[Federal Register Volume 83, Number 114 (Wednesday, June 13, 2018)]
[Proposed Rules]
[Pages 27523-27524]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-12646]


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POSTAL REGULATORY COMMISSION

39 CFR Part 3050

[Docket No. RM2018-6; Order No. 4635]


Periodic Reporting

AGENCY: Postal Regulatory Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commission is noticing a recent filing requesting that the 
Commission initiate an informal rulemaking proceeding to consider 
changes to an analytical method for use in periodic reporting (Proposal 
Three). This document informs the public of the filing, invites public 
comment, and takes other administrative steps.

DATES: Comments are due: June 29, 2018.

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. Proposal Three
III. Notice and Comment
IV. Ordering Paragraphs

I. Introduction

    On June 1, 2018, the Postal Service filed a petition pursuant to 39 
CFR 3050.11, requesting that the Commission initiate a rulemaking 
proceeding to consider changes to analytical principles relating to 
periodic reports.\1\ The Petition identifies the proposed analytical 
changes filed in this docket as Proposal Three.
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    \1\ Petition of the United States Postal Service for the 
Initiation of a Proceeding to Consider Proposed Changes in 
Analytical Principles (Proposal Three), June 1, 2018 (Petition).
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II. Proposal Three

    Background. The Commission adopted the use of incremental costs as 
the basis for class-level and product-level attributable costs in 
September of 2016.\2\ In FY 2017, the methodology was fully applied for 
the first time.\3\ Proposal Three seeks to revise two incremental 
costing procedures in accordance with this methodological change.
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    \2\ Docket No. ACR2017, Annual Compliance Report, December 29, 
2017, at 4-6.
    \3\ Docket No. ACR2017, Annual Compliance Determination, March 
29, 2018, at 8.
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    The first proposed revision concerns the Postal Service's method 
for calculating incremental costs for competitive products 
collectively. Under current analytical principles, the Postal Service 
calculates these costs using a so-called ``hybrid'' approach. The 
Postal Service first calculates the incremental costs of competitive 
domestic products (including group specific costs for these products) 
and then adds it to the volume variable and product specific costs of 
competitive international products. This ``hybrid'' approach blends an 
estimate of competitive domestic incremental costs with a proxy 
estimate of competitive international incremental costs.
    The second proposed revision relates to estimating inframarginal 
costs for products with insufficient data at the cost pool level. The 
Postal Service states that this revision primarily concerns negotiated 
service agreements (NSAs), because NSAs are classified as independent 
products, which can have low volumes. Petition, Proposal Three at 1. 
Furthermore, the Postal Service contends that NSAs create practical 
issues in calculating incremental costs, in part because the Postal 
Service's data systems do not distinguish between NSA and non-NSA 
mailpieces. Id. at 13. This prevents the Postal Service from creating 
the standard cost drivers for NSAs (e.g. volume, weight, cubic volume), 
which are necessary for calculating incremental costs. Id.
    Proposal. As discussed above, the Postal Service proposes two 
procedures to revise its calculation of incremental costs.
    Under procedure one, the Postal Service seeks to replace the 
``hybrid'' approach to calculating aggregate incremental costs, which 
relies on a proxy for international costs, with a direct estimation of 
those costs. Id. at 4. Due to improvements suggested in the FY 2016 
Annual Compliance Determination, in conjunction with corresponding 
analytical improvements, the Postal Service states that it can now 
directly estimate the actual incremental costs of international mail. 
Id. at 6.
    Under procedure two, the Postal Service proposes thresholds for 
calculating inframarginal costs and an alternative methodology for 
approximating the appropriate cost driver ratios for NSAs. Id. at 8. 
Specifically, the Postal Service suggests that it should not have to 
calculate the incremental costs if an NSA has less than 0.3 percent of 
the product type's (e.g. Priority Mail, Parcel Select) volume variable 
cost or less than $8 million in volume variable cost. Id. at 11. The 
Postal Service also seeks to use the ratio of NSA volume variable costs 
to product type volume variable costs as a proxy cost driver to 
calculate the incremental cost of NSA products. Id. at 12-20.
    Rationale and impact. The Postal Service contends that procedure 
one will allow it ``to rely upon the best available information'' 
because the

[[Page 27524]]

procedure replaces the hybrid approach's proxy incremental costs with 
actual estimation of the incremental costs of international products. 
Id. at 7. The Postal Service comments that ``[t]his alone constitute[s] 
a clear improvement over past practice.'' Id. at 6. Furthermore, the 
Postal Service notes that the change will allow ``the incremental cost 
model to directly estimate the costs of producing all competitive 
products simultaneously, and thus provide exactly the information 
needed to fully conduct the cross-subsidy test as intended.'' Id. at 7.
    The Postal Service estimates that the impact of procedure one would 
be to raise competitive product incremental costs by 0.2 percent. Id. 
at 7-8. The Postal Service estimates that amount to be approximately 
$25 million. Id.
    The Postal Service argues that procedure two's proposed thresholds 
are appropriate because its testing suggests that NSAs ``have no 
appreciable inframarginal costs'' below these thresholds. Id. at 11. 
The Postal Service argues that ``when a product has a very small volume 
relative to the other products handled in the activity or cost pool, 
the product's volume variable cost and incremental cost will virtually 
be the same.'' Id. at 9. For that reason, the Postal Service avers that 
``the calculation of incremental costs for the hundreds of domestic 
NSA's with minimal volumes would require a material amount of scarce 
Postal Service resources, and the resulting incremental cost estimates 
for those products would not be practically different from their volume 
variable costs.'' Id. at 12. The Postal Service concludes that it and 
the Commission ``are better served when the Postal Service expends 
those resources on other, critical, costing issues.'' Id.
    With regard to procedure two's proposed cost driver change, the 
Postal Service states that it ``is not possible . . . to generate the 
required cost driver proportions for specific NSA products.'' Id. at 
13. For this reason, the Postal Service proposes to use ``the volume 
variable cost ratio as a proxy for the unknown true variable, the ratio 
of the cost drivers.'' Id. at 17. In the Postal Service's view ``the 
approximation used for the missing driver ratios should reflect the 
characteristics of the missing information as well as possible.'' Id. 
at 13.
    The Postal Service states that the impacts associated with 
procedure two are ``less clear cut'' than procedure one because ``there 
is no intuitive baseline against which to compare [results].'' Id. at 
20. The Postal Service explains that ``[i]n theory, the logical 
baseline would be actual inframarginal costs calculated using actual 
data at the cost pool level.'' Id. However, ``since the very reason we 
must rely on the approximation is because such actual data at that 
level do not exist, that theoretical baseline does not exist either.'' 
Id.

III. Notice and Comment

    The Commission establishes Docket No. RM2018-6 for consideration of 
matters raised by the Petition. More information on the Petition may be 
accessed via the Commission's website at http://www.prc.gov. Interested 
persons may submit comments on the Petition and Proposal Three no later 
than June 29, 2018. Pursuant to 39 U.S.C. 505, Katalin K. Clendenin is 
designated as an officer of the Commission (Public Representative) to 
represent the interests of the general public in this proceeding.

IV. Ordering Paragraphs

    It is ordered:
    1. The Commission establishes Docket No. RM2018-6 for consideration 
of the matters raised by the Petition of the United States Postal 
Service for the Initiation of a Proceeding to Consider Proposed Changes 
in Analytical Principles (Proposal Three), filed June 1, 2018.
    2. Comments by interested persons in this proceeding are due no 
later than June 29, 2018.
    3. Pursuant to 39 U.S.C. 505, the Commission appoints Katalin K. 
Clendenin to serve as an officer of the Commission (Public 
Representative) to represent the interests of the general public in 
this docket.
    4. The Secretary shall arrange for publication of this order in the 
Federal Register.

    By the Commission.
Stacy L. Ruble,
Secretary.
[FR Doc. 2018-12646 Filed 6-12-18; 8:45 am]
 BILLING CODE 7710-FW-P