National Postal Policy Council Current Regulatory Concerns Mark Acton, Vice-Chairman Postal Regulatory Commission September 22, 2011

Thanks  Art Sackler, Executive Director National Postal Policy Council  Chuck Fattore, Donnelley Logistics (Chair)  Familiar faces and friends I have yet to meet – My 4th visit to NPPC 2

Summary of Content  Remand of the Exigent Rate Case  Annual Compliance Determination FY2010  Discover Financial Services NSA  Workshare Discount Methodology  Universal Service Obligation: Value of Societal Benefits Studies  White House Proposal 3

Coming Attractions Joint PRC/USPS Periodicals Study 39 USC USC 701 – PRC’s 5-Year Review of the Postal Accountability and Enhancement Act Advisory Opinion: “Retail Access Optimization Initiative” “Peak Load” Study 4

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

Exigent Rate Adjustment: Why the Rate Cap is Key  CPI-U price-cap trend: 2.9% December 2007 (R2008-1cap) 3.8%December 2008 (R cap) 0.356%December %August 2011 (if USPS filed today it would be eligible for 9-month partial year limitation equal to 2.133) please see  Prepared by Postal Regulatory Commission Last Update: 9/15/2011 6

Exigent Rate Case  USPS proposal must: (39 USC 3622(d)(1)(E)) Describe the exigent circumstances and show why they necessitate the increase, Demonstrate that the proposed rates are reasonable and equitable, and Note circumstances under which the increases could be rescinded or reduced 7

Exigent Rate Case  On July 6, 2010 the Postal Service filed with the PRC a request for an exigent rate adjustment  PRC established a docket to provide for public comment and conducted hearings on the record Interested parties were encouraged to participate in building the record and suggesting relevant questions to the PRC for the USPS to answer during the course of public hearings  Commission required to issue Decision within 90 days of USPS filing Published Order Denying Request for Exigent Rate Adjustment on September 30, one week early 8

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 the Commission’s first concern 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 9

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 10

Exigent Rate Case Appeal  U S Court of Appeals for the D.C. Circuit  Ruling May 24, 2011: Remanded case to Commission “ We therefore remand to the Commission so that it can exercise its discretion to construe the ambiguous language of section 201*, explaining the extent of causation the Commission requires the Postal Service to demonstrate between the exigent circumstance’s impact on Postal Service finances and the proposed rate increase.” * PAEA Section

Docket No. R2010-4R  Court of Appeals issued Mandate July 7, 2011  PRC opened Docket R2010-4R (“Remand”)  Commission is considering and formulating a response that will clarify the showing that USPS must make – relating the impact on USPS finances to the exigent occurrence(s)  Order 864, issued September 20,

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 13

Annual Compliance Determination FY 2010  Commission findings for FY 2010 Annual Compliance Determination issued 3/29/2011 Total Factor Productivity increased 2.2 %, as USPS reduced workhours by 75.1 M, saving an estimated $3.6 B USPS was able to meet all of its obligations in FY 2010, ending the year with $1.2 B in cash 14

Annual Compliance Determination Findings  Volume and Revenue Declines: Total volume declined by 3.5%, or more than 6 billion pieces First-Class Mail volume and revenue continue to decline, falling by 5.5 B pieces and more than $1.8 B, respectively Total revenues declined by 1.5% Total expenses increased by 5.1% 15

Annual Compliance Determination Findings  Pricing: Competitive products, as a whole, made a positive contribution to institutional cost amounting to 7.1% -- exceeding the required 5.5% share The Commission identifies 10 market dominant products and services with revenue that did not cover attributable costs in FY2010, including flats, periodicals, and non-profit mail, totaling $1.7 B in losses including:  $611 million from Periodicals,  $577 million from Standard Mail Flats, and  $172 million from Standard Mail Parcels/Not-Flat Machinables For the first time ever, Commission finds rates not in compliance with the statute, and directs the Postal Service to take action to address the intra- class cross subsidy for Standard Mail Flats as soon as practicable 16

Annual Compliance Determination Findings  Service Measurement: The Commission reviewed the Postal Service’s service measurement systems based on the Intelligent Mail barcode (IMb) and found persistent data errors, insufficient customer IMb usage, and a lack of product specific documentation The Commission is concerned with USPS ability to report service performance measurements for market dominant products as required by PAEA  Structural Obstacles:  The Postal Service’s liquidity crisis is related to an overly ambitious requirement for the Postal Service to prefund its future retiree health benefit premiums  Over the past four years, the Postal Service has paid $21.9 B to prefund these benefits, while the Postal Service’s cumulative losses were just $20 B. The Postal Service is mandated to make another $5.5 B payment this year  Full text of FY2010 ACD at: www prc.gov 17

Annual Compliance Determination  The Postal Service has appealed the ACD’s order to increase the cost coverage of Standard Mail Flats, “among other things”  Case No  Briefs due to the U S Court of Appeals for the DC Circuit December

Discover Financial Services NSA  On March 15, in Commission Order 694, the PRC approved a Negotiated Service Agreement for Discover Financial Services the first Market Dominant negotiated service agreement sought by USPS in four years since passage of PAEA postal reform 3-year Agreement designed to maintain the total contribution the Postal Service receives from DFS First-Class Mail and Standard Mail DFS NSA provides an incentive for net contribution beyond that total amount 19

Discover Financial Services NSA  5 key components of DFS NSA: 1. a revenue threshold 2. a revenue threshold adjustment 3. a postage commitment 4. rebates on First-Class Mail 5. rebates on Standard Mail 20

Discover Financial Services NSA  Commission approved DFS NSA to permit USPS management to learn more about potential tools to slow overall decline of First-Class Mail volume Creates a quantitative model for measuring estimated volumes through the NSA. PRC recognizes that non-problematic data are not always available As a result Commission is hopeful that USPS will be better off in the long run due to this NSA 21

RM2009-3: Analytical Principles Regarding Workshare Discount Methodology  39 U.S.C. 3622(e) limits workshare discounts to the costs avoided by worksharing  USPS proposed new methods of estimating costs avoided by workshared mail when calculating proposed rates for presort First-Class, Standard High Density, and Standard Saturation mail  The Commission initiated this docket to develop a full record on issues concerning the proper interpretation, scope, and application of section 3622(e) 22

RM2009-3: Order 536  September 14, 2010: The Commission found:  There is a large subset of Single-Piece First-Class mail that serves essentially the same market as presort First-Class Mail, and that a worksharing relationship exists between the two groups;  The benchmark currently used to measure avoided costs for presort First-Class Mail is obsolete; and  Because Standard High Density and Standard Saturation Mail serve separate markets, the section 3622(e) limitations on workshare discounts do not apply to the rate relationship between those two categories. 23

RM2009-3: Order 536  The Commission also established guidelines to help determine the scope of worksharing activities. The Commission initiated Docket RM to consider proposals to identify appropriate benchmarks for measuring the costs avoided by worksharing and establish discounts in the future. 24

Worksharing Discounts RM2009-3: Order 536  On October 13, 2010 USPS appealed Order 536 to the United States Court of Appeals for the DC Circuit (case ) USPS and PRC briefs filed in February NPPC reply brief (as intervenor) filed May 4, 2011 (NPPC and USPS assert that W S discounts may not be determined across products; only within products) Oral Argument September 21 25

Societal Benefits of the US Postal Service  USO / Value of Societal Benefits in addition to access, what benefits does infrastructure offer?  The Commission is considering supplementing its 2008 Report on Universal Postal Service and the Postal Monopoly  6 “Social Value” studies conducted by 3 independent contractors were posted on the PRC website August 31 26

Upcoming: §708 Study  Joint PRC/USPS Periodical Study  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  No deadline in the law 27

PAEA §708 Study  Joint PRC/USPS Periodical Study  The joint study group so far has: 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. Developed a report draft outline.  The Commission anticipates publication of the final report to Congress soon. 28

PAEA §701 Study  PAEA Section 701 directs PRC to submit a report to the President and Congress, at least every five years, regarding how well the PAEA is operating and to recommend measures to improve the effectiveness and efficiency of postal laws  Deadline for first report: December 2011  A draft was transmitted to USPS for comment August 5; comments received September 16  Issued today; check “What’s New” at prc.gov 29

N Advisory Opinion: RAO Initiative  N2001-1: On July 27, 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 approximately 3650” of the 32,000 retail facilities in its network  The Commission is committed to providing an Advisory Opinion with all due diligence, as swiftly as possible (Chairman wrote to PMG June 8 recommending data useful for review in the anticipated AO request filing  Public invited to provide comments via PRC website 30

Advisory Opinion: “Retail Access Optimization Initiative”  Hearing September 8 for cross- examination of USPS witnesses Jim Boldt & Dean Granholm  Issuance of PRC findings: near Thanksgiving  PRC Advisory Opinions are not binding on USPS, however, USPS has incorporated AO recommendations in their processes 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

Proposed USPS Service Standards Now Proposed  Priority Mail: 1−3 days 1−3 days  First-Class Mail: 1−3 days 2−3 days  Standard Mail: 3−10 days 3−10 days  Periodicals: 1−9 days 2−9 days  Package Services: 2−8 days 2−8 days  Postal Service indicated they would request an Advisory Opinion in November 33

USPS Proposal Online  press-kits/our-future-network/study-list pdf -- A Facilities List press-kits/our-future-network/study-list pdf  press-kits/our-future-network/welcome.htm press-kits/our-future-network/welcome.htm -- Press Kit for the “Comprehensive Changes” Proposal 34

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  Flexible cost models & pricing 35

FY 2011 Outlook:  Gloomy  USPS anticipates ending FY 2011 with $9-10 B deficit. Also, as of June 30, 2011 it was $12.69 in debt to US Treasury  USPS has a statutory $15 B debt limit 36

Monday, 9/19/11 White House Proposal 37

White House Proposal  Restructure Retiree Health Benefit pre- funding in order to reduce near-year Postal payments  Provide USPS with a 2-year Federal Employees Retirement System employer contribution holiday to take into consideration the current $6.9 billion surplus in Postal contributions  Reduce USPS operating costs by giving USPS authority to reduce mail delivery from six days to five days 38

White House Proposal  Allow USPS to offer non-postal products and increase collaboration with state and local governments and  “Permit USPS to seek the modest one-time increase in postage rates it proposed a year ago” (5.6% exigent request)  These reforms would provide USPS with over $20 billion in cash relief over the next several years and in total would reduce the federal deficit by more than $10 billion over 10 years 39

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