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[Federal Register Volume 73, Number 174 (Monday, September 8, 2008)]
[Proposed Rules]
[Pages 51983-51990]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-20694]

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POSTAL REGULATORY COMMISSION

39 CFR Part 3001

[Docket No. RM2008-2; Order Nos. 99 and 102]

Periodic Reporting Rules

AGENCY: Postal Regulatory Commission.

ACTION: Proposed rule; availability of rulemaking petition.

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SUMMARY: Under a new law, the Postal Service must file an annual 
compliance report with the Postal Regulatory Commission on costs, 
revenues, rates, and quality of service associated with its products. 
It has filed documents with the Commission to change some of the 
methods it uses to compile the fiscal year 2008 report. In the 
Commission's view, these documents constitute a rulemaking petition. 
Therefore, it has established a rulemaking docket to allow the public 
to comment on potential changes in periodic reporting rules.

DATES: 1. Technical conference: August 27, 2008 at 10 a.m.
    2. Initial comments: September 8, 2008.
    3. Reply comments: September 15, 2008.

ADDRESSES: Submit comments electronically via the Commission's Filing 
Online system at http://www.prc.gov.

FOR FURTHER INFORMATION CONTACT: Stephen L. Sharfman, General Counsel, 
202-789-6820 and [email protected].

SUPPLEMENTARY INFORMATION: On August 11, 2008, the Commission received 
Request of the United States Postal Service for Commission Order 
Amending the Established Costing Methodologies for Purposes of 
Preparing the FY 2008 Annual Compliance Report (Request). In the 
Request, the Postal Service states that it has eight changes that it 
would like to make to the methods by which it compiles the FY 2008 
version of the annual report that is required by 39 U.S.C. 3652 to 
provide to the Commission each year. It cites 39 U.S.C. 3652(a)(1), 
which gives the Commission the responsibility to prescribe methods that 
are used to produce the information that is compiled in the annual 
report. Request at 2. Among other things, the information supplied in 
the annual report is used by the Commission to prepare the Annual 
Compliance Determination (ACD) that is required by 39 U.S.C. 3653.
    The Postal Service references pages 9-10 of the most recent 
Commission ACD. FY 2008 Annual Compliance Determination, March 27, 2007 
(FY 2007 ACD). There, numerous commenters recommended that the Postal 
Service not change methods for collecting and analyzing cost data 
unless interested persons have had an opportunity to evaluate and 
comment on them. The Commission concurred, stating that it intended to 
issue regulations governing periodic reports generally (including the 
Postal Service's annual report) that would vet proposed changes in 
analytical methods through informal rulemakings in advance of the 
filing of the report. FY 2007 ACD at 10.

I. Procedural Expedition

    The Postal Service notes that it is already preparing its annual 
report for FY 2008. Given the lead time that is required, it observes 
that it is unlikely that the regulations that the Commission described 
in its FY 2007 ACD can be issued, and public scrutiny of particular 
changes in analytical methods could be completed under those 
regulations, in time to be incorporated in its FY 2008 annual report. 
It therefore asks that an alternative, expedited procedure be used to 
vet its proposed changes in analytical methods.
    In the Postal Service's view, none of its proposed methodological 
changes ``are of sufficient complexity to hinder relatively 
straightforward evaluation by both the parties and the Commission.'' 
Request at 2. It therefore proposes that its filing be treated as a 
rule 21 motion for a Commission order approving its proposed changes to 
current baseline methods used to analyze costs. Id., n.2. The Postal 
Service notes that its Request includes the rationale for each of the 
eight methodological changes that it proposes, and estimates the impact 
of each change on the costs borne by mail classes. Equipped with this 
information, it suggests, the public could provide input in the form of 
answers supporting or opposing the motion. It recognizes, however, that 
the 7-day period that rule 21 allows for answers to motions should

[[Page 51984]]

probably be lengthened. The Postal Service notes that if interested 
parties feel that more elaborate procedures for their input are needed, 
they can include those suggestions in their answers. Id. at 2. As 
noted, the Postal Service's petition is followed by a description of 
each proposal, together with its background, objective, and supporting 
rationale.\1\
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    \1\ Time Warner Inc. (Time Warner) has responded with a motion 
asking that the deadline for answers be extended to September 2, 
2008. See Motion of Time Warner Inc. to Extend the Period for 
Response to Request of the United States Postal Service for 
Commission Order Amending the Established Costing Methodologies for 
Purposes of Preparing the FY 2008 Annual Compliance Report, August 
14, 2008 (Motion). It argues that the substance of these proposals 
is not sufficiently simple and straightforward to be vetted in 7 
days. It argues, further, that it needs more time to examine and 
comment on the alternative procedures that the Postal Service 
proposes, particularly if they are to become standard procedures for 
vetting methodological changes. Motion at 3-4. The rulemaking 
procedures and extended deadlines authorized in this notice should 
meet Time Warner's procedural objections.
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    Although it does not have all of the changes to baseline analytical 
methods that it hopes to incorporate in its 2008 annual report ready to 
submit for public comment, the Postal Service observes that the process 
should begin. It notes that these proposed changes would be part of the 
core cost and revenue analysis process, which must be finalized before 
other changes, such as those from new special studies, can be added to 
its cost and revenue analysis. It says that other proposed changes will 
be submitted for public scrutiny as they are developed. Id. at 3.
    The Commission agrees that the process of vetting proposed changes 
in the methods by which cost incurrence will be analyzed in the Postal 
Service's FY 2008 annual report should begin now with those proposals 
that are sufficiently refined to be submitted for public comment. The 
Request suggests that it should be procedurally sufficient for the 
Commission to adopt an order ruling on its proposed methodological 
changes. The Commission, however, prefers at least initially to 
interpret the definition of a ``rule'' in the Administrative Procedure 
Act (APA) to include analytical methods that affect the way costs or 
revenues are accounted for in a rate setting regulatory regime. The APA 
requires that notice be given in the Federal Register and an 
opportunity for public comment be provided before substantive rules 
take effect. See 5 U.S.C. 551(4) and 553. For this reason, the 
Commission will treat the Postal Service's August 11, 2008 filing as a 
petition to initiate an informal rulemaking consistent with section 553 
of the APA.
    The Commission hereby grants the Postal Service's petition. Since 
time is of the essence in vetting these proposed methodological 
changes, the Commission is tentatively scheduling a technical 
conference in which Postal Service experts would be available to answer 
questions related to these proposals. The technical conference will be 
held on August 27, 2008 at 10 a.m. in the Commission's hearing room. 
The Postal Service should also arrange for the possibility that a 
follow-up technical conference could be held on the afternoon of 
September 3, 2008, if needed. Interested persons may file written 
comments on the Postal Service's proposals on or before September 8, 
2008. Reply Comments may be filed on or before September 15, 2008.

II. Substance of Postal Service Proposals

    The Postal Service proposals, see Request at 5 et seq., are 
described below.
    Proposal One. Proposed Group Specific Cost Change (Cost Segment 
18).
    Objective: A methodology change is proposed for the manner in which 
headquarters Finance Number (FN) Cost Segment 18 costs are categorized 
in the FY 2008 Cost & Revenue Analysis (CRA) Report.
    Background: In FY 2007, and for years before, almost all Cost 
Segment 18 costs for headquarters Finance Numbers were treated as 
institutional costs. With the enactment of the Postal Act of 2006, 
however, there is a need to define a new category of cost--``group-
specific'' cost. Group-specific costs are those costs which cannot be 
attributed to individual products, but which are caused by either the 
competitive or market-dominant products as a group. The remaining 
business sustaining or common fixed costs are ``institutional.'' An 
example of a competitive product group-specific cost would be a HQ 
organization unit that only supports competitive products. Pursuant to 
Commission rule 3015.7(a), the Commission is currently using 
competitive products' attributable costs, supplemented to include 
causally related, group-specific costs, to test for cross-subsidies.
    Competitive products also must cover an ``appropriate share'' of 
institutional cost. In addition to the identification of competitive 
product group-specific costs, the identification of market-dominant 
group-specific costs is also important, as the value of the 
institutional cost will be the residual of postal costs that are not 
attributable to products and are not group-specific to either group. To 
the extent costs are group-specific costs, the remaining 
``institutional cost'' will be a smaller amount than it would be 
otherwise.
    Proposal: The new taxonomy for costs places a new requirement to be 
able to identify group-specific HQ administrative and program costs for 
market-dominant and competitive product groups. The Postal Service 
captures costs for administrative activities and programs using a cost 
center designation of the ``Finance Number.'' Administrative 
organization units and programs are assigned a Finance Number and all 
expenses are charged to the Finance Number. Most Headquarters 
activities and programs support the entire enterprise or support all 
products. However, the cost in some Finance Numbers may be associated 
with either competitive or market-dominant product groups.
    To facilitate the identification of group-specific costs in 
Headquarters, the Postal Service has created a new attribute for 
Finance Numbers called the Product Activity Attribute. The value of the 
Product Activity Attribute will indicate which of the following 
describes the activities and costs of the Headquarters Finance Number:
    Market-Dominant--Activity in Finance Number only supports Market-
Dominant Products.
    Competitive--Activity in Finance Number only supports Competitive 
Products.
    Common/Enterprise Sustaining--Activity in Finance Number supports 
both groups of products, or supports the Enterprise as a whole.
    In the analysis to support the Annual Compliance Report beginning 
in FY 2008, the Postal Service proposes to use the value of the Product 
Activity Attribute for Headquarters Finance Numbers to help identify 
group-specific costs (and possibly some product-specific costs) for 
competitive and market-dominant products. That is, expenses in Finance 
Numbers deemed ``Market-Dominant'' would be candidates for market-
dominant group-specific costs and expenses in Finance Numbers deemed 
``Competitive'' would be candidates for competitive product group-
specific costs. Costs in Finance Numbers deemed ``Common/Enterprise 
Sustaining'' would be candidates for Institutional Cost. The analysis 
of group-specific costs by Finance Number would not replace, but rather 
would supplement, existing volume-variable and product-specific 
analysis of expenses in Headquarters Finance Numbers.

[[Page 51985]]

Approach To Determine Value of the Product Activity Attribute

A. Existing Finance Numbers
    The Postal Service is conducting a survey of the owners of the 
Headquarters Finance numbers to obtain information on the type of 
activity or program performed in the Finance Number. Responses to the 
survey will be used to help ascertain whether the activity supports a 
specific product group or is Common/Enterprise Sustaining. The Cost 
Attribution unit in Corporate Financial Planning will analyze the 
results of the survey and conduct further research as necessary to 
determine the appropriate value of the Product Activity Attribute for 
each Finance Number. The value of the Product Activity Attribute will 
be populated in the Finance Number Control Master File.
B. New Finance Numbers
    The Postal Service will modify its current business process for the 
creation of new Finance Numbers to include a step for the requestor of 
the new Finance Number to respond to the Product Activity Survey 
Questions. The Cost Attribution unit in Corporate Financial Planning 
will serve as the gate-keeper for review and approval of the value of 
the Product Activity Attribute in the official Finance Number Control 
Master File.
    Impact: The proposed approach is designed to position the Postal 
Service to identify group-specific costs as the organization and 
strategies for Mailing Services (i.e., Market-dominant products) and 
Shipping Services (i.e., Competitive products) evolve. The Postal 
Service does not have survey data to estimate the impact of the 
proposed approach on FY 2007 costs and, because of the substantial 
amount of HQ organizational restructuring which has taken place this 
fiscal year, believes that historical information from FY 2007 would 
have limited value in projecting future group-specific costs. The 
typical FN at headquarters usually contains several million dollars, 
however, so depending on the numbers of FNs determined to be Market-
Dominant or Competitive Product, something between tens of millions to 
perhaps as much as several hundreds of millions of dollars would be 
expected to move out of institutional costs and into group specific 
costs.
    Proposal Two: Proposed Group-Specific Cost Change (Cost Segment 
16).
    Objective: A methodology change is proposed for the manner in which 
advertising costs (Cost Segment 16) for Click-N-Ship and Carrier Pickup 
are assigned in the FY 2008 Cost & Revenue Analysis (CRA) Report.
    Background: In the FY 2007 CRA, the advertising costs for Click-N-
Ship and Carrier Pickup were treated as institutional, even though 
these costs related to specific products (Express Mail, Priority Mail, 
International packages, International Express Mail, and International 
Priority Mail), all of which are Competitive Products.
    Proposal: In FY 2008, it is proposed that advertising costs for 
Click-N-Ship and Carrier pickup be assigned as a group-specific cost to 
competitive products, as the advertising for these services relates 
specifically to products that are competitive.
    Impact: In FY 2007, approximately $40 million was spent on 
advertising for Click-N-Ship and Carrier Pickup, together. Therefore, a 
similar amount of group-specific costs to competitive products might be 
expected in FY 2008.
    Proposal Three: Proposed In-Office Cost System (IOCS) Mixed Mail. 
Coding Changes. Objective: changes are proposed to the IOCS coding of 
mixed mail that better support shape-based costing by the Postal 
Service.
    Background: Currently, readings observed on employees handling 
wheeled containers, pallets, and empty containers are assigned mixed 
mail activity codes that depend only on the operation where the sampled 
employee was assigned. While this approach works well for employees in 
operations that handle a single shape of mail, it is fairly imprecise 
for allied operations such as platform.
    Proposal: For FY 2008, it is proposed to use additional information 
on the shape (letter, flat, or parcel) of the contents in a wheeled 
container or pallet when assigning IOCS mixed mail codes. If the 
contents are all of the same shape (for example, all loose letter-
shaped mail and letter trays), it is proposed to assign the mixed mail 
code to the corresponding shape. For empty equipment, it is proposed to 
assign a shape-based mixed mail code that corresponds to the equipment 
type; for example, empty letter trays would be assigned a letter-shape 
code. Containers that contain multiple shapes or no shape information 
would continue to be assigned as they are now.
    Impact: There would be a decrease in the IOCS dollar-weighted 
tallies associated with IOCS activity codes for mixed mail all shapes 
and empty equipment of approximately 28 percent, and a corresponding 
increase in shape-specific mixed mail codes of 86 percent. These 
changes, when incorporated in the mail processing model, would slightly 
increase unit costs for parcel-shape mail, slightly decrease them for 
letter-shape mail, and leave costs for flat-shape almost unchanged.
    Proposal Four: Proposed City Carrier Collection Cost Change. 
Objective: A change is proposed to identify an additional $60 million 
of First-Class Mail product specific cost in collection costs for city 
delivery carriers.
    Background: In the FY 2007 CRA, the Postal Service attributed the 
non-volume variable portion ($60 million) of the city carrier time, 
associated with picking up mail in blue collection boxes, to First-
Class single-piece letters. However, in the Commission's FY 2007 Annual 
Compliance Determination Report, the Commission rejected this 
treatment.
    Proposal: For FY 2008, the Postal Service again proposes that this 
$60 million be attributed to First-Class single-piece letters. These 
costs represent a portion of the labor costs for collecting mail at 
``blue'' collection boxes. The Commission correctly noted in its FY 
2007 Annual Compliance Determination that the boxes do not state that 
their use is solely for the collection of First-Class single-piece 
letters. Still, over 90 percent of collection box mail is First-Class 
single-piece letters. (Moreover, in the new regime, single-piece 
letters and single-piece cards are now both components of the same Mail 
Classification Schedule ``product'' to which these costs will be 
treated as product specific, which is a change from the old regime in 
which cards and letters were separate subclasses.) Collection boxes are 
put into service for collecting First-Class single-piece letters, 
though a small amount of other products are sometimes deposited there. 
Furthermore, as of July 2007, the Postal Service prohibited stamped 
mail over 13 ounces from being deposited in these collection boxes, for 
security reasons. This would exclude some classes of mail that would 
have been there previously. Finally, with Carrier Pickup, competitive 
products such as Express and Priority Mail now have an alternative to 
using collection boxes. Therefore, the non-volume variable labor costs 
of sweeping collection boxes are reasonably treated as product specific 
to First-Class single-piece letters. Of course, to the limited extent 
that other types of mail are deposited in collection boxes, they will 
continue to get a proportionate distribution of the volume-variable 
costs, based on the existing distribution key.
    Impact: The impact is $60 million of attributable cost for First-
Class single-piece letters, which would be institutional otherwise.

[[Page 51986]]

    Proposal Five: Proposed Express Mail Processing Changes. Objective: 
The purpose of this document is to propose addressing and implementing 
the changes recommended in the Commission's FY 2007 Annual Compliance 
Determination Report for (1) the distribution key for the costs of the 
mail processing activity called ``out of office, delivering Express 
Mail,'' and (2) the treatment of the non-volume variable portion of the 
cost for the same mail processing activity.
    Background: In the FY 2007 CRA, the distribution key used for the 
costs of the mail processing activity called ``out of office, 
delivering Express Mail'' were the costs of the mail processing 
activities that the clerks were performing when they were ``in 
office.'' However, in the Commission's FY 2007 Annual Compliance 
Determination Report, the Commission suggested using Revenue, Pieces, 
and Weight (RPW) volumes of domestic and international Express to 
distribute the ``out of office, delivering Express Mail'' costs. Thus, 
the Postal Service is proposing adoption of the Commission's 
suggestion.
    In the FY 2007 CRA, the non-volume variable portion (57 percent) of 
the costs for the ``out of office, delivering Express Mail'' activity 
was treated as institutional. In the Commission's FY 2007 Annual 
Compliance Determination Report, the Commission suggested the Postal 
Service review this variability/treatment and return with further 
suggestions.
    Proposal: For FY 2008, the Postal Service proposes adopting the 
Commission's suggestion to use the relative RPW volumes of domestic and 
international Express Mail to form the distribution key.
    For FY 2008, since the Postal Service does not have a new study to 
update the variability, it is proposing continuing with the 43 percent 
variability (with the remaining 57 percent non-volume variable), and 
also proposing to treat the 57 percent non-volume variable amount as 
group-specific to Competitive Products, as these costs are solely for 
domestic and international Express Mail, which are both Competitive 
Products.
    Impact: Using the RPW volume of domestic and international Express 
Mail shifts about $4.346 million away from domestic Express Mail and 
into international Express Mail (using FY 2007 cost information in C/S 
3.1 inputs to the spreadsheets).
    Treating the 57 percent non-volume variable costs as Group Specific 
to Competitive Products shifts about $33.882 million from Institutional 
Costs to Attributable Competitive Group Specific (using FY 2007 cost 
information).
    Proposal Six: Proposed Change to Distribution of Empty Equipment 
Costs
    Objective: For FY 2008, the Postal Service proposes a change in the 
methodology by which attributable empty equipment Cost Segment 14 
(Purchased Transportation) costs are distributed to products.
    Background: Accrued purchased transportation empty equipment costs 
are contained in two general ledger accounts, 53191 and 53192, for 
highway and rail empty equipment costs, respectively. Empty equipment 
costs are generally incurred when empty equipment items, i.e. letter 
trays, flat tubs, sacks, rolling stock, etc., are transported between 
mail processing facilities and Mail Transport Equipment Service Centers 
(MTESC), or from MTESC directly to large mailers.
    The attributable costs are computed by applying the variability 
factor to the accrued costs. The variability for transporting empty 
equipment by highway is the average cost weighted variability from all 
contracted highway transportation (approximately 80 percent). The 
variability for transporting empty equipment by rail is equal to the 
freight rail variability (approximately 99 percent). The Postal Service 
is not proposing any change in the variability factor applied to either 
highway or rail accrued empty equipment costs.
    Currently, after the highway and rail attributable empty equipment 
costs are computed, they are distributed to products in the same 
proportions as the aggregate of all non-amphibious (that is, with the 
exception of inland and offshore water) Cost Segment 14 costs, using a 
simple three-step process. First, all other attributable Cost Segment 
14 costs are distributed to products based on the distribution keys and 
distribution factors for the various other Cost Segment 14 components. 
Second, based on the results of the first step, the cumulative 
proportion of all non-amphibious Cost Segment 14 costs that have been 
distributed to each product is calculated. Third, each product then 
receives the same proportion of empty equipment costs as it received of 
total of all non-amphibious Cost Segment 14 costs. This methodology has 
been utilized in PRC versions of the CRA since FY 2000.
    Proposal: In the second step of the distribution process described 
above, the Postal Service is proposing to exclude a portion of Cost 
Segment 14 costs mapped to component 828 (Total International) when 
calculating the cumulative distribution factors used to distribute 
highway and rail empty equipment attributable costs to products. 
Specifically, it proposes to exclude costs from accounts 53261, 53262, 
53263, and 53268 before calculating the distribution key that 
attributes empty equipment costs to products. In FY07, those four 
accounts totaled $472.4 million.
    Rationale: The Postal Service believes the current method of 
allocating attributable empty equipment costs to products should be 
refined to compute the distribution factors after excluding the portion 
of costs mapped to component 828 (Total International) that are not 
transportation related. The accounts recommended to be excluded from 
the distribution factor calculation are for terminal dues (accounts 
53262, 53263, 53268) and for internal conveyance charges (account 
53261). These costs are largely the result of settling foreign postal 
transactions, and are not transportation related. Since there is no 
apparent causal relationship between variations in non-transportation 
component 828 costs and empty equipment costs, these non-transportation 
costs should be eliminated from the distribution factor calculation.
    In the current domestic Cost Segment 14 model, all component 828 
costs are mapped to the International Mail product group. As a result, 
including all component 828 costs (transportation and non-
transportation) in computing the empty equipment distribution factors 
causes International Products to be assigned an inequitable proportion 
of empty equipment costs. Computing the distribution factors after 
excluding the non-transportation related portion of component 828 costs 
will result in a fairer distribution of highway and rail empty 
equipment costs to products. Of course, international mail products are 
sampled as they travel via the various modes of domestic 
transportation, and they will therefore continue to be assigned an 
appropriate share of empty equipment costs on that basis.
    Impact: The following table which shows the impact of the proposed 
change on products (using FY07 mail categories and costs). The proposed 
methodology results in International Products receiving $9 million less 
in empty equipment costs, while First Class Mail and Priority Mail each 
receive $3 million in additional highway and rail empty equipment 
costs, respectively.

[[Page 51987]]

                                                               Impact of Proposed Changes
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                                                              FY 2007                                         FY 2007
                                              FY 2007        Proposed         Highway      FY 2007 Rail    Proposed rail       Rail       Highway + rail
   Class, subclass, or special service     Highway empty   highway empty    difference         empty           empty        difference      difference
                                             equipment       equipment      (proposed-       equipment       equipment      (proposed-      (proposed-
                                               costs           costs         current)          costs           costs         current)        current)
--------------------------------------------------------------------------------------------------------------------------------------------------------
First-Class Mail:
    Single-Piece Letters................         $10,259         $11,193             934          $4,839          $5,272             433           1,368
    Presort Letters.....................           9,863          10,750             887           4,676           5,090             414           1,301
    Single-Piece Cards..................             126             137              11              61              66               5              16
    Presort Cards.......................             297             324              27             143             156              13              40
                                         ---------------------------------------------------------------------------------------------------------------
        Total First-Class...............          20,545          22,405           1,860           9,719          10,584             865           2,725
                                         ---------------------------------------------------------------------------------------------------------------
Priority Mail...........................          24,157          26,393           2,236          11,156          12,169           1,012           3,248
Express Mail............................           1,799           1,964             165             837             912              75             240
Periodicals:
    Within County.......................               2               2               0               1               1               0               0
    Outside County......................           3,633           3,963             330           1,716           1,870             153             483
                                         ---------------------------------------------------------------------------------------------------------------
        Total Periodicals...............           3,635           3,965             330           1,717           1,870             153             484
                                         ---------------------------------------------------------------------------------------------------------------
Standard Mail:
    Enhanced Carrier Route..............           1,361           1,485             124             636             693              57             181
    Regular.............................           6,591           7,183             593           3,125           3,402             277             869
                                         ---------------------------------------------------------------------------------------------------------------
        Total Standard Mail.............           7,951           8,668             717           3,761           4,094             334           1,050
                                         ---------------------------------------------------------------------------------------------------------------
Package Services:
    Parcel Post.........................           5,045           5,508             462           2,355           2,567             212             674
    Bound Printed Matter................           1,197           1,305             108             568             618              50             159
    Media Mail..........................           1,695           1,849             154             806             878              72             226
                                         ---------------------------------------------------------------------------------------------------------------
        Total Package Services..........           7,938           8,662             724           3,729           4,064             334           1,059
                                         ---------------------------------------------------------------------------------------------------------------
U.S. Postal Service.....................             567             620              53             265             289              24              77
Free Mail...............................              79              86               7              38              41               3              10
International Mail......................          14,409            8,31         (6,091)            6,73           3,930         (2,802)         (8,893)
                                         ---------------------------------------------------------------------------------------------------------------
        Total Volume Variable...........          81,079          81,079             (0)          37,953          37,953             (0)             (0)
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Proposal Seven: Proposed Change in Distribution Key for Vehicle 
Service Driver (VSD) Costs.
    Objective: A methodology change is proposed for FY 2008 in the 
distribution key for Cost Segment 8 (Vehicle Service Drivers) costs.
    Background: Cost Segment 8 includes the salaries, benefits, and 
related costs of vehicle service driver (VSD) labor. VSD workload 
involves transporting mail using postal-owned and leased vehicles. 
Transportation runs are made between post offices, branches, Processing 
and Distribution Centers/Facilities, Air Mail Centers/Air Mail 
Facilities, Bulk Mail Centers, depots, and certain customer locations.
    The attributable costs are calculated by applying the variability 
factor of 60.44 percent to the accrued costs (approximately $660 
million in FY 2007). The volume variability factor was developed in 
R97-1 (USPS-T-20, Exhibit 2 Revised, page 22). This proposal does not 
address changing the volume variability factor. In FY 2007, there were 
approximately $400 million in VSD attributable costs. Currently, after 
the attributable costs are calculated, they are distributed to products 
in the same proportions as cubic feet of originating mail obtained from 
Revenue, Pieces and Weight (RPW) Statistics.
    Proposal: The Postal Service is proposing to distribute the 
attributable costs to products in the same proportions as the estimated 
cubic-foot miles of mail sampled on Intra-SCF routes. The relevant 
proportions are developed through the Transportation Cost System 
(TRACS).
    Rationale: The Postal Service submits that the current method of 
distributing attributable costs to products incorrectly assigns Vehicle 
Service Driver labor costs to mail that originates at the Destination 
Delivery Unit (DDU). Presumably, this mail is entered at the DDU for 
delivery on routes from that office, and thus avoids VSD costs. The 
current methodology, however, treats all originating mail, regardless 
of entry point, as incurring the same amount of these labor costs. 
Absent a specific VSD distribution key, the Postal Service takes the 
view that a distribution key consisting of the cubic-foot-mile 
proportions on Intra-SCF runs provides a reasonable proxy for 
distributing attributable VSD costs to products. Relative proportions 
of mail transported by Intra-SCF contracts are much more likely to be 
representative of VSD mail

[[Page 51988]]

than relative proportions of originating cube, which necessarily 
include DDU mail that VSD drivers are unlikely to transport. Intra-SCF 
highway contracts, by definition, provide local transportation and 
include some trips from mail processing facilities to delivery units.
    Impact: The following table which shows the impact of the proposed 
change on products (using FY 2007 costs).

                                                          Impact of Proposed Change on Products
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                            Proposed FY
   FY 2007 Class, subclass, or special    Highway intra-   Highway cubic      Current        2007 rail    Proposed minus      Current      Rail proposed
                 service                    SCF highway        feet        highway 2007     costs using    proposed rail      percent         percent
                                                                             CS8 costs       intra-SCF     current costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
First-Class Mail:
    Single-Piece Letters................        $145,729         109,232         $23,408         $69,963         $46,555            5.89           17.60
    Presort Letters.....................          56,127         129,637          27,781          26,946           (835)            6.99            6.78
    Single-Piece Cards..................           2,718             971             208           1,305           1,097            0.05            0.33
    Presort Cards.......................           4,857           2,852             611           2,332           1,721            0.15            0.59
                                         ---------------------------------------------------------------------------------------------------------------
        Total First-Class...............         209,431         242,692          52,008         100,546          48,538           13.08           25.29
                                         ---------------------------------------------------------------------------------------------------------------
Priority Mail...........................         216,478         398,040          85,298         103,929          18,631           21.46           26.15
Express Mail............................          11,041           8,334           1,786           5,301           3,515            0.45            1.33
Periodicals:
    Within County.......................             112          10,277           2,202              54         (2,148)            0.55            0.01
    Regular.............................          90,696         145,187          31,113          43,542          12,429            7.83           10.95
                                         ---------------------------------------------------------------------------------------------------------------
        Total Periodicals...............          90,807         155,464          33,315          43,596          10,281            8.38           10.97
                                         ---------------------------------------------------------------------------------------------------------------
Standard Mail:
    Enhanced Carr Rte...................          50,726         226,200          48,473          24,353        (24,120)           12.19            6.13
    Regular.............................         116,008         263,241          56,411          55,694           (717)           14.19           14.01
                                         ---------------------------------------------------------------------------------------------------------------
        Total Standard Mail.............         166,734         489,441         104,884          80,047        (24,837)           26.39           20.14
                                         ---------------------------------------------------------------------------------------------------------------
Package Services:
    Parcel Post.........................          70,236         302,504          64,825          33,720        (31,105)           16.31            8.48
    Bound Printed Matter................          24,648         149,015          31,933          11,833        (20,100)            8.03            2.98
    Media Mail..........................          16,447          47,026          10,077           7,896         (2,181)            2.54            1.99
                                         ---------------------------------------------------------------------------------------------------------------
        Total Package Services..........         111,331         498,545         106,835          53,449        (53,386)           26.88           13.45
                                         ---------------------------------------------------------------------------------------------------------------
U.S. Postal Service.....................           8,352          21,612           4,631           4,010           (621)            1.17            1.01
Free Mail...............................           1,808           3,024             648             868             220              16            0.22
International Mail......................          11,985          37,770           8,094           5,754         (2,340)            2.04            1.45
                                         ---------------------------------------------------------------------------------------------------------------
    Total Volume Variable...............         827,968       1,854,922         397,499         397,499  ..............          100.00          100.00
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Proposal Eight: [Proposed change to bundle-based mapping for First-
Class Mail Automation flats]
    Objective: A change in Mail Characteristics Study methodology is 
proposed to correct an error in the procedure used to map First-Class 
Mail Automation flats pieces to rate elements in the FY2007 ACR and the 
two previous rate cases (Docket Nos. R2006-1 and R2005-1).
    Background: The methodology used for mapping preparation 
characteristic to rate element for First-Class Mail Automation flats in 
R2005-1, R2006-1, and the 2007 ACR was incorrect. These previous Mail 
Characteristics Studies (e.g., in the 2007 ACR, FY07-14) included a 
scheme to map automation flats pieces from preparation characteristic 
to rate element that used a container-based mapping. In fact, however, 
a bundle-based mapping should apply for automation flats. For example, 
an automation piece in a 5-digit bundle that is placed in a 3-digit 
container is assessed the 5-digit rate, and not the 3-digit rate that 
would be consistent with the presort level of the container. (To give a 
slightly more complete background, the current container-based mapping 
scheme was appropriate when designed in anticipation of adoption of a 
container-based rate structure. The error, so to speak, occurred when 
the container-based rate structure was never implemented, but, through 
oversight, the container-based mapped scheme was nonetheless maintained 
in the spreadsheets, rather than being adapted to a bundle-based 
mapping scheme to reflect the actual bundle-based rate structure. The 
intent of this proposal is to correct that oversight.)
    Rationale: The bundle-based rates are in effect for automation 
First-Class Mail flats. Pieces are assessed postage based on the 
presort level of the bundle, not the presort level of the container.
    Impact: The correction of the mapping of preparation characteristic 
does not alter the aggregate volume of pieces by rate element because 
RPW rate

[[Page 51989]]

element volumes are used as control values. The correction, however, 
will alter the distribution of pieces across preparation characteristic 
within rate elements. The effect of the correction will increase the 
modeled cost for all First-Class Mail Automation flats rate elements. 
The costs for 5-digit automation pieces increase because the 5-digit 
rate element includes pieces in 5-digit bundles that have been placed 
in MADC, ADC or 3-digit tubs and incur additional bundle sorts. In the 
incorrect versions, the 5-digit automation rate element only included 
pieces in 5-digit trays, which do not incur bundle sorting costs. The 
costs of 3-digit automation, ADC automation, and MADC automation pieces 
increase because these rate elements previously included the relatively 
lower cost pieces in bundles with a finer bundle presort than the 
container sort. For example, the 3-digit automation modeled costs 
included the modeled costs of 5-digit bundles that do not incur as many 
piece-sorts as pieces in 3-digit bundles. The increase in the modeled 
costs for each rate element decreases the CRA adjustment factor. As a 
result of a decrease in the CRA adjustment factor, the non-auto presort 
rate category costs go down. The effect on the avoided costs is 
indeterminate because the avoided costs depend on the estimated 
distribution of pieces across preparation characteristic.
    [The following text added by Order No. 102.] On August 18, 2008, 
Order No. 99 [footnote omitted] established this docket to evaluate 
eight changes in costing methods that the Postal Service proposes to 
use in its FY 2008 annual report that it must file under 39 U.S.C. 
3652. Later that day, the Commission received the Motion of the United 
States Postal Service to Supplement the List of Its Proposed Costing 
Changes for Purposes of Preparing the FY 2008 Annual Compliance Report 
(Motion). The Motion states that the Postal Service has finalized a 
ninth proposed change in costing methodology. It requests the 
Commission to consider its proposal under the procedures and schedule 
established in Order No. 99.
    The Postal Service characterizes this additional proposed change as 
relatively straightforward. It notes that a description of the proposed 
change, the rationale for adopting it, and an estimate of the impact of 
adopting it, accompanies the Motion. Given these circumstances, the 
Postal Service argues, consideration of this additional proposal could 
be consolidated with the original eight proposals and evaluated under 
the procedures outlined in Order No. 99, without detracting from the 
ability of the postal community to evaluate the original eight.
    The Commission agrees. It therefore orders consolidation of the 
proposed change in costing methods described below with the eight 
proposals already under consideration in Docket No. RM2008-2.
    Proposal Nine: Proposed Change in Distribution Key for PARS 
Equipment Depreciation, Maintenance Labor, and Parts/Supplies Costs.
    Objective: A methodology change is proposed for FY 2008 in the 
distribution key for the portion of depreciation (cost segment 20.1), 
maintenance labor (cost segment 11.2), and parts and supplies (cost 
segment 16.3.2) costs related to Postal Automation Redirection System 
(PARS) equipment.
    Background: PARS equipment is being deployed, replacing the use of 
Computer Forwarding System (CFS) in the forwarding and return to sender 
operations for letters. A description of PARS was provided in Docket 
No. R2006-1 in the testimony of Marc McCrery, USPS-T-42. PARS reduces 
the costs for processing, transporting and delivery of letters by 
identifying letter mail that is to be forwarded or returned, at origin. 
As shown in ACR 2007, USPS-FY07-8, spreadsheet fy07equip.xls, the FY07 
depreciation, maintenance labor and parts and supplies for PARS were 
$59.5, $3.6 and $0.7 million. These will grow in FY08.
    These costs, having a volume variability of nearly 100 percent, 
were distributed to class and subclass in the FY07 CRA based on the 
distribution key for CFS.
    Proposal: The Postal Service is proposing to distribute the 
attributable costs to products based on the IOCS tallies for the PARS 
related operations, as done for the distribution key for the PARS 
related work in the remote encoding centers, LDC 15 (see ACR 2007, 
USPS-FY07-7, Preface.Part1, page 2).
    Rationale: The current method of distributing attributable PARS 
costs to products, using the CFS distribution, was the best available 
proxy in the past. But now that PARS tallies are available from the 
IOCS, there is no reason why the CFS proxy should not be replaced with 
information directly relating to relative usage of PARS. The current 
method incorrectly apportions much PARS equipment costs to classes and 
subclasses that benefit very little from PARS, particularly (because of 
shape) Periodicals. The proposed PARS distribution key will assign PARS 
equipment costs to those classes of mail processed with PARS, classes 
that also obtain the labor savings enabled by PARS.
    Impact: The following spreadsheet shows the impact of the proposed 
change on products (using FY07 costs).

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                               FY07                                          Change in
                                             Component No.     LDC 49--Comp forwarding     Distribution      FY07 PARS     Distribution    distribution
              Component name                 cost segment   system (938) 98.1  Set equal      of PARS         tallies      based on PARS    by adopting
                                                 notes         to 938  Set W = 0.9992      related costs   distribution    tallies  $ in   proposal nine
                                                                                             $ in 000s                         000s          $ in 000s
--------------------------------------------------------------------------------------------------------------------------------------------------------
First-Class Mail:
    Single Piece Letters..................             101  26..........................          16,597        30219.58          19,935           3,338
    Presort Letters.......................             102  25..........................          16,138        43172.00          28,480          12,341
        Total Letters.....................             103  51..........................          32,736  ..............  ..............  ..............
    Single Piece Cards....................             104  1...........................             663         3023.10           1,994           1,331
    Presort Cards.........................             105  1...........................             701         1663.90           1,098             396
        Total Cards.......................             108  2...........................           1,365  ..............  ..............  ..............
Total First-Class.........................             109  53..........................          34,100  ..............  ..............  ..............
Priority Mail.............................             110  1...........................             657  ..............  ..............           (657)
Express Mail..............................             111  0...........................              19  ..............  ..............            (19)
Periodicals:
    Within County.........................             113  1...........................             516  ..............  ..............           (516)
    Outside County........................             117  26..........................          16,336          802.05             529        (15,807)
Total Periodicals.........................             123  26..........................          16,852  ..............  ..............  ..............
Standard Mail:

[[Page 51990]]

 
    Enhanced Carrier Route................             126  1...........................             567          219.81             145           (422)
    Regular...............................             127  10..........................           6,688        16238.00          10,712           4,023
Total Standard Mail.......................             135  11..........................           7,256  ..............  ..............  ..............
Package Services:
    Parcel Post...........................             136  1...........................             516  ..............  ..............           (516)
    Bound Printed Matter..................             137  2...........................           1,014  ..............  ..............         (1,014)
    Media Mail............................             139  0...........................             236  ..............  ..............           (236)
Total Package Services....................             141  3...........................           1,766  ..............  ..............  ..............
U.S. Postal Service.......................             142  4...........................           2,499         1076.50             710         (1,789)
Free Mail.................................             147  0...........................              96          222.77  ..............            (96)
International Mail........................             161  0...........................              89  ..............             147              57
Total All Mail............................             162  99..........................          63,336  ..............  ..............  ..............
Special Services:
    Registry..............................             163  0...........................              64  ..............  ..............            (64)
    Certified.............................             164  0...........................  ..............  ..............  ..............  ..............
    Insurance.............................             165  0...........................  ..............  ..............  ..............  ..............
    COD...................................             166  0...........................  ..............  ..............  ..............  ..............
    Money Orders..........................             168  0...........................  ..............  ..............  ..............  ..............
    Stamped Cards.........................             159  0...........................  ..............  ..............  ..............  ..............
    Stamped Envelopes.....................             169  0...........................  ..............  ..............  ..............  ..............
    Special Handling......................             170  0...........................  ..............  ..............  ..............  ..............
    Post Office Box.......................             171  0...........................  ..............  ..............  ..............  ..............
    Other.................................             172  1...........................             351  ..............  ..............           (351)
Total Special Services....................             173  1...........................             414  ..............  ..............  ..............
Total Attributable........................             198  100.........................          63,750        96637.71          63,750             (0)
Other Costs...............................             199  ............................  ..............  ..............  ..............  ..............
Total Costs...............................             200  ............................  ..............  ..............  ..............  ..............
                                            ..............  Deprec......................         $59,476  ..............  ..............  ..............
                                            ..............  Maintenance Labor...........         $ 3,627  ..............  ..............  ..............
                                            ..............  Parts & Supplies............           $ 698  ..............  ..............  ..............
                                            ..............  ............................         $63,801  ..............  ..............  ..............
                                            ..............  Variability.................         0.99920  ..............  ..............  ..............
                                            ..............  Total Vol. Var. Costs.......         $63,750  ..............  ..............  ..............
--------------------------------------------------------------------------------------------------------------------------------------------------------

III. Ordering Paragraphs

    [Order No. 99]
    It is Ordered:
    1. Docket No. RM2008-3 is established for the purpose of 
considering the Request of the United States Postal Service for 
Commission Order Amending the established Costing Methodologies for 
Purposes of Preparing the FY 2008 Annual Compliance Report, filed 
August 11, 2008.
    2. An informal technical conference to explore and clarify 
proposals is scheduled for August 27, 2008 at 10 a.m. in the 
Commission's hearing room.
    3. Interested persons may file initial comments on or before 
September 8, 2008.
    4. Reply comments may be filed on or before September 15, 2008.
    5. William C. Miller is designated as the Public Representative 
representing the interests of the general public in this proceeding.
    6. The Secretary shall arrange for publication of this Notice in 
the Federal Register.
    [Order No. 102]
    1. The Motion of the United States Postal Service to Supplement the 
List of Its Proposed Costing Changes for Purposes of Preparing the FY 
2008 Annual Compliance Report, filed August 18, 2008, is granted.
    2. The proposal described in this Order will be considered under 
the current procedural schedule in Docket No. RM2008-2.
    3. The Secretary shall arrange for publication of this Notice in 
the Federal Register.

    Authority: 39 U.S.C. 3652.

    By the Commission.
Judith M. Grady,
Acting Secretary.
 [FR Doc. E8-20694 Filed 9-5-08; 8:45 am]
BILLING CODE 7710-FW-P
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