NATIONAL POSTAL POLICY COUNCIL Postal Counsel Report William B. Baker February 18, 2016

Exigency Case Appeal Briefing Schedule: NPPC has intervened on side of PRC USPS brief due Jan. 4 PRC brief delayed until Feb. 24 Intervenors (NPPC et al.) due Mar. 2 Oral argument still not scheduled

Exigency Surcharge Removal USPS must give 45-day advance notice of removal USPS circulated “rollback” rates on Feb. 5 Feb. 16 report: Stay?

R2013-10 Remand “Full Service IMb” case – when is a mailing regulation change a mail classification change? Court found PRC decision poorly explained & remanded PRC adopted a new test on remand Order No. 3047 (Jan. 22): “a mail preparation change will be considered a classification change with price cap effects requiring compliance with 39 C.F.R. § 3010.23(d) when the change results in either the deletion and/or redefinition of a rate cell” Deletion of a rate cell occurs when the mail preparation change causes the elimination of a rate, or the functional equivalent of an elimination of a rate, e.g., making the rate inaccessible. Redefinition of a rate cell occurs when the mail preparation change causes a significant change to a basic characteristic of the mailing. USPS to designate initially; PRC proposing to require mailer motions wtihin 30 days of notice. Comments due 3/2

ACR FY2015 NPPC filed comments on Feb. 2 PRC ACD due by end of March Supported USPS’s pragmatic approach to pricing ofworkshare discounts that exceed 100 percent due to reductions in the estimated costs avoided (5-Digit Auto flats was worst 120.8%) Criticized the 69.4% pass-through at the Automation 5-Digit level for (1) sending inefficient signals; and (2) not charging a compensatory price for sorting to the 3-Digit/AADC level; The continued excessive cost coverage for First-Class Mail indicates a problem with the current system of using “top- down” pricing; and The Commission should consider applying an incremental cost test in market-dominant mail in the future. PRC ACD due by end of March

UPS Petition: RM2016-2 UPS contends USPS has not attributed costs to Competitive Services properly, and focused on competing in package services while reducing M-D service and seeking above-cap M-D rate increases Comments NPPC filed comments in January: stated that if cross-subsidies exist, Presort Mailers are paying the largest share NPPC took no position on the specific proposals of UPS regarding the attribution of inframarginal costs NPPC took no position on whether UPS had correctly identified costs that the USPS may have mis-classified as fixed\ Reply comment are due March 25

Ex Parte Rules, RM2016-4 PRC rulemaking on its ex parte rules Would treat informal rulemakings like formal complaints and adjudications Would in effect foreclose communications before a petition for rulemaking is submitted Stringent penalty for violations NPPC likely to join with other mailers in opposing unreasonably restrictive rules and favoring “permit but disclose”

Petition re Price Elasticities, RM2014-5 Comments on NOI #1 filed in August Urged PRC to develop better understanding of how mailers make decisions before re-specifying the econometric model Awaiting PRC action

Dec. 2016 Review of Market-Dominant Rate System NPPC is gearing up Retaining economic consultants Already thinking about possible arguments Beginning to raise issues in comments that will form basis of comments during the review This will be a major effort USPS wants permanent surcharge Rate design issues

USPS – Wants Far More Money Than Current Cap Allows USPS: as of 9/30/15, liabilities exceed assets by $101 Billion USPS: owes an additional $51 Billion in unfunded RHB USPS argued in exigency case for $11 Billion surcharge USPS is calling for permanent surcharge in legislation

Rate Design: Presort Mail Institutional Cost Burden In FY215 Total System-wide Contribution to Institutional Costs= $28,731.6 billion FC Presort Letters/Cards: $10.675 billion (Letters $10.44 billion) In contrast: FC Single-Piece: $4.740 billion FC Flats: $0.798 billion Standard Mail Letters: $5.003 billion Standard HD/Sat Flats: $0.861 billion All Competitive Products in total: $4,511.2 billion

Current System Allows USPS To Keep Presort Rates High If a cross-subsidy occurs, NPPC members pay the most of it FC Presort contribution per piece has increased steadily from 22 cents in 2009 to 26.6 cents in FY15 USPS wants to keep the 5-Digit price high because it is leaving the system more slowly than SP Since 2009: FC volume has declined 24.4% Presort letter volume has declined 15.2 percent 5-Digit Auto letters volume has risen 14.1 percent 2009, SP Letters have fallen 34.2%

Aspects of Current System Hurt Presort Mailers “Linking” Presort/Automation discounts to Single-Piece Rates Permits inefficiency by allowing pass-through of less than 100 percent of cost savings “Top-down” pricing of discounts means Presort Mailers do not get full “credit” for cost-saving characteristics Same cap applicable to SP and Presort allows USPS to raise Presort rates more than by CPI Current price cap allows USPS to profit from reducing service No volume discounts? No destination entry discounts?