Current Regulatory Concerns Mark Acton Postal Regulatory Commissioner April 13, 2010

Summary of Content USPS Plan: Envisioning America’s Future Postal Service Change in Frequency of Delivery: 5 days Exigent Rate Case Annual Compliance Determination Nature of Service Case: Facility Closings Postal/Nonpostal Litigation: USPS vs. PRC

Summary of Content International Issues Upcoming Issuances –Pension Cost Special Study –Joint PRC/USPS Periodical Study –USO/Value of Societal Benefits Cataloger Concerns Q & A

USPS: “Envisioning America’s Future Postal Service” March 2, Postal Service unveils plan –Concerted Government Affairs/Public Relations Initiative Mail volume will fall: 177 B pieces (2009) to 150 B (2020) No action -- cumulative shortfall of $238 billion by 2020

USPS: “Envisioning America’s Future Postal Service” As much as $123 billion in savings during that same time period through aggressive cost cutting and increased productivity Even so, “Estimated $115 billion shortfall will remain.”

USPS: “Envisioning America’s Future Postal Service” What is the USPS Action Plan? Further cost cutting and ramped up productivity, and Regulatory and legislative changes Restructure RHB payments and address overpayments to CSRS fund Adjust delivery days to “better reflect current mail volumes and customer habits”

USPS: “Envisioning America’s Future Postal Service” What is the USPS Action Plan? Continue to modernize customer access –provide more convenience to customers (USPS presence in grocery stores, pharmacies, retail centers) –Increase customer access through business partnerships, self- service kiosks and usps.com website Establish more flexible workforce –over 300,000 employees become eligible to retire in the coming decade –Accomplish workforce adjustment through attrition; not lay-offs

USPS: “Envisioning America’s Future Postal Service” What is the USPS Action Plan? Ensure prices of Market Dominant products are based on demand rather than capping prices for every class at the rate of inflation –Abandon the price-cap regulation of PAEA and replace with a strictly market driven pricing approach Permit USPS to introduce more new products consistent with its mission, so it can respond to customer needs and compete more effectively in marketplace

USPS: “Envisioning America’s Future Postal Service” What is the USPS Action Plan? Exigent price increase will be proposed effective in 2011 –More on that

Change in Delivery Frequency: 6-5 days March 30, 2010: USPS filed request with the Commission for an Advisory Opinion [39 U.S.C. 3661(c)] for the elimination of Saturday delivery “A change in frequency, not a change in service” –Discontinue Saturday residential and business delivery/collections –Post Offices usually open on Saturday remain open –No mail pick-up from blue collection boxes

Change in Delivery Frequency: 6-5 days Key Exceptions: –Delivery of Express Mail –Delivery to P.O. boxes –Remittance mail (bill payments) to P.O. boxes and Caller Service –Acceptance of drop-shipping of destination bulk mail continues –Firm hold outs (mail that businesses pick up at the Post Office) would be available

Change in Delivery Frequency: 6-5 days PRC is “watchdog agency” protecting USPS’s Universal Service Obligation to Nation One of the most significant changes the Postal Service has ever presented to the Commission Advisory Opinion could take 6 months or more (September/October, 2010) –No statutory deadline

Change in Delivery Frequency: 6-5 days Public, on-the-record PRC hearings and proceedings will analyze and cross-examine USPS proposal and supporting evidence During the process, mail users and interested members of the public may offer supporting or opposing views, both informally and as part of more formal, technical presentations

Change in Delivery Frequency: 6-5 days Field Hearings: The Commission will conduct as many as 6 field hearings –Dallas, Sacramento, Chicago, Memphis, Las Vegas, and Boston are among the cities under consideration for possible field hearing locations –Field hearings schedule: Posted on 04/27/2010 at Solicit public comments via our website –Response to date has been exceptional

An Exigent Rate Case (?) “ Exigency” has its root in Latin, and refers to a “demand” Exigence/or exigency: Demand, want, need, imperativeness. Something arising suddenly out of current events; any event or occasional combination of circumstances calling for an immediate remedy; a pressing necessity; a sudden and unexpected happening or an unforeseen occurrence or condition -- Black’s Law Dictionary 5 th Edition “exigency” has yet to be defined by the Commission

An Exigent Rate Case (?) Setting the cap: –The Commission determines the price cap for any 12-month period by calculating the ratio of two 12-month CPI 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

An Exigent Rate Case (?) CPI-U price-cap trend: 2.9% December 2007 (R2008-1cap) 3.8%December 2008 (R cap) 0.356%December % through February 2010 … please see –Prepared by Postal Regulatory Commission –Last Update: 3/18/2010

An Exigent Rate Case (?) On March 2, 2010 the Postmaster General suggested it would be necessary for USPS to file with the Commission for an exigent rate increase to take effect in January 2011 USPS customarily files rate adjustments in twice the required timeframe prior to implementation of new rates –Here, 90 days x 2 = 6 months –Near July, 2010 in this case

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

An Exigent Rate Case (?) PRC will establish a docket, provide for public comment and conduct a hearing on the record Interested parties are encouraged to participate on the record and to suggest relevant questions to the PRC that might be posed during the course of these hearings Commission will issue its decision within 90 days of the USPS filing –Deadline set by law

FY 2009 Annual Compliance Determination FY 2009 financial results call into question USPS future ability to continue to provide fundamental services Despite $4 billion in legislative relief from obligation to prepay RHB, the Postal Service ended FY 2009 with a $3.8 billion loss. –Postal Service anticipates losses near $7 billion in FY 2010 The economic recession and Internet substitution caused significant volume declines –but losses resulting from the rates charged for certain major classes of mail are indicative of structural problems as well

FY 2009 Annual Compliance Determination Decrease in mail volume of 25.6 billion pieces, or 13.5 percent, from FY 2008 –largest percent decrease since the Great Depression Second consecutive year of decline in Total Factor Productivity despite eliminating million workhours Decrease of 9.5 percent, $6.8 billion, in operating revenue 14 market dominant products and services failed to cover attributable costs –losing $1.7 billion in aggregate

FY 2009 Annual Compliance Determination $616 million loss from Standard Mail Flats –Which for 2nd year in a row, had a below-average price increase in May 2009 $205 million loss from Standard Mail NFMs and Parcels 30 workshare discounts exceed avoided costs: –17 justified by exceptions in the statute; and –13 not justified (must be realigned in next general market dominant price adjustment filing – the exigent case in this instance)

Advisory Opinion: USPS “Station and Branch Optimization Consolidation Initiative” USC 3661(c): The Commission shall not issue its opinion on any proposal until an opportunity for hearing on the record under sections 556 and 557 of title 5 has been accorded to the Postal Service, users of the mail, and an officer of the Commission who shall be required to represent the interests of the general public. The opinion shall be in writing and shall include a certification by each Commissioner agreeing with the opinion that in his judgment the opinion conforms to the policies established under this title Nature of Service Case: Facility Closings

Advisory Opinion: USPS “Station and Branch Optimization Consolidation Initiative” 2009 USPS: review more than 3,000 stations and branches nationwide for possible closure –USPS alone has the authority to close postal facilities, regulator’s interest is limited to due process USPS: As of February 2010 only 162 locations remain under review –This number does not rise to concern of national scope, but USPS plan is to be applied on a national scale

Nature of Service Case: Facility Closings Advisory Opinion: USPS “Station and Branch Optimization Consolidation Initiative” 2009 Hosted Field Hearings: –Independence, OH –Bronx, NY PRC: input from the public in hearings and written submissions before reaching its conclusions

Nature of Service Case: Facility Closings Advisory Opinion: USPS “Station and Branch Optimization Consolidation Initiative” 2009 Commission findings go to proper due process: –10 days advance customer notice insufficient limits opportunity for customer consultation –Inconsistent financial and operational analyses impair evaluations of facility closures and consolidations –Standardized review procedures should be developed and consistently applied nationwide to ensure adequate and efficient service levels and comply with statutory guidelines

Postal/Nonpostal Litigation: PRC vs. USPS USPS and PRC held differing views regarding some aspects of the postal/nonpostal categories of products and services as provided for in PAEA The agencies’ dispute centered on the PRC’s regulatory authority over non-postal services such as sale of philatelic items, product licensing, and leasing of property

Postal/Nonpostal Litigation: PRC vs. USPS Although the PRC had determined that the services should be allowed to continue, subject to the Commission’s regulation, the USPS challenged the PRC’s authority provided under PAEA On March 30, 2010 the U.S. Court of Appeals for the District of Columbia ruled in favor of the Commission’s interpretation of the law

Standard Mail Pricing Initiative “Summer Sale” The primary objective of the program is to generate incremental Standard Mail volume and revenue –USPS estimates volume will increase between 311 million and 1.1 billion in new pieces Key points: –Approved by PRC on April 7, 2010 –Incentive period is July 1 to September 30, 2010 –Rebate amount is 30% off applicable rate above baseline –Includes catalogs –Establishes a rulemaking to collect key data and review competing volume estimation methodologies

Standard Mail Pricing Initiative “Summer Sale” “Why include catalogs?” –PRC found inclusion of Standard Mail Flats within the 2010 Incentive Program consistent with the exercise of USPS pricing flexibility –USPS should explore opportunities to expand its incentive programs to include the maximum number of mailers –Inclusion of Standard Mail Flats in the program is consistent with the intent to design a program encouraging volume growth not only directly, but indirectly through additional mail resulting from discounted mail –Including Standard Mail Flats and Nonprofit products also provides opportunity for USPS to measure response of additional types of mailers to short-term price changes

Standard Mail Pricing Initiative “Summer Sale” The wide variation in growth patterns for individual mailers from year to year due to both cyclical and secular reasons suggests the difficulty in developing a formula to avoid anyhow volume qualifying for a discount Further analysis of this program will assist in determining its viability and in designing future programs

International Mail ACD findings for FY2009: –some international products not covering cost – need to improve cost coverage without sacrificing service quality April 2010 PRC participation in Universal Postal Union (UPU) meetings –State Department has lead; PRC key member of U.S. delegation Key issue is terminal dues (payments for letter mail among postal administrations) –need to improve cost coverage for inbound mail (FY2009: USPS $105 M loss) –ensure affordable international rates/gradual rate increases

International Mail Improving quality of service for international letters and surface parcels through pay for performance –Linking delivery payments to service quality –UPU is working to measure letter mail service quality for all 191 members by 2017 PRC Initiated 2009 Postal Regulator Dialogue –Regulators share in detail issues of mutual interest: USO / rate setting / quality of service –2010 Postal Regulator Dialogue tentatively scheduled in China For more info, please see the “International” webpage at

PRC Review of Postal Service Retiree Health Benefit Fund Liability Background: Office of Personnel Management (OPM) and USPS Office of Inspector General (OIG) each have developed estimates of Retiree Health Benefit Costs: –Both used reasonable financial principles –Each support different actuarial payment schedules –Estimates assumed different inflation trend rates. Both used static trend rates (not more commonly used graded trend rate) –The studies used different estimates of USPS workforce –Finally, the OPM and OIG estimates reflected different rates of return on assets –Estimates differed by $57 billion in terms of full liability

PRC Review of Postal Service Retiree Health Benefit Fund Liability Request by Chairman Stephen F. Lynch, Subcommittee on Federal Workforce, Postal Service and the District of Columbia, Committee on Oversight and Government Reform, U.S. House of Representatives –Requested on June 15, 2009 –PRC presented its report to the Subcommittee July 30, 2009 –Consultant was Mercer Health and Benefits LLC Annual Payments to Achieve 73% Funded Status: –OPM:$5.5 billion –OIG:$1.7 billion –PRC:$3.4 billion

Upcoming Issuances: Special Study (SS2010-1) USPS CSRS Pension Funding Background: USPS Office of Inspector General (OIG) Report released January estimates USPS overpaid CSRS by $75 B IG estimates that if the overcharge was used to prepay the Postal Service’s health benefits fund, it would fully meet all of the Postal Service’s accrued retiree health care liabilities and eliminate the need for the required annual payments of more than $5 B –“Also, the health benefits fund could immediately start meeting its intended purpose -- paying the annual payment for current retirees, which was $2 billion in 2009”

Upcoming Issuances: Special Study (SS2010-1) USPS CSRS Pension Funding 39 USC 802(c): The Commission, upon request of USPS, promptly procures service of an actuary qualified to evaluate pension obligations to conduct a review in accordance with generally accepted actuarial practices and principles and provide a report to the Commission containing the results of the review

Upcoming Issuances: Special Study (SS2010-1) USPS CSRS Pension Funding Per USPS request of February 23, 2010, PRC established Docket SS to conduct a review of the Civil Service Retirement System (CSRS) pension liability of USPS –PRC received 3 bids in response to recent solicitation –PRC will review actuary’s report, comment as appropriate, and submit findings to USPS, Congress and OPM. Office of Personnel Management (OPM) responsible for calculating the Postal Service’s CSRS pension liability

Upcoming Issuances: 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 –There is no deadline

Upcoming Issuances: 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 in FY 2010

Upcoming Issuances: USO / Value of Societal Benefits The Commission is considering supplementing its 2008 Report on Universal Postal Service and the Postal Monopoly –PRC has engaged a consultant to assess the range of societal benefits of Postal Service –The consultant targeted eight broad categories and offers metrics to quantify societal benefits in those categories –This provides a possible outline for a more in-depth investigation estimating the “societal” value aspect of the universal service obligation to our Nation

Cataloger Concerns Percentage Rate Changes FY 2008 FY 2009 First-Class Presort Flats Standard Flats High Density/Saturation Flats & Parcels Carrier Route Flats and Parcels

Cataloger Concerns Mailers expend lots of energy and resources making mailpieces accommodate USPS's sorting equipment. –Many of you turned addresses “upside down” in preparation for FSS Can IMB help gain efficiencies for catalog mailings? Strategies in dealing with this include: –co-mailing to create more carrier-route bundles –switching mail from sacks to pallets –and converting mailings to formats that comply with the "droop" test

Cataloger Concerns “Your Catalog Advocate!” -- ACMA

On March 2, 2010, the Postal Service unveiled a thoughtful and comprehensive ten-year plan to address what would otherwise be ever-growing deficits. The Commission looks forward to participating actively with the public and Congress in the exploration of the Postal Service’s retiree healthcare benefit funding, pension funding, strategies to reduce costs and improve customer service, and opportunities to expand products and services. We will also continue to provide regulatory oversight of the Postal Service on a monthly, quarterly and annual basis. -- Chairman’s letter, FY 2009 Annual Compliance Determination