Service stated that

it plans to phase out services that are not covering 

their costs.31 Given that this is the first time the Postal 

Service has estimated costs for Address Management 

Services and the product received an average 

increase of 1.69 percent in Docket No. R2011-2,

32

the Commission finds that the appropriate action 

is for the Postal Service to raise the contribution for 

Address Management Service through cost reductions 

and future price adjustments. In its FY 2011 ACR, 

the Postal Service is directed to report on its effort 

to reduce costs for Address Management Services. 

The Postal Service should also focus on its cost 

methodology and refine it, if necessary. 

Additionally, Order No. 391 directed the Postal 

Service to file current fee and revenue information 

for eight address management services.33 The 

ACR’s Nonpostal Section discusses the current fee 

and revenue for the eight services. ACR at 72. In 

29 Docket No. MC2009-19, Order Approving Addition of Posta

Services to the Mail Classification Schedule Product Lists, January 13, 

2010 (Order No. 391). 30 See Library Reference USPS-FY2010-28, Excel file, AMS2010.xls. 31 Docket No. R2010-4, Statement of James M. Kiefer on Behalf o

United States Postal Service at 50 and 52 (July 6, 2010). 32 Docket No. R2011-2, Order Reviewing Postal Service Marke

Dominant Price Adjustments, Table III-E-1, Special Services Price

Adjustment, at 53, February 16, 2011 (Order No. 675). 33 Docket No. MC2009-19, Order No. 391 at 1
 POSTAL REGULATORY COMMISSION 127

future ACR filings, the Postal Service is directed to 

file the fee and revenue data associated with the 

eight services in the Special Services section in its 

discussion of the Address Management Services 

product.

Caller Service. Caller Service is a premium service 

available to customers who require more than free 

carrier service or receive more mail than can be 

delivered to the largest installed post office box at a 

postal facility. Customers who use this service pick up 

their mail at the Post Office call window or 

loading dock.

In FY 2010, Caller Service earned $93.9 million 

in revenue and incurred $30.6 million in total 

attributable cost. The product contributed $63.3 

million towards institutional costs and had a cost 

coverage of 306.7 percent. This was the second 

year the CRA separated costs for Caller Service from 

Post Office Boxes to permit analysis of Caller Service 

as a stand-alone product.

Change-of-Address Credit Card Authentication.

The Change-of-Address Credit Card Authentication 

product allows customers to file change-of-address 

requests online and over the telephone. The Postal 

Service charges a $1 fee to verify the customer’s 

identity and has a third party agreement with a 

credit card vendor to manage the Change-of-Address 

program. This was the second year the CRA isolated 

cost data for the Change-of-Address Credit Card 

Authentication product.

In FY 2010, the Postal Service processed 11.2 

million internet and telephone change-of-address 

applications, collectively, which generated $11.2 

million in revenue. The CRA indicates that the 

product incurred $1.4 million in attributable costs.

However, a portion of the total revenue generated 

for the product is paid to the third party vendor. 

ACR at 47. As a result, the Postal Service indicates 

that the cost coverage for Change-of-Address Credit 

Card Authentication product does not equal the 

revenue divided by the attributable cost figure. The 

Postal Service supplemented its filing by providing 

a non-public library reference that shows the actual 

revenue earned by the product (once the portion of 

the revenue paid to the third party vendor is removed) 

and the expenses incurred in FY 2010.34 Based 

on a review of the non-public library reference, the 

Commission finds that the revenues for Changeof-Address Credit Card Authentication covered its 

attributable cost in FY 2010.

Confirm. Confirm consists of four subscription tiers that 

allow business mailers to receive scan (tracking) data 

about mailpieces.35

In FY 2010, Confirm Service earned $2.7 million in 

revenue and incurred $1.1 million in total attributable 

cost. The product contributed $1.6 million towards 

institutional costs and had a cost coverage of 240.5 

percent. Compared to FY 2009, Confirm’s cost 

coverage improved by 158.9 percentage points.

Customized Postage. The Customized Postage 

product permits vendors to provide their customers 

with Postal Service authorized postage consisting 

of customer-selected images. PRC Order No. 391 

added Customized Postage to the Market dominant 

product list in FY 2010.36 Additionally, in FY 2010, 

34 See Library Reference USPS-FY09-NP26, Excel file, 

“COACreditCard2010.xls.” 35 Mailers can subscribe to the Bronze, Gold, Silver, and Platinum tiers 

and may purchase Additional IDs which allow mailers to receive scan

data for their clients. 36 Docket No. MC2009-19, Order Approving Addition of Posta

Services to the Mail Classification Schedule Product Lists, January 13, 

2010 (Order No. 391).
128 2010 Anu

four vendors participated in the Customized Postage 

program and the Postal Service charged $300,000 

per vendor.

The Commission identified a discrepancy between 

the revenue listed in the RPW and the CRA. The 

RPW reports revenue of $600,000 while the CRA 

reports revenue of $1.2 million. In response to 

CHIR No. 1, question 16, the Postal Service stated 

that the RPW “only found records of payment (of 

$600,000) for two of the four contracts. In actuality, 

three of the four contractors paid in FY 2010, for a 

total of $900,000, while payment from one of the 

contractors was not received until early FY 2011.”

ld. Further, the Postal Service states that one of the 

payments from three vendors who paid in FY 2010 

was “not credited to the correct account,” which is 

why the RPW only reported $600,000. The Postal 

Service suggests that the Commission should report 

$1.2 million as the revenue for FY 2010. ld.

The Commission recognizes that the Postal Service 

acquired additional revenue in FY 2011 for 

Customized Postage that should have been paid in 

FY 2010. However, for the FY 2010 compliance 

review, the Commission will only analyze the booked 

revenue at the end of FY 2010. Therefore, in FY 

2010, Customized Postage earned $900,000 in 

revenue and incurred $50,000 in total attributable 

cost. The product contributed $850,000 towards 

institutional costs and had a cost coverage of 

1,800.0 percent.

Thus the Postal Service must ensure that its reported 

RPW figures for all products are accurate, and that 

its financial reports (CRA, billing determinants, and 

RPW) are consistent with each other. RPW estimates 

are used in the annual report for the Postal Service, 

which is certified by an independent registered 

public accounting firm, and signed by the Postmaster 

General. While the discrepancy is relatively minor, it 

nonetheless underscores an important point.

Money Orders. Money Orders service provides 

the customer with an instrument for payment of a 

specified sum of money. The maximum value for 

which a domestic postal money order may be 

purchased is $1,000.

Money Orders earned $183.2 million in revenue 

and incurred $126.3 million in attributable cost.

Money Orders contributed $56.8 million towards the 

institutional costs of the Postal Service and had a cost 

coverage of 145.0 percent. The unit attributable cost 

for the Money Orders decreased by 5.4 percent, 

which is why Money Orders cost coverage improved 

in FY 2010. The Commission finds that Money Orders 

complied with applicable provisions of title 39.

Post Office Boxes. The Post Office (PO) Boxes product 

consists of eight Fee Groups (1-7 and E) which are 

based on the market value of the postal facilities.37

Fee Groups determine the rate a customer must 

pay to rent a PO Box. The most expensive postal 

locations are contained in Fee Group 1 and the least 

expensive are contained in Fee Group 7. 

In FY 2010, PO Boxes generated $813.2 million in 

revenue and incurred $674.9 million in attributable 

cost. PO Boxes contributed $138.3 million towards 

the institutional costs of the Postal Service and had a 

cost coverage of 120.5 percent.

On June 17, 2010, the Commission approved the 

Postal Service’s request to establish a competitive PO 

Boxes product, transferring 52 ZIP Code locations 

37 Fee Group E is offered free-of-charge to customers where the Postal 

Service does not provide offer carrier delivery.
 POSTAL REGULATORY COMMISSION 129

from the Special Services class in the market 

dominant product list to the competitive product list.38

All of the PO Box locations were in Fee Group 1.39

Stamp Fulfillment Services. Stamp Fulfillment Services 

provide the fulfillment of stamp orders placed by 

mail, phone, fax, or online to the Stamp Fulfillment 

Services office in Kansas City, Missouri.40 Stamp 

orders mailed to domestic destinations are charged 

a $1.00 handling fee, plus an additional $2.00 for 

customized orders. Orders mailed to non-domestic 

destinations will pay a $6.00 handling fee, plus 

$2.00 for customized orders.41 PRC Order No. 

487 added Stamp Fulfillment Services to the market 

dominant product list in FY 2010.42

The CRA reports that in FY 2010, Stamp Fulfillment 

Services generated $3.1 million in revenue and 

incurred $5.8 million in attributable cost. Stamp 

Fulfillment Services contributed a negative $2.7 

million towards the institutional costs of the Postal 

Service and had a cost coverage of 53.1 percent.

However, the Commission notes that the CRA 

included nonpostal philatelic sales revenue and 

cost with Stamp Fulfillment Services. Further, the 

Commission observes that in FY 2010, stamp orders 

were approximately 90 percent of the revenue for 

Stamp Fulfillment Services. Therefore, it is reasonable 

38 Docket No. MC2010-20, Order Approving Request to Transfe

Selected Post Office Box Service Locations to the Competitive Product 

List, July 17, 2010 (Order No. 473). For financial information on 

Competitive PO Boxes, see Library Reference PRC-ACR2010-NP-LR1. 39 The Postal Service’s transfer request did not affect Group E boxes at 

the 52 ZIP Code locations. 40 The Stamp Fulfillment Services center handles orders for stamps and 

two nonpostal services: philatelic sales and Officially Licensed Retail 

Products. 41 These handling fees do not apply to certain combined orders of 

stamps and philatelic items, to certain stamps sent as part of a 

subscription, or to orders requested expedited shipping. 42 Docket MC2009-19, Order Accepting Product Descriptio

and Approving Addition of Stamp Fulfillment Services to the Mail 

Classification Schedule Product Lists, July 13, 2010 (Order No. 487). 

to conclude that Stamp Fulfillment Services did 

not cover its attributable cost in FY 2010 and is 

inconsistent with section 3622(c)(2).43

The Postal Service explains that it plans to evaluate 

costs and pricing strategies for Stamp Fulfillment 

Services in order to determine how best to cover 

costs. In addition, the Postal Service states that it will 

also consider the “balance between covering costs 

for Stamp Fulfillment Services and promoting stamp 

sales through cost effective channels.” Response to 

CHIR No. 1, question 13.

Thus, the Commission finds that the appropriate 

action is for the Postal Service to develop a plan 

to improve the cost coverage for Stamp Fulfillment 

Services. The Postal Service is directed to report on 

its efforts to evaluate costs and pricing strategies for 

Stamp Fulfillment Services in its FY 2011 ACR.

MARKET DOMINANT 

INTERNATIONAL PRODUCTS

Introduction

Market dominant international mail consists of seven 

products: Outbound First-Class Single-Piece Mail 

International, Inbound First-Class Single-Piece Mail 

International (at UPU rates), Inbound First-Class SinglePiece Mail International (at non-UPU rates), Inbound 

Surface Parcel Post (at UPU rates), International 

Ancillary Services, International Reply Coupon Service, 

43 In response to CHIR No. 4, question 6, the Postal Service provides

FY 2010 revenue and cost estimates for Stamp Fulfillment Service 

that exclude the nonpostal Philatelic Sales product. The Postal 

Service estimates that in FY 2010, Stamp Fulfillment Services earned 

$2.9 million in revenue and incurred $4.9 million in attributable 

costs, which corresponds to a cost coverage of 60.0 percent. The 

Commission views the Postal Service’s response as a satisfactory proxy 

for the revenue and attributable cost for Stamp Fulfillment Services.

However, the Commission expects the Postal Service’s CRAs to report 

accurate revenue and attributable cost for Stamp Fulfillment Services.

See Response of the United States Postal Service to Chairman’s 

Information Request No. 4, questions 5-6, February 28, 2011.
130 2010 Anu

and International Business Reply Mail Service.44 In 

addition, for the first time, the Postal Service reports 

financial results for Global Direct Entry with Foreign

Postal Administrations. It intends to formalize these 

NSAs, entered into prior to the PAEA, in FY 2011.

The Postal Service establishes rates and fees of 

general applicability for Outbound First-Class SinglePiece Mail International and outbound services within 

the International Ancillary Services product pursuant to 

the provisions of 39 U.S.C. 3622. For Inbound FirstClass Single-Piece Mail International, Inbound Surface 

Parcel Post (at UPU rates), and inbound services 

within the International Ancillary Services product, 

rates are determined by international agreement 

through the Universal Postal Union (UPU)45 or through 

bilateral agreement.

The principal FY 2010 findings are:

 Revenues exceeded attributable costs for market 

dominant international products as a whole by 

$281.7 million;

 Revenues exceeded attributable costs for 

the Outbound First-Class Single-Piece Mail 

International and Inbound Surface Parcel Post (at 

UPU rates) products by $327.4 million and 

$5.6 million, respectively; 

 Revenues for Inbound First-Class Single-Piece Mail 

International, including revenues from Canadaorigin inbound First-Class Mail International, did 

not cover attributable costs by $53.2 million; 

44 For FY 2010, the Postal Service does not report any volumes, 

revenues or costs for the International Reply Coupon Service product. 

With respect to the International Business Reply Mail Service product, 

the Postal Service only reports volumes and revenues. Given the 

available data, the Commission is unable to determine at this time 

whether these products comply with the statute. 45 The Universal Postal Union is a United Nations technical agency 

through which international treaties governing the exchange of 

international mail, including the rates, are negotiated among its 191 

members. The United States is a member of the UPU.

 Revenues for International Ancillary Services 

exceeded attributable costs by $1.5 million, 

although the Inbound Registered Mail service 

failed to cover attributable costs by $6.2 million.

The section below presents a financial analysis 

of market dominant international mail products. In 

addition, the Quality of Service link to terminal dues 

system and market dominant international negotiated 

service agreements are discussed.46

Financial Analysis

During FY 2010, market dominant international mail

products as a whole provided a net contribution to 

the institutional costs of the Postal Service of $281.7 

million. This represents an improvement of 65.5 

percent compared to FY 2009. Outbound First-Class 

Single-Piece Mail International, Inbound First-Class 

Single-Piece Mail, Inbound Surface Parcel Post (at 

UPU rates), and International Ancillary Services all 

showed an increase in contribution over FY 2009. 

Each of these products is discussed below. The 

financial results for Inbound First-Class Single-Piece 

Mail (at non-UPU rates) are non-public. For purposes 

of this analysis, therefore, the results for this product 

46 Unless stated otherwise, this section analyzes revenues and expenses 

for international mail products developed according to the “booked” 

accounting method. The use of booked revenues and expenses 

ensures that the Commission’s financial analyses are consistent with 

the Postal Service’s audited financial statements. The Postal Service 

uses “imputed” revenues reported in the FY 2010 ICRA, which differ 

from booked revenues reported in the RPW. Under the imputed 

method, inbound revenues for the current fiscal year are estimated 

using current-year volumes multiplied by the current-year “settlement” 

rates, i.e., terminal dues, inward land rates, etc., which are converted 

to U.S. dollars using the average Special Drawing Right (SDR) to U.S

dollar exchange rates in effect during the fiscal year. By contrast, 

under the booked method, inbound revenues for a fiscal year are 

estimated using volumes from the same period last year and current 

settlement rates, converted to U.S. dollars using a fixed SDR to U.S.

dollar exchange. For FY 2010, the Postal Service implemented the 

Foreign Post Settlement (FPS) system, which will replace the imputed 

method. Under the FPS system, inbound revenue accruals provided to 

the ICRA and RPW will be based upon current-year volumes and the 

current settlement rates, with the resulting inbound revenues converted 

to U.S. dollars using current SDR to U.S. dollar exchange rates
 POSTAL REGULATORY COMMISSION 131

and Inbound First-Class Single-Piece Mail International 

(at UPU rates) are discussed in the aggregate under 

the heading Inbound First-Class Single-Piece Mail 

International. 

Outbound First-Class Single-Piece Mail International

Outbound First-Class Single-Piece Mail International 

is the largest source of market dominant international 

mail contribution, amounting to $327.4 million 

during FY 2010. The cost coverage was 190.2 

percent. Compared to FY 2009, the contribution for 

Outbound First-Class Single-Piece Mail International 

improved by 13.3 percent and the cost coverage 

increased 28.5 points.

Inbound Surface Parcel Post (at UPU Rates)

During FY 2010, revenues from Inbound Surface

Parcel Post (at UPU rates) exceeded attributable 

costs by $5.6 million, resulting in a cost coverage of 

148.6 percent. Both contribution and cost coverage 

for Inbound Surface Parcel Post (at UPU rates) 

improved compared to FY 2009, when revenues 

failed to cover attributable costs. In FY 2009, the 

contribution was a negative $2.4 million, and the 

cost coverage was 84.5 percent.

Inbound First-Class Single-Piece Mail International

The Postal Service provides financial results for two 

products under the heading Inbound First-Class 

Single-Piece Mail International: 1) Inbound First-Class 

Single-Piece Mail International (at UPU rates), which 

consists of inbound letter post subject to UPU terminal 

dues rates, and 2) Inbound First-Class Single-Piece 

Mail International (at non-UPU rates), which consists of 

inbound letter post from Canada subject to negotiated 

rates.47 For FY 2010, attributable costs exceeded 

47 The term “letter post” is the name given to international mail that is not 

classified as Parcel Post or Express Mail (EMS). Also known as LC/

revenues for Inbound First-Class Single-Piece Mail 

International as a whole by $53.2 million. The 

resulting cost coverage was 79.4 percent. According 

to the Postal Service, Inbound First-Class Single-Piece 

Mail International from each country category of 

origin “showed improvement over Fiscal Year 2009." 

Response to CHIR No. 1, question 23(a). The Postal 

Service adds that “revenue increased, expenses 

decreased and contribution improved despite 

declining volumes.” Id.

Inbound Letter Post (at UPU rates)

This product accounted for the bulk of the reported loss 

for Inbound First-Class Single-Piece Mail International. 

The Postal Service states that the “UPU per item and 

per kilogram terminal dues rates were . . . not based 

upon USPS costs” and, therefore, did not generate 

sufficient revenues to cover costs. FY 2010 ACR at 21. 

Moreover, terminal dues rates are set according to a 

formula that is renegotiated in the UPU only once every 

four years. Thus, the Postal Service maintains it “does 

not independently determine these prices for delivering 

foreign origin mail.” Id. Although the Commission 

recognizes that the formula used to derive the terminal 

dues rates is determined within the context of a United 

Nations system of one country, one vote, the Postal 

Service does play an active role in the UPU working 

group that develops the terminal dues formula. 

AO mail (i.e., letters and cards, and all other, including flats, small 

packets, bags, and containers), letter post consists of mail similar to 

domestic First-Class Mail, Periodicals, Standard Mail, Bound Printed 

Matter, and Media/Library Mail, weighing up to four pounds (1.8 

kilograms). Inbound letter post from Canada enters the U.S. pursuant 

to the United States Postal Service to Add Canada Post United States 

Postal Service Contractual Bilateral Agreement for Inbound Market 

Dominant Services. See Request of the United States Postal Service to

Add Canada Post United States Postal Service Contractual Bilateral 

Agreement for Inbound Market Dominant Services to the Market

Dominant Product List, Notice of Type 2 Rate Adjustment, and Notice

of Filing Agreement (Under Seal), Docket Nos. MC2010-12 and

R2010-2, November 19, 2009.
132 2010 Anu

Because the current UPU terminal dues rates 

will remain in effect through 2013, with modest 

annual increases, it is clear that the resulting noncompensatory terminal dues rates will continue to 

adversely affect the financial performance of Inbound 

First-Class Single-Piece Mail International. For FY 

2010, therefore, the Commission concludes that 

Inbound First-Class Mail International did not satisfy 

the “requirement that each class of mail or type of 

mail service bear the direct and indirect postal costs 

attributable to each class or type of mail service." 

See 39 U.S.C. 3622(c)(2). Under the circumstances, 

the Commission recommends that the Postal Service 

continue efforts to negotiate more compensatory 

terminal dues rates in the UPU Terminal Dues Group 

and pursue adoption of the most compensatory rates 

possible at the 2012 UPU Congress.

Pursuant to the UPU Convention, the Postal Service 

(or any postal administration) may negotiate bilateral 

(or multilateral) rate agreements with other postal 

administrations as an alternative to the UPU terminal 

dues rates for some or all of its inbound letter post. 

In this regard, during FY 2010, the Postal Service 

negotiated terminal dues rates applicable to inbound 

letter post in bilateral agreements concluded with 

TNT Post (Netherlands) and the China Post Group.48

The Commission approved these agreements, which 

are effective in FY 2011.49 The Postal Service states 

that it will continue “working to improve the inbound 

48 See Request of United States Postal Service to Add Inbound MarketDominant Multi-Service Agreements with Foreign Postal Operators to

the Market Dominant Product List, Notice of Type 2 Rate Adjustments,

and Notice of Filing Two Functionally Equivalent Agreements (Under 

Seal), Docket Nos. MC2010-35, R2010-5 and R 2010-6, August

13, 2010. 49 See PRC Order No. 549, Order Adding Inbound Market Dominant

Multi-Service Agreements with Foreign Postal Operators 1 to the 

Market Dominant Product List and Approving Included Agreements,

Docket Nos. MC2010-35, R2010-5 and R2010-6, September 30,

2010.

cost coverage via bilateral agreements . . . in the 

upcoming calendar year.” FY 2010 ACR at 21. 

The Commission commends the Postal Service for its 

successful negotiation of two bilateral agreements 

during FY 2010. The Commission recommends 

that the Postal Service pursue more aggressively the 

negotiation of additional compensatory bilateral 

(or multilateral) agreements in the upcoming fiscal 

year, notwithstanding the relative improvement in 

contribution and cost coverage during FY 2010. 

Inbound Letter Post (at non-UPU rates)

Revenues from terminal dues rates negotiated through 

the bilateral agreement with Canada Post—the only 

bilateral agreement applicable to inbound letter post 

during FY 2010—did not cover attributable costs. 

However, when financial results are analyzed using 

the FY 2010 imputed method, results improve—

although costs for inbound letter post from Canada 

still exceed revenues.50

The Postal Service defends its financial model used 

to justify the higher negotiated Canadian inbound 

letter post rates implemented in January 2010. That 

financial model, based upon the imputed method, 

estimated a positive contribution for inbound letter 

post from Canada during FY 2010. However, 

the Postal Service notes that most of the revenues 

estimated in the financial model will appear in 

calendar year 2011, and therefore cannot be 

compared to the revenues reported for FY 2010.51

In addition, the Postal Service states that a lower 

exchange rate, and higher mail processing and 

domestic transportation costs than those estimated 

50 See USPS-FY10-NP2, Excel File Reports.xls, worksheet tab A Pages 

(md). 51 Response to CHIR No. 2, question 6. The Postal Service reports 

financial results on a fiscal year basis while the bilateral agreement 

with Canada Post is implemented on a calendar year basis.
 POSTAL REGULATORY COMMISSION 133

in the financial model, reduced the estimated 

contribution, which nevertheless remained positive. Id. 

The Commission’s analysis is consistent with the 

analysis of the Postal Service with respect to the 

improved financial results for inbound letter post 

during FY 2010. Nevertheless, the fact remains that 

for FY 2010 the negotiated bilateral terminal dues 

rates did not cover the attributable costs of inbound 

letter post from Canada, and exacerbated the 

negative contribution for inbound First-Class SinglePiece Mail International as a whole. Moreover, 

there is a discrepancy between the positive cost 

coverage estimated in the financial model, even 

after substituting known exchange rates and actual 

FY 2010 costs, and the reported cost coverage 

for FY 2010. The Postal Service’s financial model 

underestimated the actual costs and therefore 

overestimated the expected contribution. 

For FY 2010, the Commission concludes that 

the terminal dues rates for inbound letter post 

from Canada did not satisfy section 3622(c)(2). 

The Commission therefore recommends that the 

Postal Service include in future financial models 

accompanying negotiated price changes for 

inbound letter post (at non-UPU rates) a higher cost 

contingency that is sufficient to account for the 

uncertainties inherent in estimating attributable costs. 

International Ancillary Services

For FY 2010, revenues from International Ancillary 

Services as a whole exceeded attributable costs by 

$1.5 million, resulting in a cost coverage of 105.5 

percent.52 Within the International Ancillary Services 

52 The International Ancillary Services product consists of the following 

special services: Certificate of Mailing, Registered Mail, Inbound 

Registered Mail, Return Receipt, Inbound Return Receipt, Restricted 

Delivery, Inbound Restricted Delivery, and Customs Clearance an

Delivery Fee (Inbound)

product, however, costs for Inbound Registered Mail 

service exceeded revenues by $6.2 million. This loss 

in contribution represents a significant improvement 

compared to the loss of $16.0 million for Inbound 

Registered Mail reported in FY 2009.

The Postal Service observes that Inbound Registered 

Mail “exhibited increased revenue, decreased costs 

and improved contribution between Fiscal Year 

2009 and Fiscal Year 2010." Response to CHIR 

No. 1, question 23(b). Despite this improvement,

revenues received by the Postal Service for handling 

Inbound Registered Mail are constrained by fixed 

rates of reimbursement established pursuant to the 

UPU Convention. Id. Moreover, rates for Inbound 

Registered Mail are renegotiated by UPU-member 

countries once every four years.

The Commission notes that the UPU is working to 

improve reimbursement rates for handling Inbound 

Registered Mail and that a minimal increase was 

implemented by the UPU in 2010. The Commission 

therefore recommends that the Postal Service work 

within the UPU to ensure a more compensatory 

increase in supplementary rates for Inbound 

Registered Mail to be approved at the 2012 UPU 

Congress.

Quality of Service Link to Terminal Dues 

Terminal dues revenues are derived from payments for 

handling and delivering inbound letter post. Under 

the UPU’s Quality Link Measurement System (QLMS), 

payments are adjusted for the quality of service 

provided in the country of destination for inbound 

letter post coming from other countries participating in 

the system.

As an incentive for participating in the system, the 

Postal Service receives an automatic 2.5 percent 
134 2010 Anu

increase in its terminal dues payments from other 

participating postal administrations. The Postal 

Service is also eligible for an additional 2.5 percent 

bonus payment if service performance achieves the 

UPU established annual performance target. For the 

Postal Service, the FY 2010 target was 88 percent 

of inbound letter post delivered within the domestic 

overnight, two-day, and three-day service standards 

for First-Class Mail.

As discussed above, terminal dues payments 

from UPU-member countries to the Postal Service 

for delivering inbound letter post did not cover 

attributable costs during FY 2010. Because the 

Postal Service did not meet the UPU quality of 

service target for calendar year 2009,53 it received 

less than the maximum terminal dues payment for 

the first quarter (October-December 2009) of FY

2010, thereby denying the Postal Service a small 

amount of additional revenue. Preliminary service 

performance scores for January through November 

2010 generally show improvement in the monthly 

on-time performance scores compared to the same 

monthly on-time performance scores reported in 

CY 2009. This improvement indicates that the 

Postal Service is likely to exceed the UPU quality of 

service target for calendar year 2010, as well as 

the calendar year 2009 actual on-time performance 

score. The Commission encourages the Postal Service 

to continue efforts to improve its on-time service 

performance.

Market Dominant International Negotiated 

Service Agreements

In addition to the Canada Post-United States Postal 

Service Contractual Bilateral Agreement for Inbound 

53 Response to CHIR No. 1, question 19(a).

Market Dominant Services, which establishes terminal

dues rates for inbound letter post from Canada, the 

Postal Service reports financial results for Global 

Direct Entry with Foreign Postal Administrations.

Under this mail service, foreign postal operators 

can enter items bearing the indicia of the respective 

domestic mail classes directly with the Postal Service 

for delivery in the U.S. Such items are entered at 

negotiated rates. During FY 2010, inbound direct

entry items were received from the postal operators of 

six countries.

The Postal Service reports Global Direct Entry

Contracts with Foreign Postal Administrations as 

a market dominant product for the first time in the 

FY 2010 ICRA.54 The Postal Service states that 

the “arrangements” governing inbound direct entry 

predate Commission regulation of market dominant 

products pursuant to the PAEA. Response to CHIR 

No. 5, question 7(a)-(b). The Postal Service adds that 

it “plans to update, and where necessary, formalize 

these arrangements in the coming fiscal year and to 

file a request to add the resulting bilateral agreements 

to the Mail Classification Schedule” as part of the 

market dominant product list. Id. 

Based upon the financial results provided for the 

six foreign postal operators, revenues exceeded 

attributable costs for Global Direct Entry Contracts

with Foreign Postal Administrations as a whole, 

resulting in a net contribution to the institutional costs 

of the Postal Service. The Commission recommends 

that the Postal Service act promptly to add these 

bilateral agreements to the Mail Classification 

Schedule as part of the market dominant product list.

54 See USPS-FY10-NP2, Excel File Reports (Booked).xls, worksheet tab A 

Pages (md), Table A-2, Note 6. 
 POSTAL REGULATORY COMMISSION 135

Negotiated Service Agreements

In FY 2010, the Postal Service had market dominant 

NSAs in effect with the Bradford Group (Docket No.

MC2007-4) and Lifeline (Docket No. MC2007-5).

These agreements offer specific mailers discounts 

(rebates) designed to encourage higher mail volumes. 

The Postal Service provided the financial performance 

of NSAs using two methodologies: the Postal 

Service methodology and the Commission-accepted 

methodology. The Postal Service methodology 

compares actual volumes to before-rates volumes 

estimated when originally proposing the agreements. 

The Postal Service estimates that volumes sent above 

the before-rates volume is incentivized by the rebates. 

Bradford’s actual volume of 197 million pieces fell 

short of the before-rates volume of 202 million pieces 

as estimated in 2007 by the Postal Service. Bradford 

sent over 63 million flat-shaped pieces, 9 million 

pieces above the before-rates volume estimated for 

that shape. The Postal Service estimates that the Flat 

volume above the before-rates estimated volume was 

volume incentivized by the rebates. The Postal Service 

estimates that the additional Flat volume mailed by 

Bradford increased contribution by $71,161.

Lifeline mailed over 90 Million pieces, 20 million 

less than the before-rates volume estimated by the 

Postal Service in 2007. However, Lifeline sent roughly 

2.5 million pieces above the discount threshold. 

The Postal Service estimates that no volume was 

incentivized due to the $24,756 in rebates. As such, 

the Postal Service estimates a loss in contribution of 

$24,756 due to the rebates collected by Lifeline. The 

Postal Service estimates that the net effect of these 

two agreements was an increase in contribution of 

$46,405.

To assess performance under the agreements, the 

Commission uses the accepted methodology which 

incorporates contract year after-rates volume, the 

marginal discount earned, and the Standard Regular 

and ECR own-price elasticities.55 In the second year 

of its three year agreement, the Bradford Group 

received $114,000 in rebates on over 9 million 

pieces. The Commission’s analysis shows that roughly 

2 million incremental pieces can be attributed to 

the rebates.56 This implies rebates were paid on 7 

million pieces that would have been sent without the 

incentive. 

In contract year two, the rebated mail pieces sent 

by the Bradford Group were a mix of Standard Mail 

Flats and Carrier Route Flats. The Standard Mail 

Flats sent by Bradford had an average contribution 

of negative 10.0 cents per piece, while the Carrier 

Route Flats had an average contribution of 7.5 cents 

per piece. Due to the negative per piece contribution

from Standard Mail Flats, the mail mix of incentivized 

pieces had an average contribution of 2 cents 

per piece before the discount. With the discount, 

average contribution was 0.7 cents per piece. Thus, 

the volume incentivized by the rebates yielded an 

additional total contribution of $16,167. However, 

the Postal Service paid $88,100 in rebates on 

pieces that would have been mailed without the 

rebate. Thus, the Postal Service lost nearly $72 

thousand in contribution in the second year of the 

Bradford Group NSA.

55 The Postal Service’s estimates reflect subclasses, rather than products, 

that were used prior to the PAEA. Standard Regular includes the 

following commercial Standard Mail products: Letters. Flats, and 

NFMs/Parcels. ECR refers to Enhanced Carrier Route. It includes 

the following commercial products: Carrier Route, High Density and

Saturation Letters, and High Density and Saturation Flats and Parcels. 56 The accepted methodology was developed in Docket No. MC200

3. The 2010 Standard Mail Regular elasticity is -0.286 and the 

Carrier Route elasticity is -0.727, as provided in the attachment to the 

January 20, 2011 letter from Andrew German.
136 2010 Anu

39 U.S.C. 3622(c)(10) requires that special 

classifications improve the net financial position of the 

Postal Service or improve operational performance, 

while not causing competitive harm. The Bradford 

Group NSA is estimated to have had a negative 

effect on the net financial position of the Postal 

Service in FY 2010. However, the first two years 

of the agreement combined have resulted in an 

increased contribution to the Postal Service. Further, 

the FY 2010 loss in contribution was relatively minor. 

Finally, if the Postal Service anticipates that the final 

year of the agreement will have a sizable negative 

financial impact, the Postal Service has the protection 

of a cancellation clause.

In the second full year of its three year agreement, 

Lifeline collected $24,756 in rebates on nearly 2.5 

million pieces. Using the accepted methodology, 

the Commission estimates that over 1 million pieces 

were incentivized by the rebates, earning the Postal 

Service $115,651 in additional contribution. The 

remaining 1 million discounted pieces produced a 

lost contribution in the amount of $11,801. As a 

result of the Lifeline NSA, the Postal Service realized 

a net gain in contribution of $103,850.

Table VII-29 summarizes the financial effects of 

volume-incentive NSAs active in FY 2010 for the past 

two fiscal years.

For these reasons, the Commission finds the two 

market dominant NSAs in effect in FY 2010 

consistent with title 39. 

 Table VII–29—FY 2010 Summary of 

Net Effect on Contribution 

($ in Thousands) 

FY 2009 FY 2010 Total 

Lifeline 25 104 129 

Bradford 93 (72) 21 

Total 118 32 150 
 POSTAL REGULATORY COMMISSION 137

Chapter VIII

Competitive Products 

Introduction

Section 3653(b)(1) of title 39 requires the Commission to determine “whether any rates or fees in effect during 

[the prior fiscal] year (for products individually or collectively) were not in compliance with applicable provisions 

of this chapter (or regulations promulgated there under)[.]” Section 3633(a) prescribes the legal standards, 

implemented through Commission regulations, governing the Commission’s review of all competitive products. 

PRC Order No. 43 adopted regulations establishing standards for determining the lawfulness of competitive 

products’ rates or prices. PRC Order No. 43, October 29, 2007. It first established which products would 

be considered to be competitive. This competitive product list has been subsequently amended pursuant to 39 

U.S.C. 3642. The list of competitive products for Fiscal Year 2010 is shown in Table VIII–1.

Table VIII–2 contains the Postal Service's FY 2010 disaggregated revenue, cost, and volume for several 

groupings of competitive products. Table VIII–2 shows the Commission’s audited FY 2010 figures. 

FY 2010 competitive volumes, compared with FY 2009 increased 2.8 percent, unit revenues increased 3.8 

percent, and unit attributable costs decreased 1.4 percent. See PRC-ACR2010-LR1. Unit contribution from the 

aggregate of all competitive products increased from $1.42 in FY 2009 to $1.70 in FY 2010. Specifically, 

unit contribution increased $0.76 for Express Mail and $0.17 for Priority Mail. The overall cost coverage for 

all competitive products increased from 131.8 percent in FY 2009 to 138.7 percent in FY 2010. Competitive 

products’ total contribution to institutional costs increased from $1.96 billion to $2.42 billion. 

In this chapter the Commission reviews competitive mail products, including competitive negotiated service 

agreements to determine whether any rates or fees in effect during FY 2010 were not in compliance with 

applicable provisions of chapter 36 of title 39. The Commission’s review is guided by section 3633(a) of title 
138 2010 Anu

39, which sets forth the legal standards applicable 

to rates for competitive products, directing the 

Commission to promulgate regulations to:

 Prohibit subsidization of competitive by market 

dominant products—section 3633(a)(1);

 Ensure that each competitive product covers its 

attributable costs—section 3633(a)(2); and

 Ensure that collectively competitive products cover 

an appropriate share of institutional costs of the 

Postal Service—section 3633(a)(3).

The Commission also includes an analysis of 

Competitive Market Tests and the Competitive 

Products Fund at the end of this Chapter.

The FY 2010, principal findings are:

 Revenues from the Postal Service’s competitive 

products as a whole exceeded the sum of their 

attributable costs, plus group-specific costs. Thus, 

market dominant products did not subsidize 

competitive products during FY 2010 and the Postal 

Service met the requirement of section 3633(a)(1).

 Revenues for four products were less than the 

costs attributed to them and did not satisfy section 

3633(a)(2). The remaining competitive products 

did satisfy section 3633(a)(2). 

 The contribution from competitive products to the 

recovery of the Postal Service’s institutional costs 

was 7.1 percent, which exceeds the 5.5 percent 

regulatory requirement. Consequently, the Postal 

Service met the requirement of section 3633(a)(3) 

during FY 2010.

Section 3633 (a)(1)

The incremental costs of competitive products are 

used to test whether revenues from market dominant 

products cross-subsidize competitive products. Order 

No. 399 approved the Postal Service’s methodology 

to produce a hybrid incremental cost model using the 

available incremental costs for domestic competitive 

mail. PRC Order No. 399, January 27, 2010. 

Order No. 399 further established that in lieu of 

incremental costs, international competitive mail 

would use attributable costs because incremental 

costs are not available for international products. 

Id. Combining the incremental costs from domestic 

competitive mail, domestic group specific costs and 

the attributable cost for international competitive 

Table VIII–1 

Competitive Domestic and International 

Products

DOMESTIC

Express Mail

Priority Mail

Parcel Select

Parcel Return Service

Premium Forwarding Service

Address Enhancement Service

Greeting Cards and Stationery

Shipping and Mailing Supplies

Post Office Box Service

Domestic Competitive NSA Products

INTERNATIONAL

Outbound International Expedited Services

Outbound Priority Mail International

Inbound Air Parcel Post (at UPU rates)

International Priority Airlift (IPA)

International Surface Airlift (ISAL)

International Direct Sacks M-Bag

International Ancillary Services

International Money Transfer Service—Inbound

International Money Transfer Service—Outbound

International Competitive NSA Products2

1See the Domestic Competitive NSA section of this Chapter for a

complete list of domestic competitive NSAs

2See the International section of this Chapter for a complete list of 

Competitive International NSAs.
 POSTAL REGULATORY COMMISSION 139

mail results in a total hybrid incremental cost for 

competitive products of $6.386 billion.1

The total revenues for competitive products in FY 

2010 were $8.677 billion. See Table VIII–2.2

Accordingly, revenues from competitive products 

exceeded the hybrid incremental costs in FY 2010. 

Consequently, the Commission finds that revenues 

from market dominant products do not subsidize 

competitive products, satisfying section 3633(a)(1). 

Section 3633(a)(2)

Section 3633(a)(2) requires revenues from each 

competitive product to be greater than the costs 

1 International Money Transfer Service is counted as one product, but is 

a competitive product grouping that consists of Inbound International 

Money Transfer Service, and Outbound International Money 

Transfer Service. For a complete discussion of these products see the 

international section of this chapter. 2 Group specific costs includes costs from competitive market tests 

because these costs are specific to a competitive product and do 

not vary with volume. However, discontinuing the experiment will 

eliminate the cost.

attributed to that particular product. In making this 

determination with respect to competitive international 

mail products, the Commission relies on the booked 

revenues from RPW and costs reported in the CRA 

and the ICRA for inbound mail products.

In FY 2010, the Commission finds the following 

products’ attributable costs exceed their respective 

revenues:

 Address Enhancement Service

 Inbound International Expedited Services 2 (EMS 

Cooperative)

 International Ancillary Services

 International Money Transfer Service (IMTS)3

The Commission finds that in FY 2010, Address 

Enhancement Service did not generate sufficient 

3 This is a competitive product grouping that consists of Inbound 

International Money Transfer Service, and Outbound International 

Money Transfer Service. For a complete discussion of these products 

see the international section of this chapter.

Table VIII–2 

Fiscal Year 2010 Volume, Revenue, Cost and Cost Coverage 

Select Competitive Products and Competitive Product Groupings

Volume 

(000)

Revenue 

($000)

Attributable Cost 

($000)

Contribution to 

Institutional Cost 

($000)

Rev./Pc-. 

(Cents)

Cost/Pc. 

(Cents)

Contribution 

to 

Institutional 

Cost/Pc. 

(Cents)

Cost 

Coverage

COMPETITIVE MAIL

Express Mail 42,553 827,898 495,560 332,338 1,945.571 1,164.571 781.000 167.1%

Priority Mail 809,471 5,656,639 4,246,634 1,410,005 698.807 524.619 174.189 133.2%

Parcel Select and 

Parcel Return Service 

(PRS)

296,824 568,756 419,897 148,859 191.614 141.463 50.150 135.5%

Competitive 

International Mail 270,737 1,480,530 967,055 513,475 546.853 357.194 189.658 153.1%

Competitive Domestic

Services 82,675 135,018 115,681 19,336 163.312 139.923 23.388 116.7%

Competitive 

International Services 1,261 8,267 12,056 (3,790) 655.757 956.366 (300.609) 68.6%

Total Competitive 

Mail and Services 1,419,584.173 8,677,107.978 6,256,884.340 2,420,223.638 611.243 440.755 170.488 138.7%
140 2010 Anu

revenues to cover attributable costs, which is 

inconsistent with section 3633(a)(2). This is the 

first ACD where the Postal Service has attempted

to estimate the attributable costs associated with 

Address Enhancement Service. The Postal Service 

recently proposed, and the Commission approved, 

a 5.4 percent increase for this product that went into 

effect January 2, 2011.4 In Response to CHIR No. 

4, question 7, the Postal Service states that it, “plans 

to evaluate costs and pricing strategies in order to 

determine how best to cover costs.” Therefore, prior 

to the next ACR, or the next general competitive 

product price increase if it precedes the ACR, the 

Postal Service is directed to develop accurate costs 

for this product and provide a plan of what future 

pricing strategies are necessary to ensure that is 

product is in compliance with section 3633(a)(2).

For FY 2010, the Commission finds that the Inbound 

EMS product consisting of countries in the EMS 

Cooperative did not satisfy section 3633(a)(2). The 

Commission therefore recommends that in future 

financial models the Postal Service increase the 

cost contingency factor used for setting Inbound 

International Expedited Services rates through the 

EMS Cooperative. 

The Commission concludes that the International 

Ancillary Services product did not satisfy section 

3633(a)(2). As a result, the Commission recommends 

that the Postal Service ensure the proper recording 

and reporting of revenues for competitive international 

insurance. 

For FY 2010, the Commission finds that IMTS did 

not satisfy section 3633(a)(2) using the booked 

revenues reported by the Postal Service in its 

4 See Order Approving Changes In Rates Of General Applicability For 

Competitive Products (December 2, 2010)

financial statements. The Commission recommends 

no additional action on the part of the Postal Service 

with respect to IMTS.

5

The Commission finds that all other competitive 

products produced sufficient revenues to recover 

attributable costs in FY 2010, satisfying the 

requirements of 3633(a)(2).

Section 3633(a)(3)

In implementing section 3633(a)(3), the Commission 

established that if the contribution to institutional costs 

earned by competitive products was equal to 5.5 

percent or more of the institutional costs of the Postal 

Service, then competitive products would be making 

an appropriate contribution toward the recovery of 

its institutional costs. See 39 CFR 3015.7(c). Thus, 

the Postal Service’s competitive products as a whole 

would meet the requirements of section 3633(a)(3) if 

the dollar value of the sum of their contributions was 

equal to or greater than 5.5 percent of the Postal 

Service’s institutional costs.

In FY 2010, the Postal Service reported total 

institutional costs for all products to be $34 billion. This 

means competitive products must contribute at least 

$1.87 billion to institutional costs to adhere to section 

3633(a)(3). The total contribution to institutional costs 

from competitive products in FY 2010 was $2.5 

billion – 7.1 percent of total institutional costs. In 

absolute terms, competitive products’ contribution to 

institutional costs has increased $0.5 billion from FY 

2009. The Commission finds that competitive products 

contributed an appropriate amount of institutional costs 

in FY 2010, in satisfaction of section 3633(a)(3).

5 See the international section of this chapter for a complete discussion 

of this product’s compliance with section 3633(a)(2).
 POSTAL REGULATORY COMMISSION 141

Domestic Competitive Negotiated Service 

Agreements

For FY 2010, the Postal Service provided total 

volume, revenue, and cost data on each domestic 

competitive NSA that was in effect during the fiscal 

year. Rule 3050.21(g)(2) requires that the Postal 

Service file data with the Commission that are 

sufficient to evaluate each agreement for compliance 

with section 3633. For certain agreements, specific 

billing determinants by weight, zone, and cube 

were not provided because, according to the Postal 

Service, the information was not available.6

Pursuant to section 3633(a)(2), each NSA product 

must cover its attributable costs. There were 39 

domestic competitive NSA products in effect and 

active in FY 2010. The Postal Service provided 

actual revenue, volume, and estimated costs for 28 

agreements.7 Each of these agreements appears 

to comply with the statutory requirements of section 

3633(a)(2). For the remaining 11 agreements8 the 

Postal Service did not file complete volume data;9

therefore, the Commission has insufficient evidence 

that demonstrates that these agreements comply with 

6 See LR-FY10-NP27, file “NSACostRevenue SummaryFY10.xlsx”, 

column L. 7 See Docket Nos. CP2009-13/MC2009-11; CP2009-17

MC2009-13; CP2009-2/MC2009-1; CP2009-21/MC2009-15; 

CP2009-24/MC2009-17; CP2009-25/MC2009-18; CP2009-3/

MC2009-2; CP2009-30/MC2009-25; CP2009-31/MC2009-25; 

CP2009-37/MC2009-27; CP2009-39/MC2009-29; CP2009-4/

MC2009-3; CP2009-42/MC2009-31; CP2009-43/MC2009-32; 

CP2009-44/MC2009-33; CP2009-45/MC2009-34; CP2009-

55/MC2009-36; CP2009-56/MC2009-37; CP2009-61/

MC2009-40; CP2009-63/MC2009-42; CP2010-15/MC2010-

15; CP2010-16/MC2010-16; CP2010-2/MC2010-2; CP2010-

4/MC2010-4; CP2010-5/MC2010-5; CP2010-6/MC2010-6; 

CP2010-76/MC2010-31; CP2010-9/MC2010-9; MC2008-5. 8 See Docket Nos. CP2008-26/MC2008-8; CP2009-14/MC2009

12; CP2009-24/MC2009-17; CP2009-33/MC2009-25; 

CP2009-38/MC2009-28; CP2009-40/MC2009-30; CP2009-

54/MC2009-35; CP2009-6/MC2009-5; CP2010-1/MC2010-

1; CP2010-3/MC2010-3; CP2010-77/MC2010-32. 9 See Response to CHIR No. 1, question 18 (under seal).

section 3633(a)(2). For the FY 2011 ACR, the Postal 

Service must collect and provide data for each NSA 

in effect during FY 2011 to enable the Commission 

to make a determination of compliance with regard to 

section 3633(a)(2).

The Commission notes that the following changes were 

made to the supporting worksheets for domestic NSAs: 

 the addition of cost avoidance for Priority 

mailpieces; 

 inclusion of D-Report adjustments;

 incorporation of the CRA adjustment for Alaska Air 

Priority transportation; and

 changes in distribution of other costs for Parcel 

Select and Parcel Return Service. 

In response to CHIR No. 5, question 3, the 

Postal Service appears to make an argument 

that these changes could be considered changes 

to quantification techniques. It also states that 

such changes may be considered changes to 

analytical principles, which must be accepted by 

the Commission before being used in the context of 

an ACR. The Commission preliminarily views these 

changes as changes to analytical principles which 

require prior Commission approval before being used 

in an ACR. Accordingly, the Commission uses the 

workpapers filed in response to CHIR No. 5, question 

3, which remove these four changes to evaluate 

compliance with 3633(a)(2). Using these revised 

workpapers does not change the Commission’s 

findings regarding domestic NSAs' compliance 

with section 3633(a)(2). If the Postal Service seeks 

to use these techniques in future proceedings, it 

should file for approval prior to incorporating such 

changes. Once the Postal Service files for approval 

of these changes, the Commission will be able to fully 
142 2010 Anu

evaluate the proposals. The Postal Service notes that 

the NSA “analysis methods have begun to stabilize 

and we [the Postal Service] can anticipate there will 

be fewer corrections and changes in the future.” This 

should minimize the need for rulemakings to make 

analytical principle changes for NSAs.

COMPETITIVE INTERNATIONAL 

PRODUCTS

Competitive international mail consists of nine 

products featuring rates and fees of general 

applicability.10 Those products are: Outbound 

International Expedited Services, Outbound Priority 

Mail International, Inbound Air Parcel Post (at UPU 

rates), International Priority Airmail (IPA), International 

Surface Airlift (ISAL), International Direct SacksM-Bags, International Money Transfer Service

Outbound, International Money Transfer Service—

Inbound, and International Ancillary Services. 

In addition to the nine products listed above, 

competitive international mail also consists of a 

number of products whose rates and fees are 

established pursuant to one or more Negotiated 

Service Agreements—negotiated contracts between 

the Postal Service and a qualifying mailer or foreign 

postal administration that govern outbound or inbound 

international mail. Below, the Commission discusses 

separately the financial performance of competitive 

international mail products and competitive 

international Negotiated Service Agreements.

10 During FY 2010, rates and fees of general applicability fo

competitive international mail products were implemented by the 

Postal Service on May 11th, 2009 and January 4th, 2010. See

Notice of the United States Postal Service of Changes in Rates 

of General Applicability for Competitive Products Established in 

Governors’ Decision No. 09-01, February 10, 2009; see als

Notice of the United States Postal Service of Changes in Rates 

of General Applicability for Competitive Products Established in 

Governors’ Decision No. 08-19, November 13, 2009

Financial Analysis of Competitive 

International Products with Rates of General 

Applicability

For FY 2010, revenues for competitive international 

mail products with rates of general applicability 

collectively covered their attributable costs and 

provided a net contribution to the institutional costs of 

the Postal Service.11 Among competitive international 

mail products, the following provided a positive 

contribution to institutional costs: Outbound International 

Expedited Services, Outbound Priority Mail 

International, Inbound Air Parcel Post (at UPU rates), 

International Priority Airmail (IPA), International Surface 

Airlift (ISAL), and International Direct Sacks-M-Bags

The Commission concludes that for FY 2010, each 

of the above-referenced competitive international mail 

products featuring rates of general applicability satisfy 

section 3633(a)(2). However, for the combined 

International Money Transfer Service—Outbound 

(IMTS-Outbound) and International Money Transfer 

Service—Inbound (IMTS-Inbound) product, and 

International Ancillary Services, revenues did not 

11 Unless stated otherwise, this section analyzes revenues and expenses 

for international mail products developed according to the “booked” 

accounting method. The use of booked revenues and expenses 

ensures that the Commission’s financial analyses are consistent with 

the Postal Service’s audited financial statements. The Postal Service 

uses “imputed” revenues reported in the FY 2010 ICRA, which differ 

from booked revenues reported in the RPW. Under the imputed 

method, inbound revenues for the current fiscal year are estimated 

using current-year volumes multiplied by the current-year “settlement” 

rates, i.e., terminal dues, inward land rates, etc., which are converted 

to U.S. dollars using the average Special Drawing Right (SDR) to U.S

dollar exchange rates in effect during the fiscal year. By contrast, 

under the booked method, inbound revenues for a fiscal year are 

estimated using volumes from the same period last year and current 

settlement rates converted to U.S. dollars using a fixed SDR to U.S.

dollar exchange. For FY 2010, the Postal Service implemented the 

Foreign Post Settlement (FPS) system, which will replace the imputed 

method. Under the FPS system, inbound revenue accruals provided to 

the ICRA and RPW will be based upon current-year volumes and the 

current settlement rates, with the resulting inbound revenues converted 

to U.S. dollars using current SDR to U.S. dollar exchange rates.
 POSTAL REGULATORY COMMISSION 143

cover attributable costs, and therefore did not satisfy 

section 3633(a)(2). 

International Money Transfer Service

In FY 2010, the Commission approved the Postal 

Service’s request to classify IMTS-Outbound 

and IMTS-Inbound as separate products on the 

competitive product list.12 More recently, the Postal 

Service petitioned the Commission to approve a 

methodological change by which the Postal Service 

could separate the financial results for the IMTSOutbound and IMTS-Inbound products.13 Because 

the petition is under review, the Postal Service, of 

necessity, must report the financial results of the 

outbound and inbound IMTS products together.14

Revenues did not cover the attributable costs of 

the combined IMTS product using the “booked” 

method reported in the RPW. Response to CHIR 

No. 4, question 11. Using the “imputed” method, 

however, the Postal Service reports that revenues 

for the combined IMTS product covered attributable 

costs. According to the Postal Service, these differing 

financial results reflect the reporting of revenue 

associated with “money order float” and “outstanding 

money orders taken into revenue” under the imputed 

method, and the exclusion of such revenues under 

12 See PRC Order No. 391, Order Approving Addition of Postal 

Services to the Mail Classification Schedule Product Lists, Docket

No. MC2009-19, January 13, 2010. The IMTS-Outbound product 

features prices of general applicability for postal money orders 

cashed (and electronic transfers accessed) in foreign countries. The 

IMTS-Inbound product consists of agreements with 10 foreign postal 

administrations that pre-date the PAEA and govern Postal Service 

payment of foreign money orders presented at post offices in the U.S. 

There is no charge to the recipient for receiving payment. 13 See Petition of the United States Postal Service Requesting Initiation of 

a Proceeding to Proposed Changes in Analytic Principles, Docket No.

RM2011-5, December 20, 2010. 14 USPS-FY10-NP2 (non-public), Excel file Reports (Booked).xls,

worksheet tab A Pages (c), at page A-2, Note 5. 

the booked method. Id. In contrast to revenues, 

attributable costs are the same under both methods.15

The Commission concurs that revenues covered the 

attributable costs of the combined IMTS product 

using the imputed method and recognizes the Postal 

Service’s successful efforts to reduce IMTS costs. For 

FY 2010, however, the Commission concludes that 

IMTS did not satisfy section 3633(a)(2) using the 

booked revenues reported by the Postal Service in 

its financial statements. Under the circumstances, the 

Commission recommends no additional action on the 

part of the Postal Service with respect to IMTS.

International Ancillary Services

The Postal Service reports revenues and costs 

separately for the following services that comprise the 

competitive International Ancillary Services product: 

Registered Mail, Return Receipt, Insurance, and 

Customs Clearance and Delivery Fee (Inbound).1

With the exception of outbound Insurance, each of 

the above-referenced services provides a positive 

contribution to institutional costs. Nevertheless, 

attributable costs exceeded revenues for the 

International Ancillary Services product as a whole 

because of the financial performance of outbound 

Insurance, resulting in negative contribution. 

The Postal Service observes that a cause of 

competitive insurance’s poor financial performance 

is “the possible undercounting of insurance revenue.” 

15 Compare USPS-FY10-NP2 (non-public), Excel file Reports (Booked).

xls, worksheet tab A Pages (c), and Excel file Reports.xls, worksheet 

tab A Pages (c). 16 The Postal Service does not report revenues and costs for three 

ancillary services—Certificate of Mailing, Inbound Return Receipt, 

and Inbound Insurance. For Outbound Restricted Delivery, the

Postal Service reports transactions and revenues. However, costs 

for Outbound Restricted Delivery are not separately identified, and

instead are reported with Outbound Return Receipt. USPS-FY10-NP2 

(non-public), Excel file Reports (Booked).xls, worksheet tab A Pages 

(c), at page A-2, Note 6. 
144 2010 Anu

FY 2010 ACR at 67. The Postal Service states that 

it is “unable to offer a definitive explanation as to 

whether revenue for insurance is understated at this 

time,” although it is studying this possibility. Id. In 

response to an information request, the Postal Service 

adds that it believes insurance revenue is understated 

“due to the exclusion of revenue for insurance arising 

from sales transactions made through the Click-N-Ship 

(CNS) channel” for Priority Mail International (PMI). 

Response to CHIR No. 1, question 24(c). Instead, 

insurance sales revenue was included with Priority 

Mail International revenue, rather than separately 

identified in the CNS transaction and recorded with 

insurance. Id. The Postal Service’s response also 

provides the total amount of insurance sales revenue 

generated from CNS transactions during FY 2010.17

In addition, the Postal Service attributes the poor 

financial performance to a 42 percent increase in 

costs, caused largely by an increase in indemnities.18

The Postal Service maintains that it has “taken steps to 

improve the financial performance of the [International 

Ancillary Services] product by raising prices for 

international insurance effective January 1, 2011.” 

Response to CHIR No. 1, question 24(b). Moreover, 

the Postal Service asserts that “[c]ontribution will 

likely improve once revenue from online channels is 

reported with other insurance revenue.” Id.

17 Response (non-public) to CHIR No. 1, question 24(c). 18 Response to CHIR No. 1, question 24(b). The financial performance 

of insurance, as well as outbound Registered Mail and Return Receipt, 

also reflects the fact that these ancillary services are “relatively small” 

and therefore “may exhibit annual cost variations associated with 

small transactional volumes.” Response of the United States Postal 

Service to CHIR No. 2, Question 19(b), Docket No. ACR2009.

During the Commission’s consideration of the Postal Service’s FY

2009 Annual Compliance Reported, the Postal Service stated its 

intent to monitor the financial performance of the underlying ancillary 

services during FY 2010 “to determine whether [FY 2009] is an 

anomaly or indication of a trend.” Id. For FY 2010, the Postal Service 

did not provide information from its monitoring plan.

The Commission agrees with the Postal Service’s 

analysis that the contribution of the International 

Ancillary Services product will likely improve once 

revenue is properly recorded for insurance. However, 

the Commission finds that FY 2010 total insurance 

revenues, which includes insurance sales revenue 

generated from CNS transactions separately reported 

by the Postal Service, did not cover the attributable 

costs of the International Ancillary Services product. 

Given these circumstances, the Commission 

concludes that the International Ancillary Services 

product did not satisfy section 3633(a)(2). As a result, 

the Commission recommends that the Postal Service 

ensure the proper recording and reporting of revenues 

for competitive international insurance. 

Financial Analysis of Competitive 

International Negotiated Service Agreements

Each competitive international product that features 

rates not of general applicability has been established 

in an international Negotiated Service Agreement 

(NSA). Such contractual agreements often require 

a minimum volume and/or revenue commitment by 

mailers or foreign postal administrations in exchange 

for discounted rates from the Postal Service. 

In general, each international NSA or contract 

is classified as a separate competitive product 

on the competitive product list.19 Accordingly, 

the Commission must evaluate each international 

contract classified as a separate competitive product 

for its consistency with section 3633(a)(2), which 

requires that each product cover its attributable costs. 

International contracts that exhibit similar market or 

cost characteristics, however, are grouped together 

19 PRC Order No. 43, Order Establishing Ratemaking Regulations for 

Market Dominant and Competitive Products, Docket No. RM2007-1

October 29, 2007, sections 2177, 3001. 
 POSTAL REGULATORY COMMISSION 145

into a single product under one product heading. 

Such international contracts as a group are classified 

as the product and collectively evaluated for 

consistency with section 3633(a)(2).

For FY 2010, the Postal Service reports volume, 

revenue and cost data on each international NSA 

or contract. The Postal Service provides such data 

on 104 international NSAs, 91 of which relate to 

outbound mail and 13 of which relate to inbound 

mail. The financial results for outbound and inbound 

international contracts are separately discussed below.

Competitive Outbound International Negotiated 

Service Agreements

The Commission has established classifications for 

outbound competitive products featuring negotiated 

rates under the following product headings: Direct

Entry Parcels Contracts, Global Direct Contracts,

Global Expedited Package Services (GEPS) 

Contracts, Global Expedited Package Service Nonpublished Rates 2, and Global Plus Contracts.20

For FY 2010, the Postal Service reports data for 

91 outbound contracts for Global Direct Contracts,

GEPS Contracts, and contracts for Global Plus 1 and 

Global Plus 2.

Based upon the data provided, the Commission 

finds that 90 of the 91 outbound international 

contracts generated sufficient revenues to cover 

their attributable costs.21 However, most of these 

20 Under the Direct Entry Parcels Contracts product heading, Direct Entr

Parcels 1 is listed as the product. With respect to the GEPS Contracts, 

the listed products are Global Expedited Package Services 1 and 

Global Expedited Package Services 2. The Global Plus Contracts 

product heading lists Global Plus 1, 1A, 2, and 2A as products. 21 The contract in which attributable costs exceed revenues is one

contract among many within the product and therefore not subject to 

section 3633. However, because market dominant products must not 

subsidize competitive products, and because the U.S. Government has 

granted the Postal Service a letter monopoly, the Postal Service should 

not allow any service to continue to generate negative contribution.

contracts are grouped under the above-referenced 

product headings and therefore should be collectively 

evaluated for consistency with section 3633(a)

(2). The Commission concludes that Global Direct 

Contracts, GEPS Contracts and Global Plus Contracts 

provided a net contribution to the institutional costs of 

the Postal Service.

Competitive Inbound International Negotiated 

Service Agreements

Like outbound NSAs, the Commission establishes 

classifications for inbound competitive products 

featuring negotiated rates. The competitive product list 

identifies international contracts under the following 

product headings: Inbound International Expedited 

Services, Inbound International Expedited Services 

3 (China Post), Inbound Air Parcel Post (at non-UPU 

rates), Inbound Surface Parcel Post (at non-UPU rates), 

Inbound Competitive Multi-Service Agreements with 

Foreign Postal Operators 1, Inbound Direct Entry

with Foreign Postal Administrations, and International 

Business Reply Service Competitive Contract 1 and 2.

For FY 2010, the Postal Service reports data for 13 

Inbound International NSAs: Inbound International 

Expedited Services, Inbound Air Parcel Post (at 

non-UPU rates), Inbound Surface Parcel Post (at nonUPU rates), Inbound Direct Entry with Foreign Postal

Administrations, and International Business Reply 

Service. 

Inbound International Expedited Services. The Postal 

Service has bilateral agreements with more than180 

foreign postal administrations under the auspices of 

the UPU Express Mail Service (EMS) Cooperative for 

the delivery of expedited inbound international mail 

referred to as Inbound EMS. In addition, the Postal 

Service has a separate bilateral agreement with the 
146 2010 Anu

China Post Group.22 Inbound EMS volumes enter 

the U.S. pursuant to these agreements. Rates for the 

delivery of most Inbound EMS are established by the 

Postal Service through the UPU’s EMS Cooperative. 

On the competitive product list, Inbound EMS rates 

established through the EMS Cooperative constitute 

a product. Rates applicable to EMS from China 

constitute a separate product on the competitive 

product list. In the ICRA, however, the Postal Service 

only reports the financial results for Inbound EMS from 

all countries, including China, under the heading 

Inbound International Expedited Services. Both 

products are discussed below.

For FY 2010, revenues for Inbound International 

Expedited Services as a whole did not cover 

attributable costs using the booked or imputed 

accounting methods. The Postal Service notes that 

based upon the imputed method, “the ICRA shows 

better financial performance for Inbound International 

Expedited Services.” FY 2010 ACR at 67, fn 27. 

This stands in contrast to the financial results for FY 

2009 in which revenues for Inbound International 

Expedited Services covered attributable costs based 

upon the imputed method, though not based upon the 

booked method.

The Postal Service states that using the booked 

method, “Revenues and contribution for Inbound EMS 

improved between Fiscal Year 2009 and Fiscal Year 

2010, although expenses increased to offset these 

improvements.” Response to CHIR No. 1, question 

24(a). The Postal Service adds that most of the 

increased expenses occurred from “mail processing, 

22 See Request to Add Inbound Expedited Services 1 to the Competitive 

Product List, and Notice of United States Postal Service of Filing 

China Post Group—United States Postal Service Contractual Bilateral 

Agreement (Under Seal), Docket Nos. MC2010-13 and CP 2010

12, November 20, 2009.

and about 10 percent of the increase can be 

explained by the scan barcode edit.” Id. Introduced 

in FY 2010, the scan barcode edit identifies inbound 

EMS pieces that “had originally been recorded 

incorrectly as inbound Parcel Post or Letter Post.” 

Response to CHIR No. 5, question 5. The Postal 

Service also observes that the FY 2010 financial 

performance of Inbound EMS was adversely affected 

by price increases implemented in January 2010, 

which did not apply in the first quarter of FY 2010 

(October to December 2009). FY 2010 ACR at 66

The Postal Service asserts that it is addressing the 

financial performance of Inbound EMS by raising 

Inbound EMS prices again. These price increases 

became effective in January 2011. It also maintains 

that the estimates in its financial model upon which 

the January 2011 price increases were based 

showed that these prices would generate sufficient 

revenues to cover costs and thereby satisfy the 

statutory pricing criteria for competitive products. 

Id. at 66–67.

In response to an information request concerning 

the difference between the FY 2010 actual results 

and earlier financial models, which showed that 

its proposed rates that became effective in CY 

2009 and CY 2010 would cover costs, the Postal 

Service explained that the models were “based upon 

‘imputed’ revenues and expenses” and adds that 

the causes were “both revenue and cost related.” 

Response to CHIR No. 2, question 8. With respect 

to revenue, the Postal Service states that the financial 

model estimated revenues using the higher CY 2010 

prices. By contrast, the actual FY 2010, Quarter 1 

rates were lower than the rates for Quarters 2–4, 

which reflect the Postal Service’s CY 2010 prices. 

If the higher CY 2010 prices were used for the full 
 POSTAL REGULATORY COMMISSION 147

fiscal year, Inbound EMS “would have reported 

a small positive contribution.” Id. In addition, an 

unfavorable exchange rate compared to the one used 

in the financial model, which was accurate at the 

time, caused a reduction in actual revenues, thereby 

reducing contribution, although maintaining a small 

positive contribution. Id. 

With respect to costs, the Postal Service reports that 

unit domestic mail processing, delivery and other 

costs were higher than the inflation-adjusted costs 

estimated in the financial models, while domestic 

transportation unit costs were slightly lower. The net 

effect of these cost changes would have reduced 

the estimated contribution, although the contribution 

would have remained positive. Id.

Finally, the Postal Service references the Commission’s 

finding in the FY 2009 ACD that the differing

financial results for Inbound EMS:

are not a consequence of any postal 

management action. Rather, such results are 

a consequence of a Commission-mandated 

methodological change requiring the use of 

booked revenues and expenses for purposes 

of analyzing the financial performance of all 

products. FY 2009 ACD at 121

As a result, the Commission recommended “no 

additional action” given the positive contribution of 

Inbound EMS using imputed revenues and 

expenses. Id.

The Postal Service misinterprets the Commission’s 

recommendation, which reflected the negative 

contribution using the booked method, while 

recognizing that Inbound EMS covered its attributable 

costs based upon the imputed method. By contrast, for 

FY 2010, Inbound EMS under both the booked and 

imputed methods does not cover its attributable costs.

The Postal Service is responsible for setting inbound 

EMS rates annually, which are then implemented on a 

calendar year basis rather than on a fiscal year basis. 

The Postal Service therefore needs to ensure that such 

rates cover attributable costs for the entire fiscal year to 

comply with section 3633(a)(2). Moreover, exchange 

rate fluctuations and price changes that reduce 

revenues and otherwise adversely affect contribution 

must be adequately factored into the financial models 

used in setting the Inbound EMS rates.

For FY 2010, the Commission concludes that the 

Inbound EMS product consisting of countries in the 

EMS Cooperative did not satisfy section 3633(a)

(2). The Commission therefore recommends that in 

future financial models the Postal Service increase 

the cost contingency factor used for setting Inbound 

International Expedited Services rates through the 

EMS Cooperative. 

In the ICRA, as noted above, the Postal Service 

provided financial results for its bilateral agreement 

with China Post Group together with Inbound EMS 

from all other foreign postal operators in the EMS 

Cooperative. At the request of the Commission, the 

Postal Service provided separate financial results 

using the booked method for inbound EMS from the 

China Post Group. Using the booked methodology, 

revenues from Inbound EMS from the China Post 

Group did not cover attributable costs. Financial 

results using the imputed method for Inbound EMS 

from the China Post Group were not separately 

provided by the Postal Service. Based upon the 

Commission’s analysis, however, it appears that the 

bilateral agreement with China Post Group covered 

its attributable costs using the imputed method.
148 2010 Anu

Inbound Surface Parcel Post (at non-UPU rates).

Inbound Surface Parcel Post (at non-UPU rates) is 

a product classification intended to house multiple 

contracts between the Postal Service and foreign 

postal administrations. During FY 2010, this product

was comprised of only one contract between the 

Postal Service and Canada Post.23

For FY 2010, the Postal Service reports financial 

results for Inbound Surface Parcel Post (at non-UPU 

rates). The Postal Service also separately provides the 

financial results for Expedited Parcels and Xpresspost. 

Expedited Parcels enter the U.S. as inbound surface 

parcels. Xpresspost is a service similar to domestic 

Priority Mail for documents and merchandise and 

enters the U.S. Priority Mail network. Based upon the 

data provided, the Postal Service reports that Inbound 

Surface Parcel Post (at non-UPU rates), including 

Expedited Parcels and Xpresspost, generated 

sufficient revenues to cover attributable costs. 

The Commission concludes that Inbound Surface 

Parcel Post (at non-UPU rates) entered pursuant to the 

Canada Post–United States Postal Service Contractual 

Bilateral Agreement for Competitive Inbound Services 

satisfies section 3633(a)(2). 

Inbound Direct Entry Contracts with Foreign Postal 

Administrations. Inbound Direct Entry Contracts with

Foreign Postal Administrations (IDE) is classified as one

product on the competitive product list. Under the IDE

product, the Postal Service provides foreign postal 

administrations with the ability to ship sacks of parcels 

that are pre-labeled for direct entry into the Postal 

Service’s domestic network in exchange for applicable 

domestic postage plus a sack handling fee. 

23 See PRC Order No. 376, Order Concerning Bilateral Agreement 

with Canada Post for Inbound Competitive Services, Docket No.

MC2010-14, December 30, 2010

For FY 2010, the Postal Service reports financial 

results for three contracts which comprise the IDE

product. Based upon the financial results provided, 

each of the contracts generated sufficient revenues 

to cover attributable costs, resulting in the product as 

a whole providing a net contribution to institutional 

costs. As a result, for FY 2010, the Commission 

finds that the Inbound Direct Entry Contracts product 

with Foreign Postal Administrations satisfies section 

3633(a)(2).

Inbound Air Parcel Post (at non-UPU rates).

Inbound Air Parcel Post (at non-UPU rates) consists 

of a contractual agreement with a group of postal 

administrations governing the receipt of inbound air 

parcels at inward land rates, i.e., the rates postal 

administrations pay each other for the handling and 

delivery of such parcels. These agreements constitute 

a product on the competitive product list. There is 

also a separate agreement with Royal Mail of Great 

Britain, which is also listed as a separate product.

At the request of the Commission, the Postal Service 

provided separate financial results for both products. 

Based upon the results provided, the Commission 

concludes that for FY 2010 each product generated 

sufficient revenues to cover attributable costs, resulting 

in both Inbound Air Parcel Post (at non-UPU rates) 

products making a net contribution to the institutional 

costs of the Postal Service.

International Business Reply Services Competitive 

Contracts. On the competitive product list, 

International Business Reply Services Competitive 

Contracts 1 and International Business Reply 

Services Competitive Contracts 2 are identified as 

products. Under these products, an IBRS contract 

customer supplies prepaid IBRS packaging for use 
 POSTAL REGULATORY COMMISSION 149

by its customers in foreign countries to return used 

or defective merchandise weighing up to 4 pounds 

at no direct cost to the foreign customer. The IBRS 

contract customer compensates the Postal Service 

for this service, and the Postal Service remits to the 

relevant foreign postal administration the amount due 

for collection of such items in the foreign country and 

transportation to the U.S. 

The Postal Service has entered into five IBRS 

contracts. Revenue and attributable cost data 

provided for each contract reveal that all five 

generated sufficient revenues to cover costs. 

Consequently, the Commission finds that International 

Business Reply Services Competitive Contracts as a 

whole provided a net contribution to the institutional 

costs of the Postal Service.

COMPETITIVE MARKET TESTS

Two competitive market tests were in effect during FY 

2010: Collaborative Logistics and Samples Co-Op 

Box. Section 3641 authorizes the Postal Service to 

“conduct market tests of experimental products in 

accordance with this section.” A product may not 

be tested, however, unless it satisfies each of the 

following conditions:

 The product is significantly different from all 

products offered by the Postal Service within 

the 2-year period preceding the start of the test 

(section 3641(b)(1));

 The product will not result in undue market 

disruption, especially for small business concerns 

(section 3641(b)(2)); and

 The product is correctly characterized as 

either market dominant or competitive (section 

3641(b)(3)).

In addition, market tests of experimental products may 

not exceed 24 months (section 3641(d)), or annually 

exceed $10 million in revenue (section 3641(e)).

The Postal Service reports the total revenue 

for Collaborative Logistics in FY 2010 was 

$1,667,856, which exceeded total costs 

reported by the Postal Service. The Postal Service 

also provided a total cost figure under seal for 

Collaborative Logistics in USPS-FY10-NP27. In 

response to Chairman’s Information Request No. 1 

Question 25, the Postal Service filed a more detailed 

explanation of the actual costs it believes the Market 

Test incurred during FY 2010. USPS-FY10-NP30 

Excel file: ChIR.1.Q.25.NONPUBLIC.Collab.

Logistics.xls. The revenue figure presented by the 

Postal Service is greater than the cost figure presented 

under seal, demonstrating that Collaborative Logistics 

is providing a contribution to institutional costs. 

The Sample Co-Op Box market test was authorized 

by the Commission in Order No. 452, Docket No.

MT2010-1 (May 5, 2010). The Postal Service 

reports the cost of this market test was $250,000 

and generated no revenue. The Postal Service stated, 

no noticeable impact on operational 

efficiency was observed. Market test results 

also confirmed that the design of the piece 

worked extremely well. Moreover, no results 

of the experiment indicated that offering this 

product created an inappropriate competitive 

advantage for the Postal Service or any mailer.

ACR at 70.

The costs associated with both of these market tests 

have been added to the group specific to ensure 

competitive products as a whole are in compliance 

with section 3633(a)(1).
150 2010 Anu

Neither market test exceeded 24 months duration nor 

exceeded the $10 million revenue limit.

COMPETITIVE PRODUCTS FUND

The Competitive Products Fund was established by 

39 U.S.C. 2011 to deposit receipts from competitive 

products revenues, returns on its investments and 

any amounts directly associated with the competitive 

products enterprise. It is a revolving fund and can 

be used for the withdrawals within mandated limits 

for the payment of costs attributable to competitive 

products. The Postal Service has filed all materials 

required under Commission Rules 3060.20 through 

3060.30 relating the Competitive Products Fund as 

Library Reference USPS-FY10-39. 

The fund balance in the Postal Service Competitive 

Products Fund Report at October 1 of each fiscal year 

is as follows. 

The FY 2010 Postal Service Competitive Products 

Report indicates that the Competitive Products Fund 

generated pretax earnings of $550.8 million, 

producing a tax obligation of $192.8 million, which 

was transferred to the Postal Service Fund January 

15, 2011. 

Overall, FY 2010 Shipping Services revenue totaled 

$8.68 billion, up 6.7 percent from FY 2009, and 

volume totaled 1.7 billion pieces. The FY 2010 

contribution for Shipping Services equaled 7.12 

percent of the Postal Service’s institutional costs.

The Statement of Allocated Assets and Liabilities for 

Competitive Products is filed for the first time pursuant 

to the PAEA requirement that any withdrawals from the 

Competitive Products Fund be satisfied from revenues 

generated from competitive products.24 There has 

been no borrowing from the Fund since inception.

24 39 U.S.C. 2011(e)(1)(B)(i).

Fiscal Year

Investment 

Income 

($000)

Pre Tax 

Income

($000)

Income 

Tax

($000)

Balance in 

Competitive 

Products 

Fund 

($000)

2008 0 14,386 4,935 9,451

2009 2 368,228 128,880 248,8011

2010 198 549,407 192,292 606,114

1The balance of the Competitive Products Fund held within the U.S. 

Treasury and listed in Table III-Detail of Treasury Securities Outstanding,

September 30, 2010 of the Monthly Statement of Public Debt is

$249 million.
 POSTAL REGULATORY COMMISSION 151

Chapter IX

Nonpostal Services

Introduction

The PAEA required the Commission to review nonpostal services provided by the Postal Service to determine 

whether they may be authorized to continue as nonpostal services, or should be terminated. 39 U.S.C. 

404(e). Those nonpostal services that were authorized to continue are to be regulated under title 39 as market 

dominant, competitive, or experimental products. 39 U.S.C. 404(e)(5).

In Docket No. MC2008-1, the Commission authorized 14 nonpostal services to continue. Of these nonpostal 

services authorized to continue,1 two were designated as market dominant and 12 were designated as 

competitive. Table IX lists the 14 nonpostal services authorized to continue in Order No. 154. 

FY 2010 Analysis

Pursuant to rule 3050.21(i), the Postal Service reported FY 2010 cost, revenue, and volume for nonpostal 

services. A review of the financial results for nonpostal services2 reveals that they generated $430.6 million in 

revenue and incurred $256.1 million in expenses, which resulted in a net income of $174.5 million. Only the 

Migratory Bird service failed to cover its expenses with a minor loss of $238,000.3

In its review of the CRA and RPW, the Commission observed two instances where nonpostal services were 

included with the Special Services class. In the CRA, the revenue, volume, and cost associated with some 

1 Docket No. MC2008-1, Review of Nonpostal Services Under the Postal Accountability and Enhancement Act, December 19, 2008 (Order No. 

154). 2 See ACR at 71 where the Postal Service presents a table that identifies the revenue, expense, and volume for the following: (1) Migratory Bird; 

(2) Passports; (3) Passport Photos; (4) Officially Licensed Retail Products; (5) FedEx Dropboxes; (6) Meter Manufacturers Program; (7) Electronic 

Postmark; (8) MoverSource; (9) Licensing Programs Other Than Officially licensed Retail Products; and (10) Hybrid Mail. Some items in the table 

were redacted. See Library Reference USPS-FY2010-NP27 for an unredacted table. 3 The Commission notes that two services listed in the table, Migratory Bird and Passports, are not nonpostal services subject to review under section 

404(e) of title 39. Order No. 154 at 57-59.
152 2010 An

philatelic sales purchases were included with the 

Stamp Fulfillment Services product. See Response to 

CHIR No. 4, question 6. Also, the non-public RPW 

and the competitive billing determinants identified 

Officially Licensed Retail Products as a Competitive 

special service. Because the financial data for 

nonpostal services must be separated from postal 

services, the Commission directs the Postal Service 

to report nonpostal revenues with Miscellaneous 

Revenue/Other Income in the CRA and the RPW. 

Currently, in Docket No. MC2010-24, the 

Commission is reviewing proposed mail classification 

language for nonpostal services.4 The Postal Service 

proposed to realign and combine the 14 nonpostal 

services into 12 nonpostal services. In its subsequent 

ACR filings, the Postal Service is directed to report 

revenue, cost, and volume data for each nonpostal 

service approved in Docket No. MC2010-24.

4 Docket No. MC2010-24, Notice and Order Concerning Mail 

Classification Schedule Language for Nonpostal Services, May 7, 

2010 (Order No. 457).

Table IX–1—Nonpostal Services as of Order 

No. 154

Market Dominant

1 MoverSource

2 Philatelic Sales

Competitive

1 Affiliates for Website

2 Affiliates—Other (Linking Only)

3 Electronic Postmark

4 FedEx Drop Boxes

5 Licensing Programs Other Than Officially 

Licensed Retail Products

6 Meter Manufacturers Marketing Program

7 Non-Sale Lease Agreements (Non-Government)

8 Officially Licensed Retail Products (OLRP)

9 Passport Photo Service

10 Photocopying Service

11 Training Facilities (In part)

12 Warranty Repair Program
 POSTAL REGULATORY COMMISSION 153

Appendix A

Empirical Review of Price Cap Application

The Commission’s rules for the pre-implementation review of proposed rate adjustments calculate the 

percentage change in rates for each class by using the most recent available historical billing determinants to 

weight the percentage change of each rate cell. The rules also instruct the Postal Service to make reasonable 

adjustments to the billing determinants to account for classification changes such as the addition, elimination, 

or redefinition of rate categories. See 39 C.F.R. § 3010.23. At the time the rules were proposed, several 

parties expressed concern that this approach might not accurately reflect the actual change in rates. The 

Commission took note of these concerns and stated its intent to monitor the effectiveness of the rules. See

RM2007-1 Order No. 26, para 2069-2077 (August 15, 2007). 

As part of the monitoring process, the Commission included in the 2009 ACD a review of the R2008-1 

rate adjustment. The review consisted of a comparison of the percentage change in rates for each class 

calculated using two different sets of billing determinants as weights. The first of these was the historical billing 

determinants used in the Commission’s pre-implementation review, and the second was the billing determinants 

from the first full year that the R2008-1 rates were in effect.1

This year, the Commission performs a similar post-implementation review of the R2009-2 rate adjustment. 

Unlike the R2008-1 adjustment, it is not possible to construct a full year of billing determinants that begins 

on the day of implementation.2 Therefore, the four quarters following the implementation of R2009-2 rates 

(FY2009 Q4 through FY2010 Q3) are used instead. Table A–1 presents a comparison of the average rate 

1 This is roughly the last 1 1⁄2 quarters of FY 2008 plus the first 2 1⁄2 quarters of FY 2009. 2 Billing determinants are broken out between before and after the implementation date of R2009-2 rates, but because of negative inflation that 

occurred in FY2010, there was no rate adjustment implemented one year later, as would normally be the case. Therefore, it is not possible to divide 

FY2010 Q3 billing determinants between the period less than a year and more than a year after the implementation of R2009-2 rates. A few minor 

issues with the First-Class Mail International billing determinants are dealt with as described in PRC-ACR2010-LR3.
154 2010 An

increase for each class from the pre-implementation 

review with those developed using actual volumes 

sent at the R2009-2 rates. It also shows the results 

of last year’s review of R2008-1 rates and the 

cumulative effect of both rate adjustments.3

The table shows that, on a cumulative basis, the 

change in rates for Standard Mail, Package Services, 

and Special Services as measured using a postimplementation price index is less than the preimplementation price index. For First-Class mail, the 

post-implementation price index modestly exceeds the 

pre-implementation price index (0.003 percent), while 

the post-implementation price index for Periodicals 

3 The cumulative changes are greater than the sum of the two 

adjustments due to compounding.

exceeds the pre-implementation price index by 

0.575 percent

The R2009-2 rate adjustment included several 

classification changes, including the introduction of 

Full-Service IMb discounts. Despite a slow start, the 

percentage of First-Class letters using Full-Service IMb 

during the post-implementation period was close to 

the levels estimated by the Postal Service over the 

first year of implementation. The adoption rates for 

First-Class flats and Standard Mail were significantly 

less than forecast.4 However, the volume of First-Class 

flats and the amount of the Full-Service IMb discount 

for Standard Mail are small enough that the effect of 

the low adoption rates on the average rate increases 

4 The Postal Service did not report any volume of Full-Service IMb 

cards.

Table A-1 

Percentage Change in Rates

R2008-1

Pre-implementation

Proxy Volumes

Volumes at

R2008-1 Rates Difference

First-Class 2.886 2.916 0.030

Periodicals 2.724 2.908 0.184

Standard 2.838 2.835 -0.003

Package Services 2.875 2.631 -0.244

Special Services 2.848 2.863 0.015

R2009-2

Pre-implementation

Proxy Volumes

Volumes at

R2009-2 Rates Difference

First-Class 3.770 3.743 -0.027

Periodicals 3.967 4.340 0.373

Standard 3.781 3.574 -0.207

Package Services 3.800 3.660 -0.140

Special Services 3.715 3.615 -0.100

Cummulative

Pre-implementation

Proxy Volumes

Volumes at

New Rates Difference

First-Class 6.765 6.768 0.003

Periodicals 6.799 7.374 0.575

Standard 6.726 6.510 -0.216

Package Services 6.784 6.387 -0.397

Special Services 6.669 6.581 -0.087
 POSTAL REGULATORY COMMISSION 155

was relatively small. In contrast, classification 

changes in Standard Mail parcels appear to have 

had a significant effect on the measured change in 

rates. Changes in overall volume levels for parcels 

complicate the analysis, but it is clear that the preimplementation assumptions about the redistribution 

of volumes from eliminated categories elevated the 

measured rate increase compared with actual postimplementation volumes.

Nevertheless, preliminary analysis suggests that the 

differences shown above primarily reflect continuing 

patterns of volume shifts within each class. For 

example, First-Class single-piece letter volume 

decreased by about 17 percent, while automation 

letter volume decreased by only about 9 percent. 

Therefore using the updated volume weights, the rate 

increase for automation letters (3.1 percent) accounts 

for a larger share of the class average increase than 

it did in the pre-implementation calculation. Similarly, 

the rate increase for single-piece letters (4.8 percent) 

accounts for a smaller share than it did in the original 

calculation. Because single-piece and automation 

letters combine to make up the majority of First-Class 

Mail volumes, these volume trends are the primary 

reason that the average increase is lower when the 

actual volumes at R2009-2 rates are used. 

This effect is the result of a continuing trend in FirstClass Mail where single-piece letter volume is 

declining faster than the rest of the class. In last year’s 

review of the R2008-1 rate adjustment, this trend 

resulted in larger increases at post-implementation 

volumes because in that case single-piece letters 

received a smaller increase than automation letters. As 

the cumulative rate change figures in Table A-1 show, 

this year’s reversal nearly offsets last year’s result.

The Commission intends to continue monitoring the 

effectiveness of its rules through similar analysis in 

the future. However, as there was no general market 

dominant rate adjustment implemented in FY2010, 

next year’s ACD will not include the type of analysis 

shown in Table A-1.
156 2010 An
 POSTAL REGULATORY COMMISSION 157

Appendix B

Financial Results Under Previous Classification And Comparison Of Original And 

Revised Revenue, Pieces, And Weight Figures

This appendix presents: (1) FY 2010 data using the mail classification system in place prior to passage of the 

PAEA, and (2) a comparison of original and revised Revenue, Pieces, and Weight (RPW) reported figures. The 

revised figures, however, are pro forma as they were based on a methodological change not applicable to 

the prior fiscal year.

Previous Mail Classification System

Prior to the PAEA, the classes of mail were subdivided into subclasses and the financial reports reflected that 

organization. The PAEA uses the term product, defined as “a postal service with a distinct cost or market 

characteristic for which a rate or rates are, or may reasonably be applied." 39 U.S.C. 102(6). Within 

classes, the Postal Service reports data by product, not by subclass. To facilitate historical comparisons, 

Table B–1 presents volumes, revenues, attributable costs, and contribution to institutional cost using the former 

classification scheme of subclasses.

Revised RPW Figures

The RPW report always contains data from the current year and the previous year. For example, the FY 2010 

RPW contains both FY 2009 and FY 2010 data. From time to time, the Postal Service will revise RPW figures. 

Typically, revisions for a past year are reported in a current RPW. Under the PRA, such changes did not have 

a material impact on the Commission’s rate and classification responsibilities, however, such changes may 

materially affect results of the prior year’s ACD. 
158 2010 Anal compliance determination Table B-1 Fiscal Year 2010 Volume, Revenue, Cost and Cost Coverage by Class Previous Classification (Subclasses) Volume (000) Revenue ($000) Attributable Cost ($000) Contribution to Institutional Cost ($000) Rev./Pc. (Cents) Cost/Pc. (Cents) Contribution to Institutional Cost/Pc. (Cents) Cost Coverage Competitive Mail Express Mail 42,553 827,898 495,560 332,338 1,945.571 1,164.571 781.000 167.1% Priority Mail 809,471 5,656,639 4,246,634 1,410,005 698.807 524.619 174.189 133.2% Parcel Select & Parcel Return Service (PRS) 296,824 568,756 419,897 148,859 191.614 141.463 50.150 135.5% Competitive Int’l Mail 270,737 1,480,530 967,055 513,475 546.853 357.194 189.658 153.1% Competitive Domestic Services 82,675 135,018 115,681 19,336 163.312 139.923 23.388 116.7% Competitive Int’l Services 1,261 8,267 12,056 (3,790) 655

Total Competitive Mail and Services 1,419,584 8,677,108 6,256,884 2,420,224 611.243 440.755 170.488 138.7%

Market Dominant MailFirst-Class Mail

Letters, Flats & Parcels 73,500,160 32,072,558 15,819,039 16,253,519 43.636 21.522 22.114 202.7%

Cards 4,368,559 1,058,001 635,621 422,379 24.219 14.550 9.669 166.5%

Standard Mail

Regular 45,041,170 10,903,460 7,322,850 3,580,610 24.208 16.258 7.950 148.9%

Nonprofit 11,217,473 1,591,268 1,753,966 (162,698) 14.186 15.636 (1.450) 90.7%

Regular and Nonprofit 56,258,643 12,494,728 9,076,816 3,417,912 22.209 16.134 6.075 137.7%

Enhanced Carrier Route (ECR) 24,374,651 4,627,266 2,544,018 2,083,249 18.984 10.437 8.547 181.9%

Nonprofit ECR 1,890,453 208,415 197,529 10,886 11.025 10.449 0.576 105.5%

ECR and NECR 26,265,104 4,835,681 2,741,547 2,094,134 18.411 10.438 7.973 176.4%

Periodicals

Within County 695,455 74,301 98,495 (24,194) 10.684 14.163 (3.479) 75.4%

Outside County 6,574,014 1,804,533 2,391,343 (586,810) 27.449 36.376 (8.926) 75.5%

Package Services

Single-Piece Parcel Post 61,408 615,241 748,869 (133,628) 1,001.885 1,219.490 (217.605) 82.2%

Bound Printed Matter 474,487 513,872 478,607 35,265 108.301 100.868 7.432 107.4%

Media Mail 114,914 348,382 303.168 

Library Rate 7,408 20,980 283.189 
 POSTAL REGULATORY COMMISSION 159

Table B-1 

Fiscal Year 2010 Volume, Revenue, Cost and Cost Coverage by Class Previous Classification (Subclasses)—Continued

Volume

(000)

Revenue

($000)

Attributable

Cost

($000)

Contribution to

Institutional

Cost

($000)

Rev./Pc.

(Cents)

Cost/Pc.

(Cents)

Contribution 

to

Institutional

Cost/Pc.

(Cents)

Cost

Coverage

Media and Library Mail 122,322 369,361 458,551 (89,190) 301.958 374.872 (72.914) 80.5%

U.S. Postal Service Mail 431,206 Free Mail 67,214 66,303 (66,303) 98.645 

Market Dominant Int’l Mail 335,547 912,571 632,371 280,200 271.965 188.460 83.505 144.3%

Total Market Dominant Mail 169,154,120 54,750,848 33,147,563 21,603,285 32.367 19.596 12.771 165.2%

Market Dominant Services

Certified Mail 268,725 752,429 634,691 117,738 280.000 236.186 43.814 118.6%

COD 834 6,522 8,246 (1,724) 781.562 988.125 (206.563) 79.1%

Insurance 39,146 125,567 98,624 26,944 320.764 251.936 68.828 127.3%

Registered Mail 2,967 47,806 42,567 5,239 1,611.492 1,434.887 176.604 112.3%

Stamped Envelopes 14,029 3,717 10,311 377.4%

Stamped Cards 879 646 233 136.1%

Money Orders 123,405 183,153 126,339 56,814 148.416 102.378 46.039 145.0%

Post Office Box Service 813,186 674,892 138,295 120.5%Caller Service 93,921 30,621 63,300 Other Special Services 842,747 524,055 318,692 160.8%International Services 2,032 28,920 27,402 1,518 105.5%

Other Income 625,262 625,262 

Total Mail and Services 170,573,704 66,962,376 41,576,247 25,386,129 39.257 24.374 14.883 161.1%

Institutional Costs 34,005,721 Appropriations: Revenue Forgone 88,877 Investment Income 25,326Total Revenues 67,076,580Total Costs 75,581,968 Net Income (Loss) (8,505,388)

Source: Library Reference PRC-ACR2010-LR1
160 2010 An

The RPW total revenue figure must equal the audited 

total revenue figure appearing in the Postal Service’s 

Annual Report. The revisions are reported at the 

product (or service) level. Thus, only by comparing 

the FY 2009 data from the FY 2010 report with 

the FY 2009 data from the FY 2009 report is it 

possible to determine that figures have been revised. 

Ex post changes may be significant as any revised 

product revenues will have some impact on the net 

contribution of affected products. 

During its review of the ACR and accompanying 

materials, the Commission discovered that FY 2009 

revenue and volume figures had been revised in the 

year-to-date RPW report for FY 2010. For example, 

the FY 2009 volumes and revenues reported for 

Within County were revised downward by 16 

percent and 16.9 percent, respectively. This is a 

substantial revision. 

The FY 2009 numbers for virtually every postal 

product were revised in FY 2010. Most adjustments 

were relatively small and would have had no impact 

on the Commission’s conclusions. However, based on 

the revisions, cost coverages reported in the FY 2009 

ACD would change.

Apparently, the Postal Service employed a revised 

methodology, approved in Docket No. RM2010-

10, for calculating FY 2009 and FY 2010 revenues 

in the RPW.1 Evidently, this was done to facilitate 

comparative analyses of FY 2009 and FY 2010. 

However, the Postal Service gave no notice that it 

was revising FY 2009 RPW figures. 

1 Docket No. RM2010-10, Order Concerning Analytical Principles for 

Periodic Reporting (Proposal Two), January 14, 2011 (Order No. 

650).

Unless specifically authorized otherwise, changes in 

methodology are to be applied prospectively. In Order 

No. 650, the Commission approved a methodological 

change beginning with FY 2010 reporting. 

For reporting purposes, revisions based on 

methodological changes to a prior year’s RPW figures 

made following the issuance of that year’s ACD are 

inappropriate. If the Postal Service wishes to perform 

a comparative analysis using a revised methodology, 

it is free to do so, provided the results are clearly 

labeled pro forma.

The revisions to the FY 2009 data are based on a 

methodology not applicable to that year. The 

valid figures are those relied upon in the FY 2009 

ACD. Thus, the Commission’s findings in that ACD 

remain valid. 

For informational purposes, Table B-2 shows the 

original and revised FY 2009 RPW figures.
 POSTAL REGULATORY COMMISSION 161

Table B–2—Revenue, Pieces, and Weight by Classes of Mail and Special Services for Fiscal Year 2009 

The Original Filed in ACD 2009 (RPW 2009) Compared with the Revised Filed in ACD 2010 (RPW 2010) 

(Data in Thousands)

Service Category

Revenue ($) Pieces Weight (Pounds)

Revised

FY 2009

Original

FY 2009

Change Revised

FY 2009

Original

FY 2009

Change Revised

FY 2009

Original

FY 2009

Change

Amount Percent Amount Percent Amount Percent

First-Class Mail: Single-Piece Letters 13,320,933 13,298,977 21,956 0.2 30,066,660 30,016,465 50,195 0.2 914,548 912,864 1,684 0.2  Single-Piece Cards 454,390 454,534 (143) (0.0) 1,616,231 1,616,755 (524) (0.0) 10,330 10,348 (18) (0.2)

Total Single-Piece Letters and Cards 13,775,324 13,753,511 21,813 0.2 31,682,890 31,633,220 49,671 0.2 924,878 923,212 1,666 0.2 

 Presort Letters 15,656,797 15,616,345 40,453 0.3 44,943,532 44,807,701 135,831 0.3 1,881,815 1,874,581 7,234 0.4  Presort Cards 622,876 666,224 (43,348) (6.5) 2,944,297 3,126,016 (181,718) (5.8) 24,019 25,335 (1,316) (5.2)

Total Presort Letters and Cards 16,279,673 16,282,569 (2,895) (0.0) 47,887,829 47,933,717 (45,888) (0.1) 1,905,834 1,899,916 5,918 0.3 

 Flats 3,528,090 3,539,892 (11,802) (0.3) 2,854,785 2,864,496 (9,711) (0.3) 594,433 597,233 (2,801) (0.5) Parcels 1,117,255 1,113,758 3,497 0.3 582,836 580,826 2,011 0.3 190,316 189,711 605 0.3 

Domestic Negotiated Serv. 

Agreement Mail 98,554 98,554 0 0.0 301,476 301,476 0 0.0 12,337 12,337 0 0.0 

Outbound First-Class Mail International 756,357 756,357 0 0.0 456,449 456,449 0 0.0 55,791 55,791 0 0.0 Inbound Intl. Letter-Post Single-Piece & NSA Mail 161,354 161,354 0 0.0 0 0 0 0 0 0 Inbound Intl. Negotiated Serv. Agreement Mail 0 0 0 0 0 0 0 0 0 

 First-Class Mail Fees 166,647 166,761 (115) (0.1) 0 0 0 0 0 0 

First-Class Dom. NSA Mail Fees 0 0 0 0 0 0 0 0 0 

 Total First-Class Mail 35,883,254 35,872,756 10,498 0.0 83,766,266 83,770,183 (3,917) (0.0) 3,683,590 3,678,201 5,389 0.1 

Standard Mail:

High Density and Saturation Letters 672,691 681,946 (9,255) (1.4) 4,995,529 5,085,391 (89,862) (1.8) 227,198 228,548 (1,350) (0.6)High Density and Saturation Flats & Parcels 1,891,556 1,971,816 (80,260) (4.1) 11,801,047 12,356,828 (555,781) (4.5) 2,115,165 2,174,819 (59,653) (2.7)

 Carrier Route 2,293,684 2,271,929 21,754 1.0 9,953,347 9,856,763 96,584 1.0 2,012,078 1,993,435 18,643 0.9  Letters 8,813,844 8,773,592 40,253 0.5 46,800,733 46,559,408 241,324 0.5 2,597,519 2,585,932 11,587 0.4  Flats 2,868,410 2,865,807 2,603 0.1 7,837,100 7,793,175 43,925 0.6 1,981,328 1,963,766 17,562 0.9 

Not Flat-Machinables and Parcels 637,808 631,898 5,910 0.9 684,919 679,041 5,878 0.9 308,688 305,920 2,769 0.9 
162 2010 Anal compliance determination Table B–2—Revenue, Pieces, and Weight by Classes of Mail and Special Services for Fiscal Year 2009 The Original Filed in ACD 2009 (RPW 2009) Compared with the Revised Filed in ACD 2010 (RPW 2010) (Data in Thousands)—Continued Service Category Revenue ($) Pieces Weight (Pounds) Revised FY 2009 Original FY 2009 Change Revised FY 2009 Original FY 2009 Change Revised FY 2009 Original FY 2009 Change Amount Percent Amount Percent Amount Percent Domestic Negotiated Serv. Agreement Mail 78,319 78,319 0 0.0 374,955 374,955 0 0.0 37,023 37,023 0 0.0 Inbound Intl. Negotiated Serv. Agreement Mail 374 374 0 0.0  649 0 0.0 160 160 0 0.0    Standard Mail Fees 88,444 88,419 25 0.0 0 0 - 0 Standard Mail DomMail Fees 0 0 0 0 - 0       Total Standard Mail 17,345,129 17,364,099 (18,970) (0.1) 82,448,280 82,706,211 (257,931) (0.3) 9,279,

Periodicals Mail: In-County 75,344 90,616 (15,271) (16.9) 721,786 859,268 (137,482) (16.0) 212,543 267,226 (54,683) (20.5) Outside County 1,947,356 1,932,085 15,271 0.8 7,179,114 7,094,447 84,668 1.2 2,805,003 2,765,136 39,867 1.4  Periodicals Mail Fees 15,446 15,443 3 0.0 0 0 0 0  Total Periodicals Mail 2,038,147 2,038,144 3 0.0 7,900,900 7,953,715 (52,815) (0.7) 3,017,546 3,032,362 (14,816) (0.5)Package Services Mail: Single-Piece Parcel Post 699,909 699,269 640 0.1 80,793 80,716 76 0.1 444,722 444,397 325 0.1 

Inbound Intl. Surface Parcel 

Post (at UPU Rates) 12,880 12,880 0 0.0 

Inbound Intl. Negotiated Service Agreement Mail 74 74 0 0.0 32 32 0 0.0 92 92 0 0.0 

 Bound Printed Matter Flats 206,450 206,445 5 0.0 238,801 238,799 2 0.0 332,353 332,351 2 0.0 

 Bound Printed Matter Parcels 362,618 362,608 10 0.0 270,627 270,623 4 0.0 780,725 780,716 8 0.0 

 Media and Library Mail 397,790 397,398 392 0.1 140,273 140,139 134 0.1 314,834 314,553 280 0.1  Package Services Mail Fees 3,978 3,977 1 0.0 

Total Package Services Mail 1,683,699 1,682,651 1,048 0.1 730,526 730,309 216 0.0 1,872,726 1,872,110 616 0.0 

U.S. Postal Service Mail 0 0 0 455,426 454,865 561 0.1 126,288 126,141 146 0.1 Free Mail 0 0 0 62,038 61,958 80 0.1 30,283 30,243 40 0.1 

Total Mailing Services Mail 56,950,229 56,957,650 (7,421) (0.0) 175,363,436 175,677,241 (313,806) (0.2) 18,009,593 18,028,660 (19,068) (0.1)

Ancillary Services: Certified Mail 730,780 729,813 967 0.1 266,841 266,491 350 0.1  Collect on Delivery 7,559 7,564 (5) (0.1) 1,015 1,015 (1) (0.1)
 POSTAL REGULATORY COMMISSION 163

Table B–2—Revenue, Pieces, and Weight by Classes of Mail and Special Services for Fiscal Year 2009 

The Original Filed in ACD 2009 (RPW 2009) Compared with the Revised Filed in ACD 2010 (RPW 2010) 

(Data in Thousands)—Continued

Service Category

Revenue ($) Pieces Weight (Pounds)

Revised

FY 2009

Original

FY 2009

Change Revised

FY 2009

Original

FY 2009

Change Revised

FY 2009

Original

FY 2009

Change

Amount Percent Amount Percent Amount Percent

 Delivery Confirmation 166,105 166,105 0 0.0 1,062,932 1,062,932 0 0.0  Insurance 129,079 129,069 9 0.0 43,771 43,767 3 0.0  Registered Mail 49,923 49,906 17 0.0 3,183 3,182 1 0.0  Return Receipts 543,835 543,142 693 0.1 220,539 220,271 268 0.1 

Stamped Envelopes and Cards 17,222 17,222 0 0.0 0 0 Other Domestic Ancillary Services 42,287 42,232 55 0.1 18,559 18,536 23 0.1 Outbound International Ancillary Services 16,334 16,103 231 1.4 1,914 1,749 165 9.4 Inbound International Ancillary Services 9,581 9,581 0 0.0 31 31 0 0.1 

 Total Ancilliary Services 1,712,704 1,710,738 1,966 (0.1) 1,618,785 1,617,975 810 0.1 Special Services: Money Orders 189,728 189,728 0 0.0 135,039 135,039 0 0.0  Post Office Box Service 817,075 817,075 0 0.0 0 0 0 

Other Domestic Special Services 111,446 94,822 16,625 17.5 410,995 0 410,995 

Total Additional Special Services 1,118,250 1,101,625 16,625 0.0 546,035 135,039 410,995 304.4 Total Mailing Services Services 2,830,954 2,812,363 18,591 0.7 2,164,819 1,753,014 411,805 23.5 Total Mailing Services Mail and Services 59,781,183 59,770,014 11,169 0.0 

Other Mailing Services Revenue 81,114 213,791 (132,677) (62.1)

Total Mailing Services Revenue 59,862,297 59,983,804 (121,507) (0.2)

Express Mail: Total Express Mail 884,571 884,571 0 0.0 47,015 47,015 0 0.0 44,915 44,915 0 0.0 

Priority Mail: Total Priority Mail 5,367,921 5,362,466 5,455 0.1 790,896 790,070 826 0.1 1,636,001 1,634,452 1,550 0.1 
164 2010 Anal compliance determination Table B–2—Revenue, Pieces, and Weight by Classes of Mail and Special Services for Fiscal Year 2009 The Original Filed in ACD 2009 (RPW 2009) Compared with the Revised Filed in ACD 2010 (RPW 2010) (Data in Thousands)—Continued Service Category Revenue ($) Pieces Weight (Pounds) Revised FY 2009 Original FY 2009 Change Revised FY 2009 Original FY 2009 Change Revised FY 2009 Original FY 2009 Change Amount Percent Amount Percent Amount nt Parcel Select Mail:      Total Parcel Select Mail 466,112 466,112 0 0.0 222,932 222,932 0 0.0 869,465 869,465 0 0.0

Total Parcel Return Service Mail 48,922 48,922 0 0.0 18,255 18,255 0 0.0 39,340 39,340 0 0.0 

International Mail: International Expediated Services

Outbound International Expedited Services 267,287 267,287 0 0.0 5,522 5,522 0 0.0 24,426 24,426 0 0.0 Inbound International Expedited Services 72,891 72,891 0 0.0 0 0 0 0 0 0 

 International Priority Mail

Outbound Priority Mail International 750,204 750,204 0 0.0 23,629 23,629 0 0.0 121,711 121,711 0 0.0 

 Inbound Air Parcel Post 15,815 15,815 0 0.0 0 0 0 0 0 0  Other International Mail 238,503 238,503 0 0.0 273,139 273,139 0 0.0 39,089 39,089 0 0.0 

 International Mail Fees 76 76 0 0.0 0 0 0 0 0 0  Total International Mail 1,344,777 1,344,777 0 0.0 302,290 302,290 0 0.0 185,226 185,226 0 0.0 

Total Shipping Services Mail 8,112,302 8,106,848 0 0.1 1,381,387 1,380,561 826 0.1 2,774,947 2,773,397 0 0.1 

Ancillary Services:

Outbound International Ancillary Services 5,782 5,782 0 0.0 1,083 1,083 0 0.0 Inbound International Ancillary Services 146 146 0 0.1 27 27 0 0.1 

 Total Ancilliary Services 5,928 5,928 0 0.0 1,111 1,111 0 0.0 

Special Services: Premium Forwarding Service 17,068 17,068 0 0.0 1,227 1,227 0 0.0 

Intl. Money Orders & Money Transfer Service 2,574 2,574 0 0.0 264 264 0 0.0 Other Domestic Special Services 116,052 116,052 80,595 
 POSTAL REGULATORY COMMISSION 165

Table B–2—Revenue, Pieces, and Weight by Classes of Mail and Special Services for Fiscal Year 2009 

The Original Filed in ACD 2009 (RPW 2009) Compared with the Revised Filed in ACD 2010 (RPW 2010) 

(Data in Thousands—Continued)

Service Category

Revenue ($) Pieces Weight (Pounds)

Revised

FY 2009

Original

FY 2009

Change Revised

FY 2009

Original

FY 2009

Change Revised

FY 2009

Original

FY 2009

Change

Amount Percent Amount Percent Amount Percent

 Total Special Services 135,694 19,642 116,052 590.9 82,086 1,491 0 5,405.4 

Total Shipping Services Services 141,622 25,570 116,052 453.9 83,197 2,602 0 3,097.8 Total Shipping Services Mail and Services 8,253,924 8,132,417 116,052 1.5 

Other Shipping Services Revenue 0 0 0 

Total Shipping Services Revenue 8,253,924 8,132,417 116,052 1.5 

Total Mailing and Shipping Services

 Total All Mail 65,062,531 65,064,498 (1,966) (0.0) 176,744,822 177,057,802 (312,980) (0.2) 20,784,539 20,802,057 (17,518) (0.1) Total All Services 2,972,576 2,837,933 134,643 4.7 2,248,017 1,755,616 492,401 28.0 

Total All Mail and Services 68,035,107 67,902,431 132,677 0.2 

 Total All Other Revenue 81,114 213,791 (132,677) (62.1) Total All Revenue 68,116,221 68,116,221 (0) (0.0)
166 2010 An
 POSTAL REGULATORY COMMISSION 167

Appendix C

Methodology Changes and MODS

This appendix contains two parts: (1) a summary of the methodological changes, and (2) a discussion of the 

Postal Service’s Management Operational Data System (MODS).

Methodology Changes

In FY 2010, the Postal Service filed a number of petitions to change analytical principles relating to its 

periodic reports. A summary of the proposed changes to the analytical principles, and the Commission’s 

analysis and recommendations of the changes are provided below. 

RM2010-8: Proposal One

The Postal Service proposed to immediately eliminate Transportation Cost System (TRACS) rail sampling 

subsystem. Instead, it proposed to use the TRACS Inter-BMC highway distribution factors for distributing freight 

rail and rail plant load cost pools in CS14. The rationale for this change, as stated by the Postal Service, 

was the continued decline in freight rail costs as a result of a shift in transportation from rail to trucks. The shift 

in transportation costs was due to the realignment of transportation and distribution networks, including the 

implementation of Network Distribution Centers (NDCs) that began in FY 2009.1 The Postal Service noted that 

this change would have minimal impacts on distribution keys. 

Upon review of the proposal, when comparing the FY 2009 TRACS Inter-BMC highway key with that of the 

TRACS freight rail distribution key, the Commission found large differences in the attributable cost shares for some 

classes of mail, particularly First-Class Mail, and suggested the 2009 TRACS freight rail key as an alternative 

1 The Postal Service has been transforming the Bulk Mail Center (BMC) into a new system of Network Distribution Centers (NDCs) since 2009. The 

NDC network consolidates the processing of originating mail into fewer sites to increase operational efficiency, decrease cost, and maintain service 

quality.
168 2010 An

proxy. In its response to the Commission’s concerns, 

the Postal Service suggested that continued use of the 

2009 TRACS freight rail distribution key would be a 

reasonable alternative to using the FY 2010 Inter-BMC 

highway distribution key that is initially proposed. 

The Commission concurred with the Postal Service 

that the immediate elimination of the TRACS rail 

sampling subsystem would result in a more efficient 

use of resources. However, the Commission found 

that the FY 2009 freight rail distribution key would 

be a more appropriate representative distribution key 

than that of the Inter-BMC highway. The Commission 

recommended a modified Proposal One that the 

Postal Service should use the FY 2009 freight rail 

distribution key to distribute the costs of freight rail 

to products in FY 2010 and in subsequent reporting 

years. The proposed change was incorporated into 

the FY2010 ACR. See Order No. 424.

RM2010-10: Proposals Two –A and Two-B

Proposal Two-A

Proposal Two-A was a resubmission of the proposal 

in Docket No. RM2009-5. In that Docket, the Postal 

Service proposed to reduce the sample size of OriginDestination Information System—Revenue, Pieces 

and Weight (ODIS-RPW) data by 20 percent. As 

described in RM2009-5, the proposal was part of 

an organization-wide policy to lower administrative 

expenses in response to its financial difficulties. It 

estimated that the reduction in sample size would 

reduce the number of tests by about 25,600, and 

would have saved approximately $6 million in data 

collection expenses on an annual basis. Through 

a number of chairman information requests, the 

Commission asked the Postal Service to quantify the 

loss in precision that its proposal would cause in 

ODIS-RPW data at various levels of aggregation. 

The Postal Service did not provide the requested 

quantification of the proposal’s impact, stating that 

preparing the requested information would be too 

expensive and time consuming. The Commission 

denied the proposal; because the Postal Service 

did not quantify the reduction in precision and the 

impact it would have on critical analysis of services 

performance, costs and rate setting (Order No. 396). 

In this Docket, the Postal Service resubmitted the 

same proposal as Proposal Two-A concurrently with 

Proposal Two-B. Under Proposal Two-A, it intended 

to reduce the ODIS-RPW sample size by 20 

percent, starting from the first Quarter of FY 2010. In 

Proposal Two-B, the Postal Service was concurrently 

seeking the approval to allocate 10 percent of the 

current ODIS-RPW sample size to a special study to 

implement an alternative and more reliable ODISRPW sampling method. If the Commission approved 

Proposal Two-A, the Postal Service would allocate 10 

percent of the ODIS-RPW sample to conduct Proposal 

Two-B, and would reduce another 10 percent of the 

sample to reduce expenses. If Proposal Two-A was 

not approved, it would still request the approval 

to implement the reallocation of 10 percent of the 

current sample to implement Proposal Two-B.

To address the Commission concerns raised in Order 

No. 396, the Postal Service provided a sensitivity 

analysis to estimate the impact of loss of precision 

of ODIS-RPW data on two principal applications, 

i.e., on revenue and volume data. It also argued that 

some studies that rely on the ODIS-RPW data system 

would not be significantly affected or that the problem 

could be mitigated by conducting analysis at a 

higher level of aggregation. The Commission agreed 

that the effect of imprecision in ODIS-RPW-based 
 POSTAL REGULATORY COMMISSION 169

billing determinants on class price cap calculations 

would be minimal. At the national level, the ODISRPW sample produces revenue, volume, and mail 

characteristic estimates that are precise. However, 

the Postal Service’s sensitivity analyses and arguments 

do not resolve the rest of the issues identified in 

Order No. 396. The problem of imprecision in the 

disaggregated ODIS-RPW data is still a concern. 

In RM2009-5, the Commission emphasized that the 

Postal Service must demonstrate the proposal would 

not make the disaggregated data significantly less 

functional. The Postal Service did not fully demonstrate 

in the current docket what the Commission sought 

in RM2009-5. It also had not quantified the loss of 

precision that would result from reducing the sample 

size by 20 percent as requested by the Commission. 

Consequently, the impact of Proposal Two-A on the 

integrity of data vital to Postal Service activities couldn’t 

be determined. For these reasons, the Commission 

denied Proposal Two-A. See Order No. 650.

Proposal Two-B

The Postal Service proposed to reduce ODIS-RPW 

sample size by 10 percent and use the money saved 

to test an alternative ODIS-RPW sampling frame. 

Currently, the sample frame unit is defined as an 

entire mailstream of a given shape (i.e., letter, flat, 

or parcel) exiting from a specific destination delivery 

unit (DDU). The shape-mailstream is sampled prior to 

distribution to individual carriers. Since Delivery Point 

Sequenced (DPS) letters and flats sequenced on the 

Flat Sequencing System (FSS) arrive at the DDU late 

in the morning, this leaves an increasingly narrow 

window for the ODIS-RPW data collector to conduct 

sampling. The proposed alternative sampling frame 

would treat individual city and rural carrier routes 

as sample frame units. All shapes of mail would be 

sampled after they arrive at an individual carrier 

case. Sampling of cased mail would begin before the 

arrival of DPS and FSS mail. The alternative sampling 

frame would also combine mail exiting the system 

by means other than street delivery (i.e., postal box, 

firm hold out, caller service, parcel post route) into a 

single, aggregate sampling unit. The proposed study 

is designed to minimize the impact on the precision of 

the ODIS-RPW estimates used in RPW Reporting, and 

provide equivalent disaggregated data for all other 

purposes. The proposal provides the data technician 

a wider window for conducting the survey. It is also 

less disruptive to the DDU operations, and more 

reliable in a 5-day delivery environment.

The Commission maintained that this proposal would 

improve the quality of the ODIS-RPW data in a 

number of ways including (1) widening the window 

available to data collectors to collect sample data at 

the redefined Mail Exit Points (MEPs) (2) improving the 

precision of the sample data, (3) allowing to adapt 

to a 5-day delivery environment if that becomes 

necessary, and (4) implementation of the proposal 

without sacrificing precession in the 

ODIS-RPW sample data without net increases in 

expenses. The Commission approved the proposal 

and it was implemented in the FY 2010 ACR. See

Order No. 650.

RM2010-12: Proposals Three through Eight 

Proposal Three 

The Postal Service proposed to align the revenues 

and delivery costs for the products that use direct 

bundles. The alignment would be implemented by 

assigning the costs of direct bundles to the products 

that utilize city delivery. A new data element captured 
170 2010 An

as part of the City Carrier Cost System (CCCS) would 

allow distinguishing direct bundles from other parcels. 

Prior to FY 2009, it was impossible to distinguish 

from the CCCS the parcels that were direct bundles 

or the shape of the pieces that made up the bundles. 

Estimates for direct bundles were included the parcel 

cost pools, and then distributed to parcel products. 

The proposal would still record the parcel-shaped 

direct bundle as a parcel, but within the First-Class 

Presort Letter product so that the revenues and delivery 

costs would align. 

The Commission agreed that the proposal would 

improve the Postal Service’s costing by correctly 

assigning the costs of direct bundles to the appropriate 

products that incur them. The proposal would make 

the treatment of city delivery and rural delivery 

costs consistent. For these reasons, the Commission 

accepted this proposal and it was implemented in the 

FY 2010 ACR. See Order No. 658.

Proposal Four 

The Postal Service proposed to change the way 

retail window acceptance costs are attributed to 

non-retail mail pieces with extra services attached 

to the host mailpiece. It proposed to assign window 

acceptance costs to the host mailpiece when the 

pieces are accepted at the window, bearing nonretail indicia and hosts any of the Extra Services 

(other than Registered Mail), including Certified Mail, 

Insured Mail, Return Receipts, Delivery Confirmation, 

Signature Confirmation, and Collect on Delivery 

(COD). Currently, when mail is accepted at a retail 

window and includes an extra service, the In-Office 

Cost System (IOCS) treats this as if a retail transaction 

had taken place, and thus assigns the cost of 

acceptance to the extra service instead of the host 

mailpiece, even though the actual driver of the cost 

of acceptance is the host mailpiece. For example, 

when a customer is dropping off a prepaid mailpiece 

that cannot be deposited in a mailbox due to weight, 

customs restrictions or any other reason, the proposed 

approach would assign the IOCS cost tally to the host 

mailpiece rather than to the Extra Service. 

In response to the Chairman’s information request 

concerning the implementation of the proposal, the 

Postal Service indicated that it intended to implement 

the reassignment of costs by adjusting the IOCS 

computer program that assigns the tally costs to 

extra services. No change to the Segment 3 “B”

workpapers or the IOCS questionnaire would be 

required. The Commission accepted this proposal on 

the rational that it would enable allocation of the costs 

of retail window acceptance to the prepaid non-retail 

mailpiece, which is the primary driver of the cost of 

acceptance, rather than the extra service attached to 

the host mailpiece. The changes were incorporated in 

the FY2010 ACR. See Order No. 658.

Proposal Five

The Postal Service proposed to change the 

methodology of distributing relevant rural carrier 

collection costs (Cost Segment 10) for prepaid 

Parcels that weigh less than or equal to two pounds. 

It would use the new information collected through 

the Rural Carrier Cost System (RCCS) for this purpose. 

The amounts recorded under the newly-established 

prepaid Parcels less than or equal to two pounds 

category on the form would be added to the 

estimates for the Letters, Cards, and Flats category. 

No change would be necessary to the method in 

which the respective collection estimates are entered 

in workbook I-Forms, worksheet I-CS10RCS columns 
 POSTAL REGULATORY COMMISSION 171

11 and 12, which flow through the model and into 

the CS10 workbook. 

In response to the Chairman’s information request, 

the Postal Service noted that the proposal would 

address the inconsistency between the costing 

method utilized in CS10 and the way in which rural 

carriers are compensated for collected pieces. A rural 

carrier receives Letter/Flat credit for prepaid Parcels 

two pounds or less, but CS10 currently treats those 

pieces as Collected Parcels. The proposed change in 

methodology shifts volumes from the Collected Parcels 

cost pool to the Collected Letters/Flats cost pool, 

changing the distribution factors in each cost pool, 

after which the costs are assigned to products based 

on their new respective distribution factors.

The Commission noted that rural carrier costs would 

be reduced due to this proposal since the level of 

attributable costs is largely determined based on 

the interaction between the RMC and contractually 

negotiated evaluation factors in the rural carriers 

contract. However, the proposal will make the cost 

distribution method utilized in CS10, which is based 

on the RCCS data, consistent with the way in which 

rural carriers are compensated for collected pieces. 

It will result in a more accurate allocation of rural 

carrier costs to products and a more accurate count 

of Parcels Accepted. The Commission accepted this 

change and it was employed in FY 2010. See Order 

No. 658.

Proposal Six

The Postal Service sought to incorporate the InOffice Cost System (IOCS) tally analysis into the 

International Cost and Revenue Analysis (ICRA) model 

by eliminating one step from the two step procedure. 

The current two step procedure involves producing 

an ICRA and then adjusting the ICRA results to 

reflect the IOCS tally analysis. This change in the 

calculation procedure would separately incorporate 

the Inbound Processing and Carrier In-Office costs 

for Canada, Developing Countries and Industrialized 

Countries into the ICRA model using the IOCS. The 

Postal Service proposed to calculate inbound mail 

costs according to a methodology developed by the 

Commission that uses an analysis of IOCS tallies and 

to incorporate that methodology into the ICRA. 

Currently, the Postal Service calculates the system 

average attributable cost for each of the categories of 

inbound mail in the ICRA. It also prepares a separate 

analysis of IOCS tallies. The Commission uses the 

IOCS tally analysis, as well as the volume data from 

the ICRA to calculate separate Mail Processing (i.e., 

CS2 and CS3) and In-Office Delivery (i.e., CS6) unit 

costs for each category of inbound mail by terminal 

dues regime. 

For purposes of analyzing the financial performance 

of inbound international mail categories, the 

Commission considers the development of inbound 

mail costs by terminal dues group to be a more 

accurate estimate of inbound costs than the system 

average reported in the ICRA. Therefore, the 

Commission approved the proposed change and it 

was incorporated in the FY 2010 ACR. To facilitate 

the review of the Postal Service’s calculations, the 

Commission recommended that the Postal Service 

continue to accompany the ICRA with a separate 

IOCS tally analysis through the filing of the FY 2011 

ACR. See Order No. 658.

Proposal Seven

The Postal Service proposed to introduce a mailflowbased model of mail processing costs for Standard 
172 2010 An

Parcels and Not Flat Machinables (NFMs). This 

model was intended to disaggregate the CRA costs 

for Standard Mail Parcels and NFMs, producing 

separate cost estimates for machinable, irregular and 

NFM price categories by presort and entry level. In 

the past, the rate differences for Standard Parcels 

and NFMs have been supported by a cost analysis 

that estimated the additional mail processing costs 

required to process parcels and NFM mail pieces in 

comparison to an average Standard Mail flat. This 

new model will not change the aggregate costs for 

parcel and NFMs. Instead, it will disaggregate by 

mail characteristics those aggregate costs. Cost sheets 

that depict the mail processing operations required 

to process each parcel up to the point that the mail 

has been sorted to the carrier level at delivery units 

have been developed for each price category. These 

model cost estimates are then used to “de-average”

an overall mail processing cost estimate by shape 

into price category cost estimates for machinable, 

irregular, and NFM parcels. 

The Commission concurred that the proposal is an 

improvement over the current approach. Nevertheless, 

the Commission found that the classification of the 

cost pools can be improved by adhering to the 

principles outlined in Docket No. RM2006-1. In 

RM2006-1, the Commission introduced a revised 

cost pool classification methodology for the letter mail 

processing cost models. The Postal Service did not 

agree with the Commission’s cost pool classification 

applied to the letter and flats models, and thus did 

not believe it should be applied to the parcel model. 

Specifically, it did not agree with the approach that 

distributes non-modeled costs for a particular shape 

according to the ratio of proportional and fixed 

costs for that shape. According to the Postal Service, 

the issue is primarily one of determining whether a 

particular kind of “unexpected” cost is appropriate 

to “piggyback.” Treating “unexpected” costs as 

worksharing related is less appropriately applied to 

parcel sorting that IOCS data indicate are sorted in a 

non-parcel mailstream. The Postal Service argues that 

it is less likely that parcels are actually sorted outside 

the parcel mailstream less than letters and flats would 

be sorted outside their intended mailstreams. On the 

other hand, although the processing of parcels outside 

their intended mailsteam may be less frequent than for 

letters or flats, the Commission suggests that it can’t 

be completely ruled out. The Commission found that 

the Postal Service’s rationale was not convincing for 

disregarding sorting costs for parcels that are reported 

to have occurred in a mailstream meant to process a 

different shape. It is more reasonable to piggyback 

non-modeled costs consistently in letter, flat, and 

parcel cost models. 

The Commission approved the proposal with the 

following modification of the cost pool allocation. The 

Commission recommended assigning parcel sorting 

cost pools as proportional, a group of cost pools is 

treated as fixed, and allied, support and unexpected 

costs are piggybacked. The Commission noted that 

the issue of the appropriate treatment of non-modeled 

costs would be examined in greater depth in Docket 

No. RM2010-13, Consideration of Technical 

Methods to be Applied in Workshare Discount 

Design. See Order No. 658.

Proposal Eight

Surpluses and deficits of mail equipment occur in 

postal facilities, and empty equipment is transported 

from surplus to deficit sites. The Postal Service 

proposed to allocate transportation costs of empty 
 POSTAL REGULATORY COMMISSION 173

equipment to postal products using a distribution 

factor that is based on the aggregate pound-miles 

traveled on modes of transportation sampled by 

the Transportation Cost System (TRACS). Such costs 

are incurred in the general ledger accounts 53191 

and 53192 for highway and rail transportation, 

respectively. According to the proposal, the total 

pound-miles for each product is computed and its 

share of the aggregate total provides each product’s 

share of the costs of transporting empty equipment. 

The same distribution factors would be applied for 

both highway and rail costs. In the past, these costs 

were distributed to products based on the overall 

distribution of transportation costs in CS14. This 

approach assigns a higher proportion of the costs 

to products that use more air transportation since 

air transportation costs are generally higher than 

surface transportation costs on a per pound basis. 

The proposed change in methodology would assign 

these costs based on appropriate transportation cost 

driver, pound-miles, that more accurately reflects the 

incurrence of costs for transporting empty equipment. 

As described in the Postal Service’s response to 

the Chairman’s information inquiry on October, 25 

2010, the distribution factors would include poundmiles of Commercial Air, UPS, FedEx Day, FedEx 

Night, Intra-SCF, Inter-SCF, Intra-BMC, and Inter-BMC. 

The Commission agreed with the Postal Service that 

the use of transportation equipment by postal products 

is the most direct cost driver of empty equipment 

transportation cost. Therefore, distribution factors that 

are based on the aggregate pound-miles traveled on 

modes of transportation is an appropriate measure of 

a product’s share of that cost driver. The Commission 

accepted the proposal and the changes were 

implemented in the 2010 ACR. See Order No.658.

RM2011-5 Proposals Nine through Twelve

These proposals were submitted to the Commission 

on December 20, 2010. Consequently, the 

Commission did not have adequate time to solicit 

comments and complete its review before issuance 

of the Annual Compliance Determination. The 

Postal Service, however, included them in its Annual 

Compliance Review. 

Proposal Nine

The Postal Service proposed to incorporate new input 

data and a new bundle sorting cost methodology 

into the First-Class Mail presort letters and Standard 

Mail presort letters mail processing cost models. 

The following six types of new input data would 

be incorporated into these models: (1) automation 

density table, (2) manual density table, (3) post 

office box destination percentage, (4) plant carrier 

route finalization percentage, (5) manual incoming 

secondary and post office box walling productivities, 

and (6) remote bar code system (RBCS) leakage rate. 

The Postal Service also proposed a new bundle 

sorting methodology in the above models. The reason 

for this change is that a very small percentage of 

letters are now entered as bundles. Bundle sorting 

operations that exclusively process letter bundles are 

rare. As a result, letter bundles are either processed 

with flat bundles or in manual piece distribution 

centers. The new methodology uses data from the 

manual density table to estimate the number of 

bundle handlings, and plant productivity for manually 

sorting bundles of 503 pieces per hour, which was 

developed in a 2008 field study (USPS-FY08-14 

Table FS-1). 

On February 16, 2011, the Chairman filed an 

information request to the Postal Service regarding 
174 2010 An

this proposal. The Postal Service responded to the 

information request on February 25, 2011. The 

Commission is currently reviewing the proposal.

Proposal Ten

The Postal Service proposed to modify the assignment 

of clerk and mailhandler labor costs of Inbound 

International mail to the three country groups (i.e., 

Canada, Industrialized Countries, and Developing 

Countries) within In-Office Cost System (IOCS) so that 

normal downstream Cost and Revenue Analysis (CRA) 

and International Cost and Revenue Analysis (ICRA) 

processes can automatically distribute costs to those 

country groups using a methodology that is consistent 

with other mail products. This proposal extends 

proposal six in Docket RM2010-12 to incorporate 

the methodology change of using results of mail 

processing model within the ICRA.

Prior to the FY 2010, the assignment of such costs 

to country groups was implemented using only direct 

mailpiece tally data from the IOCS data system. 

This approach ignored the impact of downstream 

processing steps that distribute mixed mail and allied 

costs back to products based on factors such as cost 

pools, container types and shape. The Commission is 

currently reviewing this proposal.

Proposal Eleven

The Postal Service proposed to change the 

methodology for reporting International Money 

Transfer Services (IMTS) separately for Inbound and 

Outbound products. This proposal addresses the 

Commission’s recommendation in Order No. 391 

for these products. This proposal would not have cost 

impacts on the CRA report for IMTS products, but 

there would be two lines in the ICRA report, i.e., one 

for Outbound and another for inbound IMTS. The 

sum of the two lines would add up to the currently 

reported IMTS line in the CRA report. This change in 

methodology is implemented based on information 

from the Point of Sale System (POS), the In-Office 

Cost System (IOCS) and Chapter 9 in Docket No. 

ACR2009, Library Reference USPS-FY09-NP5. In a 

response to the Chairman’s information request, the 

Postal Service noted that the POS keeps track of the 

volume for cashed paper money orders, and can 

distinguish between domestic and international money 

orders cashed. Addressing the Commission’s concern 

regarding the relatively small number of IOCS tallies 

for IMTS and the consequent volatility of the data, 

the Postal Service plans to consider increasing the 

sample size in a manner similar to other international 

products. It will also investigate other alternatives, 

such as engineering-based estimates of time required 

for IMTS-Outbound and -Inbound transactions. The 

Commission is currently reviewing the proposal.

Proposal Twelve

The Postal Service proposed to develop alternative 

data inputs to the Media Mail/Library Mail 

processing cost model, the Bound Printed matter 

transportation cost model, and the Bulk Parcel Return 

Service (BPRS) cost model. The proposal addresses 

the Commission’s concern in the FY2009 ACD that 

the use of the Intra- and Inter-BMC volume split for 

Parcel Post single-piece was no longer appropriate 

since this distinction no longer exists for Parcel Post 

single-piece.

The Postal Service noted that the Parcel Post singlepiece Intra-NDC volume percentage could be 

obtained by dividing the sum of the volumes for zones 

1, 2, and 3 by the total volume because, based 

on FY 2008 data, 96 percent of the mail volume 
 POSTAL REGULATORY COMMISSION 175

was found in these zones. This estimate could be 

obtained annually from Parcel Post volume, cubic 

feet, and weight data, and then incorporated into 

future versions of the Media Mail / Library Mail 

mail processing cost model. The CS14.3 data that 

were used to calculate the zone related percentages 

are available from ACR USPS-FY09-32. These 

data would be used to estimate the zone-related 

percentages in future versions of the Bound Printed 

Matter transportation cost model. BPRS parcels 

are returned Standard Mail machinable parcels. 

The Postal Service proposed to use data from the 

Standard Mail destination entry cost model (USPSFY09-13) to estimate the Bulk Parcel Return Service 

(BPRS) transportation and delivery costs.

On January 11, 2011, the Chairman filed an 

information request to the Postal Service. The 

Postal Service provided the requested information 

on January 19, 2011. Up on further review, the 

Chairman requested the Postal Service for more 

information on March 1, 2011. The Commission is 

still reviewing the proposal.

RM2011-6 Proposals Thirteen and Fourteen

The Postal Service filed these proposals on 

December 22, 2010. It also implemented these 

proposals in the 2010 Annual Compliance Review. 

However, the Commission did not have adequate 

time to solicit comments and complete its review 

of these proposals before issuance of the Annual 

Compliance Determination.

Proposal Thirteen 

The Postal Service proposed to develop a new Parcel 

Select/Parcel Return Service (PRS) mail processing cost 

model. It noted that the mail processing cost model 

has been continuously modified as both the price 

structure and the cost and revenue analysis (CRA) 

requirements have changed. Most of the input data, 

nevertheless, have not been updated for several years. 

In addition, several of the productivity values that 

support the model were established from old studies.

The proposed model would be developed based on 

data that was collected for the Standard Mail parcel/

Non-flat Machinable (NFM) processing cost model 

as filed in RM2010-12 Proposal Seven, and the 

Parcel Select arrival profile data that were collected 

from PS forms 3605 and 8125 in FY 2009. This 

cost model would apply a methodology similar to that 

used for other mail processing cost models. Model 

cost estimates are developed that represent the mail 

processing tasks required to process the mail for 

each price category. The model cost estimates and 

the mail volume estimates for each price category 

are then used to de-average a CRA cost-by-shape 

estimate into CRA-adjusted price category cost 

estimates. The Postal Service noted that the proposed 

approach would decrease the mail processing unit 

cost estimates for price categories that require more 

processing steps, and increase the cost estimates for 

DDU and RDU. However, all of the changes in cost 

estimate are at the price category level. The overall 

costs reported in the CRA would not be affected for 

any of the products.

On March 1, 2011, the Chairman filed an information 

request to the Postal Service regarding the proposed 

cost model. The proposal is currently under review. 

Proposal Fourteen

The Postal Service proposed to develop a 

modified Parcel Select/Parcel Return Service (PRS) 

transportation cost model. The proposed modification 

has five components: (1) present transportation 
176 2010 An

cost estimates only for current price categories, (2) 

use 2010 PostalOne! data for estimating the cost 

of transportation legs for the non-dropship price 

categories, (3) incorporate the official revenue, 

pieces, and weights (RPW) volumes into the analysis, 

(4) Use the method that was applied for distributing 

the Parcel Select transportation costs for distributing 

Parcel Return Service transportation costs, and (5) use 

a new methodology to estimate the return network 

distribution center (RNDC) cubic foot miles by zone. 

The Postal Service noted that it could not provide 

estimates of the impact of the changes because it 

utilized data that was not fully available in FY 2009. 

The Commission is currently reviewing the proposal

Management Operational Data 

System

The Management Operating Data System (MODS) 

collects and reports mail piece handlings and 

workhours by highly disaggregated MODS pools. For 

purposes of analyzing the product shares of attributable 

mail processing costs, it breaks costs out into 

approximately 40 MODS cost pools, each intended 

to reflect a discrete mail processing technology. This 

detailed functional breakdown also plays a role in 

the distribution of attributable mail processing costs to 

products. IOCS tallies reflecting the relative labor hours 

spent processing the various products are compiled 

by MODS cost pools. Attributable costs from each 

pool are then distributed to products in proportion to 

the product shares of IOCS tallies that are recorded in 

each pool. In an even more detailed set of cost pools, 

the ratio of MODS piece handlings to workhours is 

used to calculate mail processing productivities. These 

productivities are used to calculate the avoided costs 

on which discounts are based. 

Comments from Participants

Only the Public Representative filed comments directly 

related to MODS data. The Public Representative (PR) 

claims that such a high percentage of MODS data 

is erroneous that the productivity data that is derived 

from them is suspect. It also says the calculation 

of the premium pay adjustment to attributable mail 

processing costs depends on the accuracy of MODS 

data, and is suspect as well. This, it says, would put 

at risk the accuracy to the calculation that seeks to 

identify the extent of any cross subsidy of competitive 

products by market dominant products. Public 

Representative Comments in Response to Order No. 

636 at 22.

According to the Public Representative, MODS data 

have the following flaws: 1) they have high levels 

of measurement error; 2) the data are aggregated 

before being corrected for data errors; and 3) 

the decreasing sample size may result in a loss of 

precision and accuracy. The Public Representative 

also contends that “this continued decrease in the 

number of observations used in recent years may 

be a significant change in analytic principles” and 

should follow rule 39 C.F.R. § 3050.11 establishing 

procedures to change analytic principles relating 

to the Postal Service’s periodic reports. Public 

Representative Comments at 23-25. The Public 

Representative also complains that FY 2010 Annual 

Compliance Report Costs for FSS Mail Processing 

were not reported, and is concerned that manual 

flats productivity is decreasing while the proportion 

of manual flats processing relative to automated mail 

processing is increasing. Id. at 20-21.
 POSTAL REGULATORY COMMISSION 177

Commission Analysis

In its reply comments, the Postal Service states that the 

FSS data were included in AFSM 100 data because 

the FSS program is still in its roll-out period, and 

any productivities that would be separately reported 

would be misleading. In the preface to USPS-FY10-

LR-7 at 2, the Postal Service states that “In FY 2010, 

the FSS operations continue to be (as they were in 

past years) listed with the AFSM operations until the 

FSS hours become substantial enough at some time in 

the future to have their own separate cost pool.” The 

Commission assumes that data reported separately for 

FSS operations will be provided in the Postal Service’s 

ACR for FY 2011.

The Postal Service provides persuasive arguments 

that the decline in total MODS observation counts 

are due to operational changes rather than an 

analytical change in periodic reporting. It identifies 

as the main sources of decline, the retirement of 

UFSM 1000 equipment and the winding down of 

the Return to Sender operations. Postal Service Reply 

Comments at 7-8. The Postal Service also explains 

that the proportion of manual flats processing has 

increased relative to automated processing because 

the inefficient FSM 1000 operations is being rapidly 

phased out. Because more of the workload of the FSM 

1000 in absolute terms is being shifted to the AFSM 

100 than is being shifted to manual processing, it 

concludes that the net effect is to increase overall flat 

processing productivity. Id. at 9-11.

The most significant criticism by the Public 

Representative relative to MODS data is the potential 

effect of the high percentage of erroneous data on 

the productivities that are used to calculate the cost 

avoidances that underlie workshare discounts. A 

2007 audit by the Postal Service Inspector General2

found that the proportion of MODS data that was 

obviously erroneous was 39 percent. It concluded 

that there would not be a legitimate reason for this 

quantity of anomalous data entries. IG Report at 7. 

The Commission recently analyzed outgoing piece 

handling MODS data in Docket No. N2010 to verify 

the day-to-day variation in mail processing operations 

productivities on which the Postal Service based its 

estimate of the amount it would save by eliminating 

Saturday street delivery. It found that more than a third 

of those data were obviously erroneous. 

The errors that can be identified by inspection consist 

of illogical observations, including observations 

of zero workhours associated with positive piece 

handlings in a particular operation, zero piece 

handlings associated with positive workhours, and 

negative workhours or negative piece handlings.3 The 

Postal Service has informally informed the Commission 

that a minority of observations where zero workhours 

are paired with positive piece handlings or positive 

workhours are paired with zero piece handlings are 

not unexpected. The fact remains that a very high 

percentage of such observations where this pairing is 

unexpected remains. 

The Postal Service contends that most of the MODS 

data that is obviously erroneous is due to erroneous 

clock rings at the three-digit operation level. It argues 

that the data is not actually used to calculated MODS 

operation productivities until such operation-byoperation data is aggregated to form broader cost 

2 Audit Report – Management Operating Data System (Report Number 

MS-AR-07-003). 3 Observations where First Handled Pieces (FHP) exceed Total Handled 

Pieces (THP), which made up part of the 39 percent of obviously 

erroneous data found by the IG no longer occur because First 

Handled Pieces are no longer directly measured. 
178 2010 An

pools. There the inaccurate clock rings are likely to 

be harmless, because, it assumes, the clock rings are 

likely to be accurate for the broader cost pools for 

which productivity is actually calculated. It argues, 

also, that screening of data that is obviously erroneous 

can cure the effect of erroneous observations. It 

emphasizes that MODS productivities are based 

on sums of MODS observations, and argues that 

whatever sample error exists at the disaggregated 

level is cured by aggregation, since there is no reason 

to expect that the erroneous data is significantly 

biased. Postal Service Reply Comments at 5-6.

The Postal Service’s argument with respect to 

productivity calculations is valid as far as it applies. 

MODS data that contain large proportions of sample 

error at the disaggregated level could still be reliable 

at a certain level of aggregation if there were no bias. 

However, whether the level of aggregation that is 

used in the workshare discount cost avoidance models 

is sufficient to overcome the very high proportion 

of error in MODS observations is something that 

warrants more concrete demonstration. Coefficients 

of variation might be calculated that would give the 

postal community the basis for assuming that the Postal 

Service’s assurances are valid. The Postal Service has 

not yet provided that calculation.

There is another issue that would have to be 

addressed before an appropriate calculation of CVs 

would settle the question of whether productivities 

based on MODS data are reliable. Most of the 

obvious errors in MODS data are errors that reveal 

themselves because they report illogical results. These 

are different from measurement errors, some of which 

can be tentatively identified by their unexpectedly 

extreme values. Observations with illogical values, 

such as those described by the IG report, are nonsample error. There is no assurance that non-sample 

error is unbiased unless the process that produced the 

error is known. Therefore, there is no assurance that a 

dataset with high proportions of non-sample error can 

be made accurate or reliable simply by aggregating 

the data. 

The Commission agrees with the Postal Service that 

this is the kind of issue that should be resolved in a 

rulemaking designed to address the issue in depth. Id. 

at 8. A closely related issue is the method by which 

the Postal Service now estimates First Handled Pieces 

and Subsequent Handled Pieces for manual mail 

processing operations. It currently infers mail volume 

processed as FHP and projects manual subsequent 

handling pieces (SHP) using annual surveys of flow 

densities. See MODS Handbook M32, section 

3-2. The validity of the assumptions upon which 

this system of inferences is based should also be 

evaluated in a rulemaking designed to address the 

issue of the quality of the MODS data. The pending 

strategic rulemaking (Docket No. RM2011-3) is an 

appropriate context to examine this issue. 
 POSTAL REGULATORY COMMISSION 179

Appendix D

Abbreviations and Acronyms

Long Version Abbreviation/Acronym

Annual Compliance Report ACR

area distribution center ADC

automated area distribution center AADC

Automated Flat Sorting Machine AFSM

Automated Package Processing System APPS

Automated Tray Handling System ATHS

City Carrier Cost System CCCS

Civil Service Retirement System CSRS

Collect on Delivery COD

2010 Comprehensive Statement on Postal Operations 2010 Comprehensive Statement

Consumer Price Index for all urban consumers CPI-U

Consumer Price Index for all workers CPI-W

cost and revenue analysis CRA

Cost of Living Adjustments COLA

Customer Experience Measurement CEM

delivery point sequence DPS

delivery point sequenced DPS’d

Destinating Sectional Center Facilities DSCF

destination delivery units DDU

destination bulk mail center DBMC

detached address label DAL

educational, cultural, scientific or informational [value] ECSI

enhanced carrier route ECR

Equal Employment Opportunity EEO

External First-Class Measurement System EXFC

Flats Sequencing System FSS

Global Express Guaranteed GXG
180 2010 An

Long Version Abbreviation/Acronym

Government Performance and Results Act of 1993 GPRA

Integrated Financial Plan IFP

Intelligent Mail Barcode IMb

International Cost and Revenue Analysis ICRA

International Customized Mail ICRA

International Mail Measurement System IMMS

International Priority Airmail IPA

International Surface Airlift ISAL

irregular pieces and packages IPPs

letter post LC/AO

Labor Distribution Code LDC

Mail Classification Schedule MCS

Mailers Technology Advisory Council MTAC

Management Operating Data System MODS

mixed area distribution center MADC

multiline optical character reader information service system MLOCR-ISS

Negotiated Service Agreement NSA

Network Distribution Center NDC

Office of Personnel Management OPM

Occupational Safety and Health Administration OSHA

Operating Income and Deliveries per work hour DPWH

Origin Destination Information System Revenue, Pieces, and Weight System ODIS-RPW

personal computer software and solution PC SAS

Postal Accountability and Enhancement Act PAEA

Postal Reorganization Act PRA

qualified business reply mail QBRM

Quality Link Measurement System QLM

Remote Encoding Center REC

Point of Service POS

Postal Service Retirement Health Benefits Fund PSRHBF

Premium Forwarding Service PFS

Priority Mail International PMI

Rapid Information Bulletin Board System RIBBS

Revenue, Pieces, and Weights RPW

Rural Carrier Cost System RCCS

Sarbanes-Oxley Act SOX

Short Run Marginal Cost SRMC

Small Parcel Bundle Sorter SPBS

software and solution SAS

Total Factor Productivity TFP

unit delivery costs UDC

United States Postal Service Annual Compliance Report ACR

Universal Postal Union UPU

Voice of the Employee VOE
 POSTAL REGULATORY COMMISSION 181

Appendix E

Commenters— 2010 Annual Compliance 

Determination

Commenter Comment Citation Citation Short Form

Alliance of Nonprofit Mailers Reply Comments of Alliance of Nonprofit Mailers on 

Preferred Rates

ANM Reply Comments

February 17, 2011

American Catalog Mailers Association Comments of the American Catalog Mailers 

Association (ACMA)

ACMA Comments

February 2, 2011

Reply Comments of the American Catalog Mailers 

Association (ACMA)

ACMA Reply Comments

February 17, 2011

American Postal Workers Union, AFL-CIO Initial Comments of American Postal Workers Union, 

AFL-CIO

APWU Comments

February 3, 2011

Association for Postal Commerce Comments of the Association for Postal Commerce in 

Response to Order No. 636

PostCom Comments

February 2, 2011

Association for Postal Commerce and Alliance 

of Nonprofit Mailers

Reply Comments of the Association for Postal 

Commerce and Alliance of Nonprofit Mailers in 

Response to Order No. 636

PostCom/ANM Reply 

Comments

February 17, 2011

Condé Nast Publications

Comments on the Postal Service Annual Compliance 

Report as Regards to Periodical Mailing and Cost 

Coverage

Conde Nast Comments

February 2, 2011

Greeting Card Association Reply Comments of the Greeting Card Association GCA Reply Comments

February 17, 2011
182 2010 Anu

Commenter Comment Citation Citation Short Form

L.L. Bean, Inc. Initial Comments of L.L. Bean, Inc. LL Bean Comments

February 2, 2011

Reply Comments of L.L. Bean, Inc. LL Bean Reply Comments

February 17, 2011

Magazine Publishers of America, Inc., Alliance 

of Nonprofit Mailers, American Business Media

Comments of Magazine Publishers of America, Inc., 

Alliance of Nonprofit Mailers and American Business 

Media

MPA et al. Comments

February 2, 2011

Reply Comments of Magazine Publishers of America, 

Inc., Alliance of Nonprofit Mailers and American 

Business Media

MPA et al. Reply 

Comments

February 17, 2011

National Association of Presort Mailers Reply Comments of the National Association of Presort 

Mailers on USPS FY 2010 Annual Compliance Report

NAPM Reply Comments

February 23, 2011

National Postal Policy Council Comments of the National Postal Policy Council on 

Annual Compliance Review

NPPC Comments

February 2, 2011

Public Representative Public Representative Comments in Response to Order 

No. 636

PR Comments

February 2, 2011

Public Representative Reply Comments in Response to 

Order No. 636

PR Reply Comments

February 17, 2011

Time Inc. Initial Comments of Time Inc. on USPS FY 2010 

Annual Compliance Report

Time Comments

February 2, 2011

Reply Comments of Time Inc. on USPS FY 2010 

Annual Compliance Report

Time Reply Comments

February 17, 2011

United States Postal Service Reply Comments of the United States Postal Service Postal Service Reply 

Comments

February 17, 2011

Valpak Direct Marketing Systems, Inc. and

Valpak Dealers’ Association, Inc

Valpak Direct Marketing Systems, Inc. and Valpak

Dealers’ Association, Inc. Initial Comments on

the United States Postal Service FY 2010 Annual 

Compliance Report

Valpak Comments

February 2, 2011

Valpak Direct Marketing Systems, Inc. and Valpak

Dealers’ Association, Inc. Reply Comments on

the United States Postal Service FY 2010 Annual 

Compliance Report

Valpak Reply Comments

February 17, 2011
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