IDEAlliance Leadership Conference Primex 2012 Current Regulatory Concerns Mark Acton Postal Regulatory Commissioner February 7, 2012

Thanks David Steinhardt, President and CEO of IDEAlliance Georgia Volakis, Director of Events & Membership My second visit to the IDEAlliance - familiar faces and new friends 2

Summary of Content  Remand of the Exigent Rate Case  White House Budget Proposal  Proposed Legislation  39 USC 701 – PRC’s 5-Year Review of the Postal Accountability and Enhancement Act  Joint PRC/USPS Periodicals Study – 39 USC 708 3

 Advisory Opinion: “Retail Access Optimization Initiative” [N2011-1]  Universal Service Obligation: Value of Societal Benefits Studies  “Peak Load” Study  Advisory Opinion [N2012-1] Mail Processing Network Rationalization Service Changes  Other Commission activities  new technologies 4 Summary of Content

The CPI-U Price Cap  Setting the cap: The Commission determines the price cap for any 12-month period by calculating the ratio of two 12-month CPI (Urban) averages that are 12 months apart, subtracting one, and expressing the value as a percentage.  For a more detailed explanation of the calculation of the price cap please see 39 CFR § , or the PRC rules at:  docs/home/PAEA/FinalRulesWeb.pdf 5

Current cap allowance  CPI-U price-cap trend: 2.9% December 2007 (R2008-1cap) 3.8%December 2008 (R cap) 1.741%November 2010 (R cap) 2.426%August 2011 (Partial Year Price cap for Docket No. R = 2.133%) please see  Prepared by Postal Regulatory Commission Last Update: 1/20/2012 6

Exigent Rate Case Order  9/30/2010 Order No Denying Request for Exigent Rate Adjustments Commission: A unanimous and bipartisan message that, in a price cap regulatory regime, the integrity of the cap is paramount  Guarding the rate cap is one of the Commission’s primary concerns Commission found the requested exigent rate adjustments “not designed to respond to the recent recession, or its impact on mail volume. Rather, they represented an attempt to address long- term structural problems not caused by the recent recession.” The Postal Service achieved over $6 billion in cost reductions in 2009  These results indicate that the price cap is working and providing the right signals for USPS to reduce costs & improve efficiency 7

Exigent Rate Case Appeal  USPS Appeal of Commission Decision heard by US Court of Appeals for the DC Circuit, Case No Oral Arguments heard March 15, 2011 Price cap not to be pierced absent compelling, direct causation due to exigent circumstances  Court: Clarify the relationship which must be shown between exigent circumstances and the rate increase requested 8

Exigent Rate Case Appeal  Court of Appeals issued Mandate July 7, 2011  PRC opened Docket R2010-4R (“Remand”)  Commission clarified the showing that USPS must make – relating the impact on USPS finances to the exigent occurrence(s)  Order 864, issued September 20,

Exigent Rate Case Appeal  In Order 864 (September 20, 2011) PRC found exigent rate adjustments: (1) Permitted only if, and to the extent that, they compensate for the net adverse financial impact of the exigent circumstances; (2) That to quantify the net adverse financial impact of exigent circumstances, USPS need not quantify such impact with absolute precision, but must:  (a) under the circumstances presented, support its quantification through supportable methods commensurate with the amount of the proposed adjustments; and  (b) demonstrate that the amount of the proposed adjustments does not exceed the net adverse financial impact of the exigent circumstances 10

Exigent Rate Case Appeal  The Postal Service has indicated on the record that it is interested in filing for an exigent rate increase  Publicly, Postal officials have stated they do not want to do so 11

Monday, 9/19/11 White House Proposal 12

White House Budget Proposal  The President recommended to the “Super Committee”: Approving an exigent rate request Eliminating Saturday door delivery Adjustments to prefunding requirements for retiree benefits 13

Proposed Legislation  In both houses of Congress, legislators have prepared bills to address the Postal Service’s financial crisis.  Chairman Joseph I. Lieberman and Senators Susan M. Collins, Thomas R. Carper and Scott Brown are co-sponsoring S. 1789, “The 21st Century Postal Service Act.”  In the House, Chairman Issa has championed the H.R. 2309, “Postal Reform Act of 2011.”  Both bills have merit – but take very different approaches to ensure USPS solvency. 14

S. 1789, “The 21st Century Postal Service Act” Would:  Authorize the Postal Service to offer buyouts to employees to help reduce workforce. The Office of Personnel Management (OPM) is directed to refund USPS for overpayment to the Federal Employees Retirement System. Using this money to support buyouts, the Postmaster General estimates he can reduce the USPS workforce by as many as 100,000 employees over the next three years in order to reach savings of $8 billion a year.  Allow the Postal Service to work with its employee unions and OPM to develop a new health plan to cover postal employees. The Postmaster General estimates that a new healthcare plan could cut costs roughly in half, while maintaining adequate benefits. (cont’d) 15

S. 1789, “The 21st Century Postal Service Act” (cont’d)  Recalibrate the pre-funding requirements for its retiree health benefits by amortizing those payments over time.  Bar the USPS from 5-day-a-week mail delivery for 2 years, and until it develops remedies for customers who may be affected disproportionately by the change in service. USPS also must reduce costs and increase revenues by other means before 5-day delivery takes effect. 16

H.R. 2309, “Postal Reform Act of 2011” Would:  Permit the Postal Service to reduce mail delivery from six to five days per week  Transfer about $11 billion in surplus retirement contributions from the Civil Service Retirement and Disability Fund (CSRDF) to the Postal Service Fund  Reduce the contribution made by the Postal Service for employees’ health and life insurance premiums (cont’d) 17

H.R. 2309, “Postal Reform Act of 2011” (cont’d)  Change the payments that the Postal Service is required to make to the Postal Service Retiree Health Benefits Fund (PSRHBF)  Eliminate annual appropriations made to the Postal Service for free and reduced rate mail  Other provisions of H.R would aim to help the Postal Service reduce its costs and increase its income 18

39 USC 701: Five-Year Review of Postal Accountability & Enhancement Act  December 2, 2010 Commission invited public comment  Public forum January 11, 2011, at the Commission offices; discussion with participants  February 1, 2011 comment period closed  Report issued September 22, 2011 (available at PRC website) included recommendations for legislative change 19

Section 701 Report The Commission recommended Congress consider:  Adjusting the current Postal Service Retiree Health Benefit Fund (PSRHBF) payment schedule, using the Commission’s (39 USC) section 802(c) report on the Postal Service's Civil Service Retirement System liability as a potential remedy  Explicitly allowing the Postal Service to add new market dominant classes of mail, enabling USPS to adapt to rapidly changing needs of mail users and the postal system  lf Congress decides to allow the Postal Service to offer new nonpostal services, those services should be subject to appropriate regulatory oversight and review – ensuring that USPS offers profitable, nonpostal services without disrupting the competitive marketplace(cont’d) 20

Section 701 Report (cont’d) Recommended:  Amending title 39 by raising the maximum revenue limitation on market tests of experimental products to encourage innovation on a larger scale  Requiring consultations with the Commission prior to any changes to service standards  Requiring USPS to provide regular reports to the Commission on its retail network plans and activities  Allowing the Postal Service to obtain expedited consideration for requests for advisory opinions and requiring USPS to provide a written response to Commission advisory opinions prior to implementing changes in service 21

Joint PRC/USPS Periodicals Study 39 USC 708  Joint PRC/USPS Periodical Study resulted in assessments from PRC and USPS  PAEA Section 708 directs the USPS and PRC to jointly study the quality data used to determine attributable costs of Periodicals mail and opportunities for improving the efficiency of this mail class 22

Joint PRC/USPS Periodicals Study 39 USC 708 Visited USPS facilities to view Periodicals processing Conducted meetings with mailers Hosted webinar on cost issues related to Periodicals mail Analyzed data related specifically to publications; as well as overall costing data Provided to Congress and the White House October 13,

Joint PRC/USPS Periodicals Study 39 USC 708 findings  A managed reduction in manual processing of Periodicals mail (wherever feasible) would significantly reduce costs; this will require key operational changes that may impact current mailing practices and service levels of Periodicals mailings.  The Postal Service agreed operational initiatives “should, must, and will be pursued,” but recognizes that cost reduction initiatives alone will not be nearly enough to resolve the Periodicals deficit. 24

Advisory Opinion: “Retail Access Optimization Initiative” [N2011-1]  N2001-1: On July 27, 2011 USPS filed a request with the Commission for an Advisory Opinion on a centrally-directed plan, the Retail Access Optimization (RAO) Initiative, to examine whether to continue providing retail and other services and products at more than 3600 of the 32,000 retail facilities in its network  The Commission committed to providing an Advisory Opinion with all due diligence, as swiftly as possible  Public invited to provide comments via PRC website 25

Advisory Opinion: “Retail Access Optimization Initiative” [N2011-1]  The Commission found: The USPS review process should include:  application of a true optimization model (not a screen)  the statutory requirements applicable when evaluating a retail postal facility for closure  more robust processes for obtaining and evaluating relevant community information (cont’d) 26

Advisory Opinion: “Retail Access Optimization Initiative” [N2011-1] (cont’d)  information on how other Postal Service initiatives may impact service in the affected area  full development of suitable alternative access prior to (or concurrent with) implementation of retail facility closings 27

Advisory Opinion: “Retail Access Optimization Initiative” [N2011-1] (cont’d)  Present level of data development does not permit reliable costs savings estimates on either program-wide or per facility basis. 28

Advisory Opinion: “Retail Access Optimization Initiative” [N2011-1]  Opinion issued December 23, 2011  USPS has not yet responded to our Opinion  PRC Advisory Opinions are not binding on USPS, however, USPS has incorporated AO previous recommendations in their processes 29

Universal Service Obligation: Value of Societal Benefits Studies  USO / Value of Societal Benefits in addition to access, what benefits does infrastructure offer?  The Commission supplemented its 2008 Report on Universal Postal Service and the Postal Monopoly  6 “Social Value” studies (August 2011) conducted by 3 independent contractors were posted on the PRC website 30

“Peak Load” Study  On August 2, the Postal Regulatory Commission issued a Request for Proposal to produce a “Report on Peak Load Costs”  Peak load costs are traditionally thought of as additional costs that are born to cover higher demand than normal  Theory being: flexible cost models & pricing would be useful in better examining efficiencies of fewer delivery days and/or realigning network  Commission will publish Study once the research is completed and analyzed 31

USPS: “Comprehensive Changes to Nationwide Infrastructure ” September 15, 2011 USPS proposed:  Studying 250 processing facilities for possible consolidation or closure  Reducing mail processing equipment by as much as 50 percent  Dramatically decreasing the nationwide transportation network  Adjusting the workforce size by as many as 35,000 positions and  Revising service standards for First-Class Mail 32

Advisory Opinion [N2012-1] Mail Processing Network Rationalization Service Changes  On December 5, 2012 USPS requested an Advisory Opinion on a plan to eliminate the expectation of overnight service for significant portions of First-Class Mail and Periodicals. Two-day delivery would be greatly expanded and some current two- day service would be moved to the three- day delivery range. 33

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Advisory Opinion [N2012-1] Mail Processing Network Rationalization Service Change  The Postal Service’s request is complex, including the testimony of 13 witnesses and over 50 library references.  To afford due process for all participants, including the opportunity to cross- examine and rebut USPS witnesses, ample time is needed 35

Advisory Opinion [N2012-1] Mail Processing Network Rationalization Service Change  After the Commission established a procedural schedule for this matter, the Postal Service requested the Commission to provide an Opinion by mid-April  In Commission Order 1183 (January 31, 2012) the Commission explained why such an early a determination is unfeasible. 36

Other Commission activities  Initiatives the Commission has approved in the past year:  2011’s Incentive Program designed to “increase awareness of how integrating technology increases the value of the mail” (also known as): The Quick Response “QR” Code marketing incentive -- a 60- day incentive program to reduce prices by three percent for qualifying mailpieces that contained a barcode readable by a smartphone 37

Other Commission activities  “Every Door Direct Mail” Market Test allows postal customers to target specific delivery areas and demographics for promotional mailings through interactive software  Allowing alternative postage payment methods for negotiated service agreements (NSAs) – NSA customers may pay on terms 38

Our Commitment to the Public  The Commission supports and encourages the Postal Service to continue innovating and perform as a channel for business, personal and government messages Ensure transparency and accountability of the United States Postal Service and foster a vital and efficient universal mail system. --U S Postal Regulatory Mission Statement 39

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