[Federal Register Volume 85, Number 242 (Wednesday, December 16, 2020)]
[Notices]
[Pages 81527-81530]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-27635]


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POSTAL REGULATORY COMMISSION

[Docket No. PI2021-1; Order No. 5777]


Public Inquiry

AGENCY: Postal Regulatory Commission.

ACTION: Notice.

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SUMMARY: The Commission is revisiting the methodology it uses to 
estimate the value of the Postal Service's universal service obligation 
(USO), which the Commission last considered in 2008. This document 
informs the public of this proceeding and the technical conference, 
invites public comment, and takes other administrative steps.

DATES: Comments are due: March 15, 2021.

ADDRESSES: Submit comments electronically via the Commission's Filing 
Online system at http://www.prc.gov. Those who cannot submit comments 
electronically should contact the person identified in the FOR FURTHER 
INFORMATION CONTACT section by telephone for advice on filing 
alternatives.

FOR FURTHER INFORMATION CONTACT: David A. Trissell, General Counsel, at 
202-789-6820.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
II. Background
III. Discussion
IV. Comments
V. Ordering Paragraphs

I. Introduction

    In this docket, the Commission intends to revisit the methodology 
it uses to estimate the cost of the Postal Service's universal service 
obligation (USO), which the Commission last

[[Page 81528]]

considered in 2008.\1\ In particular, the Commission seeks to determine 
whether all of the assumptions underlying that methodology remain valid 
in light of changed conditions over the intervening twelve years. To 
that end, the Commission seeks public comment with respect to the 
current USO valuation methodology, including any suggested 
modifications or enhancements.
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    \1\ See Report on Universal Postal Service and the Postal 
Monopoly, December 19, 2008 (2008 USO Report).
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II. Background

    Section 702 of the Postal Accountability and Enhancement Act 
(PAEA), Public Law 109-435, 120 Stat. 3198 (2006), required the 
Commission to submit a report to the president and Congress on 
``universal postal service and the postal monopoly in the United 
States. . . .'' This report was required to include ``a comprehensive 
review of the history and development of universal service . . .,'' as 
well as ``the scope and standards of universal service . . . provided 
under current law . . .'' PAEA, Pulic Law 109-435, 702(a)(2), 120 Stat. 
3198 (2006). The Commission released the report on December 19, 2008. 
See 2008 USO Report. The Commission found that the USO consisted of 
seven different attributes: Geographic scope; product range; access; 
delivery; pricing; service quality; and an enforcement mechanism. Id. 
at 18-33.
    In completing the report, the Commission was also required to 
estimate the costs of the USO. Id. at 101. Generally speaking, these 
costs are calculated as the difference between the amount of profit the 
Postal Service earns while fulfilling its USO and the amount of profit 
the Postal Service could theoretically earn if it were not required to 
provide universal service, or any specific component thereof. Id. at 
101-102. The Commission identified various USO elements based on 
statutory requirements or on what Congress might be expected to include 
if it were to specifically define a postal USO. For each element, the 
Commission determined what level of service a theoretical profit-
maximizing Postal Service without a USO would provide. Id. at 119-143. 
The difference in profit between the former and the latter can be 
thought of as the cost of providing universal service. Id.
    The Commission updates its estimate of the cost of the USO each 
year in its Annual Report to the President and Congress based on the 
methodological approach adopted in the 2008 USO Report.\2\ That 
methodological approach is dependent on assumptions concerning what a 
profit-maximizing Postal Service would do absent a particular USO 
mandate. 2008 USO Report at 121. Such assumptions are necessarily based 
on economic, technological, legislative, and societal considerations at 
the time they are made. The assumptions underlying the 2008 USO Report 
were thoroughly debated at that time, with contractors retained by both 
the Commission and the Postal Service presenting differing assumptions 
and the Commission ultimately exercising its judgment as to which 
assumptions it found to be the most reasonable. Id. at 119-143.
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    \2\ See 39 U.S.C. 3651(b); see, e.g., Postal Regulatory 
Commission, FY 2019 Annual Report to the President and Congress, 
January 21, 2020, at 41-51 (FY 2019 Annual Report). The most recent 
estimate of the USO's cost was $5.21 billion. See FY 2019 Annual 
Report at 42, Table IV-1.
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    In Docket No. PI2014-1, the Commission interpreted ``other public 
services or activities'' under 39 U.S.C. 3651(b)(1)(C) to include 
statutorily-required offerings and ``public facing'' actions by the 
Postal Service.\3\ Applying the framework developed in that docket, the 
Commission in the FY 2019 Annual Report clarified its interpretation of 
the scope of the USO, determining that it should include the net cost 
of the Postal Inspection Service. FY 2019 Annual Report at 49. The 
methodologies used to estimate the cost of all other elements of the 
USO have remained essentially unchanged from the 2008 USO Report.\4\
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    \3\ Docket No. PI2014-1, Order Interpreting 39 U.S.C. 
3651(b)(1)(C), November 17, 2015, at 24 (Order No. 2820).
    \4\ One notable exception is that the methodology for estimating 
the cost of 6-day delivery reflects refined and more comprehensive 
costs based on the Commission's findings in its Advisory Opinion on 
Elimination of Saturday Delivery. See Docket No. N2010-1, Advisory 
Opinion on Elimination of Saturday Delivery, March 24, 2011; Postal 
Regulatory Commission, FY 2011 Annual Report to the President and 
Congress, December 21, 2011, at 41 (FY 2011 Annual Report).
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    Much has changed in the United States since 2008--economically, 
technologically, and societally. Consequently, revisiting the 
assumptions underlying the 2008 USO Report is appropriate in order to 
ensure that the Commission's valuation of the USO continues to reflect 
the environment in which the Postal Service operates.

III. Discussion

    The Commission invites comment with respect to any and all aspects 
of the current USO valuation methodology. The Commission has also 
identified two USO components in particular with valuation assumptions 
that appear to be ripe for revisiting--frequency of delivery and 
maintaining small post offices. It is important to note that the 
Commission is not proposing or recommending changes to these or any 
other USO components at this time. Rather, the Commission is seeking 
input into whether the level of service that a theoretical profit-
maximizing Postal Service without a USO would provide has changed since 
2008. This is necessary in order to place an accurate value on the cost 
of the USO, and to evaluate that cost through a transparent process.

A. Frequency of Delivery

    In the 2008 USO Report, the Commission noted that in every year 
since 1984 Congress has inserted language into postal appropriation 
legislation requiring that 6-day delivery shall continue ``at the 1983 
level.'' 2008 USO Report at 20, 22, 29, 123. The insertion of this 
language into appropriation legislation has continued since 2008, and 
thus 6-day delivery continues to constitute the current USO requirement 
for frequency of delivery.
    In terms of valuing this USO component, the Commission sought in 
the 2008 USO Report to determine what the minimum frequency of delivery 
would be for a theoretical profit-maximizing Postal Service without a 
USO. Id. at 123-131. The Commission considered assumptions by the two 
separate contractors. The contractor hired by the Commission concluded 
that the minimum frequency of delivery would be 3 days per week. Id. at 
124. The contractor hired by the Postal Service concluded that the 
Postal Service would theoretically maximize profits by varying 
frequency of delivery to equalize volume across 3-digit ZIP Codes, or 
potentially even 5-Digit ZIP Codes or mail routes. Id. at 131. The two 
contractors reached different conclusions with regard to what the cost 
savings associated with reducing delivery frequency would be. Id. at 
124-131.
    The Commission determined that the minimum frequency of delivery 
for a theoretical profit-maximizing Postal Service without a USO would 
be 5 days per week. Id. at 123. It based this conclusion on the fact 
that ``frequency of delivery is generally a priority for businesses,'' 
and ``bills, remittances, and date-specific advertising remain major 
sources of revenue.'' Id. (footnote omitted). The Commission found that 
``[w]ithout at least 5-day delivery, it would be difficult for the mail 
to remain an attractive channel for communications of this kind.'' Id. 
This conclusion did not make any

[[Page 81529]]

differentiation between mail types or mail destinations. The Commission 
accepted as most reasonable an estimate that reducing delivery 
frequency from 6 to 5 days would have increased the Postal Service's FY 
2007 net income by $1.930 billion (2 percent of the Postal Service's 
total costs). Id. at 123-124.
    Since FY 2007, the mail mix has changed significantly. According to 
the Postal Service, it has lost about a third of First-Class Mail and 
USPS Marketing Mail volume.\5\ At the same time, package volumes have 
nearly doubled and have become the Postal Service's primary source of 
revenue growth, although the Postal Service reports that growth has 
begun to slow since FY 2017 as commercial customers have begun 
insourcing more of their last mile deliveries. Postal Service Five-Year 
Strategic Plan at 8. In the time since the 2008 USO Report, the Postal 
Service has also begun delivering some packages on Sundays, thereby in 
some circumstances providing greater delivery frequency than what is 
required by the USO.\6\
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    \5\ See United States Postal Service, The U.S. Postal Service 
Five-Year Strategic Plan FY2020-FY2024, available at: https://about.usps.com/strategic-planning/five-year-strategic-plan-2020-2024.pdf, at 8 (Postal Service Five-Year Strategic Plan).
    \6\ See Docket Nos. MC2014-1 and CP2014-1, Order Adding Parcel 
Select and Parcel Return Service Contract 5 to the Competitive 
Product List, October 29, 2013 (Order No. 1863).
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    A theoretical profit-maximizing Postal Service without a USO might 
differentiate the frequency of delivery of letters and flats from that 
of packages. The Commission therefore seeks input as to whether, in the 
absence of a requirement for 6-day delivery, the Postal Service would 
be likely to provide different frequency of delivery for different 
types of mail. The Commission also seeks input as to what the minimum 
frequency of delivery would be for each type of mail (e.g., letters, 
flats, or packages).
    A theoretical profit-maximizing Postal Service without a USO might 
also provide different levels of service to high-density, as opposed to 
low-density, areas.\7\ It could deliver more frequently to high-density 
areas, and less frequently to low-density areas. Alternatively, it 
could implement a surcharge for delivery to low-density areas. The 
Commission seeks input as to how a theoretical profit-maximizing Postal 
Service without a USO would be most likely to address delivering to 
areas that differ in density.
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    \7\ In this context, density can be interpreted as geographic 
density of delivery points (delivery points per square mile), or 
alternatively as ``mail density'' (volume per delivery point). 
Commenters who address this topic are requested to specify how they 
would define density as used to determine the provision of different 
frequency of delivery to different areas.
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    In sum, the Commission seeks to better understand whether a 
theoretical profit-maximizing Postal Service without a USO in today's 
operating environment would maintain uniform 5-day delivery as 
previously assumed, or whether it might differentiate delivery 
frequency either between different types of mail, or between high-
density and low-density areas, or both.

B. Maintaining Small Post Offices

    The Postal Service is required to ``establish and maintain postal 
facilities of such character and in such locations, that postal patrons 
throughout the Nation will, consistent with reasonable economies of 
postal operations, have ready access to essential postal services.'' 39 
U.S.C. 403(b)(3). In the 2008 USO Report, the Commission noted that in 
developing rural free delivery services in the early 20th century, 
Congress substituted rural carrier services for the services of small 
post offices in many rural areas. 2008 USO Report at 136. The 
Commission also noted that since FY 1985, Congress had added language 
to annual appropriations bills that prohibited the Postal Service from 
using appropriated funds to close or consolidate small rural and other 
small post offices, but the Commission acknowledged that this did not 
appear to bar the Postal Service from using other funds to close or 
consolidate small post offices because the Postal Service had closed or 
consolidated hundreds of small post offices since 1985. Id.
    Two contractors addressed this issue in the 2008 USO Report. They 
differed as to how many small post offices would be closed in the 
absence of a USO--the contractor hired by the Commission concluded that 
a theoretical profit-maximizing Postal Service without a USO would 
close all post offices in Cost Ascertainment Groups (CAGs) K and L, 
while the contractor hired by the Postal Service concluded that it 
would close post offices in CAGs H through L.\8\ The Commission found 
the first scenario (CAGs K and L) to be more plausible, and accepted a 
valuation based on adjusting the gross savings from closing such post 
offices with the cost of replacement services and the amount of lost 
revenue, which came to $0.586 billion. Id. at 138. In accepting this 
valuation, the Commission also adopted the assumption of one of the two 
contractors that rural carrier services could be substituted for small 
post offices in the absence of a USO. Id. at 137.
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    \8\ Id. at 137-138. CAGs classify post offices based on revenue 
units. A revenue unit is the average amount of revenue per fiscal 
year from postal rates and fees for 1,000 pieces of originating mail 
and Special Service transactions. CAG H-J offices have 190-949 
revenue units; CAG K offices have 36-189 revenue units; and CAG L 
offices have less than 36 revenue units. See United States Postal 
Service, Glossary of Postal Terms, available at: https://usps.com/publications/pub32 (Publication 32).
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    The Commission invites interested persons to comment on whether a 
theoretical profit-maximizing Postal Service without a USO would 
utilize other alternatives besides rural carrier services in place of 
CAGs K and L, and whether additional post offices besides CAGs K and L 
would be eliminated. Since postal customers can access products and 
services online and at grocery stores, office supply chains, 
pharmacies, and other retail outlets, it is unclear whether the 
assumption that only CAGs K and L would be replaced or consolidated 
still holds. It is also possible that post offices could be replaced by 
Contract Postal Units (CPUs) \9\ or Automated Postal Centers 
(APCs).\10\ Therefore, the Commission seeks input from interested 
persons on whether to revise the assumptions regarding which post 
offices would be closed by a theoretical profit-maximizing Postal 
Service without a USO and what replacement services would be utilized.
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    \9\ A CPU is a supplier-owned or supplier-leased site operated 
by the supplier, under contract with the Postal Service to provide 
postal products and services to the public at Postal Service prices. 
See Publication 32.
    \10\ An APC is a self-service kiosk that allows customers to 
mail letters, flats, and packages; buy stamps and some Special 
Services; and mail international letters. It also offers ZIP Code 
and tracking lookup and provides information on different services. 
See Publication 32.
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IV. Comments

    The Commission invites interested persons to identify components of 
the current USO valuation methodology where the underlying assumptions 
about how a theoretical profit-maximizing Postal Service without a USO 
would behave are no longer compelling. The Commission further seeks 
suggestions concerning how to revise any outdated assumptions, as well 
as what data and analytical methods would be necessary to incorporate 
any suggested changes into the calculation of the USO's cost. Comments 
are due March 15, 2021. Material filed in this docket will be available 
for review on the Commission's website, http://www.prc.gov.
    Pursuant to 39 U.S.C. 505, Kenneth R. Moeller is appointed to serve 
as an officer of the Commission (Public

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Representative) to represent the interests of the general public in 
this docket.

V. Ordering Paragraphs

    It is ordered:
    1. The Commission establishes Docket No. PI2021-1 for the purpose 
of considering potential changes to the Commission's valuation 
methodology for the Universal Service Obligation.
    2. Interested persons may submit written comments on any or all 
aspects of the Universal Service Obligation valuation methodology no 
later than March 15, 2021.
    3. Pursuant to 39 U.S.C. 505, Kenneth R. Moeller is appointed to 
serve as Public Representative in this proceeding.
    4. The Secretary shall arrange for publication of this Notice in 
the Federal Register.

    By the Commission.
Erica A. Barker,
Secretary.
[FR Doc. 2020-27635 Filed 12-15-20; 8:45 am]
BILLING CODE 7710-FW-P