POSTAL REGULATORY COMMISSION Association of Alternate Postal Systems Regulatory Update Alex Cooper Special Assistant to Commissioner Mark D. Acton May.

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Association of Alternate Postal SystemsRegulatory Update

Alex CooperSpecial Assistant to

Commissioner Mark D. Acton

May 5, 2015

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Contents

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The Postal Regulatory CommissionPRC DutiesCompliance MattersRatemakingRequests for Proposal (RFPs)International RoleLegislative UpdateQuestions & Answers

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The Postal Regulatory Commission

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Mission Statement: Ensure transparency and accountability of the United States Postal Service and foster a vital and efficient universal mail system

Present Composition• 5 Commissioners, appointed by the President and confirmed by the

U.S. Senate—this is the full complement• Office of Accountability and Compliance – Technical Analysis• Office of the General Counsel - Legal• Office of the Secretary and Administration• Office of Public Affairs and Government Relations• Office of the Inspector General

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PRC Duties

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• Ensure the Postal Service complies with the law and applicable regulations• Provide the public with transparency and

accountability of the United States Postal Service• Provide Advisory Opinions, which offer professional

analytical and legal feedback to the public when USPS wishes to make a change in the “Nature of Service,” or its core functions • Provide views to Secretary of State when new or

amended international Market Dominant rates are established as to their consistency with U.S.C. § 3622

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Compliance:Annual Compliance Determination

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Annual Compliance Determination• A report is issued by the Postal Regulatory

Commission (PRC) in response to the Annual Compliance Report submitted by USPS to the PRC each fiscal year• PRC determines whether any price or fee in

effect during the year under review was not in compliance with applicable provisions and whether any service standards were not met

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Compliance:Annual Compliance Determination

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Principal Findings for FY 2014 include:• 26 workshare discounts did not comply with section 3622(e), which requires

the Commission to ensure that workshare discounts do not exceed the costs avoided by the Postal Service as a result of mailers preparing the mail.

• Seven noncompensatory Market Dominant products are identified: Periodicals In-County, Periodicals Outside County, Standard Flats, Standard Parcels, Media/Library Mail, Inbound Letter Post and Stamp Fulfillment Services.

• Revenue for two Competitive products failed to cover attributable costs and therefore do not comply with the law: International Money Transfer Service – Inbound, and International Money Transfer Service – Outbound.

• The Postal Service met its service performance targets for Presorted First-Class Letters/Postcards (Overnight and 2-Day), while performance results for Periodicals and Package Services fell short despite initiatives to increase performance.

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Compliance: Financial Analysis

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• Separated from the ACD for the second year for greater clarity and transparency • Includes a more in-depth discussion of

the cost savings the Postal Service has generated, the financial impact of the various classes of mail, and a review of its assets and liabilities

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Compliance: Financial Analysis

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• In FY 2014, the Postal Service had a total net loss of $5.5 billion. This is the Postal Service’s eighth consecutive financial loss, bringing its total net deficit since FY 2007 to $51.7 billion.

• The total net loss for the year was $10.9 billion less than the total net loss in FY 2012 and $1 billion better than expected under the Financial Plan.

• The Postal Service had an operational net income for the first time since FY 2008.

• Postal Service liquidity is insufficient to significantly improve operational efficiency.

• Liquid assets (current assets) are insufficient to meet the payment of current liabilities.

• The Postal Service has no further access to borrowing under current law.

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Rate Making:Latest CPI-U Based Price Cap Authority

(This has not been updated since 12/2014)

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Rate Making:R2013-11 Exigent Rate Case

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• On September 26, 2013, the Postal Service filed a request for an average 4.3% increase above the CPI-cap for market dominant products.

• “Exigent” circumstances are defined as “Due to extraordinary or exceptional circumstances.”

• The Postal Service justified the need for an exigent rate increase as being the result of the Great Recession.

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Rate Making:R2013-11 Exigent Rate Case

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• The exigent rate increase is functionally a surcharge adjustment• The CPI-based rates and the exigent surcharge, are

by PRC, design separate and distinct considerations.

• This means any CPI-based rate change in the future (the next opportunity would be 2015) would be based on the current CPI rates, not CPI rate + exigent surcharge.

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Rate Making:R2013-11 Exigent Rate Case

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• The decision by the PRC to grant in part the Postal Service’s request is being appealed by both mailers and the Postal Service.• Oral arguments in DC Circuit Court of Appeals occurred on

September 9, 2014.• This case is pending in a court of law, therefore we are

unable to discuss details or opinions on the case.

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Rate Making:R2013-11 Exigent Rate Case

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• There are three possible general outcomes:– The Postal Service could be found to be correct in asserting that

the exigency should go on forever, and be “baked into” the base rate, or the Court could make a determination that the exigency should be allowed to collect more than the $3.2 billion the Commission determined. USPS is on track to reach that number around September 2015.

– The Alliance for Nonprofit Mailers et al. could be found to be correct, in which case the Postal Service would have to return those exigent revenues.

– The Court could remand our decision back to us for expansion or clarification, or alternatively they could agree with the Commission’s original order granting in part the exigent request from the Postal Service.

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International Role

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• The PRC contributes to the work of the Universal Postal Union (UPU) to develop terminal dues rates for letters, as well as rates for parcels and supplementary services. Commission staff also participate in work on broader regulatory issues.

• For Market Dominant products, the Commissions seeks to promote compliance with § 3622.

• For Competitive products, the Commission seeks to promote a level playing field between the Postal Service and the private sector.

• The PRC is working as part of the U.S. delegation to the UPU to finalize proposals on international rates and other issues for adoption at the September 2016 UPU Congress in Istanbul.

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Terminal Dues Study

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• Terminal dues are the rates that postal operators pay to each other for the delivery of letter mail. In the UPU, many national postal operators receive terminal dues that are below cost. Therefore, foreign mailers are accessing domestic delivery markets at lower rates than domestic mailers, with domestic mailers subsidizing foreign mailers.

• In 2014, the PRC commissioned Copenhagen Economics to study, from the perspective of economic theory, whether the UPU terminal dues system distorts competition and to determine how to measure any such distortions.

• Copenhagen Economics found that a system of terminal dues that are below cost for national postal operators does create market distortions, and proposed that an ideal terminal dues system should be based on the average incremental cost of last-mile delivery.

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Legislative Update

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• As of yet, no major postal legislation has been introduced by the Chairman or Ranking Member of either the House or Senate postal oversight committees– Both Committees have new Chairmen—in the House, Rep. Jason Chaffetz,

and in the Senate, Sen. Ron Johnson.

• Senate Homeland Security and Governmental Affairs Committee Ranking Member, Sen. Tom Carper, hosted a postal briefing for committee members on April 16, in which the PRC participated, which dealt with USPS finances.

• The PRC has been invited to participate in a second briefing later this month to discuss issues related to rural delivery

• The Postal Service had its first operational profit since 2008, which may impact the chances of significant legislation as the circumstances surrounding USPS may seem less dire.

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QUESTIONS?WWW.PRC.GOV