[Federal Register: September 4, 2007 (Volume 72, Number 170)]
[Proposed Rules]
[Page 50743-50786]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04se07-10]
[[Page 50743]]
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Part III
Postal Regulatory Commission
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39 CFR Parts 3001, 3010, 3015, and 3020
Administrative Practice and Procedure, Postal Service; Proposed Rule
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POSTAL REGULATORY COMMISSION
39 CFR Parts 3001, 3010, 3015 and 3020
[Docket No. RM2007-1; Order Nos. 26 and 27]
Administrative Practice and Procedure, Postal Service
AGENCY: Postal Regulatory Commission.
ACTION: Proposed rule.
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SUMMARY: A recently-enacted federal law directs the Commission to
develop rules to implement a new postal ratemaking system. This
proposal responds to that directive by presenting rules addressing
market dominant and competitive products, including negotiated service
agreements, the regulatory calendar, and product lists. This document
incorporates a revision identified in an errata notice. Issuance of
this document will allow the Commission to consider comments and, if
appropriate, to make revisions prior to adoption of final rules.
DATES: Submit comments by September 24, 2007; submit reply comments by
October 9, 2007.
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 stephen.sharfman@prc.gov.
SUPPLEMENTARY INFORMATION:
Regulatory History
72 FR 5230, February 5, 2007.
72 FR 29284, May 25, 2007.
72 FR 33261, June 15, 2007.
I. Introduction
This is the third in a series of orders designed to establish
regulations implementing a modern system for regulating rates and
classes for market dominant and competitive products.\1\ In response to
those earlier orders, the Commission received more than 100 comments
from interested parties.\2\ The Commission has reviewed these comments
carefully. They have been useful in clarifying the Commission's
analysis, and the parties' contributions are appreciated.
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\1\ PRC Order No. 2, January 30, 2007 and PRC Order No. 15, May
17, 2007.
\2\ Attachment A to this order contains a list of the parties
filing comments.
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In this order, the Commission outlines how it intends to administer
various provisions of the Postal Accountability and Enhancement Act
(PAEA), Pub. L. No. 109-435, 120 Stat. 3198 (December 20, 2006). The
proposed regulations are set forth in section V. Comments are due by
September 14, 2007. Reply comments are due by September 28, 2007.
Although afforded 18 months, until June 19, 2008, to promulgate the
new regulations under the PAEA, the Commission has made a concerted
effort to accelerate that schedule considerably. The Commission views
early implementation as beneficial to all stakeholders. Early
implementation of a ratemaking framework prior to the statutory
deadline will enable the Postal Service to use new, streamlined
procedures to initiate rate (and class) changes as needed to respond to
its financial needs and market conditions. The regulations may serve as
a safety valve, providing an immediate means to address challenges
faced by the Postal Service and perhaps obviate the necessity for rate
relief through an omnibus rate case under existing procedures. The
commenters urge that such a filing should be avoided, thereby allowing
the Postal Service and the Commission to dedicate more resources to
thoughtfully implementing other aspects of the reform legislation. It
would be unfortunate if, in this reformed environment, rate changes had
to be litigated under the old cost of service system. Having this new
framework in place, and the Postal Service operating under the new
framework as early as practical, would provide the Postal Service
flexibility to respond quickly to changed conditions.
The Commission's goal is to make this new system of rate adjustment
advantageous for all stakeholders, enabling the Postal Service to price
its own products, ensuring the lawfulness of competitive rates,
providing increased transparency, and maintaining universal service at
affordable rates. Fulfilling these objectives requires that competing
interests be carefully balanced.
The Commission, among other things, identifies the mail matter that
comprises each type of mail listed in section 3631(a) and the products
within the competitive category of mail. It also discusses generally
the mail matter that comprises each type of mail listed in section
3621(a). However, in lieu of identifying specific market dominant
products, the Commission has determined that for reasons of accuracy
and expedition, it would be preferable to accept the Postal Service
offer to prepare and submit a draft mail classification schedule,
which, inter alia, identifies the market dominant products it believes
should be contained therein. This will enable the Postal Service to
categorize its market dominant services into products that best serve
its business needs. In addition, it will permit the Postal Service to
fashion a draft mail classification schedule with what it believes is
an appropriate level of detail. The Commission then will be able to
evaluate this draft for consistency with the principles discussed in
this order. The draft mail classification schedule is due September 14,
2007. Comments on the draft mail classification schedule are due
September 28, 2007.
The proposed regulations represent the Commission's initial effort
to establish a functional framework for regulating rates and classes
for market dominant and competitive products. The proposed regulations
do not seek to address every issue that might arise under the PAEA. The
intent is that these regulations provide a reasonable starting point
and that they will evolve over time.
In the sections that follow, the Commission discusses proposed
regulations governing:
Rules Applicable to Rate Adjustments for Market Dominant
Products (part 3010);
Regulation of Rates for Competitive Products (part 3015);
and
Product Lists (part 3020).
The Commission must also issue proposals amending the structure of
its rules, and specific regulations applicable to complaints, reporting
requirements, and commercially sensitive materials, as well as
regulations to implement sections 404a and 504(f). Completing those
tasks is complementary to the proposed regulations, which, once
implemented, will be sufficient to enable the Postal Service to begin
to operate as contemplated by the PAEA.
II. Market Dominant Products
A. Introduction
Background. This segment of the rulemaking focuses on rate changes
referred to as ``rate adjustments'' in the PAEA for market dominant
products. The emphasis is on proposing regulations that will provide
the Postal Service with the option of pursuing its next general round
of price changes under the new law's ratesetting provisions, which
feature a price cap mechanism and a streamlined advance notice and
review, and on providing a comprehensive framework.
Much of the discussion on this topic since the enactment of the
PAEA has occurred in the context of a joint Postal Regulatory
Commission-Postal Service
[[Page 50745]]
summit, regional field hearings, \3\ comments filed in response to
Commission orders, \4\ and Congressional hearings. The Commission's
preliminary conclusions about the direction of this regulatory effort
reflect considered review of the comments and testimony presented in
these forums.
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\3\ See PRC Order No. 19, Notice and Order on Field Hearings to
Receive Testimony on Implementation of Modern System of Ratemaking,
Docket No. RM2007-1, June 8, 2007.
\4\ The parties have submitted several rounds of comments in
response to the two advance notices of proposed rulemaking. As a
matter of convenience, citations to these comments will identify the
party's comments by filing date; reply comments will be so denoted.
For example, the referenced Postal Service initial comments are
cited as Postal Service Comments, June 18, 2007, at xx; reply
comments are cited similarly, e.g., PSA Reply Comments, July 3,
2007, at xx.
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Commenters identify two main tasks for the Commission at this stage
of implementation. One is reaching consensus on conceptual and
practical aspects of the scope, depth and timeframe of Commission
review of planned rate changes. The other is transforming numerous
statutory requirements, objectives and factors into a new ``road map''
for navigating the regulatory calendar, expedited procedures, and price
cap mechanism that are core components of the new system. Most
commenters observe that these tasks involve balancing policy
considerations, pragmatic concerns, and a revamped PRC/Postal Service
partnership.\5\ They agree that the statute provides certainty on some
key points, but point to numerous instances where other important
issues are open to interpretation. Some urge the Commission to adopt a
light-handed approach to the new notice-and-review process, with the
price cap calculation being the sole focus.\6\ Others caution that
implementation will allow price changes to occur more often than
annually, the cap to be applied unequally to products within a class of
mail, and the cap to be exceeded (within a certain range) under an
exception referred to as ``unused rate adjustment authority'' or the
banking exception. They suggest that these possibilities may have
significant implications with respect to mailers' expectations that the
modern system will provide predictability, certainty and stability.
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\5\ See, for example, Advo Comments, April 6, 2007, at 2-3; MOAA
Reply Comments, May 7, 2007, at 1-2; PSA Comments, April 6, 2007, at
1-4; Time Warner Comments, April 6, 2007, at 1-3; and Postal Service
Comments, April 6, 2007, at 2-4.
\6\ Jon Mulford, for example, states: ``[the] PAEA has given the
Commission extraordinary power to regulate the USPS. The Commission,
in devising its system for setting rates * * * should at all costs
avoid unnecessarily tying USPS management's hands as they attempt to
cope with an impending financial crisis.'' Mulford Comments, March
9, 2007, at 5.
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The Commission appreciates the responses to its request for
assistance in developing new regulations, and finds that the
commenters' observations provide useful guidance. It also appreciates
the Postal Service's efforts, outside of this rulemaking, to work with
mailers on developing a viable regulatory calendar and on addressing
rate implementation issues. See Postal Service Reply Comments, May 7,
2007, at 3-4 and Appendix B. The Commission proposes basic rules
regarding the regulatory calendar in proposed rule 3010.7.
B. Statutory Framework for Rate Changes
Section 3622(d) of the PAEA, captioned ``Requirements,'' addresses
some of the mandatory features the Commission must include in the
modern regulatory system.\7\ It provides, in pertinent part:
\7\ These requirements are not ``stand alone'' elements of the
new system, but must be given effect in concert with certain
statutory factors and objectives. However, unlike the
``requirements,'' most of which are new postal ratemaking features,
many of the factors and objectives are identical to those employed
in the Postal Reorganization Act of 1970 (PRA) ratemaking.
(1) In General.--The system for regulating rates and classes for
market-dominant products shall--
(A) include an annual limitation on the percentage changes in
rates to be set by the Postal Regulatory Commission that will be
equal to change in the Consumer Price Index for All Urban Consumers
unadjusted for seasonal variation over the most recent available 12-
month period preceding the date the Postal Service files notice of
its intention to increase rates;
(B) establish a schedule whereby rates, when necessary and
appropriate, would change at regular intervals by predictable
amounts;
(C) not later than 45 days before the implementation of any
adjustment in rates under this section, including adjustments made
under subsection (c)(10)-
(i) require the Postal Service to provide public notice of the
adjustment;
(ii) provide an opportunity for review by the Postal Regulatory
Commission;
(iii) provide for the Postal Regulatory Commission to notify the
Postal Service of any noncompliance of the adjustment with the
limitation under subparagraph (A); and
(iv) require the Postal Service to respond to the notice
provided under clause (iii) and describe the actions to be taken to
comply with the limitation under subparagraph (A);
(D) establish procedures whereby the Postal Service may adjust
rates not in excess of the annual limitations under subparagraph
(A).
* * * * *
However, the ``price cap'' in subsection 3622(d)(1)(A) is not an
absolute limit; other provisions expressly require that the new
system:
(E) notwithstanding any limitation set under subparagraphs (A)
and (C), and provided there is not sufficient unused rate authority
under paragraph (2)(C), establish procedures whereby rates may be
adjusted on an expedited basis due to either extraordinary or
exceptional circumstances, provided that the Commission determines,
after notice and opportunity for a public hearing and comment, and
within 90 days after any request by the Postal Service, that such
adjustment is reasonable and 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.
* * * * *
Further, the following provisions in subsection 3622(d)(2)
authorize the annual cap to be exceeded under certain conditions:
* * * * *
(C) Use of Unused Rate Authority.--
(i) Definition.--In this subparagraph, the term ``unused rate
adjustment authority'' means the difference between--
(I) the maximum amount of a rate adjustment that the Postal
Service is authorized to make in any year subject to the annual
limitation under paragraph (1); and
(II) the amount of the rate adjustment the Postal Service
actually makes in that year.
(ii) Authority. Subject to clause (iii), the Postal Service may
use any unused rate adjustment authority for any of the 5 years
following the year such authority occurred.
Finally, the exercise of ``banking authority'' is itself subject
to the following limitations:
(iii) Limitations.--In exercising the authority under clause
(ii) in any year, the Postal Service--
(I) may use unused rate adjustment authority from more than 1
year;
(II) may use any part of the unused rate adjustment authority
from any year;
(III) shall use the unused rate adjustment authority from the
earliest year such authority first occurred and then each following
year; and
(IV) for any class or service, may not exceed the annual
limitation under paragraph (1) by more than 2 percentage points.
* * * * *
These comprehensive provisions unequivocally establish subsection
3622(d) as the administrative cornerstone of the new rate setting
system for market dominant products. Collectively, streamlined advance
review procedures, the price cap mechanism, the banking exception, and
the exigency clause are designed to foster pricing flexibility, reduce
burden, and facilitate quick implementation of rate changes. The
Commission's proposed regulations are intended to fill in many of the
details of price cap
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administration, content of rate change filings, and due process.
C. Summary of Main Issues
The PAEA specifies use of the Bureau of Labor Statistics' widely-
known CPI-U, but does not address some related aspects of
administration, such as how to calculate the index adjustment and how
to calculate the base to which the adjustment applies. It also does not
address the extent of documentation of worksharing discounts. The
Commission sought comments on these matters in its Second Advance
Notice of Proposed Rulemaking on Regulations Establishing a System of
Ratemaking, May 17, 2007.
Additional implementation issues raised in the comments include:
--whether the phrase ``not later than 45 days'' used in section
3622(d)(1)(C) limits Commission review to this number of days, or
allows a longer period;
--whether price change filings, other than exigent requests, involve
``barebones'' notice and documentation or more comprehensive support;
--Whether the Commission's advance review is limited to assessing
compliance with the price cap provisions or extends to other matters,
such as an evaluation of worksharing discounts;
--whether the Commission should solicit public comment in routine rate
change filings;
--whether the authority to ``bank'' unused rate adjustment authority
for up to 5 years carries with it the ability to apply the banked
pricing credit to a class other than the one in which it was
accumulated; and
--whether the rules should define ``exigent circumstances'' and whether
trial-type proceedings must or should be held.
D. Structure of New Proceedings and Rules
Review of the comments points to interest in a new road map for
rate changes. William Berkley usefully highlights this by observing:
We need to keep in mind that we have to keep proceedings simple
and rules of practice simple to avoid a system that only postal
attorneys and economists can use. We ask when you establish these
new rules that you remember to keep it as simple as you can.
Proceedings before every regulator are always difficult, but let us
also insure that we make it easy to navigate and understand the
proceedings in this evolving system.
Berkley Testimony at 5.\8\
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\8\ Testimony of William S. Berkley, President and CEO, Tension
Envelope Corporation, Before the United States Postal Regulatory
Commission Field Hearing, Kansas City, June 22, 2007.
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United Parcel Service (UPS), addressing implementation in general,
asserts: ``To the extent possible, the Commission should interpret PAEA
in a way that recognizes the value of administrative simplicity and
practicality, and that minimizes the Postal Service's burden, while
remaining consistent with the statutory requirements.'' UPS Reply
Comments, July 3, 2007, at 10.
Accordingly, the Commission proposes to:
--Organize most of the rules directly affecting market dominant
products into a largely self-contained unit;
--Standardize terms, definitions and methods to the extent feasible;
and
--Establish streamlined proceedings to facilitate all types of price
changes.
The Commission proposes to establish a separate part, designated
part 3010, Rules Applicable to Rate Adjustments for Market Dominant
Products, in 39 CFR. This part is divided into five subparts:
Subpart A--General Provisions.
Subpart B--Rules for Rate Adjustments for Rates of General
Applicability (Type 1 Rate Adjustments).
Subpart C--Rules for Applying the Price Cap.
Subpart D--Rules for Rate Adjustments for Negotiated Service
Agreements (Type 2 Rate Adjustments).
Subpart E--Rules for Rate Adjustments in Exigent Circumstances
(Type 3 Rate Adjustments).
E. Overview of Proposed Subpart A--General Provisions
This subpart consists of seven proposed rules. The first provision,
proposed 3010.1, captioned ``Applicability,'' is a general
representation that the rules in subpart A implement the ratesetting
policies and procedures of the PAEA for market dominant products. It
also notes a distinction between ``notice'' filings and ``request''
filings.
Proposed 3010.2(a) codifies the following basic scenarios in which
rate changes for market dominant products may be addressed: under price
cap authority or a variation thereon, often referred to by commenters
as the banking exception or banking authority; under a special
contractual, or negotiated service agreement; and under an exigent
circumstance. For ease of reference and reporting, this rule reflects
the Commission's proposal to refer to each of these scenarios as
``types'' of filings, similar to the approach that has been used
successfully for six categories of library references since Docket No.
RM98-2. The Commission notes, for example, that for purposes of
conducting the 10-year assessment of the new ratesetting approach, it
may prove useful to have a ready tool for determining how many
different types of notices and requests have been filed. The Commission
incorporates these definitions into the regulations and the
accompanying discussion. The following table summarizes this approach.
Table II-1.--Summary of Alternative Filing Terms
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Proposed
Statutory source Filing basis alternative(s)
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39 U.S.C. 3622(d)(1)(A)..... ``annual limitation Type 1-A Rate
on the percentage Adjustment.
changes in rates''.
39 U.S.C. 3622(d)(2)(C)(i).. ``unused rate Type 1-B Rate
adjustment Adjustment.
authority''.
39 U.S.C. 3622(c)(10)....... ``the desirability Type 2 Rate
of special Adjustment.
classifications . .
. including
agreements between
the Postal Service
and postal users''.
39 U.S.C. 3622(d)(1)(E)..... ``due to either Type 3 Rate
extraordinary or Adjustment.
exceptional
circumstances''.
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F. Overview of Proposed Subpart B--Rules for Rate Adjustments for Rates
of General Applicability (Type 1 Rate Adjustments)
This subpart consists of five rules. These rules lay out basic
procedures and certain fundamental Commission positions. Some of the
debate among commenters centered on the timeframe for Commission action
in a price change proceeding and on public input. The timeframe issue
stems from the highlighted wording in the following passage from the
PAEA:
(C) not later than 45 days before the implementation of any
adjustment in rates under this section, including adjustments made
under subsection (c)(10)--
(i) require the Postal Service to provide public notice of the
adjustment;
(ii) provide an opportunity for review by the Postal Regulatory
Commission.
39 U.S.C. 3622(d)(1)(C)(i)-(ii).
The crux of the issue is whether the statute intends 45 days as the
maximum or minimum period for advance notice and review. The Postal
Service appears to read this language as establishing a statutory
maximum, but acknowledges that some changes, as a matter of good
business practice, such as those involving new worksharing discounts,
will create more implementation issues. It indicates that it intends to
provide additional notice in these instances. Postal Service Comments,
June 18, 2007, at 14-15. The Mail Order Association of America (MOAA)
shares the Postal Service's view. MOAA Reply Comments, May 7, 2007, at
14-15. Many commenters, however, see the wording in the statute as
establishing a minimum, and therefore clearly authorizing the
Commission to require the Postal Service to provide more notice. Time
Warner suggests 90 days. Time Warner Comments, April 6, 2007, at 15.
The Commission concludes that as a matter of statutory
interpretation, the Postal Service's position reads the qualifier ``at
least'' completely out of the statute. The conclusion more consistent
with the statute's overall theme of transparency is that 45 days is the
minimum period required by the statute, and the Commission may require
a longer period in certain circumstances.\9\ At the same time, it seems
that any extension should be in keeping with the notion of streamlined
review; thus, the four months the OCA suggests as the routine approach
appears excessive for the Commission's task of assessing the planned
rate changes in terms of the price cap and/or the use of banking
authority.
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\9\ Based on the Postal Service's comments, it anticipates
filing 90 days in advance of implementation with the first 45 days
constituting the statutory period for Commission review and the
second half for implementation.
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The Commission concludes that for purposes of drafting an initial
set of regulations, the language from the statute requiring notice and
review ``not later than 45 days'' can be carried over directly into
proposed rules 3010.10(a)(1) and (2). A provision in proposed rule
3010.10(b) encouraging more time for review recognizes the Postal
Service's representations on this record that it intends to provide
additional time for review when price changes are more complicated.
Postal Service Comments, June 18, 2007, at 9-10. Proposed rule
3010.10(a) does not require the Postal Service to publish a Federal
Register notice concerning a planned adjustment, but does contemplate
broad dissemination of its intent to the mailing community and to the
general public. This typically provides more effective notice than a
Federal Register notice, in keeping with a modern rate setting system,
and reduces administrative burden by freeing the Postal Service from
the production details necessarily associated with Federal Register
publication. The Commission notes that it imposes on itself, in
proposed rule 3010.13(a), an obligation to publish notice of a rate
adjustment filing in the Federal Register.
Commenters are divided on the question of public input during the
review period. Some, including the Postal Service, argue against it on
grounds that the logic of the PAEA suggests that if public input is not
expressly provided for in the statute, it is not authorized. On the
other hand, the OCA and several others think it would be helpful.
Newspaper Association of America (NAA), for example, asserts that
allowing public comment would promote transparency. NAA Comments, March
30, 2007, at 2. NAA acknowledges that the new statute expressly
provides for public participation when rate adjustments are based on
exigent circumstances, but asserts:
Nothing in the PAEA, however, prohibits the Commission from
inviting such comment also when the Postal Service purports to
notice rate adjustments consistent with the CPI limitation. Public
comment--which necessarily would have to be expedited and would be
submitted in writing--would promote transparency and could provide
information helpful to the Commission's review.
Id. at 7.
It adds:
Where the Postal Service's notice is straightforward, there
likely will be relatively few comments. However, in instances when
the Postal Service notices a more complicated set of rate changes,
the Commission may benefit from the insights that the mailing
community and broader public may be able to offer. The stakes of
this review are important because the rates that will take effect
from this process will be in effect for a substantial period of time
before they are later reviewed by the Commission either in an annual
review or in a complaint.
Id. at 7-8.
The Commission agrees that the statute does not expressly provide
for public participation during the review period as it does in the
exigency clause (in subsection 3622(d)(1)(E)). At the same time, the
statute gives the Commission broad discretion in deciding on how to
conduct its review. It follows that if the Commission believes public
input might be helpful in determining the compliance of the anticipated
rate changes with the statutory pricing provisions, there is no
statutory bar to incorporating this into its review proceedings/
procedures. The Commission believes this will be the case, and
provides, in proposed rule 3010.13(a) for 20 days (from the date of
filing of a rate adjustment notice) for the public to file written
comments.
Proposed rule 3010.11 addresses several ``housekeeping'' details.
It notes the limitation on rate increases in any 12-month period, the
existence of CPI-U as a limitation, the exception allowing annual
recapture of unused rate authority, and the allocation of unused rate
authority to each class of mail. The latter provision directly
addresses some commenters' concerns about ``cross-class'' banking.
Proposed rule 3010.12 adopts the PAEA's stated inflation measure
(CPI-U) and describes the source as the Bureau of Labor Statistics. The
clarity of the PAEA on this point meant that there was no debate among
the commenters on the benchmark that is to be used.
Proposed rules 3010.13 and 14 address the nature of proceedings and
the content of rate adjustment filings, and are the most extensive
rules in this subpart. The flagship proceedings under the former
statutory structure were 10-month trial-type ``omnibus'' rate and
classification proceedings, bookended between considerable advance
preparation on the part of the Postal Service (and many mailers) and a
post-decision phase encompassing review by the Governors and the
potential for reconsideration. Commenters agree that, barring a final
omnibus rate case under 39 U.S.C. 3622(f), the PAEA casts that
apparatus aside and replaces it with a
[[Page 50748]]
simpler process. In keeping with the new statutory emphasis on simpler
proceedings, the Commission does not propose formal discovery, Notices
of Inquiry, Presiding Officer's Information Requests, testimony, and
hearings. It anticipates handling resolution of discrepancies or other
matters through direct communication with the Postal Service.
There also has been considerable discussion of the statutory scope
of the Commission's review. The main positions are that it extends to:
--Only, or primarily, the price cap;
--The price cap, plus some evaluation of worksharing; and
--The price cap, worksharing evaluation, plus consistency with
statutory factors and objectives, plus identification of certain
features, such as differential intra-class treatment exceeding a
certain percentage.
Some commenters, such as the Postal Service and MOAA, advocate
``light-handed'' review, the OCA seeks extensive review, and some, such
as the NAA, take a middle ground. NAA suggests that during the review
period, the Commission has, at a minimum, legal authority:
--To review the notices of rate adjustments for compliance with the CPI
cap;
--To review the noticed change to ensure at least facial compliance
with the provisions of section 3622(e) regarding workshare discounts;
--To prohibit rates that are unlawful on their face from taking effect;
and
--To review the justification for changes in rate categories within a
class that exceed CPI by an amount set by the Commission, such as the
CPI plus 2 percent proposed by NAA.
NAA Reply Comments, May 7, 2007, at 25-26.
The Commission agrees that the PAEA ushers in a fundamentally
different approach to rate regulation for market dominant products, and
that its implementing regulations should honor the spirit and letter of
the new law. Proposed rule 3010.13(b) limits the appropriate scope of
public comments to compliance with the price cap formula and
consistency with certain statutory policies; thus, they represent a
marked shift away from PRA-style in-depth examination. The proposed
scope of public comment is no longer open-ended. The Commission does
not invite, and will not entertain, public comment during the 45-day
review period on matters such as costing methods. Moreover, in proposed
rule 3010.13(e), the Commission expedites review to determine the
consistency of an amended notice of rate adjustment with filing
requirements.
Filing contents. Proposed rule 3010.14 describes the contents of
the Postal Service's rate adjustment filings. The notice is to include
a schedule of proposed rates, identification of the effective date(s),
and a representation or evidence that public notice of the planned
changes has been issued or will be issued at least 45 days before the
effective date(s) of the proposed rates.
In addition, proposed rule 3010.14(b)(1)-(8) identifies explanatory
material that is to be provided. This includes the amount of the
applicable change in CPI-U calculated under Commission rules and the
percentage change in rates for each class, calculated as required by
Commission rules along with supporting workpapers. It also includes the
amount of new unused rate authority that will be generated by the
instant notice of rate adjustment and a 5-year schedule showing unused
rate authority for each class of mail, along with supporting
calculations. For Type 1-B filings, which draw on recaptured pricing
authority, the Postal Service is to identify for each affected class
how much existing unused rate authority is used in the proposed rates
calculated as required by Commission rules. See proposed rule
3010.14(d). An explanation must be provided if new unused rate
authority will be generated for a class of mail that is not expected to
cover its attributable costs.
Several commenters express concern about the potential for intra-
class increases to exceed the cap. NAA asserts that the Postal
Service's authority to exceed the annual cap for a rate category is not
unlimited, as the phrase ``predictable amounts'' is not limited to the
aggregate change for a class, but ``on its face requires that the
specific rate changes themselves within the class should be reasonably
predictable.'' NAA Comments, March 30, 2007, at 9. It contends that
objective 8, which requires that the rate schedule be ``just and
reasonable'' supports this interpretation. Id. NAA suggests that the
Commission impose a standard whereby, absent special justification,
increases for a rate category beyond a pre-established range (such as
CPI plus 2 percent) would not be considered ``predictable'' or ``just
and reasonable.'' Id. at 9-10. It asserts that this approach, which it
refers to as a ``soft band,'' would satisfy the statutory objective of
providing the Postal Service with pricing flexibility, while honoring
the provision in objective 8 allowing changes of unequal magnitude
within, between or among class of mail. Id. at 9; NAA Reply Comments,
May 7, 2007, at 8. In terms of proposed rules, NAA suggests that the
Postal Service could be required to certify that no rate would change
by more than the permitted range (when this is the case) or bring
changes exceeding the range to the Commission's attention and provide
additional justification. NAA Comments, March 30, 2007, at 10. It
contends that over time, as the Commission reviews these explanations
on a case-by-case basis, it will become evident which explanations are
adequate to allow the rates to become effective, and which are not. NAA
Reply Comments, May 7, 2007, at 8.
The Parcel Shippers Association (PSA) does not suggest prohibiting
adjustments beyond a certain level, but suggests that the Commission
require the Postal Service to provide a written, on the record,
justification for any market dominant rate increases that substantially
exceed inflation. PSA Comments, April 6, 2007, at 4-5, 22-23. (Emphasis
in original.)
In a similar vein, OCA suggests, given the potential for large
percentage increases in rates for individual subclasses, that subclass
increases be capped at 50 percent above the overall class increase. OCA
Comments, June 18, 2007, at 2, 15-19. It notes:
Some of the principles of rate setting include continuity of
expectations, implementation of rates that are understandable, and
perceived and/or actual fairness. Accordingly, some level of
subclass protection appears to be appropriate. We suggest 50 percent
as reasonable: that is, if rates for a class of service increase by
an overall maximum of two percent, no subclass rate would increase
by more than three percent.
Id. at 15.
Discover Financial Services, LLC (DFS) asserts that the OCA's
recommendation is ``at odds with the legislation, which nowhere
indicates that such a cap would be permissible. Indeed, notions that
rates should be capped in any fashion other than at the class level
were much debated in Congress and specifically rejected as not giving
the Postal Service sufficient rate flexibility.'' DFS Further Comments,
July 16, 2007, at 4.
NAA, PSA and OCA identify a clear example of where statutory
objectives may conflict. The Commission does not view capping subclass
increases as sanctioned by the PAEA. Requiring a separate certification
or justification is not statutorily suspect in the same sense; however,
adopting a rule of this sort makes the process cumbersome. It is to be
expected that rate adjustments within a class will be both above and
[[Page 50749]]
below average. Requiring written justification for individual rates is
contrary to the goals of a simpler, more flexible, process. The
Commission finds that the Postal Service should be given an opportunity
to exercise its pricing flexibility by making changes of unequal
magnitude without having to file separate justification for what some
might consider ``excessive'' above-cap increases within a class. Should
the Postal Service abuse this discretion, and regularly fail to develop
rate adjustments consistent with the statutory objective of maintenance
of just and reasonable rate schedules, additional regulations in this
area can be developed.
Information supporting proposed workshare discounts. The PAEA
charges the Commission with establishing a modern system of ratemaking
that is designed to achieve nine specific objectives including to
maximize incentives to reduce costs and increase efficiency. The PAEA
also enumerates several factors which must be considered by the
Commission in establishing this system. Two of these factors--
3622(c)(5), the degree of preparation of mail for delivery into the
postal system performed by the mailer and its effect upon reducing
costs to the Postal Service; and 3622(c)(12), the need for the Postal
Service to increase its efficiency and reduce its costs--can be linked
directly to workshare discounts. Section 3622(e)(2) directs the
Commission to ensure that [workshare] discounts do not exceed the cost
that the Postal Service avoids as a result of workshare activity.\10\
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\10\ There are four limited exceptions to this mandate: (1) When
the discount is new and mailers must be encouraged to use it; (2)
when the discount is already in place and reducing it will cause
rate shock; (3) when the discount is provided in connection with
subclasses consisting exclusively of mail matter of educational,
cultural, scientific, or informational value; and (4) when reducing
or eliminating the discount would cause a shift in mail mix that
would lead to operational inefficiencies for the Postal Service. For
the first two exceptions, the Postal Service must eventually phase
out the excess discount.
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The PAEA defines workshare discounts as rate discounts provided to
mailers for the presorting, pre-barcoding, handling, or transportation
of mail. Both the Commission and the Postal Service have long held the
view that setting workshare discounts in line with the Efficient
Component Pricing Rule (ECPR) is an effective method for encouraging
efficient mailing practices. The ECPR is the principle that workshare
discounts should be set equal, on a per-unit basis, to the costs
avoided by the Postal Service when the mailer performs the workshare
activity.
Several parties reiterated the importance of ECPR in encouraging
efficiency and satisfying the objectives of the PAEA. Pitney Bowes
states ``regulations should require the Postal Service to establish
discounts that reflect the full measure of workshare-related costs
avoided to the extent practicable.'' Pitney Bowes Comments, April 6,
2007, at 36. In addition, Pitney Bowes sponsored the comments of John
Panzar which focus exclusively on the merits of continued use of ECPR
in ratemaking. The Alliance of Nonprofit Mailers, National Association
of Presort Mailers, and National Postal Policy Council (ANM/NAPM/NPPC)
believe that the Postal Service's rates should be presumed reasonable
as long as the discounts satisfy the ECPR. ANM/NAPM/NPPC Comments,
April 6, 2007, at 16-19.
Support for efficient component pricing is also found in testimony
received during the Commission's field hearings. Don Hall, Jr.,
President and CEO of Hallmark Cards, seeks assurance that the workshare
discounts will reflect the true savings to the Postal Service.
Transcript of Kansas City Field Hearing, June 22, 2007, at 29. John
Campo, Vice President of Postal Relations for Pitney Bowes, said the
``regulations should encourage the Postal Service to adopt pricing
incentives or work sharing discounts to fully reward mailer activity
that reduces total postal system costs.'' Transcript of Wilmington
Field Hearing, July 9, 2007, at 10. John Carper, Director of Mail and
Receiving Services, Pepperdine University, claims that ``[worksharing]
can flourish fully only if the discounts offered by the Postal Service
* * * he costs that the Postal Service saves.'' Transcript of Los
Angeles Field Hearing, June 28, 2007, at 39.
In contrast, Advo, Inc. presents three reasons why ECPR should not
be followed in setting rates under the PAEA:
First, the statute does not permit consideration of factors
other than compliance with price caps in the review process. Second,
ECP, although useful in theory as a pricing tool, is not the only
appropriate consideration in setting discounts and is susceptible to
being misapplied. Third, adoption of ECP as the ``gold standard''
will inevitably and unnecessarily impinge on the Postal Service's
pricing flexibility--a flexibility that is imperative to its ability
to remain viable under the price cap regime.
Advo Reply Comments, July 3, 2007, at 6.
MOAA, NAA, and the Postal Service recognize the importance of the
ECPR, but contend that other, perhaps competing, factors are also
important. Therefore, they believe that ECPR should not be a
requirement for workshare discounts.
The Commission strongly believes that efficient component pricing
should be used as a guiding principle in establishing and maintaining
workshare discounts. In both sections 3622(b) and 3622(c) the statute
stresses the need for efficient rates and efficient component pricing
is an established method of measuring efficient ratemaking.
Nonetheless, the Commission recognizes that other factors must also be
considered, and that the PAEA grants the Postal Service substantial
flexibility in setting rates. However, in the interest of transparency
and accountability, the Postal Service has a burden to explain how its
rates, including workshare discounts, meet the objectives and factors
of the PAEA.
The Postal Service has proposed that when it files its notice of
price adjustment, it will also file, for pre-existing workshare
discounts, a comparison of the new (or unchanged) discount price with
the historical, Commission reviewed cost avoidances of the last Annual
Compliance Review, and will provide appropriate justification for any
discount that exceeds those cost avoidances. Postal Service Comments,
June 18, 2007, at 11. The proposed rules reflect this undertaking. To
meet its burden of ensuring that the rates are in compliance with the
objectives and factors of the PAEA, the Postal Service must also
identify and explain any discounts that are substantially below the
cost avoidances.
The Postal Service is to provide with each notice of rate
adjustment a schedule of the workshare discounts included in the
proposed rates, together with a companion schedule listing underlying
avoided costs, along with supporting workpapers. The avoided cost
figures must be developed from the most recent PRC Annual Compliance
Report. The Postal Service is to provide a separate justification for
all proposed workshare discounts that exceed avoided costs. The Postal
Service shall also identify and explain discounts that are set
substantially below avoided costs, and explain any relationship between
discounts that are above and those that are below avoided costs.
In addition, when new workshare discounts are established, the
Postal Service is to include with its filing a statement explaining its
reasons for establishing the discount; provide all data, economic
analyses, and other information believed to justify the discount; and
certify, based on
[[Page 50750]]
comprehensive, competent analyses that the discount will not adversely
affect either the rates or the service levels of users of postal
services who do not take advantage of the discount.
Lastly, the Postal Service is to provide a discussion of how the
proposed rates will help achieve the objectives listed in 39 U.S.C.
3622(b) and properly take into account the factors listed in 39 U.S.C
3622(c).
G. Overview of Subpart C--Rules for Applying the Price Cap
This subpart consists of nine rules related primarily to
administration of the price cap mechanism. Proposed rule 3010.21
addresses how to calculate the statutory annual inflation-based
limitation. A question has arisen over the
* * * an annual limitation * * * equal to the change in the Consumer
Price Index for All Urban Consumers unadjusted for seasonal
variation over the most recent available 12-month period preceding
the date the Postal Service files notice of its intention to
increase rates.
39 U.S.C. 3622(d)(1)(A). (Emphasis added.)
Two suggestions have emerged on this record, but commenters
generally agree that both approaches are consistent with the statute.
One is referred to as the ``point-to-point'' method and was initially
suggested by the Postal Service and the OCA. The other is the ``running
average'' or ``weighted average'' method which is incorporated in the
proposed rules.
JPMorgan Chase & Company (Chase) comments are representative. Chase
urges the Commission to calculate the index adjustment based on a 12-
month average of CPI levels, rather than on a ``snapshot'' of year-
over-year changes to the CPI between a single pair of beginning and end
dates. It reasons:
While the two approaches should achieve similar results over the
long run, the use of the twelve-month average is likely to produce a
much less bumpy and volatile path along the way by damping the
short-term oscillations in the CPI index. For Chase and other
mailers that operate on an annual budget cycle--i.e., for the
mailers that generate most of the Postal Service's volume, reducing
the short-term unpredictability of cost increases is extremely
important.
Emens Testimony at 5.\11\
\11\ Testimony of Daniel C. Emens on Behalf of JPMorgan Chase &
Co., July 9, 2007 (Emens Testimony).
---------------------------------------------------------------------------
Many parties commented that they prefer the moving average method
because it provides more predictability and stability in rates. NAA
states, the average method ``better advance[s] the statutory objective
of creating `predictability and stability in rates' while promoting
transparency in rates and assuring that the Postal Service is
financially sound.'' NAA Comments, June 18, 2007, at 2. See also Advo
Comments, June 18, 2007, at 2; Advo Reply Comments, July 3, 2007, at 1;
GCA Reply Comments, July 3, 2007, at 1-2; Pitney Bowes Reply Comments,
July 3, 2007, at 3; and PostCom Reply Comments, July 3, 2007, at 2.
Contrary to these views, OCA states that the point method ``does
not result in significantly less rate stability and predictability.''
OCA Reply Comments, July 3, 2007, at 6. It contends that the moving
average method ``would have substantial lags in the updating of
rates.'' OCA Initial Comments, June 18, 2007, at 7. See also Valpak
Comments, June 18, 2007, at 5; and OCA Reply Comments, July 3, 2007, at
2-4.
The Postal Service expressed concern that using the moving average
method includes 24 months of data rather than 12. USPS states, ``It is
arguable that calculating the price cap by reference to CPI-U data over
a 24-month period is counter to the statutory requirement that the CPI
calculation be ``equal to'' the change in CPI-U ``over the most recent
available 12-month period.'' Postal Service Comments, June 18, 2007, at
3-4. APWU also believes that the point method better adheres to the
plain language of the PAEA. APWU Comments, June 18, 2007, at 2-3. APWU
and Valpak advocate the point method as providing more transparency and
less administrative burden. APWU Comments, June 18, 2007, at 2; and
Valpak Comments, June 18, 2007, at 4-5.
The majority of commenters are satisfied that both the moving
average method and point method meet the statutory requirements of the
PAEA. MOAA states, ``The provisions of [the] PAEA are sufficiently
broad that either the [moving average method] or the [point method]
could be used for the purpose of calculating the CPI cap limitation as
set forth in 3622 (b), (c) and (d).'' MOAA Comments, June 18, 2007, at
1. See also GCA Comments, June 18, 2007, at 2; Advo Comments, June 18,
2007, at 2; PostCom Comments, June 18, 2007, at 2; and Pitney Bowes
Comments, June 18, 2007, at 2.
The Commission proposes to use the moving average method of
calculating the CPI-U limitation. This method provides mailers with
stable and predictable rates, and also grants the Postal Service the
same benefits. The moving average method does not impose any undue
administrative burden on the Postal Service and does not inhibit
transparency. The Commission finds the increased predictability and
stability resulting from use of the moving average method are quite
valuable, and directly further the specific objectives of the PAEA. The
Commission derives the moving average method from Bureau of Labor
Statistics (BLS) monthly CPI-U values. At the end of each calendar
year, BLS calculates the annual percentage change between two years as
the percentage change between the two years' annual averages. The only
difference in methodology is that BLS applies this methodology to
calendar years, and the Commission will apply it to 12-month periods.
Calculation of the annual limitation in this method involves three
steps. First, a simple average CPI-U index (Recent Average) is
calculated by summing the most recently available 12 monthly CPI-U
values from the date the Postal Service files notice of its intentions
to increase rates, and dividing the sum by 12. Then, a second simple
average CPI-U index (Base Average) is similarly calculated by summing
the 12 monthly CPI-U values preceding those used in the Recent Average
calculation and dividing the sum by 12. Finally, the percentage change
between the Recent Average and the Base Average is computed, using the
following formula: Annual Limitation (Moving Average Method) = (Recent
Average/ Base Average) - 1.
Example 1 illustrates the annual limitation calculation, using the
moving average method, assuming that the Postal Service had filed a
hypothetical notice of its intentions to increase rates during the
third week of April 2006.\12\
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\12\ All CPI-U data is obtained from the BLS Web site at: http://data.bls.gov/cpi-bin/surveymost
.
---------------------------------------------------------------------------
[[Page 50751]]
[GRAPHIC] [TIFF OMITTED] TP04SE07.000
Example 1 assumes that rate filings are 12 months apart; that is,
that the Postal Service filed its most recent previous notice for a
rate increase in April 2006. This assumption can be adjusted in two
ways depending on when the Postal Service files a notice of rate
adjustment.
The first adjustment occurs when the Postal Service files a notice
of rate adjustment less than one year after the previous adjustment. In
this instance, if the calculation were to use 12 months of data, the
Postal Service would benefit from double counting months of CPI data.
This would violate the statutory limitation. To remedy this problem, a
partial year limitation is calculated.
Example 2 calculates a partial year limitation. First, a simple 12-
month average must be calculated using the most recently available 12
months of CPI-U data from the BLS Web site (Recent Average). Then the
partial year limitation is calculated by dividing the Recent Average by
the Recent Average from the most recent previous notice and subtracting
1. The formula is as follows: Partial Year Limitation = (Recent
Average/Recent Average from most recent previous notice) - 1.
Still assuming that the Postal Service filed its first notice of
rate adjustment in April of 2006 (Example 1), assume now that the
Postal Service files its second hypothetical notice of rate adjustment
in October 2006 (six months later). Example 2 shows how the partial
year limitation will be calculated for the October 2006 rate
adjustment.
[[Page 50752]]
[GRAPHIC] [TIFF OMITTED] TP04SE07.001
A corresponding adjustment can be made should the Postal Service
file a notice of rate adjustment more than 12 months after the last
adjustment. This scenario provides no reason to alter the calculation
of the annual inflation-based limitation, but does present a different
concern; there are several months of CPI-U changes that the Postal
Service may lose. The clear intent of the statutory provision allowing
for recapture of unused rate authority is to encourage the Postal
Service to whenever possible refrain from imposing the maximum
permissible rate increases. If the Postal Service can delay imposing
increases on the public, it should not be penalized. See proposed rule
3010.26(c). To address this concern, the interim unused rate authority
will be added to the cumulative unused rate authority.
Still assuming that the Postal Service filed its first notice of
rate adjustment in April 2006 (Example 1), assume now that the Postal
Service files its second hypothetical notice of rate adjustment in July
2007 (15 months later). Example 3 illustrates how the price cap will be
calculated for the July 2007 notice of rate adjustment, along with the
calculation of the three months of interim unused rate authority. To
calculate interim unused rate authority, divide the Base Average of the
current notice by the Recent Average of the last notice and subtract 1.
The formula to calculate the amount of interim unused rate authority is
as follows: Interim Unused Rate Authority = (Base Average for Current
Notice/ Recent Average for Last Notice) - 1.
[[Page 50753]]
[GRAPHIC] [TIFF OMITTED] TP04SE07.002
APWU argues for cross-class application of unused rate authority
and recommends a method of weighting the revenue. This cross-class
application of unused rate authority would grant the Postal Service the
ability to use unused rate authority from one class, and apply it to
other classes of mail in later years. APWU Comments, April 6, 2007, at
9-10. Several parties assert that this would (1) be at odds with
section 3622(d)(2)(C), which states that the annual limitations shall
apply to a class of mail and defines unused rate authority in terms of
an individual class of mail; (2) be inconsistent with the legislative
history; and (3) merge multiple class-specific baskets into a single
basket. See ANM/MPA Reply Comments, May 7, 2007, at 3-6; ANM/NAPM/NPPC
Reply Comments, May 7, 2007, at 9-11; MOAA Reply Comments, May 7, 2007,
at 11; Pitney Bowes Comments, April 6, 2007, at 9; and USPS Reply
Comments, May 7, 2007, at 16.
The Commission agrees that unused rate authority for a given class
of mail may only be applied to the class where it originated.
Finally, The McGraw-Hill Companies, Inc. (McGraw-Hill) suggests
that the rules should include a method to reduce the price cap if the
Postal Service performance levels deteriorate, or if the Postal Service
places costly mail preparation requirements on mailers. See McGraw-Hill
Reply Comments, July 30, 2007, at 6-7. During the Kansas City field
hearings, witness Stumbo of Meredith Corporation expressed a similar
concern:
We would submit that the critical issues regarding cost shifting
and service reduction are [sic] the rate-setting process must
contain a mechanism to adjust rates to reflect the shift in cost
from the Postal Service to private industry. In addition, the rules
should contain methodology to adjust rates to reflect the diminished
level of service the imposition of preparation rule changes or other
means.
Transcript of Kansas City Field Hearing, June 22, 2007, at 40.
No commenter has suggested a method for applying such adjustments.
The Commission is sympathetic to these concerns, yet finds the better
course is to defer such considerations. The statute establishes a
system of accountability through increased transparency. The Commission
is developing separate rules providing for annual Postal Service
reports that will include data on service achievement. Additionally,
proposed rule 3020.91 requires the Postal Service to inform the
Commission of changes that would alter the nature of a product through
the imposition of preparation rule changes.
The Commission expects that the Postal Service will operate within
both the letter and the spirit of the PAEA. For now, it is best to
presume that the Postal Service will do so. If experience shows that
additional regulations in this area are necessary to achieve the
objectives of the legislation, the Commission is obligated to develop
such regulations, or
[[Page 50754]]
recommend to Congress appropriate additional legislation.
Test for compliance with the annual limitation. Proposed rule
3010.20 states that the appropriate annual limitation shall be applied
to a measure of the rates paid by mail sent in each class for which
rate adjustments are to be made to determine whether planned rates are
consistent with the annual limitation.
39 U.S.C. 3622(d) requires that the system for regulating rates and
classes for market dominant products include a limitation on the
percentage increase in rates. To calculate the percentage change in an
individual rate is a simple matter, but section 3622(d)(2)(A)
stipulates that the restriction be applied at the class level.
Therefore, to determine compliance in the context of a pre-
implementation compliance review of a notice of rate adjustment, it is
necessary to develop rules that provide a means of calculating the
aggregate percentage change in rates for each class. To accomplish
this, weights (in the form of billing determinants) must be applied to
the set of rates that comprise a class.
Postal Service proposal. The Postal Service proposes to apply the
most recent available billing determinants to the current rates, then
apply the same billing determinants to the new rates and compare the
resulting revenues to determine the change in rates for a class. As
acknowledged by the Postal Service, this is not ideal because an annual
rate cycle combined with the need for advance notice dictates that the
billing determinants will not correspond to a single set of rates, but
will reflect mailer behavior for part of a year at the current rates
and part at the previous rates. Postal Service Reply Comments, May 7,
2007, Appendix C. Rather than debating the rates (current or new) to
which the ideal billing determinants would correspond, the parties'
comments have focused on more practical considerations regarding the
use of historical billing determinants instead of forecast billing
determinants.
Parties' positions. On this, there is near universal support for
the Postal Service's proposed approach, or some slight variation
thereof. Pitney Bowes, OCA, MOAA, ANM/MPA, APWU, PostCom, Advo, and
JPMorgan/Chase all support the use of historical billing determinants
as weights in their comments. The primary rationale for this position
is that historical data are far less likely to be controversial than
forecasts, and given the limited time and public participation for the
review of notices of rate adjustment, simplicity and speed of analysis
should take precedence.
There is some disagreement regarding the treatment of
classification changes and negotiated service agreements. The Postal
Service proposes to make adjustments to the historical billing
determinants to incorporate the effects of classification changes, such
as the creation or elimination of rates. It proposes to use known mail
characteristics and reasonable judgments to make the necessary
adjustments. See Postal Service Comments, June 18, 2007, at 7-10, inter
alia. This proposal is supported by MOAA. See also MOAA Comments, April
6, 2007 at 4-5; ANM/MPA Comments, May 7, 2007, at 1-2; and APWU
Comments, June 18, 2007, at 3-4.
PostCom takes the position that the effects of classification
changes are outside the scope of the Commission's pre-implementation
review of a notice of rate adjustment. It argues that the effects of
such changes on compliance with the price cap may only be determined in
a post hoc review of the new rates. PostCom concludes that, ``any
attempt by the Commission to assess the effects of a change in rate
design at the time that the change is proposed will entail a re-
introduction of the old cost of service methods that the Commission has
used under the Postal Reorganization Act, including the attempt to
establish a test year, the reintroduction of roll-forwards and volume
and revenue forecasts, and all of the uncertainty, controversy and
confusion that these methods entail.'' PostCom Comments, June 18, 2007,
at 4-5.
Commission analysis. The Commission's proposed rules calculate the
percentage change in rates using the most recent available billing
determinant as weights. As many parties point out, any attempt to
develop a forecast of billing determinants would likely be
controversial and complex, and a worthwhile analysis and resolution
cannot realistically be achieved in the context of a pre-implementation
review under section 3622(d)(1)(C).
The rules also instruct the Postal Service to make reasonable
adjustments to the billing determinants to account for the effects of
classification changes. The Postal Service has stated that such
adjustments will typically be straightforward and based on known mail
characteristics. Any adjustments are to be fully explained by the
Postal Service at the time of the notice.
The Commission recognizes that the pre-implementation method of
calculating the percentage change in rates in the proposed rules is not
a perfect measure of what the actual change in rates will be. The
billing determinants to be used will likely not correspond to a single
set of rates, and adjustments for classification changes will be
imperfect. Some commenters suggest that the after-the-fact review will
be the most effective means of ensuring compliance with the rate cap.
Id. at 4-6; see also Transcript of Wilmington Field Hearing, July 9,
2007, at 47. (Emens).\13\ The statute requires the Commission to
monitor the effectiveness of these rules and consider modifications to
improve their effectiveness as events warrant.
---------------------------------------------------------------------------
\13\ See also Campbell James, An Analysis of Provisions of the
Postal Accountability and Enhancement Act Relating to the Regulation
of Postal Rates and Services. August 3, 2007, at 52-55.
---------------------------------------------------------------------------
Proposed rule 3010.23, captioned ``Calculation of percentage change
in rates,'' explains in paragraph (b) that for each class of mail, the
percentage change in rates is calculated in three steps. The first step
involves multiplying the volume of each rate cell in the class by the
current rate for that cell and summing the resulting products. (In the
case of seasonal or temporary rates, the most recently applied rate
shall be considered the current rate.) The second step involves
multiplying the same set of rate cell volumes by the corresponding
planned rate for each cell and summing the resulting products. The
third step involves calculating the percentage change in rates by
dividing the results of the first step by the results of the second
step and subtracting 1 from the quotient. The result is expressed as a
percentage. Paragraph (c) sets out the formula.
Treatment of volume associated with negotiated service agreements.
Advo and Pitney Bowes advocate the exclusion of negotiated service
agreements from the determination of percentage changes in rates. They
assert that including the lower rates offered to negotiated service
agreement partners will allow for offsetting larger increases for non-
negotiated service agreement mail, thus undermining the price cap
protection afforded to non-participating mailers. See Advo Comments,
June 18, 2007, at 4; Pitney Bowes Comments, June 18, 2007, at 4. The
Postal Service disagrees, arguing that in certain situations, some
negotiated service agreement mailers may pay prices higher than list
prices. If this occurs, excluding negotiated service agreements from
the calculation of change in revenue would deny non-negotiated service
agreement mailers the opportunity for potentially lower
[[Page 50755]]
increases. Postal Service Reply Comments, July 3, 2007, at 6-7.
The proposed rules exclude the effects of negotiated service
agreements from the calculation of percentage change in rates. The
foundational argument in support of negotiated service agreements is
that they can be structured to benefit the participating mailer and the
Postal Service, while not harming (and hopefully, benefiting) non-
participating mailers. Pitney Bowes and Advo are correct in their
conclusion that including negotiated service agreements in the test for
compliance with the rate cap may lead to rates for non-participating
mailers that exceed the rate cap. This would undermine the rationale
for permitting negotiated service agreements.
Proposed section 3010.24 addresses volume associated with
negotiated service agreements. Paragraph (a) provides that mail volumes
sent at non-tariff rates under negotiated service agreements are to be
included in the calculation of percentage change in rates as though
they paid the appropriate rates of general applicability. Where it is
impractical to identify the rates of general applicability, the volumes
associated with the mail sent under the terms of the negotiated service
agreement shall be excluded from the calculation of percentage change
in rates. Paragraph (b) requires related support in the form of
identification and explanation of all assumptions made with respect to
the treatment of negotiated service agreements in the calculation of
the percentage change in rates and the rationale for assumptions.
Limit on application of banking exception. Proposed rule 3010.25
addresses certain limits on unused rate adjustment authority. It
provides that these adjustments may only be applied together with
inflation-based limitation rate adjustments or when inflation-based
limitation rate adjustments are not possible. It further provides that
unused rate adjustment authority may not be used in lieu of an
inflation-based limitation rate adjustment.
H. Overview of Subpart D--Rules for Rate Adjustments for Negotiated
Service Agreements (Type 2 Rate Adjustments)
Section 3622(c)(10) of the PAEA requires consideration of the
desirability of special classifications for both postal users and the
Postal Service. Subsections 3622(c)(10)(A) and (B) mandate that such
agreements must improve the net finances of the Postal Service or
enhance operational performance while not causing unreasonable harm to
the marketplace. Section 3622(d)(1)(C) further details the review
period that will begin ``not later than 45 days before the
implementation'' of any agreement made under subsection (c)(10). These
subsections of the PAEA provide the basis and criteria for evaluating
and approving negotiated service agreements.
In their comments, parties have expressed a range of views on how
the Commission should implement the legislative framework for
negotiated service agreement regulation. The level of review described
in these diverse comments can be summarized into two groups: Parties
who consider the current negotiated service agreement process amenable
with the PAEA, and parties who assert that the PAEA calls for a
significantly streamlined process.
Parties who support a continuation of the current process, and in
some instances, the regulations as currently written, include Valpak,
NAA, Jon Mulford Associates, and APWU. This viewpoint was summarized by
NAA, stating
[t]he Commission should continue to adhere to its established,
balanced approach to considering special classifications in the form
of negotiated services agreements or niche classifications. This
includes conducting a thorough public and prior review, which
results in a determination that the proposed mailer-specific
agreement may or may not take effect. In keeping with the new
statutory approach giving the Commission the final say, that
determination should be subject to judicial review.
NAA Reply Comments, May 7, 2007, at 13.
Parties supporting a simplified and minimal review of negotiated
service agreements include Advo, Discover Financial Services, LLC
(DFS), MOAA, Pitney Bowes, and Time Warner. This viewpoint was
summarized by Pitney Bowes stating, ``The elimination of advance, on-
the-record Commission review of NSAs should significantly enhance the
Postal Service's ability to meet the needs of mailers * * *.'' Pitney
Bowes Reply Comments, May 7, 2007, at 13.
The Commission finds that the statute requires a regulatory
approach that combines elements of the divergent views among parties.
The legislation seeks to provide the Postal Service with added
flexibility to enhance producer and consumer surplus through negotiated
service agreements. The proposed rules will decrease the administrative
and economic burden in implementing such agreements. However, arguments
such as those presented in the comments of Jon Mulford, stating ``[t]he
Commission should insure that periodic audits verify that claimed
benefits persist through the duration of the NSA'' also reflect the
policies of the PAEA. See Jon Mulford Associates Comments, March 14,
2007, at 4. Combining flexibility and accountability is the essence of
the new legislation, and the Commission attempts to achieve the proper
balance in the subpart D rules.
This subpart consists of four rules. Proposed rule 3010.40
expresses the Commission's objective in administering the
implementation of negotiated service agreements. It clarifies that this
objective is directly tied to statutory requirements in 39 U.S.C.
3622(c)(10) mandating that special classifications either improve the
net financial position of the Postal Service or enhance the performance
of operational functions and do not cause unreasonable harm to the
marketplace.
Timing of notice and review. Proposed rule 3010.41 addresses
procedures. Paragraphs (a)(1) and (2) reflect the requirements for Type
2 changes that public notice and notice to the Commission occur not
later than 45 days prior to the intended rate implementation date.
Contents of filing. Proposed rule 3010.42 addresses the contents of
a notice in support of a negotiated settlement agreement. It indicates
that this should include, at a minimum, a copy of the negotiated
service agreement and a statement identifying all parties and a
description explaining the operative components. It is also to include
the estimated mailer-specific costs, volumes and revenues of the Postal
Service absent the implementation of the agreement; the estimated
mailer-specific costs, volumes and revenues of the Postal Service which
result from implementation; and an analysis of the effects of the
agreement on the contribution to institutional costs from mailers not
party to the agreement. If mailer-specific costs are not available, the
source and derivation of the costs that are used shall be provided,
together with a discussion of the currency and reliability of those
costs, and their suitability as a proxy for the mailer-specific costs.
The Postal Service is also to identify each component of the
agreement expected to enhance the performance of mail preparation,
processing, transportation or other functions in each year of the
agreement, and a discussion of the nature and expected impact of each
such agreement. Furthermore, it is to provide details regarding any and
all actions to assure that the agreement will not result in
unreasonable harm to the marketplace.
[[Page 50756]]
Finally, the Postal Service is to collect and provide annual data
that are intended to enable the Commission and interested persons to
evaluate whether each negotiated service agreement has met, and is
likely to meet in the future, the expectations that caused the Postal
Service to enter the agreement. It is understood that not every
agreement will meet Postal Service expectations. Nonetheless,
continuing periodic review is the best way to assure that flaws in
Postal Service projection techniques are recognized and remedied.
I. Overview of Subpart E--Rules for Rate Adjustments in Exigent
Circumstances (Type 3 Rate Adjustments)
The PAEA also requires that the Commission establish procedures to
allow rate adjustments in excess of the annual limitation on an
expedited basis due to either extraordinary or exceptional
circumstances, provided:
[T]here is not sufficient unused rate authority as defined in 39
U.S.C. 3622(d)(2)(C); and
[T]he Commission determines, after notice and opportunity for a
public hearing and comment, and within 90 days after any request by
the Postal Service, that such adjustment is reasonable and 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.
See 39 U.S.C. 3622(d)(1)(E).
There are several significant differences between a Type 3 change
and the other three types. First, based on the legislative history, a
Type 3 change is expected to be an atypical occurrence, while the other
types are considered more routine. Types 1-A, 1-B and 2 changes follow
the streamlined 45-day notice-and-review process, while a Type 3 filing
occurs pursuant to a request and a hearing, with up to 90 days for
consideration.
Commenters addressing implementation of the exigency clause in 39
U.S.C. 3622(d)(1)(E) focus mainly on the extent to which Commission
rules should define ``exigent circumstances'' for purposes of rate
adjustments; the related possibility, if the definition is too broad,
that frequent requests for exigent increases could undermine the
intended discipline of the price cap mechanism; and the nature and
extent of public participation in exigent request filings.
The Postal Service describes the PAEA's exigency clause as a safety
valve for those ``extraordinary or exceptional situations in which the
[price] cap cannot be met even through honest, efficient, and
economical management.'' Postal Service Comments, April 6, 2007, at 16.
It does not address the content of an exigent rate filing or the role
of the public, but asserts, with respect to defining exigent
circumstances, that it is not necessary or prudent for the Commission
to attempt to specify in this rulemaking the situations that might be
covered in advance of an actual need to do so. Postal Service Reply
Comments, May 7, 2007, at 15.
Pitney Bowes and Time Warner share the Postal Service's view that
the Commission should not attempt to define qualifying circumstances at
this time. Pitney Bowes suggests addressing the question on a case-by-
case basis as circumstances arise. Pitney Bowes Comments, April 6,
2007, at 10. Similarly, Time Warner says:
* * * the Commission need not and should not attempt to
determine a substantive standard for granting Postal Service
requests under the exigent circumstances provision (other than the
standard set out in Sec. 3622(d)(1)(E) itself) until presented with
the concrete circumstances attending an actual Postal Service
request under that provision; the kind of judgment that the
Commission is called on to make in deciding whether to grant such a
request cannot be exercised well in the abstract or upon
hypotheticals; moreover, to the extent that such a standard might
err on the side of leniency, it would undermine the discipline that
the price caps are intended to instill, and to the extent that it
might err on the side of stringency, it could create perverse
incentives to find alternative ways of circumventing the caps.
Time Warner Comments, April 6, 2007, at 22-23.
Several other commenters echo Time Warner's concern about the
relationship between the exigency clause and the price cap mechanism.
The Alliance of Nonprofit Mailers, National Association of Presort
Mailers, and National Postal Policy Council jointly state: ``* * * the
exigency provision for ``extraordinary or exceptional'' services must
be drawn very narrowly; otherwise the availability of this mechanism
will undermine the index as a constraint on costs and efficiency.''
ANM/NAPM/NPPC Comments, April 6, 2007, at 2 and 11; see also ANM/NAPM/
NPPC Reply Comments, May 7, 2007, at 8. They urge the Commission to
make it clear that exigent financial consequences should have to be
large enough to threaten the Postal Service's financial integrity, and
must not be due to an unreasonable failure to hedge and insure against
risk or any other form of inefficient or uneconomical management. ANM/
NAPM/NPPC Comments, April 6, 2007, at 11. Randy Stumbo, representing
Meredith Corporation, says: ``An easy out provided by a liberal
exigency provision would seriously damage the cost control incentive
created by a rate cap.'' Stumbo Testimony at 3.\14\
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\14\ Testimony of Randy Stumbo, Director of Distributoin and
Postal Affairs for Meredith Corporation, Postal Regulatory
Commission Field Hearing, Kansas City, June 22, 2007 (Stumbo
Testimony).
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Don Hall, Jr., representing Hallmark, also cautions: ``* * * [I]f
the exigency provision is over-used, mail users in all classes will
have to conclude that the price cap scheme is not going to succeed--
and, as the Act also provides, after 10 years this Commission will have
to devise something better.'' Hall Testimony at 7.\15\
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\15\ Testimony of Don Hall, Jr., President and CEO, Hallmark
Cards, Inc., June 22, 2007 (Hall Testimony).
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Mr. Hall also asserts that it is imperative that the Commission
clarify what circumstances warrant the rate cap to be pierced and to
make certain that the Postal Service exhaust all other resources
provided by its ability to retain earnings before seeking rate
increases above the cap. Id. at 12.
Mr. Stumbo seeks more specific direction, as he suggests:
While it seems premature and imprudent to explicitly define in
the abstract the events under which exigency may be exercised, it is
necessary to define what it is not. Attributable cost shortfalls at
the class or subclass level do not constitute exigent circumstances.
Nor should the exigency clause be used to re-apportion rates in any
way.
Stumbo Testimony at 3.
The Magazine Publishers Association (MPA) and the Alliance of
Nonprofit Mailers (ANM) agree that the failure of a class to cover its
attributable costs should be affirmatively identified as not qualifying
as an exigent circumstances. ANM/MPA Comments, April 6, 2007, at 11-12.
Time Warner, however, claims that the Commission need not and should
not decide that failure of a class to recover attributable costs could
never constitute exigent circumstances justifying above-cap increases.
Time Warner Reply Comments, May 2, 2007, at 33.
The Greeting Card Association (GCA) suggests that the Commission
could clarify the scope of the exigency clause by defining
``extraordinary or exceptional circumstances'' to exclude matters that,
under the Postal Reorganization Act of 1970, would have been dealt with
under the provision for contingencies. GCA Comments, April 6, 2007, at
9. It says the Commission should provide guidance on how the nature of
the ``extraordinary or exceptional'' circumstances motivating the
adjustment relates to the allocation
[[Page 50757]]
of burdens among mail users. Id. at 11-12. GCA also concludes, after
addressing the potential impact of external and internal events, that
the Commission:
* * * should make clear in setting up the subparagraph (E)
[exigency clause] procedures that the Postal Service, in first
presenting its proposed adjustment, must explain fully (i) the
nature of the extraordinary or exceptional circumstances claimed to
justify the rate change, and (ii) the theory on which it considers
its proposed rate changes appropriate to reflect (i).
Id. at 13. Moreover, it asserts that this explanation should be
required to be part of the initial filing, as the Commission must make
its required findings in 90 days or less. Id.
Commenters differ on the nature and extent of public comment. Advo,
for example, simply notes, in contrasting the types of public input
called for in the PAEA, that the statute requires that the Commission
provide ``notice and opportunity for public hearing and comment,'' but
does not address the nature and scope of the public hearing. Advo
Comments, April 6, 2007, at 5. GCA and Time Warner note that the PAEA
provides an opportunity for public participation when the Postal
Service files an exigent request, but do not contend that this mandates
formal trial-type hearings. GCA, instead, asserts that the procedures
must provide ``some opportunity'' for parties to raise challenges to
the bases of the proposed increase, and that the Postal Service must
overcome such challenges to meet the burden of justifying exigent
increases. GCA Comments, April 6, 2007, at 14-15. Others suggest that
the PAEA's reference to an ``opportunity for public participation and
comment'' means that the Commission must establish trial-type
proceedings for exigent requests. See, for example, ANM/NAPM/NPPC
Comments, May 7, 2007, at 11.
Discussion. The Commission appreciates commenters' concerns that
the exigency clause, if invoked too frequently, could undermine the
statutory price cap mechanism. At this point, it should be assumed that
the Postal Service's intent is to honor the clear import of the PAEA's
overarching ratesetting philosophy that exigent requests are meant to
be a safety net for dealing with unforeseeable emergencies. The
Commission believes that the commenters' concerns can largely be
addressed by requiring, as proposed rule 3010.61 does, that the Postal
Service provide focused explanation in support of any exigent request.
This includes a full discussion of the circumstances giving rise to the
filing, the reasons why the requested increases are necessary, and why
the specific proposed increases are reasonable and equitable as between
the types of users of market dominant products. The Postal Service will
be required to provide considerable additional context, such as an
explanation of how long the exigent increases are intended to be in
effect, the circumstances under which rescission of the increases might
occur, a justification addressing the foreseeability or avoidability of
the circumstances giving rise to the request, and other information
that would assist the Commission in reaching a decision. The Commission
reserves the right, in proposed rule 3010.62, to require the Postal
Service to clarify or further supplement its request. These provisions
do not explicitly define ``exigent circumstances,'' and unmistakably
convey the message that exigent requests are indeed ``extraordinary or
exceptional.''
The proposed rules provide that upon receipt of an exigent request,
the Commission will conduct an expedited review, including a public
hearing, that allows for resolution within 90 days. The rulemaking
record is relatively slim on this aspect of PAEA implementation,
perhaps due to the focus on filings considered more routine. The
Commission has carefully considered the nature and extent of public
input for exigent requests, and preliminarily has concluded that while
the PAEA would not preclude reviving the trial-type proceedings that
held sway in the past, it also does not require them. The fact that the
statute does not explicitly refer to a hearing ``on the record,'' which
is universally associated with trial-type hearings under the
Administrative Procedure Act (APA), provides support for this
conclusion. The drafters were well aware that the system they were
replacing had included APA-style formal proceedings, and could have
mandated equivalent proceedings for exigent requests by including an
unmistakable reference to ``on the record'' proceedings, but did not.
Additional support is drawn from the period of time (90 days) allowed
for review, which is inconsistent with overly-elaborate hearings; and
as the Postal Service and some joint commenters suggest, the likelihood
that issues will not simply require adjudication of facts, but also may
involve significant policy considerations. Given these considerations,
the Commission proposes a written process, without cross-examination,
to facilitate public participation, coupled with public hearings at
which one or more responsible Postal Service official would appear for
questioning by the Commission. This mechanism strikes an appropriate
balance between assuring transparency and accountability in keeping
with the statute, while facilitating completion of review within 90
days. These provisions appear in proposed subpart E.
III. Competitive Products
Subchapter II of chapter 36 of 39 U.S.C., 39 U.S.C. 3631-34, sets
forth the provisions applicable to competitive products, which,
pursuant to Sec. 3631(a), initially include priority mail, expedited
mail, bulk parcel post, bulk international mail, and mailgrams.\16\
Section 3631(c) provides that ``[m]ail matter referred to in [Sec.
3631(a)] shall, for purposes of this subchapter, be considered to have
the meaning given to such mail matter under the mail classification
schedule.'' In Order No. 15, the Commission solicited the parties'
views on ``mail matter'' comprising each of the foregoing types of mail
and on the meaning of the phrase ``mail classification schedule.'' PRC
Order No. 15, May 17, 2007, at 6. Several parties addressed these
issues. See, e.g., Postal Service Comments, June 18, 2007, at 11-16;
UPS Comments, June 18, 2007, at 2-4; OCA Comments, June 18, 2007 at 22-
27; and PSA Comments, June 18, 2007, at 1-3.
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\16\ Pursuant to section 3642, the Commission may change the
lists of competitive products under section 3631 and market dominant
products under section 3621 by adding new products to or removing
products from the lists, or transferring products between the lists.
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A. Mail Classification Schedule
OCA and UPS contend that ``mail classification schedule'' as used
in section 3631(c) refers to the Domestic Mail Classification Schedule
(DMCS).\17\ For several reasons, the Commission is not persuaded by
this construction. First, section 3631(a) includes mail matter not
subject to the DMCS, i.e., bulk international mail. Second, when
Congress intended that the DMCS be used, it was specific. See section
3622(d)(2)(A), applying the price cap limit to ``a class of mail, as
defined in the Domestic Mail Classification Schedule as in effect on
the date of enactment of the [PAEA].'' Thus, the failure to specify the
DMCS in section 3631(c) suggests that something else is intended.
Third, while the DMCS may be useful in initially determining mail
matter comprising the competitive products, the mail classification
[[Page 50758]]
schedule has a continuing, if somewhat new, role under the statute.
Among other things, the mail classification schedule incorporates
international mail (both single-piece and bulk) and is subject to
section 3642, which authorizes the Commission to modify the makeup of
competitive and market dominant products.
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\17\ OCA Comments, June 18, 2007, at 23; UPS Comments, June 18,
2007, at 2.
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The Postal Service recognizes that the PAEA contemplates a mail
classification schedule, suggesting that it would contain ``a level of
detail equivalent to the current DMCS,'' with additional language added
to account for international mail. Postal Service Comments, June 18,
2007, at 16. The Postal Service advocates that separate classification
schedules be established for market dominant and competitive products.
Id.
In supplemental comments, the Postal Service offers its views on
what it calls the classification process.\18\ Regarding competitive
products, it argues that the Commission has no role in developing or
overseeing the mail classification schedule other than determining,
pursuant to section 3642, what products are in the competitive category
of mail. Id. at 14. The Postal Service asserts that ``the Governors
will maintain the ``Competitive Products Classification Schedule,'''
with changes made pursuant to section 3632(b). Id. The Commission
interprets its responsibilities under the PAEA differently, concluding
that the mail classification schedule falls within its purview.
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\18\ Postal Service Supplemental Comments, June 19, 2007. The
bulk of these comments relate to market dominant products, with the
Postal Service suggesting a framework for classification changes and
development of a mail classification schedule. Id. at 1-14.
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The Postal Service states that ``the PAEA clearly vests
classification authority with the Governors[.]'' Id. To a point, this
statement is unobjectionable. Notably, however, it overlooks
limitations on the Governors' authority, namely, that it is subject to
subchapter II (of chapter 36 of title 39) and regulations promulgated
by the Commission under section 3633. Moreover, the Governors'
authority to change rates or classes (pursuant to section 3632) cannot
reasonably be read to encompass the wholly separate power to develop
and maintain a mail classification schedule for competitive products.
If the Governors were intended to have such authority, there would be
no reason for the process mandated by section 3631 or for subjecting
the Governors' authority to change rates or classes to the Commission's
regulations. Nor would there be any reason for the separate provision,
section 3642, for establishing new products.
Section 3631(a) identifies the initial list of competitive mail
matter, including priority mail, expedited mail, bulk parcel post, and
bulk international mail.\19\ None of these terms is defined in the
statute. To establish what each of the foregoing means section 3631(c)
instructs that the ``[m]ail matter referred to in subsection (a) shall,
for purposes of this subchapter, be considered to have the meaning
given to such mail matter under the mail classification schedule.''
Pursuant to this rulemaking, the Commission will identify the mail
matter, including the products, in the (competitive) mail
classification schedule that initially comprise each type of mail
listed in section 3631(a). This process is integral to the Commission
fulfilling its responsibilities under the PAEA, which requires, among
other things, that each competitive product cover its attributable
costs.
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\19\ The list also includes ``mailgrams,'' a service which was
terminated on August 17, 2006. See Postal Bulletin 22192, October
26, 2006, at 5; see also letter from Daniel J. Foucheaux, Jr. to
Steven W. Williams, Secretary, Postal Rate Commission, filed
November 2, 2006.
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Commission maintenance of the mail classification schedule does not
deprive the Governors of any flexibility to change rates or classes or
offer new products. It does, however, assure non-discriminatory service
and transparency in a manner contemplated by the statute.\20\ The mail
classification schedule identifies the products subject to the
Commission's oversight, a task which does not fall to the
Governors.\21\
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\20\ The Commission concurs with the Postal Service's position
that the mail classification schedule should provide a level of
detail similar to the DMCS. The Commission also agrees with the
Postal Service that maintaining separate classification schedules
for market dominant products and competitive products is reasonable.
Nonetheless, for administrative convenience and clarity, the
Commission intends to initially combine the separate lists for
market dominant and competitive products in a single mail
classification schedule.
\21\ The mail classification schedule also serves as the source
of the list of competitive products maintained by the Commission
pursuant to section 3642.
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B. Competitive Mail Matter
Not unreasonably, parties addressing the issue define mail matter,
in the first instance, by reference to the existing materials, namely,
the DMCS and International Mail Manual (IMM). This works reasonably
well for ``priority mail'' and ``expedited mail,'' both of which appear
in the DMCS. Thus, for example, the Postal Service suggests that
``priority mail'' consists of mail within the ``Priority Mail''
subclass (DMCS section 223) and ``expedited mail'' consists of Express
Mail entered under the ``Expedited Mail Classification Schedule'' (DMCS
section 110 et seq.). Postal Service Comments, June 18, 2007, at 11-
12.\22\
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\22\ See also OCA Comments, June 18, 2007, at 22; PSA Comments,
April 6, 2007, at 8, n.8; PSA Comments, June 18, 2007, at 2; and UPS
Comments, June 18, 2007, at 2.
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For purposes of promulgating the initial regulations applicable to
competitive products, the Commission agrees that, at a minimum, mail
matter qualifying as priority mail and expedited mail is that described
in the DMCS. There are three features to this initial classification:
each represents only domestic mail; each is a separate product; and the
rates for each product are rates of general applicability.
OCA notes that the listing of priority mail and expedited mail in
section 3631(a) does not distinguish between domestic and international
mail or between single-piece and bulk. OCA Comments, June 18, 2007, at
23. Thus, it asserts that priority mail and expedited mail should
include both domestic and international in the competitive mail
classification schedule.\23\ This position is not unreasonable and the
Commission proposes to include outbound international priority mail
(Priority Mail International) and expedited mail (Global Express
Guaranteed and Express Mail International) as separate products within
the priority mail and expedited mail classifications respectively. As
discussed below, inbound shipments would be classified as market
dominant.
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\23\ Id. Elsewhere, however, OCA appears to suggest that other
than two ``bulk international mail'' services all remaining
international mail should be categorized as market dominant. Id. at
26.
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Reference to the DMCS and IMM works less well for ``bulk parcel
post'' and ``bulk international mail'' since neither is clearly
delineated.\24\ The parties addressing the issue agree generally that
``bulk parcel post'' consists of the following mail matter: Parcel
Select (DMCS sections 521.23-26); Parcel Select Return Service (DMCS
sections 521.27-28); Inter-BMC qualifying for OBMC and BMC discounts
(DMCS sections 521.41-42); and Inter-BMC and Intra-BMC qualifying for a
barcode discount (DMCS section 521.5). See Postal Service Comments,
June 18, 2007, at 12-13; PSA Comments, June 18, 2007, at 3;
[[Page 50759]]
OCA Comments, June 18, 2007, at 24; and UPS Comments, June 18, 2007, at
2-3.
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\24\ As PSA points out, the listing of ``Bulk Parcel Post''
among the rate categories of the Parcel Post subclass (DMCS section
521.3) is an anachronism since there is no current rate associated
with that rate category which preceded the Parcel Select rate
categories. PSA Comments, June 18, 2007, at 2.
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The Commission agrees with the consensus view that ``bulk parcel
post'' consists of the following mail matter: Parcel Select, Parcel
Return Service, and Parcel Post mail qualifying for OBMC, BMC, and
barcode discounts. Initially, therefore, bulk parcel post would be
comprised of these three products.
UPS and the Postal Service also suggest that bulk parcel post
include additional mail matter. UPS would include mail entered as
Inter-BMC or Intra-BMC Parcel Post by commercial mailers in quantities
greater than one. UPS Comments, June 18, 2007, at 3; see also UPS Reply
Comments, July 3, 2007, at 1. PSA opposes UPS's proposal as contrary to
the commonly accepted use of the terms ``bulk'' and ``single-piece'' in
the DMCS. PSA Reply Comments, July 3, 2007, at 2-3.
To qualify for various current Parcel Post discounts, mailers must
deposit at least 50 properly prepared pieces. See, e.g., DMCS sections
521.23-26 and 521.41-42. This minimum quantity is a prerequisite for
mailing at discounted (or non-single-piece) rates. UPS offers no
justification for reducing that minimum volume threshold to two.
Accordingly, the Commission will not adopt that suggestion.\25\
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\25\ Should experience prove otherwise, mail matter defined as
single-piece parcel post may, if appropriate, be transferred to the
competitive products classification pursuant to section 3642.
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The Postal Service suggests that ``bulk parcel post'' include
Inter- and Intra-BMC Parcel Post pieces if postage is paid using a
Merchandise Return Service permit. Postal Service Comments, June 18,
2007, at 12-13. Merchandise Return Service is a special service
enabling the permit holder to authorize a mailer to mail parcels,
including Parcel Post mail, with the postage and fees paid by the
permit holder. Merchandise Return Service is also available for sending
First-Class Mail parcels. No party commented on this proposal
specifically.\26\
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\26\ In its reply comments, UPS notes that it agrees generally
with the Postal Service's definition of bulk parcel post. UPS Reply
Comments, July 3, 2007, at 1.
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Although the proposal has some appeal, the Commission will not
adopt it at this juncture. Under the PAEA, special services are
classified as market dominant as are First-Class Mail parcels. The
availability of Merchandise Return Service as both a market dominant
and competitive service raises practical difficulties that are
unexplored in this docket. Moreover, there may well be other special
services that would be better categorized as competitive. Thus, to
consider one in isolation may lead to results with unintended
consequences. The better practice is to utilize the procedures for
transferring items between the market dominant and competitive product
lists once these lists have been established as specified by Congress
in the PAEA.
The parties' attempts to define the term ``bulk international
mail'' are handicapped by the lack of a long-standing mail
classification schedule. Instead, they turn to the IMM for guidance. It
is a useful tool, but does not eliminate uncertainty surrounding the
meaning of the term ``bulk international mail.'' Based on the parties''
comments, there appears to be little dispute that, at a minimum, bulk
international mail consists of the following: \27\ International
Priority Airmail Service (IPA), which is available to bulk mailers of
all international letter items (IMM section 292); International Surface
Airlift Service (ISAL), which is a bulk mailing system for the delivery
of letter items (IMM section 293); and International Customized Mailing
Agreements (ICMs), which are mailer-specific agreements subject to
minimum revenue or quantity requirements (IMM section 297).\28\ There
is, however, some controversy over the characterization of the
remaining international mail services.
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\27\ See Postal Service Reply Comments, May 7, 2007, at 32-33;
Postal Service Comments, June 18, 2007, at 13-14; UPS Comments, June
18, 2007, at 4; OCA Comments, June 18, 2007, at 26; and PSA
Comments, April 6, 2007, at 8, n.8; see also Pitney Bowes Comments,
June 18, 2007, at 12-13.
\28\ OCA contends that ICMs involving single-piece international
mail should be characterized as a market dominant product. OCA
Comments, June 18, 2007, at 56-57.
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The Postal Service suggests that bulk international mail should be
interpreted to include ``multi-item mailings tendered by a single
mailer.'' \29\ The Postal Service indicates that multiple quantities
may be satisfied by volume commitments or other types of annual
guarantees. Id. at 13. Thus, in addition to the foregoing international
services, the Postal Service proposes that the following be
characterized as bulk international mail: Global Bulk Economy, which it
indicates provides for surface transportation of bulk First-Class Mail
international items; Global Direct, which it indicates provides for
direct entry of bulk mailings sent through the Postal Service bearing
the indicia, postal markings, and return address of the destination
country; and direct sacks of printed matter sent to a single foreign
addressee, also known as M-bags. Id. at 14.\30\
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\29\ Postal Service Comments, June 18, 2007, at 13. In an
earlier round of comments, the Postal Service endorsed the views of
PSA and the International Mailers' Advisory Group (IMAG) that
certain single-piece international mail should be categorized as
competitive products, but on different grounds, namely, that the
products, e.g., Global Express Guaranteed, Priority Mail
International, and Express Mail International, are ``subject to
fierce competition[.]'' Postal Service Reply Comments, May 7, 2007,
at 32. In its more recent comments, the Postal Service's position on
what constitutes bulk international mail appears to be limited to
multi-item mailings tendered by a single mailer. See Postal Service
Reply Comments, July 3, 2007, at 38-39. As an exception to this, the
Postal Service indicates that because costs and revenues associated
with Global Package Discount service are not separately collected,
Express International Mail would need to be categorized as a
competitive product. Postal Service Comments, June 18, 2007, at 15,
n.17.
\30\ In its discussion of ICMs, the Postal Service refers to
Global Shipping Solutions and Global Package Discounts. Postal
Service Comments, June 18, 2007, at 15, see also id. at n.17.
Whether these are separate services or marketing programs in the
form of ICMs is unclear. In its comments, the Postal Service should
clarify their status.
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No party filed comments opposing the Postal Service's view of bulk
international mail.\31\ UPS agrees with it. UPS Reply Comments, July 3,
2007, at 1. For purposes of promulgating these initial regulations, the
Commission proposes to define bulk international mail by reference to
bulk commercial services, which may be satisfied by volume commitments
or other types of annual guarantees. This would include IPA, ISAL,
ICMs, and M-bags.\32\ The Commission proposes to define IPA, ISAL, and
M-bags as separate products and, at least initially, each ICM as a
product.
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\31\ As noted above, in earlier comments OCA contends that an
ICM involving single-piece international mail, such as Priority Mail
International, should be categorized as a market dominant product.
OCA Comments, June 18, 2007, at 56-57.
\32\ The Postal Service identifies Global Bulk Economy and
Global Direct as candidates for inclusion in the bulk international
mail category. Postal Service Comments, June 18, 2007, at 15. It
indicates that these services are available through an ICM. Whether
these services are available only as an ICM or if they represent a
separate category of international mail similar to IPA and ISAL is
unclear. In its comments, the Postal Service should clarify their
status.
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Regarding international mail determined by the Commission to be a
competitive product, the PAEA amends title 39 by adding section
407(e)(2) as follows: \33\
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\33\ The Express Delivery & Logistics Association filed a white
paper concerning section 407(e) taking issue with the Postal Service
position on inbound mail. White Paper by Express Delivery &
Logistics Association Regarding Implementation of Section 405 of the
Postal Accountability and Enhancement Act of 2006, July 20, 2007, at
2. See also FedEx Comments, April 6, 2007, at 4-5.
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With respect to shipments of international mail that are
competitive products within the meaning of section 3631 that are
exported or imported by
[[Page 50760]]
the Postal Service, the Customs Service and other appropriate Federal
agencies shall apply the customs laws of the United States and all
other laws relating to the importation or exportation of such shipments
in the same manner to both shipments by the Postal Service and similar
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shipments by private companies.
Section 407(e)(1) defines the term ``private company'' as one
``substantially owned or controlled by persons who are citizens of the
United States.'' Thus, the Commission's findings regarding
international mail classified as competitive products are relevant to
the application of customs and related laws to the importation and
exportation of such shipments, requiring that such laws be applied ``in
the same manner to both shipments by the Postal Service and similar
shipments by private companies.'' Regarding outbound international mail
classified as competitive products, e.g., IPA, ISAL, and ICMs, section
407(e)(2) would apply to shipments by the Postal Service and similar
shipments by private companies.\34\
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\34\ The Commission's interpretation of section 407(e) concerns
only its role as the arbiter of international mail to be classified
as a competitive product. It is not intended to suggest how other
federal agencies may apply the customs laws and other laws relating
to the importation and exportation of mail.
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Regarding inbound international mail, there are two issues. First,
the demarcation between bulk and single-piece international mail is
less clear. The Universal Postal Union (UPU) identifies three types of
mail: Letter Post, Express, and Parcel Post. The issues of inbound
international mail have not been addressed sufficiently to enable the
Commission to determine what inbound international mail qualifies as
``bulk international mail.'' Given the UPU's designations, one
possibility would be to classify Letter Post as market dominant with
the other types of mail classified as competitive products. The
Commission, however, has no data indicating that either Express or
Parcel Post is properly considered to be ``bulk international mail.''
Second, it is not apparent that classifying any inbound
international mail as a competitive product has the same significance
it does for outbound mail. To be sure, section 407(e) applies to the
importation of shipments deemed competitive. More specifically,
however, it applies to such shipments by the Postal Service and private
companies owned by U.S. citizens. The Postal Service does not operate
ETOEs (extra-territorial offices of exchange). Thus, there are no
foreign-originating mail shipments by the Postal Service. Currently,
shipments of inbound mail are handled by foreign posts and by private
carriers. Foreign posts are not defined as private companies for
purposes of section 407(e). In addition, although the Postal Service
receives inbound mail from foreign posts at various customs locations,
whether such mail is, within the meaning of section 407(e), ``imported
by the Postal Service'' is unclear. Finally, even if shipments received
by the Postal Service from foreign posts are construed as shipments by
the Postal Service, there may be good reason to view such inbound mail
as market dominant. The record is not sufficiently developed to enable
the Commission to determine what inbound international mail is
appropriately classified as ``bulk international'' and, therefore, a
competitive product. The parties commenting on the foregoing discussion
should thoroughly address the law and facts supporting their position
and, in particular, the application of section 407(e) to inbound mail.
Lastly, regarding competitive products, section 3632(b)(3) permits
rate (or class) changes not of general applicability for competitive
products. In recognition of this, the Commission is initially of the
view that negotiated service agreements for mail classified as
competitive are within the competitive products category and that each
such agreement should be classified as a separate product.
C. General Applicability of Rates and Classes
Section 3632(b) identifies two types of rates or classes--those of
general applicability and those not of general applicability. Each is
qualified by the phrase ``in the Nation as a whole or in any
substantial region of the Nation[.]'' Sections 3632(b)(2) and (b)(3).
Section 3632(b)(4) provides that the Commission shall establish by
regulation the criteria for determining whether a rate or class is or
is not of general applicability in the nation or any substantial part
of the nation.
Three parties address the ``general applicability'' of rates or
classes largely by reference to their availability. The Postal Service
suggests that a rate (or class) is of general applicability if it is
``publicly available throughout the nation[.]'' Postal Service
Comments, June 18, 2007, at 19. UPS advocates a generally similar
standard, contending that a rate or class is of general applicability
``if it is available to all mailers equally,'' even if not all mailers
satisfy the conditions for the rate or class. UPS Comments, June 18,
2007, at 7. At the other end of the spectrum, the parties suggest that
rates or classes negotiated between the Postal Service and individual
mailers are not of general applicability. See Postal Service Comments,
June 18, 2007, at 19; UPS Comments, June 18, 2007, at 7; and PSA
Comments, June 18, 2007, at 4.
Defining whether a rate or class is ``of general applicability'' by
reference to its availability is a reasonable means for establishing
the outer bounds of the term. The Commission will adopt that standard.
Thus, a rate (or class) of general applicability is one that is
available nationwide to all mailers equally, i.e., on the same terms.
That some mailers may not be able to qualify for the rate, e.g., for
failure to satisfy the preparation requirements, or because it is not
available in all geographic areas, does not alter the nature of the
rate as one of general applicability.\35\
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\35\ Express Mail is not available to or from certain difficult-
to-access locations. Nonetheless, it is available in the nation as a
whole.
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On the other hand, a contract rate (negotiated service agreement)
negotiated between the Postal Service and an individual mailer would
not be of general applicability.\36\ Between these parameters, however,
determining whether a rate or class is or is not of general
applicability throughout the nation or in any substantial region of the
nation is less exact and, in all likelihood, would turn on the facts.
In those situations, availability will continue to serve as a
reasonable touchstone for determining the general applicability of the
rate or class.
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\36\ A ``negotiated service agreement'' is a contract negotiated
between the Postal Service and another entity, most likely the
mailer, for service and rates different from those of general
applicability.
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Only the Postal Service addresses the meaning of the term
``substantial region,'' suggesting that it be defined by the size of
the population of the relevant region. Postal Service Comments, June
18, 2007, at 19-20. That standard is one of several that might be
appropriate.\37\ Rather than address the issue in the abstract, the
Commission concludes that whether a rate or class is or is not of
general applicability in any substantial
[[Page 50761]]
region of the country is, at least at the outset, best determined on a
case-by-case basis based on the facts presented. Currently, with the
possible exception of Alaska bypass, the Postal Service does not
provide any non-nationwide service.\38\ Among other things, section
3642 concerns the establishment of new products. Thus, to the extent
the Postal Service chooses to offer a product on a less-than-nationwide
basis, there will be an opportunity to consider the phrase
``substantial region of the nation'' in the context of a specific
proposal.
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\37\ The Census Bureau, for example, divides the country into
four regions, which are further subdivided into divisions. The
geographic area of the nine states that comprise the West Region's
Mountain Division is more than three times greater than that
occupied by the South Region's South Atlantic Division, which is
comprised of eight states and the District of Columbia stretching
from Delaware to Florida (856.1 thousand square miles versus 266.1
thousand square miles). However, the population in the South
Atlantic Division is more than 2.5 times greater than that of the
Mountain Division (57.1 million versus 20.8 million based on July
2006 estimates).
\38\ Although Express Mail service is not available at every
post office, unquestionably the service would be fairly
characterized as being of general applicability throughout the
nation.
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D. Information Supporting Rate and Class Decisions
The Governors' authority to establish rates and classes for
competitive products is subject to subchapter II of chapter 36 of title
39 and the regulations promulgated by the Commission under section 3633
to: (a) Prohibit cross-subsidies of competitive products by market
dominant products, (b) require each competitive product to cover its
attributable costs, and (c) ensure that collectively competitive
products cover an appropriate share of the institutional costs of the
Postal Service. In Order No. 15, the Commission solicited the parties'
views on what information is needed to support changes in rates or
classes whether of general applicability or not. PRC Order No. 15, May
17, 2007, at 6-7. In addition, the Commission asked whether the
information needed to support a rate decrease differed from that for a
rate increase. Id. at 6.
The parties offer starkly contrasting views on the information
needed to support changes in rates. Advo, PSA, and the Postal Service
contend that nothing need be filed with the Commission, other than the
notice required under section 3632(b)(3), at the time rate changes are
announced.\39\ These parties assert that competitive products'
compliance with section 3633 should be considered only in the annual
compliance review under section 3653. Id. UPS, on the other hand,
contends that rate changes should be accompanied by the following
information: Volumes, revenues, billing determinants, attributable
costs, including an explanation of substantial cost changes; prior
fiscal year audited data; projected data for the period when the rates
are in effect; and unaudited data for the current fiscal year.\40\ UPS
concludes that pre-implementation review is a prerequisite for
determining competitive products' compliance with section 3633. Id.
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\39\ Advo Comments, June 18, 2007, at 10-11; PSA Comments, June
18, 2007, at 4; and Postal Service Comments, June 18, 2007, at 18-
19.
\40\ UPS Comments, June 18, 2007, at 4-5. In its reply comments,
UPS appears to modify its position, indicating, among other things,
that it is not suggesting the Postal Service be required to file
test year projections and that fiscal year data included in the
annual report may be sufficient for rate changes noticed relatively
shortly after the filing of the annual report. UPS Reply Comments,
July 3, 2007, at 3-4.
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The Postal Service asserts that the ``structure of the statute,
including, the nature of the data required to show compliance with
3633, suggests that there is no prior review by the Commission.''
Postal Service Comments, June 18, 2007, at 18. In support, it points to
the different notice requirements associated with rate changes of
general applicability (Federal Register notice no less than 30 days
prior to the effective date) and rate changes of less than general
applicability (filing with the Commission not less than 15 days prior
to the effective date). Id. at 18-19. It argues that the former
suggests that any substantive review is limited to the annual
compliance review, whereas the latter seemingly is intended to protect
the confidentiality of customized agreements. Id. at 19. This argument
is not persuasive.
The statutory provisions governing competitive products, 39 U.S.C.
3631-34, neither explicitly provide for nor prohibit pre-implementation
review of rate changes by the Commission. Section 3633 directs the
Commission to promulgate regulations to: (a) Prohibit cross-subsidies
of competitive products by market dominant products; (b) ensure that
each competitive product covers its attributable costs; and (c) that
collectively competitive products make an appropriate contribution to
the Postal Service's overhead. To fulfill these responsibilities, the
Commission cannot turn a blind eye to changes which may not be in
compliance with those requirements. The different notice/filing
requirements prescribed by section 3632 suggest the need for closer
scrutiny of certain types of rate changes.
Section 3632(b)(2) requires that, for rate (or class) changes of
general applicability, the Governors publish each rate (or class)
decision and the record of the Governors' proceeding in the Federal
Register at least 30 days before the effective date of any new rates or
classes.\41\ Rates (or classes) of general applicability are available
to all mailers equally, i.e., those satisfying the eligibility
standards for the rate (or class). So, for example, Parcel Select rates
would be available to all mailers meeting the eligibility requirements
for such service. In essence, rates of general applicability are the
published (or tariff) rates for the particular service. When a
carrier's published rates (those of general applicability) are changed,
experience suggests that they are likely to be increased.\42\ As a
general rule, anytime competitive prices are increased concern over
unfair competition is diminished. Likewise, increases in postal rates
of general applicability above those found in compliance with section
3633 can, for purposes of these implementing regulations, be deemed to
be presumptively reasonable. In that situation, the annual review would
appear to be adequate to assure compliance with section 3633. The
complaint process would be available as well.
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\41\ Pursuant to the proposed regulations, the Postal Service
will also be required to file the notice of all proposed rate (and
class) changes of general applicability with the Commission no later
than the date such notice is published in the Federal Register.
\42\ See, e.g., FedEx Corporation's press releases of December
4, 2006, announcing a 4.9 percent increase in certain ``standard
list rates;'' and of November 3, 2006, announcing a 3.5 percent
increase in the net average shipping rate for FedEx Express, both of
which may be accessed at: http://www.fedex.com/us/about/news/pressreleases/?link=4
.
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An identical presumption of reasonableness cannot fairly be
presumed for rate decreases of general applicability, which, at a
minimum, intensify concerns about potentially unfair competition. This
is not to suggest any limitation on the Governors' authority to change
rates. Unlike its private enterprise counterparts, however, the Postal
Service has no residual claimants, i.e., stockholders, to shoulder the
consequences of an improvident decision to change rates. The
Commission's role is to ensure that rates and classes comply with
section 3633. By doing so, the Commission preserves fair competition.
The change in circumstances giving rise to the decrease, resulting in a
reduction from the pre-existing presumptively lawful rates, justifies
the pre-implementation review to ensure continued compliance with
section 3633. Thus, the Commission proposes that for decreases in rates
of general applicability the Postal Service will be required to
demonstrate the change is in compliance with section 3633. See section
3015.3(c) of the proposed regulations. The Commission does not
anticipate that the regulations will either unduly burden the Postal
Service
[[Page 50762]]
or delay the effectiveness of changes satisfying the minimal standards
of lawfulness.
Section 3632(b)(3) authorizes the Governors to establish rates (or
classes) not of general applicability, i.e., to execute negotiated
service agreements with mailers providing for rates different from the
published rates (of general applicability). Notably, negotiated service
agreements are subject to different filing requirements than are rate
changes of general applicability. Specifically, each such negotiated
service agreement (rate or class decision not of general applicability)
and the record of proceedings in connection with such decision must be
filed with the Commission not less than 15 days prior to the effective
date of