CHAPTER III | A

SECTION 701 REPORT

Analysis of the Postal 

Accountability and 

Enhancement Act of 2006

November 14, 2016

Postal Regulatory Commission

Submitted 11/14/2016 1:29:44 PM

Filing ID: 97815

Accepted 11/14/2016
- i - 

TABLE OF CONTENTS 

Page 

EXECUTIVE SUMMARY ....................................................................................................................................... 1

I. EVALUATION OF THE PAEA AMENDMENTS AND RECOMMENDATIONS FOR 

LEGISLATIVE CHANGE ......................................................................................................................... 3

A. Introduction ................................................................................................................................ 3

B. Postal Service Financial Situation ...................................................................................... 4

1. Introduction and Background ............................................................................... 4

2. Commission Recommendations ........................................................................... 6

C. Market Dominant Rate System ........................................................................................... 7

1. Introduction and Background ............................................................................... 7

2. Commission Recommendation .......................................................................... 10

D. Competitive Product Rate System .................................................................................. 11

1. Introduction and Background ............................................................................ 11

2. Commission Recommendations ........................................................................ 12

E. Negotiated Service Agreements ....................................................................................... 13

1. Introduction and Background ............................................................................ 13

2. Commission Recommendations ........................................................................ 17

F. Post Office Closings and Consolidations ....................................................................... 18

1. Introduction and Background ............................................................................ 18

2. Commission Recommendations ........................................................................ 19

G. Service Standards .................................................................................................................. 22

1. Introduction and Background ............................................................................ 22

2. Commission Recommendations ........................................................................ 24

H. Nonpostal Services ................................................................................................................ 25

1. Introduction and Background ............................................................................ 25

2. Commission Recommendations ........................................................................ 26

I. Advisory Opinion Process .................................................................................................. 27

1. Introduction and Background ............................................................................ 27

2. Commission Recommendations ........................................................................ 29

J. Market Tests of Experimental Products ....................................................................... 31

1. Introduction and Background ............................................................................ 31

2. Commission Recommendations ........................................................................ 32
K. Universal Service and the Postal Monopoly ................................................................ 34

1. Introduction and Background ............................................................................ 34

2. Commission Recommendations ........................................................................ 37

L. Public Representative .......................................................................................................... 38

II. 2011 REPORT RECOMMENDATIONS AND COMMENTS ON CURRENT 701 REPORT

..................................................................................................................................................................... 39

A. 2011 Report Recommendations ...................................................................................... 39

B. Comments Regarding Current 701 Report .................................................................. 40

1. Comments on Postal Service Financial Situation ........................................ 42

2. Comments on Market Dominant Rate System ............................................. 45

3. Comments on Competitive Product Rate System ....................................... 48

4. Comments Summary .............................................................................................. 51

5. Comments on Post Office Closings and Consolidations ........................... 52

6. Comments on Service Performance ................................................................. 55

7. Comments on Nonpostal Services .................................................................... 56

8. Comments on Advisory Opinion Process ....................................................... 57

9. Comments on Market Tests of Experimental Products ............................ 58

10. Comments on Universal Service and the Postal Monopoly .................... 58

11. Comments on the Public Representative ....................................................... 59

III. CONCLUSION ......................................................................................................................................... 60

Appendix A—Section 701 Report Recommendations 

Appendix B—Comments of the United States Postal Service 
EXECUTIVE SUMMARY

This marks the Postal Regulatory Commission’s (Commission) second report under section 

701 of the Postal Accountability and Enhancement Act (PAEA) of 2006. Every 5 years the 

Commission is required to issue a report and its first one was submitted to Congress and 

the President in 2011 (2011 Report). In general, the reports are to reflect the Commission’s 

assessment of how well the PAEA is operating and is an opportunity to recommend 

legislation or other measures necessary to improve the effectiveness and efficiency of our 

Nation’s postal laws.

The Commission’s 2016 report, like its 2011 Report, emphasizes the starkly different 

environment faced by the Postal Service since the PAEA’s enactment in 2006 – a time when 

volume was growing and the Postal Service was earning revenues that exceeded costs. 

Today, the Postal Service faces the reverse: mail volume that has declined more than 25 

percent since 2006 coupled with a total net loss of $5.1 billion in FY 2015 - despite an 

exigent surcharge that generated an additional $2.1 billion in revenue. 

Twice this year, the Commission was invited to provide testimony at congressional 

hearings focused on the steadily deteriorating financial condition of the U.S. Postal Service. 

Specifically, the Commission was asked to share with the Senate and House oversight 

committees key findings of its annual Financial Analysis of U.S. Postal Service Financial 

Results. Testimony delivered by Acting Chairman Taub described the fundamental 

problems facing the Postal Service: a growing liability for retiree health benefits; an 

inability to borrow for needed capital investments, such as new delivery vehicles and 

package sortation equipment; and the continued loss of high margin First-Class Mail 

revenues. 

This fiscal year total net loss as of June 30, 2016, was $3.3 billion compared to a net loss of 

$2.8 billion for the same period last year, a deterioration of $0.5 billion. For this same time 

period, the Postal Service’s total liabilities exceeded the total value of its assets by $53.7 

billion. The Postal Service has recorded monthly net operating losses since the expiration 

of the exigent surcharge in April this year; and working capital for the 9 months which 

ended June 30, 2016, was negative $43.3 billion. The net deterioration of $2.3 billion in 

working capital from the beginning of the fiscal year was largely due to the growth in 

employee-related liabilities, including the statutory accruals for payments into the 

Retirement Health Benefits Fund (RHBF).

It is clear, the most important legislative recommendations the Commission can make 

relate directly to improving the financial condition of the U.S. Postal Service. While this 

year’s 701 report will again discuss and make recommendations related to certain rate and 
Section 701 Report - 2 - 

service matters, along with improvements to Commission processes, the Commission 

places a particular emphasis upon the following recommendations: 

 The Commission renews its recommendation from its 2011 Report that Congress 

modify the retiree health benefits fund prefunding level and payment schedule as a 

measure to improve Postal Service sustainability. Decreasing the funding target to 

one more in line with industry norms would provide much needed improvement in 

the Postal Service’s assets to liabilities ratio.

 The Commission recommends lengthening the amortization period of the current 

unfunded liability. The current amortization period is 40 years. Extending the 

amortization period would free significant capital by reducing Postal Service annual 

payments. 

 Further improvement in liquidity could be provided by allowing the Postal Service 

to use any available Federal Employees Retirement System (FERS) surplus, rather 

than requiring the surplus to be transferred to the RHBF. The Commission, 

therefore, recommends that Congress grant the Postal Service the authority to use 

available FERS surpluses to pay off current or future liabilities, including debt to the 

U.S. Treasury, pension liabilities, and retiree health benefit liabilities. 

Finally, it must be noted that the timing of this report coincides closely with a significant 

Commission undertaking. By law, after December 20, 2016, the Commission shall 

commence a review of the price cap system for regulating Market Dominant products. The 

purpose is to determine whether the system is achieving its statutory objectives and if it is 

not, to “make such modification or adopt such alternative system” to achieve the objectives. 

Considering the breadth of this review, certain postal rate matters that would normally be 

addressed in this report will be deferred for consideration in December’s review. 

In this report, the Commission also details a variety of other recommendations for possible 

changes to discreet rate, service, and regulatory matters or processes. All of the 

Commission’s recommendations are listed in Appendix A.

On October 20, 2016, the Commission sent its report to the Postal Service for review and an 

opportunity to comment, consistent with Section 701 of PAEA. On November 9, 2016, the 

Postal Service sent back its comments, which are attached at Appendix B. 
Section 701 Report - 3 - 

I. EVALUATION OF THE PAEA 

AMENDMENTS AND 

RECOMMENDATIONS FOR 

LEGISLATIVE CHANGE

A. Introduction

Every 5 years, the Postal Regulatory Commission (Commission) is required to: 

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

concerning—(1) the operation of the amendments made by 

[PAEA]; and (2) recommendations for any legislation or other 

measures necessary to improve the effectiveness or efficiency 

of the postal laws of the United States. 

Pub. L. 109-435, 120 Stat. 3198 (2006).1 Additionally, PAEA section 701(b) requires the 

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

submit written comments. 

This report marks the second section 701 report to the President and Congress. The first 

section 701 report was submitted in 2011 (2011 Report).2 The recommendations of the 

2011 Report are summarized in section II, below. In addition, on April 14, 2016, the 

Commission issued a notice seeking public comment on issues the Commission should 

consider in the current 701 report, and those comments are reviewed in section II as well.3

Because we are in the tenth year since the passage of the PAEA, the timing of this report 

occurs adjacent to another significant Commission undertaking, the review of the system 

for regulating rates and classes for Market Dominant products required by 39 U.S.C. § 

3622(d)(3) (Section 3622 Review). As a result, some of the areas previously addressed by 

 

1

 Postal Accountability and Enhancement Act (PAEA), Pub. L. 109-435, 120 Stat. 3198 (2006), section 701. 

2

Postal Regulatory Commission, Section 701 Report, Analysis of the Postal Accountability and Enhancement Act of 2006, September 22, 2011 

(2011 Report).

3

 Docket No. PI2016-3, Notice and Order Seeking Comments on Report to the President and Congress Pursuant to Section 701 of the Postal 

Accountability and Enhancement Act, April 14, 2016 (Order No. 3238).
Section 701 Report - 4 - 

the Commission in the 2011 Report will instead be covered during the Section 3622 

Review. 

B. Postal Service Financial Situation

1. Introduction and Background

The Postal Service is not currently generating sufficient funds to cover mandated expenses 

or invest in critically deferred capital needs. 

The Commission requires the Postal Service to file monthly, quarterly, and annual reports 

regarding its financial results. See 39 C.F.R. part 3050. Until FY 2014, the Commission 

addressed the overall financial health of the Postal Service in the Annual Compliance 

Determination (ACD). However, given the time frame for conducting the ACD, the 

Commission determined that a detailed analysis of Postal Service financial data would be 

better served by a separate analysis. In FY 2013, the Commission developed a separate 

annual financial analysis report to provide a more detailed analysis of the Postal Service’s 

financial position. The annual financial report reviews the overall financial position of the 

Postal Service, as well as volumes, revenues, and costs of both Market Dominant products 

and Competitive products.4 The report also analyzes the Postal Service’s profitability, 

solvency, activity, and financial stability using accounting ratios.5

As reported in the Commission’s FY 2015 Financial Report, the Postal Service had a net loss 

of $5.1 billion in FY 2015. FY 2015 Financial Report at 7. This marks the ninth consecutive 

net loss posted since FY 2007, increasing the cumulative net deficit since FY 2007 to $56.8 

billion.6 These losses have reduced the Postal Service’s liquidity. See FY 2015 Financial 

Report at 25. At the end of FY 2015, the Postal Service’s current net assets totaled $7.9 

billion, while its current liabilities totaled $48.9 billion.7 This gap is the result of a multitude 

of factors including the continuing decline in the volume of Market Dominant products, and 

high personnel-related expenses. 

 

4

See Postal Regulatory Commission, Financial Analysis of United States Postal Service Financial Results and 10-K Statement, Fiscal Year 2015, 

March 29, 2016 (FY 2015 Financial Report).

5

 The Financial Analysis Report examines the Postal Service’s Altman-Z score, which is a compilation of financial ratios developed by New York 

University Professor Edward Altman, as a tool to gauge an entity’s long-term viability. See FY 2015 Financial Report at 84. 

6

See United States Postal Service, Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2015, at 32 (Annual Report on Form 10-

K).

7

Id. at 24. Table 11-7. $6.9 billion of the current net assets was cash or cash equivalents. Id.
Section 701 Report - 5 - 

From FY 2007, the total volume for Market Dominant products has declined by 60.4 billion 

pieces. Id. at 37, Figure III-1. The volume decline was precipitated by a long-term trend of 

mail migrating to electronic media and exacerbated by the economic recession that began 

in December of 2007. The Postal Service states that the volume lost to electronic media is 

not expected to return, as the migration represents a fundamental and permanent change 

in mail use by households and businesses.8 The decline in First-Class Mail volume, a 4.3 

percent average annual rate of decline since FY 2007, is particularly troubling because 

First-Class Mail contributes the most revenue to the Postal Service’s total overhead costs. 

See FY 2015 Financial Report at 37; Appendix A. 

The Postal Services also faces the challenge that its personnel-related obligations include 

off-balance sheet items not recognized in the Postal Service’s financial statements. FY 2015 

Financial Report at 30. These items include costs for unfunded liabilities in both the Civil 

Service Retirement and Disability Fund (CSRDF) and the Postal Service’s Retirement Health 

Benefits Fund (RHBF). Id. 

The CSRDF provides pension benefits to retired and disabled Federal employees, including 

Postal Service employees covered by the Civil Service Retirement System (CSRS) and 

Federal Employee Retirement System (FERS). Both the CSRS and FERS pension plans had 

unfunded Postal Service liabilities in FY 2014. Id. at 31.9 In FY 2015, OPM directed the 

Postal Service to pay an additional $241 million per year for 30 years to eliminate the 

unfunded portion of the FERS liability. Annual Report on Form 10-K at 22. Beginning in 

FY 2018, the Postal Service must begin making actuarial payments on the unfunded CSRDF 

liability. 5 U.S.C. § 8348(h)(2)(B). 

The PAEA established the RHBF to fund the long-term retiree health benefits for postal 

employees, retirees, and their survivors. Like CSRS and FERS, the RHBF is administered by 

OPM. See 2011 Report at 19-20. The initial funding of $17.1 billion was transferred from 

the CSRS surplus at the end of FY 2006. FY 2015 Financial Report at 32. The PAEA requires 

the Postal Service to contribute annual payments to the fund averaging $5.2 billion per 

year, added to the annual government share of retiree health benefit premiums. Id. at 31. 

The Postal Service has not made its annual contribution to the fund since FY 2010. Id. at 32. 

Each year since FY 2007, OPM has determined the increase in the retiree health benefit 

liability and the funding status of the RHBF. The defaulted payments are accrued and 

reported as a current liability on the Postal Service’s balance sheets. Through FY 2015, the 

 

8

 United States Postal Service, Ensuring a Viable Postal Service for America: An Action Plan for the Future, March 2, 2010, at 4. 

9

 In 2017, the Office of Personnel Management (OPM) must determine the funding status of CSRS, and any surplus must be transferred to the 

RHBF. However, if there is an unfunded liability, which appears to be increasingly likely, OPM must develop a 30 year amortization of the 

unfunded liability, which the Postal Service will have to begin paying in FY 2017. 
Section 701 Report - 6 - 

Postal Service missed a total of $28.1 billion in payments, and owes $5.8 billion for 

FY 2016. Id. This current liability contributes significantly to the Postal Service’s negative 

working capital. As of FY 2015, the defaulted RHBF payments made up 57 percent of the 

Postal Service’s current liabilities, substantially impacting the Postal Service’s liquidity and 

overall sustainability. Id. at 77. 

In FY 2017, the funding of the RHBF will change by law. The Postal Service will be required 

to fund the RHBF with amortized payments consisting of the normal cost, plus the 

unfunded portion of the RHBF liability. 5 U.S.C. § 8909a(d)(3)(b). With this change, the 

RHBF, rather than the Postal Service, will pay the annual government share of the postal 

retiree health benefit premiums. FY 2015 Financial Report at 32. 

2. Commission Recommendations

In the 2011 Report, the Commission recommended that Congress adjust the current RHBF 

payment schedule. 2011 Report at 21. The Commission noted that the financial condition of 

the Postal Service had dramatically changed since the passage of the PAEA. Id. Five years 

later, the Postal Service remains unable to achieve the financial stability contemplated by 

the PAEA. The Commission urges Congress to consider the Postal Service’s current financial 

situation, as fully discussed in the Commission’s annual financial analysis reports. 

The Commission renews its recommendation from the 2011 Report that Congress modify 

the retiree health benefits prefunding level and payment schedule as a measure to improve 

Postal Service sustainability. As noted by several commenters, the Postal Service is faced 

with a unique requirement to fund 100 percent of its retiree health benefits liability. The 

Commission supports decreasing the funding target to one more in line with industry 

norms as a means of improving Postal Service liquidity and solvency. The Commission 

recommends that Congress amend the current required prefunding level to comport to 

standard industry practice in both private and public sectors. 

In its 2011 Report, the Commission provided estimated statutory payments for FY 2011 

through FY 2016 for funding levels of 50, 60, and 70 percent. 2011 Report at 24. The 

forecasted scenarios resulted in higher funding levels than private sector and other public 

entities, while also provided a significant reduction in estimated liabilities. Id. at 23-24. If 

Congress adjusts the prefunding level in the near term, the Postal Service would likely 

receive a comparable cash benefit. While the Commission does not endorse a particular 

funding level in line with industry norms, it anticipates that any reduction in the RHBF 

prefunding target would provide needed improvement in the Postal Service’s assets to 

liabilities ratio. 
Section 701 Report - 7 - 

Relief from the 100 percent prefunding target would provide the Postal Service some 

flexibility to make needed capital investments.10 In addition to reducing the prefunding 

target, the Commission further recommends lengthening the amortization period of the 

current unfunded liability. The new payment schedule for the current unfunded liability 

begins in FY 2017. The current amortization period is 40 years. FY 2015 Financial Report 

at 31-32. Extending the amortization period would free significant capital by reducing 

Postal Service annual payments. 

Further improvement in liquidity could be provided by allowing the Postal Service to use 

any available FERS surplus, rather than requiring the surplus to be transferred to the 

RHBF. The Commission recommends that Congress provide this flexibility, as it may help 

restore the Postal Service’s borrowing capability. A FERS surplus could first be paid toward 

the Postal Service’s debt to the U.S. Treasury, and after that debt was paid off, any 

remaining or future surplus could be applied to pension liabilities, retiree health benefit 

liabilities, or other general debt. The Commission recommends that Congress grant the 

Postal Service the authority to use available FERS surpluses to pay off current or future 

liabilities. 2011 Report at 19-21.

C. Market Dominant Rate System

1. Introduction and Background

The Commission analyzes three general categories of the Market Dominant rate system: 

the price cap, the recent exigent surcharge removal, and workshare discounts. 

a. Price Cap 

The PAEA created a new system for regulating rates and classes for Market Dominant 

products, a departure from the previous cost-of-service ratemaking system under the 

Postal Reorganization Act of 1970 (PRA). The current system provides for an annual 

limitation in the percentage change in rates for each class of Market Dominant mail. 

39 U.S.C. § 3622(d)(1). In general, the average rate increase for mail within a class cannot 

exceed the increase in the Consumer Price Index for All Urban Consumers (CPI-U) 

unadjusted for seasonal variation in a given year (Annual Limitation). 39 U.S.C. § 

3622(d)(1),(2). When the Postal Service elects to use less than its full authority in a given 

price adjustment, it may “bank” unused rate adjustment authority. It may subsequently use 

banked authority to adjust prices by more than the Annual Limitation. Any unused banked 

 

10 “The FY 2015 Integrated Financial Plan (IFP) included a capital investment budget of $1.5 billion for mail processing equipment, vehicles, and 

information technology.” Total actual capital investments were $0.4 billion less than planned. See FY 2015 Financial Report at 2-3, n.9. 
Section 701 Report - 8 - 

authority expires after 5 years. Banked authority must be used on a first-in-first-out basis, 

and for any class or service the rate adjustment authority used must not exceed the Annual 

Limitation by more than 2 percent. 39 U.S.C. § 3622(d)(2)(C). 

The Postal Service must provide a schedule for rate changes at regular intervals and by 

predictable amounts. 39 U.S.C. § 3622(d)(1)(B). However, if no sufficient banked authority 

exists, the Postal Service may request a rate increase greater than the Annual Limitation on 

an expedited basis due to either extraordinary or exceptional circumstances. The 

Commission must determine whether the exigent price adjustment request is reasonable, 

equitable, and necessary to enable the Postal Service, under best practices of honest, 

efficient, and economical management, to maintain and continue the development of postal 

services of the kind and quality adapted to the needs of the United States. 39 U.S.C. 

§ 3622(d)(1)(E). 

b. History of Exigent Requests 

The Postal Service first filed a request for exigent price adjustment in FY 2010 seeking to 

increase rates for Market Dominant products by 5.6 percent, on average.11 After a public 

hearing and an analysis of the record, the Commission denied the exigent request.12 The 

Commission found that although the Great Recession and its impact were an “extraordinary 

or exceptional circumstance”, the Postal Service failed to demonstrate that the proposed 

rate adjustments were “due to” the Great Recession and also failed to quantify the impact of 

the recession on postal finances and relate that impact to the requested price adjustment. 

Order No. 547 at 50, 64. The Postal Service appealed the Commission’s order to the U.S. 

Court of Appeals for the District of Columbia Circuit. Although the court concluded that the 

Commission correctly construed “due to” to require a causal relationship between the 

exigent circumstances' effects on the Postal Service and the amount of the above-cap rate 

increases, it remanded the exigent price adjustment decision, in part, for the Commission to 

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

extraordinary or exigent circumstance.13 On remand,14 the Commission concluded “that 

exigent rate adjustments are permitted only if, and to the extent that, they compensate for 

the net adverse financial impact of the exigent circumstances.” Order No. 864 at 45. It also 

clarified the level of proof sufficient to demonstrate the causal nexus of the “due to” clause 

of section 3622(d)(1)(E) at 46-55. 

 

11 Docket No. R2010-4, Exigent Request of the United States Postal Service, July 6, 2010. 

12 Docket No. R2010-4, Order Denying Request for Exigent Rate Adjustments, September 30, 2010 (Order No. 547). 

13 United States Postal Service v. Postal Regulatory Commission, 640 F.3d 1263 at 1264, 1268 (D.C. Cir. 2011). 

14 Docket No. R2010-4R, Order Resolving Issues on Remand, September 20, 2011 (Order No. 864). 
Section 701 Report - 9 - 

The Postal Service subsequently renewed its request for an exigent rate adjustment on 

September 26, 2013.15 This time, the Postal Service requested a 4.3 percent across-theboard increase to restore contribution lost as a result of the Great Recession. On December 

24, 2013, the Commission found that the Postal Service was entitled to collect $2.766 

billion in 2014 after-rates contribution as a result of losses incurred due to the Great 

Recession.16 The Postal Service again petitioned the U.S. Court of Appeals for the District of 

Columbia Circuit for review of the Commission’s order. The court’s order largely affirmed 

the Commission’s finding in Order No. 1926 but vacated the Commission’s method for 

accounting for mail volume lost due to the exigent circumstance and it remanded the case 

to the Commission.17 On remand,18 the Commission found that the Postal Service was 

entitled to recover $1.191 billion in additional contribution in addition to the amount 

originally authorized. On August 28, 2015, the Postal Service filed a petition with the U.S. 

Court of Appeals for the District of Columbia Circuit for review of Order No. 2623. That 

petition is currently pending before the court.19 On February 25, 2016, the Postal Service 

filed notice of its intention to remove the exigent surcharge from existing Market Dominant 

rates effective April 10, 2016.20 The Commission approved the Postal Service’s planned 

removal of the exigent surcharge on March 29, 2016.21 The exigent surcharge was removed 

April 10, 2016. 

c. Worksharing 

Workshare discounts refer to rate discounts provided to mailers for the presorting, 

prebarcoding, handling, or transportation of mail. 39 U.S.C. § 3622(e)(1). These discounts 

provide reduced rates for mail prepared or entered to avoid certain activities that the 

Postal Service would otherwise have to perform. The amount of each discount is based on 

the estimated avoided costs that result from the mailer performing that activity. The 

Commission is responsible for ensuring that workshare discounts do not exceed the costs 

that the Postal Service avoids as a result of the worksharing activity. 39 U.S.C. § 3622(e)(2). 

The passthrough, or the amount of discount relative to the cost avoided, may exceed 100 

percent in four instances: if the discount is associated with a new postal service, change to 

 

15 See Docket No. R2013-11, Renewed Exigent Request of the United States Postal Service in Response to Commission Order No. 1059, 

September 26, 2013. 

16 See Docket No. R2013-11, Order Granting Exigent Price Increase, December 24, 2013 (Order No. 1926). 

17 Alliance of Nonprofit Mailers v. Postal Regulatory Commission, 790 F.3d 186 (D.C. Cir. 2015). 

18 See Docket No. R2013-11R, Order Resolving Issues on Remand, July 29, 2015 (Order No. 2623). 

19 United States Postal Service v. Postal Regulatory Commission, No. 15-1297 (D.C. Cir. filed Aug. 28, 2015). 

20 See Docket No. R2013-11, Notice of the United States Postal Service of Removal of the Exigent Surcharge, February 25, 2016. 

21 See Docket No. R2013-11, Order No. 3186, Order on Removal of the Exigent Surcharge and Related Changes to the Mail Classification 

Schedule, March 29, 2016. 
Section 701 Report - 10 - 

existing postal service, or with a new workshare initiative related to an existing postal 

service and is necessary to induce mailer behavior that furthers the economically efficient 

operation of the Postal Service and the portion of the discounts in excess of the cost 

avoided will be phased out over time; if the amount of the discount above avoided costs is 

necessary to mitigate rate shock and will be phased out over time; if the discount is 

provided in connection with mail consisting exclusively of mail matter of educational, 

cultural, scientific, or informational value; or if reducing or eliminating the discount would 

impede the efficient operation of the Postal Service. 39 U.S.C. § 3622(e)(2)(A)-(D).

2. Commission Recommendation

The Commission is required by statute to conduct a review, 10 years after enactment of the 

PAEA, of the modern system of regulating rates and classes for Market Dominant products 

pursuant to 39 U.S.C. § 3622(d)(3). The Commission intends to consider matters related to 

the Market Dominant system of rate making during its Section 3622 Review, including 

discussions regarding the price cap and other related matters.22

As for worksharing, the Commission recognizes that establishing a “soft floor” (a lower 

limit subject to certain exceptions) on worksharing discounts may eliminate inefficiencies 

caused by the Postal Service performing work that mailers may perform at a lower cost. If 

Congress chooses to establish such a requirement, the Commission notes that the Postal 

Service’s concerns about pricing flexibility may be balanced with the goal of increased 

efficiency by allowing limited statutory exceptions to the soft floor requirement. These 

statutory exceptions would be modeled on the exceptions that currently exist for the 

worksharing discount “soft ceiling” (an upper limit subject to certain exceptions). 

Currently, the Postal Service may claim an exception for workshare discounts exceeding 

the costs avoided if: 

(A) the discount is (i) associated with a new postal service, a 

change to an existing postal service, or with a new work share 

initiative related to an existing postal service; and (ii) 

necessary to induce mailer behavior that furthers the 

economically efficient operation of the Postal Service and the 

portion of the discount in excess of the cost that the Postal 

Service avoids as a result of the workshare activity will be 

phased out over a limited period of time; 

 

22 Press Release, Postal Regulatory Commission, PRC Announces Plan for 10-year Review of System of Regulating Rates and Classes for Market 

Dominant Products (September 1, 2016). 
Section 701 Report - 11 - 

(B) the amount of the discount above costs avoided (i) is 

necessary to mitigate rate shock; and (ii) will be phased out 

over time; 

(C) the discount is provided in connection with the subclasses 

of mail consisting exclusively of mail matter of educational, 

cultural, scientific, or informational value; or 

(D) reduction or elimination of the discount would impede the 

efficient operation of the Postal Service. 

39 U.S.C. § 3622(e)(2). 

With clearly defined and limited exceptions similar to those already in place for the 

workshare discount ceiling, the Commission notes that establishing a soft floor would be an 

enhancement to the PAEA that would benefit the postal community by providing 

appropriate pricing signals to incentivize efficient mail preparation. 

D. Competitive Product Rate System

1. Introduction and Background

The PAEA tasks the Commission with determining whether a product offered by the Postal 

Service is Competitive or Market Dominant. Pursuant to 39 U.S.C. § 3642(b)(1), the 

Commission must consider whether “the Postal Service exercises sufficient market power 

that it can effectively set the price of such product substantially above costs, raise prices 

significantly, decrease quality, or decrease output, without risk of losing a significant level 

of business to other firms offering similar products.” Products over which the Postal 

Service exercises such power are categorized as Market Dominant while all others are 

categorized as Competitive.23 Competitive product prices are subject to Commission review 

for compliance with 39 U.S.C. § 3633. 

The remainder of this section discusses three issues relevant to these statutory 

requirements including the “appropriate share” that Competitive products must contribute 

towards the Postal Service’s institutional cost and the cost attribution methodologies used 

to determine compliance with 39 U.S.C. § 3633. 

 

23 Any product covered by the letter monopoly is categorized as Market Dominant regardless of market analysis, pursuant to 39 U.S.C. § 601 et 

seq. 
Section 701 Report - 12 - 

a. Competitive Contribution to Institutional Cost 

Pursuant to 39 U.S.C. § 3633(a), the Postal Service’s Competitive prices must not result in 

those products’ subsidization by Market Dominant products; ensure that each Competitive 

product covers its attributable costs; and ensure that all Competitive products collectively 

contribute an appropriate share of the institutional costs of the Postal Service. With regard 

to the third criterion, the Commission promulgated regulations to ensure that Competitive 

products, collectively, bear an “appropriate share” of the Postal Service’s institutional costs. 

See 39 C.F.R. § 3015.7(c). At a minimum, every 5 years, the Commission is required to 

review its “appropriate share” regulation. 39 U.S.C. § 3633(b). The Commission may also 

eliminate the contribution requirement. Id. In Order No. 1449, the Commission conducted 

its first review of that regulation and determined the “appropriate share” should remain 

5.5 percent of total institutional costs as initially set in FY 2007.24

b. Competitive Product Costing 

Underlying the Commission’s review pursuant to 39 U.S.C. § 3633(a) are the costs used by 

the Commission in its evaluation of cost coverages. Additionally, it relies upon the Postal 

Service’s reported costs to ensure that the prices set by the Postal Service for its 

competitive products satisfy the prohibition against subsidization of Competitive products 

by Market Dominant products. The Commission has reviewed and implemented numerous 

methodological changes since FY 2007. Recently, in Docket No. RM2016-2, the Commission 

considered a cost attribution methodology proposed by United Parcel Service (UPS). UPS’s 

proposed methodology in that docket sought to increase the costs attributed to products 

and, consequently, raise the price floor for Competitive products. The Commission’s final 

decision on UPS’s proposal is discussed in the recommendation section below.

2. Commission Recommendations

There have been several significant changes to Competitive products since the 

Commission’s last review of the appropriate institutional cost share. The Commission has 

approved numerous additions to the competitive product list and transfers from the 

market dominant product list to the competitive product list (e.g., Inbound Surface Parcel 

Post (at Universal Postal Union (UPU) rates),25 Parcel Post,26 Commercial Standard Mail 

 

24 See Docket No. RM2012-3, Order Reviewing Competitive Products’ Appropriate Share Contribution to Attributable Costs, August 23, 2012 

(Order No. 1449). 

25 Docket No. MC2014-28, Order No. 2160, Order Approving Product List Transfer, August 19, 2014. 

26 Docket No. MC2012-13, Order No. 1411, Order Conditionally Granting Request to Transfer Parcel Post to the Competitive Product List, July 

20, 2012. 
Section 701 Report - 13 - 

Parcels,27 and Commercial First-Class Mail Parcels28). Additionally, since FY 2007, 

Competitive product volume and revenue have grown significantly.29 Moreover, 

Competitive products represent a greater share of total volume than in FY 2007, when the 

appropriate share was set. As the Commission stated in Order No. 3506,30 the Commission 

intends to consider changes to the appropriate share in the next 5-year review. No 

legislative change is necessary at this time on the issue of the appropriate institutional cost 

share as the Commission intends to review the appropriate share during FY 2016. 

As for cost attribution methodology, the Commission considered the efficacy of the 

methodologies used to attribute costs to products in Docket No. RM2016-2. In Order No. 

3506, the Commission concluded its consideration of the cost attribution proposals put 

forth by UPS. The Commission did not adopt UPS’s proposal to incorporate all the variable 

costs in the costs attributable to individual products. Order No. 3506 at 3. However, the 

Commission recognized additional costs that are reliably identified and causally related but 

have not been previously attributed. In that Order, the Commission found that productlevel and class-level incremental costs are attributable costs. Id. As a result, the Commission 

makes no recommendations requiring potential statutory changes to the cost attribution 

methodology.31

E. Negotiated Service Agreements

1. Introduction and Background

The Postal Service is empowered by the PAEA to enter into special agreements with 

mailers, including negotiated service agreements (NSA). From FY 2008 through July 2016, 

the Commission has reviewed 29 Market Dominant NSAs (4 domestic and 26 international) 

and 630 Competitive NSAs (265 domestic and 365 international). The Commission 

reiterates its statement from the 2011 Report that both Competitive and Market Dominant 

NSAs offer many potential benefits to the Postal Service and the mailing community. Below, 

the Commission discusses its experience with different types of NSAs, its current methods 

for providing access to non-public NSA information, and recommends a potential change to 

the Market Dominant NSA standard. 

 

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

Competitive Product List, March 2, 2011. 

28 See Docket No. MC2011-22, Order No. 710, Order Adding Lightweight Commercial Parcels to the Competitive Product List, April 6, 2011. 

29 See Docket No. ACR2007, Annual Compliance Determination, March 27, 2008, at 24 (FY 2007 ACD); FY 2015 Financial Report at 71. 

30 Docket No. RM2016-2, Order Concerning United Parcel Service, Inc.’s Proposed Changes to Postal Service Costing Methodologies (UPS 

Proposals One, Two, and Three), September 9, 2016, at 123 (Order No. 3506). 

31 United Parcel Service, Inc., v. Postal Regulatory Commission, No. 16-1354 (D.C. Cir. filed Oct. 12, 2016). 
Section 701 Report - 14 - 

a. Competitive NSAs 

As with any proposed Competitive product, before adding an NSA to the competitive 

product list, the Commission must determine that the Postal Service does not exercise 

sufficient market power that it can effectively set the price of the product substantially 

above costs, raise prices significantly, decrease quality, or decrease output, without the risk 

of losing a significant level of business to other firms offering similar products. See 39 U.S.C. 

§ 3642(b)(1); 39 C.F.R. § 3020.34. It must also consider the availability and nature of 

private sector enterprises engaged in delivering the product, the views of those who use 

the product, and the likely impact on small business concerns. See 39 U.S.C. § 3642(b)(3); 

39 C.F.R. §§ 3020.32(f), (g), and (h). 

Finally, once the Commission determines that an NSA meets all the above requirements, 

prior to approving the NSA, it must determine that the agreement covers its attributable 

costs, does not cause Market Dominant products to subsidize Competitive products, and 

contributes to the Postal Service’s institutional costs. 39 U.S.C. § 3622(a); 39 C.F.R. §§ 

3015.5 and 3015.7. 

b. Commission Procedures Regarding Non-Public NSA 

Information 

Many of the terms of NSAs are customized based on specific details of the customer’s use of 

the mail and are considered non-public. The Commission’s rules for obtaining access to 

non-public materials are currently set forth in 39 C.F.R. §§ 3007.1 through 3007.62. Any 

party who wishes to obtain access to non-public materials in a Commission docket 

(including all NSA filings) must file a motion setting forth a detailed justification for access 

and a list of relevant affiliations of the party requesting access. 39 C.F.R. § 3007.40. 

To determine whether to grant a party access to non-public material, the Commission 

applies the balancing test based on Federal Rule of Civil Procedure 26, which balances the 

need of the requesting party to have access to participate effectively in a Commission 

proceeding against the Postal Service or a third party with a proprietary interest in the 

materials.32

 

32 See Docket No. RM2008-1, Order No. 225, Final Rules Establishing Appropriate Confidentiality Procedures, June 19, 2009, at 16-17; 39 C.F.R. § 

3007.42. 
Section 701 Report - 15 - 

c. Market Dominant NSAs 

(1) International Market Dominant NSAs 

As an alternative to UPU terminal dues, the Postal Service enters into bilateral NSAs with 

foreign postal operators that include negotiated rates for some or all of their inbound letter 

post items. 

International Market Dominant NSAs are composed largely of agreements with foreign 

postal operators. By the Postal Service’s own estimate, these have lost approximately $25 

million in net revenue in FY 2012.33 2013 GAO Report at 12. However, the mail sent under 

these NSAs would have generated even greater losses if the volumes were sent under UPU 

rates. Id.

(2) Domestic Market Dominant NSAs

When the Postal Service submits a proposed domestic Market Dominant NSA for approval 

by the Commission, the Commission must first independently determine whether the 

product is properly categorized as Market Dominant. The Commission does so by 

evaluating whether “the Postal Service exercises sufficient market power that it can 

effectively set the price of such product substantially above costs, raise prices significantly, 

decrease quality, or decrease output, without risk of losing a significant level of business to 

other firms offering similar products.” 39 U.S.C. § 3642(b)(1). If a product meets these 

specifications or is covered by the postal monopoly, then it is categorized as Market 

Dominant. 39 U.S.C. § 3642(b)(2). All other products are categorized as Competitive.34

When evaluating the new product, the Commission is required to give “due regard” to: 

(A) the availability and nature of enterprises in the public 

sector engaged in the delivery of the product involved; 

(B) the views of those who use the product involved on the 

appropriateness of the proposed action; and 

(C) the likely impact of the proposed action on small 

business concerns (within the meaning of section 

3641(h)). 

39 U.S.C. § 3642(b)(3). 

 

33 United States Government Accountability Office, U.S. Postal Service: Opportunities to Increase Revenue Exist with Competitive Products; 

Reviewing Long-Term Results Could Better Inform Promotions Decisions, GAO-13-578, June 2013 (2013 GAO Report).

34 Any product covered by the letter monopoly is categorized as Market Dominant regardless of market analysis, pursuant to 39 U.S.C. § 601 et 

seq. 
Section 701 Report - 16 - 

If the Commission determines that the proposed NSA is properly classified as Market 

Dominant, it must then determine that the NSA will either: (i) improve the net financial 

position of the Postal Service through reducing costs or increasing overall contribution to 

institutional costs or (ii) enhance the performance of mail preparation, processing, 

transportation, or other functions. It must also find that the NSA will not cause 

unreasonable harm to the marketplace. 39 U.S.C. § 3622(c)(10). The NSA must also be 

made available “on public and reasonable terms to similarly situated mailers.” 39 C.F.R. 

§ 3010.40(c). 

Since the PAEA has been in effect, the Commission has evaluated four domestic Market 

Dominant NSAs, approving three and denying one.35 Domestic Market Dominant NSAs have 

collectively had a negative impact on net revenue. Table I-1, below, sets forth the net effect 

on Postal Service contribution for each domestic Market Dominant NSA approved after the 

passage of the PAEA. The Commission has encouraged the Postal Service to identify a more 

reliable method for evaluating the financial impact of Market Dominant NSAs. 

 

35 See Docket Nos. MC2011-19 and R2011-3, Order No. 694, Order Adding Discover Financial Services 1 Negotiated Service Agreement to the 

Market Dominant Product List, March 15, 2011; Docket Nos. MC2012-14 and R2012-8, Order No. 1448, Order Approving Addition of Valassis 

Direct Mail, Inc. Negotiated Service Agreement to the Market Dominant List, August 23, 2012; Docket Nos. MC2014-21 and R2014-6, Order 

No. 20197, Order Adding PHI Acquisitions Inc. Negotiated Service Agreement to the Market Dominant Product List, June 19, 2014; Docket 

Nos. MC2015-3 and R2015-2, Order No. 2410, Order Rejecting the Postal Service’s Request to Add Discover Negotiated Services Agreement to 

the Market Dominant Product List, March 24, 2015. 
Section 701 Report - 17 - 

Table I-1 

The Commission’s current accepted methodology for estimating volume changes due to the 

Postal Service’s pricing incentive programs uses price elasticity. Order No. 738 at 1. In 

Docket RM2010-9, the Commission sought public comment on potential “new methods to 

estimate volume changes resulting from pricing incentive programs of the Postal Service” 

but after receiving comments, determined that it was unpersuaded “that the alternatives 

offer a demonstrable improvement over the current method” and opted to retain the 

elasticity-based methodology.36

The Postal Service continues to take the position that it “should have the flexibility to 

determine and employ relevant and appropriate methodologies compatible with its 

business model.”

37 It contends that no statutory requirement mandates the use of any one 

methodology. Id. In the FY 2014 ACD, the Commission directed the Postal Service to use the 

elasticity-based accepted analytical principle when estimating volume changes resulting 

from its pricing incentive programs unless the Commission accepts an alternative 

analytical principle.38

2. Commission Recommendations

The Commission continues to have a positive view of the Competitive NSA process, which 

has proven beneficial to both the Postal Service and the mailing community. 

 

36 See Docket No. RM2010-9, Order No. 469, Notice of Proposed Rulemaking Concerning Methods to Estimate Volume Changes Caused by 

Pricing Incentive Programs, June 8, 2010; Docket No. RM2010-9, Order No. 738, Order Terminating Proceeding, May 27, 2011, at 1. 

37 Docket No. ACR2014, Reply Comments of the United States Postal Service, February 18, 2015, at 11 (Docket No. ACR2014, USPS Reply 

Comments).

38 Docket No. ACR2014, Annual Compliance Determination, March 27, 2015, at 60 (FY 2014 ACD). 
Section 701 Report - 18 - 

While commenters offer divergent views on the current treatment of non-public material, 

the Commission maintains that the current approach to granting access to non-public 

material strikes the appropriate balance between the public interest in transparency and 

the Postal Service’s and contract partner’s need to keep certain information confidential. 

Any party may petition the Commission at any time to consider modification or 

improvement of the rules and the balance they strike. The Commission does not at this time 

recommend any legislative changes related to Competitive NSAs or procedures for seeking 

access to non-public material. 

For domestic Market Dominant NSAs, these have not consistently performed up to 

expectations. Several commenters remarked that the current statutory standard has a 

chilling effect on domestic Market Dominant NSAs. Congress should clarify whether the 

more stringent standard set forth in 39 U.S.C. § 3622 (c)(10) that the agreement “improve 

the net financial position” of the Postal Service is still intended, rather than the standard for 

Competitive NSAs which are only required to cover their attributable costs. 

This approach would have the advantage of providing the Postal Service with increased 

opportunities to experiment with its pricing, with a goal towards designing domestic 

Market Dominant NSAs that ultimately result in an improved financial position. However, 

the disadvantages of this approach include the likelihood that the Postal Service will 

continue to lose money on these agreements while it searches for the correct pricing 

formula. Given the inelastic demand for Market Dominant products, price reductions on 

these products have rarely proven to be profitable in the past. In addition, the Commission 

notes that if Congress chooses to implement this new standard, the Commission’s review 

would be limited to the consideration of whether the proposed domestic Market Dominant 

NSA would improve the Postal Service’s position from a cost coverage perspective, rather 

than its current holistic analysis of whether the Postal Service would be financially better 

off overall with the NSA than it would be otherwise. 

F. Post Office Closings and Consolidations

1. Introduction and Background

The PAEA sets forth the requirements for Postal Service determinations to close or 

consolidate post offices. See 39 U.S.C. § 404(d). Section 404(d) also delineates the 

Commission’s jurisdiction to review such determinations upon appeal by any person 

served by the post office subject to the determination. 39 U.S.C. § 404(d)(5). 

In deciding whether or not to close or consolidate a post office, the Postal Service must 

consider: (i) the effect on the community served by the post office; (ii) the effect on the 

employees of the post office; (iii) consistency with a policy of providing a maximum degree 
Section 701 Report - 19 - 

of effective and regular postal services to rural areas, communities, and small towns where 

post offices are not self-sustaining; (iv) economic savings to the Postal Service from the 

closing or consolidation; and (v) other factors as the Postal Service determines are 

necessary. 39 U.S.C. § 404(d)(2)(A). 

Section 404(d)(5) authorizes any person served by the post office subject to the 

determination of closure or consolidation to file an appeal with the Commission within 30 

days of the determination. When considering an appeal, the Commission must set aside a 

determination found to be arbitrary or capricious, without observance of procedure 

required by law, or unsupported by substantial evidence on the record. The Commission 

must complete its administrative review no later than 120 days after receiving the appeal. 

In the 2011 Report, the Commission did not recommend changes to the statutory 

procedural requirements under 39 U.S.C. § 404(d). However, the Commission did 

recommend that Congress consider requiring the Postal Service to provide regular reports 

to the Commission on plans and activities regarding the Postal Service’s retail network. See 

2011 Report at 77. The Commission noted that such reporting would enhance the PAEA’s 

goals of transparency and accountability. Id. The Commission’s 2011 Report also included a 

recommendation that the scope of the Commission’s administrative review be clarified to 

adopt the plain meaning of the term “post office”. Id.

The Commission recently concluded Docket No. PI2016-2 concerning post office 

consolidations and closings.39 The Commission opened PI2016-2 to seek input as to what, 

in commenters’ views, constitutes a relocation or rearrangement of postal services and is 

thus exempt from Commission review pursuant to section 404(d); and when or if the 

Commission should have jurisdiction to review the closing or consolidation of a contract 

postal unit (CPU).40 The comments are summarized in section II with the public comments 

received as input to this report. 

2. Commission Recommendations

There is disagreement on the Commission’s authority to review post office closings on 

appeal over what is, and what is not, a “post office” under 39 U.S.C. § 404(d).

The Postal Service maintains that it should be extended substantial deference in defining 

the terms in 39 U.S.C. § 404(d) because it claims that it should retain substantial discretion 

 

39 Docket No. PI2016-2, Order No. 3456, Order Concluding Proceeding, August 8, 2016. 

40 Docket No. PI2016-2, Notice and Order Seeking Comments on Commission Jurisdiction Over Postal Service Determinations to Close or 

Consolidate Post Offices, December 10, 2015, at 4 (Order No. 2862). 
Section 701 Report - 20 - 

concerning closures and consolidations of post offices.41 The Postal Service suggests that 

the plain language of section 404(d), read in accordance with Congress’s interpretation and 

legislative intent, suggests that the term “post office” does not include stations or branches. 

Id. at 9. The Postal Service’s regulations provide that “[p]ost [o]ffices are established and 

maintained at locations deemed necessary to ensure that regular and effective postal 

services are available to all customers within specified geographic boundaries.” 39 C.F.R. 

§ 241.1. The Postal Service considers this definition to include only “Postal Serviceoperated retail facilities operated or staffed by a postmaster, or by an employee at the 

direction of a postmaster. . . .” Docket No. PI2016-2, USPS Comments at 6. 

The Postal Service notes that nearly all stations and branches are found within urban areas 

where a central facility or main post office is located in the same community, and 

customers have multiple options for retail service. Thus, according to the Postal Service, 

the stations and branches within the geographic boundary of the post office are not post 

offices themselves. Similarly, the Postal Service also takes the position that CPUs are not 

post offices under section 404(d), asserting that designating a termination of a CPU 

contract as a closing would restrict the Postal Service’s ability to function as a business. Id.

at 12. 

Other members of the postal community urge a broader definition of a post office. They 

suggest that the Commission’s jurisdiction regarding appeals should include closings of all

types of post office, including independent post offices, stations, branches, and contract 

post offices. They argue that appeals procedures should be similar for all types of retail 

facilities. 

The Commission, for its part, has long held that the term “post office” includes not only 

postal facilities covered by the Postal Service’s organizational unit definition, but stations 

and branches as well.42 The opposing interpretations of the term “post office” continue to 

create uncertainty and confusion among the public. Legislative clarification of the 

definition of a post office would remove ambiguity as to which closings or consolidations 

are subject to administrative review by the Commission. The Commission again 

recommends that the definition of a post office be clarified to adopt the plain meaning of 

 

41 See Docket No. PI2016-2, United States Postal Service Comments on the Interpretation of Terms Related to 39 U.S.C§ 404(d), February 5, 

2016, at 2-3 (Docket No. PI2016-2, USPS Comments).

42 Docket No. A2013-5, Order No. 1866, Order Affirming Determination, October 31, 2013, at 11. “The Commission has repeatedly held that 39 

U.S.C§ 404(d) provides appeal rights to persons served by post offices that are labeled for administrative purposes as stations or branches.” 

See, e.g., Order No. 436, Docket No. A82-10, In re Oceana Station, Virginia Beach, Virginia, June 25, 1982, at 4 (Oceana Station); Order No. 

1480, Docket No. A2006-1, In re Observatory Finance Station Pittsburg, PA 15214-0651, September 29, 2006, at 6-12; Order No. 748, Docket No. 

A2011-16, Akron-East Station, Akron, Ohio, June 17, 2011, at 2; Order No 865, Docket No. A2011-18, Order Affirming Determination (Valley 

Falls Station), September 20, 2011; Order No. 1037, Docket No. A2011-49, Order Affirming Determination (Village Station), December 12, 2011; 

Order No. 1317, Docket No. A2012-108, Order Remanding Determination (South Valley Station), April 18, 2012. Id. at n.13. 
Section 701 Report - 21 - 

the term post office, inclusive of branches and stations. The Commission further 

recommends clarification on whether CPUs and nonpostal operation units also fall under 

the Commission’s administrative review authority under section 404(d).

As discussed in the Commission’s 2011 Report, the Postal Service utilizes emergency 

suspensions of post offices in certain situations. The Postal Service defines an emergency as 

“an occurrence that constitutes a threat to the safety and health of Postal Service 

employees or customers or to the security of mail or revenue.”43 These occurrences include 

natural disasters, termination of a lease or rental agreement, lack of personnel to operate 

the facility, severe health or safety hazard, severe damage to the office, or lack of measures 

to safeguard the office or revenues. Postal Service Discontinuance Handbook, section 611. 

Many emergency suspensions represent genuine emergencies requiring the suspension of 

operations. The Postal Service’s reliance on anticipated terminations of leases, however, 

are more problematic. In Docket No. PI2010-1, the Commission sought to investigate the 

number and duration of emergency suspensions.44 The Commission recognized that the 

Postal Service could suspend operations of a post office as a means of avoiding the 

discontinuance process indefinitely, and imposing a de facto closing of the office. 

Following the 2011 report, the Postal Service changed its regulations regarding closing and 

consolidations, located at 39 C.F.R. part 241. The regulations provided that where an 

anticipated lease expiration was the reason for the emergency suspension, “responsible 

personnel should initiate [an] initial feasibility study sufficiently in advance of the 

circumstance prompting the emergency suspension to allow a meaningful opportunity for 

public input to be taken into account.” 39 C.F.R. 241.3(a)(5)(iv). The initial feasibility study 

is intended to “assist the district manager in determining whether to proceed in with a 

written proposal to discontinue the facility.” 39 C.F.R. 241.3(a)(5).

Congress may wish to consider a maximum time a post office may remain in suspension 

status. The Commission has previously recommended that the Postal Service “proceed 

expeditiously in either discontinuing offices under suspension or reopening them.” See FY 

2013 ACD at 121; FY 2014 ACD at 121; FY 2015 ACD at 150. In the FY 2015 ACD, the 

Commission directed the Postal Service “to reduce the number of facilities under 

suspension in FY 2016” and, “if it was unable to do so . . . include a detailed explanation of 

why it was unable to do so in the FY 2016 Annual Compliance Report.” FY 2015 ACD at 150. 

 

43 Post Office Discontinuous Guide, Handbook PO 101, Chapter 6 – Special Considerations, Subchaper 61 – Emergency Suspensions (Postal 

Service Discontinuous Handbook). 

44 Docket No. PI2010-1, Order No. 335, Notice and Order Providing an Opportunity to Comment, November 9, 2009. 
Section 701 Report - 22 - 

G. Service Standards

1. Introduction and Background

The PAEA requires that the Postal Service, in consultation with the Commission, to 

establish service standards for Market Dominant products. 39 U.S.C. § 3691(a). Each year, 

the Postal Service is required to report to the Commission on each Market Dominant 

product’s “level of service (described in terms of speed of delivery and reliability)” and the 

degree of customer satisfaction. 39 U.S.C. § 3652(a)(2)(B). The Commission reviews the 

Postal Service’s service performance in accordance with the regulations set forth at 39 

C.F.R. part 3055. The PAEA intended this review to ensure that quality of service does not 

deteriorate as a result of cost-cutting measures implemented to comply with the consumer 

price index (CPI) price cap. 

The Postal Service uses a variety of measuring systems to measure service performance for 

its various products, including: External First-Class Measurement System (EXFC); 

Intelligent Mail Accuracy and Performance System (iMAPS); Product Tracking System 

(PTS); Seamless Acceptance and Service Performance (SASP); International Mail 

Measurement System (IMMS); and Intelligent Mail Barcode (IMb).45 The Postal Service 

utilizes these systems and compares the collected transit times against service 

performance targets for its respective products. For reporting service performance to the 

Commission, service performance must be measured by an objective external performance 

measurement system unless the Commission approves the use of an internal measurement 

system. See 39 U.S.C. § 3691(b)(1)(D) and (b)(2). Currently before the Commission is a 

public inquiry docket regarding proposals to develop new internal service performance 

measurement systems. The Commission’s evaluation of the new systems has included 

reviews of the systems’ performance data, as well as technical conferences wherein the 

Postal Service has detailed the operation of the internal systems. The Commission has 

requested further information from the Postal Service, which is necessary to review the 

proposed internal systems.46

The Postal Service generally makes its performance goals available to the public via its 

website47 and also includes its performance data in quarterly reports and in its Annual 

 

45 For a detailed description of the abovementioned measurement systems, see Docket No. ACR2015, Annual Compliance Determination, 

March 28, 2016, at 95-98 (FY 2015 ACD).

46 See Docket No. PI2015-1, Order No. 2336, Notice of Request for Comments and Scheduling of Technical Conference Concerning Service 

Performance Measurement Systems for Market Dominant Products, January 29, 2015. 

47 See United States Postal Service, Service Performance Targets FY 2016 Market Dominant Products, http://about.usps.com/what-we-aredoing/service-performance/fy2016-targets-page.html.
Section 701 Report - 23 - 

Compliance Report. Speed of delivery is evaluated based on a mailpiece reaching its 

destination within a given service window. FY 2015 ACD at 94. Reliability refers to 

consistency of delivery. Id.

In September 2015, the Government Accountability Office (GAO) published a report 

recommending that the Commission hold a public hearing to address how the Postal 

Service may improve the completeness of its service data.48 In response to the 2015 GAO 

Report, the Commission opened a public inquiry docket pertaining to potential 

improvements in service performance measurement data.49 The Commission found that 

additional reporting by the Postal Service is necessary to enhance the quality and 

completeness of service performance data.50 The Commission directed the Postal Service to 

provide descriptions of the methodologies used to verify accuracy, reliability and 

representativeness of all current measurement systems and to regularly report on mail 

excluded from measurement and mail volumes measured and unmeasured by Full Service 

IMb. Order No. 3490 at 24-25. 

The Commission’s Annual Compliance Determination analyzes the yearly service 

performance data. In FY 2015, for the first time since the Postal Service began reporting 

service performance for all Market Dominant mail products, no First-Class Mail product 

met or exceeded its service performance targets. See FY 2015 ACD at 131-138. This decline 

in service performance coincided with a shift to longer processing periods. Id. at 135. 

The Commission found that the Postal Service met service performance targets for 

Standard Mail High Density and Saturation Letters, but noted concern with slippage in the 

performance of Standard Mail Letters and the failure to meet targets for Every Door Direct 

Mail – Retail and Standard Mail High Density and Saturation Flats/Parcels. Id. at 141. The 

Commission also found that Standard Mail Carrier Route and Standard Mail Flats fell 

substantially below performance targets. Id. at 142. The Commission directed the Postal 

Service to provide a report on long-term difficulties in processing and delivering flats in a 

timely and cost-effective manner. Id. at 180-181. On July 27, 2016, the Postal Service 

submitted its report.51 On September 27, 2016, the Commission requested additional 

information from the Postal Service.52 The Commission held an off-the-record technical 

 

48 United States Government Accountability Office, U.S. Postal Service: Actions Needed to Make Delivery Performance Information More 

Complete, Useful, and Transparent, GAO-15-756, September 30, 2015 (2015 GAO Report). 

49 Docket No. PI2016-1, Order No. 2791, Notice Establishing Docket Concerning Service Performance Measurement Data, October 29, 2015. 

50 Docket No. PI2016-1, Order Enhancing Service Performance Reporting Requirements and Closing Docket, August 26, 2016 (Order No. 3490). 

51 Docket No ACR2015, Third Response of the United States Postal Service to Commission Requests for Additional Information in the FY 2015 

Annual Compliance Determination, July 26, 2016. 

52 Docket No. ACR2015, Commission Information Request No. 1, September 27, 2016. 
Section 701 Report - 24 - 

conference on October 21, 2016, during which the Postal Service provided a presentation 

on the status of its proposed method to measure, track, and report cost and service 

performance issues with Flats delivery.53

Service performance results for Periodicals in FY 2015 decreased for the second 

consecutive year, and fell below performance targets for the fourth straight year. Id. at 142. 

Package Services were inconsistent, as Media Mail/Library Mail and Bound Printed Mail 

Parcels exceeded performance targets, while Bound Printed Matter Flats fell substantially 

below other Package Services products for the fourth straight year. Id. at 144. All Special 

services met or exceeded performance targets with the exception of Post Office Box 

Service. Id. 

2. Commission Recommendations

The Commission recognizes its statutory role in setting and enforcing service standards has 

created challenges for the postal community. Accordingly, the Commission reiterates and 

expands upon its recommendations from the 2011 Report. 

The first of these recommendations is that Congress consider clarifying under which 

circumstances the Postal Service is required to consult with the Commission. See 2011 

Report at 64-65. There is no dispute that the Postal Service must consult with the 

Commission when establishing service standards. See 39 U.S.C. § 3691(a). However, the law 

is silent as to whether the Postal Service must consult with the Commission when it 

changes service standards. Currently, the Postal Service does not formally consult with the 

Commission when it changes service standards, although the Commission has interpreted 

section 3691 as a requirement that the Postal Service do so. 2011 Report at 64. To 

eliminate potential confusion and the conflicting interpretations, Congress should clarify 

the provision as to whether or not consultations with the Commission are required for 

proposals to change service standards. 

Perhaps equally ambiguous is the section 3691 requirement to establish standards “in 

consultation with” the Commission. There is substantial room for interpretation as to what 

the term “in consultation with” actually requires of the Postal Service. For example, a 

narrowly construed interpretation of the term “in consultation with” may simply obligate 

the Postal Service to notify the Commission of proposed service standards. A broader 

interpretation would suggest that the Postal Service might be required to receive and 

respond to Commission recommendations and input. The Commission recommends that 

Congress clarify the responsibilities of the Postal Service inherent in its requirement to 

 

53 Docket No. ACR2015, Order No. 3539, Order Scheduling Technical Conference, September 27, 2016. 
Section 701 Report - 25 - 

consult with the Commission. These clarifications would provide more meaningful 

consultation in setting service standards, while promoting the transparency and 

accountability of the Postal Service. 

The Commission’s 2011 Report recommendations included a proposal for service price 

adjustments as an incentive for the Postal Service to improve its service performance. See 

2011 Report at 65. The Commission appreciates that commenters maintain interest for or 

against such a proposal. However, the relationship between service performance and price 

cap authority has not been fully explored. The Commission may review the relationship 

between service performance and pricing authority in its Section 3622 Review. 

H. Nonpostal Services

1. Introduction and Background

The passage of the PAEA revoked the Postal Service’s authority to offer new nonpostal 

services. See 39 U.S.C. § 404(e)(2). It required the Commission to review each existing 

nonpostal service offered and determine whether those services should continue. 39 U.S.C. 

§ 404(e)(3). The Commission was required to consider the public’s need for each service 

and the ability of the private sector to meet the public need. 

The Commission established Docket No. MC2008-1 to review and evaluate existing 

nonpostal services.54 The Commission sought and received evidence and arguments of 

interested participants in evaluating whether the existing nonpostal services should 

continue. In Order No. 154, the Commission identified the nonpostal services that should 

be continued.55

 

54 Docket No. MC2008-1, Order No. 50, Notice and Order Concerning Review of Nonpostal Services, December 20, 2007. 

55 See Docket No. MC2008-1, Review of Nonpostal Services under the Postal Accountability and Enhancement Act, December 19, 2008 (Order 

No. 154).Order No. 154 left open the issue of whether to allow the following nonpostal activities to continue: the licensing of mailing and 

shipping supplies; the warranty repair program; and the sale of CDs and DVDs. See Order No. 154 at 4, 35. The Commission initiated Phase II of 

Docket No. MC2008-1 to resolve those three services. See Docket No. MC2008-1 (Phase II), Notice and Order Initiating Phase II Proceedings 

(Order No. 168), January 9, 2009. The Commission concluded that: licensing of mailing and shipping supplies should not be part of the 

competitive nonpostal service of licensing; warranty repair should be discontinued; and sales of CDs and DVDs should be discontinued. On 

appeal, the United States Court of Appeals for the District of Columbia Circuit remanded to the Commission for further consideration the issue 

of licensing the Postal Service’s logo for use on mailing and shipping supplies. LePage’s 2000, Inc. and LePage’s Products., Inc. v. Postal 

Regulatory Commission, 642 F.3d 225 (D.C. Cir. Jun. 7, 2011), slip op. at 1. On remand, the Commission concluded that mailing and shipping 

licensing could continue because it serves a public need that the private sector cannot meet. Docket No. MC2008-1 (Phase IIR), Order Resolving 

Issues on Remand, April 30, 2012, at 2 (Order No. 1326). 
Section 701 Report - 26 - 

The current list of Postal Service nonpostal service offerings and their descriptions was 

approved in Order No. 1575.56 Currently, the Postal Service’s nonpostal offerings include 

two Market Dominant services:57

● Alliances with the Private Sector to Defray Cost of Key Public Functions 

● Philatelic Sales 

In FY 2015, these two services generated net revenue of $62 million, representing a 13 

percent increase from FY 2014. FY 2015 ACD at 75. 

The mail classification schedule also includes nine Competitive nonpostal services:58

● Advertising 

● Licensing of Intellectual Property other than Officially Licensed Retail 

Products(OLRP) 

● Mail Services Promotion 

● Officially Licensed Retail Products (OLRP) 

● Passport Photo Service 

● Photocopying Service 

● Rental, Leasing, Licensing or Other Non-Sale Disposition of Tangible Property 

● Training Facilities and Related Services 

● USPS Electronic Postmark Service (EPM) Program 

In FY 2015, Competitive nonpostal services generated net revenue of $89 million, 

representing a 4 percent increase from FY 2014. FY 2015 ACD at 92. 

2. Commission Recommendations

The Commission reiterates the recommendations in the 2011 Report regarding new 

offerings of nonpostal services. If Congress decides to allow the Postal Service to offer 

nonpostal services, it should include adequate safeguards to reduce the risks of: 

 

56 See Docket No. MC2010-24, Order Approving Mail Classification Schedule Descriptions and Prices for Nonpostal Service Products, December 

11, 2012 (Order No. 1575). 

57 Mail Classification Schedule, section 1700.2.

58 Mail Classification Schedule, section 2700.2. 
Section 701 Report - 27 - 

unprofitable business ventures; distortion of private markets for nonpostal services; and 

diversion of Postal Service resources from core responsibilities. See 2011 Report at 50. 

The Commission recommends that if the Postal Service is permitted to offer new nonpostal 

services, proposed offerings should be subject to the same regulatory review the 

Commission applied when reviewing existing nonpostal services pursuant to section 

404(e)(3). Applying such review would require the Commission to consider the public 

need and the ability of the private sector to meet the need for proposed new nonpostal 

services. Proposed nonpostal services should also primarily utilize existing Postal Service 

assets to minimize risk. The Commission would not approve new nonpostal service 

offerings that did not meet these statutory tests. 

Similarly, the Commission recommends that where a proposed offering meets the statutory 

test for new nonpostal services, the Commission should have the authority to designate the 

service as a Market Dominant, Competitive, or experimental product. See 39 U.S.C. § 

404(e)(5). Regulatory oversight of approved new nonpostal services would operate in the 

same way it does currently for existing services. 

Implementation of these changes would safeguard against market distortion and the 

diversion of Postal Service resources. 

I. Advisory Opinion Process

1. Introduction and Background

Any change made by the Postal Service that will generally affect service on a nationwide or 

substantially nationwide basis requires the Postal Service to seek an advisory opinion from 

the Commission pursuant to 39 U.S.C. § 3661. 

Since the PAEA was enacted, the Postal Service has filed seven requests for advisory 

opinions with the Commission. These cases are commonly referred to as “N-cases.”59 As the 

Postal Service’s financial situation has deteriorated, the number of N-cases has increased. 

Of the requests filed since FY 2006, four have required 200 days or more to complete.60

Table I-2, below, illustrates the number of days taken to complete N-cases since the 

passage of the PAEA. 

 

59 Where “N” stands for “Nature of Service.”

60 Docket No. RM2012-4, Order Adopting Amended Rules of Procedure for Nature of Service Proceedings Under 39 U.S.C. 3661, May 20, 2014, 

at 4-5 (Order No. 2080). 
Section 701 Report - 28 - 

Table I-2 

In the 2011 Report, the Commission recommended that Congress consider adding 

statutory language allowing the Postal Service to request expedited consideration for timesensitive N-Cases and requiring the Postal Service to submit a written response to the 

advisory opinion prior to implementing its changes in service. 2011 Report at 84. The 

Postal Service’s written response would include an explanation of how the Commission’s 

recommendations would be implemented or, in the alternative, why it disagrees with the 

Commission’s recommendations. The Commission suggested that the proposed changes 

not be implemented until the Postal Service’s written response was provided to Congress. 

Id. 

In its response to the 2011 Report, the Postal Service expressed support for a legislative 

proposal pending at the time which would require the Commission to issue an advisory 

opinion within 90 days and remove the formal hearing requirement from the advisory 

opinion process.61 The Postal Service did not comment on the requirement of a formal 

written response. 

After the 2011 Report was issued, the Commission opened Docket No. RM2012-4, 

proposing and ultimately adopting amended rules of procedure for N-cases to address the 

need for more timely completion of the advisory opinion process. The Commission cited 

several considerations for prescribing a 90-day time frame for its advisory opinion process, 

including the need for more prompt resolution of N-cases given the Postal Service’s current 

financial situation. Order No. 2080 at 13.

 

61 United States Postal Service Response to Commission’s Draft Section 701 Report, September 16, 2011, at 22 (USPS Response to 2011 Report). 
Section 701 Report - 29 - 

The most significant change adopted in Docket No. RM2012-4 was the establishment of a 

pro forma procedural schedule for N-cases that contemplates issuance of an advisory 

opinion by the Commission within 90 days of the Postal Service’s proposal. Order No. 2080 

at 7. Other modifications to the regulations affecting N-cases were established to 

streamline procedures while still providing the requisite level of due process to 

participants. These ancillary changes included: 

 The establishment of a pre-filing phase intended to inform interested persons of the 

Postal Service’s proposal and to provide the Postal Service with feedback useful in 

preparing a final proposal less likely to require substantial revisions after 

commencement of formal Commission proceedings; 

 A limitation on the scope of the proceeding to the Postal Service’s proposal with an 

opportunity for participants to explore related subjects by means of special 

Commission studies or public inquiry proceedings; 

 The adoption of expedited deadlines for filing and responding to motions; 

 The adoption of new discovery procedures that provide for a mandatory technical 

conference and a limitation on the number of written interrogatories; 

 Expedited filing of rebuttal and surrebuttal testimony, if any; 

 Revised hearing procedures that provide for back-to-back hearings on the Postal 

Service’s direct case; rebuttal testimony, if any; and surrebuttal testimony, if any;

 An expedited briefing schedule and limitations on the length of initial and reply 

briefs; and 

 The adoption of a policy of issuing advisory opinions targeted to the Postal Service’s 

proposal and, when appropriate, the institution of special studies or a public inquiry 

proceeding to explore related subjects. 

Order No. 2080 at 7. 

2. Commission Recommendations

39 U.S.C. § 3661 prohibits the Commission from issuing an advisory opinion “until an 

opportunity for a hearing on the record under sections 556 and 557 of title 5 has been 

accorded to the Postal Service, users of the mail, and an officer of the Commission who shall 

be required to represent the interests of the general public.” 39 U.S.C. § 3661(c). In Docket 

No. RM2012-4, the Commission adopted new procedural rules that, to date, have not been 

tested because the Postal Service has not filed a new request for an advisory opinion with 

the Commission after its adoption of the new rule. The Commission’s approach in its 

regulations attempted to balance the desirability and utility of an expeditious advisory 

opinion with the statutory mandate for a hearing on the record under the Administrative 
Section 701 Report - 30 - 

Procedure Act. As long as the requirement for the hearing on the record exists, so will the 

potential for scheduling difficulties and delays in the advisory opinion process. 

However, notwithstanding the new back-to-back hearing schedule in the new procedures, 

the Commission noted the potential logistical challenges inherent in maintaining the 

opportunity for back-to-back hearings on the record in Order No. 2080. It noted that other 

procedural changes designed to increase transparency regarding the Postal Service’s 

proposal may minimize potential logistical challenges. 

Some commenters oppose elimination of the hearing on the record requirement because 

they maintain that a hearing would provide a valuable avenue for stakeholders to explore 

the potential implications of the Postal Service’s proposal. Pursuant to the pro forma 

procedural schedule for N-cases, however, the hearing on the record would occur between 

the 42nd-56th day of the pro forma procedural schedule, depending on whether any 

rebuttal or surrebuttal cases were filed. Order No. 2080 at 83. Other stages of the 

procedure, such as the pre-filing conference, technical conference, and discovery stage, all 

provide opportunities for stakeholders to question the Postal Service and alert the 

Commission about potential implications to the proposal at an earlier stage of the advisory 

opinion process. The updated procedures include various safeguards to ensure that ample 

opportunities are provided to stakeholders well in advance of the hearing stage to discover 

problems with the Postal Service’s proposal.

Congress should consider that the hearing on the record requirement affords the highest 

form of due process available in an administrative proceeding. The hearing on the record 

requirement is a key signifier of legislative intent to provide participants with all the 

protections of a formal adjudicatory proceeding. See City of W. Chicago, Ill. v. U.S. Nuclear 

Regulatory Comm’n, 701 F.2d 632, 644 (7th Cir. 1983); Izaak Walton League of Am. v. 

Marsh, 655 F.2d 346, 341 (D.C. Cir. 1981). The Commission emphasizes that a delicate 

balance exists between its obligations to provide stakeholders with sufficient opportunities 

to identify and discuss the potential impacts of Postal Service proposals to substantially 

change service within a formal adjudicatory structure and the need for expedition in the 

advisory opinion process. 

The Commission notes its recommendation from the 2011 Report that Congress consider 

adding language to 39 U.S.C. § 3661 that requires, upon receipt of the Commission’s 

advisory opinion, the Postal Service provide a written response to Congress, prior to 

implementation, addressing the Commission’s recommendations.
Section 701 Report - 31 - 

J. Market Tests of Experimental Products

1. Introduction and Background

Under the PAEA, the Postal Service has the authority to conduct market tests of 

experimental products. See 39 U.S.C. § 3641. The provision allowing for such market tests 

was driven by Congress’ recognition of the Postal Service’s need to “innovate and develop 

new products and services” to “meet the evolving needs of its customers.” S. Rep. 108-318, 

at 16 (2004). 

Section 3641(b) sets forth the requirements for market tests of experimental products. 

First, the subject product must be, from the viewpoint of mail users, significantly different 

from all products offered by the Postal Service within the 2 year period preceding the start 

of the market test. 39 U.S.C. § 3641(b)(1). Second, the product must not create an unfair or 

otherwise inappropriate competitive advantage for the Postal Service or any mailer. 

39 U.S.C. § 3641(b)(2). Finally, the product must be correctly classified as either a Market 

Dominant or Competitive product. 39 U.S.C. § 3641(b)(3). 

Market tests are subject to a 24 month limit in duration, though the Commission may grant 

an extension up to an additional 12 months. 39 U.S.C. § 3641(d). Revenues for products 

introduced in a market test, either anticipated or actually received by the Postal Service, 

may not exceed $10 million in any year, subject to inflation. 39 U.S.C. § 3641(e).

The Postal Service must file a notice of a market test with the Commission and publish the 

notice in the Federal Register at least 30 days prior to the market test’s initiation. 39 U.S.C. § 

3641(c)(1). The notice must describe the nature and scope of the market test and set forth 

the basis for the Postal Service’s determination that the market test meets the statutory 

requirements. In reviewing market tests for compliance, the Commission considers public 

comments from interested persons, mailers, and other stakeholders in the postal 

community. The Commission also reviews Postal Service responses to specific requests for 

information issued by the Commission. 

Since the submission of the 2011 Report, the Postal Service has filed five notices of market 

tests of experimental products: Docket No. MT2012-1, First-Class Tracer; Docket No. 

MT2013-1, Metro Post; Docket No. MT2013-2, International Merchandise Return Service 

Non-Published Rates; Docket No. MT2014-1, Customized Delivery; and Docket No. 

MT2016-1, Global eCommerce Marketplace (GeM) Non-Published Rates. The Commission 

ultimately approved the First-Class Tracer, Metro Post, International Merchandise Return 
Section 701 Report - 32 - 

Service Non-Published Rates, Customized Delivery, and GeM market tests. The Postal 

Service requested, and the Commission granted, a one year extension of the Metro Post 

market test.62 The Commission granted a request for a one year extension of the 

International Merchandise Return Service market test to accommodate one year negotiated 

service agreements executed in the second year of the market test.63

2. Commission Recommendations

The Commission maintains its position that the statutory authority and rules under 

the PAEA governing market tests of experimental products are working as intended and 

providing the Postal Service increased flexibility in the development of new postal 

products. See 2011 Report at 70.

a. Increases on Maximum Revenue and Duration 

In its 2011 Report, the Commission recommended Congress consider raising the maximum 

revenue limitation on market test products. 2011 Report at 70. The Commission continues 

to support this change, which would provide the Postal Service more opportunities for 

advancement of new postal products to bolster revenue streams. Accordingly, the 

Commission reiterates its 2011 Report recommendation that Congress consider raising the 

maximum revenue limitation for market tests. The Commission also recommends that 

Congress increase the maximum duration limitation on market tests for experimental 

products. As with an increase in the revenue limitation, an increased maximum duration 

should encourage more innovation by giving the Postal Service flexibility to advance more 

ideas to bolster revenue streams. 

b. Modification of “Market Disruption” Requirement

The Commission has identified one potentially problematic area in the PAEA’s conditions 

for market tests. The PAEA requires experimental products to be “significantly different 

from all products offered by the Postal Service” within the 2 years preceding the start of a 

market test 39 U.S.C. § 3641(b)(1). The Postal Service is required to show that the 

introduction of the product will not cause market disruption. 39 U.S.C. § 3641(b)(2). In 

practice, the juxtaposition between these two requirements creates a challenge for the 

Postal Service in implementing market tests. 

On one hand, the introduction of the product must not create an unfair advantage for the 

Postal Service or any mailer. The Commission’s rules require that, in a notice of a market 

test, the Postal Service establish that the product will not create a market disruption. 39 

 

62 Docket No. MT2013-1, Order No. 2243, Order Approving Request for Extension and Expansion of Metro Post Market Test, November 7, 2014. 

63 Docket No. MT2013-2, Order No. 1806, Order Authorizing Market Test to Proceed and Granting Extension, August 12, 2013. 
Section 701 Report - 33 - 

C.F.R. § 3035.3(a)(1)(ii). On the other hand, the product must be one that is significantly 

different from any product the Postal Service has offered within the last 2 years. Because 

experimental products necessarily must not have been offered recently by the Postal 

Service, the Postal Service generally lacks the relevant data necessary to determine the 

experimental product’s potential impact on the market. Without having offered a similar 

product itself, the Postal Service’s determination that the product would not create an 

unfair advantage is highly speculative. The Postal Service generally does not, prior to 

implementation of a market test, have access to revenues and volumes of similar products 

offered by individual competitors, or revenue and volume for the market for similar 

products as a whole. As a result, the determination that an experimental product would not 

cause market disruption is often hypothetical. 

For example, in establishing that the GeM experimental product would not cause market 

disruption, the Postal Service was unable to rely on its own data, as it had not offered a 

similar product.64 As a result, the Postal Service was forced to speculate that while at least 

four companies offered similar services, the offering would not create an unfair advantage. 

Id. Without specific information as to the competitors and market disruption, the 

Commission sought additional information from the Postal Service.65 The information 

requests provided the Commission more information about the nature of the experimental 

product, and about competitors offering similar services. 

UPS filed comments regarding the notice of market test.66 UPS argued that introduction of 

the GeM product would indeed cause market disruption, because the Postal Service enjoys 

monopoly privileges as a state-owned enterprise and UPU designated operator. Docket No. 

MT2016-1, UPS Comments at 3-4. Lacking sufficient market information, the Commission 

was compelled to issue a Notice of Inquiry, requesting from interested parties volume and 

revenue information for the previous 3 years, and for the related market as a whole.67 This 

information-gathering process requires the expenditure of significant resources, while still 

providing only limited market information. The GeM market test request illustrates the 

difficulty in balancing the requirements of insuring against market disruption while 

offering a substantially new product. 

 

64 Docket No. MT2016-1, Notice of the United States Postal Service of Market Test of Experimental Product – Global eCommerce Marketplace 

(GeM) Merchant Solution and Notice of Filing GeM Merchant Model Contract and Application for Non-Public Treatment of Materials Filed 

Under Seal, March 16, 2016, at 5 (Docket No. MT2016-1, Notice). 

65 See Docket No. MT2016-1, Chairman’s Information Request No. 1, March 30, 2016 (Docket No. MT2016-1, CHIR No. 1); Docket No. MT2016-

1, Chairman’s Information Request No. 2, April 5, 2016 (Docket No. MT2016-1, CHIR No. 2);Docket No. MT2016-1, Commission Information 

Request No. 1, April 29, 2016 (Docket No. MT2016-1, CIR No. 1). 

66 Docket No. MT2016-1, Comments of United Parcel Service on Postal Service Notice of Global eCommerce Marketplace Proposed Market Test, 

April 19, 2016 (Docket No. MT2016-1, UPS Comments). 

67 Docket No. MT2016-1, Notice of Inquiry No. 1, April 29, 2016 (Docket No. MT2016-1, NOI No. 1). 
Section 701 Report - 34 - 

Congress may consider modifying the standard of proof for section 3641(b)(2) to instead 

require the Postal Service to set forth to the Commission its reasonable basis for belief that 

the introduction of the proposed experimental product will not cause market disruption. 

This proposed standard would be less onerous than the current requirement that the 

Postal Service attempt to demonstrate that no market disruption will occur (for an 

experimental product that is substantially different than anything the Postal Service has 

offered within 2 years) before the test. Congress could safeguard the potential for market 

disruption of an experimental product by allowing an avenue to challenge the experimental 

product, if during the market test a user of the mail believed such a product created an 

unfair or otherwise inappropriate competitive advantage for the Postal Service or other 

mailer (especially small business concerns). This approach would be similar to the avenue 

made available by 39 U.S.C. § 404a(a)(1) for rules or regulations of the Postal Service that 

may have an anticompetitive effect. This would provide the Postal Service with the 

appropriate flexibility in its market test offerings while still safeguarding the interests of 

the market as a whole. 

K. Universal Service and the Postal Monopoly

1. Introduction and Background

The Commission is required to report to the President and Congress estimates of costs 

incurred by the Postal Service in providing universal service on an annual basis. 39 U.S.C. § 

3651(b)(1)(A). Additionally, in December 2008, the Commission provided a report to the 

President and Congress detailing the current status of the Postal Service’s Universal Service 

Obligation (USO) and the postal monopoly, including any deficiencies in universal service; 

and options for considering how to change both in the future.68 The USO Report was 

mandated in section 702(a)(2) of the PAEA.69 The Commission’s subsequent annual reports 

contain yearly estimates of the costs of the USO and postal monopoly. The 

recommendations in the USO Report and the estimates in the FY 2015 Annual Report are 

discussed in more detail below.

a. USO Report 

In drafting its USO Report, the Commission sought public input by holding three field 

hearings, sponsoring an open workshop, and soliciting formal and informal written 

comments. The Commission found, as a threshold matter, that both senders and recipients 

were generally satisfied with the level of universal service, no geographic areas were 

 

68 Postal Regulatory Commission, Report on Universal Postal Service and the Postal Monopoly, December 19, 2008 (USO Report). 

69 Pub. L. 109-435, 120 Stat. 3198 (2006), section 701(a)(2). 
Section 701 Report - 35 - 

unserved by the Postal Service, and no service was deficient in scope or quality. USO Report 

at 1. However, the report noted that the still unfolding Great Recession was having a 

substantial impact on postal revenues and recognized that the Postal Service would have to 

assess and evaluate its options in the near future in response to its financial challenges. Id.

at 2. 

In the USO Report, the Commission found that the Postal Service’s obligation to provide 

service to all persons in all parts of the nation, as well as its territories and possessions, 

remains paramount and should not be altered. It also found that the USO was applicable to 

both Market Dominant and Competitive products, and included seven relevant attributes: 

Geographic scope; Range of Products; Access to Postal Facilities; Delivery Frequency; 

Prices and Affordability; Quality of Service; and Users’ Rights of Enforcement. Id. at 19-21; 

25. Its initial estimate of the annual cost of the USO, based on FY 2007 data, was $4.4 

billion. Id. at 5. Its initial estimate of the values of the combined letter mail and mailbox 

monopolies, based on the same data, was $3.5 billion. Id. These estimates have been 

updated and refined in subsequent annual reports. 

Finally, the USO Report included the following recommendations: 

 That Congress consider and balance all the features of universal service as part of 

any review of changes necessary to preserve a financially viable Postal Service. 

 That the Postal Service be directed to develop information on the probable impact 

on mail usage by large volume mailers in reaction to potential alternative changes in 

the seven features of universal service. 

 That, before any decisions to adjust or eliminate universal service or the monopoly 

are made, the resulting impact on the societal benefits of a Federal postal service 

should be carefully addressed. 

Id. at 6. 

b. Annual Reports 

The estimated cost of the USO and value of the postal monopoly, provided in the 

Commission’s annual reports, are summarized in Table I-3 below: 
Section 701 Report - 36 - 

Table I-370

c. Federal Trade Commission Report 

Pursuant to section 703(a)71 in the PAEA, the Federal Trade Commission (FTC) was tasked 

with submitting a separate report, which was to identify federal and state laws that applied 

differently to the Postal Service in comparison to private carriers and include, as 

appropriate, an accounting of the net economic effects provided by the legal differences, as 

well as recommendations for bringing such legal differences to an end.72

The FTC report included the following conclusions: 

 The Postal Service’s unique legal status likely provides it with a net competitive 

disadvantage as compared to private carriers — legal and political restraints on the 

Postal Service increase its costs from between $330 million - $782 million annually, 

which is slightly mitigated by an implicit subsidy of its Competitive products 

estimated as $39 million - $117 million a year. 

 The costs and benefits of the Postal Service’s distinct legal obligations should be 

viewed as two market distortions that compound each other and negatively affect 

the provision of Competitive products. 

 

70 Postal Regulatory Commission, Annual Report to the President and Congress, Fiscal Year 2015, January 2016, at 41, 48. 

71 Pub. L. 109-435, 120 Stat. 3198 (2006), section 703(a). 

72 Federal Trade Commission, Accounting for Laws that Apply Differently to the USPS and its Private Competitors, December 2007 (FTC Report). 
Section 701 Report - 37 - 

 Congress should consider acting to reduce the legal constraints on the Postal 

Service’s Competitive product operations. 

 The Commission should consider requiring the Postal Service to account for its 

implicit subsidies when making pricing and production decisions. 

 Worksharing and the requirement that the Competitive products cover 5.5 percent 

of institutional costs may reduce any advantage that the postal monopoly provides 

in the delivery of competitive products. 

 Long term options for addressing the distinct legal treatment between the Postal 

Service’s competitive business and its private carrier competitors include relaxing 

the current mailbox monopoly; narrowing the scope of the postal monopoly; or 

establishing the Postal Service’s Competitive products division as a separate 

corporate entity. 

FTC Report at 8-11. 

2. Commission Recommendations

The Commission notes that the challenges the Postal Service currently faces are similar to 

those discussed in the USO Report. See USO Report at 191-192. The attributes of the USO do 

not exist in a vacuum, and specific mandates for one or more attributes, such as the price 

cap on Market Dominant products or the annual appropriations requirement that delivery 

levels remain at 1983 levels, may impact how the Postal Service must consider and achieve 

other attributes. See id. at 193, 196-197. Given a flexible USO, how the Postal Service 

achieves each attribute does not remain fixed. The range of products offered may expand 

or contract to meet the needs of users of the mail. The quality of service provided for 

different products may be recalibrated to meet changing demand. Access to facilities and 

offerings may change as populations and technologies evolve. See id. at 194-198, 201. 

Comprehensive review and action on all attributes of the USO would allow for any changes 

to be considered in light of the potential effects on other attributes. 

Given the continued financial and other challenges the Postal Service currently faces, and 

the discussion above, the Commission reiterates the principal findings of its USO Report, 

and emphasizes that all of its findings remain important for Congress to consider. In 

particular, it urges Congress to consider and balance all the features of universal service as 

part of any review of changes necessary to preserve a financially viable Postal Service. Id.

at 6.

The Commission also concurs with commenters and notes that the postal industry and 

general public could benefit from an updated FTC Report with a more current accounting 

for the value of relevant legal differences between the Postal Service and its private 

competitors.
Section 701 Report - 38 - 

L. Public Representative

The Commission is statutorily required to designate an officer to represent the interests of 

the general public in all public proceedings. 39 U.S.C. § 505. The current process employed 

by the Commission involves appointing a member of its staff from the Office of General 

Counsel or Office of Accountability and Compliance as the public representative (Public 

Representative) in a given docket. Depending on the complexity of the docket, one or more 

other staff members may be assigned to assist the Public Representative in his or her 

analysis of the issues presented. The Public Representative then files comments on behalf 

of the general public in the docket to which he or she is assigned. The Public Representative 

is prohibited by both the Commission’s ex parte rules and Commission policy from 

discussing substantive matters with Commission decision-making personnel for the 

dockets on which the individual is serving as Public Representative.

In FY 2016, the Commission evaluated 299 Competitive NSAs. Each of those routine cases 

requires a 7 day window for comments for all interested persons, which includes a Public 

Representative, to ensure expeditious Commission review. For each of these cases the 

Commission assigns an advisory team of an attorney and analyst as well as a second analyst 

to serve as a Public Representative. The Public Representative teams are staffed from the 

total Commission pool of 19 analysts, who also serve to staff each Commission docket 

requiring analytical expertise. To adequately staff each Competitive NSA in FY 2016, 

therefore, there were 598 analyst assignments from that pool. Public Representative 

responsibilities for larger cases are also assigned to Commission attorneys and analysts on 

the basis of expertise. 

However, the Commission recognizes the value of the Public Representative program and 

appreciates the dedication of staff members assigned as Public Representatives. The Public 

Representative’s insight has consistently proven valuable to the Commission in its 

decision-making process. Commenters have reiterated the importance of the Public 

Representative and the value provided to members of the postal community by the 

program. 
Section 701 Report - 39 - 

II. 2011 REPORT RECOMMENDATIONS 

AND COMMENTS ON CURRENT 701 

REPORT

A. 2011 Report Recommendations

The 2011 Report focused its recommendations and review on three main areas: the Postal 

Service’s financial condition; postal rate and service matters; and improvements to 

Commission processes. 2011 Report at 1-2.

In its analysis of the Postal Service’s financial condition in FY 2011, the Commission 

recommended that Congress adjust the schedule of payments to the Postal Service RHBF 

and suggested several alternative payment options intended to alleviate Postal Service 

liquidity issues. Id. at 21-25. The 2011 Report also included a discussion of the Postal 

Service’s annual financial reporting requirements and Sarbanes-Oxley Act compliance, 

finding that the PAEA requirements resulted in improved transparency and greater cost 

savings. Id. at 25-27. 

The 2011 Report also included several recommendations regarding rate and service 

matters. First, the Commission recommended that the PAEA be amended to allow the 

Postal Service to add new Market Dominant classes of mail. Id. at 44. Second, the 

Commission noted that if Congress approves the introduction of new nonpostal services, 

there be adequate safeguards to reduce the potential for introducing unprofitable products. 

Id. at 50. The Commission also suggested that any new nonpostal products be subject to 

review under 39 U.S.C. § 404(e)(3), the same regulatory review applied to determining 

whether to “grandfather” in a nonpostal service. Id. 

Although the Commission found that the PAEA constraints on market tests were effective 

and not unduly burdensome, the 2011 Report included as its third recommendation that 

Congress consider raising the maximum revenue limitation on experimental market test 

products to further bolster Postal Service revenue streams. Id. at 70. Fourth, the 

Commission recommended that Congress clarify the PAEA to require the Postal Service to 

consult with the Commission not only in establishing service standards for market 

dominant products, but also when seeking to change existing service standards. Id. at 

64-65. The Commission did not recommend any changes to existing procedures for price 
Section 701 Report - 40 - 

adjustments but instead recommended that Congress consider allowing the Postal Service 

increased pricing flexibility based on improvements to quality of service. Id. at 40. 

Finally, the Commission made three major recommendations aimed at developing 

enhancements to improve Commission processes. The first was a recommendation that 

Congress require the Postal Service to provide the Commission with regular reports on 

retail network plans and activities. Id. at 77. The second recommendation was to clarify the 

scope of the Commission’s appellate review of post office closings, including a definition of 

“post office” that would encompass all Postal Service-operated retail facilities. Id. at 77-78. 

The third recommendation was that Congress consider allowing the Postal Service to 

obtain expedited consideration of requests for advisory opinions by the Commission. Id. at 

83-84. 

B. Comments Regarding Current 701 Report

On April 14, 2016, the Commission issued a Notice seeking public comment on the current 

701 Report. Order No. 3238. The following parties submitted comments: 

 The American Consumer Institute Center for Citizen Research (ACI)73

 A Grand Alliance to Save Our Public Postal Service (AGA)74

 Amazon Fulfillment Services, Inc. (Amazon)75

 American Postal Workers Union, AFL-CIO (APWU)76

 Citizens Against Government Waste (CAGW)77

 Don Cheney (Cheney)78

 Campaign for Postal Banking (CPB)79

 Former Utility Regulators (FUR)80

 Greeting Card Association (GCA)81

 Steven Hutkins (Hutkins)82

 

73 Comments of the American Consumer Institute Center for Consumer Research, June 14, 2016 (ACI Comments). 

74 Comments of A Grand Alliance to Save Our Public Postal Service, June 14, 2016 (AGA Comments). 

75 Comments of Amazon Fulfillment Services, Inc., June 14, 2016 (Amazon Comments). 

76 Comments of American Postal Workers Union, AFL-CIO, June 14, 2016 (APWU Comments). 

77 Comments of the Citizens Against Government Waste, June 14, 2016 (CAGW Comments). 

78 Comments of Don Cheney, June 15, 2016 (Cheney Comments). Don Cheney concurrently filed a Motion from Don Cheney for Late Acceptance 

of Comments, June 15, 2016 (Cheney Motion). The Cheney Motion is granted. 

79 Comments of Campaign for Postal Banking, June 14, 2016 (CPB Comments). 

80 Comments of Former Utility Regulators, June 15, 2016 (FUR Comments). Former Utility Regulators concurrently filed a Motion for Late 

Acceptance of Comments of Former Utility Regulators, June 15, 2016 (FUR Motion). The FUR Motion is granted. 

81 Comments of the Greeting Card Association, June 14, 2016 (GCA Comments). 
Section 701 Report - 41 - 

 Lexington Institute (Lexington Institute)83

 Elaine Mittleman (Mittleman)84

 MPA-Association of Magazine Media and Alliance of Nonprofit Mailers (MPA)85

 National Association of Letter Carriers, AFL-CIO (NALC)86

 National Association of Presort Mailers (NAPM)87

 National Taxpayers Union (NTU)88

 Linda O’Donnell (O’Donnell)89

 The Parcel Shippers Association (PSA)90

 Pitney Bowes Inc. (Pitney Bowes)91

 United States Postal Service (Postal Service)92

 The Association for Postal Commerce, Major Mailers Association, and Saturation 

Mailers Coalition (PostCom)93

 Public Representative94

 R Street Institute (R Street)95

 United Parcel Service, Inc. (UPS)96

 

82 Initial Comments by Steven Hutkins Regarding the Commission’s Section 701 Report, June 14, 2016 (Hutkins Comments).

83 Comments of the Lexington Institute, June 14, 2016 (Lexington Institute Comments). 

84 Comments of Elaine Mittleman on the Report to the President and Congress Pursuant to Section 701 of the Postal Accountability and 

Enhancement Act, June 14, 2016 (Mittleman Comments). Elaine Mittleman filed Supplemental Comments on the Report to the President and 

Congress Pursuant to Section 701 of the Postal Accountability and Enhancement Act Comments about Historic Venice, California, Post Office 

Building and Biberman Mural, July 6, 2016 (Mittleman Supplemental Comments).

85 Comments of MPA–Association of Magazine Mailers and Alliance of Nonprofit Mailers, June 14, 2016 (MPA Comments). 

86 Comment of the National Association of Letter Carriers, AFL-CIO, June 20, 2016 (NALC Comments). NALC also filed a Motion by the National 

Association of Letter Carriers, AFL-CIO for Extension of Time to File Comment, June 14, 2016 (NALC Motion). In Order No. 3372, the Commission 

denied NALC’s request for a one week extension of time to file comments, but granted NALC an extension of 3 days to file its comments. Order 

No. 3372, Order Granting Extension of Time to File Comments, June 15, 2016, at 3. Concurrently with its comments, NALC filed a Motion by the 

National Association of Letter Carriers, AFL-CIO for Late Acceptance of Comment, June 20, 2016 (June 20, 2016, NALC Motion). The June 20, 

2016, NALC Motion is granted. 

87 Comments of the National Association of Presort Mailers, June 14, 2016 (NAPM Comments). 

88 Comments of the National Taxpayer Union, June 14, 2016 (NTU Comments). 

89 Comments of Linda O’Donnell, June 14, 2016 (O’Donnell Comments).

90 Comments of the Parcel Shippers Association, June 14, 2016 (PSA Comments). 

91 Comments of Pitney Bowes Inc., June 14, 2016 (Pitney Bowes Comments). 

92United States Postal Service Comments in Response to Order 3238, June 14, 2016 (USPS Comments). 

93 Comments of the Association for Postal Commerce, Major Mailers Association, and Saturation Mailers Coalition, June 14, 2016 (PostCom 

Comments). 

94 Public Representative Comments, June 15, 2016 (PR Comments). The Public Representative concurrently filed a Motion of the Public 

Representative for Late Acceptance of Comments, June 15, 2016 (PR Motion). The PR Motion is granted.

95 Comments of R Street Institute, June 14, 2016 (R Street Comments). 

96 Comments of the United Parcel Service, Inc. on the Section 701 Report, June 14, 2016 (UPS Comments). 
Section 701 Report - 42 - 

 Valpak Direct Marketing Systems, Inc. and the Valpak Franchise Association, Inc. 

(Valpak)97

 David Yao, (Yao)98

1. Comments on Postal Service Financial Situation

a. Financial Position and Liquidity 

In Order No. 3238, the Commission requested comments on the PAEA’s impact on the 

Postal Service’s overall financial position, and suggestions for legislative recommendations. 

Order No. 3238 at 5. The Commission received comments from the Postal Service, APWU, 

AGA, PSA, GCA, NAPM, Yao, NALC, PostCom, Pitney Bowes, MPA, and the Public 

Representative. These commenters collectively discuss a number of areas related to the 

Postal Service’s financial situation, including the RHBF, the expansion of Postal Service 

borrowing authority, and improvements to accounting methods. 

The Postal Service states that it has sustained net losses each year since the PAEA was 

implemented. USPS Comments at 4. It notes that even when discounting RHBF liabilities, it 

sustained losses from FY 2009 through FY 2013, and would have continued to do so in FY 

2014 and FY 2015 but for an exigent surcharge which has since expired. Id. In describing its 

own financial challenges, the Postal Service cites low liquidity, exhaustion of U.S. Treasury 

credit, and a lack of cash to meet current obligations and for much needed capital 

investments. Id. at 5-6. The Postal Service attributes its ability to maintain sufficient 

liquidity only to its default on legally mandated RHBF payments. Id. at 7. 

The Postal Service lists four factors as the cause of its financial difficulties. First, it notes the 

decline in total mail volumes and a shift in mail mix from high- to low-margin products. Id.

at 8-9. Second, it points to the price cap required by the PAEA. The Postal Service notes its 

inability to raise prices above the CPI-U based price cap, emphasizing that the remaining 

mail volumes do not generate enough to cover the Postal Service’s costs. Id. at 9. Third, it 

points to its own fixed or growing infrastructure costs, which are inflexible. Declining 

volumes dictate that there is less and less revenue to pay for the infrastructure costs 

required to maintain a delivery network of 155 million delivery points. Id. at 9-10. Fourth, 

the Postal Service suggests that the PAEA limits its flexibility concerning cost structure, 

particularly with respect to personnel-related costs. Id. at 10-11.

 

97 Valpak Direct Marketing Systems, Inc. and the Valpak Franchise Association, Inc. Comments on Commission Report to the President and 

Congress Pursuant to Section 701 of the Postal Accountability and Enhancement Act, June 14, 2016 (Valpak Comments). 

98 Comments of David Yao, June 15, 2016 (Yao Comments). 
Section 701 Report - 43 - 

The Postal Service states that despite its constraints, it has been successful in reducing 

operating costs in response to declining volumes. Id. at 11. It notes that it has reduced its 

cost base by approximately $15 billion annually through rationalization of its retail, 

processing, transportation, and delivery networks, as well as labor cost reductions. Id. It 

cites increased total factor productivity (TFP)99 in each of the past 6 years, despite 

declining volume. Id. at 11-12. However, the Postal Service suggests that it has taken 

advantage of most cost-cutting initiatives available to it in light of its universal service 

obligation. Id. at 12. 

b. Postal Service Retiree Health Benefits Fund

Several commenters suggest changes regarding the funding of the RHBF, including removal 

of any funding requirement. For example, APWU suggests that while “the Postal Service is 

required to fully pre-fund future retiree health benefits 75 years in advance over a ten-year 

period,” no other public or private entity does so. APWU Comments at 1-2. APWU suggests 

Congress eliminate the prefunding mandate and legislate a refund of payments to allow the 

Postal Service the necessary cash flow to “make the Postal Service viable again.” Id. at 2. 

AGA characterizes the PAEA’s prefunding requirement as “an unfair crushing financial 

mandate” that no other government agency is forced to bear, and notes that without the 

mandate, the Postal Service would have enjoyed an operating surplus over the previous 3 

years. AGA Comments at 2. GCA states that “removal of the impracticable schedule for 

prefunding” might do more to improve the effectiveness of the PAEA than any other single 

change. GCA Comments at 1. Yao characterizes the prefunding requirement as “a mistake

by Congress, which has severely constrained access to capital by the USPS.” Yao Comments 

at 1.

Other commenters suggest changes to the prefunding schedule and other modifications 

regarding the RHBF, rather than elimination in its entirety. The PAEA requires the Postal 

Service to prefund 100 percent of its retiree health benefits liability. 5 U.S.C. § 8909a. The 

Postal Service, citing lower funding-level targets in the private sector, state governments, 

and other federal agencies, proposes a target of 80 percent. USPS Comments at 22-23.100

NALC notes that it has previously proposed a prefunding target that matches private 

industry best practice, between 33 and 50 percent or, alternatively, a funding target 

 

99 “Total factor productivity (TFP) measures the change in the relationship between outputs (weighted workload) and inputs (resources used) 

over a period of time. Total workload is calculated using weighted mail volumes, miscellaneous output, and the change in delivery points. 

Resources consist of labor, materials (including purchased transportation), and deployed capital assets. Workload growth, less growth in 

resources used, equals TFP growth.” FY 2015 Financial Report at 18. 

100 The Postal Service’s comments echo a set of proposed reforms already presented to Congress by Megan J. Brennan, Postmaster General and 

Chief Executive Officer. See House Oversight and Government Reform Committee Hearing, “Reforming the Postal Service: Finding a Viable 

Solution,” 114th Congress (May 11, 2016). 
Section 701 Report - 44 - 

contingent upon the Postal Service’s profitability. NALC Comments at 3. The Public 

Representative proposes a cancellation of RHBF payments which have already been 

defaulted on by the Postal Service. PR Comments at 33. 

Additionally, the Postal Service has proposed full Medicare integration of the Federal 

Employees Health Benefits Program (FEHBP). USPS Comments at 20. It notes that 9 

percent of Medicare-eligible annuitants and dependents do not take advantage of Medicare 

Part A, and 27 percent do not take advantage of Medicare Part B. Id. It suggests that “[n]o 

rational self-funding employer would pay Medicare taxes, yet continue to pay the full costs 

of health benefits that could be covered by Medicare in the first instance.” Id. The Postal 

Service proposes the creation of a separately-rated Postal Service plan within FEHBP, 

appropriately assigning claims costs to Medicare, and establishing an Employer Group 

Waiver Plan for Medicare Part D prescription drug benefits. It asserts this would eliminate 

94 percent ($54 billion) of the current unfunded RHB liability. USPS Comments at 20-21.

Valpak also supports full Medicare integration. Valpak Comments at 6. PostCom considers 

the prefunding requirement to be an “artificial” obligation, and suggests that its removal 

coupled with requiring Postal Service retirees to participate in Medicare would lead to an 

even greater reduction in liabilities. PostCom Comments at 4. MPA considers unused 

contributions to Medicare an “unjustified subsidy of the Treasury by the Postal Service and 

its customers.” MPA Comments at 1.

The Postal Service also notes that the PAEA requires it to invest 100 percent of RHBF assets 

in low-yield Treasury securities. USPS Comments at 21. It points to other post-retirement 

funds for private-sector employees and for other public-sector employees that invest assets 

for growth in order to lower unfunded employer liability. Id. The Postal Service states that 

if RHBF assets had been allocated according to the Thrift Savings Plan’s (TSP’s) L 2040 

portfolio, the unfunded liability would have been 18.4 percent lower in FY 2015. Id. at 22. 

The Postal Service proposes that 50 percent, and possibly up to 75 percent, of the fund’s 

assets be invested with TSP’s longest-term lifecycle fund. Id. 

NALC also discusses RHBF fund investment in its comments, concluding that more diverse 

investment will “over the long run, improve the balance sheet of the OPM and reduce the 

cost of pre-funding for the Postal Service” allowing for affordable postage rates and better 

service to America’s mailers and citizens. NALC Comments at 8.

Postmaster General Brennan’s plan, which includes the three proposals outlined in the 

Postal Service’s comments: a reduced funding target, full Medicare integration, and less 

restrictive investment is supported by PSA and NAPM. See PSA Comments at 2; NAPM 

Comments at 2-3.
Section 701 Report - 45 - 

In the 2011 Report, the Commission recommended that any excess CSRS funds caused by 

an overstated liability be transferred into the RHBF. See 2011 Report at 25. Both the Public 

Representative and Pitney Bowes support re-adopting the recommendation as a means of 

improving the overall financial situation. See PR Comments at 35; Pitney Bowes Comments 

at 1-2.

c. Borrowing Authority 

As noted above, the Postal Service exhausted its statutory borrowing authority of $15 

billion. FY 2015 Financial Report at 2. The Public Representative states that the Postal 

Service is consequently without flexibility to make necessary capital investments. PR 

Comments at 34. The Public Representative recommends that borrowing authority be 

increased to account for inflation in light of the need for financial flexibility and the need to 

make necessary investments. Id. at 35. 

d. Accounting Standards 

MPA suggests that “the Commission should recommend to Congress a study of the market 

value of the Postal Service’s real estate assets.” MPA Comments at 5. MPA notes that the 

Postal Service currently accounts for the net book value of real property, which does not 

reflect the Postal Service’s true financial resources. Id. MPA goes on to assert that the net 

book value of the Postal Service’s real estate is approximately $13.2 billion, and the fair 

market value has been estimated as high as $85 billion. Id. at 6. MPA posits that if the real 

estate was sold, it could yield its fair market value to satisfy its liabilities. Id. at 5. 

Similarly, PostCom identifies property, plant, and equipment (PPE) as an area carried on 

balance sheets at the original cost. PostCom Comments at 5. PostCom states that because 

PPE often has a value far in excess of the original cost due to real estate appreciation, the 

PPE account of the Postal Service is a hidden strength. Id. It points out that the National 

Postal Museum Property was purchased for $47 million, but in FY 2011 had an assessed tax 

value of $304 million. Id. at 6. PostCom urges that the “true value” of Postal Service assets 

be accounted for in assessments of the Postal Service’s financial situation. Id. at 5. 

2. Comments on Market Dominant Rate System

a. Price Cap 

Several parties noted that discussion of the price cap system is best reserved for the 

Section 3622 Review. USPS Comments at 26; GCA Comments at 2. Several parties, including 

PostCom and NAPM, express support for the current price cap system. PostCom Comments 

at 8; NAPM Comments at 4. However, PostCom asserts that costing and accounting 

methods should be improved to make the price cap system work more effective and 

efficiently. PostCom Comments at 9-10. In particular, PostCom asserts that the Postal 

Service should fully utilize data generated by the IMb system and other data systems to 
Section 701 Report - 46 - 

evaluate the effectiveness of cost-reduction initiatives, identify cost drivers within the mail 

processing system, and develop more efficient pricing. Id. at 11. 

The Postal Service, Valpak, and the Public Representative all maintain that major changes 

are needed to the price cap system. The Postal Service asserts that the price cap has been 

ineffective in allowing it to raise the revenue it needs to fulfill its statutory obligations as 

well as ensure the financial sustainability of universal service. USPS Comments at 26. 

Valpak states that the price cap does not remedy unfair pricing within a mail class, and 

urges Congress to amend the PAEA in a way that would prevent cross-subsidies within 

classes and require each Market Dominant product to cover its incremental cost in addition 

to making a “meaningful” contribution to institutional costs. Valpak Comments at 12, 26. 

The Public Representative opines that an amendment to the price cap system is necessary 

to factor in declining mail volumes and an increasing number of delivery points. PR 

Comments at 46-49. He discusses two potential amendments to the price cap previously 

proposed by the Postal Service’s inspector general101 — the revenue per delivery point 

adjustment and the hybrid cap adjustment methods — and notes that either of these 

methods would pose a superior alternative than the existing system. PR Comments at 50-

53.

GCA and NAPM both raise a recommendation from the 2011 Report of the potential for the 

Postal Service to obtain increased pricing flexibility for quality of service enhancements. 

2011 Report at 40. NAPM expresses support for this idea, asserting that such a credit 

would drive efficiencies in its operations and improve service performance. NAPM 

Comments at 6. GCA, however, opposes the credit, as it states that Market Dominant users 

would provide the majority of revenue for the benefit of Competitive users. GCA Comments 

at 5. 

b. Exigent Surcharge 

Several parties comment on the recent exigent surcharge removal. ACI asserts that the 

surcharge was detrimental to postal customers, and opposes any renewal or reinstatement 

of the surcharge because it would fail to address systemic problems of the Postal Service. 

ACI Comments at 1-3. APWU presents the opposite view, and states that the Commission 

should restore the surcharge because removal was a “boon to the major mailers . . . at a 

time when the Postal Service needs to restore its capital stock.” APWU Comments at 4. GCA 

points to the surcharge as an example that the current price cap system is working and that 

an exigent increase can be counted on by the Postal Service in the event of another 

economic downturn. GCA Comments at 2. The Postal Service restates its position that 

 

101 United States Postal Service, Office of Inspector General, Revisiting the CPI-Only Price Cap Formula, Report Number: RARC-WP-13-007, April 

12, 2013. 
Section 701 Report - 47 - 

Congress reinstate the exigent surcharge and make it part of the rate base, at least pending 

the resolution of the Commission’s Section 3622 Review. USPS Comments at 26. Valpak 

opposes legislative reinstatement of the surcharge and asserts that such a measure would 

be a repudiation of the pricing mechanism established in the PAEA. Valpak Comments at 5. 

c. Worksharing 

In its solicitation for comments in this docket, the Commission specifically sought public 

input on “the current operation of the provisions regarding workshare discounts, as well as 

insights on how the discounts and exceptions have functioned in practice.” Order No. 3238 

at 6. Of those who commented on worksharing, GCA alone stated that it was in favor of the 

status quo for worksharing discounts. GCA Comments at 7-8. Other commenters, including 

PSA, Pitney Bowes, Valpak, NAPM, the Public Representative, and APWU proposed 

suggestions for improvements to worksharing discounts. 

PSA, NAPM, Pitney Bowes, and Valpak all express support for a requirement that 

worksharing passthroughs (or the amount of discount relative to avoided costs) also be 

prohibited from falling below 100 percent. PSA asserts that a “soft floor” for discounts 

would promote efficiency and ensure the work is being performed by the lowest cost 

provider. PSA Comments at 6. Pitney Bowes urges that several exceptions to the “soft floor” 

be allowed, subject to certain exceptions. Pitney Bowes Comments at 16. NAPM notes that 

such a rule would be consistent with statutory objectives and factors of the PAEA and 

would help improve operational efficiency. NAPM Comments at 8. Valpak suggests that the 

Commission should have the authority to adjust passthroughs upward if they fall below 

100 percent. Valpak Comments at 28. The Postal Service opposes the idea of a soft floor on 

worksharing discounts because it states that such an approach would reduce its pricing 

flexibility. USPS Comments at 29. 

The Public Representative recommends legislative changes to require the Postal Service to 

adjust workshare discounts annually to reflect its most recent cost avoided estimates. PR 

Comments at 55. He states that this change would ensure that discounts more accurately 

reflect avoided costs. Id. 

APWU states that the Commission has been “passive” on excessive cost avoidances to date, 

and suggests that Congress authorize private complaints for unwarranted discounts. APWU 

Comments at 5. 
Section 701 Report - 48 - 

3. Comments on Competitive Product Rate System

a. Comments on Competitive Contribution to Institutional 

Cost 

The Commission received a number of comments pertaining to the appropriate 

institutional cost share requirement. Amazon, PSA, and the Postal Service oppose 

increasing the appropriate share from 5.5 percent of institutional costs. PSA and Amazon 

urge the Commission to eliminate the appropriate share requirement altogether. However, 

they advocate deferring consideration of the appropriate share to the next 5 year review or 

alternatively to the next phase of Docket No. RM2016-2. In Docket No. RM2016-2, Proposal 

Three, UPS proposed to increase the appropriate share of total institutional costs that 

Competitive products must cover.102

Amazon opines that “[u]nder current business conditions, the 5.5 percent minimum 

contribution requirement is essentially irrelevant.” Amazon Comments at 5. It notes that 

the contribution made by Competitive products to institutional costs considerably exceeds 

5.5 percent. It also suggests that if economic conditions change and the Postal Service 

cannot meet the contribution requirement, it “should be allowed to charge contributionmaximizing prices rather than lose the competitive business entirely.” Id. It dismisses the 

notion that Competitive products would be subsidized by Market Dominant products if 

Competitive products didn’t cover a share of the Postal Service’s fixed costs. It contends 

that as long as the revenue of a product or a group of products covers the marginal and 

incremental costs of those products, the products are not subsidized. Id. at 6. 

Amazon also notes that the Postal Service offers destination-entry prices for its 

Competitive services. Id. at 7. It asserts that the Postal Service’s economies of scale, scope 

and density are largely in last-mile delivery. Id. It suggests that the fact that the Postal 

Service shares these advantages with its competitors by “unbundling last-mile delivery 

from upstream functions, and offering last-mile delivery to competitors at reasonable 

rates” minimizes the risk that the Postal Service’s pricing could injure competition. Id. It 

observes that the Postal Service’s primary competitors “enjoy healthy and growing profits.” 

Id.

 

102 The Commission discussed the importance of the “appropriate share” requirement in Order No. 1449. It stated that: “[a] primary function of 

the appropriate share requirement is to ensure a level playing field in the competitive marketplace. The Postal Service’s competitors incur 

certain fixed operating costs. If the Postal Service’s competitive products were provided by a stand-alone enterprise, it too would incur fixed 

operating costs. The appropriate share requirement could be said to represent the fixed costs of the competitive enterprise and should reflect 

the ways in which institutional resources are spent on the competitive enterprise. If the Postal Service’s competitive products were not 

required to contribute an appropriate share towards the institutional costs of the enterprise, this could result in the Market Dominant products 

cross-subsidizing the fixed costs of the stand-alone competitive enterprise. For this reason, the appropriate share requirement is an important 

safeguard to ensure fair competition on the part of the Postal Service.” Order No. 1449 at 13. 
Section 701 Report - 49 - 

PSA contends that the existing Competitive rate system has worked as intended. Similar to 

Amazon, it notes that the contribution of Competitive products to institutional costs is 

“substantially above 5.5 percent and growing.” PSA Comments at 3. It asserts that because 

the contribution made by Competitive products far exceeds 5.5 percent, the current 

minimum contribution requirement has no effect on Postal Service pricing. It therefore 

advises the Commission to eliminate the minimum contribution requirement. Id.

The Postal Service asserts that it has been attempting to enhance contribution from 

Competitive products, as evidenced by the fact that Competitive products consistently

outperformed the minimum 5.5 percent “appropriate share” requirement. It asserts the 

playing field is more likely tilted against the Postal Service than competitors. It cites a 2008 

report by the FTC that concluded that the Postal Service’s legal status places it at a 

competitive disadvantage and artificially heightens the prices of its Competitive products. 

USPS Comments at 15-16. It asserts that the situation is unlikely to have changed 

significantly in the intervening years. Id. at 16. It suggests that increasing the appropriate 

share would further tilt the playing field against the Postal Service. Id.

b. Comments on Competitive Products Costing 

Commenters express a range of opinions regarding the proper methodology the 

Commission should utilize when calculating Competitive products’ attributable cost. 

Commenters also express varied opinions regarding subsidization of the Postal Service’s 

Competitive products by its Market Dominant products. Under the current attribution 

methodology, Competitive products cover their attributable cost. However, changes to the 

cost attribution methodology may affect the cost coverage of products. 

UPS asserts that the methodology used by the Commission puts the Postal Service at a 

competitive advantage. UPS Comments at 3. It questions how the Postal Service allocates 

cost for new large investments made to develop the Postal Service’s parcel business. Id.

UPS proposes that the Postal Service “be required to provide a clear and complete 

disclosure of how it is accounting for new large investments, such as those requiring over 

$100 million in capital investment or $100 million in increased operational costs over five 

years, including a detailed description of how those costs are being attributed to individual 

products under 39 U.S.C. § 3633(a)(2).” Id. at 5. UPS asserts that either the Commission 

should impose this reporting requirement going forward or it should ask Congress to 

mandate it. Id.

Amazon and PSA opposed the methodological changes proposed by UPS in Docket No. 

RM2016-2. They opined that the current attributable and incremental cost tests adequately 

account for the marginal and incremental costs of the Postal Service. Amazon and PSA 

contended that Postal Service’s domestic Competitive rates satisfy the prohibition against 
Section 701 Report - 50 - 

subsidization of Competitive products by Market Dominant products. Amazon Comments 

at 2, PSA Comments at 3. 

The Postal Service also opposed UPS’s proposals. Unlike UPS, it contended it is at a 

competitive disadvantage compared with private carriers. It urged the Commission to

“reject any call to recommend changes to the cost attribution standards in 39 U.S.C. §§ 

3622(c)(2) and 3631(b).” USPS Comments at 15. 

Former Utility Regulators discuss the importance of preventing the subsidization of 

Competitive products by “monopoly” products. FUR Comments at 1-2. It suggests that the 

Commission ask Congress for whatever tools it needs to prevent cross-subsidization and 

ensure that Competitive products cover their costs. FUR Comments at 2. With its 

comments, Former Utility Regulators includes a white paper titled “Cross-Subsidization: 

Applying Lessons From Utility Regulation To The United States Postal Service,” Bryan 

Tramont, Raymond Gifford, and Greg Sopkin, June 14, 2016 (White Paper). The White 

Paper provides an overview of how utility regulators, across a variety of sectors, have dealt 

with “issues presented when a monopoly provider of utility services also provides services 

in competitive markets.” FUR Comments at 1. Specifically, the White Paper discusses the 

experience of utilities in preventing cross-subsidization of Competitive products by 

monopoly products and reviews several regulatory alternatives for preventing crosssubsidies including structural separation, line of business restrictions, and accounting 

separations. With regard to accounting separations, the White Paper emphasizes the 

importance of accurate and detailed cost data and transparency regarding the cost 

assignment methodologies employed. White Paper at 10. It concludes that “[l]essons from 

the utility sector demonstrate that, in order to be effective in preventing cross 

subsidization, accounting separation must, at a minimum: 1) be based on accurate and 

reliable cost data; 2) approach cost assignment and allocation in a transparent manner; and 

3) direct assign costs to the maximum extent possible, leaving to allocation only those joint 

and common costs that are truly incapable of being direct assigned.” Id. at 20. 

Lexington Institute includes a paper with its comments titled “Practices of the U.S. Postal 

Service That Imply Anti-Competitive Behavior: Historical Parallels and Remedies Across Other 

Regulated Sectors”, Don Soifer, June 14, 2016 (Soifer Paper). 

The Soifer Paper asserts that the cost burden assigned to regulated products is 

disproportionate to that imposed on Competitive products, effectively giving the latter a 

financial boost, if not a free ride. Soifer Paper at 1. It discusses legal and regulatory 

remedies based on structural separations, as well as accounting separations. Id. The Soifer 

Paper discusses the experience of monopolies in the telecommunications, electric utilities 

and government research sectors. Id.
Section 701 Report - 51 - 

The Soifer Paper notes that “[b]ecause mail and packages are so physically different that 

their processing requires separate infrastructure, some potential for structural separation 

between monopoly and competitive activities is possible without significant disruption to 

economies of scale for market-dominant mail products.” Id. at 14. Where structural 

separation of activities is not practical, the Soifer Paper asserts that “accounting separation 

should establish a fair market value charge for utilization of shared infrastructure . . . .” Id.

4. Comments Summary

a. Competitive NSAs 

Amazon and PSA both submitted comments in favor of the current statutory system for 

reviewing Competitive NSAs. Amazon expresses the view that the current review system 

for Competitive NSAs should remain unchanged, as the current products generate 

additional volume and contribution for the Postal Service. Amazon Comments at 10. PSA 

views Competitive NSAs as a major success of the PAEA. PSA Comments at 5. 

b. Commission Procedures Regarding Non-public NSA 

Information 

Both PSA and APWU commented on the Commission’s current procedures for obtaining 

access to non-public materials. PSA is not opposed to the current process by which 

interested parties may request and be granted access, subject to protected conditions, to 

non-public material regarding the Postal Service’s costs, but asserts that the bar for 

justifying access to customer-specific NSA information should be much higher. PSA 

Comments at 5. PSA does not propose an alternative standard for accessing customerspecific information. Id.

APWU takes the opposite view, asserting that the confidentiality of contract partner 

identity may give the contract partner an unfair advantage over its competitors, and urges 

Congress and the Commission to require that NSAs (both Competitive and Market 

Dominant) be made public “to provide for public scrutiny of deals that the Commission 

currently reviews in secret.” APWU Comments at 6.

c. Comments on Market Dominant NSAs 

No party submitted comments regarding international Market Dominant NSAs. The Public 

Representative, Pitney Bowes, PostCom, and Valpak all submitted comments about 

domestic Market Dominant NSAs.

The Public Representative maintains that the Commission’s approach of using elasticities 

to determine if a domestic Market Dominant NSA will improve the net financial position of 

the Postal Service is consistent with the PAEA. PR Comments at 60. He also states that the 

PAEA sets the appropriate standards to ensure that the Postal Service does not engage in 
Section 701 Report - 52 - 

unprofitable agreements, and thus recommends that the current standard remain 

unchanged. Id. at 60-61.

Pitney Bowes characterizes the current regulatory approval process for domestic Market 

Dominant NSAs as “expensive and uncertain” and goes on to state that the standard 

adopted by the Commission for establishing net financial improvement to the Postal 

Service’s financial situation has had a chilling effect on the number of Market Dominant 

NSAs negotiated by the Postal Service. Pitney Bowes Comments at 19. It urges the 

Commission to reassess how it evaluates risk for domestic Market Dominant NSAs, stating 

that a lower burden of proof or a higher risk tolerance would both be justified. It also 

asserts that the Commission should encourage the Postal Service to pursue domestic 

Market Dominant NSAs that will improve the operational efficiency or enhance the 

performance of mail preparation, processing, transportation, and other functions. Id. 

PostCom concurs with Pitney Bowes, stating that domestic Market Dominant NSAs have 

not lived up to their potential because the metrics and process employed by the 

Commission to evaluate NSAs discourages both mailers and the Postal Service from 

entering into these agreements. PostCom Comments at 13. It asserts that review of such 

agreements should be limited, and so long as the contract does not represent an abuse of 

market power and is available to similarly situated mailers on reasonably equivalent terms, 

it should be approved by the Commission. Id.

Valpak asserts that overall, domestic Market Dominant NSAs have been highly unprofitable. 

Valpak Comments at 30-31.

5. Comments on Post Office Closings and 

Consolidations

a. Comments Received in Response to Order No. 3238

The Commission received comments on post office closings that suggest these closings 

have contributed to the Postal Service’s declining levels of service. APWU cites declining 

service dating back to the Postal Service’s “massive program of plant closings and 

consolidations since [FY] 2012.” APWU Comments at 6. It calls for a mandatory reversal of 

consolidations of the past 5 years, and cancellation of any consolidations planned for FY 

2017. Id. at 6-7.

Commenters address both the scope of the Commission’s review of appeals and the 

definition of the term “post office.” Mittleman and Hutkins express disagreement with the 
Section 701 Report - 53 - 

opinion issued by the U.S. Court of Appeals for the District of Columbia Circuit in Mittleman 

v. Postal Regulatory Commission,

103 which held that Commission orders concerning appeals 

of closings are not subject to judicial review. See Hutkins Comments at 3; Mittleman 

Comments at 15-16. 

PostCom argues that as long as adequate service is maintained, the Postal Service should be 

allowed flexibility to close or consolidate post offices for economic efficiency. PostCom 

Comments at 16. It further maintains that the Postal Service should be afforded means of 

mitigating exogenous costs, such as co-location of additional government services in postal 

facilities to maximize the value of the location to the community. Id.

Both Hutkins and Mittleman also recommend Congress and the Commission clarify the 

definition of a post office. Mittleman suggests abolishing the concept of stations and 

branches, recommending that there be no distinction between main post offices, stations, 

and branches. Mittleman Comments at 15. Both Mittleman and Hutkins suggest clearer 

definitions of “rearrangements” of postal retail facilities in a community Hutkins Comments 

at 2; Mittleman Comments at 13-14.

The Public Representative proposes changes to the Postal Service’s emergency suspension 

procedures. PR Comments at 65. His proposed changes include a mandatory feasibility 

study, with a deadline for the study’s completion, as well as a deadline for the Postal 

Service to propose discontinuance of a facility to prevent an emergency suspension from 

operating as a de facto closure without any right to appeal. Id. He supports the 

Commission’s 2011 Report recommendations that the Postal Service be required to 

provide regular reports on its plans and activities regarding its retail network, and that the 

scope of the Commission’s appellate review be clarified to include Postal Service stations 

and branches. Id. at 66. 

Cheney proposes that Congress require the Postal Service to offer mitigation measures to 

displaced Postal Service employees, including reemployment assistance and early 

retirement benefits. Cheney Comments at 1. 

b. Comments Submitted in Docket No. PI2016-2 

The Commission has determined in appeals cases that Postal Service decisions to relocate 

retail facilities within the same community are not closings or consolidations and, 

therefore, fall outside the scope of the Commission’s jurisdiction under 39 U.S.C. § 404(d). 

See Order No. 436 at 7. Under this rationale, the Commission has dismissed several post 

office closing appeals and found that transfers of retail operations constituted relocations

 

103 Mittleman v. Postal Regulatory Commission, Nos. 12-1095, 12-1110, 12-1157 (D.C. Cir. filed Jul. 8, 2014). 
Section 701 Report - 54 - 

which it lacks jurisdiction to review under section 404(d). See Order No. 2862 at 5. 

Similarly, the Commission has consistently dismissed several post office closing appeals on 

the grounds that the Postal Service action constituted a rearrangement of retail facilities 

within a community. 

The Commission received several comments on relocation and rearrangement of postal 

services in Docket No. PI2016-2. The comments reflected competing perspectives on the 

Commission’s jurisdiction in appeals of post office relocations and rearrangements. Many 

commenters proposed a broader interpretation of the Commission’s authority, suggesting 

that limiting jurisdiction permits the elimination of a community’s access to effective or 

regular postal services without the statutory safeguards for process.104 On the other hand, 

the Postal Service’s comments argued for a more limited interpretation of the scope of 39 

U.S.C. § 404(d), stating that in addition to a determination that the Commission lacks 

jurisdiction to review relocations and rearrangements, closings of branches and stations 

should likewise not be subject to review. Docket No. PI2016-2, USPS Comments at 1. 

CPUs and Community Post Offices (CPOs) are types of contractor-operated (as opposed to 

Postal Service-operated) facilities. See 39 C.F.R. § 241.3(a)(2)(ii). A CPU is a contract 

station, contract branch, or CPO operated under contract by persons who are not postal 

employees in a space provided by the contractor.105 Village Post Offices (VPOs), although 

operated under a contract, are not classified by the Postal Service as a CPU.106 While CPUs 

generally do not fall within the scope of 39 U.S.C. § 404(d), in select circumstances when 

the Commission determines that a CPU is the sole source of postal retail services to a 

community, it has found that section 404(d) (both the statutory intent and language) 

justifies the Commission exercise of review authority over sole source CPU closures and 

consolidations.107

Comments on the “sole source” standard for the exercise of the Commission’s review 

authority were mixed. The Postal Service urged that Commission review of CPU closures 

 

104 See, e.g., Docket No. PI2016-2, Public Representative's Comments on the Commission's Ability to Review Postal Service Determinations to 

Close or Consolidate Any Post Office, February 5, 2016, at 7. 

105 Postal Operations Manual section 123.126, Issue 9, July 2002, Updated With Postal Bulletin Revisions Through October 31, 2013 (POM); see 

also, Publication 32 – Glossary of Postal Terms, July 2013, https://about.usps.com/publications/pub32/ (Glossary of Postal Terms), defining a 

CPU as a “postal unit that is a subordinate unit within the service area of a main Post Office. It is usually located in a store or place of business 

and is operated by a contractor who accepts mail from the public, sells postage and supplies, and provides selected Special Services (e.g., Postal 

Money Order or Registered Mail). Also called contract branch, contract station, and community Post Office unit.”

106 See Village Post Offices Fact Sheet, July 2011, https://about.usps.com/news/electronic-press-kits/expandedaccess/assets/pdf/vpo-fact-sheet110726.pdf. VPOs, like CPUs and CPOs, are part of the Postal Service’s “Approved Postal Provider” network and are retail outlets for postal 

products and services operated by a third party. 

107 See Docket No. A83-30, In the Matter of Knob Fork, West Virginia 26579, Commission Opinion Remanding Determination for Further 

Consideration 39 U.S.C § 404(b)(5), January 18, 1984, at 7. 
Section 701 Report - 55 - 

“impedes the effective management and operational authority of the Postal Service” and is 

otherwise not supported by legislative history. Docket No. PI2016-2, USPS Comments at 

10-11. Other commenters argue CPUs should be considered under the definition of “post 

office” and thus be subject to review, and that the sole source standard is applied too 

narrowly.108

6. Comments on Service Performance

The Commission received a range of comments on different areas related to service 

standards and performance. 

Several commenters note generally that service performance has declined. APWU states 

that continued declining service will lead to a decline in volumes, and that Congress should 

restore service standards to pre-2012 levels. See APWU Comments at 8-9. Similarly, AGA 

expresses concern that the Postal Service has “slowed mail service, closed community 

based Post Offices and mail processing facilities, slashed hours of operations, tried 

ceaselessly to end six day service as well as door to door delivery.” AGA Comments at 2. 

AGA believes that Congress should restore service standards to pre-2012 levels, and 

protect 6-day and door-to-door delivery. Id. at 3. 

O’Donnell, a Postal Service employee, cited the consolidation of mail processing facilities as 

a cause of delayed mail. O’Donnell Comments at 1. O’Donnell also suggests reducing 

customers’ time in line by “properly staffing post office windows” and restoring service 

hours. Id.

PostCom focuses its comments on the Commission’s oversight of service standards and 

performance. See PostCom Comments at 16-17. PostCom notes that the Postal Service 

“cannot even meet the standards it has set for itself” and that it is imperative that the 

Commission oversee a move to higher quality operations that truly reduce costs and meet 

the needs of customers. Id. at 17. PostCom suggests that the Commission have ultimate 

authority to set and enforce service standards. Id. at 18. 

Valpak focuses its comments on the recommendation in the Commission’s 2011 Report 

that Congress consider providing an opportunity for the Postal Service to achieve increased 

pricing authority for increases in quality of service. See 2011 Report at 28, 40. Valpak 

recommends that consideration of service quality pricing authority should be deferred. 

Valpak Comments at 33. It states that should such a system be implemented, it should cut 

both ways as a financial incentive for improving service and as a penalty for declining 

 

108 See, e.g., Docket No. PI2016-2, Reply Comments of Steve Hutkins on the Commission’s Jurisdiction Over Post Office Closings, March 29, 

2016, at 13-15 (Docket No. PI2016-2, Reply Comments of Steve Hutkins). 
Section 701 Report - 56 - 

service. Id. at 31-32. Valpak states that until better service performance data are available, 

and given the Postal Service’s low financial liquidity, “implementation of any meaningful 

penalty provision for service degradation likely would be impractical as it might threaten 

the Postal Service’s continued financial viability.” Id. at 32-33. 

UPS comments on the relationship between service performance and the Postal Service’s 

prioritization of certain products. Specifically, UPS notes that service performance results 

for Standard Mail Carrier Route, Standard Mail Flats, and Standard Mail Letters have not 

met their targets for several years and have not shown significant improvement, while 

parcels and other high density shipments “exceeded the performance targets set by the 

Postal Service.” UPS Comments at 9. UPS maintains that these results are reflective of the 

Postal Service prioritizing service standards “for specific high-growth products, like 

parcels, over the service standards for monopoly products, like letter mail.” Id. at 8-9. UPS 

urges Congress to require the Postal Service to adhere to quality of service reporting 

requirements of 39 U.S.C. § 3652 for its Competitive product lines as well as Market 

Dominant products. Id. at 10. UPS says “[this requirement would allow for a fair 

comparison of the quality of service being provided for the Postal Service’s marketdominant business” against quality of service for its Competitive products business. Id. 

7. Comments on Nonpostal Services

The Commission received comments on nonpostal services from the Postal Service, AGA, 

APWU, Pitney Bowes, NAPM, CAGW, CPB, Yao, and O’Donnell. The commenters fall into 

three general categories: those that favor expanded nonpostal services, those that oppose 

the expansion of nonpostal services, and those that favor limited expansion. Several of 

these comments offered specific nonpostal services that should be considered. Other 

comments suggested that the Postal Service should not offer any nonpostal services at all. 

Commenters in favor of expanded nonpostal services include CPB, APWU, AGA, Yao, and 

O’Donnell. CPB states that 28 percent of domestic households lack access to affordable 

financial services and asserts that because the Postal Service is a trusted, accessible, and 

secure government agency with the world’s largest retail network, it is in a unique position 

to fill the public need. CPB Comments at 1-2. CPB notes that the U.S. has a tradition of postal 

banking and continues to offer domestic and international money orders and wire 

transfers. CPB argues that permitting the Postal Service to offer financial services (e.g.,

ATMs, savings accounts, and small dollar loans) would both serve the public and 

strengthen the Postal Service financial situation. Id. at 2. 

Other commenters, including APWU, Yao, AGA, and O’Donnell, support the expansion of 

postal banking. APWU Comments At 3; Yao Comments at 1; AGA Comments at 3; O’Donnell 

Comments at 1. 
Section 701 Report - 57 - 

Both NAPM and CAGW oppose the expansion of nonpostal services. NAPM expresses its 

concern that core competencies will suffer if the Postal Service is permitted to enter into 

commercial nonpostal markets, because limited resources will be diverted. See NAPM 

Comments at 8; CAGW asserts that the Postal Service “shouldn’t be dabbling in financially 

volatile, nascent start-up services.” CAGW Comments at 1. 

Commenters supporting a limited expansion of Postal Services include PSA, Pitney Bowes, 

and the Postal Service. PSA argues that the Postal Service lacks the resources to maintain 

its existing services while exploring new nonpostal endeavors. PSA Comments at 7. PSA 

does, however, support proposals to specifically authorize the Postal Service to provide 

governmental services in lieu of local or state governments. Pitney Bowes shares the view 

that the Postal Service should be permitted to provide other governmental services to 

state, local, and tribal governments, but says that the offering of commercial nonpostal 

services would distort private markets and divert from the Postal Service’s core 

competencies. Pitney Bowes Comments at 17. 

The Postal Service recommends a “somewhat expanded” range of services, which could 

provide needed revenue. USPS Comments at 29-30. Specifically, the Postal Service suggests 

that it be permitted to enter into agreements to provide services to state, local and tribal 

governments. Id. at 30. The Postal Service mentions that it could be permitted to carry beer, 

wine, and distilled spirits through the mail as a potential expanded service, and says that 

the Commission should be allowed to approve other new nonpostal services that are 

consistent with the public interest, do not cause unfair competition, do not interfere with 

the value of postal services, comply with all applicable federal laws and regulations, and are 

expected to improve the Postal Service’s net financial position. Id. 

8. Comments on Advisory Opinion Process

PostCom maintains that as long as the Commission’s opinion remains advisory and the 

Commission lacks the power to enforce its conclusions, there is no need for a hearing on 

the record. PostCom Comments at 18. It notes that, although valuable information may be 

gained during advisory opinion proceedings, so long as the Postal Service is not obligated 

to follow the Commission’s recommendations, “the expenditure of resources to develop 

that information is entirely wasted.” Id. at 19. It suggests that the advisory opinion process 

should either be abolished entirely or revised to provide the Commission with a means of 

enforcing its recommendations. Id. 

The Public Representative opposes elimination of the hearing on the record requirement. 

PR Comments at 69. He asserts that the requirement “ensures that stakeholders . . . have 

the opportunity, through the discovery and adjudicatory hearing procedures, to explore the 

potential implications of the Postal Service’s proposals.” He notes that the Postal Service 

proposals are often presented to the Commission with “no established body of relevant 
Section 701 Report - 58 - 

data and information,” which distinguishes N-cases from annual compliance 

determinations and rate proceedings, for which a hearing on the record is not required. Id.

He states that, for the reasons stated by the Commission in its 2011 Report, section 3661 

should be amended to require that the Postal Service provide a written response to 

advisory opinions. Id. at 70. 

APWU asserts that the current 90-day process does not provide the requisite level of due 

process for unions and customers. APWU Comments at 10. It urges Congress to change the 

advisory opinion process to allow for extensions to the advisory opinion process to give 

stakeholders the opportunity to prepare documentation and testimony. Id. 

9. Comments on Market Tests of Experimental 

Products

The Commission received comments on statutes and regulations regarding market tests 

from the Public Representative, CAGW, and Pitney Bowes. The comments illustrate 

different perspectives of members of the postal community. 

The Public Representative opines that the framework for the regulation of market tests is 

working as intended and should not be altered. PR Comments at 71. 

CAGW holds the opinion that “the Postal Service shouldn’t be dabbling in financially 

volatile, nascent start-up services.” CAGW Comments at 1. The CAGW position is that the 

Postal Service should not “venture outside of its core mission of delivering letter mail.” Id.

Pitney Bowes comments that no market test has had a material effect on the Postal 

Service’s financial condition due to statutory limitations on duration and anticipated 

revenues. Pitney Bowes Comments at 18. Pitney Bowes suggests that the Commission 

recommend increases on the duration and revenue cap limitations, and commensurate 

increase in the Postal Service’s burden to demonstrate that introduction of the 

experimental product “will not create an unfair or otherwise inappropriate competitive 

advantage for the Postal Service.” Id. at 18-19.

10. Comments on Universal Service and the Postal 

Monopoly

The Postal Service asserts that many of the cost savings from improved efficiency are 

limited by legal and universal service constraints. USPS Comments at 12. 

UPS and Amazon both commented on the FTC report. UPS asserts that the FTC report 

should be updated in light of the Postal Service’s expansion of its parcel delivery business. 
Section 701 Report - 59 - 

UPS Comments at 5. Additionally, UPS maintains that the FTC Report appears to have 

underestimated the Postal Service’s competitive advantages, particularly those related to 

the postal monopoly. Id. at 6. It disagrees with the report’s conclusion that worksharing 

and economies of scale and scope reduce the Postal Service’s competitive advantage. Id. at 

6-7. It recommends that Congress revisit the need for, and appropriate scope of, the 

mailbox monopoly. Id. at 7-8.

Amazon also comments that the FTC Report is dated, but reaches the opposite conclusion 

from UPS and asserts that subsequent developments, including the transfer of several 

Market Dominant products to the competitive product list, the substantial rise in average 

competitive product price, and the growing profitability of private carriers, have reduced 

the risk that distinct legal treatment of the Postal Service could disadvantage its 

competitors. Amazon Comments at 7-8. It goes on to state that the Postal Service’s policies 

of sharing economies of scale, scope, and density through last mile delivery provide an 

additional layer of protection from competitive harm. Id. at 8. It notes that the FTC Report 

did not include in its estimate the cost burden associated with the Postal Service’s limited 

ability to invest its retirement account assets in U.S. Treasury securities. Id. 

11. Comments on the Public Representative

UPS states that the Public Representative serves a valuable role in Commission proceedings 

by facilitating the public’s understanding of the Postal Service’s practices and serving an 

important advocacy role for the general public. UPS Comments at 11. APWU suggests 

overhauling the Commission’s current method of assigning Public Representatives in favor 

of creating an independent Consumer Advocate role at the Commission to help individuals 

participate in Commission dockets. APWU Comments at 11. 

The Public Representative concurs with UPS, asserting that the participation of Public 

Representatives has contributed to better informed Commission decisions and benefits the 

public good by providing an experienced Commission staff member capable of presenting 

information and arguments in a form that is persuasive and familiar to decisional staff. PR 

Comments at 72. 
Section 701 Report - 60 - 

III. CONCLUSION

The Commission appreciates the opportunity to contribute to the essential discussion of 

postal policy by providing its second 701 Report to measure the effectiveness of the PAEA. 

In this 701 Report, the Commission has identified areas where adjustments to postal laws 

could address key issues including the Postal Service’s current liquidity crisis. It expects to 

conduct a more in depth review of the Postal Service’s Market Dominant system of 

ratemaking in its Section 3622 Review. 
Section 701 Report Appendix A 

Page 1 of 2 

Section 701 Report Recommendations 

 The Commission recommends that Congress amend the current required RHBF 

prefunding level to comport with standard industry practice in both private and 

public sectors. 

 The Commission recommends lengthening the amortization period of the current 

unfunded liability. 

 The Commission recommends that Congress grant the Postal Service the authority 

to use available FERS surpluses to pay off current or future liabilities. 

 With clearly defined and limited exceptions, the Commission recommends 

establishing a “soft floor” (a lower limit subject to certain exceptions) on 

worksharing discounts, which would benefit the postal community by providing 

appropriate pricing signals to incentivize efficient mail preparation. 

 The Commission again recommends that the definition of a post office be clarified to 

adopt the plain meaning of the term post office, inclusive of branches and stations. 

 The Commission recommends clarification on whether CPUs and nonpostal 

operation units also fall under the Commission’s administrative review authority 

under section 404(d). 

 The Commission recommends consideration of the duration of emergency 

suspensions of post offices. 

 The Commission recommends that Congress consider clarifying under which 

circumstances the Postal Service is required to consult with the Commission when 

making proposed service standard changes. 

 The Commission recommends that Congress clarify the meaning of section 3691 and 

the requirement that the Postal Service set service standards “in consultation with” 

the Commission. 

 The Commission recommends that if the Postal Service is permitted to offer new 

nonpostal services, proposed nonpostal services be subject to the same regulatory 

review the Commission applied when reviewing existing nonpostal services 

pursuant to section 404(e)(3). 

 The Commission recommends that where a proposed nonpostal service meets the 

statutory test, the Commission should have the authority to designate the service as 

a Market Dominant, Competitive, or experimental product. 
Section 701 Report Appendix A 

Page 2 of 2 

 The Commission recommends that Congress consider adding language to 39 U.S.C. 

§ 3661 that requires the Postal Service, upon receipt of the Commission’s advisory 

opinion, and prior to implementation, to provide a written response to Congress 

addressing the Commission’s recommendations. 

 The Commission recommends that Congress consider raising the maximum revenue 

limitation on market test products thereby providing the Postal Service with more 

opportunities for advancement of new postal products to bolster revenue streams. 

 The Commission recommends that Congress increase the maximum duration on 

market tests for experimental products. 

 The Commission recommends Congress consider allowing the Postal Service to 

satisfy the requirements of section 3641(b)(2) by setting forth a reasonable basis 

for its belief that an experimental product would not cause market disruption. 

 The Commission urges Congress to consider and balance all the features of universal 

service as part of any review of changes necessary to preserve a financially viable 

Postal Service. 

 The Commission concurs with commenters that the postal industry and general 

public could benefit from an updated FTC Report with a more current accounting for 

the value of relevant legal differences between the Postal Service and its private 

competitors. 
Section 701 Report Appendix B 

 Comments of the United States Postal Service 

- 1 - 

POSTAL SERVICE COMMENTS TO THE COMMISSION’S SECTION 701 REPORT

The Postal Regulatory Commission’s Section 701 Report is an important 

opportunity to apprise the President and Congress of the Postal Service’s financial 

condition and to recommend measures “necessary to improve the effectiveness or 

efficiency of the postal laws of the United States.”1 The report that the Commission 

provided the Postal Service on October 20, 2016, takes that opportunity to highlight the 

Postal Service’s dire financial condition, which results from a combination of declining 

mail volumes and legal constraints.2 The Commission has sounded this alarm in other 

reports, and it does well to do so again here. 

The Commission acknowledges that “the most important legislative 

recommendations the Commission can make relate directly to improving the financial 

condition of the U.S. Postal Service.”3 The Postal Service agrees. As it explained in its 

comments leading up to the Section 701 Report, the Postal Service must achieve 

financial stability in order to ensure the future of universal postal service and fulfill all of 

its legal obligations. However, current law leaves the Postal Service with inadequate 

tools to address the problems that loom before it, particularly (1) declining mail volumes, 

especially in high-contribution First Class Mail, coupled with rising delivery points; and 

(2) excessive benefits liabilities. Therefore, meaningful solutions will need to come from 

Congress, through the passage of postal reform legislation, and the Commission, 

through the replacement of the current price cap system with a more suitable regulatory 

structure upon conducting the ten-year review required under 39 U.S.C. § 3622(d)(3). 

1 Postal Accountability and Enhancement Act of 2006, Pub. L. No. 109-435, § 701(a). 

2 Postal Regulatory Comm’n, Section 701 Report: Analysis of the Postal Accountability and Enhancement 

Act of 2006 (Oct. 20, 2006) [hereinafter “Section 701 Report”], at 1, 4-6. 

3 Id. at 1. 
- 2 - 

Regarding the topic of postal reform legislation, in its comments, and consistent 

with what it had “already developed and presented [to] Congress,” the Postal Service 

offered a “a set of common-sense reforms that would put the Postal Service on a more 

stable financial footing, allowing for further innovation, investments, and growth for the 

Postal Service, and the mailing industry as a whole.”4 The reforms discussed by the 

Postal Service are: 

1) Retiree health benefits (RHB) should be fully integrated with Medicare. 

2) The RHB liability should be calculated using net claims costs, rather than 

premium costs, in accordance with sound actuarial practice. 

3) RHB Fund assets should be invested prudently, as is the practice among other 

governmental retiree benefits funds. 

4) The RHB funding target should be lowered from 100 percent to 80 percent. 

5) Pension liabilities should be calculated on the basis of postal-specific economic 

and demographic assumptions. 

6) Any current Federal Employees Retirement System (FERS) surplus should be 

used to pay down debt; future surpluses should be applied against pension or 

RHB liabilities or debt. 

7) The amortization period for supplemental Civil Service Retirement System 

(CSRS) liability should be lengthened to match the period for RHB. 

8) The exigent surcharge should be restored as a policy matter (regardless of 

whether the Commission-ordered rollback of the surcharge is a reasonable 

application of the current statute). 

9) The Postal Service should be given increased flexibility to offer services to state 

and local governments, as well as new commercial nonpostal services that meet 

certain conditions (including approval by the Commission).5

 

4 United States Postal Service Comments in Response to Order No. 3238, PRC Docket No. PI2016-3 

(June 14, 2016) [hereinafter “USPS Comments”], at 17. Consistent with certain other parties, the Postal 

Service encouraged the Commission to defer matters implicated by the ten-year review to the review 

itself, rather than addressing such matters in its Report. Id. at 26-27. The Commission prudently 

determined to follow this course of action. Section 701 Report at 2-4, 10. 

5 USPS Comments at 16-30. 
- 3 - 

Taken together, these reforms would “constitute significant progress towards financial 

sustainability of the Postal Service” and would reduce “the financial gap that will have to 

be reckoned with in the ten-year review of the market-dominant rate regulation 

system.”6 Many of these proposals also enjoy the support of a broad cross-section of 

postal stakeholders, as reflected in other parties’ comments to the Commission.7

Despite its acknowledgment of the importance of recommendations aimed at 

improving the Postal Service’s financial problems, and despite the presence of these 

and other substantive reform proposals in the comments that the Commission had 

solicited,8 the Commission’s report misses the opportunity to make any such “important 

legislative recommendations.” Instead of offering the President and Congress with an 

analysis and endorsement of any up-to-date proposals, the Commission largely 

retreads its recommendations from 2011, few of which have garnered much support in 

the meantime. More to the point, almost none of the Commission’s 17 

recommendations would meaningfully improve the Postal Service’s financial condition. 

Most of the recommendations amount to minor tinkering with the regulatory structure 

governing the Postal Service, rather than reforms that would materially mitigate 

 

6 Id. at 18. 

7 Id. at 17-18; see also Comment of the National Association of Letter Carriers, AFL-CIO, PRC Docket 

No. PI2016-3 (June 20, 2016), at 1-8; Comments of the American Postal Workers Union, AFL-CIO, PRC 

Docket No. PI2016-3 (June 14, 2016), at 4; Comments of the Association for Postal Commerce, Major 

Mailers Association, and Saturation Mailers Coalition, PRC Docket No. PI2016-3 (June 14, 2016), at 2-3; 

Comments of the National Association of Presort Mailers, PRC Docket No. PI2016-3 (June 14, 2016), at 

2-3; Comments of MPA-Association of Magazine Media and Alliance of Nonprofit Mailers, PRC Docket 

No. PI2016-3 (June 14, 2016), at 1-6; Valpak Direct Marketing Systems, Inc. and the Valpak Franchise 

Association, Inc. Comments on Commission Report to the President and Congress Pursuant to Section 

701 of the Postal Accountability and Enhancement Act, PRC Docket No. PI2016-3 (June 14, 2016), at 6-

7. 

8 The Public Representative also offered concepts that, while different from the proposals that other 

commenters advanced, would similarly appear to make a significant contribution toward improving the 

Postal Service’s financial condition. Public Representative Comments, PRC Docket No. PI2016-3 (June 

15, 2016), at 33-53. 
- 4 - 

expenses or enhance revenues. Of the three recommendations aimed at the Postal 

Service’s staggering benefits costs, one (regarding pensions) would have only 

theoretical benefit, and the other two (regarding RHB) would only lower funding 

obligations without reducing the size of the liability that the Postal Service will ultimately 

have to cover, even though there are straightforward ways, consistent with universal 

practice among other employers, for that liability to be reduced. These comments 

explain why those three recommendations are inadequate, and will offer additional 

discussion about some of the Commission’s other recommendations. 

I. Reform of the Retiree Health Benefit Obligation 

The Postal Service’s Retiree Health Benefit (“RHB”) reform proposals would, by 

integrating the Postal Service’s retiree health program with Medicare, significantly 

reduce its liability in the Postal Service Retiree Health Benefits Fund (PSRHBF), and 

hence lower the Postal Service’s normal cost payments and eliminate the need for large 

annual amortization payments to cover the unfunded RHB liability.9 As the Postal 

Service explained, this action would harmonize the Postal Service’s RHB obligations 

with best practices of private and other public employers, which uniformly integrate 

benefits fully with Medicare Parts A, B, and D. As part of this proposal to integrate with 

Medicare, the Postal Service also proposes to change the law to accord with actuarial 

principles, by having the RHB liability calculated based on net claims costs (rather than 

premiums), and by using a discount rate based on funding assumptions (rather than 

accounting standards). 

 

9 Beginning in FY2017, the Postal Service is obligated to make two payments in to the PSRHBF: (1) a 

normal cost payment, and (2) an amortization payment to address the unfunded accrued actuarial liability. 
- 5 - 

Furthermore, the Postal Service also proposes to better align its RHB funding 

obligations with the private sector in two other ways, by investing a portion of fund 

proceeds in diversified portfolios rather than exclusively in low-yield Treasury securities, 

and by funding 80 percent of the RHB liability, rather than 100 percent. In both of these 

respects, the Postal Service’s proposal is much more modest than what is done by 

other private and public employers; for instance, other employees that provide retiree 

health benefits prefund a far lower portion of their RHB liabilities than the Postal Service 

is currently required to do, or even what the Postal Service would do under its proposal. 

A host of other commenters – mailing industry and labor alike – lent their support 

to these common-sense proposals. Inexplicably, however, the Commission has chosen 

not to support Medicare integration, but to recommend only two RHB reforms: 

1) Lengthen the amortization period for the unfunded liability beyond the current 

40-year schedule; and 

2) Adjust the funding target from 100 percent of RHB liabilities to an unspecified 

“level in line with industry norms.”10

Legislative reform regarding RHB that is limited solely to an extension of the 

amortization schedule and a reduced funding level would reduce the Postal Service’s 

funding obligations in the near term as compared to current law, but would do nothing to 

address the central problem: the excessive, unaffordable, and unsustainable RHB 

liability. As the Postal Service pointed out in its comments, “retiree health benefits are 

real obligations [for which] there must be a reckoning, or else there will be no money to 

pay for retirees’ promised benefits.”11 Under current law, the costs of the Postal 

Service’s RHB program are excessive, due to the fact that a significant proportion of 

 

10 Section 701 Report at 6-7. 

11 USPS Comments at 18. 
- 6 - 

postal annuitants fail to enroll in Medicare when they become eligible, even though the 

Postal Service and its employees have paid into Medicare for decades. Ultimately, 

those costs will have to be paid by the Postal Service, either by setting money aside in 

the PSRHBF or by directly covering annuitant premiums after the PSRHBF is exhausted 

due to a lack of adequate inflows from the Postal Service’s payments to the Fund 

(under current law, if the PSRHBF is exhausted, the obligation to pay annuitant 

premiums reverts back to the Postal Service).12 However, in the future, the Postal 

Service will have even less mail volume than it does today, and hence less ability to 

cover those costs. This would, in turn, raise the prospect that at some point there will 

either be a cessation of promised benefits or a cash infusion from taxpayer funds to 

cover those benefits, contrary to the fundamental statutory policy that the Postal Service 

be self-sufficient. Alternatively, ratepayers will have to make up the difference. 

To be sure, the Postal Service agrees that the prefunding level should be 

adjusted: as noted above, it is one of the elements of the Postal Service’s proposal to 

lighten the unreasonable and crushing RHB prefunding burden. Indeed, both the Postal 

Service’s proposed 80-percent funding level and the Commission’s hypothesized 50- to 

70-percent levels are far above “industry norms.” Almost two-thirds of Fortune 1000 

companies prefund 0 percent of their RHB liabilities, and the remaining third prefunded 

 

12 In its earlier comments, the Postal Service pointed out that, if it is unable to make normal cost and 

amortization payments into the RHB Fund, “the fund could run out of money in a little over a decade.” Id.

at 19. The Congressional Budget Office (CBO) recently underscored this point with its estimate that, 

under a current law baseline, the RHB Fund would exhaust Treasury balances by 2026 if 25 percent of 

fund assets were removed from the Treasury in 2017 for investment in non-Treasury funds. Cong. 

Budget Off., Cost Estimate: H.R. 5707, Postal Service Financial Improvement Act of 2016 (Oct. 20, 2016), 

at 2, available at http://go.usa.gov/xksPn. If those assets were kept in the RHB Fund (as is the 

expectation under current law), the CBO estimate suggests that exhaustion would likely occur in 2028. 

Of course, making smaller payments under a longer amortization schedule and reduced funding target 

would lengthen the amount of time before the PSRHBF would run out of money, but eventually it would 

still occur. 
- 7 - 

at a median level of only 23 to 37 percent between 2001 and 2010.13 Thus, the overall 

average level of prefunding across all Fortune 1000 companies was only approximately 

9 to 14 percent during that period. State governments and the Department of Defense 

prefund only about 30 percent of their liabilities.14 Moreover, all of those employers 

have already reduced their liabilities through full Medicare integration; if normalized to 

the Postal Service’s situation (which lacks full Medicare integration), the prefundinglevel benchmarks would be even lower. Hence, “standard industry practice” would 

dictate funding levels well below what the Postal Service’s proposal or the 

Commission’s report contemplates. 

However, simply lowering the prefunding level, without more, only kicks the can 

down the road without solving the underlying problem—the excessive, unaffordable 

costs of the Postal Service’s RHB program—which cannot be ignored over the long 

term. That is why the Postal Service has proposed to tackle the costs of the RHB 

program, through Medicare integration. The Commission’s approach, by contrast, elides 

the essential problem, which is ultimately puzzling because Medicare integration, 

supported by the mailing industry and labor, constitutes a straightforward and 

appropriate way of tackling the RHB liability itself, thereby putting the Postal Service’s 

RHB program on a sound financial footing. Therefore, instead of implementing reforms 

that are limited solely to what the Commission is recommending, the President and 

Congress should instead implement the comprehensive combination of reforms that the 

Postal Service has proposed and industry and labor stakeholders have endorsed. 

 

13 USPS Comments at 22. 

14 Id. 
- 8 - 

II. Pension Reform 

Another major contributor to the Postal Service’s financial predicament are its 

artificially burdensome pension obligations. As the Postal Service explained in its 

earlier comments: 

The Postal Service is required to fund 100 percent of its total pension 

liabilities and has achieved 92.2 percent funding as of FY2015, far more 

than private-sector and state and local government employers and four 

times more than the rest of the federal government. Like the RHB Fund, 

assets are invested solely in low-yield Treasury securities, rather than 

higher-yielding diversified portfolios. Moreover, [the Office of Personnel 

Management (OPM)] calculates pension liabilities not on the basis of 

demographic and salary-growth assumptions relevant to postal 

employees, but on the basis of assumptions concerning the entire federal 

workforce. Finally, there is no provision to return overpayments in FERS 

to the Postal Service. Needless to say, no rational self-funded employer 

that still provides a defined-benefit pension plan would design such a 

funding scheme.15

The Postal Service has proposed three remedies that seek to mitigate the costs of its 

statutorily required participation in the Federal Employees Retirement System (“FERS”) 

and the Civil Service Retirement System (“CSRS”): 

1) Require OPM to calculate pension liabilities on the basis of postal-specific 

economic and demographic assumptions. 

2) After recalculation of the liability, apply any current FERS surplus against 

outstanding debt, and any future surpluses against pension or RHB liabilities or 

debt. 

3) Lengthen the amortization period for the supplemental CSRS liability to match 

the RHB amortization period. This measure alone would cut the annual CSRS 

payment almost in half. 

 

15 Id. at 23. 
- 9 - 

Instead of this comprehensive, common-sense, and consensus set of reforms, the 

Commission’s report contemplates only the second measure: using FERS surpluses to 

offset other obligations.16

The asymmetry in FERS between the treatment of supplemental liabilities (which 

must be covered by the Postal Service through a series of amortization payments) and 

surpluses (which cannot be recouped by the Postal Service in any way) is undoubtedly 

important. By itself, however, this reform would no longer offer any real relief. Over the 

past few years, what was once a projected FERS surplus has turned into a 

supplemental liability to be amortized at an estimated $0.2 billion per year, as calculated 

by OPM using government-wide assumptions.17 

The bigger issue with pensions is that the FERS liability and the greater CSRS 

liability are calculated unfairly on the basis of the federal workforce as a whole. No 

reasonable employer would calculate its pension liabilities by reference to other 

employers’ workforce. It is therefore critical that any legislative reform require OPM to 

utilize postal-specific assumptions when calculating the Postal Service’s pension 

liabilities, to ensure that the Postal Service is not obligated to pay more than is 

necessary.18 In addition, the amortization period for CSRS should be lengthened to at 

least a period consistent with the RHB amortization schedule established in current law, 

in the interest of consistency among the Postal Service’s post-retirement benefits 

 

16 Section 701 Report at 7. 

17 USPS Comments at 7, 24. 

18 Even if postal-specific assumptions were used to calculate the Postal Service’s liabilities, the FERS 

surplus would now be modest. Therefore, a move to postal-specific assumptions would not lead to a large 

infusion of cash. Rather, the primary benefit of moving to postal-specific assumptions is to ensure that, 

moving forward, the Postal Service’s pension liabilities are appropriately calculated, and payments to 

OPM are no larger than necessary. 
- 10 - 

obligations. Without these reforms – which the Commission’s report neglects – the 

Postal Service will bear $3.2 billion more in expenses over the next five years than if 

Congress adopted the Postal Service’s legislative proposal. 

III. Product and Pricing Issues 

The Postal Service is disappointed that the Commission declined the opportunity 

to urge the President and Congress to restore the recently expired exigent surcharge, at 

least pending the outcome of the ten-year review. As the Postal Service explained in its 

initial comments, Commissioners themselves have recognized that it would make sense 

for Congress, as a policy matter, to ameliorate the Postal Service’s financial distress by 

allowing a longer exigent price increase.19 The point of disagreement has always been 

over whether such a price increase is consistent with the specific terms of the current 

exigency provision, but Congress, unlike the Commission, is free to change the statute 

in the interest of providing much-needed financial relief. 

Beyond this critical omission, the Postal Service agrees with many of the 

Commission’s recommendations on products and pricing. The Postal Service agrees 

with the Commission’s determination that the problems with the market-dominant price 

cap can and will be addressed in the upcoming ten-year review.20 The Postal Service 

also appreciates that the Commission’s recommendation that any new authority to offer 

nonpostal services be subject to reasonable regulation21 aligns with the consensus 

proposal advanced by the Postal Service and numerous other labor and industry 

stakeholders. The President and Congress would also do well to consider the 

 

19 USPS Comments at 27-28. 

20 Section 701 Report at 2, 10. 

21 Id. at 26-27. 
- 11 - 

Commission’s recommendations to allow the Postal Service greater leeway to 

experiment through market tests.22

However, the Postal Service believes that the Commission’s recommendation on 

workshare discounts is counterproductive, for the reasons noted below. In addition, the 

recommendations on negotiated service agreements (NSAs) bear some clarification. 

A. Workshare Discounts 

The Commission’s report identifies the current statute’s prohibition on workshare 

discounts that exceed 100 percent of the Postal Service costs avoided through the 

worksharing activity (subject to certain exceptions).23 The Commission goes on to 

recommend that Congress add a “soft floor”: that is, a prohibition on workshare 

discounts less than 100 percent of avoided costs (subject to unspecified but “limited” 

exceptions).24 In other words, the Postal Service would have to set (and periodically 

adjust) workshare discounts to pass through exactly 100 percent of avoided costs, with 

no room for business judgment, in almost all cases. 

Despite the Commission’s appeal to efficiency, the true effect of such a 

mechanistic requirement would be to dramatically reduce the Postal Service’s pricing 

flexibility, without enhancing revenue or contribution. It is possible that raising discounts 

(in other words, lowering prices) further might lead some new actors to engage in 

worksharing, which would promote some efficiency in the market. However, any 

modest incremental gain would be overwhelmed by the enormous subsidy that the 

Postal Service would be forced to hand over to businesses that already find it 

 

22 Id. at 32-34. 

23 Id. at 9-11. 

24 Id. at 10-11. 
- 12 - 

worthwhile to workshare at current prices, even with less than 100 percent of avoided 

costs being passed on to them. 

Such a recommendation is hard to square with the Commission’s professed 

appreciation for the overwhelming importance of improving the Postal Service’s financial 

condition – particularly given that the Commission’s report devotes little space to 

recommendations that would actually make a meaningful contribution to that goal.25 So 

long as the Postal Service’s condition is so dire, then the time is simply not ripe to 

entertain (let alone focus disproportionately on) ways for Congress to hem in the Postal 

Service’s ability to maintain revenue and contribution. 

B. Negotiated Service Agreements 

The Postal Service agrees with the Commission’s assessment of the current 

process and legal standards for competitive Negotiated Service Agreements (“NSAs”) 

and the treatment of non-public information: namely that the status quo is adequate and 

requires no statutory change.26

With respect to domestic market-dominant NSAs, the Commission proposes that 

Congress “clarify whether the more stringent standard set forth in 39 U.S.C. 

§ 3622(c)(10) that the agreement ‘improve the net financial position’ of the Postal 

Service is still intended.”27 Instead, the Commission suggests that the standard could 

be harmonized with the attributable-cost-coverage standard for competitive NSAs, 

which the Commission views as less onerous and as “providing the Postal Service with 

increased opportunities to experiment with its pricing, with a goal towards designing 

 

25 Id. at 1. 

26 Id. at 17-18. 

27 Id. at 18. 
- 13 - 

domestic Market Dominant NSAs that ultimately result in an improved financial 

position.”28

The Postal Service takes no position on this recommendation. However, it 

wishes to emphasize that any benefits of the Commission’s recommendation only apply 

in the context of domestic market-dominant NSAs. For international market-dominant 

NSAs, the existing “improve net financial position” standard is clearly appropriate, and a 

“cover attributable costs” standard would actually be counterproductive, not liberating. 

International market-dominant NSAs consist of agreements with foreign posts to 

exchange mail at negotiated rates, rather than the default rates established in treaty 

instruments of the Universal Postal Union. Those default rates have historically failed to 

cover the Postal Service’s costs of delivering inbound international mail. Therefore, the 

Postal Service has sought to improve its financial condition by negotiating higher rates 

for inbound international mail (in exchange for accepting higher rates for outbound 

international mail).29 Given the lower default rates, however, the Postal Service is illpositioned to achieve negotiated rates that fully achieve attributable-cost coverage. If 

the Postal Service were required to do so, the paradoxical result would be that foreign 

posts would prefer to stick with non-remunerative default rates rather than agreeing to 

the high price increases necessary for the Postal Service to cover attributable costs. 

Thus, a “cover attributable costs” standard for international market-dominant NSAs 

would actually worsen the Postal Service’s net financial position. 

 

28 Id. 

29 Under longstanding practice since the PAEA, only the inbound half of this reciprocal rate relationship is 

subject to regulation as an NSA “product.” The outbound rates represent costs to the Postal Service and 

are reflected in the financial analysis of outbound international products like First-Class Mail International. 
- 14 - 

IV. Service Issues

A. Contractor-Operated Retail Facilities

The Commission’s report recommends “clarification on whether [Contract Postal 

Units] and nonpostal operation units also fall under the Commission’s administrative 

review authority under [39 U.S.C. §] 404(d).”30 There is a good reason why Post Office 

discontinuance laws and procedures have not been broadly expanded to contractoroperated facilities. As the Postal Service has repeatedly warned the Commission, doing 

so would interfere with the Postal Service’s operational efficiency and business 

relationships by giving contractors undue leverage in negotiations. Congress has never 

intended the Commission to function as a board of contract appeals, overseeing the 

Postal Service’s relationships with its suppliers. The Postal Service would only support 

“clarification” if it maintains these well-established boundaries. 

B. Consultation Regarding Service Standard Changes 

The Commission’s report recommends that “Congress should clarify [39 U.S.C. 

§ 3691] as to whether consultations with the Commission are required for proposals to

change service standards,” or only for proposals to establish new service standards. 

The Commission would also prefer clarification as to what degree of “consultation” is 

required.31

Whatever theoretical ambiguities might exist, actual practice should dispel any 

concern. Since the Postal Accountability and Enhancement Act (PAEA) introduced the 

relevant provision, the Postal Service has sought advisory opinions from the 

Commission under 39 U.S.C. § 3661 for all changes to service standards for its market30 Id. at 21. 

31 Id. at 24-25. 
- 15 - 

dominant products, all of which affected service on a “nationwide or substantially 

nationwide” basis. Whatever “consultation” might mean, the process of a months-long 

back-and-forth between the Postal Service and Commission and the eventual issuance 

of an advisory opinion obviously fulfills that standard; if anything, it far exceeds it. 

Thus, the ambiguities to which the Commission adverts only affect changes in 

service standards for market-dominant products that would have a purely local effect 

(for instance, a hypothetical change in the service standard for First-Class Mail between 

Hawaii and Guam). This scenario has not arisen in the decade since the PAEA. If it 

were to arise in the future, the Commission would be made aware of it and have an 

opportunity to present its views to the Postal Service. As such, it is difficult to see why 

this issue merits inclusion in the Commission’s report. 

C. Advisory Opinion Proceedings 

The Commission asks Congress to require the Postal Service to provide a written 

response to Commission advisory opinions on nationwide service changes.32 In 

essence, the Commission would like Congress to single out one preferred piece of the 

threefold reforms that the Senate passed in 2011 and that Senator Thomas Carper has 

included in more recent postal reform bills.33 These provisions would (1) impose a 

statutory 90-day time limit on advisory opinion proceedings, (2) eliminate the antiquated 

requirement for a hearing on the record, and (3) require a Postal Service response to 

the Commission’s advisory opinion. The Commission’s exclusive focus on the third 

element would elevate the desire for additional regulation of the Postal Service over the 

 

32 Id. at 30. 

33 See S. 1789, 112th Cong. § 208 (passed Senate 2012); S. 2051, § 407 (introduced 2015). 
- 16 - 

equal, if not greater, need for reforms that would make the entire advisory opinion 

exercise more timely and relevant. 

In an apparent attempt to obviate the need for a statutory time limit, the 

Commission touts its own undertaking to streamline advisory opinion proceedings.34 

The Commission’s rules have yet to be tested in practice, but the Postal Service is 

hopeful that they will have the intended effect of allowing for more timely and relevant 

advisory opinions. However, what the Commission’s report fails to acknowledge are the 

numerous loopholes that threaten to allow advisory opinion proceedings to extend well 

beyond the aspirational 90-day goal. That concern is particularly palpable for situations 

when the issue is the very sort of significant network changes that have drawn out 

advisory opinion proceedings in the past and, consequently, drawn frustration from the 

Postal Service and Members of Congress seeking more timely analysis. Thus, it may 

well be that the Commission’s rule changes will not result in any real improvement in 

advisory opinions’ timeliness. A statutory time limit is essential, and it would be in 

keeping with the firm statutory deadlines on most other Commission proceedings.35

Equally essential is the elimination of the requirement for formal hearings on the 

record. Although the Commission’s report acknowledges the difficulty of streamlining 

proceedings under a formal-hearing requirement,36 the Commission fails to take the 

logical next step of recommending that that requirement be abolished. This degree of 

formality is a relic from the pre-PAEA regulatory model, whereas the PAEA updated and 

 

34 Section 701 Report at 29-30. 

35 E.g., 39 U.S.C. § 404(d)(5) (120 days for Post Office closing appeals); id. § 3622(d)(1)(C) (45 days for 

market-dominant price adjustments); id. at (d)(1)(E) (90 days for exigent price adjustments); id.

§ 3632(b)(3) (15 days for competitive rates or classes not of general applicability); id. § 3641(c)(1) (30 

days for market tests); id. § 3653 (90 days for annual compliance determination). 

36 Section 701 Report at 30. 
- 17 - 

streamlined every other form of postal regulatory proceeding.37 If notice-and-comment 

procedures provide adequate due process on such complex matters as exigent rate 

increases and annual compliance determinations, which result in binding orders, then it 

is baffling why more burdensome and time-consuming procedures should be necessary 

for the Commission to issue a non-binding advisory opinion. Removing the requirement 

for a formal hearing on the record would update this outlier provision of postal law to 

allow for more timely and relevant advisory opinions while ensuring the same level of 

due process that has sufficed in all other postal regulatory settings. 

V. Conclusion 

The Postal Service’s dire financial condition puts in peril its ability to provide 

universal service to the nation and meet its other legal obligations, absent legislative 

and regulatory change. Significant revisions to the PAEA are needed to enable the 

Postal Service to restore itself to financial solvency. Improving the Postal Service's 

financial stability in both the short-term and the long-term requires more comprehensive 

changes than are discussed in the Commission’s report. 

37 Indeed, formal-hearing requirements appear to be antiquated in general. A search of post-PAEA Acts 

of Congress revealed not a single instance (other than in enforcement contexts) where Congress saw fit 

to introduce a requirement for an agency to hold hearings on the record. 
901 New York Avenue NW, Suite 200 Washington, DC 20268-0001

(202) 789-6800 | www.prc.gov
- i - 

TABLE OF CONTENTS 

Page 

EXECUTIVE SUMMARY ....................................................................................................................................... 1

I. EVALUATION OF THE PAEA AMENDMENTS AND RECOMMENDATIONS FOR 

LEGISLATIVE CHANGE ......................................................................................................................... 3

A. Introduction ................................................................................................................................ 3

B. Postal Service Financial Situation ...................................................................................... 4

1. Introduction and Background ............................................................................... 4

2. Commission Recommendations ........................................................................... 6

C. Market Dominant Rate System ........................................................................................... 7

1. Introduction and Background ............................................................................... 7

2. Commission Recommendation .......................................................................... 10

D. Competitive Product Rate System .................................................................................. 11

1. Introduction and Background ............................................................................ 11

2. Commission Recommendations ........................................................................ 12

E. Negotiated Service Agreements ....................................................................................... 13

1. Introduction and Background ............................................................................ 13

2. Commission Recommendations ........................................................................ 17

F. Post Office Closings and Consolidations ....................................................................... 18

1. Introduction and Background ............................................................................ 18

2. Commission Recommendations ........................................................................ 19

G. Service Standards .................................................................................................................. 22

1. Introduction and Background ............................................................................ 22

2. Commission Recommendations ........................................................................ 24

H. Nonpostal Services ................................................................................................................ 25

1. Introduction and Background ............................................................................ 25

2. Commission Recommendations ........................................................................ 26

I. Advisory Opinion Process .................................................................................................. 27

1. Introduction and Background ............................................................................ 27

2. Commission Recommendations ........................................................................ 29

J. Market Tests of Experimental Products ....................................................................... 31

1. Introduction and Background ............................................................................ 31

2. Commission Recommendations ........................................................................ 32
K. Universal Service and the Postal Monopoly ................................................................ 34

1. Introduction and Background ............................................................................ 34

2. Commission Recommendations ........................................................................ 37

L. Public Representative .......................................................................................................... 38

II. 2011 REPORT RECOMMENDATIONS AND COMMENTS ON CURRENT 701 REPORT

..................................................................................................................................................................... 39

A. 2011 Report Recommendations ...................................................................................... 39

B. Comments Regarding Current 701 Report .................................................................. 40

1. Comments on Postal Service Financial Situation ........................................ 42

2. Comments on Market Dominant Rate System ............................................. 45

3. Comments on Competitive Product Rate System ....................................... 48

4. Comments Summary .............................................................................................. 51

5. Comments on Post Office Closings and Consolidations ........................... 52

6. Comments on Service Performance ................................................................. 55

7. Comments on Nonpostal Services .................................................................... 56

8. Comments on Advisory Opinion Process ....................................................... 57

9. Comments on Market Tests of Experimental Products ............................ 58

10. Comments on Universal Service and the Postal Monopoly .................... 58

11. Comments on the Public Representative ....................................................... 59

III. CONCLUSION ......................................................................................................................................... 60

Appendix A—Section 701 Report Recommendations 

Appendix B—Comments of the United States Postal Service 
EXECUTIVE SUMMARY

This marks the Postal Regulatory Commission’s (Commission) second report under section 

701 of the Postal Accountability and Enhancement Act (PAEA) of 2006. Every 5 years the 

Commission is required to issue a report and its first one was submitted to Congress and 

the President in 2011 (2011 Report). In general, the reports are to reflect the Commission’s 

assessment of how well the PAEA is operating and is an opportunity to recommend 

legislation or other measures necessary to improve the effectiveness and efficiency of our 

Nation’s postal laws.

The Commission’s 2016 report, like its 2011 Report, emphasizes the starkly different 

environment faced by the Postal Service since the PAEA’s enactment in 2006 – a time when 

volume was growing and the Postal Service was earning revenues that exceeded costs. 

Today, the Postal Service faces the reverse: mail volume that has declined more than 25 

percent since 2006 coupled with a total net loss of $5.1 billion in FY 2015 - despite an 

exigent surcharge that generated an additional $2.1 billion in revenue. 

Twice this year, the Commission was invited to provide testimony at congressional 

hearings focused on the steadily deteriorating financial condition of the U.S. Postal Service. 

Specifically, the Commission was asked to share with the Senate and House oversight 

committees key findings of its annual Financial Analysis of U.S. Postal Service Financial 

Results. Testimony delivered by Acting Chairman Taub described the fundamental 

problems facing the Postal Service: a growing liability for retiree health benefits; an 

inability to borrow for needed capital investments, such as new delivery vehicles and 

package sortation equipment; and the continued loss of high margin First-Class Mail 

revenues. 

This fiscal year total net loss as of June 30, 2016, was $3.3 billion compared to a net loss of 

$2.8 billion for the same period last year, a deterioration of $0.5 billion. For this same time 

period, the Postal Service’s total liabilities exceeded the total value of its assets by $53.7 

billion. The Postal Service has recorded monthly net operating losses since the expiration 

of the exigent surcharge in April this year; and working capital for the 9 months which 

ended June 30, 2016, was negative $43.3 billion. The net deterioration of $2.3 billion in 

working capital from the beginning of the fiscal year was largely due to the growth in 

employee-related liabilities, including the statutory accruals for payments into the 

Retirement Health Benefits Fund (RHBF).

It is clear, the most important legislative recommendations the Commission can make 

relate directly to improving the financial condition of the U.S. Postal Service. While this 

year’s 701 report will again discuss and make recommendations related to certain rate and 
Section 701 Report - 2 - 

service matters, along with improvements to Commission processes, the Commission 

places a particular emphasis upon the following recommendations: 

 The Commission renews its recommendation from its 2011 Report that Congress 

modify the retiree health benefits fund prefunding level and payment schedule as a 

measure to improve Postal Service sustainability. Decreasing the funding target to 

one more in line with industry norms would provide much needed improvement in 

the Postal Service’s assets to liabilities ratio.

 The Commission recommends lengthening the amortization period of the current 

unfunded liability. The current amortization period is 40 years. Extending the 

amortization period would free significant capital by reducing Postal Service annual 

payments. 

 Further improvement in liquidity could be provided by allowing the Postal Service 

to use any available Federal Employees Retirement System (FERS) surplus, rather 

than requiring the surplus to be transferred to the RHBF. The Commission, 

therefore, recommends that Congress grant the Postal Service the authority to use 

available FERS surpluses to pay off current or future liabilities, including debt to the 

U.S. Treasury, pension liabilities, and retiree health benefit liabilities. 

Finally, it must be noted that the timing of this report coincides closely with a significant 

Commission undertaking. By law, after December 20, 2016, the Commission shall 

commence a review of the price cap system for regulating Market Dominant products. The 

purpose is to determine whether the system is achieving its statutory objectives and if it is 

not, to “make such modification or adopt such alternative system” to achieve the objectives. 

Considering the breadth of this review, certain postal rate matters that would normally be 

addressed in this report will be deferred for consideration in December’s review. 

In this report, the Commission also details a variety of other recommendations for possible 

changes to discreet rate, service, and regulatory matters or processes. All of the 

Commission’s recommendations are listed in Appendix A.

On October 20, 2016, the Commission sent its report to the Postal Service for review and an 

opportunity to comment, consistent with Section 701 of PAEA. On November 9, 2016, the 

Postal Service sent back its comments, which are attached at Appendix B. 
Section 701 Report - 3 - 

I. EVALUATION OF THE PAEA 

AMENDMENTS AND 

RECOMMENDATIONS FOR 

LEGISLATIVE CHANGE

A. Introduction

Every 5 years, the Postal Regulatory Commission (Commission) is required to: 

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

concerning—(1) the operation of the amendments made by 

[PAEA]; and (2) recommendations for any legislation or other 

measures necessary to improve the effectiveness or efficiency 

of the postal laws of the United States. 

Pub. L. 109-435, 120 Stat. 3198 (2006).1 Additionally, PAEA section 701(b) requires the 

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

submit written comments. 

This report marks the second section 701 report to the President and Congress. The first 

section 701 report was submitted in 2011 (2011 Report).2 The recommendations of the 

2011 Report are summarized in section II, below. In addition, on April 14, 2016, the 

Commission issued a notice seeking public comment on issues the Commission should 

consider in the current 701 report, and those comments are reviewed in section II as well.3

Because we are in the tenth year since the passage of the PAEA, the timing of this report 

occurs adjacent to another significant Commission undertaking, the review of the system 

for regulating rates and classes for Market Dominant products required by 39 U.S.C. § 

3622(d)(3) (Section 3622 Review). As a result, some of the areas previously addressed by 

 

1

 Postal Accountability and Enhancement Act (PAEA), Pub. L. 109-435, 120 Stat. 3198 (2006), section 701. 

2

Postal Regulatory Commission, Section 701 Report, Analysis of the Postal Accountability and Enhancement Act of 2006, September 22, 2011 

(2011 Report).

3

 Docket No. PI2016-3, Notice and Order Seeking Comments on Report to the President and Congress Pursuant to Section 701 of the Postal 

Accountability and Enhancement Act, April 14, 2016 (Order No. 3238).
Section 701 Report - 4 - 

the Commission in the 2011 Report will instead be covered during the Section 3622 

Review. 

B. Postal Service Financial Situation

1. Introduction and Background

The Postal Service is not currently generating sufficient funds to cover mandated expenses 

or invest in critically deferred capital needs. 

The Commission requires the Postal Service to file monthly, quarterly, and annual reports 

regarding its financial results. See 39 C.F.R. part 3050. Until FY 2014, the Commission 

addressed the overall financial health of the Postal Service in the Annual Compliance 

Determination (ACD). However, given the time frame for conducting the ACD, the 

Commission determined that a detailed analysis of Postal Service financial data would be 

better served by a separate analysis. In FY 2013, the Commission developed a separate 

annual financial analysis report to provide a more detailed analysis of the Postal Service’s 

financial position. The annual financial report reviews the overall financial position of the 

Postal Service, as well as volumes, revenues, and costs of both Market Dominant products 

and Competitive products.4 The report also analyzes the Postal Service’s profitability, 

solvency, activity, and financial stability using accounting ratios.5

As reported in the Commission’s FY 2015 Financial Report, the Postal Service had a net loss 

of $5.1 billion in FY 2015. FY 2015 Financial Report at 7. This marks the ninth consecutive 

net loss posted since FY 2007, increasing the cumulative net deficit since FY 2007 to $56.8 

billion.6 These losses have reduced the Postal Service’s liquidity. See FY 2015 Financial 

Report at 25. At the end of FY 2015, the Postal Service’s current net assets totaled $7.9 

billion, while its current liabilities totaled $48.9 billion.7 This gap is the result of a multitude 

of factors including the continuing decline in the volume of Market Dominant products, and 

high personnel-related expenses. 

 

4

See Postal Regulatory Commission, Financial Analysis of United States Postal Service Financial Results and 10-K Statement, Fiscal Year 2015, 

March 29, 2016 (FY 2015 Financial Report).

5

 The Financial Analysis Report examines the Postal Service’s Altman-Z score, which is a compilation of financial ratios developed by New York 

University Professor Edward Altman, as a tool to gauge an entity’s long-term viability. See FY 2015 Financial Report at 84. 

6

See United States Postal Service, Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2015, at 32 (Annual Report on Form 10-

K).

7

Id. at 24. Table 11-7. $6.9 billion of the current net assets was cash or cash equivalents. Id.
Section 701 Report - 5 - 

From FY 2007, the total volume for Market Dominant products has declined by 60.4 billion 

pieces. Id. at 37, Figure III-1. The volume decline was precipitated by a long-term trend of 

mail migrating to electronic media and exacerbated by the economic recession that began 

in December of 2007. The Postal Service states that the volume lost to electronic media is 

not expected to return, as the migration represents a fundamental and permanent change 

in mail use by households and businesses.8 The decline in First-Class Mail volume, a 4.3 

percent average annual rate of decline since FY 2007, is particularly troubling because 

First-Class Mail contributes the most revenue to the Postal Service’s total overhead costs. 

See FY 2015 Financial Report at 37; Appendix A. 

The Postal Services also faces the challenge that its personnel-related obligations include 

off-balance sheet items not recognized in the Postal Service’s financial statements. FY 2015 

Financial Report at 30. These items include costs for unfunded liabilities in both the Civil 

Service Retirement and Disability Fund (CSRDF) and the Postal Service’s Retirement Health 

Benefits Fund (RHBF). Id. 

The CSRDF provides pension benefits to retired and disabled Federal employees, including 

Postal Service employees covered by the Civil Service Retirement System (CSRS) and 

Federal Employee Retirement System (FERS). Both the CSRS and FERS pension plans had 

unfunded Postal Service liabilities in FY 2014. Id. at 31.9 In FY 2015, OPM directed the 

Postal Service to pay an additional $241 million per year for 30 years to eliminate the 

unfunded portion of the FERS liability. Annual Report on Form 10-K at 22. Beginning in 

FY 2018, the Postal Service must begin making actuarial payments on the unfunded CSRDF 

liability. 5 U.S.C. § 8348(h)(2)(B). 

The PAEA established the RHBF to fund the long-term retiree health benefits for postal 

employees, retirees, and their survivors. Like CSRS and FERS, the RHBF is administered by 

OPM. See 2011 Report at 19-20. The initial funding of $17.1 billion was transferred from 

the CSRS surplus at the end of FY 2006. FY 2015 Financial Report at 32. The PAEA requires 

the Postal Service to contribute annual payments to the fund averaging $5.2 billion per 

year, added to the annual government share of retiree health benefit premiums. Id. at 31. 

The Postal Service has not made its annual contribution to the fund since FY 2010. Id. at 32. 

Each year since FY 2007, OPM has determined the increase in the retiree health benefit 

liability and the funding status of the RHBF. The defaulted payments are accrued and 

reported as a current liability on the Postal Service’s balance sheets. Through FY 2015, the 

 

8

 United States Postal Service, Ensuring a Viable Postal Service for America: An Action Plan for the Future, March 2, 2010, at 4. 

9

 In 2017, the Office of Personnel Management (OPM) must determine the funding status of CSRS, and any surplus must be transferred to the 

RHBF. However, if there is an unfunded liability, which appears to be increasingly likely, OPM must develop a 30 year amortization of the 

unfunded liability, which the Postal Service will have to begin paying in FY 2017. 
Section 701 Report - 6 - 

Postal Service missed a total of $28.1 billion in payments, and owes $5.8 billion for 

FY 2016. Id. This current liability contributes significantly to the Postal Service’s negative 

working capital. As of FY 2015, the defaulted RHBF payments made up 57 percent of the 

Postal Service’s current liabilities, substantially impacting the Postal Service’s liquidity and 

overall sustainability. Id. at 77. 

In FY 2017, the funding of the RHBF will change by law. The Postal Service will be required 

to fund the RHBF with amortized payments consisting of the normal cost, plus the 

unfunded portion of the RHBF liability. 5 U.S.C. § 8909a(d)(3)(b). With this change, the 

RHBF, rather than the Postal Service, will pay the annual government share of the postal 

retiree health benefit premiums. FY 2015 Financial Report at 32. 

2. Commission Recommendations

In the 2011 Report, the Commission recommended that Congress adjust the current RHBF 

payment schedule. 2011 Report at 21. The Commission noted that the financial condition of 

the Postal Service had dramatically changed since the passage of the PAEA. Id. Five years 

later, the Postal Service remains unable to achieve the financial stability contemplated by 

the PAEA. The Commission urges Congress to consider the Postal Service’s current financial 

situation, as fully discussed in the Commission’s annual financial analysis reports. 

The Commission renews its recommendation from the 2011 Report that Congress modify 

the retiree health benefits prefunding level and payment schedule as a measure to improve 

Postal Service sustainability. As noted by several commenters, the Postal Service is faced 

with a unique requirement to fund 100 percent of its retiree health benefits liability. The 

Commission supports decreasing the funding target to one more in line with industry 

norms as a means of improving Postal Service liquidity and solvency. The Commission 

recommends that Congress amend the current required prefunding level to comport to 

standard industry practice in both private and public sectors. 

In its 2011 Report, the Commission provided estimated statutory payments for FY 2011 

through FY 2016 for funding levels of 50, 60, and 70 percent. 2011 Report at 24. The 

forecasted scenarios resulted in higher funding levels than private sector and other public 

entities, while also provided a significant reduction in estimated liabilities. Id. at 23-24. If 

Congress adjusts the prefunding level in the near term, the Postal Service would likely 

receive a comparable cash benefit. While the Commission does not endorse a particular 

funding level in line with industry norms, it anticipates that any reduction in the RHBF 

prefunding target would provide needed improvement in the Postal Service’s assets to 

liabilities ratio. 
Section 701 Report - 7 - 

Relief from the 100 percent prefunding target would provide the Postal Service some 

flexibility to make needed capital investments.10 In addition to reducing the prefunding 

target, the Commission further recommends lengthening the amortization period of the 

current unfunded liability. The new payment schedule for the current unfunded liability 

begins in FY 2017. The current amortization period is 40 years. FY 2015 Financial Report 

at 31-32. Extending the amortization period would free significant capital by reducing 

Postal Service annual payments. 

Further improvement in liquidity could be provided by allowing the Postal Service to use 

any available FERS surplus, rather than requiring the surplus to be transferred to the 

RHBF. The Commission recommends that Congress provide this flexibility, as it may help 

restore the Postal Service’s borrowing capability. A FERS surplus could first be paid toward 

the Postal Service’s debt to the U.S. Treasury, and after that debt was paid off, any 

remaining or future surplus could be applied to pension liabilities, retiree health benefit 

liabilities, or other general debt. The Commission recommends that Congress grant the 

Postal Service the authority to use available FERS surpluses to pay off current or future 

liabilities. 2011 Report at 19-21.

C. Market Dominant Rate System

1. Introduction and Background

The Commission analyzes three general categories of the Market Dominant rate system: 

the price cap, the recent exigent surcharge removal, and workshare discounts. 

a. Price Cap 

The PAEA created a new system for regulating rates and classes for Market Dominant 

products, a departure from the previous cost-of-service ratemaking system under the 

Postal Reorganization Act of 1970 (PRA). The current system provides for an annual 

limitation in the percentage change in rates for each class of Market Dominant mail. 

39 U.S.C. § 3622(d)(1). In general, the average rate increase for mail within a class cannot 

exceed the increase in the Consumer Price Index for All Urban Consumers (CPI-U) 

unadjusted for seasonal variation in a given year (Annual Limitation). 39 U.S.C. § 

3622(d)(1),(2). When the Postal Service elects to use less than its full authority in a given 

price adjustment, it may “bank” unused rate adjustment authority. It may subsequently use 

banked authority to adjust prices by more than the Annual Limitation. Any unused banked 

 

10 “The FY 2015 Integrated Financial Plan (IFP) included a capital investment budget of $1.5 billion for mail processing equipment, vehicles, and 

information technology.” Total actual capital investments were $0.4 billion less than planned. See FY 2015 Financial Report at 2-3, n.9. 
Section 701 Report - 8 - 

authority expires after 5 years. Banked authority must be used on a first-in-first-out basis, 

and for any class or service the rate adjustment authority used must not exceed the Annual 

Limitation by more than 2 percent. 39 U.S.C. § 3622(d)(2)(C). 

The Postal Service must provide a schedule for rate changes at regular intervals and by 

predictable amounts. 39 U.S.C. § 3622(d)(1)(B). However, if no sufficient banked authority 

exists, the Postal Service may request a rate increase greater than the Annual Limitation on 

an expedited basis due to either extraordinary or exceptional circumstances. The 

Commission must determine whether the exigent price adjustment request is reasonable, 

equitable, and necessary to enable the Postal Service, under best practices of honest, 

efficient, and economical management, to maintain and continue the development of postal 

services of the kind and quality adapted to the needs of the United States. 39 U.S.C. 

§ 3622(d)(1)(E). 

b. History of Exigent Requests 

The Postal Service first filed a request for exigent price adjustment in FY 2010 seeking to 

increase rates for Market Dominant products by 5.6 percent, on average.11 After a public 

hearing and an analysis of the record, the Commission denied the exigent request.12 The 

Commission found that although the Great Recession and its impact were an “extraordinary 

or exceptional circumstance”, the Postal Service failed to demonstrate that the proposed 

rate adjustments were “due to” the Great Recession and also failed to quantify the impact of 

the recession on postal finances and relate that impact to the requested price adjustment. 

Order No. 547 at 50, 64. The Postal Service appealed the Commission’s order to the U.S. 

Court of Appeals for the District of Columbia Circuit. Although the court concluded that the 

Commission correctly construed “due to” to require a causal relationship between the 

exigent circumstances' effects on the Postal Service and the amount of the above-cap rate 

increases, it remanded the exigent price adjustment decision, in part, for the Commission to 

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

extraordinary or exigent circumstance.13 On remand,14 the Commission concluded “that 

exigent rate adjustments are permitted only if, and to the extent that, they compensate for 

the net adverse financial impact of the exigent circumstances.” Order No. 864 at 45. It also 

clarified the level of proof sufficient to demonstrate the causal nexus of the “due to” clause 

of section 3622(d)(1)(E) at 46-55. 

 

11 Docket No. R2010-4, Exigent Request of the United States Postal Service, July 6, 2010. 

12 Docket No. R2010-4, Order Denying Request for Exigent Rate Adjustments, September 30, 2010 (Order No. 547). 

13 United States Postal Service v. Postal Regulatory Commission, 640 F.3d 1263 at 1264, 1268 (D.C. Cir. 2011). 

14 Docket No. R2010-4R, Order Resolving Issues on Remand, September 20, 2011 (Order No. 864). 
Section 701 Report - 9 - 

The Postal Service subsequently renewed its request for an exigent rate adjustment on 

September 26, 2013.15 This time, the Postal Service requested a 4.3 percent across-theboard increase to restore contribution lost as a result of the Great Recession. On December 

24, 2013, the Commission found that the Postal Service was entitled to collect $2.766 

billion in 2014 after-rates contribution as a result of losses incurred due to the Great 

Recession.16 The Postal Service again petitioned the U.S. Court of Appeals for the District of 

Columbia Circuit for review of the Commission’s order. The court’s order largely affirmed 

the Commission’s finding in Order No. 1926 but vacated the Commission’s method for 

accounting for mail volume lost due to the exigent circumstance and it remanded the case 

to the Commission.17 On remand,18 the Commission found that the Postal Service was 

entitled to recover $1.191 billion in additional contribution in addition to the amount 

originally authorized. On August 28, 2015, the Postal Service filed a petition with the U.S. 

Court of Appeals for the District of Columbia Circuit for review of Order No. 2623. That 

petition is currently pending before the court.19 On February 25, 2016, the Postal Service 

filed notice of its intention to remove the exigent surcharge from existing Market Dominant 

rates effective April 10, 2016.20 The Commission approved the Postal Service’s planned 

removal of the exigent surcharge on March 29, 2016.21 The exigent surcharge was removed 

April 10, 2016. 

c. Worksharing 

Workshare discounts refer to rate discounts provided to mailers for the presorting, 

prebarcoding, handling, or transportation of mail. 39 U.S.C. § 3622(e)(1). These discounts 

provide reduced rates for mail prepared or entered to avoid certain activities that the 

Postal Service would otherwise have to perform. The amount of each discount is based on 

the estimated avoided costs that result from the mailer performing that activity. The 

Commission is responsible for ensuring that workshare discounts do not exceed the costs 

that the Postal Service avoids as a result of the worksharing activity. 39 U.S.C. § 3622(e)(2). 

The passthrough, or the amount of discount relative to the cost avoided, may exceed 100 

percent in four instances: if the discount is associated with a new postal service, change to 

 

15 See Docket No. R2013-11, Renewed Exigent Request of the United States Postal Service in Response to Commission Order No. 1059, 

September 26, 2013. 

16 See Docket No. R2013-11, Order Granting Exigent Price Increase, December 24, 2013 (Order No. 1926). 

17 Alliance of Nonprofit Mailers v. Postal Regulatory Commission, 790 F.3d 186 (D.C. Cir. 2015). 

18 See Docket No. R2013-11R, Order Resolving Issues on Remand, July 29, 2015 (Order No. 2623). 

19 United States Postal Service v. Postal Regulatory Commission, No. 15-1297 (D.C. Cir. filed Aug. 28, 2015). 

20 See Docket No. R2013-11, Notice of the United States Postal Service of Removal of the Exigent Surcharge, February 25, 2016. 

21 See Docket No. R2013-11, Order No. 3186, Order on Removal of the Exigent Surcharge and Related Changes to the Mail Classification 

Schedule, March 29, 2016. 
Section 701 Report - 10 - 

existing postal service, or with a new workshare initiative related to an existing postal 

service and is necessary to induce mailer behavior that furthers the economically efficient 

operation of the Postal Service and the portion of the discounts in excess of the cost 

avoided will be phased out over time; if the amount of the discount above avoided costs is 

necessary to mitigate rate shock and will be phased out over time; if the discount is 

provided in connection with mail consisting exclusively of mail matter of educational, 

cultural, scientific, or informational value; or if reducing or eliminating the discount would 

impede the efficient operation of the Postal Service. 39 U.S.C. § 3622(e)(2)(A)-(D).

2. Commission Recommendation

The Commission is required by statute to conduct a review, 10 years after enactment of the 

PAEA, of the modern system of regulating rates and classes for Market Dominant products 

pursuant to 39 U.S.C. § 3622(d)(3). The Commission intends to consider matters related to 

the Market Dominant system of rate making during its Section 3622 Review, including 

discussions regarding the price cap and other related matters.22

As for worksharing, the Commission recognizes that establishing a “soft floor” (a lower 

limit subject to certain exceptions) on worksharing discounts may eliminate inefficiencies 

caused by the Postal Service performing work that mailers may perform at a lower cost. If 

Congress chooses to establish such a requirement, the Commission notes that the Postal 

Service’s concerns about pricing flexibility may be balanced with the goal of increased 

efficiency by allowing limited statutory exceptions to the soft floor requirement. These 

statutory exceptions would be modeled on the exceptions that currently exist for the 

worksharing discount “soft ceiling” (an upper limit subject to certain exceptions). 

Currently, the Postal Service may claim an exception for workshare discounts exceeding 

the costs avoided if: 

(A) the discount is (i) associated with a new postal service, a 

change to an existing postal service, or with a new work share 

initiative related to an existing postal service; and (ii) 

necessary to induce mailer behavior that furthers the 

economically efficient operation of the Postal Service and the 

portion of the discount in excess of the cost that the Postal 

Service avoids as a result of the workshare activity will be 

phased out over a limited period of time; 

 

22 Press Release, Postal Regulatory Commission, PRC Announces Plan for 10-year Review of System of Regulating Rates and Classes for Market 

Dominant Products (September 1, 2016). 
Section 701 Report - 11 - 

(B) the amount of the discount above costs avoided (i) is 

necessary to mitigate rate shock; and (ii) will be phased out 

over time; 

(C) the discount is provided in connection with the subclasses 

of mail consisting exclusively of mail matter of educational, 

cultural, scientific, or informational value; or 

(D) reduction or elimination of the discount would impede the 

efficient operation of the Postal Service. 

39 U.S.C. § 3622(e)(2). 

With clearly defined and limited exceptions similar to those already in place for the 

workshare discount ceiling, the Commission notes that establishing a soft floor would be an 

enhancement to the PAEA that would benefit the postal community by providing 

appropriate pricing signals to incentivize efficient mail preparation. 

D. Competitive Product Rate System

1. Introduction and Background

The PAEA tasks the Commission with determining whether a product offered by the Postal 

Service is Competitive or Market Dominant. Pursuant to 39 U.S.C. § 3642(b)(1), the 

Commission must consider whether “the Postal Service exercises sufficient market power 

that it can effectively set the price of such product substantially above costs, raise prices 

significantly, decrease quality, or decrease output, without risk of losing a significant level 

of business to other firms offering similar products.” Products over which the Postal 

Service exercises such power are categorized as Market Dominant while all others are 

categorized as Competitive.23 Competitive product prices are subject to Commission review 

for compliance with 39 U.S.C. § 3633. 

The remainder of this section discusses three issues relevant to these statutory 

requirements including the “appropriate share” that Competitive products must contribute 

towards the Postal Service’s institutional cost and the cost attribution methodologies used 

to determine compliance with 39 U.S.C. § 3633. 

 

23 Any product covered by the letter monopoly is categorized as Market Dominant regardless of market analysis, pursuant to 39 U.S.C. § 601 et 

seq. 
Section 701 Report - 12 - 

a. Competitive Contribution to Institutional Cost 

Pursuant to 39 U.S.C. § 3633(a), the Postal Service’s Competitive prices must not result in 

those products’ subsidization by Market Dominant products; ensure that each Competitive 

product covers its attributable costs; and ensure that all Competitive products collectively 

contribute an appropriate share of the institutional costs of the Postal Service. With regard 

to the third criterion, the Commission promulgated regulations to ensure that Competitive 

products, collectively, bear an “appropriate share” of the Postal Service’s institutional costs. 

See 39 C.F.R. § 3015.7(c). At a minimum, every 5 years, the Commission is required to 

review its “appropriate share” regulation. 39 U.S.C. § 3633(b). The Commission may also 

eliminate the contribution requirement. Id. In Order No. 1449, the Commission conducted 

its first review of that regulation and determined the “appropriate share” should remain 

5.5 percent of total institutional costs as initially set in FY 2007.24

b. Competitive Product Costing 

Underlying the Commission’s review pursuant to 39 U.S.C. § 3633(a) are the costs used by 

the Commission in its evaluation of cost coverages. Additionally, it relies upon the Postal 

Service’s reported costs to ensure that the prices set by the Postal Service for its 

competitive products satisfy the prohibition against subsidization of Competitive products 

by Market Dominant products. The Commission has reviewed and implemented numerous 

methodological changes since FY 2007. Recently, in Docket No. RM2016-2, the Commission 

considered a cost attribution methodology proposed by United Parcel Service (UPS). UPS’s 

proposed methodology in that docket sought to increase the costs attributed to products 

and, consequently, raise the price floor for Competitive products. The Commission’s final 

decision on UPS’s proposal is discussed in the recommendation section below.

2. Commission Recommendations

There have been several significant changes to Competitive products since the 

Commission’s last review of the appropriate institutional cost share. The Commission has 

approved numerous additions to the competitive product list and transfers from the 

market dominant product list to the competitive product list (e.g., Inbound Surface Parcel 

Post (at Universal Postal Union (UPU) rates),25 Parcel Post,26 Commercial Standard Mail 

 

24 See Docket No. RM2012-3, Order Reviewing Competitive Products’ Appropriate Share Contribution to Attributable Costs, August 23, 2012 

(Order No. 1449). 

25 Docket No. MC2014-28, Order No. 2160, Order Approving Product List Transfer, August 19, 2014. 

26 Docket No. MC2012-13, Order No. 1411, Order Conditionally Granting Request to Transfer Parcel Post to the Competitive Product List, July 

20, 2012. 
Section 701 Report - 13 - 

Parcels,27 and Commercial First-Class Mail Parcels28). Additionally, since FY 2007, 

Competitive product volume and revenue have grown significantly.29 Moreover, 

Competitive products represent a greater share of total volume than in FY 2007, when the 

appropriate share was set. As the Commission stated in Order No. 3506,30 the Commission 

intends to consider changes to the appropriate share in the next 5-year review. No 

legislative change is necessary at this time on the issue of the appropriate institutional cost 

share as the Commission intends to review the appropriate share during FY 2016. 

As for cost attribution methodology, the Commission considered the efficacy of the 

methodologies used to attribute costs to products in Docket No. RM2016-2. In Order No. 

3506, the Commission concluded its consideration of the cost attribution proposals put 

forth by UPS. The Commission did not adopt UPS’s proposal to incorporate all the variable 

costs in the costs attributable to individual products. Order No. 3506 at 3. However, the 

Commission recognized additional costs that are reliably identified and causally related but 

have not been previously attributed. In that Order, the Commission found that productlevel and class-level incremental costs are attributable costs. Id. As a result, the Commission 

makes no recommendations requiring potential statutory changes to the cost attribution 

methodology.31

E. Negotiated Service Agreements

1. Introduction and Background

The Postal Service is empowered by the PAEA to enter into special agreements with 

mailers, including negotiated service agreements (NSA). From FY 2008 through July 2016, 

the Commission has reviewed 29 Market Dominant NSAs (4 domestic and 26 international) 

and 630 Competitive NSAs (265 domestic and 365 international). The Commission 

reiterates its statement from the 2011 Report that both Competitive and Market Dominant 

NSAs offer many potential benefits to the Postal Service and the mailing community. Below, 

the Commission discusses its experience with different types of NSAs, its current methods 

for providing access to non-public NSA information, and recommends a potential change to 

the Market Dominant NSA standard. 

 

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

Competitive Product List, March 2, 2011. 

28 See Docket No. MC2011-22, Order No. 710, Order Adding Lightweight Commercial Parcels to the Competitive Product List, April 6, 2011. 

29 See Docket No. ACR2007, Annual Compliance Determination, March 27, 2008, at 24 (FY 2007 ACD); FY 2015 Financial Report at 71. 

30 Docket No. RM2016-2, Order Concerning United Parcel Service, Inc.’s Proposed Changes to Postal Service Costing Methodologies (UPS 

Proposals One, Two, and Three), September 9, 2016, at 123 (Order No. 3506). 

31 United Parcel Service, Inc., v. Postal Regulatory Commission, No. 16-1354 (D.C. Cir. filed Oct. 12, 2016). 
Section 701 Report - 14 - 

a. Competitive NSAs 

As with any proposed Competitive product, before adding an NSA to the competitive 

product list, the Commission must determine that the Postal Service does not exercise 

sufficient market power that it can effectively set the price of the product substantially 

above costs, raise prices significantly, decrease quality, or decrease output, without the risk 

of losing a significant level of business to other firms offering similar products. See 39 U.S.C. 

§ 3642(b)(1); 39 C.F.R. § 3020.34. It must also consider the availability and nature of 

private sector enterprises engaged in delivering the product, the views of those who use 

the product, and the likely impact on small business concerns. See 39 U.S.C. § 3642(b)(3); 

39 C.F.R. §§ 3020.32(f), (g), and (h). 

Finally, once the Commission determines that an NSA meets all the above requirements, 

prior to approving the NSA, it must determine that the agreement covers its attributable 

costs, does not cause Market Dominant products to subsidize Competitive products, and 

contributes to the Postal Service’s institutional costs. 39 U.S.C. § 3622(a); 39 C.F.R. §§ 

3015.5 and 3015.7. 

b. Commission Procedures Regarding Non-Public NSA 

Information 

Many of the terms of NSAs are customized based on specific details of the customer’s use of 

the mail and are considered non-public. The Commission’s rules for obtaining access to 

non-public materials are currently set forth in 39 C.F.R. §§ 3007.1 through 3007.62. Any 

party who wishes to obtain access to non-public materials in a Commission docket 

(including all NSA filings) must file a motion setting forth a detailed justification for access 

and a list of relevant affiliations of the party requesting access. 39 C.F.R. § 3007.40. 

To determine whether to grant a party access to non-public material, the Commission 

applies the balancing test based on Federal Rule of Civil Procedure 26, which balances the 

need of the requesting party to have access to participate effectively in a Commission 

proceeding against the Postal Service or a third party with a proprietary interest in the 

materials.32

 

32 See Docket No. RM2008-1, Order No. 225, Final Rules Establishing Appropriate Confidentiality Procedures, June 19, 2009, at 16-17; 39 C.F.R. § 

3007.42. 
Section 701 Report - 15 - 

c. Market Dominant NSAs 

(1) International Market Dominant NSAs 

As an alternative to UPU terminal dues, the Postal Service enters into bilateral NSAs with 

foreign postal operators that include negotiated rates for some or all of their inbound letter 

post items. 

International Market Dominant NSAs are composed largely of agreements with foreign 

postal operators. By the Postal Service’s own estimate, these have lost approximately $25 

million in net revenue in FY 2012.33 2013 GAO Report at 12. However, the mail sent under 

these NSAs would have generated even greater losses if the volumes were sent under UPU 

rates. Id.

(2) Domestic Market Dominant NSAs

When the Postal Service submits a proposed domestic Market Dominant NSA for approval 

by the Commission, the Commission must first independently determine whether the 

product is properly categorized as Market Dominant. The Commission does so by 

evaluating whether “the Postal Service exercises sufficient market power that it can 

effectively set the price of such product substantially above costs, raise prices significantly, 

decrease quality, or decrease output, without risk of losing a significant level of business to 

other firms offering similar products.” 39 U.S.C. § 3642(b)(1). If a product meets these 

specifications or is covered by the postal monopoly, then it is categorized as Market 

Dominant. 39 U.S.C. § 3642(b)(2). All other products are categorized as Competitive.34

When evaluating the new product, the Commission is required to give “due regard” to: 

(A) the availability and nature of enterprises in the public 

sector engaged in the delivery of the product involved; 

(B) the views of those who use the product involved on the 

appropriateness of the proposed action; and 

(C) the likely impact of the proposed action on small 

business concerns (within the meaning of section 

3641(h)). 

39 U.S.C. § 3642(b)(3). 

 

33 United States Government Accountability Office, U.S. Postal Service: Opportunities to Increase Revenue Exist with Competitive Products; 

Reviewing Long-Term Results Could Better Inform Promotions Decisions, GAO-13-578, June 2013 (2013 GAO Report).

34 Any product covered by the letter monopoly is categorized as Market Dominant regardless of market analysis, pursuant to 39 U.S.C. § 601 et 

seq. 
Section 701 Report - 16 - 

If the Commission determines that the proposed NSA is properly classified as Market 

Dominant, it must then determine that the NSA will either: (i) improve the net financial 

position of the Postal Service through reducing costs or increasing overall contribution to 

institutional costs or (ii) enhance the performance of mail preparation, processing, 

transportation, or other functions. It must also find that the NSA will not cause 

unreasonable harm to the marketplace. 39 U.S.C. § 3622(c)(10). The NSA must also be 

made available “on public and reasonable terms to similarly situated mailers.” 39 C.F.R. 

§ 3010.40(c). 

Since the PAEA has been in effect, the Commission has evaluated four domestic Market 

Dominant NSAs, approving three and denying one.35 Domestic Market Dominant NSAs have 

collectively had a negative impact on net revenue. Table I-1, below, sets forth the net effect 

on Postal Service contribution for each domestic Market Dominant NSA approved after the 

passage of the PAEA. The Commission has encouraged the Postal Service to identify a more 

reliable method for evaluating the financial impact of Market Dominant NSAs. 

 

35 See Docket Nos. MC2011-19 and R2011-3, Order No. 694, Order Adding Discover Financial Services 1 Negotiated Service Agreement to the 

Market Dominant Product List, March 15, 2011; Docket Nos. MC2012-14 and R2012-8, Order No. 1448, Order Approving Addition of Valassis 

Direct Mail, Inc. Negotiated Service Agreement to the Market Dominant List, August 23, 2012; Docket Nos. MC2014-21 and R2014-6, Order 

No. 20197, Order Adding PHI Acquisitions Inc. Negotiated Service Agreement to the Market Dominant Product List, June 19, 2014; Docket 

Nos. MC2015-3 and R2015-2, Order No. 2410, Order Rejecting the Postal Service’s Request to Add Discover Negotiated Services Agreement to 

the Market Dominant Product List, March 24, 2015. 
Section 701 Report - 17 - 

Table I-1 

The Commission’s current accepted methodology for estimating volume changes due to the 

Postal Service’s pricing incentive programs uses price elasticity. Order No. 738 at 1. In 

Docket RM2010-9, the Commission sought public comment on potential “new methods to 

estimate volume changes resulting from pricing incentive programs of the Postal Service” 

but after receiving comments, determined that it was unpersuaded “that the alternatives 

offer a demonstrable improvement over the current method” and opted to retain the 

elasticity-based methodology.36

The Postal Service continues to take the position that it “should have the flexibility to 

determine and employ relevant and appropriate methodologies compatible with its 

business model.”

37 It contends that no statutory requirement mandates the use of any one 

methodology. Id. In the FY 2014 ACD, the Commission directed the Postal Service to use the 

elasticity-based accepted analytical principle when estimating volume changes resulting 

from its pricing incentive programs unless the Commission accepts an alternative 

analytical principle.38

2. Commission Recommendations

The Commission continues to have a positive view of the Competitive NSA process, which 

has proven beneficial to both the Postal Service and the mailing community. 

 

36 See Docket No. RM2010-9, Order No. 469, Notice of Proposed Rulemaking Concerning Methods to Estimate Volume Changes Caused by 

Pricing Incentive Programs, June 8, 2010; Docket No. RM2010-9, Order No. 738, Order Terminating Proceeding, May 27, 2011, at 1. 

37 Docket No. ACR2014, Reply Comments of the United States Postal Service, February 18, 2015, at 11 (Docket No. ACR2014, USPS Reply 

Comments).

38 Docket No. ACR2014, Annual Compliance Determination, March 27, 2015, at 60 (FY 2014 ACD). 
Section 701 Report - 18 - 

While commenters offer divergent views on the current treatment of non-public material, 

the Commission maintains that the current approach to granting access to non-public 

material strikes the appropriate balance between the public interest in transparency and 

the Postal Service’s and contract partner’s need to keep certain information confidential. 

Any party may petition the Commission at any time to consider modification or 

improvement of the rules and the balance they strike. The Commission does not at this time 

recommend any legislative changes related to Competitive NSAs or procedures for seeking 

access to non-public material. 

For domestic Market Dominant NSAs, these have not consistently performed up to 

expectations. Several commenters remarked that the current statutory standard has a 

chilling effect on domestic Market Dominant NSAs. Congress should clarify whether the 

more stringent standard set forth in 39 U.S.C. § 3622 (c)(10) that the agreement “improve 

the net financial position” of the Postal Service is still intended, rather than the standard for 

Competitive NSAs which are only required to cover their attributable costs. 

This approach would have the advantage of providing the Postal Service with increased 

opportunities to experiment with its pricing, with a goal towards designing domestic 

Market Dominant NSAs that ultimately result in an improved financial position. However, 

the disadvantages of this approach include the likelihood that the Postal Service will 

continue to lose money on these agreements while it searches for the correct pricing 

formula. Given the inelastic demand for Market Dominant products, price reductions on 

these products have rarely proven to be profitable in the past. In addition, the Commission 

notes that if Congress chooses to implement this new standard, the Commission’s review 

would be limited to the consideration of whether the proposed domestic Market Dominant 

NSA would improve the Postal Service’s position from a cost coverage perspective, rather 

than its current holistic analysis of whether the Postal Service would be financially better 

off overall with the NSA than it would be otherwise. 

F. Post Office Closings and Consolidations

1. Introduction and Background

The PAEA sets forth the requirements for Postal Service determinations to close or 

consolidate post offices. See 39 U.S.C. § 404(d). Section 404(d) also delineates the 

Commission’s jurisdiction to review such determinations upon appeal by any person 

served by the post office subject to the determination. 39 U.S.C. § 404(d)(5). 

In deciding whether or not to close or consolidate a post office, the Postal Service must 

consider: (i) the effect on the community served by the post office; (ii) the effect on the 

employees of the post office; (iii) consistency with a policy of providing a maximum degree 
Section 701 Report - 19 - 

of effective and regular postal services to rural areas, communities, and small towns where 

post offices are not self-sustaining; (iv) economic savings to the Postal Service from the 

closing or consolidation; and (v) other factors as the Postal Service determines are 

necessary. 39 U.S.C. § 404(d)(2)(A). 

Section 404(d)(5) authorizes any person served by the post office subject to the 

determination of closure or consolidation to file an appeal with the Commission within 30 

days of the determination. When considering an appeal, the Commission must set aside a 

determination found to be arbitrary or capricious, without observance of procedure 

required by law, or unsupported by substantial evidence on the record. The Commission 

must complete its administrative review no later than 120 days after receiving the appeal. 

In the 2011 Report, the Commission did not recommend changes to the statutory 

procedural requirements under 39 U.S.C. § 404(d). However, the Commission did 

recommend that Congress consider requiring the Postal Service to provide regular reports 

to the Commission on plans and activities regarding the Postal Service’s retail network. See 

2011 Report at 77. The Commission noted that such reporting would enhance the PAEA’s 

goals of transparency and accountability. Id. The Commission’s 2011 Report also included a 

recommendation that the scope of the Commission’s administrative review be clarified to 

adopt the plain meaning of the term “post office”. Id.

The Commission recently concluded Docket No. PI2016-2 concerning post office 

consolidations and closings.39 The Commission opened PI2016-2 to seek input as to what, 

in commenters’ views, constitutes a relocation or rearrangement of postal services and is 

thus exempt from Commission review pursuant to section 404(d); and when or if the 

Commission should have jurisdiction to review the closing or consolidation of a contract 

postal unit (CPU).40 The comments are summarized in section II with the public comments 

received as input to this report. 

2. Commission Recommendations

There is disagreement on the Commission’s authority to review post office closings on 

appeal over what is, and what is not, a “post office” under 39 U.S.C. § 404(d).

The Postal Service maintains that it should be extended substantial deference in defining 

the terms in 39 U.S.C. § 404(d) because it claims that it should retain substantial discretion 

 

39 Docket No. PI2016-2, Order No. 3456, Order Concluding Proceeding, August 8, 2016. 

40 Docket No. PI2016-2, Notice and Order Seeking Comments on Commission Jurisdiction Over Postal Service Determinations to Close or 

Consolidate Post Offices, December 10, 2015, at 4 (Order No. 2862). 
Section 701 Report - 20 - 

concerning closures and consolidations of post offices.41 The Postal Service suggests that 

the plain language of section 404(d), read in accordance with Congress’s interpretation and 

legislative intent, suggests that the term “post office” does not include stations or branches. 

Id. at 9. The Postal Service’s regulations provide that “[p]ost [o]ffices are established and 

maintained at locations deemed necessary to ensure that regular and effective postal 

services are available to all customers within specified geographic boundaries.” 39 C.F.R. 

§ 241.1. The Postal Service considers this definition to include only “Postal Serviceoperated retail facilities operated or staffed by a postmaster, or by an employee at the 

direction of a postmaster. . . .” Docket No. PI2016-2, USPS Comments at 6. 

The Postal Service notes that nearly all stations and branches are found within urban areas 

where a central facility or main post office is located in the same community, and 

customers have multiple options for retail service. Thus, according to the Postal Service, 

the stations and branches within the geographic boundary of the post office are not post 

offices themselves. Similarly, the Postal Service also takes the position that CPUs are not 

post offices under section 404(d), asserting that designating a termination of a CPU 

contract as a closing would restrict the Postal Service’s ability to function as a business. Id.

at 12. 

Other members of the postal community urge a broader definition of a post office. They 

suggest that the Commission’s jurisdiction regarding appeals should include closings of all

types of post office, including independent post offices, stations, branches, and contract 

post offices. They argue that appeals procedures should be similar for all types of retail 

facilities. 

The Commission, for its part, has long held that the term “post office” includes not only 

postal facilities covered by the Postal Service’s organizational unit definition, but stations 

and branches as well.42 The opposing interpretations of the term “post office” continue to 

create uncertainty and confusion among the public. Legislative clarification of the 

definition of a post office would remove ambiguity as to which closings or consolidations 

are subject to administrative review by the Commission. The Commission again 

recommends that the definition of a post office be clarified to adopt the plain meaning of 

 

41 See Docket No. PI2016-2, United States Postal Service Comments on the Interpretation of Terms Related to 39 U.S.C§ 404(d), February 5, 

2016, at 2-3 (Docket No. PI2016-2, USPS Comments).

42 Docket No. A2013-5, Order No. 1866, Order Affirming Determination, October 31, 2013, at 11. “The Commission has repeatedly held that 39 

U.S.C§ 404(d) provides appeal rights to persons served by post offices that are labeled for administrative purposes as stations or branches.” 

See, e.g., Order No. 436, Docket No. A82-10, In re Oceana Station, Virginia Beach, Virginia, June 25, 1982, at 4 (Oceana Station); Order No. 

1480, Docket No. A2006-1, In re Observatory Finance Station Pittsburg, PA 15214-0651, September 29, 2006, at 6-12; Order No. 748, Docket No. 

A2011-16, Akron-East Station, Akron, Ohio, June 17, 2011, at 2; Order No 865, Docket No. A2011-18, Order Affirming Determination (Valley 

Falls Station), September 20, 2011; Order No. 1037, Docket No. A2011-49, Order Affirming Determination (Village Station), December 12, 2011; 

Order No. 1317, Docket No. A2012-108, Order Remanding Determination (South Valley Station), April 18, 2012. Id. at n.13. 
Section 701 Report - 21 - 

the term post office, inclusive of branches and stations. The Commission further 

recommends clarification on whether CPUs and nonpostal operation units also fall under 

the Commission’s administrative review authority under section 404(d).

As discussed in the Commission’s 2011 Report, the Postal Service utilizes emergency 

suspensions of post offices in certain situations. The Postal Service defines an emergency as 

“an occurrence that constitutes a threat to the safety and health of Postal Service 

employees or customers or to the security of mail or revenue.”43 These occurrences include 

natural disasters, termination of a lease or rental agreement, lack of personnel to operate 

the facility, severe health or safety hazard, severe damage to the office, or lack of measures 

to safeguard the office or revenues. Postal Service Discontinuance Handbook, section 611. 

Many emergency suspensions represent genuine emergencies requiring the suspension of 

operations. The Postal Service’s reliance on anticipated terminations of leases, however, 

are more problematic. In Docket No. PI2010-1, the Commission sought to investigate the 

number and duration of emergency suspensions.44 The Commission recognized that the 

Postal Service could suspend operations of a post office as a means of avoiding the 

discontinuance process indefinitely, and imposing a de facto closing of the office. 

Following the 2011 report, the Postal Service changed its regulations regarding closing and 

consolidations, located at 39 C.F.R. part 241. The regulations provided that where an 

anticipated lease expiration was the reason for the emergency suspension, “responsible 

personnel should initiate [an] initial feasibility study sufficiently in advance of the 

circumstance prompting the emergency suspension to allow a meaningful opportunity for 

public input to be taken into account.” 39 C.F.R. 241.3(a)(5)(iv). The initial feasibility study 

is intended to “assist the district manager in determining whether to proceed in with a 

written proposal to discontinue the facility.” 39 C.F.R. 241.3(a)(5).

Congress may wish to consider a maximum time a post office may remain in suspension 

status. The Commission has previously recommended that the Postal Service “proceed 

expeditiously in either discontinuing offices under suspension or reopening them.” See FY 

2013 ACD at 121; FY 2014 ACD at 121; FY 2015 ACD at 150. In the FY 2015 ACD, the 

Commission directed the Postal Service “to reduce the number of facilities under 

suspension in FY 2016” and, “if it was unable to do so . . . include a detailed explanation of 

why it was unable to do so in the FY 2016 Annual Compliance Report.” FY 2015 ACD at 150. 

 

43 Post Office Discontinuous Guide, Handbook PO 101, Chapter 6 – Special Considerations, Subchaper 61 – Emergency Suspensions (Postal 

Service Discontinuous Handbook). 

44 Docket No. PI2010-1, Order No. 335, Notice and Order Providing an Opportunity to Comment, November 9, 2009. 
Section 701 Report - 22 - 

G. Service Standards

1. Introduction and Background

The PAEA requires that the Postal Service, in consultation with the Commission, to 

establish service standards for Market Dominant products. 39 U.S.C. § 3691(a). Each year, 

the Postal Service is required to report to the Commission on each Market Dominant 

product’s “level of service (described in terms of speed of delivery and reliability)” and the 

degree of customer satisfaction. 39 U.S.C. § 3652(a)(2)(B). The Commission reviews the 

Postal Service’s service performance in accordance with the regulations set forth at 39 

C.F.R. part 3055. The PAEA intended this review to ensure that quality of service does not 

deteriorate as a result of cost-cutting measures implemented to comply with the consumer 

price index (CPI) price cap. 

The Postal Service uses a variety of measuring systems to measure service performance for 

its various products, including: External First-Class Measurement System (EXFC); 

Intelligent Mail Accuracy and Performance System (iMAPS); Product Tracking System 

(PTS); Seamless Acceptance and Service Performance (SASP); International Mail 

Measurement System (IMMS); and Intelligent Mail Barcode (IMb).45 The Postal Service 

utilizes these systems and compares the collected transit times against service 

performance targets for its respective products. For reporting service performance to the 

Commission, service performance must be measured by an objective external performance 

measurement system unless the Commission approves the use of an internal measurement 

system. See 39 U.S.C. § 3691(b)(1)(D) and (b)(2). Currently before the Commission is a 

public inquiry docket regarding proposals to develop new internal service performance 

measurement systems. The Commission’s evaluation of the new systems has included 

reviews of the systems’ performance data, as well as technical conferences wherein the 

Postal Service has detailed the operation of the internal systems. The Commission has 

requested further information from the Postal Service, which is necessary to review the 

proposed internal systems.46

The Postal Service generally makes its performance goals available to the public via its 

website47 and also includes its performance data in quarterly reports and in its Annual 

 

45 For a detailed description of the abovementioned measurement systems, see Docket No. ACR2015, Annual Compliance Determination, 

March 28, 2016, at 95-98 (FY 2015 ACD).

46 See Docket No. PI2015-1, Order No. 2336, Notice of Request for Comments and Scheduling of Technical Conference Concerning Service 

Performance Measurement Systems for Market Dominant Products, January 29, 2015. 

47 See United States Postal Service, Service Performance Targets FY 2016 Market Dominant Products, http://about.usps.com/what-we-aredoing/service-performance/fy2016-targets-page.html.
Section 701 Report - 23 - 

Compliance Report. Speed of delivery is evaluated based on a mailpiece reaching its 

destination within a given service window. FY 2015 ACD at 94. Reliability refers to 

consistency of delivery. Id.

In September 2015, the Government Accountability Office (GAO) published a report 

recommending that the Commission hold a public hearing to address how the Postal 

Service may improve the completeness of its service data.48 In response to the 2015 GAO 

Report, the Commission opened a public inquiry docket pertaining to potential 

improvements in service performance measurement data.49 The Commission found that 

additional reporting by the Postal Service is necessary to enhance the quality and 

completeness of service performance data.50 The Commission directed the Postal Service to 

provide descriptions of the methodologies used to verify accuracy, reliability and 

representativeness of all current measurement systems and to regularly report on mail 

excluded from measurement and mail volumes measured and unmeasured by Full Service 

IMb. Order No. 3490 at 24-25. 

The Commission’s Annual Compliance Determination analyzes the yearly service 

performance data. In FY 2015, for the first time since the Postal Service began reporting 

service performance for all Market Dominant mail products, no First-Class Mail product 

met or exceeded its service performance targets. See FY 2015 ACD at 131-138. This decline 

in service performance coincided with a shift to longer processing periods. Id. at 135. 

The Commission found that the Postal Service met service performance targets for 

Standard Mail High Density and Saturation Letters, but noted concern with slippage in the 

performance of Standard Mail Letters and the failure to meet targets for Every Door Direct 

Mail – Retail and Standard Mail High Density and Saturation Flats/Parcels. Id. at 141. The 

Commission also found that Standard Mail Carrier Route and Standard Mail Flats fell 

substantially below performance targets. Id. at 142. The Commission directed the Postal 

Service to provide a report on long-term difficulties in processing and delivering flats in a 

timely and cost-effective manner. Id. at 180-181. On July 27, 2016, the Postal Service 

submitted its report.51 On September 27, 2016, the Commission requested additional 

information from the Postal Service.52 The Commission held an off-the-record technical 

 

48 United States Government Accountability Office, U.S. Postal Service: Actions Needed to Make Delivery Performance Information More 

Complete, Useful, and Transparent, GAO-15-756, September 30, 2015 (2015 GAO Report). 

49 Docket No. PI2016-1, Order No. 2791, Notice Establishing Docket Concerning Service Performance Measurement Data, October 29, 2015. 

50 Docket No. PI2016-1, Order Enhancing Service Performance Reporting Requirements and Closing Docket, August 26, 2016 (Order No. 3490). 

51 Docket No ACR2015, Third Response of the United States Postal Service to Commission Requests for Additional Information in the FY 2015 

Annual Compliance Determination, July 26, 2016. 

52 Docket No. ACR2015, Commission Information Request No. 1, September 27, 2016. 
Section 701 Report - 24 - 

conference on October 21, 2016, during which the Postal Service provided a presentation 

on the status of its proposed method to measure, track, and report cost and service 

performance issues with Flats delivery.53

Service performance results for Periodicals in FY 2015 decreased for the second 

consecutive year, and fell below performance targets for the fourth straight year. Id. at 142. 

Package Services were inconsistent, as Media Mail/Library Mail and Bound Printed Mail 

Parcels exceeded performance targets, while Bound Printed Matter Flats fell substantially 

below other Package Services products for the fourth straight year. Id. at 144. All Special 

services met or exceeded performance targets with the exception of Post Office Box 

Service. Id. 

2. Commission Recommendations

The Commission recognizes its statutory role in setting and enforcing service standards has 

created challenges for the postal community. Accordingly, the Commission reiterates and 

expands upon its recommendations from the 2011 Report. 

The first of these recommendations is that Congress consider clarifying under which 

circumstances the Postal Service is required to consult with the Commission. See 2011 

Report at 64-65. There is no dispute that the Postal Service must consult with the 

Commission when establishing service standards. See 39 U.S.C. § 3691(a). However, the law 

is silent as to whether the Postal Service must consult with the Commission when it 

changes service standards. Currently, the Postal Service does not formally consult with the 

Commission when it changes service standards, although the Commission has interpreted 

section 3691 as a requirement that the Postal Service do so. 2011 Report at 64. To 

eliminate potential confusion and the conflicting interpretations, Congress should clarify 

the provision as to whether or not consultations with the Commission are required for 

proposals to change service standards. 

Perhaps equally ambiguous is the section 3691 requirement to establish standards “in 

consultation with” the Commission. There is substantial room for interpretation as to what 

the term “in consultation with” actually requires of the Postal Service. For example, a 

narrowly construed interpretation of the term “in consultation with” may simply obligate 

the Postal Service to notify the Commission of proposed service standards. A broader 

interpretation would suggest that the Postal Service might be required to receive and 

respond to Commission recommendations and input. The Commission recommends that 

Congress clarify the responsibilities of the Postal Service inherent in its requirement to 

 

53 Docket No. ACR2015, Order No. 3539, Order Scheduling Technical Conference, September 27, 2016. 
Section 701 Report - 25 - 

consult with the Commission. These clarifications would provide more meaningful 

consultation in setting service standards, while promoting the transparency and 

accountability of the Postal Service. 

The Commission’s 2011 Report recommendations included a proposal for service price 

adjustments as an incentive for the Postal Service to improve its service performance. See 

2011 Report at 65. The Commission appreciates that commenters maintain interest for or 

against such a proposal. However, the relationship between service performance and price 

cap authority has not been fully explored. The Commission may review the relationship 

between service performance and pricing authority in its Section 3622 Review. 

H. Nonpostal Services

1. Introduction and Background

The passage of the PAEA revoked the Postal Service’s authority to offer new nonpostal 

services. See 39 U.S.C. § 404(e)(2). It required the Commission to review each existing 

nonpostal service offered and determine whether those services should continue. 39 U.S.C. 

§ 404(e)(3). The Commission was required to consider the public’s need for each service 

and the ability of the private sector to meet the public need. 

The Commission established Docket No. MC2008-1 to review and evaluate existing 

nonpostal services.54 The Commission sought and received evidence and arguments of 

interested participants in evaluating whether the existing nonpostal services should 

continue. In Order No. 154, the Commission identified the nonpostal services that should 

be continued.55

 

54 Docket No. MC2008-1, Order No. 50, Notice and Order Concerning Review of Nonpostal Services, December 20, 2007. 

55 See Docket No. MC2008-1, Review of Nonpostal Services under the Postal Accountability and Enhancement Act, December 19, 2008 (Order 

No. 154).Order No. 154 left open the issue of whether to allow the following nonpostal activities to continue: the licensing of mailing and 

shipping supplies; the warranty repair program; and the sale of CDs and DVDs. See Order No. 154 at 4, 35. The Commission initiated Phase II of 

Docket No. MC2008-1 to resolve those three services. See Docket No. MC2008-1 (Phase II), Notice and Order Initiating Phase II Proceedings 

(Order No. 168), January 9, 2009. The Commission concluded that: licensing of mailing and shipping supplies should not be part of the 

competitive nonpostal service of licensing; warranty repair should be discontinued; and sales of CDs and DVDs should be discontinued. On 

appeal, the United States Court of Appeals for the District of Columbia Circuit remanded to the Commission for further consideration the issue 

of licensing the Postal Service’s logo for use on mailing and shipping supplies. LePage’s 2000, Inc. and LePage’s Products., Inc. v. Postal 

Regulatory Commission, 642 F.3d 225 (D.C. Cir. Jun. 7, 2011), slip op. at 1. On remand, the Commission concluded that mailing and shipping 

licensing could continue because it serves a public need that the private sector cannot meet. Docket No. MC2008-1 (Phase IIR), Order Resolving 

Issues on Remand, April 30, 2012, at 2 (Order No. 1326). 
Section 701 Report - 26 - 

The current list of Postal Service nonpostal service offerings and their descriptions was 

approved in Order No. 1575.56 Currently, the Postal Service’s nonpostal offerings include 

two Market Dominant services:57

● Alliances with the Private Sector to Defray Cost of Key Public Functions 

● Philatelic Sales 

In FY 2015, these two services generated net revenue of $62 million, representing a 13 

percent increase from FY 2014. FY 2015 ACD at 75. 

The mail classification schedule also includes nine Competitive nonpostal services:58

● Advertising 

● Licensing of Intellectual Property other than Officially Licensed Retail 

Products(OLRP) 

● Mail Services Promotion 

● Officially Licensed Retail Products (OLRP) 

● Passport Photo Service 

● Photocopying Service 

● Rental, Leasing, Licensing or Other Non-Sale Disposition of Tangible Property 

● Training Facilities and Related Services 

● USPS Electronic Postmark Service (EPM) Program 

In FY 2015, Competitive nonpostal services generated net revenue of $89 million, 

representing a 4 percent increase from FY 2014. FY 2015 ACD at 92. 

2. Commission Recommendations

The Commission reiterates the recommendations in the 2011 Report regarding new 

offerings of nonpostal services. If Congress decides to allow the Postal Service to offer 

nonpostal services, it should include adequate safeguards to reduce the risks of: 

 

56 See Docket No. MC2010-24, Order Approving Mail Classification Schedule Descriptions and Prices for Nonpostal Service Products, December 

11, 2012 (Order No. 1575). 

57 Mail Classification Schedule, section 1700.2.

58 Mail Classification Schedule, section 2700.2. 
Section 701 Report - 27 - 

unprofitable business ventures; distortion of private markets for nonpostal services; and 

diversion of Postal Service resources from core responsibilities. See 2011 Report at 50. 

The Commission recommends that if the Postal Service is permitted to offer new nonpostal 

services, proposed offerings should be subject to the same regulatory review the 

Commission applied when reviewing existing nonpostal services pursuant to section 

404(e)(3). Applying such review would require the Commission to consider the public 

need and the ability of the private sector to meet the need for proposed new nonpostal 

services. Proposed nonpostal services should also primarily utilize existing Postal Service 

assets to minimize risk. The Commission would not approve new nonpostal service 

offerings that did not meet these statutory tests. 

Similarly, the Commission recommends that where a proposed offering meets the statutory 

test for new nonpostal services, the Commission should have the authority to designate the 

service as a Market Dominant, Competitive, or experimental product. See 39 U.S.C. § 

404(e)(5). Regulatory oversight of approved new nonpostal services would operate in the 

same way it does currently for existing services. 

Implementation of these changes would safeguard against market distortion and the 

diversion of Postal Service resources. 

I. Advisory Opinion Process

1. Introduction and Background

Any change made by the Postal Service that will generally affect service on a nationwide or 

substantially nationwide basis requires the Postal Service to seek an advisory opinion from 

the Commission pursuant to 39 U.S.C. § 3661. 

Since the PAEA was enacted, the Postal Service has filed seven requests for advisory 

opinions with the Commission. These cases are commonly referred to as “N-cases.”59 As the 

Postal Service’s financial situation has deteriorated, the number of N-cases has increased. 

Of the requests filed since FY 2006, four have required 200 days or more to complete.60

Table I-2, below, illustrates the number of days taken to complete N-cases since the 

passage of the PAEA. 

 

59 Where “N” stands for “Nature of Service.”

60 Docket No. RM2012-4, Order Adopting Amended Rules of Procedure for Nature of Service Proceedings Under 39 U.S.C. 3661, May 20, 2014, 

at 4-5 (Order No. 2080). 
Section 701 Report - 28 - 

Table I-2 

In the 2011 Report, the Commission recommended that Congress consider adding 

statutory language allowing the Postal Service to request expedited consideration for timesensitive N-Cases and requiring the Postal Service to submit a written response to the 

advisory opinion prior to implementing its changes in service. 2011 Report at 84. The 

Postal Service’s written response would include an explanation of how the Commission’s 

recommendations would be implemented or, in the alternative, why it disagrees with the 

Commission’s recommendations. The Commission suggested that the proposed changes 

not be implemented until the Postal Service’s written response was provided to Congress. 

Id. 

In its response to the 2011 Report, the Postal Service expressed support for a legislative 

proposal pending at the time which would require the Commission to issue an advisory 

opinion within 90 days and remove the formal hearing requirement from the advisory 

opinion process.61 The Postal Service did not comment on the requirement of a formal 

written response. 

After the 2011 Report was issued, the Commission opened Docket No. RM2012-4, 

proposing and ultimately adopting amended rules of procedure for N-cases to address the 

need for more timely completion of the advisory opinion process. The Commission cited 

several considerations for prescribing a 90-day time frame for its advisory opinion process, 

including the need for more prompt resolution of N-cases given the Postal Service’s current 

financial situation. Order No. 2080 at 13.

 

61 United States Postal Service Response to Commission’s Draft Section 701 Report, September 16, 2011, at 22 (USPS Response to 2011 Report). 
Section 701 Report - 29 - 

The most significant change adopted in Docket No. RM2012-4 was the establishment of a 

pro forma procedural schedule for N-cases that contemplates issuance of an advisory 

opinion by the Commission within 90 days of the Postal Service’s proposal. Order No. 2080 

at 7. Other modifications to the regulations affecting N-cases were established to 

streamline procedures while still providing the requisite level of due process to 

participants. These ancillary changes included: 

 The establishment of a pre-filing phase intended to inform interested persons of the 

Postal Service’s proposal and to provide the Postal Service with feedback useful in 

preparing a final proposal less likely to require substantial revisions after 

commencement of formal Commission proceedings; 

 A limitation on the scope of the proceeding to the Postal Service’s proposal with an 

opportunity for participants to explore related subjects by means of special 

Commission studies or public inquiry proceedings; 

 The adoption of expedited deadlines for filing and responding to motions; 

 The adoption of new discovery procedures that provide for a mandatory technical 

conference and a limitation on the number of written interrogatories; 

 Expedited filing of rebuttal and surrebuttal testimony, if any; 

 Revised hearing procedures that provide for back-to-back hearings on the Postal 

Service’s direct case; rebuttal testimony, if any; and surrebuttal testimony, if any;

 An expedited briefing schedule and limitations on the length of initial and reply 

briefs; and 

 The adoption of a policy of issuing advisory opinions targeted to the Postal Service’s 

proposal and, when appropriate, the institution of special studies or a public inquiry 

proceeding to explore related subjects. 

Order No. 2080 at 7. 

2. Commission Recommendations

39 U.S.C. § 3661 prohibits the Commission from issuing an advisory opinion “until an 

opportunity for a hearing on the record under sections 556 and 557 of title 5 has been 

accorded to the Postal Service, users of the mail, and an officer of the Commission who shall 

be required to represent the interests of the general public.” 39 U.S.C. § 3661(c). In Docket 

No. RM2012-4, the Commission adopted new procedural rules that, to date, have not been 

tested because the Postal Service has not filed a new request for an advisory opinion with 

the Commission after its adoption of the new rule. The Commission’s approach in its 

regulations attempted to balance the desirability and utility of an expeditious advisory 

opinion with the statutory mandate for a hearing on the record under the Administrative 
Section 701 Report - 30 - 

Procedure Act. As long as the requirement for the hearing on the record exists, so will the 

potential for scheduling difficulties and delays in the advisory opinion process. 

However, notwithstanding the new back-to-back hearing schedule in the new procedures, 

the Commission noted the potential logistical challenges inherent in maintaining the 

opportunity for back-to-back hearings on the record in Order No. 2080. It noted that other 

procedural changes designed to increase transparency regarding the Postal Service’s 

proposal may minimize potential logistical challenges. 

Some commenters oppose elimination of the hearing on the record requirement because 

they maintain that a hearing would provide a valuable avenue for stakeholders to explore 

the potential implications of the Postal Service’s proposal. Pursuant to the pro forma 

procedural schedule for N-cases, however, the hearing on the record would occur between 

the 42nd-56th day of the pro forma procedural schedule, depending on whether any 

rebuttal or surrebuttal cases were filed. Order No. 2080 at 83. Other stages of the 

procedure, such as the pre-filing conference, technical conference, and discovery stage, all 

provide opportunities for stakeholders to question the Postal Service and alert the 

Commission about potential implications to the proposal at an earlier stage of the advisory 

opinion process. The updated procedures include various safeguards to ensure that ample 

opportunities are provided to stakeholders well in advance of the hearing stage to discover 

problems with the Postal Service’s proposal.

Congress should consider that the hearing on the record requirement affords the highest 

form of due process available in an administrative proceeding. The hearing on the record 

requirement is a key signifier of legislative intent to provide participants with all the 

protections of a formal adjudicatory proceeding. See City of W. Chicago, Ill. v. U.S. Nuclear 

Regulatory Comm’n, 701 F.2d 632, 644 (7th Cir. 1983); Izaak Walton League of Am. v. 

Marsh, 655 F.2d 346, 341 (D.C. Cir. 1981). The Commission emphasizes that a delicate 

balance exists between its obligations to provide stakeholders with sufficient opportunities 

to identify and discuss the potential impacts of Postal Service proposals to substantially 

change service within a formal adjudicatory structure and the need for expedition in the 

advisory opinion process. 

The Commission notes its recommendation from the 2011 Report that Congress consider 

adding language to 39 U.S.C. § 3661 that requires, upon receipt of the Commission’s 

advisory opinion, the Postal Service provide a written response to Congress, prior to 

implementation, addressing the Commission’s recommendations.
Section 701 Report - 31 - 

J. Market Tests of Experimental Products

1. Introduction and Background

Under the PAEA, the Postal Service has the authority to conduct market tests of 

experimental products. See 39 U.S.C. § 3641. The provision allowing for such market tests 

was driven by Congress’ recognition of the Postal Service’s need to “innovate and develop 

new products and services” to “meet the evolving needs of its customers.” S. Rep. 108-318, 

at 16 (2004). 

Section 3641(b) sets forth the requirements for market tests of experimental products. 

First, the subject product must be, from the viewpoint of mail users, significantly different 

from all products offered by the Postal Service within the 2 year period preceding the start 

of the market test. 39 U.S.C. § 3641(b)(1). Second, the product must not create an unfair or 

otherwise inappropriate competitive advantage for the Postal Service or any mailer. 

39 U.S.C. § 3641(b)(2). Finally, the product must be correctly classified as either a Market 

Dominant or Competitive product. 39 U.S.C. § 3641(b)(3). 

Market tests are subject to a 24 month limit in duration, though the Commission may grant 

an extension up to an additional 12 months. 39 U.S.C. § 3641(d). Revenues for products 

introduced in a market test, either anticipated or actually received by the Postal Service, 

may not exceed $10 million in any year, subject to inflation. 39 U.S.C. § 3641(e).

The Postal Service must file a notice of a market test with the Commission and publish the 

notice in the Federal Register at least 30 days prior to the market test’s initiation. 39 U.S.C. § 

3641(c)(1). The notice must describe the nature and scope of the market test and set forth 

the basis for the Postal Service’s determination that the market test meets the statutory 

requirements. In reviewing market tests for compliance, the Commission considers public 

comments from interested persons, mailers, and other stakeholders in the postal 

community. The Commission also reviews Postal Service responses to specific requests for 

information issued by the Commission. 

Since the submission of the 2011 Report, the Postal Service has filed five notices of market 

tests of experimental products: Docket No. MT2012-1, First-Class Tracer; Docket No. 

MT2013-1, Metro Post; Docket No. MT2013-2, International Merchandise Return Service 

Non-Published Rates; Docket No. MT2014-1, Customized Delivery; and Docket No. 

MT2016-1, Global eCommerce Marketplace (GeM) Non-Published Rates. The Commission 

ultimately approved the First-Class Tracer, Metro Post, International Merchandise Return 
Section 701 Report - 32 - 

Service Non-Published Rates, Customized Delivery, and GeM market tests. The Postal 

Service requested, and the Commission granted, a one year extension of the Metro Post 

market test.62 The Commission granted a request for a one year extension of the 

International Merchandise Return Service market test to accommodate one year negotiated 

service agreements executed in the second year of the market test.63

2. Commission Recommendations

The Commission maintains its position that the statutory authority and rules under 

the PAEA governing market tests of experimental products are working as intended and 

providing the Postal Service increased flexibility in the development of new postal 

products. See 2011 Report at 70.

a. Increases on Maximum Revenue and Duration 

In its 2011 Report, the Commission recommended Congress consider raising the maximum 

revenue limitation on market test products. 2011 Report at 70. The Commission continues 

to support this change, which would provide the Postal Service more opportunities for 

advancement of new postal products to bolster revenue streams. Accordingly, the 

Commission reiterates its 2011 Report recommendation that Congress consider raising the 

maximum revenue limitation for market tests. The Commission also recommends that 

Congress increase the maximum duration limitation on market tests for experimental 

products. As with an increase in the revenue limitation, an increased maximum duration 

should encourage more innovation by giving the Postal Service flexibility to advance more 

ideas to bolster revenue streams. 

b. Modification of “Market Disruption” Requirement

The Commission has identified one potentially problematic area in the PAEA’s conditions 

for market tests. The PAEA requires experimental products to be “significantly different 

from all products offered by the Postal Service” within the 2 years preceding the start of a 

market test 39 U.S.C. § 3641(b)(1). The Postal Service is required to show that the 

introduction of the product will not cause market disruption. 39 U.S.C. § 3641(b)(2). In 

practice, the juxtaposition between these two requirements creates a challenge for the 

Postal Service in implementing market tests. 

On one hand, the introduction of the product must not create an unfair advantage for the 

Postal Service or any mailer. The Commission’s rules require that, in a notice of a market 

test, the Postal Service establish that the product will not create a market disruption. 39 

 

62 Docket No. MT2013-1, Order No. 2243, Order Approving Request for Extension and Expansion of Metro Post Market Test, November 7, 2014. 

63 Docket No. MT2013-2, Order No. 1806, Order Authorizing Market Test to Proceed and Granting Extension, August 12, 2013. 
Section 701 Report - 33 - 

C.F.R. § 3035.3(a)(1)(ii). On the other hand, the product must be one that is significantly 

different from any product the Postal Service has offered within the last 2 years. Because 

experimental products necessarily must not have been offered recently by the Postal 

Service, the Postal Service generally lacks the relevant data necessary to determine the 

experimental product’s potential impact on the market. Without having offered a similar 

product itself, the Postal Service’s determination that the product would not create an 

unfair advantage is highly speculative. The Postal Service generally does not, prior to 

implementation of a market test, have access to revenues and volumes of similar products 

offered by individual competitors, or revenue and volume for the market for similar 

products as a whole. As a result, the determination that an experimental product would not 

cause market disruption is often hypothetical. 

For example, in establishing that the GeM experimental product would not cause market 

disruption, the Postal Service was unable to rely on its own data, as it had not offered a 

similar product.64 As a result, the Postal Service was forced to speculate that while at least 

four companies offered similar services, the offering would not create an unfair advantage. 

Id. Without specific information as to the competitors and market disruption, the 

Commission sought additional information from the Postal Service.65 The information 

requests provided the Commission more information about the nature of the experimental 

product, and about competitors offering similar services. 

UPS filed comments regarding the notice of market test.66 UPS argued that introduction of 

the GeM product would indeed cause market disruption, because the Postal Service enjoys 

monopoly privileges as a state-owned enterprise and UPU designated operator. Docket No. 

MT2016-1, UPS Comments at 3-4. Lacking sufficient market information, the Commission 

was compelled to issue a Notice of Inquiry, requesting from interested parties volume and 

revenue information for the previous 3 years, and for the related market as a whole.67 This 

information-gathering process requires the expenditure of significant resources, while still 

providing only limited market information. The GeM market test request illustrates the 

difficulty in balancing the requirements of insuring against market disruption while 

offering a substantially new product. 

 

64 Docket No. MT2016-1, Notice of the United States Postal Service of Market Test of Experimental Product – Global eCommerce Marketplace 

(GeM) Merchant Solution and Notice of Filing GeM Merchant Model Contract and Application for Non-Public Treatment of Materials Filed 

Under Seal, March 16, 2016, at 5 (Docket No. MT2016-1, Notice). 

65 See Docket No. MT2016-1, Chairman’s Information Request No. 1, March 30, 2016 (Docket No. MT2016-1, CHIR No. 1); Docket No. MT2016-

1, Chairman’s Information Request No. 2, April 5, 2016 (Docket No. MT2016-1, CHIR No. 2);Docket No. MT2016-1, Commission Information 

Request No. 1, April 29, 2016 (Docket No. MT2016-1, CIR No. 1). 

66 Docket No. MT2016-1, Comments of United Parcel Service on Postal Service Notice of Global eCommerce Marketplace Proposed Market Test, 

April 19, 2016 (Docket No. MT2016-1, UPS Comments). 

67 Docket No. MT2016-1, Notice of Inquiry No. 1, April 29, 2016 (Docket No. MT2016-1, NOI No. 1). 
Section 701 Report - 34 - 

Congress may consider modifying the standard of proof for section 3641(b)(2) to instead 

require the Postal Service to set forth to the Commission its reasonable basis for belief that 

the introduction of the proposed experimental product will not cause market disruption. 

This proposed standard would be less onerous than the current requirement that the 

Postal Service attempt to demonstrate that no market disruption will occur (for an 

experimental product that is substantially different than anything the Postal Service has 

offered within 2 years) before the test. Congress could safeguard the potential for market 

disruption of an experimental product by allowing an avenue to challenge the experimental 

product, if during the market test a user of the mail believed such a product created an 

unfair or otherwise inappropriate competitive advantage for the Postal Service or other 

mailer (especially small business concerns). This approach would be similar to the avenue 

made available by 39 U.S.C. § 404a(a)(1) for rules or regulations of the Postal Service that 

may have an anticompetitive effect. This would provide the Postal Service with the 

appropriate flexibility in its market test offerings while still safeguarding the interests of 

the market as a whole. 

K. Universal Service and the Postal Monopoly

1. Introduction and Background

The Commission is required to report to the President and Congress estimates of costs 

incurred by the Postal Service in providing universal service on an annual basis. 39 U.S.C. § 

3651(b)(1)(A). Additionally, in December 2008, the Commission provided a report to the 

President and Congress detailing the current status of the Postal Service’s Universal Service 

Obligation (USO) and the postal monopoly, including any deficiencies in universal service; 

and options for considering how to change both in the future.68 The USO Report was 

mandated in section 702(a)(2) of the PAEA.69 The Commission’s subsequent annual reports 

contain yearly estimates of the costs of the USO and postal monopoly. The 

recommendations in the USO Report and the estimates in the FY 2015 Annual Report are 

discussed in more detail below.

a. USO Report 

In drafting its USO Report, the Commission sought public input by holding three field 

hearings, sponsoring an open workshop, and soliciting formal and informal written 

comments. The Commission found, as a threshold matter, that both senders and recipients 

were generally satisfied with the level of universal service, no geographic areas were 

 

68 Postal Regulatory Commission, Report on Universal Postal Service and the Postal Monopoly, December 19, 2008 (USO Report). 

69 Pub. L. 109-435, 120 Stat. 3198 (2006), section 701(a)(2). 
Section 701 Report - 35 - 

unserved by the Postal Service, and no service was deficient in scope or quality. USO Report 

at 1. However, the report noted that the still unfolding Great Recession was having a 

substantial impact on postal revenues and recognized that the Postal Service would have to 

assess and evaluate its options in the near future in response to its financial challenges. Id.

at 2. 

In the USO Report, the Commission found that the Postal Service’s obligation to provide 

service to all persons in all parts of the nation, as well as its territories and possessions, 

remains paramount and should not be altered. It also found that the USO was applicable to 

both Market Dominant and Competitive products, and included seven relevant attributes: 

Geographic scope; Range of Products; Access to Postal Facilities; Delivery Frequency; 

Prices and Affordability; Quality of Service; and Users’ Rights of Enforcement. Id. at 19-21; 

25. Its initial estimate of the annual cost of the USO, based on FY 2007 data, was $4.4 

billion. Id. at 5. Its initial estimate of the values of the combined letter mail and mailbox 

monopolies, based on the same data, was $3.5 billion. Id. These estimates have been 

updated and refined in subsequent annual reports. 

Finally, the USO Report included the following recommendations: 

 That Congress consider and balance all the features of universal service as part of 

any review of changes necessary to preserve a financially viable Postal Service. 

 That the Postal Service be directed to develop information on the probable impact 

on mail usage by large volume mailers in reaction to potential alternative changes in 

the seven features of universal service. 

 That, before any decisions to adjust or eliminate universal service or the monopoly 

are made, the resulting impact on the societal benefits of a Federal postal service 

should be carefully addressed. 

Id. at 6. 

b. Annual Reports 

The estimated cost of the USO and value of the postal monopoly, provided in the 

Commission’s annual reports, are summarized in Table I-3 below: 
Section 701 Report - 36 - 

Table I-370

c. Federal Trade Commission Report 

Pursuant to section 703(a)71 in the PAEA, the Federal Trade Commission (FTC) was tasked 

with submitting a separate report, which was to identify federal and state laws that applied 

differently to the Postal Service in comparison to private carriers and include, as 

appropriate, an accounting of the net economic effects provided by the legal differences, as 

well as recommendations for bringing such legal differences to an end.72

The FTC report included the following conclusions: 

 The Postal Service’s unique legal status likely provides it with a net competitive 

disadvantage as compared to private carriers — legal and political restraints on the 

Postal Service increase its costs from between $330 million - $782 million annually, 

which is slightly mitigated by an implicit subsidy of its Competitive products 

estimated as $39 million - $117 million a year. 

 The costs and benefits of the Postal Service’s distinct legal obligations should be 

viewed as two market distortions that compound each other and negatively affect 

the provision of Competitive products. 

 

70 Postal Regulatory Commission, Annual Report to the President and Congress, Fiscal Year 2015, January 2016, at 41, 48. 

71 Pub. L. 109-435, 120 Stat. 3198 (2006), section 703(a). 

72 Federal Trade Commission, Accounting for Laws that Apply Differently to the USPS and its Private Competitors, December 2007 (FTC Report). 

Fiscal Year Estimated Cost of the USO Value of the Postal Monopoly

($ Billions) ($ Billions)

FY 2014 4.13 4.61

FY 2013 4.52 3.93

FY 2012 4.81 3.28

FY 2011 5.17 3.34

FY 2010 5.03 3.33

Source: FY 2015 Annual Report

Annual Estimates of the Cost of the Universal Service Obligation (USO) and

 the Value of the Monopoly
Section 701 Report - 37 - 

 Congress should consider acting to reduce the legal constraints on the Postal 

Service’s Competitive product operations. 

 The Commission should consider requiring the Postal Service to account for its 

implicit subsidies when making pricing and production decisions. 

 Worksharing and the requirement that the Competitive products cover 5.5 percent 

of institutional costs may reduce any advantage that the postal monopoly provides 

in the delivery of competitive products. 

 Long term options for addressing the distinct legal treatment between the Postal 

Service’s competitive business and its private carrier competitors include relaxing 

the current mailbox monopoly; narrowing the scope of the postal monopoly; or 

establishing the Postal Service’s Competitive products division as a separate 

corporate entity. 

FTC Report at 8-11. 

2. Commission Recommendations

The Commission notes that the challenges the Postal Service currently faces are similar to 

those discussed in the USO Report. See USO Report at 191-192. The attributes of the USO do 

not exist in a vacuum, and specific mandates for one or more attributes, such as the price 

cap on Market Dominant products or the annual appropriations requirement that delivery 

levels remain at 1983 levels, may impact how the Postal Service must consider and achieve 

other attributes. See id. at 193, 196-197. Given a flexible USO, how the Postal Service 

achieves each attribute does not remain fixed. The range of products offered may expand 

or contract to meet the needs of users of the mail. The quality of service provided for 

different products may be recalibrated to meet changing demand. Access to facilities and 

offerings may change as populations and technologies evolve. See id. at 194-198, 201. 

Comprehensive review and action on all attributes of the USO would allow for any changes 

to be considered in light of the potential effects on other attributes. 

Given the continued financial and other challenges the Postal Service currently faces, and 

the discussion above, the Commission reiterates the principal findings of its USO Report, 

and emphasizes that all of its findings remain important for Congress to consider. In 

particular, it urges Congress to consider and balance all the features of universal service as 

part of any review of changes necessary to preserve a financially viable Postal Service. Id.

at 6.

The Commission also concurs with commenters and notes that the postal industry and 

general public could benefit from an updated FTC Report with a more current accounting 

for the value of relevant legal differences between the Postal Service and its private 

competitors.
Section 701 Report - 38 - 

L. Public Representative

The Commission is statutorily required to designate an officer to represent the interests of 

the general public in all public proceedings. 39 U.S.C. § 505. The current process employed 

by the Commission involves appointing a member of its staff from the Office of General 

Counsel or Office of Accountability and Compliance as the public representative (Public 

Representative) in a given docket. Depending on the complexity of the docket, one or more 

other staff members may be assigned to assist the Public Representative in his or her 

analysis of the issues presented. The Public Representative then files comments on behalf 

of the general public in the docket to which he or she is assigned. The Public Representative 

is prohibited by both the Commission’s ex parte rules and Commission policy from 

discussing substantive matters with Commission decision-making personnel for the 

dockets on which the individual is serving as Public Representative.

In FY 2016, the Commission evaluated 299 Competitive NSAs. Each of those routine cases 

requires a 7 day window for comments for all interested persons, which includes a Public 

Representative, to ensure expeditious Commission review. For each of these cases the 

Commission assigns an advisory team of an attorney and analyst as well as a second analyst 

to serve as a Public Representative. The Public Representative teams are staffed from the 

total Commission pool of 19 analysts, who also serve to staff each Commission docket 

requiring analytical expertise. To adequately staff each Competitive NSA in FY 2016, 

therefore, there were 598 analyst assignments from that pool. Public Representative 

responsibilities for larger cases are also assigned to Commission attorneys and analysts on 

the basis of expertise. 

However, the Commission recognizes the value of the Public Representative program and 

appreciates the dedication of staff members assigned as Public Representatives. The Public 

Representative’s insight has consistently proven valuable to the Commission in its 

decision-making process. Commenters have reiterated the importance of the Public 

Representative and the value provided to members of the postal community by the 

program. 
Section 701 Report - 39 - 

II. 2011 REPORT RECOMMENDATIONS 

AND COMMENTS ON CURRENT 701 

REPORT

A. 2011 Report Recommendations

The 2011 Report focused its recommendations and review on three main areas: the Postal 

Service’s financial condition; postal rate and service matters; and improvements to 

Commission processes. 2011 Report at 1-2.

In its analysis of the Postal Service’s financial condition in FY 2011, the Commission 

recommended that Congress adjust the schedule of payments to the Postal Service RHBF 

and suggested several alternative payment options intended to alleviate Postal Service 

liquidity issues. Id. at 21-25. The 2011 Report also included a discussion of the Postal 

Service’s annual financial reporting requirements and Sarbanes-Oxley Act compliance, 

finding that the PAEA requirements resulted in improved transparency and greater cost 

savings. Id. at 25-27. 

The 2011 Report also included several recommendations regarding rate and service 

matters. First, the Commission recommended that the PAEA be amended to allow the 

Postal Service to add new Market Dominant classes of mail. Id. at 44. Second, the 

Commission noted that if Congress approves the introduction of new nonpostal services, 

there be adequate safeguards to reduce the potential for introducing unprofitable products. 

Id. at 50. The Commission also suggested that any new nonpostal products be subject to 

review under 39 U.S.C. § 404(e)(3), the same regulatory review applied to determining 

whether to “grandfather” in a nonpostal service. Id. 

Although the Commission found that the PAEA constraints on market tests were effective 

and not unduly burdensome, the 2011 Report included as its third recommendation that 

Congress consider raising the maximum revenue limitation on experimental market test 

products to further bolster Postal Service revenue streams. Id. at 70. Fourth, the 

Commission recommended that Congress clarify the PAEA to require the Postal Service to 

consult with the Commission not only in establishing service standards for market 

dominant products, but also when seeking to change existing service standards. Id. at 

64-65. The Commission did not recommend any changes to existing procedures for price 
Section 701 Report - 40 - 

adjustments but instead recommended that Congress consider allowing the Postal Service 

increased pricing flexibility based on improvements to quality of service. Id. at 40. 

Finally, the Commission made three major recommendations aimed at developing 

enhancements to improve Commission processes. The first was a recommendation that 

Congress require the Postal Service to provide the Commission with regular reports on 

retail network plans and activities. Id. at 77. The second recommendation was to clarify the 

scope of the Commission’s appellate review of post office closings, including a definition of 

“post office” that would encompass all Postal Service-operated retail facilities. Id. at 77-78. 

The third recommendation was that Congress consider allowing the Postal Service to 

obtain expedited consideration of requests for advisory opinions by the Commission. Id. at 

83-84. 

B. Comments Regarding Current 701 Report

On April 14, 2016, the Commission issued a Notice seeking public comment on the current 

701 Report. Order No. 3238. The following parties submitted comments: 

 The American Consumer Institute Center for Citizen Research (ACI)73

 A Grand Alliance to Save Our Public Postal Service (AGA)74

 Amazon Fulfillment Services, Inc. (Amazon)75

 American Postal Workers Union, AFL-CIO (APWU)76

 Citizens Against Government Waste (CAGW)77

 Don Cheney (Cheney)78

 Campaign for Postal Banking (CPB)79

 Former Utility Regulators (FUR)80

 Greeting Card Association (GCA)81

 Steven Hutkins (Hutkins)82

 

73 Comments of the American Consumer Institute Center for Consumer Research, June 14, 2016 (ACI Comments). 

74 Comments of A Grand Alliance to Save Our Public Postal Service, June 14, 2016 (AGA Comments). 

75 Comments of Amazon Fulfillment Services, Inc., June 14, 2016 (Amazon Comments). 

76 Comments of American Postal Workers Union, AFL-CIO, June 14, 2016 (APWU Comments). 

77 Comments of the Citizens Against Government Waste, June 14, 2016 (CAGW Comments). 

78 Comments of Don Cheney, June 15, 2016 (Cheney Comments). Don Cheney concurrently filed a Motion from Don Cheney for Late Acceptance 

of Comments, June 15, 2016 (Cheney Motion). The Cheney Motion is granted. 

79 Comments of Campaign for Postal Banking, June 14, 2016 (CPB Comments). 

80 Comments of Former Utility Regulators, June 15, 2016 (FUR Comments). Former Utility Regulators concurrently filed a Motion for Late 

Acceptance of Comments of Former Utility Regulators, June 15, 2016 (FUR Motion). The FUR Motion is granted. 

81 Comments of the Greeting Card Association, June 14, 2016 (GCA Comments). 
Section 701 Report - 41 - 

 Lexington Institute (Lexington Institute)83

 Elaine Mittleman (Mittleman)84

 MPA-Association of Magazine Media and Alliance of Nonprofit Mailers (MPA)85

 National Association of Letter Carriers, AFL-CIO (NALC)86

 National Association of Presort Mailers (NAPM)87

 National Taxpayers Union (NTU)88

 Linda O’Donnell (O’Donnell)89

 The Parcel Shippers Association (PSA)90

 Pitney Bowes Inc. (Pitney Bowes)91

 United States Postal Service (Postal Service)92

 The Association for Postal Commerce, Major Mailers Association, and Saturation 

Mailers Coalition (PostCom)93

 Public Representative94

 R Street Institute (R Street)95

 United Parcel Service, Inc. (UPS)96

 

82 Initial Comments by Steven Hutkins Regarding the Commission’s Section 701 Report, June 14, 2016 (Hutkins Comments).

83 Comments of the Lexington Institute, June 14, 2016 (Lexington Institute Comments). 

84 Comments of Elaine Mittleman on the Report to the President and Congress Pursuant to Section 701 of the Postal Accountability and 

Enhancement Act, June 14, 2016 (Mittleman Comments). Elaine Mittleman filed Supplemental Comments on the Report to the President and 

Congress Pursuant to Section 701 of the Postal Accountability and Enhancement Act Comments about Historic Venice, California, Post Office 

Building and Biberman Mural, July 6, 2016 (Mittleman Supplemental Comments).

85 Comments of MPA–Association of Magazine Mailers and Alliance of Nonprofit Mailers, June 14, 2016 (MPA Comments). 

86 Comment of the National Association of Letter Carriers, AFL-CIO, June 20, 2016 (NALC Comments). NALC also filed a Motion by the National 

Association of Letter Carriers, AFL-CIO for Extension of Time to File Comment, June 14, 2016 (NALC Motion). In Order No. 3372, the Commission 

denied NALC’s request for a one week extension of time to file comments, but granted NALC an extension of 3 days to file its comments. Order 

No. 3372, Order Granting Extension of Time to File Comments, June 15, 2016, at 3. Concurrently with its comments, NALC filed a Motion by the 

National Association of Letter Carriers, AFL-CIO for Late Acceptance of Comment, June 20, 2016 (June 20, 2016, NALC Motion). The June 20, 

2016, NALC Motion is granted. 

87 Comments of the National Association of Presort Mailers, June 14, 2016 (NAPM Comments). 

88 Comments of the National Taxpayer Union, June 14, 2016 (NTU Comments). 

89 Comments of Linda O’Donnell, June 14, 2016 (O’Donnell Comments).

90 Comments of the Parcel Shippers Association, June 14, 2016 (PSA Comments). 

91 Comments of Pitney Bowes Inc., June 14, 2016 (Pitney Bowes Comments). 

92United States Postal Service Comments in Response to Order 3238, June 14, 2016 (USPS Comments). 

93 Comments of the Association for Postal Commerce, Major Mailers Association, and Saturation Mailers Coalition, June 14, 2016 (PostCom 

Comments). 

94 Public Representative Comments, June 15, 2016 (PR Comments). The Public Representative concurrently filed a Motion of the Public 

Representative for Late Acceptance of Comments, June 15, 2016 (PR Motion). The PR Motion is granted.

95 Comments of R Street Institute, June 14, 2016 (R Street Comments). 

96 Comments of the United Parcel Service, Inc. on the Section 701 Report, June 14, 2016 (UPS Comments). 
Section 701 Report - 42 - 

 Valpak Direct Marketing Systems, Inc. and the Valpak Franchise Association, Inc. 

(Valpak)97

 David Yao, (Yao)98

1. Comments on Postal Service Financial Situation

a. Financial Position and Liquidity 

In Order No. 3238, the Commission requested comments on the PAEA’s impact on the 

Postal Service’s overall financial position, and suggestions for legislative recommendations. 

Order No. 3238 at 5. The Commission received comments from the Postal Service, APWU, 

AGA, PSA, GCA, NAPM, Yao, NALC, PostCom, Pitney Bowes, MPA, and the Public 

Representative. These commenters collectively discuss a number of areas related to the 

Postal Service’s financial situation, including the RHBF, the expansion of Postal Service 

borrowing authority, and improvements to accounting methods. 

The Postal Service states that it has sustained net losses each year since the PAEA was 

implemented. USPS Comments at 4. It notes that even when discounting RHBF liabilities, it 

sustained losses from FY 2009 through FY 2013, and would have continued to do so in FY 

2014 and FY 2015 but for an exigent surcharge which has since expired. Id. In describing its 

own financial challenges, the Postal Service cites low liquidity, exhaustion of U.S. Treasury 

credit, and a lack of cash to meet current obligations and for much needed capital 

investments. Id. at 5-6. The Postal Service attributes its ability to maintain sufficient 

liquidity only to its default on legally mandated RHBF payments. Id. at 7. 

The Postal Service lists four factors as the cause of its financial difficulties. First, it notes the 

decline in total mail volumes and a shift in mail mix from high- to low-margin products. Id.

at 8-9. Second, it points to the price cap required by the PAEA. The Postal Service notes its 

inability to raise prices above the CPI-U based price cap, emphasizing that the remaining 

mail volumes do not generate enough to cover the Postal Service’s costs. Id. at 9. Third, it 

points to its own fixed or growing infrastructure costs, which are inflexible. Declining 

volumes dictate that there is less and less revenue to pay for the infrastructure costs 

required to maintain a delivery network of 155 million delivery points. Id. at 9-10. Fourth, 

the Postal Service suggests that the PAEA limits its flexibility concerning cost structure, 

particularly with respect to personnel-related costs. Id. at 10-11.

 

97 Valpak Direct Marketing Systems, Inc. and the Valpak Franchise Association, Inc. Comments on Commission Report to the President and 

Congress Pursuant to Section 701 of the Postal Accountability and Enhancement Act, June 14, 2016 (Valpak Comments). 

98 Comments of David Yao, June 15, 2016 (Yao Comments). 
Section 701 Report - 43 - 

The Postal Service states that despite its constraints, it has been successful in reducing 

operating costs in response to declining volumes. Id. at 11. It notes that it has reduced its 

cost base by approximately $15 billion annually through rationalization of its retail, 

processing, transportation, and delivery networks, as well as labor cost reductions. Id. It 

cites increased total factor productivity (TFP)99 in each of the past 6 years, despite 

declining volume. Id. at 11-12. However, the Postal Service suggests that it has taken 

advantage of most cost-cutting initiatives available to it in light of its universal service 

obligation. Id. at 12. 

b. Postal Service Retiree Health Benefits Fund

Several commenters suggest changes regarding the funding of the RHBF, including removal 

of any funding requirement. For example, APWU suggests that while “the Postal Service is 

required to fully pre-fund future retiree health benefits 75 years in advance over a ten-year 

period,” no other public or private entity does so. APWU Comments at 1-2. APWU suggests 

Congress eliminate the prefunding mandate and legislate a refund of payments to allow the 

Postal Service the necessary cash flow to “make the Postal Service viable again.” Id. at 2. 

AGA characterizes the PAEA’s prefunding requirement as “an unfair crushing financial 

mandate” that no other government agency is forced to bear, and notes that without the 

mandate, the Postal Service would have enjoyed an operating surplus over the previous 3 

years. AGA Comments at 2. GCA states that “removal of the impracticable schedule for 

prefunding” might do more to improve the effectiveness of the PAEA than any other single 

change. GCA Comments at 1. Yao characterizes the prefunding requirement as “a mistake

by Congress, which has severely constrained access to capital by the USPS.” Yao Comments 

at 1.

Other commenters suggest changes to the prefunding schedule and other modifications 

regarding the RHBF, rather than elimination in its entirety. The PAEA requires the Postal 

Service to prefund 100 percent of its retiree health benefits liability. 5 U.S.C. § 8909a. The 

Postal Service, citing lower funding-level targets in the private sector, state governments, 

and other federal agencies, proposes a target of 80 percent. USPS Comments at 22-23.100

NALC notes that it has previously proposed a prefunding target that matches private 

industry best practice, between 33 and 50 percent or, alternatively, a funding target 

 

99 “Total factor productivity (TFP) measures the change in the relationship between outputs (weighted workload) and inputs (resources used) 

over a period of time. Total workload is calculated using weighted mail volumes, miscellaneous output, and the change in delivery points. 

Resources consist of labor, materials (including purchased transportation), and deployed capital assets. Workload growth, less growth in 

resources used, equals TFP growth.” FY 2015 Financial Report at 18. 

100 The Postal Service’s comments echo a set of proposed reforms already presented to Congress by Megan J. Brennan, Postmaster General and 

Chief Executive Officer. See House Oversight and Government Reform Committee Hearing, “Reforming the Postal Service: Finding a Viable 

Solution,” 114th Congress (May 11, 2016). 
Section 701 Report - 44 - 

contingent upon the Postal Service’s profitability. NALC Comments at 3. The Public 

Representative proposes a cancellation of RHBF payments which have already been 

defaulted on by the Postal Service. PR Comments at 33. 

Additionally, the Postal Service has proposed full Medicare integration of the Federal 

Employees Health Benefits Program (FEHBP). USPS Comments at 20. It notes that 9 

percent of Medicare-eligible annuitants and dependents do not take advantage of Medicare 

Part A, and 27 percent do not take advantage of Medicare Part B. Id. It suggests that “[n]o 

rational self-funding employer would pay Medicare taxes, yet continue to pay the full costs 

of health benefits that could be covered by Medicare in the first instance.” Id. The Postal 

Service proposes the creation of a separately-rated Postal Service plan within FEHBP, 

appropriately assigning claims costs to Medicare, and establishing an Employer Group 

Waiver Plan for Medicare Part D prescription drug benefits. It asserts this would eliminate 

94 percent ($54 billion) of the current unfunded RHB liability. USPS Comments at 20-21.

Valpak also supports full Medicare integration. Valpak Comments at 6. PostCom considers 

the prefunding requirement to be an “artificial” obligation, and suggests that its removal 

coupled with requiring Postal Service retirees to participate in Medicare would lead to an 

even greater reduction in liabilities. PostCom Comments at 4. MPA considers unused 

contributions to Medicare an “unjustified subsidy of the Treasury by the Postal Service and 

its customers.” MPA Comments at 1.

The Postal Service also notes that the PAEA requires it to invest 100 percent of RHBF assets 

in low-yield Treasury securities. USPS Comments at 21. It points to other post-retirement 

funds for private-sector employees and for other public-sector employees that invest assets 

for growth in order to lower unfunded employer liability. Id. The Postal Service states that 

if RHBF assets had been allocated according to the Thrift Savings Plan’s (TSP’s) L 2040 

portfolio, the unfunded liability would have been 18.4 percent lower in FY 2015. Id. at 22. 

The Postal Service proposes that 50 percent, and possibly up to 75 percent, of the fund’s 

assets be invested with TSP’s longest-term lifecycle fund. Id. 

NALC also discusses RHBF fund investment in its comments, concluding that more diverse 

investment will “over the long run, improve the balance sheet of the OPM and reduce the 

cost of pre-funding for the Postal Service” allowing for affordable postage rates and better 

service to America’s mailers and citizens. NALC Comments at 8.

Postmaster General Brennan’s plan, which includes the three proposals outlined in the 

Postal Service’s comments: a reduced funding target, full Medicare integration, and less 

restrictive investment is supported by PSA and NAPM. See PSA Comments at 2; NAPM 

Comments at 2-3.
Section 701 Report - 45 - 

In the 2011 Report, the Commission recommended that any excess CSRS funds caused by 

an overstated liability be transferred into the RHBF. See 2011 Report at 25. Both the Public 

Representative and Pitney Bowes support re-adopting the recommendation as a means of 

improving the overall financial situation. See PR Comments at 35; Pitney Bowes Comments 

at 1-2.

c. Borrowing Authority 

As noted above, the Postal Service exhausted its statutory borrowing authority of $15 

billion. FY 2015 Financial Report at 2. The Public Representative states that the Postal 

Service is consequently without flexibility to make necessary capital investments. PR 

Comments at 34. The Public Representative recommends that borrowing authority be 

increased to account for inflation in light of the need for financial flexibility and the need to 

make necessary investments. Id. at 35. 

d. Accounting Standards 

MPA suggests that “the Commission should recommend to Congress a study of the market 

value of the Postal Service’s real estate assets.” MPA Comments at 5. MPA notes that the 

Postal Service currently accounts for the net book value of real property, which does not 

reflect the Postal Service’s true financial resources. Id. MPA goes on to assert that the net 

book value of the Postal Service’s real estate is approximately $13.2 billion, and the fair 

market value has been estimated as high as $85 billion. Id. at 6. MPA posits that if the real 

estate was sold, it could yield its fair market value to satisfy its liabilities. Id. at 5. 

Similarly, PostCom identifies property, plant, and equipment (PPE) as an area carried on 

balance sheets at the original cost. PostCom Comments at 5. PostCom states that because 

PPE often has a value far in excess of the original cost due to real estate appreciation, the 

PPE account of the Postal Service is a hidden strength. Id. It points out that the National 

Postal Museum Property was purchased for $47 million, but in FY 2011 had an assessed tax 

value of $304 million. Id. at 6. PostCom urges that the “true value” of Postal Service assets 

be accounted for in assessments of the Postal Service’s financial situation. Id. at 5. 

2. Comments on Market Dominant Rate System

a. Price Cap 

Several parties noted that discussion of the price cap system is best reserved for the 

Section 3622 Review. USPS Comments at 26; GCA Comments at 2. Several parties, including 

PostCom and NAPM, express support for the current price cap system. PostCom Comments 

at 8; NAPM Comments at 4. However, PostCom asserts that costing and accounting 

methods should be improved to make the price cap system work more effective and 

efficiently. PostCom Comments at 9-10. In particular, PostCom asserts that the Postal 

Service should fully utilize data generated by the IMb system and other data systems to 
Section 701 Report - 46 - 

evaluate the effectiveness of cost-reduction initiatives, identify cost drivers within the mail 

processing system, and develop more efficient pricing. Id. at 11. 

The Postal Service, Valpak, and the Public Representative all maintain that major changes 

are needed to the price cap system. The Postal Service asserts that the price cap has been 

ineffective in allowing it to raise the revenue it needs to fulfill its statutory obligations as 

well as ensure the financial sustainability of universal service. USPS Comments at 26. 

Valpak states that the price cap does not remedy unfair pricing within a mail class, and 

urges Congress to amend the PAEA in a way that would prevent cross-subsidies within 

classes and require each Market Dominant product to cover its incremental cost in addition 

to making a “meaningful” contribution to institutional costs. Valpak Comments at 12, 26. 

The Public Representative opines that an amendment to the price cap system is necessary 

to factor in declining mail volumes and an increasing number of delivery points. PR 

Comments at 46-49. He discusses two potential amendments to the price cap previously 

proposed by the Postal Service’s inspector general101 — the revenue per delivery point 

adjustment and the hybrid cap adjustment methods — and notes that either of these 

methods would pose a superior alternative than the existing system. PR Comments at 50-

53.

GCA and NAPM both raise a recommendation from the 2011 Report of the potential for the 

Postal Service to obtain increased pricing flexibility for quality of service enhancements. 

2011 Report at 40. NAPM expresses support for this idea, asserting that such a credit 

would drive efficiencies in its operations and improve service performance. NAPM 

Comments at 6. GCA, however, opposes the credit, as it states that Market Dominant users 

would provide the majority of revenue for the benefit of Competitive users. GCA Comments 

at 5. 

b. Exigent Surcharge 

Several parties comment on the recent exigent surcharge removal. ACI asserts that the 

surcharge was detrimental to postal customers, and opposes any renewal or reinstatement 

of the surcharge because it would fail to address systemic problems of the Postal Service. 

ACI Comments at 1-3. APWU presents the opposite view, and states that the Commission 

should restore the surcharge because removal was a “boon to the major mailers . . . at a 

time when the Postal Service needs to restore its capital stock.” APWU Comments at 4. GCA 

points to the surcharge as an example that the current price cap system is working and that 

an exigent increase can be counted on by the Postal Service in the event of another 

economic downturn. GCA Comments at 2. The Postal Service restates its position that 

 

101 United States Postal Service, Office of Inspector General, Revisiting the CPI-Only Price Cap Formula, Report Number: RARC-WP-13-007, April 

12, 2013. 
Section 701 Report - 47 - 

Congress reinstate the exigent surcharge and make it part of the rate base, at least pending 

the resolution of the Commission’s Section 3622 Review. USPS Comments at 26. Valpak 

opposes legislative reinstatement of the surcharge and asserts that such a measure would 

be a repudiation of the pricing mechanism established in the PAEA. Valpak Comments at 5. 

c. Worksharing 

In its solicitation for comments in this docket, the Commission specifically sought public 

input on “the current operation of the provisions regarding workshare discounts, as well as 

insights on how the discounts and exceptions have functioned in practice.” Order No. 3238 

at 6. Of those who commented on worksharing, GCA alone stated that it was in favor of the 

status quo for worksharing discounts. GCA Comments at 7-8. Other commenters, including 

PSA, Pitney Bowes, Valpak, NAPM, the Public Representative, and APWU proposed 

suggestions for improvements to worksharing discounts. 

PSA, NAPM, Pitney Bowes, and Valpak all express support for a requirement that 

worksharing passthroughs (or the amount of discount relative to avoided costs) also be 

prohibited from falling below 100 percent. PSA asserts that a “soft floor” for discounts 

would promote efficiency and ensure the work is being performed by the lowest cost 

provider. PSA Comments at 6. Pitney Bowes urges that several exceptions to the “soft floor” 

be allowed, subject to certain exceptions. Pitney Bowes Comments at 16. NAPM notes that 

such a rule would be consistent with statutory objectives and factors of the PAEA and 

would help improve operational efficiency. NAPM Comments at 8. Valpak suggests that the 

Commission should have the authority to adjust passthroughs upward if they fall below 

100 percent. Valpak Comments at 28. The Postal Service opposes the idea of a soft floor on 

worksharing discounts because it states that such an approach would reduce its pricing 

flexibility. USPS Comments at 29. 

The Public Representative recommends legislative changes to require the Postal Service to 

adjust workshare discounts annually to reflect its most recent cost avoided estimates. PR 

Comments at 55. He states that this change would ensure that discounts more accurately 

reflect avoided costs. Id. 

APWU states that the Commission has been “passive” on excessive cost avoidances to date, 

and suggests that Congress authorize private complaints for unwarranted discounts. APWU 

Comments at 5. 
Section 701 Report - 48 - 

3. Comments on Competitive Product Rate System

a. Comments on Competitive Contribution to Institutional 

Cost 

The Commission received a number of comments pertaining to the appropriate 

institutional cost share requirement. Amazon, PSA, and the Postal Service oppose 

increasing the appropriate share from 5.5 percent of institutional costs. PSA and Amazon 

urge the Commission to eliminate the appropriate share requirement altogether. However, 

they advocate deferring consideration of the appropriate share to the next 5 year review or 

alternatively to the next phase of Docket No. RM2016-2. In Docket No. RM2016-2, Proposal 

Three, UPS proposed to increase the appropriate share of total institutional costs that 

Competitive products must cover.102

Amazon opines that “[u]nder current business conditions, the 5.5 percent minimum 

contribution requirement is essentially irrelevant.” Amazon Comments at 5. It notes that 

the contribution made by Competitive products to institutional costs considerably exceeds 

5.5 percent. It also suggests that if economic conditions change and the Postal Service 

cannot meet the contribution requirement, it “should be allowed to charge contributionmaximizing prices rather than lose the competitive business entirely.” Id. It dismisses the 

notion that Competitive products would be subsidized by Market Dominant products if 

Competitive products didn’t cover a share of the Postal Service’s fixed costs. It contends 

that as long as the revenue of a product or a group of products covers the marginal and 

incremental costs of those products, the products are not subsidized. Id. at 6. 

Amazon also notes that the Postal Service offers destination-entry prices for its 

Competitive services. Id. at 7. It asserts that the Postal Service’s economies of scale, scope 

and density are largely in last-mile delivery. Id. It suggests that the fact that the Postal 

Service shares these advantages with its competitors by “unbundling last-mile delivery 

from upstream functions, and offering last-mile delivery to competitors at reasonable 

rates” minimizes the risk that the Postal Service’s pricing could injure competition. Id. It 

observes that the Postal Service’s primary competitors “enjoy healthy and growing profits.” 

Id.

 

102 The Commission discussed the importance of the “appropriate share” requirement in Order No. 1449. It stated that: “[a] primary function of 

the appropriate share requirement is to ensure a level playing field in the competitive marketplace. The Postal Service’s competitors incur 

certain fixed operating costs. If the Postal Service’s competitive products were provided by a stand-alone enterprise, it too would incur fixed 

operating costs. The appropriate share requirement could be said to represent the fixed costs of the competitive enterprise and should reflect 

the ways in which institutional resources are spent on the competitive enterprise. If the Postal Service’s competitive products were not 

required to contribute an appropriate share towards the institutional costs of the enterprise, this could result in the Market Dominant products 

cross-subsidizing the fixed costs of the stand-alone competitive enterprise. For this reason, the appropriate share requirement is an important 

safeguard to ensure fair competition on the part of the Postal Service.” Order No. 1449 at 13. 
Section 701 Report - 49 - 

PSA contends that the existing Competitive rate system has worked as intended. Similar to 

Amazon, it notes that the contribution of Competitive products to institutional costs is 

“substantially above 5.5 percent and growing.” PSA Comments at 3. It asserts that because 

the contribution made by Competitive products far exceeds 5.5 percent, the current 

minimum contribution requirement has no effect on Postal Service pricing. It therefore 

advises the Commission to eliminate the minimum contribution requirement. Id.

The Postal Service asserts that it has been attempting to enhance contribution from 

Competitive products, as evidenced by the fact that Competitive products consistently

outperformed the minimum 5.5 percent “appropriate share” requirement. It asserts the 

playing field is more likely tilted against the Postal Service than competitors. It cites a 2008 

report by the FTC that concluded that the Postal Service’s legal status places it at a 

competitive disadvantage and artificially heightens the prices of its Competitive products. 

USPS Comments at 15-16. It asserts that the situation is unlikely to have changed 

significantly in the intervening years. Id. at 16. It suggests that increasing the appropriate 

share would further tilt the playing field against the Postal Service. Id.

b. Comments on Competitive Products Costing 

Commenters express a range of opinions regarding the proper methodology the 

Commission should utilize when calculating Competitive products’ attributable cost. 

Commenters also express varied opinions regarding subsidization of the Postal Service’s 

Competitive products by its Market Dominant products. Under the current attribution 

methodology, Competitive products cover their attributable cost. However, changes to the 

cost attribution methodology may affect the cost coverage of products. 

UPS asserts that the methodology used by the Commission puts the Postal Service at a 

competitive advantage. UPS Comments at 3. It questions how the Postal Service allocates 

cost for new large investments made to develop the Postal Service’s parcel business. Id.

UPS proposes that the Postal Service “be required to provide a clear and complete 

disclosure of how it is accounting for new large investments, such as those requiring over 

$100 million in capital investment or $100 million in increased operational costs over five 

years, including a detailed description of how those costs are being attributed to individual 

products under 39 U.S.C. § 3633(a)(2).” Id. at 5. UPS asserts that either the Commission 

should impose this reporting requirement going forward or it should ask Congress to 

mandate it. Id.

Amazon and PSA opposed the methodological changes proposed by UPS in Docket No. 

RM2016-2. They opined that the current attributable and incremental cost tests adequately 

account for the marginal and incremental costs of the Postal Service. Amazon and PSA 

contended that Postal Service’s domestic Competitive rates satisfy the prohibition against 
Section 701 Report - 50 - 

subsidization of Competitive products by Market Dominant products. Amazon Comments 

at 2, PSA Comments at 3. 

The Postal Service also opposed UPS’s proposals. Unlike UPS, it contended it is at a 

competitive disadvantage compared with private carriers. It urged the Commission to

“reject any call to recommend changes to the cost attribution standards in 39 U.S.C. §§ 

3622(c)(2) and 3631(b).” USPS Comments at 15. 

Former Utility Regulators discuss the importance of preventing the subsidization of 

Competitive products by “monopoly” products. FUR Comments at 1-2. It suggests that the 

Commission ask Congress for whatever tools it needs to prevent cross-subsidization and 

ensure that Competitive products cover their costs. FUR Comments at 2. With its 

comments, Former Utility Regulators includes a white paper titled “Cross-Subsidization: 

Applying Lessons From Utility Regulation To The United States Postal Service,” Bryan 

Tramont, Raymond Gifford, and Greg Sopkin, June 14, 2016 (White Paper). The White 

Paper provides an overview of how utility regulators, across a variety of sectors, have dealt 

with “issues presented when a monopoly provider of utility services also provides services 

in competitive markets.” FUR Comments at 1. Specifically, the White Paper discusses the 

experience of utilities in preventing cross-subsidization of Competitive products by 

monopoly products and reviews several regulatory alternatives for preventing crosssubsidies including structural separation, line of business restrictions, and accounting 

separations. With regard to accounting separations, the White Paper emphasizes the 

importance of accurate and detailed cost data and transparency regarding the cost 

assignment methodologies employed. White Paper at 10. It concludes that “[l]essons from 

the utility sector demonstrate that, in order to be effective in preventing cross 

subsidization, accounting separation must, at a minimum: 1) be based on accurate and 

reliable cost data; 2) approach cost assignment and allocation in a transparent manner; and 

3) direct assign costs to the maximum extent possible, leaving to allocation only those joint 

and common costs that are truly incapable of being direct assigned.” Id. at 20. 

Lexington Institute includes a paper with its comments titled “Practices of the U.S. Postal 

Service That Imply Anti-Competitive Behavior: Historical Parallels and Remedies Across Other 

Regulated Sectors”, Don Soifer, June 14, 2016 (Soifer Paper). 

The Soifer Paper asserts that the cost burden assigned to regulated products is 

disproportionate to that imposed on Competitive products, effectively giving the latter a 

financial boost, if not a free ride. Soifer Paper at 1. It discusses legal and regulatory 

remedies based on structural separations, as well as accounting separations. Id. The Soifer 

Paper discusses the experience of monopolies in the telecommunications, electric utilities 

and government research sectors. Id.
Section 701 Report - 51 - 

The Soifer Paper notes that “[b]ecause mail and packages are so physically different that 

their processing requires separate infrastructure, some potential for structural separation 

between monopoly and competitive activities is possible without significant disruption to 

economies of scale for market-dominant mail products.” Id. at 14. Where structural 

separation of activities is not practical, the Soifer Paper asserts that “accounting separation 

should establish a fair market value charge for utilization of shared infrastructure . . . .” Id.

4. Comments Summary

a. Competitive NSAs 

Amazon and PSA both submitted comments in favor of the current statutory system for 

reviewing Competitive NSAs. Amazon expresses the view that the current review system 

for Competitive NSAs should remain unchanged, as the current products generate 

additional volume and contribution for the Postal Service. Amazon Comments at 10. PSA 

views Competitive NSAs as a major success of the PAEA. PSA Comments at 5. 

b. Commission Procedures Regarding Non-public NSA 

Information 

Both PSA and APWU commented on the Commission’s current procedures for obtaining 

access to non-public materials. PSA is not opposed to the current process by which 

interested parties may request and be granted access, subject to protected conditions, to 

non-public material regarding the Postal Service’s costs, but asserts that the bar for 

justifying access to customer-specific NSA information should be much higher. PSA 

Comments at 5. PSA does not propose an alternative standard for accessing customerspecific information. Id.

APWU takes the opposite view, asserting that the confidentiality of contract partner 

identity may give the contract partner an unfair advantage over its competitors, and urges 

Congress and the Commission to require that NSAs (both Competitive and Market 

Dominant) be made public “to provide for public scrutiny of deals that the Commission 

currently reviews in secret.” APWU Comments at 6.

c. Comments on Market Dominant NSAs 

No party submitted comments regarding international Market Dominant NSAs. The Public 

Representative, Pitney Bowes, PostCom, and Valpak all submitted comments about 

domestic Market Dominant NSAs.

The Public Representative maintains that the Commission’s approach of using elasticities 

to determine if a domestic Market Dominant NSA will improve the net financial position of 

the Postal Service is consistent with the PAEA. PR Comments at 60. He also states that the 

PAEA sets the appropriate standards to ensure that the Postal Service does not engage in 
Section 701 Report - 52 - 

unprofitable agreements, and thus recommends that the current standard remain 

unchanged. Id. at 60-61.

Pitney Bowes characterizes the current regulatory approval process for domestic Market 

Dominant NSAs as “expensive and uncertain” and goes on to state that the standard 

adopted by the Commission for establishing net financial improvement to the Postal 

Service’s financial situation has had a chilling effect on the number of Market Dominant 

NSAs negotiated by the Postal Service. Pitney Bowes Comments at 19. It urges the 

Commission to reassess how it evaluates risk for domestic Market Dominant NSAs, stating 

that a lower burden of proof or a higher risk tolerance would both be justified. It also 

asserts that the Commission should encourage the Postal Service to pursue domestic 

Market Dominant NSAs that will improve the operational efficiency or enhance the 

performance of mail preparation, processing, transportation, and other functions. Id. 

PostCom concurs with Pitney Bowes, stating that domestic Market Dominant NSAs have 

not lived up to their potential because the metrics and process employed by the 

Commission to evaluate NSAs discourages both mailers and the Postal Service from 

entering into these agreements. PostCom Comments at 13. It asserts that review of such 

agreements should be limited, and so long as the contract does not represent an abuse of 

market power and is available to similarly situated mailers on reasonably equivalent terms, 

it should be approved by the Commission. Id.

Valpak asserts that overall, domestic Market Dominant NSAs have been highly unprofitable. 

Valpak Comments at 30-31.

5. Comments on Post Office Closings and 

Consolidations

a. Comments Received in Response to Order No. 3238

The Commission received comments on post office closings that suggest these closings 

have contributed to the Postal Service’s declining levels of service. APWU cites declining 

service dating back to the Postal Service’s “massive program of plant closings and 

consolidations since [FY] 2012.” APWU Comments at 6. It calls for a mandatory reversal of 

consolidations of the past 5 years, and cancellation of any consolidations planned for FY 

2017. Id. at 6-7.

Commenters address both the scope of the Commission’s review of appeals and the 

definition of the term “post office.” Mittleman and Hutkins express disagreement with the 
Section 701 Report - 53 - 

opinion issued by the U.S. Court of Appeals for the District of Columbia Circuit in Mittleman 

v. Postal Regulatory Commission,

103 which held that Commission orders concerning appeals 

of closings are not subject to judicial review. See Hutkins Comments at 3; Mittleman 

Comments at 15-16. 

PostCom argues that as long as adequate service is maintained, the Postal Service should be 

allowed flexibility to close or consolidate post offices for economic efficiency. PostCom 

Comments at 16. It further maintains that the Postal Service should be afforded means of 

mitigating exogenous costs, such as co-location of additional government services in postal 

facilities to maximize the value of the location to the community. Id.

Both Hutkins and Mittleman also recommend Congress and the Commission clarify the 

definition of a post office. Mittleman suggests abolishing the concept of stations and 

branches, recommending that there be no distinction between main post offices, stations, 

and branches. Mittleman Comments at 15. Both Mittleman and Hutkins suggest clearer 

definitions of “rearrangements” of postal retail facilities in a community Hutkins Comments 

at 2; Mittleman Comments at 13-14.

The Public Representative proposes changes to the Postal Service’s emergency suspension 

procedures. PR Comments at 65. His proposed changes include a mandatory feasibility 

study, with a deadline for the study’s completion, as well as a deadline for the Postal 

Service to propose discontinuance of a facility to prevent an emergency suspension from 

operating as a de facto closure without any right to appeal. Id. He supports the 

Commission’s 2011 Report recommendations that the Postal Service be required to 

provide regular reports on its plans and activities regarding its retail network, and that the 

scope of the Commission’s appellate review be clarified to include Postal Service stations 

and branches. Id. at 66. 

Cheney proposes that Congress require the Postal Service to offer mitigation measures to 

displaced Postal Service employees, including reemployment assistance and early 

retirement benefits. Cheney Comments at 1. 

b. Comments Submitted in Docket No. PI2016-2 

The Commission has determined in appeals cases that Postal Service decisions to relocate 

retail facilities within the same community are not closings or consolidations and, 

therefore, fall outside the scope of the Commission’s jurisdiction under 39 U.S.C. § 404(d). 

See Order No. 436 at 7. Under this rationale, the Commission has dismissed several post 

office closing appeals and found that transfers of retail operations constituted relocations

 

103 Mittleman v. Postal Regulatory Commission, Nos. 12-1095, 12-1110, 12-1157 (D.C. Cir. filed Jul. 8, 2014). 
Section 701 Report - 54 - 

which it lacks jurisdiction to review under section 404(d). See Order No. 2862 at 5. 

Similarly, the Commission has consistently dismissed several post office closing appeals on 

the grounds that the Postal Service action constituted a rearrangement of retail facilities 

within a community. 

The Commission received several comments on relocation and rearrangement of postal 

services in Docket No. PI2016-2. The comments reflected competing perspectives on the 

Commission’s jurisdiction in appeals of post office relocations and rearrangements. Many 

commenters proposed a broader interpretation of the Commission’s authority, suggesting 

that limiting jurisdiction permits the elimination of a community’s access to effective or 

regular postal services without the statutory safeguards for process.104 On the other hand, 

the Postal Service’s comments argued for a more limited interpretation of the scope of 39 

U.S.C. § 404(d), stating that in addition to a determination that the Commission lacks 

jurisdiction to review relocations and rearrangements, closings of branches and stations 

should likewise not be subject to review. Docket No. PI2016-2, USPS Comments at 1. 

CPUs and Community Post Offices (CPOs) are types of contractor-operated (as opposed to 

Postal Service-operated) facilities. See 39 C.F.R. § 241.3(a)(2)(ii). A CPU is a contract 

station, contract branch, or CPO operated under contract by persons who are not postal 

employees in a space provided by the contractor.105 Village Post Offices (VPOs), although 

operated under a contract, are not classified by the Postal Service as a CPU.106 While CPUs 

generally do not fall within the scope of 39 U.S.C. § 404(d), in select circumstances when 

the Commission determines that a CPU is the sole source of postal retail services to a 

community, it has found that section 404(d) (both the statutory intent and language) 

justifies the Commission exercise of review authority over sole source CPU closures and 

consolidations.107

Comments on the “sole source” standard for the exercise of the Commission’s review 

authority were mixed. The Postal Service urged that Commission review of CPU closures 

 

104 See, e.g., Docket No. PI2016-2, Public Representative's Comments on the Commission's Ability to Review Postal Service Determinations to 

Close or Consolidate Any Post Office, February 5, 2016, at 7. 

105 Postal Operations Manual section 123.126, Issue 9, July 2002, Updated With Postal Bulletin Revisions Through October 31, 2013 (POM); see 

also, Publication 32 – Glossary of Postal Terms, July 2013, https://about.usps.com/publications/pub32/ (Glossary of Postal Terms), defining a 

CPU as a “postal unit that is a subordinate unit within the service area of a main Post Office. It is usually located in a store or place of business 

and is operated by a contractor who accepts mail from the public, sells postage and supplies, and provides selected Special Services (e.g., Postal 

Money Order or Registered Mail). Also called contract branch, contract station, and community Post Office unit.”

106 See Village Post Offices Fact Sheet, July 2011, https://about.usps.com/news/electronic-press-kits/expandedaccess/assets/pdf/vpo-fact-sheet110726.pdf. VPOs, like CPUs and CPOs, are part of the Postal Service’s “Approved Postal Provider” network and are retail outlets for postal 

products and services operated by a third party. 

107 See Docket No. A83-30, In the Matter of Knob Fork, West Virginia 26579, Commission Opinion Remanding Determination for Further 

Consideration 39 U.S.C § 404(b)(5), January 18, 1984, at 7. 
Section 701 Report - 55 - 

“impedes the effective management and operational authority of the Postal Service” and is 

otherwise not supported by legislative history. Docket No. PI2016-2, USPS Comments at 

10-11. Other commenters argue CPUs should be considered under the definition of “post 

office” and thus be subject to review, and that the sole source standard is applied too 

narrowly.108

6. Comments on Service Performance

The Commission received a range of comments on different areas related to service 

standards and performance. 

Several commenters note generally that service performance has declined. APWU states 

that continued declining service will lead to a decline in volumes, and that Congress should 

restore service standards to pre-2012 levels. See APWU Comments at 8-9. Similarly, AGA 

expresses concern that the Postal Service has “slowed mail service, closed community 

based Post Offices and mail processing facilities, slashed hours of operations, tried 

ceaselessly to end six day service as well as door to door delivery.” AGA Comments at 2. 

AGA believes that Congress should restore service standards to pre-2012 levels, and 

protect 6-day and door-to-door delivery. Id. at 3. 

O’Donnell, a Postal Service employee, cited the consolidation of mail processing facilities as 

a cause of delayed mail. O’Donnell Comments at 1. O’Donnell also suggests reducing 

customers’ time in line by “properly staffing post office windows” and restoring service 

hours. Id.

PostCom focuses its comments on the Commission’s oversight of service standards and 

performance. See PostCom Comments at 16-17. PostCom notes that the Postal Service 

“cannot even meet the standards it has set for itself” and that it is imperative that the 

Commission oversee a move to higher quality operations that truly reduce costs and meet 

the needs of customers. Id. at 17. PostCom suggests that the Commission have ultimate 

authority to set and enforce service standards. Id. at 18. 

Valpak focuses its comments on the recommendation in the Commission’s 2011 Report 

that Congress consider providing an opportunity for the Postal Service to achieve increased 

pricing authority for increases in quality of service. See 2011 Report at 28, 40. Valpak 

recommends that consideration of service quality pricing authority should be deferred. 

Valpak Comments at 33. It states that should such a system be implemented, it should cut 

both ways as a financial incentive for improving service and as a penalty for declining 

 

108 See, e.g., Docket No. PI2016-2, Reply Comments of Steve Hutkins on the Commission’s Jurisdiction Over Post Office Closings, March 29, 

2016, at 13-15 (Docket No. PI2016-2, Reply Comments of Steve Hutkins). 
Section 701 Report - 56 - 

service. Id. at 31-32. Valpak states that until better service performance data are available, 

and given the Postal Service’s low financial liquidity, “implementation of any meaningful 

penalty provision for service degradation likely would be impractical as it might threaten 

the Postal Service’s continued financial viability.” Id. at 32-33. 

UPS comments on the relationship between service performance and the Postal Service’s 

prioritization of certain products. Specifically, UPS notes that service performance results 

for Standard Mail Carrier Route, Standard Mail Flats, and Standard Mail Letters have not 

met their targets for several years and have not shown significant improvement, while 

parcels and other high density shipments “exceeded the performance targets set by the 

Postal Service.” UPS Comments at 9. UPS maintains that these results are reflective of the 

Postal Service prioritizing service standards “for specific high-growth products, like 

parcels, over the service standards for monopoly products, like letter mail.” Id. at 8-9. UPS 

urges Congress to require the Postal Service to adhere to quality of service reporting 

requirements of 39 U.S.C. § 3652 for its Competitive product lines as well as Market 

Dominant products. Id. at 10. UPS says “[this requirement would allow for a fair 

comparison of the quality of service being provided for the Postal Service’s marketdominant business” against quality of service for its Competitive products business. Id. 

7. Comments on Nonpostal Services

The Commission received comments on nonpostal services from the Postal Service, AGA, 

APWU, Pitney Bowes, NAPM, CAGW, CPB, Yao, and O’Donnell. The commenters fall into 

three general categories: those that favor expanded nonpostal services, those that oppose 

the expansion of nonpostal services, and those that favor limited expansion. Several of 

these comments offered specific nonpostal services that should be considered. Other 

comments suggested that the Postal Service should not offer any nonpostal services at all. 

Commenters in favor of expanded nonpostal services include CPB, APWU, AGA, Yao, and 

O’Donnell. CPB states that 28 percent of domestic households lack access to affordable 

financial services and asserts that because the Postal Service is a trusted, accessible, and 

secure government agency with the world’s largest retail network, it is in a unique position 

to fill the public need. CPB Comments at 1-2. CPB notes that the U.S. has a tradition of postal 

banking and continues to offer domestic and international money orders and wire 

transfers. CPB argues that permitting the Postal Service to offer financial services (e.g.,

ATMs, savings accounts, and small dollar loans) would both serve the public and 

strengthen the Postal Service financial situation. Id. at 2. 

Other commenters, including APWU, Yao, AGA, and O’Donnell, support the expansion of 

postal banking. APWU Comments At 3; Yao Comments at 1; AGA Comments at 3; O’Donnell 

Comments at 1. 
Section 701 Report - 57 - 

Both NAPM and CAGW oppose the expansion of nonpostal services. NAPM expresses its 

concern that core competencies will suffer if the Postal Service is permitted to enter into 

commercial nonpostal markets, because limited resources will be diverted. See NAPM 

Comments at 8; CAGW asserts that the Postal Service “shouldn’t be dabbling in financially 

volatile, nascent start-up services.” CAGW Comments at 1. 

Commenters supporting a limited expansion of Postal Services include PSA, Pitney Bowes, 

and the Postal Service. PSA argues that the Postal Service lacks the resources to maintain 

its existing services while exploring new nonpostal endeavors. PSA Comments at 7. PSA 

does, however, support proposals to specifically authorize the Postal Service to provide 

governmental services in lieu of local or state governments. Pitney Bowes shares the view 

that the Postal Service should be permitted to provide other governmental services to 

state, local, and tribal governments, but says that the offering of commercial nonpostal 

services would distort private markets and divert from the Postal Service’s core 

competencies. Pitney Bowes Comments at 17. 

The Postal Service recommends a “somewhat expanded” range of services, which could 

provide needed revenue. USPS Comments at 29-30. Specifically, the Postal Service suggests 

that it be permitted to enter into agreements to provide services to state, local and tribal 

governments. Id. at 30. The Postal Service mentions that it could be permitted to carry beer, 

wine, and distilled spirits through the mail as a potential expanded service, and says that 

the Commission should be allowed to approve other new nonpostal services that are 

consistent with the public interest, do not cause unfair competition, do not interfere with 

the value of postal services, comply with all applicable federal laws and regulations, and are 

expected to improve the Postal Service’s net financial position. Id. 

8. Comments on Advisory Opinion Process

PostCom maintains that as long as the Commission’s opinion remains advisory and the 

Commission lacks the power to enforce its conclusions, there is no need for a hearing on 

the record. PostCom Comments at 18. It notes that, although valuable information may be 

gained during advisory opinion proceedings, so long as the Postal Service is not obligated 

to follow the Commission’s recommendations, “the expenditure of resources to develop 

that information is entirely wasted.” Id. at 19. It suggests that the advisory opinion process 

should either be abolished entirely or revised to provide the Commission with a means of 

enforcing its recommendations. Id. 

The Public Representative opposes elimination of the hearing on the record requirement. 

PR Comments at 69. He asserts that the requirement “ensures that stakeholders . . . have 

the opportunity, through the discovery and adjudicatory hearing procedures, to explore the 

potential implications of the Postal Service’s proposals.” He notes that the Postal Service 

proposals are often presented to the Commission with “no established body of relevant 
Section 701 Report - 58 - 

data and information,” which distinguishes N-cases from annual compliance 

determinations and rate proceedings, for which a hearing on the record is not required. Id.

He states that, for the reasons stated by the Commission in its 2011 Report, section 3661 

should be amended to require that the Postal Service provide a written response to 

advisory opinions. Id. at 70. 

APWU asserts that the current 90-day process does not provide the requisite level of due 

process for unions and customers. APWU Comments at 10. It urges Congress to change the 

advisory opinion process to allow for extensions to the advisory opinion process to give 

stakeholders the opportunity to prepare documentation and testimony. Id. 

9. Comments on Market Tests of Experimental 

Products

The Commission received comments on statutes and regulations regarding market tests 

from the Public Representative, CAGW, and Pitney Bowes. The comments illustrate 

different perspectives of members of the postal community. 

The Public Representative opines that the framework for the regulation of market tests is 

working as intended and should not be altered. PR Comments at 71. 

CAGW holds the opinion that “the Postal Service shouldn’t be dabbling in financially 

volatile, nascent start-up services.” CAGW Comments at 1. The CAGW position is that the 

Postal Service should not “venture outside of its core mission of delivering letter mail.” Id.

Pitney Bowes comments that no market test has had a material effect on the Postal 

Service’s financial condition due to statutory limitations on duration and anticipated 

revenues. Pitney Bowes Comments at 18. Pitney Bowes suggests that the Commission 

recommend increases on the duration and revenue cap limitations, and commensurate 

increase in the Postal Service’s burden to demonstrate that introduction of the 

experimental product “will not create an unfair or otherwise inappropriate competitive 

advantage for the Postal Service.” Id. at 18-19.

10. Comments on Universal Service and the Postal 

Monopoly

The Postal Service asserts that many of the cost savings from improved efficiency are 

limited by legal and universal service constraints. USPS Comments at 12. 

UPS and Amazon both commented on the FTC report. UPS asserts that the FTC report 

should be updated in light of the Postal Service’s expansion of its parcel delivery business. 
Section 701 Report - 59 - 

UPS Comments at 5. Additionally, UPS maintains that the FTC Report appears to have 

underestimated the Postal Service’s competitive advantages, particularly those related to 

the postal monopoly. Id. at 6. It disagrees with the report’s conclusion that worksharing 

and economies of scale and scope reduce the Postal Service’s competitive advantage. Id. at 

6-7. It recommends that Congress revisit the need for, and appropriate scope of, the 

mailbox monopoly. Id. at 7-8.

Amazon also comments that the FTC Report is dated, but reaches the opposite conclusion 

from UPS and asserts that subsequent developments, including the transfer of several 

Market Dominant products to the competitive product list, the substantial rise in average 

competitive product price, and the growing profitability of private carriers, have reduced 

the risk that distinct legal treatment of the Postal Service could disadvantage its 

competitors. Amazon Comments at 7-8. It goes on to state that the Postal Service’s policies 

of sharing economies of scale, scope, and density through last mile delivery provide an 

additional layer of protection from competitive harm. Id. at 8. It notes that the FTC Report 

did not include in its estimate the cost burden associated with the Postal Service’s limited 

ability to invest its retirement account assets in U.S. Treasury securities. Id. 

11. Comments on the Public Representative

UPS states that the Public Representative serves a valuable role in Commission proceedings 

by facilitating the public’s understanding of the Postal Service’s practices and serving an 

important advocacy role for the general public. UPS Comments at 11. APWU suggests 

overhauling the Commission’s current method of assigning Public Representatives in favor 

of creating an independent Consumer Advocate role at the Commission to help individuals 

participate in Commission dockets. APWU Comments at 11. 

The Public Representative concurs with UPS, asserting that the participation of Public 

Representatives has contributed to better informed Commission decisions and benefits the 

public good by providing an experienced Commission staff member capable of presenting 

information and arguments in a form that is persuasive and familiar to decisional staff. PR 

Comments at 72. 
Section 701 Report - 60 - 

III. CONCLUSION

The Commission appreciates the opportunity to contribute to the essential discussion of 

postal policy by providing its second 701 Report to measure the effectiveness of the PAEA. 

In this 701 Report, the Commission has identified areas where adjustments to postal laws 

could address key issues including the Postal Service’s current liquidity crisis. It expects to 

conduct a more in depth review of the Postal Service’s Market Dominant system of 

ratemaking in its Section 3622 Review. 
Section 701 Report Appendix A 

Page 1 of 2 

Section 701 Report Recommendations 

 The Commission recommends that Congress amend the current required RHBF 

prefunding level to comport with standard industry practice in both private and 

public sectors. 

 The Commission recommends lengthening the amortization period of the current 

unfunded liability. 

 The Commission recommends that Congress grant the Postal Service the authority 

to use available FERS surpluses to pay off current or future liabilities. 

 With clearly defined and limited exceptions, the Commission recommends 

establishing a “soft floor” (a lower limit subject to certain exceptions) on 

worksharing discounts, which would benefit the postal community by providing 

appropriate pricing signals to incentivize efficient mail preparation. 

 The Commission again recommends that the definition of a post office be clarified to 

adopt the plain meaning of the term post office, inclusive of branches and stations. 

 The Commission recommends clarification on whether CPUs and nonpostal 

operation units also fall under the Commission’s administrative review authority 

under section 404(d). 

 The Commission recommends consideration of the duration of emergency 

suspensions of post offices. 

 The Commission recommends that Congress consider clarifying under which 

circumstances the Postal Service is required to consult with the Commission when 

making proposed service standard changes. 

 The Commission recommends that Congress clarify the meaning of section 3691 and 

the requirement that the Postal Service set service standards “in consultation with” 

the Commission. 

 The Commission recommends that if the Postal Service is permitted to offer new 

nonpostal services, proposed nonpostal services be subject to the same regulatory 

review the Commission applied when reviewing existing nonpostal services 

pursuant to section 404(e)(3). 

 The Commission recommends that where a proposed nonpostal service meets the 

statutory test, the Commission should have the authority to designate the service as 

a Market Dominant, Competitive, or experimental product. 
Section 701 Report Appendix A 

Page 2 of 2 

 The Commission recommends that Congress consider adding language to 39 U.S.C. 

§ 3661 that requires the Postal Service, upon receipt of the Commission’s advisory 

opinion, and prior to implementation, to provide a written response to Congress 

addressing the Commission’s recommendations. 

 The Commission recommends that Congress consider raising the maximum revenue 

limitation on market test products thereby providing the Postal Service with more 

opportunities for advancement of new postal products to bolster revenue streams. 

 The Commission recommends that Congress increase the maximum duration on 

market tests for experimental products. 

 The Commission recommends Congress consider allowing the Postal Service to 

satisfy the requirements of section 3641(b)(2) by setting forth a reasonable basis 

for its belief that an experimental product would not cause market disruption. 

 The Commission urges Congress to consider and balance all the features of universal 

service as part of any review of changes necessary to preserve a financially viable 

Postal Service. 

 The Commission concurs with commenters that the postal industry and general 

public could benefit from an updated FTC Report with a more current accounting for 

the value of relevant legal differences between the Postal Service and its private 

competitors. 
Section 701 Report Appendix B 

 Comments of the United States Postal Service 

- 1 - 

POSTAL SERVICE COMMENTS TO THE COMMISSION’S SECTION 701 REPORT

The Postal Regulatory Commission’s Section 701 Report is an important 

opportunity to apprise the President and Congress of the Postal Service’s financial 

condition and to recommend measures “necessary to improve the effectiveness or 

efficiency of the postal laws of the United States.”1 The report that the Commission 

provided the Postal Service on October 20, 2016, takes that opportunity to highlight the 

Postal Service’s dire financial condition, which results from a combination of declining 

mail volumes and legal constraints.2 The Commission has sounded this alarm in other 

reports, and it does well to do so again here. 

The Commission acknowledges that “the most important legislative 

recommendations the Commission can make relate directly to improving the financial 

condition of the U.S. Postal Service.”3 The Postal Service agrees. As it explained in its 

comments leading up to the Section 701 Report, the Postal Service must achieve 

financial stability in order to ensure the future of universal postal service and fulfill all of 

its legal obligations. However, current law leaves the Postal Service with inadequate 

tools to address the problems that loom before it, particularly (1) declining mail volumes, 

especially in high-contribution First Class Mail, coupled with rising delivery points; and 

(2) excessive benefits liabilities. Therefore, meaningful solutions will need to come from 

Congress, through the passage of postal reform legislation, and the Commission, 

through the replacement of the current price cap system with a more suitable regulatory 

structure upon conducting the ten-year review required under 39 U.S.C. § 3622(d)(3). 

1 Postal Accountability and Enhancement Act of 2006, Pub. L. No. 109-435, § 701(a). 

2 Postal Regulatory Comm’n, Section 701 Report: Analysis of the Postal Accountability and Enhancement 

Act of 2006 (Oct. 20, 2006) [hereinafter “Section 701 Report”], at 1, 4-6. 

3 Id. at 1. 
- 2 - 

Regarding the topic of postal reform legislation, in its comments, and consistent 

with what it had “already developed and presented [to] Congress,” the Postal Service 

offered a “a set of common-sense reforms that would put the Postal Service on a more 

stable financial footing, allowing for further innovation, investments, and growth for the 

Postal Service, and the mailing industry as a whole.”4 The reforms discussed by the 

Postal Service are: 

1) Retiree health benefits (RHB) should be fully integrated with Medicare. 

2) The RHB liability should be calculated using net claims costs, rather than 

premium costs, in accordance with sound actuarial practice. 

3) RHB Fund assets should be invested prudently, as is the practice among other 

governmental retiree benefits funds. 

4) The RHB funding target should be lowered from 100 percent to 80 percent. 

5) Pension liabilities should be calculated on the basis of postal-specific economic 

and demographic assumptions. 

6) Any current Federal Employees Retirement System (FERS) surplus should be 

used to pay down debt; future surpluses should be applied against pension or 

RHB liabilities or debt. 

7) The amortization period for supplemental Civil Service Retirement System 

(CSRS) liability should be lengthened to match the period for RHB. 

8) The exigent surcharge should be restored as a policy matter (regardless of 

whether the Commission-ordered rollback of the surcharge is a reasonable 

application of the current statute). 

9) The Postal Service should be given increased flexibility to offer services to state 

and local governments, as well as new commercial nonpostal services that meet 

certain conditions (including approval by the Commission).5

 

4 United States Postal Service Comments in Response to Order No. 3238, PRC Docket No. PI2016-3 

(June 14, 2016) [hereinafter “USPS Comments”], at 17. Consistent with certain other parties, the Postal 

Service encouraged the Commission to defer matters implicated by the ten-year review to the review 

itself, rather than addressing such matters in its Report. Id. at 26-27. The Commission prudently 

determined to follow this course of action. Section 701 Report at 2-4, 10. 

5 USPS Comments at 16-30. 
- 3 - 

Taken together, these reforms would “constitute significant progress towards financial 

sustainability of the Postal Service” and would reduce “the financial gap that will have to 

be reckoned with in the ten-year review of the market-dominant rate regulation 

system.”6 Many of these proposals also enjoy the support of a broad cross-section of 

postal stakeholders, as reflected in other parties’ comments to the Commission.7

Despite its acknowledgment of the importance of recommendations aimed at 

improving the Postal Service’s financial problems, and despite the presence of these 

and other substantive reform proposals in the comments that the Commission had 

solicited,8 the Commission’s report misses the opportunity to make any such “important 

legislative recommendations.” Instead of offering the President and Congress with an 

analysis and endorsement of any up-to-date proposals, the Commission largely 

retreads its recommendations from 2011, few of which have garnered much support in 

the meantime. More to the point, almost none of the Commission’s 17 

recommendations would meaningfully improve the Postal Service’s financial condition. 

Most of the recommendations amount to minor tinkering with the regulatory structure 

governing the Postal Service, rather than reforms that would materially mitigate 

 

6 Id. at 18. 

7 Id. at 17-18; see also Comment of the National Association of Letter Carriers, AFL-CIO, PRC Docket 

No. PI2016-3 (June 20, 2016), at 1-8; Comments of the American Postal Workers Union, AFL-CIO, PRC 

Docket No. PI2016-3 (June 14, 2016), at 4; Comments of the Association for Postal Commerce, Major 

Mailers Association, and Saturation Mailers Coalition, PRC Docket No. PI2016-3 (June 14, 2016), at 2-3; 

Comments of the National Association of Presort Mailers, PRC Docket No. PI2016-3 (June 14, 2016), at 

2-3; Comments of MPA-Association of Magazine Media and Alliance of Nonprofit Mailers, PRC Docket 

No. PI2016-3 (June 14, 2016), at 1-6; Valpak Direct Marketing Systems, Inc. and the Valpak Franchise 

Association, Inc. Comments on Commission Report to the President and Congress Pursuant to Section 

701 of the Postal Accountability and Enhancement Act, PRC Docket No. PI2016-3 (June 14, 2016), at 6-

7. 

8 The Public Representative also offered concepts that, while different from the proposals that other 

commenters advanced, would similarly appear to make a significant contribution toward improving the 

Postal Service’s financial condition. Public Representative Comments, PRC Docket No. PI2016-3 (June 

15, 2016), at 33-53. 
- 4 - 

expenses or enhance revenues. Of the three recommendations aimed at the Postal 

Service’s staggering benefits costs, one (regarding pensions) would have only 

theoretical benefit, and the other two (regarding RHB) would only lower funding 

obligations without reducing the size of the liability that the Postal Service will ultimately 

have to cover, even though there are straightforward ways, consistent with universal 

practice among other employers, for that liability to be reduced. These comments 

explain why those three recommendations are inadequate, and will offer additional 

discussion about some of the Commission’s other recommendations. 

I. Reform of the Retiree Health Benefit Obligation 

The Postal Service’s Retiree Health Benefit (“RHB”) reform proposals would, by 

integrating the Postal Service’s retiree health program with Medicare, significantly 

reduce its liability in the Postal Service Retiree Health Benefits Fund (PSRHBF), and 

hence lower the Postal Service’s normal cost payments and eliminate the need for large 

annual amortization payments to cover the unfunded RHB liability.9 As the Postal 

Service explained, this action would harmonize the Postal Service’s RHB obligations 

with best practices of private and other public employers, which uniformly integrate 

benefits fully with Medicare Parts A, B, and D. As part of this proposal to integrate with 

Medicare, the Postal Service also proposes to change the law to accord with actuarial 

principles, by having the RHB liability calculated based on net claims costs (rather than 

premiums), and by using a discount rate based on funding assumptions (rather than 

accounting standards). 

 

9 Beginning in FY2017, the Postal Service is obligated to make two payments in to the PSRHBF: (1) a 

normal cost payment, and (2) an amortization payment to address the unfunded accrued actuarial liability. 
- 5 - 

Furthermore, the Postal Service also proposes to better align its RHB funding 

obligations with the private sector in two other ways, by investing a portion of fund 

proceeds in diversified portfolios rather than exclusively in low-yield Treasury securities, 

and by funding 80 percent of the RHB liability, rather than 100 percent. In both of these 

respects, the Postal Service’s proposal is much more modest than what is done by 

other private and public employers; for instance, other employees that provide retiree 

health benefits prefund a far lower portion of their RHB liabilities than the Postal Service 

is currently required to do, or even what the Postal Service would do under its proposal. 

A host of other commenters – mailing industry and labor alike – lent their support 

to these common-sense proposals. Inexplicably, however, the Commission has chosen 

not to support Medicare integration, but to recommend only two RHB reforms: 

1) Lengthen the amortization period for the unfunded liability beyond the current 

40-year schedule; and 

2) Adjust the funding target from 100 percent of RHB liabilities to an unspecified 

“level in line with industry norms.”10

Legislative reform regarding RHB that is limited solely to an extension of the 

amortization schedule and a reduced funding level would reduce the Postal Service’s 

funding obligations in the near term as compared to current law, but would do nothing to 

address the central problem: the excessive, unaffordable, and unsustainable RHB 

liability. As the Postal Service pointed out in its comments, “retiree health benefits are 

real obligations [for which] there must be a reckoning, or else there will be no money to 

pay for retirees’ promised benefits.”11 Under current law, the costs of the Postal 

Service’s RHB program are excessive, due to the fact that a significant proportion of 

 

10 Section 701 Report at 6-7. 

11 USPS Comments at 18. 
- 6 - 

postal annuitants fail to enroll in Medicare when they become eligible, even though the 

Postal Service and its employees have paid into Medicare for decades. Ultimately, 

those costs will have to be paid by the Postal Service, either by setting money aside in 

the PSRHBF or by directly covering annuitant premiums after the PSRHBF is exhausted 

due to a lack of adequate inflows from the Postal Service’s payments to the Fund 

(under current law, if the PSRHBF is exhausted, the obligation to pay annuitant 

premiums reverts back to the Postal Service).12 However, in the future, the Postal 

Service will have even less mail volume than it does today, and hence less ability to 

cover those costs. This would, in turn, raise the prospect that at some point there will 

either be a cessation of promised benefits or a cash infusion from taxpayer funds to 

cover those benefits, contrary to the fundamental statutory policy that the Postal Service 

be self-sufficient. Alternatively, ratepayers will have to make up the difference. 

To be sure, the Postal Service agrees that the prefunding level should be 

adjusted: as noted above, it is one of the elements of the Postal Service’s proposal to 

lighten the unreasonable and crushing RHB prefunding burden. Indeed, both the Postal 

Service’s proposed 80-percent funding level and the Commission’s hypothesized 50- to 

70-percent levels are far above “industry norms.” Almost two-thirds of Fortune 1000 

companies prefund 0 percent of their RHB liabilities, and the remaining third prefunded 

 

12 In its earlier comments, the Postal Service pointed out that, if it is unable to make normal cost and 

amortization payments into the RHB Fund, “the fund could run out of money in a little over a decade.” Id.

at 19. The Congressional Budget Office (CBO) recently underscored this point with its estimate that, 

under a current law baseline, the RHB Fund would exhaust Treasury balances by 2026 if 25 percent of 

fund assets were removed from the Treasury in 2017 for investment in non-Treasury funds. Cong. 

Budget Off., Cost Estimate: H.R. 5707, Postal Service Financial Improvement Act of 2016 (Oct. 20, 2016), 

at 2, available at http://go.usa.gov/xksPn. If those assets were kept in the RHB Fund (as is the 

expectation under current law), the CBO estimate suggests that exhaustion would likely occur in 2028. 

Of course, making smaller payments under a longer amortization schedule and reduced funding target 

would lengthen the amount of time before the PSRHBF would run out of money, but eventually it would 

still occur. 
- 7 - 

at a median level of only 23 to 37 percent between 2001 and 2010.13 Thus, the overall 

average level of prefunding across all Fortune 1000 companies was only approximately 

9 to 14 percent during that period. State governments and the Department of Defense 

prefund only about 30 percent of their liabilities.14 Moreover, all of those employers 

have already reduced their liabilities through full Medicare integration; if normalized to 

the Postal Service’s situation (which lacks full Medicare integration), the prefundinglevel benchmarks would be even lower. Hence, “standard industry practice” would 

dictate funding levels well below what the Postal Service’s proposal or the 

Commission’s report contemplates. 

However, simply lowering the prefunding level, without more, only kicks the can 

down the road without solving the underlying problem—the excessive, unaffordable 

costs of the Postal Service’s RHB program—which cannot be ignored over the long 

term. That is why the Postal Service has proposed to tackle the costs of the RHB 

program, through Medicare integration. The Commission’s approach, by contrast, elides 

the essential problem, which is ultimately puzzling because Medicare integration, 

supported by the mailing industry and labor, constitutes a straightforward and 

appropriate way of tackling the RHB liability itself, thereby putting the Postal Service’s 

RHB program on a sound financial footing. Therefore, instead of implementing reforms 

that are limited solely to what the Commission is recommending, the President and 

Congress should instead implement the comprehensive combination of reforms that the 

Postal Service has proposed and industry and labor stakeholders have endorsed. 

 

13 USPS Comments at 22. 

14 Id. 
- 8 - 

II. Pension Reform 

Another major contributor to the Postal Service’s financial predicament are its 

artificially burdensome pension obligations. As the Postal Service explained in its 

earlier comments: 

The Postal Service is required to fund 100 percent of its total pension 

liabilities and has achieved 92.2 percent funding as of FY2015, far more 

than private-sector and state and local government employers and four 

times more than the rest of the federal government. Like the RHB Fund, 

assets are invested solely in low-yield Treasury securities, rather than 

higher-yielding diversified portfolios. Moreover, [the Office of Personnel 

Management (OPM)] calculates pension liabilities not on the basis of 

demographic and salary-growth assumptions relevant to postal 

employees, but on the basis of assumptions concerning the entire federal 

workforce. Finally, there is no provision to return overpayments in FERS 

to the Postal Service. Needless to say, no rational self-funded employer 

that still provides a defined-benefit pension plan would design such a 

funding scheme.15

The Postal Service has proposed three remedies that seek to mitigate the costs of its 

statutorily required participation in the Federal Employees Retirement System (“FERS”) 

and the Civil Service Retirement System (“CSRS”): 

1) Require OPM to calculate pension liabilities on the basis of postal-specific 

economic and demographic assumptions. 

2) After recalculation of the liability, apply any current FERS surplus against 

outstanding debt, and any future surpluses against pension or RHB liabilities or 

debt. 

3) Lengthen the amortization period for the supplemental CSRS liability to match 

the RHB amortization period. This measure alone would cut the annual CSRS 

payment almost in half. 

 

15 Id. at 23. 
- 9 - 

Instead of this comprehensive, common-sense, and consensus set of reforms, the 

Commission’s report contemplates only the second measure: using FERS surpluses to 

offset other obligations.16

The asymmetry in FERS between the treatment of supplemental liabilities (which 

must be covered by the Postal Service through a series of amortization payments) and 

surpluses (which cannot be recouped by the Postal Service in any way) is undoubtedly 

important. By itself, however, this reform would no longer offer any real relief. Over the 

past few years, what was once a projected FERS surplus has turned into a 

supplemental liability to be amortized at an estimated $0.2 billion per year, as calculated 

by OPM using government-wide assumptions.17 

The bigger issue with pensions is that the FERS liability and the greater CSRS 

liability are calculated unfairly on the basis of the federal workforce as a whole. No 

reasonable employer would calculate its pension liabilities by reference to other 

employers’ workforce. It is therefore critical that any legislative reform require OPM to 

utilize postal-specific assumptions when calculating the Postal Service’s pension 

liabilities, to ensure that the Postal Service is not obligated to pay more than is 

necessary.18 In addition, the amortization period for CSRS should be lengthened to at 

least a period consistent with the RHB amortization schedule established in current law, 

in the interest of consistency among the Postal Service’s post-retirement benefits 

 

16 Section 701 Report at 7. 

17 USPS Comments at 7, 24. 

18 Even if postal-specific assumptions were used to calculate the Postal Service’s liabilities, the FERS 

surplus would now be modest. Therefore, a move to postal-specific assumptions would not lead to a large 

infusion of cash. Rather, the primary benefit of moving to postal-specific assumptions is to ensure that, 

moving forward, the Postal Service’s pension liabilities are appropriately calculated, and payments to 

OPM are no larger than necessary. 
- 10 - 

obligations. Without these reforms – which the Commission’s report neglects – the 

Postal Service will bear $3.2 billion more in expenses over the next five years than if 

Congress adopted the Postal Service’s legislative proposal. 

III. Product and Pricing Issues 

The Postal Service is disappointed that the Commission declined the opportunity 

to urge the President and Congress to restore the recently expired exigent surcharge, at 

least pending the outcome of the ten-year review. As the Postal Service explained in its 

initial comments, Commissioners themselves have recognized that it would make sense 

for Congress, as a policy matter, to ameliorate the Postal Service’s financial distress by 

allowing a longer exigent price increase.19 The point of disagreement has always been 

over whether such a price increase is consistent with the specific terms of the current 

exigency provision, but Congress, unlike the Commission, is free to change the statute 

in the interest of providing much-needed financial relief. 

Beyond this critical omission, the Postal Service agrees with many of the 

Commission’s recommendations on products and pricing. The Postal Service agrees 

with the Commission’s determination that the problems with the market-dominant price 

cap can and will be addressed in the upcoming ten-year review.20 The Postal Service 

also appreciates that the Commission’s recommendation that any new authority to offer 

nonpostal services be subject to reasonable regulation21 aligns with the consensus 

proposal advanced by the Postal Service and numerous other labor and industry 

stakeholders. The President and Congress would also do well to consider the 

 

19 USPS Comments at 27-28. 

20 Section 701 Report at 2, 10. 

21 Id. at 26-27. 
- 11 - 

Commission’s recommendations to allow the Postal Service greater leeway to 

experiment through market tests.22

However, the Postal Service believes that the Commission’s recommendation on 

workshare discounts is counterproductive, for the reasons noted below. In addition, the 

recommendations on negotiated service agreements (NSAs) bear some clarification. 

A. Workshare Discounts 

The Commission’s report identifies the current statute’s prohibition on workshare 

discounts that exceed 100 percent of the Postal Service costs avoided through the 

worksharing activity (subject to certain exceptions).23 The Commission goes on to 

recommend that Congress add a “soft floor”: that is, a prohibition on workshare 

discounts less than 100 percent of avoided costs (subject to unspecified but “limited” 

exceptions).24 In other words, the Postal Service would have to set (and periodically 

adjust) workshare discounts to pass through exactly 100 percent of avoided costs, with 

no room for business judgment, in almost all cases. 

Despite the Commission’s appeal to efficiency, the true effect of such a 

mechanistic requirement would be to dramatically reduce the Postal Service’s pricing 

flexibility, without enhancing revenue or contribution. It is possible that raising discounts 

(in other words, lowering prices) further might lead some new actors to engage in 

worksharing, which would promote some efficiency in the market. However, any 

modest incremental gain would be overwhelmed by the enormous subsidy that the 

Postal Service would be forced to hand over to businesses that already find it 

 

22 Id. at 32-34. 

23 Id. at 9-11. 

24 Id. at 10-11. 
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worthwhile to workshare at current prices, even with less than 100 percent of avoided 

costs being passed on to them. 

Such a recommendation is hard to square with the Commission’s professed 

appreciation for the overwhelming importance of improving the Postal Service’s financial 

condition – particularly given that the Commission’s report devotes little space to 

recommendations that would actually make a meaningful contribution to that goal.25 So 

long as the Postal Service’s condition is so dire, then the time is simply not ripe to 

entertain (let alone focus disproportionately on) ways for Congress to hem in the Postal 

Service’s ability to maintain revenue and contribution. 

B. Negotiated Service Agreements 

The Postal Service agrees with the Commission’s assessment of the current 

process and legal standards for competitive Negotiated Service Agreements (“NSAs”) 

and the treatment of non-public information: namely that the status quo is adequate and 

requires no statutory change.26

With respect to domestic market-dominant NSAs, the Commission proposes that 

Congress “clarify whether the more stringent standard set forth in 39 U.S.C. 

§ 3622(c)(10) that the agreement ‘improve the net financial position’ of the Postal 

Service is still intended.”27 Instead, the Commission suggests that the standard could 

be harmonized with the attributable-cost-coverage standard for competitive NSAs, 

which the Commission views as less onerous and as “providing the Postal Service with 

increased opportunities to experiment with its pricing, with a goal towards designing 

 

25 Id. at 1. 

26 Id. at 17-18. 

27 Id. at 18. 
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domestic Market Dominant NSAs that ultimately result in an improved financial 

position.”28

The Postal Service takes no position on this recommendation. However, it 

wishes to emphasize that any benefits of the Commission’s recommendation only apply 

in the context of domestic market-dominant NSAs. For international market-dominant 

NSAs, the existing “improve net financial position” standard is clearly appropriate, and a 

“cover attributable costs” standard would actually be counterproductive, not liberating. 

International market-dominant NSAs consist of agreements with foreign posts to 

exchange mail at negotiated rates, rather than the default rates established in treaty 

instruments of the Universal Postal Union. Those default rates have historically failed to 

cover the Postal Service’s costs of delivering inbound international mail. Therefore, the 

Postal Service has sought to improve its financial condition by negotiating higher rates 

for inbound international mail (in exchange for accepting higher rates for outbound 

international mail).29 Given the lower default rates, however, the Postal Service is illpositioned to achieve negotiated rates that fully achieve attributable-cost coverage. If 

the Postal Service were required to do so, the paradoxical result would be that foreign 

posts would prefer to stick with non-remunerative default rates rather than agreeing to 

the high price increases necessary for the Postal Service to cover attributable costs. 

Thus, a “cover attributable costs” standard for international market-dominant NSAs 

would actually worsen the Postal Service’s net financial position. 

 

28 Id. 

29 Under longstanding practice since the PAEA, only the inbound half of this reciprocal rate relationship is 

subject to regulation as an NSA “product.” The outbound rates represent costs to the Postal Service and 

are reflected in the financial analysis of outbound international products like First-Class Mail International. 
- 14 - 

IV. Service Issues

A. Contractor-Operated Retail Facilities

The Commission’s report recommends “clarification on whether [Contract Postal 

Units] and nonpostal operation units also fall under the Commission’s administrative 

review authority under [39 U.S.C. §] 404(d).”30 There is a good reason why Post Office 

discontinuance laws and procedures have not been broadly expanded to contractoroperated facilities. As the Postal Service has repeatedly warned the Commission, doing 

so would interfere with the Postal Service’s operational efficiency and business 

relationships by giving contractors undue leverage in negotiations. Congress has never 

intended the Commission to function as a board of contract appeals, overseeing the 

Postal Service’s relationships with its suppliers. The Postal Service would only support 

“clarification” if it maintains these well-established boundaries. 

B. Consultation Regarding Service Standard Changes 

The Commission’s report recommends that “Congress should clarify [39 U.S.C. 

§ 3691] as to whether consultations with the Commission are required for proposals to

change service standards,” or only for proposals to establish new service standards. 

The Commission would also prefer clarification as to what degree of “consultation” is 

required.31

Whatever theoretical ambiguities might exist, actual practice should dispel any 

concern. Since the Postal Accountability and Enhancement Act (PAEA) introduced the 

relevant provision, the Postal Service has sought advisory opinions from the 

Commission under 39 U.S.C. § 3661 for all changes to service standards for its market30 Id. at 21. 

31 Id. at 24-25. 
- 15 - 

dominant products, all of which affected service on a “nationwide or substantially 

nationwide” basis. Whatever “consultation” might mean, the process of a months-long 

back-and-forth between the Postal Service and Commission and the eventual issuance 

of an advisory opinion obviously fulfills that standard; if anything, it far exceeds it. 

Thus, the ambiguities to which the Commission adverts only affect changes in 

service standards for market-dominant products that would have a purely local effect 

(for instance, a hypothetical change in the service standard for First-Class Mail between 

Hawaii and Guam). This scenario has not arisen in the decade since the PAEA. If it 

were to arise in the future, the Commission would be made aware of it and have an 

opportunity to present its views to the Postal Service. As such, it is difficult to see why 

this issue merits inclusion in the Commission’s report. 

C. Advisory Opinion Proceedings 

The Commission asks Congress to require the Postal Service to provide a written 

response to Commission advisory opinions on nationwide service changes.32 In 

essence, the Commission would like Congress to single out one preferred piece of the 

threefold reforms that the Senate passed in 2011 and that Senator Thomas Carper has 

included in more recent postal reform bills.33 These provisions would (1) impose a 

statutory 90-day time limit on advisory opinion proceedings, (2) eliminate the antiquated 

requirement for a hearing on the record, and (3) require a Postal Service response to 

the Commission’s advisory opinion. The Commission’s exclusive focus on the third 

element would elevate the desire for additional regulation of the Postal Service over the 

 

32 Id. at 30. 

33 See S. 1789, 112th Cong. § 208 (passed Senate 2012); S. 2051, § 407 (introduced 2015). 
- 16 - 

equal, if not greater, need for reforms that would make the entire advisory opinion 

exercise more timely and relevant. 

In an apparent attempt to obviate the need for a statutory time limit, the 

Commission touts its own undertaking to streamline advisory opinion proceedings.34 

The Commission’s rules have yet to be tested in practice, but the Postal Service is 

hopeful that they will have the intended effect of allowing for more timely and relevant 

advisory opinions. However, what the Commission’s report fails to acknowledge are the 

numerous loopholes that threaten to allow advisory opinion proceedings to extend well 

beyond the aspirational 90-day goal. That concern is particularly palpable for situations 

when the issue is the very sort of significant network changes that have drawn out 

advisory opinion proceedings in the past and, consequently, drawn frustration from the 

Postal Service and Members of Congress seeking more timely analysis. Thus, it may 

well be that the Commission’s rule changes will not result in any real improvement in 

advisory opinions’ timeliness. A statutory time limit is essential, and it would be in 

keeping with the firm statutory deadlines on most other Commission proceedings.35

Equally essential is the elimination of the requirement for formal hearings on the 

record. Although the Commission’s report acknowledges the difficulty of streamlining 

proceedings under a formal-hearing requirement,36 the Commission fails to take the 

logical next step of recommending that that requirement be abolished. This degree of 

formality is a relic from the pre-PAEA regulatory model, whereas the PAEA updated and 

 

34 Section 701 Report at 29-30. 

35 E.g., 39 U.S.C. § 404(d)(5) (120 days for Post Office closing appeals); id. § 3622(d)(1)(C) (45 days for 

market-dominant price adjustments); id. at (d)(1)(E) (90 days for exigent price adjustments); id.

§ 3632(b)(3) (15 days for competitive rates or classes not of general applicability); id. § 3641(c)(1) (30 

days for market tests); id. § 3653 (90 days for annual compliance determination). 

36 Section 701 Report at 30. 
- 17 - 

streamlined every other form of postal regulatory proceeding.37 If notice-and-comment 

procedures provide adequate due process on such complex matters as exigent rate 

increases and annual compliance determinations, which result in binding orders, then it 

is baffling why more burdensome and time-consuming procedures should be necessary 

for the Commission to issue a non-binding advisory opinion. Removing the requirement 

for a formal hearing on the record would update this outlier provision of postal law to 

allow for more timely and relevant advisory opinions while ensuring the same level of 

due process that has sufficed in all other postal regulatory settings. 

V. Conclusion 

The Postal Service’s dire financial condition puts in peril its ability to provide 

universal service to the nation and meet its other legal obligations, absent legislative 

and regulatory change. Significant revisions to the PAEA are needed to enable the 

Postal Service to restore itself to financial solvency. Improving the Postal Service's 

financial stability in both the short-term and the long-term requires more comprehensive 

changes than are discussed in the Commission’s report. 

37 Indeed, formal-hearing requirements appear to be antiquated in general. A search of post-PAEA Acts 

of Congress revealed not a single instance (other than in enforcement contexts) where Congress saw fit 

to introduce a requirement for an agency to hold hearings on the record. 
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