[Federal Register Volume 83, Number 31 (Wednesday, February 14, 2018)]
[Proposed Rules]
[Pages 6758-6788]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-02932]
[[Page 6757]]
Vol. 83
Wednesday,
No. 31
February 14, 2018
Part III
Postal Regulatory Commission
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39 CFR Part 3015
Competitive Postal Products; Proposed Rule
Federal Register / Vol. 83 , No. 31 / Wednesday, February 14, 2018 /
Proposed Rules
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POSTAL REGULATORY COMMISSION
39 CFR Part 3015
[Docket No. RM2017-1; Order No. 4402]
Competitive Postal Products
AGENCY: Postal Regulatory Commission.
ACTION: Proposed rulemaking.
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SUMMARY: The Commission is proposing to amend its existing rule related
to the minimum amount that competitive products as a whole are required
to contribute to institutional costs annually. The proposed rule
changes were developed during the Commission's second review of whether
the appropriate share level should be retained, eliminated, or
modified. The Commission invites public comment on the proposed rule.
DATES: Comments are due: April 16, 2018.
ADDRESSES: Submit comments electronically via the Commission's Filing
Online system at http://www.prc.gov. Those who cannot submit comments
electronically should contact the person identified in the FOR FURTHER
INFORMATION CONTACT section by telephone for advice on filing
alternatives.
FOR FURTHER INFORMATION CONTACT: David A. Trissell, General Counsel, at
202-789-6820.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
II. Procedural History
III. Background
IV. Commission Analysis
V. Section 703(d) of the PAEA
VI. Comments and Analysis
VII. Proposed Rules
VIII. Administrative Actions
IX. Ordering Paragraphs
I. Introduction
In this proceeding, the Commission conducts its second 39 U.S.C.
3633(b) review of the appropriate share that competitive products
contribute to institutional costs. See 39 U.S.C. 3633(b). The purpose
of the Commission's review is to determine whether the existing 5.5-
percent appropriate share should be retained, modified, or eliminated
after considering all relevant circumstances. See id.; see also 39 CFR
3015.7(c).
Postal Service products are characterized as either market dominant
or competitive. 39 U.S.C. 3642(b)(1). Market dominant products are
those products over which the Postal Service exercises sufficient
market power to effectively set prices substantially above costs, raise
prices significantly, decrease quality, or decrease output, without
risk of losing a significant level of business to other firms offering
similar products.\1\ Competitive products consist of all other Postal
Service products.\2\ All Postal Service costs are classified as either
attributable or institutional. Attributable costs are costs that are
assigned to specific products on the basis of reliably identified
causal relationships.\3\ Institutional costs are residual costs that
cannot be specifically attributed to either market dominant or
competitive products through reliably identified causal
relationships.\4\
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\1\ Id. Examples of market dominant products include products in
the First-Class Mail, USPS Marketing Mail, and Periodicals classes.
\2\ Id. Examples of competitive products include Priority Mail,
Priority Mail Express, and First-Class Package Service.
\3\ Attributable costing was most recently considered in Docket
No. RM2016-2, wherein the Commission examined the concept of
reliably identifiable causally related costs and expanded the scope
of Postal Service cost attribution. See generally Docket No. RM2016-
2, Order Concerning United Parcel Service, Inc.'s Proposed Changes
to Postal Service Costing Methodologies (UPS Proposals One, Two, and
Three), September 9, 2016 (Order No. 3506). This case is currently
pending before the United States Court of Appeals for the District
of Columbia Circuit.
\4\ Examples of institutional costs include the Postmaster
General's salary, building project expenses, and area administration
expenses.
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In this Notice of Proposed Rulemaking, the Commission proposes that
a formula be used to calculate the minimum amount that competitive
products as a whole are required to contribute to institutional costs
annually (i.e., the appropriate share). As discussed in the sections
that follow, the Commission proposes to modify the appropriate share
based on its analysis of all relevant circumstances in accordance with
39 U.S.C. 3633(b).
II. Procedural History
On November 22, 2016, the Commission issued an Advance Notice of
Proposed Rulemaking establishing the instant docket, appointing a
Public Representative, and providing interested persons with an
opportunity to comment on the Commission's examination of the
appropriate share.\5\
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\5\ Advance Notice of Proposed Rulemaking to Evaluate the
Institutional Cost Contribution Requirement for Competitive
Products, November 22, 2016 (Order No. 3624). The Advance Notice of
Proposed Rulemaking to Evaluate the Institutional Cost Contribution
Requirement for Competitive Products was published in the Federal
Register on November 29, 2016. See 81 FR 85906.
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A. Summary of Filings
The Postal Service, the Public Representative, Amazon Fulfillment
Services, Inc. (Amazon), the American Catalog Mailers Association
(ACMA), Former Utility Regulators (FUR), the Greeting Card Association
(GCA), the National Association of Letter Carriers, AFL-CIO (NALC), the
Association for Postal Commerce (PostCom), Stamps.com, United Parcel
Service, Inc. (UPS), and a collective group of market dominant mailers
and competitive shippers filed initial comments.\6\ In addition,
representatives \7\ for Amazon and UPS filed declarations supporting
the initial comments.
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\6\ The collective group of mailers includes the Parcel Shippers
Association (PSA), Alliance of Nonprofit Mailers, American Catalog
Mailers Association, Continuity Shippers Association, Data &
Marketing Association, Envelope Manufacturers Association, National
Association of Presort Mailers, National Newspaper Association, PSI
Systems, and Stamps.com (collectively ``Market Dominant Mailers and
Competitive Shippers'' (MDMCS)). Parties that make up MDMCS are
organizations that represent market dominant mailers, competitive
product shippers, or users of both market dominant and competitive
products. MDMCS Comments at 1.
\7\ The Amazon representative was John C. Panzar (Panzar), and
the UPS representative was J. Gregory Sidak (Sidak).
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Business Optimization Services (BOS), eBay, Inc. (eBay), the
National Postal Policy Council (NPPC), National Association of Presort
Mailers (NAPM), GCA, MDMCS, the Postal Service, the Public
Representative, Amazon, and UPS filed reply comments. In addition,
representatives for Amazon and UPS filed declarations supporting the
reply comments.\8\ Appendix A contains the full list of comments, reply
comments, related citations, and related filings.\9\
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\8\ The Amazon representative was Panzar, and the UPS
representatives were Sidak and Dennis W. Carlton (Carlton).
\9\ Federal Express Corporation (FedEx) filed comments on
January 23, 2017. Comments of Federal Express Corporation, January
23, 2017. On January 26, 2017, FedEx filed a motion to withdraw its
initial comments. See Motion to Withdraw Comments, January 26, 2017.
This motion is granted. FedEx's comments, filed January 23, 2017,
were not considered by the Commission as part of its review in this
docket.
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Several motions were filed by Amazon and UPS between January 4,
2017, and February 9, 2017, relating to access to non-public
materials.\10\ In addition, on January 26, 2018, UPS filed a motion to
supplement the record in this docket.\11\ Appendix B provides a
[[Page 6759]]
list of motions and Commission orders on motions relating to access to
non-public information filed in this proceeding.
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\10\ Although some of these motions were filed in a separate
docket, the movants specifically asserted that they intended to use
the requested materials for purposes of the instant docket as well.
\11\ United Parcel Service, Inc.'s Motion to Supplement Record,
January 26, 2018 (Motion to Supplement Record). In its Motion to
Supplement Record, UPS requests that the record in this docket be
supplemented to include a portion of an informal transcript from a
DC Circuit appellate case (No. 16-1354) in which UPS sought
appellate review of Commission Order No. 3506 related to
attributable costing. Motion to Supplement Record at 1-2. Both
Amazon and PSA filed oppositions to UPS's Motion to Supplement
Record. See Answer of Amazon.com Services, Inc., to Motion of United
Parcel Service, Inc. to Supplement Record, February 2, 2018;
Response of Parcel Shippers Association to United Parcel Service,
Inc.'s Motion to Supplement Record, February 2, 2018. The Commission
denies the Motion to Supplement Record at this time. UPS or any
other interested party may raise the informal transcript, as well as
any related arguments concerning it, in timely filed comments in
response to this Notice of Proposed Rulemaking.
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B. Organization of Discussion
Section III of this Notice of Proposed Rulemaking provides an
overview of 39 U.S.C. 3633 and a discussion of the Commission's two
previous decisions concerning the appropriate share that competitive
products are required to contribute to institutional costs.
Section IV discusses the proposed change to the appropriate share
requirement. The Commission explains its proposed formula-based
approach and analyzes its proposed formula pursuant to the requirements
of 39 U.S.C. 3633(b).
In section V, the Commission provides an analysis of the relevant
Federal Trade Commission (FTC) report pursuant to section 703(d) of the
Postal Accountability and Enhancement Act (PAEA), Public Law 109-435,
120 Stat. 3198 (2006).\12\
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\12\ As discussed in greater detail below, uncodified section
703 of the PAEA directs the Commission, when revising regulations
under 39 U.S.C. 3633, to consider subsequent events that affect the
continuing validity of an FTC report that analyzed the Postal
Service's economic advantages and disadvantages in the competitive
product market when compared to private competitors. See PAEA, 120
Stat. 3244; see also Federal Trade Commission, Accounting for Laws
that Apply Differently to the United States Postal Service and its
Private Competitors, December 2007 (FTC Report), available at:
https://www.ftc.gov/sites/default/files/documents/reports/accounting-laws-apply-differently-united-states-postal-service-and-its-private-competitors-report/080116postal.pdf.
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Section VI discusses comments received in this docket that have not
been addressed elsewhere in this Notice of Proposed Rulemaking,
organized by whether the commenter proposed that the current 5.5-
percent appropriate share be increased, maintained, or eliminated.
Sections VII and VIII explain the proposed changes to the rules and
take administrative steps in order to allow for comments on the
proposed changes by interested persons.
III. Background
A. Relevant Statutory Requirements
The PAEA requires that competitive products collectively cover what
the Commission determines to be an appropriate share of the Postal
Service's institutional costs. 39 U.S.C. 3633(a)(3). The Commission is
required to revisit the appropriate share regulation at least every 5
years to determine if the contribution requirement should be ``retained
in its current form, modified, or eliminated.'' 39 U.S.C. 3633.
In making such a determination, the Commission is required to
consider ``all relevant circumstances, including the prevailing
competitive conditions in the market, and the degree to which any costs
are uniquely or disproportionately associated with any competitive
products.'' Id. Thus, by its terms, section 3633(b) provides three
separate elements that the Commission must consider during each review:
(1) The prevailing competitive conditions in the market; (2) the degree
to which any costs are uniquely or disproportionately associated with
competitive products; and (3) all other relevant circumstances.
B. Previous Commission Decisions
1. Docket No. RM2007-1
In promulgating its initial competitive product rules following the
enactment of the PAEA, the Commission set the minimum competitive
product contribution level at 5.5 percent.\13\ In doing so, the
Commission considered various proposals for how best to quantify the
appropriate share, including ``equal unit contribution,'' ``equal
percentage markup,'' ``markup of competitive products' attributable
costs,'' and ``percentage of revenues.'' \14\ The Commission ultimately
determined that basing competitive products' contribution on a
percentage of total institutional costs was more easily understood and
mirrored the directive of section 3633(a)(3). Id. The Commission also
determined that the appropriate share is a floor, or minimum amount,
with ``the hope (and expectation) . . . that competitive products will
generate contributions in excess of the floor.'' Id. at 72.
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\13\ See Docket No. RM2007-1, Order Establishing Ratemaking
Regulations for Market Dominant and Competitive Products, October
29, 2007, at 91, 138 (Order No. 43).
\14\ See Docket No. RM2007-1, Order Proposing Regulations to
Establish a System of Ratemaking, August 15, 2007, at 70 (Order No.
26).
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Although the Commission projected, based on the recommended rates
at the time, that competitive products would contribute 6.9 percent to
institutional costs in test year 2008,\15\ the Commission set the
minimum contribution level lower due to the differences between the old
ratemaking system and the new one being implemented pursuant to the
PAEA. Order No. 26 at 70-72. In addition, the Commission considered the
risks inherent in a mandatory contribution level. At the time, the
Commission considered that setting it too high could hinder the Postal
Service's flexibility to compete, while setting it too low could give
the Postal Service an artificial competitive advantage. Id. at 73.
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\15\ Under the system of ratemaking in place prior to the PAEA,
rates were set to allow the Postal Service to break even over a
series of years. As part of those pre-PAEA rate cases, the revenue
necessary for the Postal Service to break even in a single year was
calculated and rates were designed to meet that revenue requirement.
Those break-even years were called ``test years.'' See Docket No.
RM2017-3, Order on the Findings and Determination of the 39 U.S.C.
3622 Review, December 1, 2017, at 24 (Order No. 4257).
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Ultimately, the Commission considered the amount that competitive
products had historically contributed to the Postal Service's
institutional costs as a reasonable means of quantifying the
appropriate share at that time. Id. at 74. The Commission estimated
that competitive products' contribution to total institutional costs
had been 5.4 percent and 5.7 percent in the two previous fiscal years,
and it set the appropriate share at 5.5 percent. Id. at 73; Order No.
43 at 91.
2. Docket No. RM2012-3
The Commission completed its first review of the appropriate share,
required by section 3633(b), in Docket No. RM2012-3.\16\ The Commission
first addressed the factors enumerated by section 3633(b), including
the prevailing competitive conditions in the market and the degree to
which any costs were uniquely or disproportionally associated with
competitive products, followed by a discussion of other relevant
circumstances. See 39 U.S.C. 3633(b). The Commission ultimately
determined that the minimum appropriate share should be maintained at
5.5 percent. Order No. 1449 at 1-2.
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\16\ See Docket No. RM2012-3, Order Reviewing Competitive
Products' Appropriate Share Contribution to Institutional Costs,
August 23, 2012 (Order No. 1449).
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a. Prevailing Competitive Conditions
The Commission found three ``prevailing competitive conditions in
the market'' relevant to its analysis: (1) Whether any evidence existed
suggesting that the Postal Service had benefitted from a competitive
advantage with respect to competitive products; (2) changes to the
Postal Service's market share with respect to competitive products
between 2007 and 2011; and (3) changes to the market and to the Postal
Service's competitors between 2007 and 2011. Id. at 14.
With regard to competitive advantage, the Commission first noted
the FTC
[[Page 6760]]
Report which had concluded that, with regard to competitive products,
the Postal Service operated at a net competitive disadvantage relative
to its competitors.\17\ Next, the Commission concluded that there was
not any evidence of predatory pricing by the Postal Service.\18\
Finally, the Commission noted that one of the PAEA's reforms had been
to make federal antitrust law generally applicable to the Postal
Service, but no antitrust-related action had been taken against the
Postal Service. Id. at 16.
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\17\ Id. at 14-15; see FTC Report at 64. The FTC Report is
discussed in more detail in section V, infra.
\18\ Order No. 1449 at 16. The Postal Service would be engaging
in predatory pricing if it set its competitive services' prices
below their marginal costs. See id. at 15. However, the Commission
found that the Postal Service's ability to engage in such behavior
is effectively mitigated by 39 U.S.C. 3633(a)(2), which requires
each competitive product to cover its attributable costs. Id.
Moreover, the Commission observed that because the appropriate share
requirement assigns a portion of the Postal Service's fixed costs to
competitive products collectively, it effectively works to impose an
additional level of protection against anti-competitive pricing by
forcing the Postal Service to set prices at levels capable of
generating sufficient revenue to cover those costs. Id.
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The second market condition considered by the Commission was the
Postal Service's share of the market. Id. The Commission determined
that there had not been a significant increase in the Postal Service's
market share between Fiscal Year (FY) 2007 and FY 2011, which minimized
concerns about any artificial advantage the Postal Service might have
over its competitors. Id. at 18.
The third and final market condition considered by the Commission
was changes to the market and the Postal Service's competitors since
the initial appropriate share level was set in 2007. Id. The Commission
noted that the package delivery market was expected to expand in the
coming years, and that a significant competitor (DHL) had exited the
market. Id. Nevertheless, the Commission ultimately determined that,
although these market changes had provided the Postal Service with an
opportunity to expand its competitive services, the Postal Service had
continued to price its competitive products in such a way that they
contributed more than the required 5.5 percent towards institutional
costs. Id. at 19. As a result, the Commission found that there was no
evidence that changed circumstances had provided the Postal Service
with an unfair advantage. Id.
b. Unique or Disproportionate Costs
In considering the second element of section 3633(b) related to
unique or disproportionate costs, the Commission found that there were
no unique or disproportionate costs associated with competitive
products that would affect the appropriate share. Id. at 14 n.14.
c. Other Relevant Circumstances
The Commission also discussed multiple factors that it considered
relevant to its review of the appropriate share.
First, the Commission addressed the contribution level of
competitive products to institutional costs over the preceding 5 years.
Id. at 19-21. The Commission determined that between 2007 and 2011 the
contribution level had generally increased, ranging from 5.54 percent
to 7.82 percent of total institutional costs, which in dollar terms
represented a 29-percent increase since FY 2007. Id. at 20-21.
Therefore, the Commission found that the 5.5-percent appropriate share
requirement had not ``hampered'' the Postal Service in pricing its
competitive products. Id. at 21.
The Commission then considered changes to competitive product
offerings and the mail mix that occurred over the preceding 5 years.
The two major changes that the Commission identified were the transfer
of both commercial First-Class Mail Parcels and Commercial Standard
Mail Parcels to the competitive product list.\19\ Despite changes to
competitive product offerings, the Commission determined that the 5.5-
percent appropriate share continued to accurately reflect the
proportion of institutional costs that should be borne by competitive
products. Id. at 23.
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\19\ Id. at 21-22. The Commission determined that as a result of
these transfers, total competitive revenue and volume had increased
by 55.8 percent and 21.4 percent, respectively. Id. at 22. As a
share of total volume, these transfers increased competitive
products' share from 0.8 percent to 1.6 percent. Id. The Commission
recognized the possibility that should competitive product volumes
increase substantially in relation to market dominant volumes, the
Commission could consider modifying the appropriate share ``under
the right circumstances.'' Id. at 22-23.
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The final factor addressed by the Commission was the level of
uncertainty regarding the Postal Service's business and financial
condition in FY 2012. Id. Specifically, two proposals by the Postal
Service were pending at that time which proposed to alter certain
service standards and restructure aspects of the Postal Service's
retail network. Id. This, combined with the Postal Service's
``unsustainable'' financial performance in the most recently available
quarterly data, led the Commission to conclude that the resolution of
these uncertainties had the potential to affect the relationship of
attributable costs to institutional costs, thus affecting the
appropriate share contribution requirement in the future. Id.
In concluding its first 5-year review, the Commission determined
that ``[t]aken together, the totality of these relevant considerations
support[ed] a conclusion that retaining the . . . appropriate share
contribution level [at 5.5 percent] [was] appropriate at [that] time.''
Id. at 24.
IV. Commission Analysis
A. Change in Approach to Setting Competitive Products' Appropriate
Share
In Docket No. RM2007-1, the Commission used the historical
contribution of competitive products to set the initial appropriate
share percentage. In Docket No. RM2012-3, the Commission examined the
requirements of 39 U.S.C. 3633(b) in an analysis that blended
qualitative and quantitative factors, the result of which led the
Commission to maintain the minimum appropriate share at 5.5 percent. In
this review of the appropriate share, the Commission analyzes the
requirements of 39 U.S.C. 3633(b) and proposes to change its approach
to setting the minimum appropriate share by using a formula that would
annually update the required amount based on market conditions.
When an agency action represents a change in policy or approach,
three criteria must be met in order to justify the change: (1) The
agency must acknowledge that it is changing its policy; (2) the agency
must provide a reasoned explanation for the new policy; and (3) the
policy must be permissible under the controlling statute.\20\ As the
Commission has already acknowledged that a formula-based approach
represents a change in the approach to setting the appropriate share,
the Commission now turns to its explanation for the changed approach.
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\20\ Fed. Commc'n Comm'n v. Fox Television Stations, Inc., 556
U.S. 502 (2009). The Court reviewed this issue after the FCC
expanded what could be considered actionably indecent language under
18 U.S.C. 1464 and then enforced the expanded policy, which was
later challenged by broadcasters.
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At the time the appropriate share was initially set in Docket No.
RM2007-1, the postal regulatory system was undergoing substantial
changes as a result of the enactment of the PAEA. In setting the
appropriate share at 5.5 percent, the Commission selected an ``easily
understood'' percentage based on competitive products' historical
contribution to institutional costs
[[Page 6761]]
during the previous 2 fiscal years. Order No. 26 at 70, 73. The
Commission was also ``mindful of the risks of setting [the appropriate
share] too high, particularly at the outset of the new system of
regulation.'' Id. at 73.
Five years later, in Docket No. RM2012-3, the Commission maintained
the appropriate share at a static 5.5 percent. At that time, the Postal
Service had only offered competitive products for 5 years. Without any
evidence that the Postal Service was benefiting from a competitive
advantage or that the market was not competitive, the Commission
determined maintaining the appropriate share at 5.5 percent was the
correct course. Order No. 1449 at 16-19.
Relevant circumstances have changed since the Commission's last
review and over the 11 years since the enactment of the PAEA. The
economy has recovered since the global financial crisis of the late
2000s, and no major dockets regarding the nature of postal services
(i.e., N cases) are currently pending before the Commission, as they
were in Docket No. RM2012-3. As discussed in section IV.C, infra, the
Postal Service's market share, competitive volumes, and competitive
contribution as a percentage of institutional costs have increased
steadily since 2007. As a result, the Commission determines that the
static 5.5-percent appropriate share should be modified to better
reflect the modern competitive market. Given that the Commission now
has over 11 years of data related to competitive products, a formula-
based approach that more directly, accurately, and frequently
incorporates prevailing competitive conditions in the market and other
relevant circumstances can be constructed and applied.
The proposed change in approach is also permissible under title 39.
As noted above, 39 U.S.C. 3633(a)(3) provides that the Commission shall
promulgate and periodically revise the regulations that ``ensure that
all competitive products collectively cover what the Commission
determines to be an appropriate share of the institutional costs of the
Postal Service.'' 39 U.S.C. 3633(a)(3). In addition, the Commission
must review the appropriate share at least every 5 years, taking into
consideration the three elements set forth in 39 U.S.C. 3633(b).\21\
Section 3633(a)(3) establishes the Commission's authority related to
setting the appropriate share, while subsection (b) outlines the
frequency of the Commission's review of the appropriate share, as well
as the elements the Commission must consider as part of its review.
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\21\ See 39 U.S.C. 3633(b). The frequency of Commission review
was first addressed in Docket No. RM2012-3, where the Commission
stated that its ability to review the appropriate share more
frequently than every 5 years allows the Commission to modify the
appropriate share when there is a relevant change in circumstances.
Docket No. RM2012-3, Order Granting, in Part, Motion of the Parcel
Shippers Association to Extend the Period for Comments, March 7,
2012, at 4 (Order No. 1276).
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The plain language of section 3633 reflects an express delegation
of authority to the Commission, by Congress, to determine what share of
institutional costs is appropriate for competitive products to cover.
Furthermore, Congress intended for the Commission to have flexibility
with regard to the use of a specific approach.\22\ The statute does not
require the Commission to use any specific approach. The only
limitation that is placed on the Commission's determination is that it
must consider the three distinct elements described in section 3633(b).
Section 3633(b) also plainly contemplates that the appropriate share
could change because it specifies that the Commission should determine
if the appropriate share should be retained, modified, or eliminated in
each review pursuant to section 3633(b).
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\22\ The Commission's view with regard to the level of
flexibility intended by Congress is echoed by the Public
Representative. In comparing various versions of the legislation
that ultimately became the PAEA, the Public Representative states
that ``although the earlier standard was revised from `reasonable
contribution' to `appropriate share,' it is fair to conclude the
drafters did not intend for the Commission to follow a particular
approach when establishing the contribution standard.'' PR Comments
at 5. Several other commenters use their views of Congress's intent
and the legislative history to support their positions. See, e.g.,
Postal Service Comments at 2-4; Panzar Decl. at 3-5; UPS Reply
Comments at 6-8, 12-13; Sidak Reply Decl. at 7-10.
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Although there is no committee or conference report issued for the
bill that was enacted into law, the legislative history underlying the
PAEA confirms the plain meaning interpretation of section 3633. The
PAEA was the product of blending different versions of postal reform
legislation authored by the House of Representatives and the Senate.
Drafts between 2000 and 2005 all included the same conflicting
language: House versions of the bill would have required competitive
products to make ``a reasonable contribution'' to institutional costs,
while Senate versions of the bill would have required competitive
products to cover ``their share'' of institutional costs.\23\
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\23\ See, e.g., H.R. 4341, 108th Cong. at 15 (2004); S. 2468,
108th Cong. at 121 (2004); S. 662, 109th Cong. at 145 (2005).
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The committee report accompanying H.R. 22, the House of
Representatives' 2005 postal reform bill, noted that ``the requirement
that competitive products collectively make a reasonable contribution
to overhead'' was a ``broad standard'' which contained ``inherent
flexibility,'' and that the standard was ``not intended to dictate a
particular approach that the [Commission] should follow.'' \24\
Although S. 2468, the Senate's 2004 postal reform bill, used the phrase
``their share,'' the accompanying committee report explained that for
the attribution of competitive product costs, including institutional
costs, ``the technical decision of what cost analysis methodologies are
sufficiently reliable at any given time to form the basis for
attribution should be left to the [Commission].'' \25\ Both committee
reports imply that the House and the Senate intended to provide the
Commission with some decision-making flexibility with regard to the
chosen approach. The blended result of these versions reflected the
common view of substantial Commission discretion, with the PAEA's
requirement that ``all competitive products collectively cover what the
Commission determines to be an appropriate share of the institutional
costs of the Postal Service.'' See 39 U.S.C. 3633(a)(3).
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\24\ H.R. Rep. No. 109-66, pt. 1, at 49 (2005); see H.R. 22,
109th Cong. (2005).
\25\ S. Rep. No. 108-318 at 9 (2004); S. 2468, 108th Cong. at
121 (2004).
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Below, the Commission discusses the two major components of its
proposed formula-based approach, explains all other terms in the
formula, and describes how the formula would function in order to
calculate the appropriate share. Following that, the Commission
addresses how its formula-based approach satisfies the elements of
section 3633(b).
B. Formula-Based Approach
As indicated above, due to changes in the market and an increase in
the availability and accessibility of information over the last 11
years, the Commission is proposing the regular application of a
formula-based approach to setting the appropriate share. This approach
uses two components to annually capture changes in the market and the
Postal Service's position in that market: the Postal Service Lerner
Index and the Competitive Market Output.
1. Postal Service Lerner Index
Section 3633(b) requires the Commission to consider ``the
prevailing competitive conditions in the market''
[[Page 6762]]
as part of its review of the appropriate share. 39 U.S.C. 3633(b). The
prior Commission decision relating to this requirement focused on a
number of considerations, including: existence (or nonexistence) of
evidence suggesting the Postal Service has benefitted from a
competitive advantage with respect to its competitive products, changes
to the Postal Service's market share since the previous review, and
changes to the competitive market and Postal Service's competitors
since the previous review. See section III.B.2, supra. Each
consideration is directed at ascertaining the Postal Service's market
power in the competitive market.\26\
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\26\ It is important to note that the role of market power under
section 3633(b) is similar to, but distinct from, the market power
analysis that the Commission conducts under section 3642 of the
PAEA. Under section 3642, the Commission is required to determine if
an individual product should be classified as market dominant by
considering whether ``the Postal Service exercises sufficient market
power that it can effectively set the price of such product
substantially above costs, raise prices significantly, decrease
quality, or decrease output, without risk of losing a significant
level of business to other firms offering similar products.'' 39
U.S.C. 3642(b)(1). The analysis that the Commission conducts in such
cases involves identifying a relevant market for the product in
question and then identifying reasonably interchangeable substitutes
for that product. See, e.g., Docket No. MC2013-57 and CP2013-75,
Order Denying Request, December 23, 2014 (Order No. 2306); Docket
No. MC2015-7, Order Denying Transfer of First-Class Mail Parcels to
the Competitive Product Category, August 26, 2015 (Order No. 2686),
remanded, 842 F.3d 1271 (D.C. Cir. 2016); Docket No. MC2015-7, Order
Conditionally Approving Transfer, July 20, 2017 (Order No. 4009).
The role of market power under section 3633(b) is focused not on
whether the Postal Service would face effective competition in the
offering of a single product, but on the Postal Service's level of
market power in offering competitive products generally. As such, it
requires a broader view of market power than the inquiry under
section 3642.
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Market power arises when a competitor in the market: (1) Can
profitably set prices well above its costs and (2) enjoys some
protection against entry or expansion by other competitors that would
normally erode such prices and profits.\27\ With the enactment of the
PAEA, Congress sought to ensure a ``level playing field'' between the
Postal Service and its competitors as a means of preserving
competition.\28\ Evaluating market power allows the Commission to
assess whether competition is being preserved and whether the Postal
Service possesses a competitive advantage.
---------------------------------------------------------------------------
\27\ Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law, Vol.
IIB, at 109 (4th ed. 2014) (Areeda & Hovenkamp).
\28\ See, e.g., H.R. Rep. No. 109-66 at 44 (``Under the [PAEA],
the Postal Service will compete on a level playing field, under many
of the same terms and conditions as faced by its private sector
competitors . . . .''); S. Rep. No. 108-318 at 27 (2004) (``[S]teps
need to be taken to level the playing field between the Postal
Service and its competitors in the competitive product market.'').
---------------------------------------------------------------------------
In previous reviews, the Commission analyzed prevailing competitive
conditions in the market and ascertained the Postal Service's market
power using a qualitative approach. However, an alternative method of
gauging the Postal Service's market power is quantitatively through a
Lerner index.
A Lerner index measures market power for a given firm by measuring
how far that firm's price is from its marginal cost, which is the cost
of producing one additional good at a given level of volume.\29\
Effectively, a Lerner index measures the profitability of an individual
firm. As a firm's marginal cost increases relative to its price, the
Lerner index will decrease, indicating that the firm's price is closer
to marginal cost, and the firm possesses less market power. As a firm
increases its price relative to its marginal cost, the Lerner index
will increase, indicating that the firm is pricing further from
marginal cost and possesses more market power. Thus, a Lerner index is
a useful tool for measuring market power because it reflects the extent
to which a firm is pricing above marginal costs.
---------------------------------------------------------------------------
\29\ See Jeffrey Church & Roger Ware, Industrial Organization: A
Strategic Approach 29 (2000) (Church & Ware), available at: https://works.bepress.com/jeffrey_church/23/.
---------------------------------------------------------------------------
The equation below represents the formula for a general Lerner
index: \30\
---------------------------------------------------------------------------
\30\ The mathematical development of this index may be found in
Church & Ware. See Church & Ware at 31-36.
[GRAPHIC] [TIFF OMITTED] TP14FE18.005
Because the Postal Service is a multi-product firm, it does not
have a single marginal cost and price; rather, it consists of many
products, each with its own marginal cost and set of prices. Therefore,
to create a Lerner index specific to the Postal Service's competitive
products, the general formula must be adapted to capture all
competitive products. To do so, the Commission develops a Lerner index
for the Postal Service's competitive products as a whole using the
average unit volume-variable cost and revenue-per-piece for all
competitive mail, as described below.
For the marginal cost variable, marginal cost data for the Postal
Service are available through the Postal Service's Cost and Revenue
Analysis (CRA) report.\31\ The Postal Service submits the CRA report
each year as part of its Annual Compliance Report (ACR), and the
Commission uses the CRA as an input to its Postal Service Product
Finances analysis (PFA), which the Commission produces every year as
part of its Annual Compliance Determination (ACD).\32\ The CRA
calculates marginal costs using volume-variable costs. The volume-
variable costs of the Postal Service are the costs of specific Postal
Service operations (e.g., mail processing, delivery), which vary with
respect to the operation's cost driver (e.g., volume, weight).\33\
These volume-variable costs are then distributed to Postal Service
products. Id. at 11-13. Dividing the total volume-variable cost of a
product by the product's volume results in unit volume-variable costs,
which are equivalent to marginal costs.\34\ Applying this methodology,
the Commission divides the sum of all competitive product volume-
variable costs in the PFA by the sum of all competitive product volume
to calculate competitive product unit volume-variable cost.
---------------------------------------------------------------------------
\31\ See, e.g., Docket No. ACR2016, Library Reference USPS-FY16-
1, December 29, 2016. For most firms, marginal cost data are not
ordinarily available, limiting the ability to calculate a Lerner
index to estimate a given firm's market power. Dennis W. Carlton &
Jeffrey M. Perloff, Modern Industrial Organization 278 (4th ed.
2005) (Carlton & Perloff).
\32\ See 39 U.S.C. 3652 and 3653; see also, e.g., USPS-FY16-1;
Docket No. ACR2016, Library Reference PRC-LR-ACR2016/1, March 28,
2017. The PFA is also frequently referred to in ACR dockets as PRC
Library Reference 1.
\33\ John C. Panzar, The Role of Costs for Postal Regulation,
September 30, 2014, at 9-10, available at: https://www.prc.gov/sites/default/files/reports/J%20Panzar%20Final%20093014.pdf. The
cost driver reflects the unit of a particular operational activity
that causes change in the activity's cost. Id. at 11-12. For
example, the cost driver for highway transportation is cubic-foot-
miles, because the relevant variable that would change costs for
this activity is the amount of space taken up by mail on trucks, and
hence how many trucks are required to transport it. Id.
\34\ Id. at 14-15; see also United States Postal Service, Rule
39 CFR Section 3050.60(f) Report for Fiscal Year 2016, July 3, 2017,
Appendix H.
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[[Page 6763]]
For the price variable, the Commission uses average revenue-per-
piece, which incorporates all of the prices for all competitive
products. The PFA presents revenue data by product. The Commission
divides the sum of all competitive product revenue by the sum of all
competitive product volume to calculate competitive product revenue-
per-piece.
The formula for calculating a Lerner index specific to the Postal
Service's competitive products is:
[GRAPHIC] [TIFF OMITTED] TP14FE18.006
The Postal Service Lerner Index, as well as the year-over-year
percentage change in the Index, is reported for FY 2007 through FY 2017
in Table IV-1 below.\35\
---------------------------------------------------------------------------
\35\ The FY 2007 PFA did not report volume-variable costs for
all competitive products due to the market dominant and competitive
product classifications not being finalized. For FY 2007, the
Commission uses attributable cost less product-specific costs for
Priority Mail, Express Mail, and Competitive International Mail to
approximate volume-variable costs.
\36\ Source: Library Reference PRC-LR-RM2017-1/1. Postal Service
Lerner Index values are rounded to the thousandths place. The
``Percentage Change in Lerner Index'' column is based on unrounded
figures, reported in PRC-LR-RM2017-1/1. The FY 2017 value is
preliminary, subject to revision of the underlying data in pending
Docket No. ACR2017. See 39 U.S.C. 3653.
Table IV-1--Postal Service Lerner Index, FY 2007-FY 2017 \36\
------------------------------------------------------------------------
Percentage
Lerner change in
Fiscal year index lerner
index
------------------------------------------------------------------------
FY 2007........................................... 0.228 N/A
FY 2008........................................... 0.217 -5.1
FY 2009........................................... 0.251 15.9
FY 2010........................................... 0.298 18.6
FY 2011........................................... 0.276 -7.3
FY 2012........................................... 0.275 -0.3
FY 2013........................................... 0.290 5.4
FY 2014........................................... 0.292 0.8
FY 2015........................................... 0.284 -2.7
FY 2016........................................... 0.332 16.6
FY 2017........................................... 0.356 7.5
------------------------------------------------------------------------
A typical Lerner index ranges from 0 to 1.\37\ At 0, revenue-per-
piece equals unit volume-variable cost, which represents a perfectly
competitive environment in which a firm makes no profit. Thus, Lerner
index numbers close to 0 are evidence of highly competitive
environments. The further a firm's Lerner index shifts away from 0 and
towards 1, the more market power that firm possesses.\38\ Network
industries, including the delivery industry in which the Postal Service
competes, contain significant barriers to entering the market.\39\
These barriers prevent perfect competition, and firms within a network
industry naturally possess some degree of market power. As a result,
Lerner index values in excess of 0 should be expected for the Postal
Service.
---------------------------------------------------------------------------
\37\ As discussed in section IV.C.1.a, infra, index values less
than 0 may indicate a firm is engaging in predatory pricing.
\38\ F.M. Scherer & David Ross, Industrial Market Structure and
Economic Performance 70-71 (3d ed. 1990).
\39\ Network industries are industries with cost advantages
arising from handling products together, whether large amounts of
the same product (economies of scale), or several different products
(economies of scope). See United States Postal Service Office of
Inspector General, Risk Analysis Research Center, Report No. RARC-
WP12-008, A Primer on Postal Costing Issues, March 20, 2012, at 2-3,
available at: https://www.uspsoig.gov/sites/default/files/document-library-files/2015/rarc-wp-12-008_0.pdf.
---------------------------------------------------------------------------
As shown in Table IV-1, the Postal Service Lerner Index has
increased from 0.228 in FY 2007 to 0.356 in FY 2017. Within this time
period, there have been some relatively large year-over-year shifts,
particularly in FY 2009, FY 2010, and FY 2016. These likely reflect the
effects of the global financial crisis of the late 2000's and changes
in market demand.
The global financial crisis of the late 2000's constituted a severe
economic shock and reduced consumer demand. Reductions in consumer
demand for Postal Service competitive products in FY 2009 were a
significant factor in decreasing the Postal Service's competitive
volume, and therefore its revenue and costs. These volume losses were
disproportionately concentrated in categories with unit contributions
below the average for competitive products. As a result, the average
unit contribution of competitive mail increased, which resulted in the
increase in the Postal Service Lerner Index.
As the economy recovered from the global financial crisis of the
late 2000's, demand increased and as a result the Postal Service's
competitive volume, revenue, and costs increased in FY 2010. The Postal
Service also exercised its pricing flexibility under PAEA, and its use
of pricing innovations such as competitive negotiated service
agreements and flat-rate pricing contributed to a large increase in the
average unit contribution of competitive mail. The increase in unit
contribution outpaced the increase in average unit revenue, leading to
an increase in the Postal Service Lerner Index in FY 2010.
In FY 2016, the volume of USPS Ground \40\ products increased.
These products have a relatively low unit volume-variable cost, so the
increase in their volume was a primary cause for decreased unit volume-
variable costs for competitive products as a whole. This decrease in
unit volume-variable costs, combined with a much smaller decrease in
average unit revenue, resulted in an increase in the Postal Service
Lerner Index.
---------------------------------------------------------------------------
\40\ USPS Ground is a CRA classification that is used to
identify Retail Ground, Parcel Select, and Parcel Return Service.
---------------------------------------------------------------------------
The Postal Service Lerner Index suggests that the Postal Service's
market power has grown over the last 10 years. This growth, however,
did not necessarily occur at the expense of the Postal Service's
competitors. It is possible that the Postal Service's competitors have
experienced similar growth in market power, due to the fact that
overall demand for competitive delivery has increased dramatically over
the last 10 years. In order to put the Postal Service's market power in
context relative to the market as a whole, the Commission uses the
Competitive Market Output in the formula, which captures the overall
size of the competitive market in which the Postal Service operates.
2. Competitive Market Output
While the Postal Service Lerner Index measures the Postal Service's
market power in the competitive market, the second component of the
Commission's formula, the Competitive Market Output, measures the
overall size of the competitive market.
Evaluating the overall size of the market provides context for
assessing prevailing competitive conditions. Capturing the overall size
of the competitive market is also important because the Postal
Service's ability to increase contribution for competitive products
should increase when the competitive market grows and decrease when the
competitive market shrinks. The appropriate share should balance
[[Page 6764]]
the Postal Service's ability to increase contribution in a growing
market with the need to adjust for the realities of a declining market.
Therefore, capturing the overall size of the competitive market is an
important part of the appropriate share formula.
In order to measure the size of the competitive market, it is first
necessary to define what the competitive market encompasses. For this
appropriate share analysis, the competitive market encompasses two
groups. The first group is the Postal Service's competitive products.
As noted above, under the PAEA, Postal Service competitive products are
any products that do not fall within the market dominant product
definition. See section I, supra; see also 39 U.S.C. 3642(b)(1).
The second group is ``similar products'' offered by the Postal
Service's competitors. This group excludes any competitors' products
that the Postal Service does not actually compete with. For example,
the Postal Service does not accept parcels weighing more than 70
pounds, so competitors' parcels over 70 pounds are excluded from the
competitive market definition.\41\
---------------------------------------------------------------------------
\41\ Domestic Mail Manual (DMM) section 3.2, available at:
https://pe.usps.com/text/dmm300/101.htm#ep1034246 (last accessed
Feb. 1, 2018).
---------------------------------------------------------------------------
Each of these groups has its own corresponding data source, and the
two are combined to calculate the overall size of the competitive
market.\42\ The Commission determines that revenue, rather than volume,
is the better measure of the overall size of the competitive market.
Therefore, the data sources for both groups are revenue-based. Revenue
data for both the Postal Service's competitive products and competitors
offering similar products are directly comparable, as they constitute
the value of all transactions. In contrast, volume data would have to
be adjusted for intra-industry transactions. The revenue data are also
available for all firms in the relevant market, whereas volume data for
the Postal Service's competitors is unavailable.
---------------------------------------------------------------------------
\42\ This market definition effectively covers both last-mile
and end-to-end deliveries of mail outside the market dominant
system. ``Last-mile'' delivery is delivery from a firm's processing
facility to the end recipient. The Postal Service routinely
contracts with its competitors to provide such service, delivering
competitive pieces that were entered with other firms to their end
recipients. This contrasts with ``end-to-end'' service, in which one
firm handles a mailpiece from acceptance to delivery, including
``last-mile'' delivery. Firms other than the Postal Service also
provide last-mile delivery services.
---------------------------------------------------------------------------
For the revenue of Postal Service's competitive products, the
Commission uses the PFA. For the revenue of Postal Service's
competitors offering similar products, the Commission uses data
obtained from two surveys conducted by the United States Census Bureau:
The Quarterly Services Survey (QSS) and the Services Annual Survey
(SAS).
a. PFA Data
To measure the Postal Service's competitive product revenue, the
Commission uses the total competitive revenue reported in the PFA.
These data are shown in Table IV-2 below.
---------------------------------------------------------------------------
\43\ Source: PRC-LR-RM2017-1/1. The FY 2017 value is
preliminary, subject to revision of the underlying data in pending
Docket No. ACR2017.
Table IV-2--Postal Service Competitive Product Revenue, FY 2007-FY 2017
\43\
------------------------------------------------------------------------
Revenue (in
Fiscal year millions)
------------------------------------------------------------------------
FY 2007................................................. $7,909
FY 2008................................................. 8,382
FY 2009................................................. 8,132
FY 2010................................................. 8,677
FY 2011................................................. 8,990
FY 2012................................................. 11,426
FY 2013................................................. 13,741
FY 2014................................................. 15,280
FY 2015................................................. 16,428
FY 2016................................................. 18,495
FY 2017................................................. 20,690
------------------------------------------------------------------------
b. QSS/SAS Data
Revenue data for competitors offering similar products is obtained
from the QSS and SAS. The QSS is a survey conducted by the United
States Census Bureau to estimate operating revenues for each service
sector of the economy. Revenue data are classified by subsector, with
the relevant subsector in this case being North American Industry
Classification System (NAICS) Code 492--``Couriers and Messengers.''
\44\ The QSS provides data on a quarterly basis, which can be combined
to correspond with the Postal Service's fiscal years. However,
quarterly data are not available for FY 2007, FY 2008, or part of FY
2009.\45\ As these data are necessary to incorporate all of the changes
in the market's size since FY 2007, the Commission uses calendar year
data from the SAS as a proxy for those fiscal years. The SAS is a
survey conducted by the United States Census Bureau to calculate
revenues, expenses, and other economic indicators for industries on a
calendar year basis. For years where both QSS and SAS data are
available, the sum of four quarters of QSS data are consistently 5 or 6
percent lower than the SAS data, as shown in Table IV-3 below.
---------------------------------------------------------------------------
\44\ NAICS is a classification system developed by the Office of
Management and Budget within the Executive Office of the President
of the United States. It is designed to classify business
establishments by type of activity performed for purposes of
collecting, analyzing, and publishing statistical data related to
the United States business economy. NAICS Code 492 encompasses all
parcel delivery by firms without a universal service obligation
(USO).
\45\ Quarterly data are only available beginning Calendar Year
(CY) 2009, which excludes the first quarter of FY 2009. Data for
Quarter 1 of FY 2009 is unavailable because this quarter took place
in CY 2008 when the QSS did not survey this sector.
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[[Page 6765]]
[GRAPHIC] [TIFF OMITTED] TP14FE18.007
These differences are primarily due to sampling differences between
the QSS and SAS and seasonality adjustments made in the SAS.\47\ Absent
any adjustment, the Competitive Market Output for FY 2007, FY 2008, and
FY 2009 would not be comparable to subsequent years. This would result
in an apparent decline in Competitive Market Output from FY 2009 to FY
2010 that is primarily due to differences between the SAS and QSS data
methodologies, rather than a real change in the market. As a result, an
adjustment to account for these differences is needed for FY 2007, FY
2008, and FY 2009. The Commission reduces the SAS data for CY 2007, CY
2008, and CY 2009 by 5 percent in order to align the SAS data with the
QSS data. The Commission uses the adjusted SAS data from those calendar
years for the corresponding fiscal years of the Postal Service, and it
sums the quarterly QSS data from FY 2010 to FY 2016 by Postal Service
fiscal year to align the QSS data with the PFA data. These revenue data
are displayed in Table IV-4 below.
---------------------------------------------------------------------------
\46\ Source: PRC-LR-RM2017-1/1.
\47\ The methodologies of the QSS and SAS surveys can be
contrasted at https://www.census.gov/services/sas/sastechdoc.html
and https://www.census.gov/services/qss/qsstechdoc.html.
Table IV-4--Competitor Revenue From Similar Products, FY 2007--FY 2017
\48\
------------------------------------------------------------------------
Revenue (in
Fiscal year millions)
------------------------------------------------------------------------
FY 2007................................................. $77,710
FY 2008................................................. 75,956
FY 2009................................................. 64,468
FY 2010................................................. 63,359
FY 2011................................................. 66,871
FY 2012................................................. 69,270
FY 2013................................................. 70,958
FY 2014................................................. 73,359
FY 2015................................................. 78,001
FY 2016................................................. 80,746
FY 2017................................................. 84,825
------------------------------------------------------------------------
c. Combined Competitive Market Output Data
---------------------------------------------------------------------------
\48\ Source: PRC-LR-RM2017-1/1. The FY 2017 value is
preliminary, subject to revision of the underlying data in pending
Docket No. ACR2017.
\49\ Source: PRC-LR-RM2017-1/1. The FY 2017 value is
preliminary, subject to revision of the underlying data in pending
Docket No. ACR2017.
---------------------------------------------------------------------------
The PFA data and QSS/SAS data are combined to produce the
Competitive Market Output. This information, along with the year-over-
year percentage change in the Competitive Market Output, is reported in
Table IV-5 below.
Table IV-5--Competitive Market Output, FY 2007--FY 2017 \49\
----------------------------------------------------------------------------------------------------------------
Postal Service Competitor revenue
competitive product from similar Competitive market Percentage change
Fiscal year revenue (in products (in output (in in competitive
millions) millions) millions) market output
----------------------------------------------------------------------------------------------------------------
FY 2007..................... $7,909 $77,710 $85,619 N/A
FY 2008..................... 8,382 75,956 84,338 -1.5
FY 2009..................... 8,132 64,468 72,600 -13.9
FY 2010..................... 8,677 63,359 72,036 -0.8
FY 2011..................... 8,990 66,871 75,861 5.3
FY 2012..................... 11,426 69,270 80,696 6.4
FY 2013..................... 13,741 70,958 84,699 5.0
FY 2014..................... 15,280 73,359 88,639 4.7
FY 2015..................... 16,428 78,001 94,429 6.5
FY 2016..................... 18,495 80,746 99,241 5.1
FY 2017..................... 20,690 84,825 105,515 6.3
----------------------------------------------------------------------------------------------------------------
Table IV-5 illustrates that the Competitive Market Output data
follow broad economic trends, declining from FY 2008 to FY 2010 during
the global financial crisis of the late 2000s and increasing
thereafter. However, Postal Service's revenue increased by a greater
percentage than its competitors' revenue, due, in part, to its use of
pricing flexibility, including the introduction of flat-rate pricing
and negotiated service agreements between
[[Page 6766]]
FY 2008 and FY 2011. Several transfers of market dominant products to
the competitive product category from FY 2010 to FY 2014 also
contributed to the increases in the Postal Service's competitive
product revenue between FY 2011 and FY 2015.\50\
---------------------------------------------------------------------------
\50\ See Docket No. MC2010-20, Order Approving Request to
Transfer Selected Post Office Box Service Locations to the
Competitive Product List, June 17, 2010, at 16 (Order No. 473);
Docket No. MC2010-36, Order Conditionally Granting Request to
Transfer Commercial Standard Mail Parcels to the Competitive Product
List, March 2, 2011, at 20 (Order No. 689); Docket No. MC2011-25,
Order Approving Request to Transfer Additional Post Office Box
Service Locations to the Competitive Product List, July 29, 2011, at
14-15 (Order No. 780); Docket No. CP2012-2, Order Approving Changes
in Rates of General Applicability for Competitive Products, December
21, 2011, at 13 (Order No. 1062); Docket No. MC2012-13, Order
Conditionally Granting Request to Transfer Parcel Post to the
Competitive Product List, July 20, 2012, at 14 (Order No. 1411);
Docket No. MC2012-44, Order Approving Request for Product List
Transfer, September 10, 2012, at 9 (Order No. 1461); Docket No.
MC2014-28, Order Approving Product List Transfer, August 19, 2014,
at 8-9 (Order No. 2160).
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3. Resulting Formula
With the two components discussed above, the Commission proposes to
calculate the appropriate share using the following formula: \51\
---------------------------------------------------------------------------
\51\ The mathematical structure of this formula, i.e.,
multiplying a base percentage by the sum of factors, is common in
regulated industries, particularly in developing price caps. See
James Ming Chen, Price-Level Regulation and Its Reform, 99 Marq.
L.R. 931, 944 (2016), available at: http://scholarship.law.marquette.edu/cgi/viewcontent.cgi?article=5295&context=mulr.
ASt+1 = ASt * (1 + %[Delta]LIt-1 +
%[Delta]CMOt-1)
If t = 0 = FY 2007, AS = 5.5%
Where
AS = Appropriate Share \52\
---------------------------------------------------------------------------
\52\ This figure would be expressed as a percentage and rounded
to one decimal place for simplicity and consistency with the
Commission's past practice of expressing an appropriate share using
only one decimal place.
---------------------------------------------------------------------------
LI = Postal Service Lerner Index
CMO = Competitive Market Output
t = Fiscal Year
The Postal Service Lerner Index and Competitive Market Output are given
equal weight in the calculation because the Commission considers both
to carry equal importance in assessing the appropriate share of
institutional costs. This is because it is necessary to balance changes
in the competitive market with changes in the Postal Service's market
power.
The Commission proposes to adjust the appropriate share annually by
using the formula to calculate the minimum appropriate share for the
upcoming fiscal year. Because the data necessary to calculate the
minimum appropriate share for an upcoming fiscal year (which begins
each October 1st) are not final until the most recent ACD is issued
(typically at the end of March), the Commission proposes to report the
new appropriate share level for the upcoming fiscal year as part of its
ACD. The adjusted appropriate share would then be applicable for the
upcoming fiscal year.\53\ In order to calculate an upcoming fiscal
year's appropriate share percentage (ASt+1, the formula
multiplies the sum of the percentage changes in the Postal Service
Lerner Index and the Competitive Market Output from the previous fiscal
years \54\ (1 + %[Delta]LIt-1 + %[Delta]CMOt-1)
by the current fiscal year's appropriate share (ASt).\55\
---------------------------------------------------------------------------
\53\ The Commission notes that, as its completion of the FY 2017
ACD is likely to occur prior to its issuance of a final rule in this
docket, the first formula-based adjustment under this proposed rule
may be announced in the final rule, as opposed to the Commission's
FY 2017 ACD. After that, however, the Commission proposes that all
future changes would be announced as part of each ACD.
\54\ The ``1 + '' is a necessary mathematical concept for any
percentage change formula in order to incorporate the pre-existing
value being changed. See Jagdish Arya & Robin Lardner, Mathematical
Analysis for Business and Economics 202-03 (2d ed. 1985).
\55\ UPS advocates for a cost-based appropriate share. See UPS
Comments at 34-37. The Commission notes that its formula is not
directly based on costs, although Postal Service costs are
incorporated into the formula through the use of unit volume-
variable costs in the Postal Service Lerner Index. The Commission
looks at the market as a whole pursuant to 39 U.S.C. 3633(b)'s
directive to consider the prevailing competitive conditions in the
market, which necessitates looking at factors beyond costs to
determine the appropriate share.
---------------------------------------------------------------------------
This formula is recursive in order to fully incorporate changes in
the Postal Service's market power and the overall market size from year
to year.\56\ By using the current fiscal year's appropriate share in
the calculation of the next fiscal year's appropriate share, this
formula includes the cumulative effects on the appropriate share from
prior fiscal years. Using data from the prior fiscal year improves the
predictability of the appropriate share formula and mitigates the
effects of outlier years by incorporating them only after the effects
of the outlier year have been reflected in the market.\57\ The formula
simplifies the planning process for the Postal Service and mailers
because parties would know months before the start of a fiscal year
what the appropriate share for that fiscal year will be.
---------------------------------------------------------------------------
\56\ A recursive formula is a formula where a previous term is
used to calculate the next term in the sequence.
\57\ Year-over-year data would not be available for
contemporaneous calculation of the appropriate share. For the
Competitive Market Output, QSS data are only available in November,
after the end of a Postal Service fiscal year. For the Postal
Service Lerner Index, data are only available when the Postal
Service files the CRA as part of its ACR at the end of each calendar
year, and only final when the Commission issues the ACD no later
than 90 days afterwards. See 39 U.S.C. 3652 and 3653. As an example,
the appropriate share for FY 2018 would be calculated using FY 2016
data for the Postal Service Lerner Index and Competitive Market
Output.
---------------------------------------------------------------------------
As an example of how the formula functions, if the current year
appropriate share is 5.5 percent, the Postal Service Lerner Index grew
by 6 percent in the prior year, and Competitive Market Output declined
by 3 percent in the prior year, the appropriate share for the next year
is calculated as follows:
Appropriate Share = 5.5% * (1 + .06 = .03) = 5.57%
Under this scenario, the next year's appropriate share would be 5.7
percent. As noted above, this result will be the starting point for
calculating the appropriate share for the following year.
Using 5.7 percent as the starting point for calculating the
appropriate share for the following year, if the Postal Service Lerner
Index grew by 2 percent and Competitive Market Output grew by 3
percent, then the calculation would be:
Appropriate Share = 5.7% * (1 + .02 = .03) = 6.0%
Under this scenario, the next year's appropriate share would be 6.0
percent and would become the starting point for calculating the
appropriate share for the next year.
In order to calculate the appropriate share for future years, the
Commission must first establish the beginning appropriate share
percentage for the calculation, as well as the beginning fiscal year.
In the terminology of the formula, this means defining the starting
value of AS and t.
The Commission sets the beginning appropriate share level for the
formula at 5.5 percent because that was the initial appropriate share
set in FY 2007. As noted above in section III, the initial appropriate
share of 5.5 percent was based on historical contribution levels, as
well as the consideration that setting the appropriate share too high
would create risks for the Postal Service.
The Commission would begin the formula calculation starting in FY
2007, calculating each subsequent fiscal year's appropriate share. This
would ensure that the appropriate share fully reflects changes in the
market since the PAEA was enacted. As discussed above, prevailing
competitive conditions in the market and market uncertainties, as
measured by the Postal Service's market power and the overall size of
the market, have changed since FY 2007. Using FY 2007 as a starting
point (i.e., the initial t value) would allow the appropriate share to
reflect the prevailing market conditions as they
[[Page 6767]]
have developed over time since the PAEA's enactment.
Table IV-6 below illustrates the application of the formula
starting with an appropriate share of 5.5 percent in FY 2007.
Table IV-6--Calculation of Appropriate Share, FY 2007--FY 2019 \58\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Percentage change in
Appropriate share Percentage change in Competitive Market Appropriate share
Fiscal year for the current Lerner index for the Output for the prior for the following
year (AS) (%) prior year year (%[Delta]CMO1) Year (ASt+1) (%)
(%[Delta]LI1)
--------------------------------------------------------------------------------------------------------------------------------------------------------
FY 2007........................................................ 5.5 N/A N/A 5.5
FY 2008........................................................ 5.5 0.0 0.0 5.5
FY 2009........................................................ 5.5 -5.1 -1.5 5.1
FY 2010........................................................ 5.1 15.9 -13.9 5.2
FY 2011........................................................ 5.2 18.6 -0.8 6.1
FY 2012........................................................ 6.1 -7.3 5.3 6.0
FY 2013........................................................ 6.0 -0.3 6.4 6.4
FY 2014........................................................ 6.4 5.4 5.0 7.1
FY 2015........................................................ 7.1 0.8 4.7 7.5
FY 2016........................................................ 7.5 -2.7 6.5 7.8
FY 2017........................................................ 7.8 16.6 5.1 9.5
FY 2018........................................................ 9.5 7.5 6.3 10.8
--------------------------------------------------------------------------------------------------------------------------------------------------------
As demonstrated in Table IV-6, the formula and each resulting
appropriate share percentage follow trends in the market. Additionally,
Table IV-6 shows what the FY 2019 appropriate share under the proposed
formula would be based on the preliminary numbers currently available.
The Commission is reviewing the CRA provided by the Postal Service in
pending Docket No. ACR2017.
---------------------------------------------------------------------------
\58\ Source: PRC-LR-RM2017-1/1. The FY 2019 value is
preliminary, subject to revision of the underlying data in pending
Docket No. ACR2017.
---------------------------------------------------------------------------
C. Analysis Pursuant to 39 U.S.C. 3633(b)
In this section, the Commission explains how its proposed formula-
based approach captures the prevailing competitive conditions in the
market and other relevant circumstances as required by 39 U.S.C.
3633(b). In addition, the Commission discusses whether any costs
classified as institutional under the Commission's costing methodology
are uniquely or disproportionately associated with Postal Service
competitive products, as required by 39 U.S.C. 3633(b).
1. Prevailing Competitive Conditions in the Market
In past appropriate share determinations, the Commission has
identified specific market conditions that are indicative of the
prevailing competitive conditions in the market: (1) The existence (or
nonexistence) of evidence suggesting that the Postal Service has
benefitted from a competitive advantage with respect to competitive
products; (2) changes to the Postal Service's market share with respect
to competitive products since the Commission's last review; and (3)
changes to the package delivery market and to the Postal Service's
competitors since the Commission's last review.\59\
---------------------------------------------------------------------------
\59\ See Order No. 26 at 69-74; Order No. 1449 at 13-19.
---------------------------------------------------------------------------
The formula-based approach developed by the Commission captures the
three specific market conditions that the Commission has considered in
its previous appropriate share determinations.\60\
---------------------------------------------------------------------------
\60\ The proposed formula captures each of these three specific
market conditions, as discussed in more detail in the remainder of
this section. However, in limited cases (e.g., antitrust actions
against the Postal Service), a purely qualitative factor previously
considered as a market condition could not be explicitly captured
through the Commission's proposed formula. Nevertheless, these
qualitative factors are, for the most part, implicitly captured. For
example, although antitrust actions against the Postal Service are
not explicitly captured, changes in the Postal Service's market
power may offer insight into whether the Postal Service is engaging
in the kinds of anticompetitive behavior that would underlie an
antitrust action. See Areeda & Hovenkamp at 107 (``Market structure
and market power are often crucial in antitrust analysis.'').
---------------------------------------------------------------------------
a. Postal Service Competitive Advantage
In analyzing evidence of competitive advantage on the part of the
Postal Service, the Commission has previously looked to the FTC's
report regarding whether the Postal Service's competitive products have
a net competitive advantage, as well as evidence of predatory pricing
by the Postal Service.\61\
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\61\ See Order No. 1449 at 14-16. The Commission has also
considered whether any antitrust actions had been filed against the
Postal Service, as such actions may indicate a competitive
advantage. The Commission was able to locate one antitrust action
filed against the Postal Service, which did not involve competitive
products and was dismissed in federal district court for not
properly falling under 39 U.S.C. 409(e). Tog, Inc. v. U.S. Postal
Serv., No. 12-cv-01946-JLK, 2013 WL 3353883 (D. Colo. July 3, 2013).
To the Commission's knowledge, no other antitrust actions have been
filed against the Postal Service.
---------------------------------------------------------------------------
The Commission discusses the FTC Report and its assessment of
whether subsequent events have affected the FTC's findings in section
V, infra. Although that analysis is the Commission's primary method for
analyzing whether the Postal Service's competitive products have a
competitive advantage, the Postal Service Lerner Index also provides
insight. The higher the Postal Service Lerner Index, the more market
power the Postal Service possesses, and sudden large increases may
indicate a competitive advantage under certain circumstances. However,
as previously explained, a Lerner index is not a zero-sum index. In
growing markets, competitors may experience similar increases in their
Lerner indices when the benefits of growth are distributed among
competitors.\62\
---------------------------------------------------------------------------
\62\ The growing profits of the Postal Service's competitors
demonstrate this. See PR Comments at 15-17; Amazon Comments at 23-
28.
---------------------------------------------------------------------------
The Postal Service Lerner Index also indicates whether the Postal
Service is engaged in predatory pricing for its competitive products as
a whole, because if such were the case then the index value would be
negative.\63\ By definition, predatory pricing involves a firm setting
its prices below marginal cost in order to drive its competitors out of
the market. Church & Ware at 659. In
[[Page 6768]]
the Postal Service context, if unit volume-variable cost is greater
than revenue-per-piece, then the difference between them will be less
than zero; hence, the Postal Service Lerner Index will be negative.\64\
Figure IV-1 below displays the Postal Service Lerner Index from FY 2007
to FY 2017.
---------------------------------------------------------------------------
\63\ While a negative Lerner index is mathematically possible,
it is unlikely to be observed economically, because a firm with a
negative Lerner index would be pricing below marginal cost and
should therefore suspend production in the short run, and if cost or
market characteristics do not change, exit the industry in the long
run. See Steven E. Landsburg, Price Theory & Applications 277-80
(8th ed. 2011).
\64\ The Commission notes that the Postal Service's ability to
engage in predatory pricing is also constrained by 39 U.S.C.
3633(a)(2), which requires that each of the Postal Service's
competitive products ``covers its costs attributable.'' Under the
Commission's costing methodology, marginal cost is the starting
point for determining which costs are attributable to specific
products. See, e.g., Order No. 3506 at 41. The practical effect of
this is to bar the Postal Service from pricing its products below
marginal cost.
[GRAPHIC] [TIFF OMITTED] TP14FE18.008
As shown in Figure IV-1, the Postal Service Lerner Index has never
been negative. Therefore, the Commission concludes that there is no
evidence that the Postal Service has engaged in predatory pricing.\66\
Developing the Postal Service's Lerner Index for use in an annual
formula will provide an ongoing indication of whether or not the Postal
Service is engaging in predatory pricing.
---------------------------------------------------------------------------
\65\ Source: PRC-LR-RM2017-1/1. The FY 2017 value is
preliminary, subject to revision of the underlying data in pending
Docket No. ACR2017.
\66\ In their comments, Amazon, the Postal Service, the Public
Representative, and Panzar all concur that there has been no
evidence of predatory pricing by the Postal Service. See Amazon
Comments at 32-33; Postal Service Comments at 10; PR Reply Comments
at 3-5; Panzar Decl. at 6. No other commenter alleges that the
Postal Service has engaged in predatory pricing.
---------------------------------------------------------------------------
b. Postal Service Market Share
In analyzing changes to the Postal Service's market share, the
Commission previously has looked to factors such as the Postal
Service's revenue and volume share in the overall market. Order No.
1449 at 16-18. The Postal Service's market share can be directly
calculated by dividing the Postal Service's competitive product revenue
(shown in section IV.B.2.a, supra) by the total Competitive Market
Output (shown in section IV.B.2.c, supra). The Postal Service's market
share between FY 2007 and FY 2017 is reported in Figure IV-2 below.
[[Page 6769]]
[GRAPHIC] [TIFF OMITTED] TP14FE18.009
Figure IV-2 demonstrates that the Postal Service's revenue-based market
share has grown since FY 2007 and that despite this growth, the Postal
Service's overall market share remains relatively low.
---------------------------------------------------------------------------
\67\ Source: PRC-LR-RM2017-1/. The FY 2017 value is preliminary,
subject to revision of the underlying data in pending Docket No.
ACR2017.
---------------------------------------------------------------------------
The change in the Postal Service's market share by revenue would
likely be reflected in both components of the Commission's proposed
formula. If there were a large shift in revenue share between the
Postal Service and competitors in the market, this would be reflected
in the composition of the Competitive Market Output. Although the
overall Competitive Market Output may not change dramatically, the
numbers in the underlying calculation would reflect shifts between
competitors and the Postal Service. If this revenue shift were to
benefit the Postal Service, it would likely take the form of increased
profitability, as the upward shift in revenue share would indicate
increased demand for Postal Service deliveries. If the shift were to
decrease the Postal Service's revenue, the Postal Service would likely
experience a decrease in profitability. The Postal Service Lerner Index
would reflect any increase or decrease in profitability that results
from the changed prices due to increased or decreased demand for its
products.
c. Changes to the Market and Competitors
In analyzing changes to the market and the competitors in it, the
Commission has looked to such factors as growth in the overall market
and firms entering or exiting the market. Order No. 1449 at 18-19.
Overall growth in the market is directly reflected in the Competitive
Market Output.
Both the Postal Service Lerner Index and Competitive Market Output
reflect the entry and exit of firms from the market. If a firm enters
the market and generates new business, the Competitive Market Output
would increase. If a firm enters and takes business from the Postal
Service, whether through pricing or innovation, the Postal Service
would have to price closer to marginal cost in order to remain
competitive, which would reduce the Postal Service Lerner Index. If a
firm exits the market, the business it generated may be lost, which
would be reflected in a decrease in the Competitive Market Output.
Alternatively, the remaining competitors might alter their pricing
strategies to gain that business, changing either the Postal Service
Lerner Index or, depending on the nature of the pricing, the
Competitive Market Output, or both.
2. Unique or Disproportionate Costs
The second element of section 3633(b) requires the Commission to
consider ``the degree to which any costs are uniquely or
disproportionately associated with any competitive products.'' 39
U.S.C. 3633(b). In this section, the Commission first summarizes the
comments and reply comments that relate to the Commission's costing
methodology and then provides its analysis of the degree to which any
costs are uniquely or disproportionately associated with any
competitive products.
a. Relevant Comments
Commenters and reply commenters addressing the degree to which any
costs are uniquely or disproportionately associated with competitive
products and the Commission's costing methodology generally fall into
two groups: (1) Those who allege the costing methodology is flawed and
assert that it should result in an increased appropriate share and (2)
those who contend the Commission's costing methodology is accurate and
that there are no unique or disproportionate costs associated with
competitive products that are not already attributed to competitive
products.
[[Page 6770]]
i. Comments Critical of Current Costing Methodology
UPS and Carlton allege a number of errors with the Commission's
costing methodology as it relates to cost attribution. UPS asserts that
``[m]any costs currently classified as `institutional' are `uniquely or
disproportionately associated with' competitive products.'' UPS
Comments at 28. UPS takes the position that ``Congress saw the minimum
contribution requirement as a means to ensure competitive products are
held responsible for all costs with which they are `disproportionately
associated,' even when competitive products are not exclusively
responsible for such costs.'' UPS Reply Comments at 17 (emphasis in
original).
For example, UPS notes that most Postal Service management costs
are classified as institutional. UPS Comments at 28-29. UPS asserts
that, as competitive product volume increases relative to market
dominant product volume, so too must the time and attention of
management toward competitive products, and costs should be attributed
accordingly. Id. UPS and Carlton also identify other cost categories as
being attributable to competitive products, such as data processing
supplies and services, inspection service field support, and building
projects expenses.\68\ UPS and Carlton maintain that these cost
categories are largely treated as institutional, even though their cost
would be reduced if the Postal Service did not deliver any competitive
products.\69\
---------------------------------------------------------------------------
\68\ UPS Reply Comments at 15 (citing Carlton Reply Decl. at 21-
23); Carlton Reply Decl. at 22-23.
\69\ UPS Reply Comments at 15-16; Carlton Reply Decl. at 22-23.
---------------------------------------------------------------------------
FUR and Sidak contend that the Postal Service has an incentive to
attribute too many costs to market dominant products and too few to
competitive products.\70\ As a result, FUR asserts that ``a high degree
of transparency and accuracy'' is needed. FUR Comments at 5. FUR is
concerned that the methodology for assigning costs may not be accurate
because the Postal Service attributes only about half of its costs,
which they state invites inaccuracies and opportunity for cross-
subsidization. Id. at 6, 13.
---------------------------------------------------------------------------
\70\ FUR Comments at 5; Sidak Decl. at 12-14.
---------------------------------------------------------------------------
UPS and Carlton assert that the Commission's costing methodology
incentivizes the Postal Service to operate with an inefficiently high
level of fixed costs, which enables the Postal Service to provide
competitive products at an artificially low marginal cost by limiting
the percentage of overall costs which can be specifically attributed to
competitive products.\71\
---------------------------------------------------------------------------
\71\ Carlton Reply Decl. at 12; UPS Reply Comments at 10.
---------------------------------------------------------------------------
iI. Comments in Support of Current Costing Methodology
NAPM, MDMCS, and Amazon assert that this proceeding is the
incorrect forum to address costing methodologies and that a separate
docket should be opened if changes to cost models are needed.\72\
Amazon, Panzar, and MDMCS point to the Commission's repeated
invitations to stakeholders to file rulemaking proceedings if they
believe existing cost attribution methods can be improved, and
specifically to Docket No. RM2016-2, which was a UPS-petitioned
rulemaking that explored these issues and resulted in a decrease of the
share of total costs treated as institutional.\73\
---------------------------------------------------------------------------
\72\ NAPM Reply Comments at 3; MDMCS Reply Comments at 2-3;
Amazon Reply Comments at 14-15.
\73\ See id. at 14-15, 18; Panzar Reply Decl. at 4; MDMCS Reply
Comments at 3.
---------------------------------------------------------------------------
NAPM ``disagree[s] with UPS's contention that the Postal Service's
cost models are not transparent or accurate.'' NAPM Reply Comments at
2. Similarly, Amazon maintains that ``[t]he Commission has given the
accuracy of its cost attribution methodology thorough scrutiny in
costing rulemakings over the last decade.'' Amazon Reply Comments at
14. Panzar also echoes this, stating that the methodology used is the
economically appropriate way to attribute costs. Panzar Reply Decl. at
3. The Postal Service denies the claim that its costing methodology
fails to account for any costs which are properly attributable to
individual products and explains that the costing system has been
developed through public, adversarial proceedings. Postal Service Reply
Comments at 30-32. Amazon asserts that UPS's contention that some
institutional costs are caused by competitive products is supported by
neither data nor evidence of a causal relationship. Amazon Reply
Comments at 16-17.
b. Commission Analysis
As most recently discussed in Docket No. RM2016-2, the costing
methodology employed by the Postal Service and the Commission is
directed at determining those costs which are ``attributable to each
class or type of mail service through reliably identified causal
relationships.'' Order No. 3506 at 14. The requirement that cost
attribution must be based on reliably identified causal relationships
comes directly from section 3622 of the PAEA. See 39 U.S.C. 3622(c)(2).
Any cost that cannot be specifically attributed to an individual
product is considered a residual or institutional cost. Order No. 3506
at 10.
The Commission finds that there are no costs uniquely or
disproportionately associated with competitive products that are not
already attributed to competitive products. Under the Commission's
methodology, any cost that is uniquely or disproportionately associated
with any competitive product is identified as an attributable cost
because it exhibits a reliably identifiable causal relationship with a
specific competitive product. With regard to costs that are
disproportionately associated with competitive products, the
Commission's cost attribution methodology identifies relationships
between costs and cost drivers, which include mail characteristics such
as weight and shape (e.g., letters or parcels). The costs associated
with a cost driver are distributed to products in proportion to the
prevalence of the driver within each product. For example, heavier
products (e.g., parcels) have more weight-driven costs attributed to
them than lighter products (e.g., letters). In this way, the costs
attributed to products reflect any disproportionate association of
those costs with any specific products (including any competitive
products).
Under the Commission's methodology, the Commission also classifies
any cost that is uniquely associated with any product (including any
competitive product) as attributable to that product. These costs are
often referred to as product-specific costs. For example,
advertisements for a specific product and supplies for money orders are
unique costs attributed to specific products under the Commission's
methodology.
By definition, costs identified as institutional are those that
cannot be causally linked to any specific product. Although UPS asserts
that certain institutional costs are disproportionately associated with
competitive products, UPS fails to provide any evidence of reliably
identified causal relationships between the institutional costs it
identifies and specific competitive products. For example, UPS states
that the vast majority of management costs are treated as
institutional, and it asserts that ``[Postal Service] management is
clearly focused today on growing the competitive products business.''
UPS Comments at 28. In support, UPS quotes two news articles and an
industry publication, which indicate the Postal
[[Page 6771]]
Service is interested in competitive product growth but provide no
evidence that management costs are disproportionately associated with
competitive products through reliably identified causal relationships.
Id. at 28-29. To the extent UPS or any other party is able to
demonstrate that costs currently classified as institutional can be
clearly linked to specific products through reliably identified causal
relationships, the Commission invites a petition for rulemaking
proposing changes to its methodology in a separate proceeding. In
addition to inviting petitions for rulemaking on these issues, the
Commission, as it has done in the past, continues to invite public
participation and scrutiny in proceedings that propose changes to
costing methodologies.
The comments alleging that the Postal Service operates with an
inefficiently high level of fixed costs appear to conflate fixed costs
with institutional costs and variable costs with attributable costs.
Under the Commission's methodology not all attributable costs are
variable, and not all institutional costs are fixed. Carlton also
understates the extent to which fixed costs are attributed to
individual products under the Commission's costing methodology due to
the methodology's use of cost drivers. For example, if the Postal
Service were to select inefficient processing technologies, the
increased costs of those technologies would be attributed to the
products using them, through the additional labor costs required to
utilize the processing machines. An inefficient mail processing machine
would require additional workhours in order to process the same amount
of mail as a more efficient machine. Under the Commission's
methodology, these workhours would be attributed to the products
utilizing these machines, which would increase those products' marginal
costs. Additionally, the economic fixed costs of facility space and
depreciation would be attributed to the products utilizing the
inefficient machine in the same proportion as workhours. This process,
known as ``piggybacking,'' is a way of attributing indirect costs to
specific products.\74\ This reduces any incentive for the Postal
Service to choose inefficient technologies with high fixed costs in the
way that Carlton suggests, because many of those costs would be
attributed to specific products under the Commission's current costing
methodology.
---------------------------------------------------------------------------
\74\ See United States Postal Service, Rule 39 CFR Section
3050.60(f) Report for Fiscal Year 2016, July 3, 2017, Appendix H at
5.
---------------------------------------------------------------------------
For the reasons discussed above, the Commission concludes that its
costing methodology already accounts for ``the degree to which any
costs are uniquely or disproportionately associated with any
competitive products.'' To the extent that any costs can be attributed
to specific competitive products, they are already distributed under
the Commission's current costing methodology and are not included in
the institutional costs of the Postal Service.
3. Other Relevant Circumstances
As noted above, section 3633(b) also requires the Commission to
consider ``all relevant circumstances.'' In previous orders regarding
the appropriate share, the Commission has analyzed ``other relevant
circumstances'' that could affect the appropriate share determination.
Such circumstances have included: (1) Transfers to the competitive
product list; (2) changes to the mail mix; (3) uncertainties in the
marketplace; and (4) risks from setting the appropriate share too high
or too low. The proposed formula-based approach incorporates all of
these circumstances.
a. Transfers to the Competitive Product List
In its previous review, the Commission considered changes in
competitive product offerings due to transfers from the market dominant
product list to the competitive product list. Since the last review of
the appropriate share, four products have been transferred to the
competitive product list: Single-Piece Parcel Post; Outbound Single-
Piece First-Class Mail International Packages (Small Packets) and
Rolls; Inbound Surface Parcel Post; and First-Class Mail Parcels.\75\
When a product is transferred from the market dominant to the
competitive product list, the formula incorporates it directly through
the Competitive Market Output, and indirectly through the Postal
Service Lerner Index. A transferred product's revenue is included in
the Postal Service's competitive product revenue and automatically
included in the Postal Service's portion of the Competitive Market
Output. Indirectly, the transferred product's revenue-per-piece and
unit volume-variable cost is incorporated into the Postal Service
Lerner Index composition, so that a change in the Postal Service's
market power after the product transfer is also reflected.
---------------------------------------------------------------------------
\75\ See Order No. 1411; Order No. 1461; Order No. 2160; Order
No. 4009.
---------------------------------------------------------------------------
b. Changes to the Mail Mix
Mail mix changes occur as demand for postal products shifts. Since
FY 2007, demand for market dominant products has declined and demand
for competitive products has grown, as shown by their respective
volumes in Figure IV-3 below.
[[Page 6772]]
[GRAPHIC] [TIFF OMITTED] TP14FE18.010
Figure IV-3 shows that since FY 2007, market dominant volume has
decreased from 211 billion pieces to 144 billion pieces, while
competitive volume has increased from 1.6 billion pieces to 5 billion
pieces. Market dominant and competitive products' respective
proportions of total Postal Service volume are demonstrated in Figure
IV-4 below.
---------------------------------------------------------------------------
\76\ Source: PRC-LR-RM2017-1/1. The FY 2017 value is
preliminary, subject to revision of the underlying data in pending
Docket No. ACR2017.
---------------------------------------------------------------------------
[[Page 6773]]
[GRAPHIC] [TIFF OMITTED] TP14FE18.011
As shown in Figure IV-4, since FY 2007 market dominant volume has
decreased from 99.2 percent of all mail to 96.6 percent, and
competitive volume has increased from 0.8 percent of all mail to 3.4
percent. In Order No. 1449, the Commission noted that a significant
increase in competitive volume, particularly in relation to market
dominant volume, would warrant a change in the appropriate share. Order
No. 1449 at 23. Under the proposed formula-based approach, the
Competitive Market Output incorporates such changes in the mail mix by
reflecting the revenue the Postal Service receives from any increase in
competitive product volume. Additionally, the Postal Service Lerner
Index will reflect the growth or decline of more or less profitable
competitive products.
---------------------------------------------------------------------------
\77\ Source: PRC-LR-RM2017-1/1. The FY 2017 value is
preliminary, subject to revision of the underlying data in pending
Docket No. ACR2017.
---------------------------------------------------------------------------
c. Uncertainties
Another relevant circumstance that the Commission has identified in
the past is uncertainty in the postal system as a whole. During the
Commission's last review of the appropriate share, several dockets
regarding the nature of postal services were pending before the
Commission that had the potential to bring about fundamental changes in
the postal system. See Order No. 1449 at 23. Additionally, the Postal
Service's financial position was precarious, and the economy was still
recovering from the global financial crisis of the late 2000s.\78\
Under the proposed formula-based approach, shifts in market demand or
macroeconomic conditions would be reflected in the appropriate share
determination through changes in the Postal Service Lerner Index and
Competitive Market Output.
---------------------------------------------------------------------------
\78\ Id. at 23-24. As the Commission recently found in Order No.
4257, the Postal Service's financial situation remained precarious
during the 10 years following the enactment of the PAEA. Order No.
4257 at 249.
---------------------------------------------------------------------------
Additionally, the Commission notes that over the last 5 years there
have been significant innovative developments and changes in e-commerce
and the delivery industry.\79\ It is important for the formula-based
approach to incorporate such changes. Efforts at innovation or changes
in e-commerce would be evident through the Competitive Market Output,
because they would be reflected in the respective competitors' revenues
as their innovations succeeded (or failed), resulting in more (or less)
revenue. Innovation from competitors could also affect the Postal
Service Lerner Index. If an innovation makes a competitor's products
more attractive to customers, the Postal Service may need to set its
prices lower than it otherwise would to attract and retain volume. This
would result in lower unit profitability and a lower Postal Service
Lerner Index.
---------------------------------------------------------------------------
\79\ See, e.g., United States Postal Service Office of Inspector
General, Risk Analysis Research Center, The Evolving Logistics
Landscape and the U.S. Postal Service, Risk Analysis Research
Center, Report No. RARC-WP-16-015, August 15, 2016.
---------------------------------------------------------------------------
d. Risks
In previous orders regarding the appropriate share, the Commission
has analyzed potential risks involved in setting the appropriate share
too high or too low as part of section 3633(b)'s ``other relevant
circumstances'' element. See, e.g., Order No. 1449 at 12.
If the appropriate share level were set too high, the Postal
Service would be forced to raise its prices to non-competitive levels
in order to meet the minimum contribution required by the appropriate
share. At these higher prices, consumers would likely stop using the
Postal Service and transfer their volume to cheaper competitors.
Depending on the scale of the volume
[[Page 6774]]
exodus and other factors,\80\ the Postal Service may be unable to meet
the minimum contribution. If the Postal Service were forced to exit the
competitive market, competition in the market would decline, harming
consumers and benefiting the Postal Service's competitors, who would be
able to absorb the remaining volume and then set prices higher than the
Postal Service had previously charged. The Commission's proposed
formula-based approach addresses this issue by limiting increases in
the appropriate share to no higher than appropriate to account for the
Postal Service's growth in market power and the growth in the market as
a whole.
---------------------------------------------------------------------------
\80\ Other factors include competitors' price changes in
response to volume shifts and changes in the Postal Service's
competitive costs.
---------------------------------------------------------------------------
Conversely, if the appropriate share were set too low, the Postal
Service might be incentivized to discount its prices in order to gain
market share. Such actions, however, would come at the expense of the
Postal Service's profitability. Both the PAEA and the Postal Service's
financial challenges incentivize profitability,\81\ so little incentive
exists for the Postal Service to significantly discount its prices.
Additionally, the time lag in the formula discourages such discounting
\82\ because the negative consequences of such discounting (i.e., lower
revenue, and therefore lower contribution) would appear before the
benefits (i.e., a lower Postal Service Lerner Index).
---------------------------------------------------------------------------
\81\ See Order No. 4257 at 32-33, 165-178.
\82\ See section IV.B.3, supra, and section VII, infra, for a
discussion of the time lag.
---------------------------------------------------------------------------
The appropriate share has historically avoided the extremes of both
being set too high and being set too low, and the proposed formula-
based approach would continue to do so. Historically, the appropriate
share has neither prevented the Postal Service from competing in the
market, nor allowed the Postal Service to dominate the market. As Table
IV-7 shows, the formula-based approach would have allowed the Postal
Service to avoid both extremes over the past 10 years.
Table IV-7--Postal Service Contribution and Formula-Based Appropriate
Share, FY 2007-FY 2019 \83\
------------------------------------------------------------------------
Postal service
contribution as a Formula- based
Fiscal year percentage of appropriate
institutional cost share (%)
------------------------------------------------------------------------
FY 2007........................... 5.67%............... 5.5
FY 2008........................... 5.53%............... 5.5
FY 2009........................... 6.78%............... 5.5
FY 2010........................... 7.12%............... 5.1
FY 2011........................... 7.82%............... 5.2
FY 2012........................... 7.49%............... 6.1
FY 2013........................... 11.64%.............. 6.0
FY 2014........................... 12.63%.............. 6.4
FY 2015........................... 13.37%.............. 7.1
FY 2016........................... 16.54%.............. 7.5
FY 2017........................... 23.16%.............. 7.8
FY 2018........................... not yet available... 9.5
FY 2019........................... not yet available... 10.8
------------------------------------------------------------------------
As Table IV-7 demonstrates, the Postal Service's actual
contribution has exceeded the proposed formula-derived appropriate
share in every year since FY 2007. This demonstrates that the proposed
formula-based approach would not have forced the Postal Service to set
prices too high, nor prevented the Postal Service from effectively
competing, as an excessive appropriate share would have done. The
proposed formula would also prevent prices from being set too low
because it responds to changes in the Postal Service's market power and
the overall market size. Although these historical data demonstrate
that the proposed formula-based approach would have been successful in
the overall positive market conditions existing from FY 2007 through FY
2017, the Commission also expects the proposed formula-based approach
to be effective in preserving competition in adverse market scenarios
because the formula allows for decreases in the minimum appropriate
share when adverse market conditions negatively impact the Postal
Service Lerner Index, Competitive Market Output, or both.
---------------------------------------------------------------------------
\83\ Source: PRC-LR-RM2017-1/1. The FY 2017 value in the second
column and the FY 2019 value in the third column are preliminary,
subject to revision of the underlying data in pending Docket No.
ACR2017.
---------------------------------------------------------------------------
D. Conclusion
The proposed formula-based approach to determining the appropriate
share is less subjective and more responsive to changing market
conditions than the considerations the Commission relied upon in the
past. It accounts for each of the considerations required by 39 U.S.C.
3633(b): The prevailing competitive conditions in the market; the
degree to which any costs are uniquely or disproportionately associated
with competitive products; and all other relevant circumstances. The
proposed approach encompasses factors previously considered by the
Commission, and it adjusts annually in order to reflect changes in
market conditions. For these reasons, the Commission proposes to change
to a formula-based approach.
V. Section 703(d) of the PAEA
As part of its enactment of the PAEA, Congress sought to determine
whether the Postal Service's competitive products enjoyed any legal
advantages over private companies providing similar products.\84\ In
section 703, Congress directed the FTC to prepare a report identifying
federal and state laws that apply differently to the Postal Service's
competitive products than similar products offered by private
competitors.\85\ The FTC was required to make recommendations
concerning how to end any such legal differences and, in the interim,
to account for the net economic effect resulting from such
differences.\86\ Additionally, section 703 directed the Commission,
when revising regulations under 39 U.S.C. 3633, to consider the FTC's
recommendations as well as subsequent events that affect the continuing
validity of the FTC's net economic effect finding.\87\
---------------------------------------------------------------------------
\84\ See PAEA, 120 Stat. 3244; see also S. Rep. No. 108-318 at
29.
\85\ PAEA section 703(a). Section 703 was not codified and is
reproduced in the notes of 39 U.S.C.A. 3633. See also FTC Report.
\86\ PAEA section 703(b).
\87\ PAEA section 703(d).
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In the instant proceeding, because the Commission proposes
revisions to its regulations pursuant to 39 U.S.C. 3633(a)(3) and (b),
an analysis pursuant to section 703(d) of the PAEA is necessary. In the
sections below, the Commission discusses the FTC Report's net economic
effect analysis, addresses comments related to section 703(d) received
in this proceeding, describes the scope of the Commission's section
703(d) review, identifies events occurring since the FTC Report's
issuance, and determines whether those events have affected the
validity of the FTC's estimate of the net economic effect. The
Commission does not address FTC recommendations because the FTC did not
include any recommendations in the FTC Report. See FTC Report at 2.
A. FTC Report
The FTC issued its report in December 2007, which considered both
the implicit subsidies enjoyed by and legal constraints imposed on the
Postal Service's competitive products due to
[[Page 6775]]
the Postal Service's unique legal status.\88\ In chapter IV of its
report, the FTC completed its net economic effect analysis by
specifically identifying those implicit subsides and legal constraints
that could be quantified in order to calculate any impact on the Postal
Service.\89\ The FTC concluded that the Postal Service's unique legal
status placed it at a net competitive disadvantage in offering
competitive products relative to private competitors. Id. at 64.
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\88\ Id. at 55-77. In its review of the Postal Service's unique
legal status, the FTC analyzed laws applicable to the Postal Service
due to its status as a governmental entity as well as those
disadvantages imposed on and advantages allowed by the PAEA.
\89\ Id. at 55-77, n.287. The FTC Report discussed additional
implicit subsidies and legal constraints beyond those listed in its
net economic effect analysis, but because the additional subsidies
and constraints could either not be quantified or the effect on the
Postal Service was unclear, the FTC did not include them as part of
its final analysis. Some of the implicit subsidies included the
Postal Service's access to federal funding and eminent domain,
preferential customs treatment compared to competitors, immunity
from certain conduct under the Federal Tort Claims Act, its
exemption from paying federal income taxes, and potential advantages
stemming from the Postal Service's letter and mailbox monopolies.
Id. at 29-37, 47-52, 64. Some of the legal constraints included
pricing restrictions on competitive products, the costs associated
with the Postal Service's USO, the limited ability of the Postal
Service to close post offices, the inability to outsource delivery
routes to private carriers, requirements related to retirees, and
the restraints on financing and investing. Id. at 37-45.
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1. Implicit Subsidies
The FTC listed multiple quantifiable implicit subsidies that the
Postal Service received due to its status as a governmental entity. Id.
at 57-58. These implicit subsides included the Postal Service's
exemption from state and local taxes,\90\ real property taxes, sales
and use taxes, personal property taxes, and certain franchise and
business taxes and fees. Id. at 57. The Postal Service is exempted from
these taxes and fees because the Supremacy Clause prevents states from
imposing taxes and some fees on federal agencies. See id. at 23-28.
Other implicit subsidies included exemptions from parking tickets,
vehicle registration fees, tolls, and tax compliance. Id. at 57. The
FTC estimated that these implicit subsidies provided a benefit of $38
million to $113 million to Postal Service competitive products.\91\
---------------------------------------------------------------------------
\90\ The FTC did not rely on a specific state and local tax
figure in its net economic effect conclusions because those taxes
would vary year-to-year based on Postal Service's annual net income.
See id. at 57 n.270. For the same reason, the Commission does not
include an estimated figure of the state and local tax implicit
subsidy in its section 703(d) analysis.
\91\ Id. at 58. The implicit subsidies identified benefited both
market dominant and competitive products, but given none were
readily assignable to either category; the FTC used competitive
products' appropriate share of institutional costs and competitive
product revenue to create an estimated range of impact on Postal
Service competitive products. The low end of the range was based on
the implicit subsidies inclusion in institutional costs, which would
require competitive products to cover 5.5 percent and the high end
of the range was based on competitive product revenue. Id. at 57.
---------------------------------------------------------------------------
In addition, the FTC discussed the borrowing authority permitted by
the PAEA as a potential advantage the Postal Service receives unrelated
to its status as a governmental entity.\92\ The FTC noted the Postal
Service has the ability to issue debt for use for competitive products
possibly resulting in a more favorable interest rate compared to
private competitors. Id. at 58. The FTC relied on figures provided by a
commenter who estimated the Postal Service enjoyed a $30.45 million
annual subsidy on its debt at the time, with competitive products
enjoying approximately $1.4 to $4 million of the annual amount.\93\ The
FTC rounds the $1.4 million to $1 million in its calculation. Id. at
61.
---------------------------------------------------------------------------
\92\ The FTC Report also included a discussion on Return on
Equity as a potential Postal Service advantage, indicating that
should the Postal Service be required to achieve the same level of
return on equity for competitive products that private carriers
achieved, the Postal Service would have to make significant pricing
and operational changes for its competitive products. Id. at 62-64.
However, this advantage was not considered in the FTC's net economic
effect analysis. See id. at 64.
\93\ Id. at 59. Applying the same methodology discussed above,
the borrowing advantage range was based on the requirement that
competitive products cover 5.5 percent of institutional costs (low-
end) and competitive product revenue (high-end). Id. at 59; see
supra at 56 n.91.
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2. Legal Constraints
The FTC listed six quantifiable legal constraints imposed on the
Postal Service due to its status as a governmental entity. The first
legal constraint included was the costs associated with the Alaska
Bypass. Id. at 56. The FTC noted the Postal Service had extensive
regulations governing its transportation of mail to remote areas within
Alaska. Id. at 44; 39 U.S.C. 5402. The FTC also included the legal
constraints associated with international mail transportation. FTC
Report at 56. While competitors were able to negotiate competitive
terms for international mail air transportation rates, the Postal
Service's rates were regulated by the Department of Transportation. Id.
at 44-45.
The FTC also identified certain employment and labor law
restrictions limiting the Postal Service, and specifically included the
Postal Service's inability to access subsidies offered to private
employers under the Medicare Part D program in its calculation. FTC
Report at 38-39, 56. The largest quantifiable legal constraint
identified by the FTC was the wage premium the Postal Service must pay
its employees due to the statutes that govern the Postal Service's
relationship with its employees. Id. at 39-40, 56. In its analysis, the
FTC used a figure submitted by the Postal Service indicating that, in
most localities, the Postal Service must pay its employees 21.2 percent
more than competitors. Id. at 39; see id. at 39 n.197 and 56 n.268.
Additionally, the FTC was able to quantify two pricing restrictions
imposed on the Postal Service as a result of the PAEA related to market
dominant Periodicals and non-profit mail. Id. at 56. The Postal
Service's ability to set flexible rates for Periodicals and non-profit
mail is limited by legal requirements that affect pricing for these
products. Id. at 44, 55-56; 39 U.S.C. 3622(c)(11); 39 U.S.C.
3626(a)(6). Although these pricing restrictions were valued between $87
million and $204 million, the FTC admitted it was ``unclear how
restrictions on periodical pricing and non-profit mail affect
competitive product costs.'' FTC Report at 56. As a result, the FTC
ultimately excluded these pricing restrictions from its calculation.
Id. at 56, 64.
3. FTC Report Conclusion: Net Economic Effect
In accounting for the differences between the various implicit
subsidies and legal constraints placed on competitive products due to
the Postal Service's unique legal status, the FTC determined that the
Postal Service's costs were $330 million to $782 million higher than
they would be otherwise, while the implicit subsidies the Postal
Service enjoyed totaled $39 million to $117 million. Id. at 64.
Therefore, the FTC determined the Postal Service incurred costs between
$213 million to $743 million higher due to its legal status. Id. As a
result, the FTC concluded that the Postal Service's unique legal status
causes it to have a net competitive disadvantage relative to its
private competitors. Id.
B. Relevant Comments
1. Postal Service
As part of its comments in the instant proceeding, the Postal
Service asserts that no credible study has undermined the fundamental
validity of the FTC's findings, and that, if anything, the FTC
[[Page 6776]]
Report significantly understates the Postal Service's net competitive
disadvantage because it fails to consider all of the legal differences
between the Postal Service and its private competitors. Postal Service
Comments at 8. Specifically, the Postal Service identifies the lack of
mandatory integration between the Federal Employees Health Benefits
Program and Medicare Parts A and B as well as differences in retirement
benefits and workers' compensation. Id. at 8-9. The Postal Service also
notes that the FTC failed to account for the private delivery
companies' superior freedom and business flexibility, as well as their
own unique economies of scale and scope. Id. at 9. The Postal Service
does not address any subsequent events that would affect the continuing
validity of the FTC's estimate of the net economic effect.
2. UPS
UPS states that the FTC Report's conclusions were incomplete
because the FTC did not include an estimate of the value of either the
letter or mailbox monopolies. UPS Comments at 10. UPS asserts that
because these monopolies provide the Postal Service with an advantage
over the private sector, the FTC's inability to estimate their value
makes it impossible to conclude from the FTC's Report that the Postal
Service operates at a net competitive disadvantage relative to the
private sector.\94\ UPS similarly criticizes the FTC Report for failing
to quantify the economies of scope deriving from the letter and mailbox
monopolies, despite the FTC Report acknowledging that such economies
exist.\95\ UPS contends that when the Postal Service's monopoly and
scope advantages are properly quantified, they outweigh the burdens
identified in the FTC Report, running counter to the FTC Report's
conclusion that the Postal Service operates at a net competitive
disadvantage.\96\
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\94\ Id. Sidak likewise asserts that the FTC Report failed to
quantify the postal monopoly and that, had it done so, this may have
turned the FTC's finding to a net competitive advantage for the
Postal Service. Sidak Reply Decl. at 11-13. Carlton states that the
mailbox monopoly puts private firms at an artificial marginal cost
disadvantage and that he is unaware of any efficiency rationale for
the mailbox monopoly. Carlton Reply Decl. at 18-19. The Postal
Service specifically denies that the postal monopoly confers any
artificial advantage on it. Postal Service Comments at 6-10.
\95\ UPS Comments at 10; Reply Comments of United Parcel
Service, Inc. on Notice of Proposed Rulemaking to Evaluate the
Institutional Cost Contribution Requirement for Competitive
Products, March 9, 2017, at 19-24 (UPS Reply Comments).
\96\ Id.; UPS Comments at 10, 15-18. UPS notes the Commission
estimated the value of the postal monopoly at $5.45 billion and the
cost of maintaining the USO at only $4.24 billion. UPS Reply
Comments at 24. See Postal Regulatory Commission, FY 2016 Annual
Report to the President and Congress, January 12, 2017, at 40, 48.
UPS lists multiple criticisms of the Commission's calculation on the
postal monopoly, including focusing incorrectly on lost profits and
using an incomplete estimation model that does not account for the
Postal Service's ability to leave small packages in mailboxes. UPS
Comments at 16-17. See also Sidak Comments at 6 (citing Robert J.
Shapiro, The Basis and Extent of the Monopoly Rights and Subsidies
Claimed by the United States Postal Service, March 2015).
Although the Commission's review under section 703(d) is
limited, the Amazon Reply Comments highlight some of the flaws with
UPS's proposed recalculation. UPS relies on a previous Commission
analysis of the postal monopoly and a paper by UPS Economist Robert
Shapiro (Shapiro Paper). Amazon points out that the Commission's
analysis of the postal monopoly did not estimate ``the cost
advantages enjoyed by the Postal Service over private carriers'' and
instead focused on the contribution the Postal Service would lose if
the postal monopoly was repealed. Amazon Reply Comments at 24. As it
relates to the Shapiro Paper, Amazon notes Shapiro estimated the
Postal Service received a $14.5 billion benefit from its postal
monopoly but contends this estimate contains multiple flaws. Id. As
an example, Amazon identifies Shapiro's failure to delineate between
market dominant products and competitive products making the
estimate ``useless'' because market dominant products represent the
majority of Postal Service volume. Id. at 24-27. Amazon further
contends that UPS representative Sidak's estimate of the Postal
Service's postal monopoly advantage is also flawed due to his heavy
reliance on the Shapiro Paper and the lack of support provided for
apportioning ``legal advantages'' to competitive products. Id. at
26-27.
---------------------------------------------------------------------------
Like the Postal Service, UPS does not address any subsequent events
that affect the continuing validly of the FTC's estimate of net
economic effect and focuses its comments on the accuracy of the FTC
Report itself.
3. Public Representative
The Public Representative focuses specifically on subsequent events
occurring in the market since the FTC Report was issued. PR Comments at
12-13. He notes the transfer of various mail services from the market
dominant product list to the competitive product list has eliminated
any impact the market dominant price cap had on those products.\97\ He
explains the product transfers changed ``to some degree'' the net
economic effect described in the FTC Report. PR Comments at 13. The
Public Representative states that, for the transferred products, the
Postal Service can compete more directly with its competitors without
the pricing constraints imposed by the price cap, ultimately leveling
the playing field.\98\
---------------------------------------------------------------------------
\97\ Id. See also Docket No. MC2010-20, Order Approving Request
to Transfer Selected Post Office Box Service Locations to the
Competitive Product List, June 17, 2010 (Order No. 472); Order No.
689; Order No. 780; Order No. 1411; Order No. 1461 (Outbound Single-
Piece First-Class Mail International Packages and Rolls); Docket No.
MC2014-28, Order No. 2160 (Inbound Surface Parcel Post (at UPU
Rates)).
\98\ Id. at 13. The Public Representative uses his conclusion to
support the position that the appropriate share should be maintained
at 5.5 percent because the playing field is already level. Id.
---------------------------------------------------------------------------
C. Commission Section 703(d) Analysis
In this analysis, the Commission first defines the scope of its
review pursuant to section 703(d) and then discusses events subsequent
to the FTC Report that may affect the validity of the FTC Report's
estimate of the net economic effect. Finally, the Commission performs a
supplementary analysis, which supports its conclusion that the FTC's
finding of a Postal Service net economic disadvantage continues to be
valid.
1. Scope of Section 703(d)
Section 703(d) directs the Commission to ``take into account the
recommendations of the Federal Trade Commission, and subsequent events
that affect the continuing validity of the estimate of the net economic
effect.'' The statute does not define the phrase ``take into account.''
The dictionary provides that the phrase ``to take into account'' is the
definition for the word ``consider.'' \99\ The Commission thus applies
the plain meaning of ``take into account'' and determines it will
consider whether subsequent events have affected the continuing
validity of the estimate of the net economic effect when the Commission
proposes revisions to its regulations promulgated under 39 U.S.C.
3633.\100\
---------------------------------------------------------------------------
\99\ Merriam-Webster, https://www.merriam-webster.com/dictionary/consider. See also Small Refiner Lead Phase-Down Task
Force v. EPA, 705 F.2d 506, 515 (DC Cir. 1983) (confirming the plain
language meaning of ``taking into account'' as requiring the agency
``consider'' statutory factors).
\100\ As previously mentioned, the FTC did not provide any
recommendations for the Commission to consider.
---------------------------------------------------------------------------
Likewise, the statute does not specifically define ``subsequent
event.'' Section 703(d) is clear that the Commission's review is
limited only to those subsequent events that affect the continuing
validity of the FTC's net economic effect estimate. As discussed above,
the FTC was tasked with identifying federal and state laws that apply
differently to the Postal Service with respect to competitive products
and using that information to estimate the laws' net economic effect on
the Postal Service.\101\ The FTC's net economic effect finding was
based on the implicit subsidies and legal constraints that the FTC
could quantify, each of which was linked to specific
[[Page 6777]]
federal or state laws. Therefore, the Commission determines
``subsequent event'' in section 703(d) refers to changes to federal or
state laws quantified in the FTC's estimate of the net economic effect.
As a result, the Commission finds the scope of its review under section
703(d) is limited to considering whether the laws behind the implicit
subsidies and legal constraints quantified by the FTC have changed
since the FTC Report's issuance, and if so, whether those changes
affect the continuing validity of the FTC's estimate of the net
economic effect of those laws.
---------------------------------------------------------------------------
\101\ See generally PAEA section 703(a) and (b).
---------------------------------------------------------------------------
Two commenters focus on what was excluded from the FTC's original
estimate of the net economic effect and not on events occurring since
the FTC Report's issuance that would affect the validity of that
estimate. The Postal Service focuses on the FTC's failure to include
healthcare, retirement, and workers' compensation costs and
competitors' business flexibility, while UPS asserts that the FTC
Report failed to estimate the value of the postal monopoly and the
Postal Service's economies of scope. Both the Postal Service and UPS
call for the Commission to reassess and recalculate the FTC's net
economic effect estimate for information known at the time of the FTC
Report that the FTC chose not to include or found was not quantifiable.
The reassessment and recalculation the Postal Service and UPS
request is outside the scope of what section 703(d) calls on the
Commission to do. As stated previously, section 703(d) requires the
Commission to consider whether subsequent events affect the continuing
validity of the FTC's estimate of net economic effect. As a result, the
Commission does not reassess the FTC's original conclusions as to what
implicit subsides and legal constraints should be included in and
excluded from the estimate of the net economic effect and whether these
constraints and subsidies were quantifiable.
In the analysis that follows, the Commission considers whether
subsequent events have affected the validity of the FTC's estimate of
the net economic effect and discusses what effects such events have on
the FTC's estimate. The Commission then offers a supplemental analysis
in support of its conclusion.
2. Events Subsequent to the FTC Report
Of the implicit subsidies and legal constraints separately
accounted for in the FTC's calculation, the Commission finds that there
has only been one law linked to a separately delineated element within
the FTC's calculation that has been amended, thereby constituting an
event subsequent to the FTC Report's issuance that affects the validity
of the estimate of the net economic effect. In the FTC Report, the FTC
explains that the Department of Transportation's regulation of
international mail air transport rates cost the Postal Service up to
$98 million more in FY 2006 than if the Postal Service were permitted
to independently negotiate the rates on the free market as private
companies were. FTC Report at 44, 56. The FTC apportioned $5 million to
$13 million of the $98 million total costs associated with the legal
constraint to competitive products specifically. Id. at 56.
In 2008, Congress eliminated the Department of Transportation's
authority to regulate the prices paid by the Postal Service for air
transport of international mail, allowing the Postal Service to
negotiate terms for international air mail transportation contracts
directly with airlines as private companies do.\102\ As a result, this
legal constraint originally estimated as a $5 million to $13 million
additional cost to the Postal Service competitive products no longer
exists.
---------------------------------------------------------------------------
\102\ See Public Law 110-405, 122 Stat. 4287 (2008); see also
FTC Report at 44-45.
---------------------------------------------------------------------------
The Commission finds no other changes to federal or state law
affected the legal constraints estimate. The FTC Report estimated the
total cost of the legal constraints imposed on the Postal Service
ranged from $330 million to $782 million. FTC Report at 64. As Table V-
1 demonstrates, after the constraint of international air
transportation rate regulation is removed and the legal constraint
total is recalculated, the total cost of the legal constraints imposed
on the Postal Service is $325 million to $769 million.
As the Commission found no changes to the laws that generate the
Postal Service's implicit subsidies, the Commission continues to accept
the FTC's conclusion concerning the total cost of the implicit
subsidies enjoyed by the Postal Service as $39 million to $117 million.
Applying the updated estimate of the effect of legal constraints, Table
V-1 demonstrates that the updated estimated net economic effect is $208
million to $730 million in net competitive disadvantage.
---------------------------------------------------------------------------
\103\ The FTC subtracted the low subsidy from the high
constraint and the high subsidy from the low constraint to create
the maximum range of net economic effects. It is not guaranteed that
both the subsidy and constraint will be near the same end of the
estimated range (high or low). Using these differences maximized the
range of possible effects. The Commission applies the same
methodology in updating the total range of costs the Postal Service
would incur.
Table V-1--Updated Estimate of Legal Constraints
------------------------------------------------------------------------
Estimate (in millions)
Legal constraints -------------------------------
5.5% 13%
------------------------------------------------------------------------
FTC's Legal Constraints Total........... $330 $782
International Air Transportation........ -5 -13
-------------------------------
Updated Legal Constraints Total..... 325 769
------------------------------------------------------------------------
Table V-2--Updated Total Range
------------------------------------------------------------------------
Estimate (in millions)
Updated range -------------------------------
5.5% 13%
------------------------------------------------------------------------
Updated Legal Constraints Total......... $325 $769
FTC's Total Implicit Subsidies.......... 39 117
-------------------------------
[[Page 6778]]
Updated Total Range \103\........... 208 730
------------------------------------------------------------------------
The Commission determines that the FTC's finding of a Postal
Service net economic disadvantage continues to be valid. Although the
subsequent event discussed above altered the overall estimate of the
net economic effect, it does not undermine the FTC's overall finding of
a net economic disadvantage.
3. Supplemental Analysis
Although the Commission's conclusion is based on legal changes
occurring subsequent to the FTC Report's issuance, the Commission also
performs a supplemental analysis by updating the high-end costs
associated with both the implicit subsidies and legal constraints based
on current competitive product revenue. This supports the Commission's
finding that the FTC's estimate of a net competitive disadvantage
remains valid.
As noted above, the FTC estimated the low-end cost impact of the
quantifiable implicit subsidies and legal constraints on competitive
products by using competitive products' 5.5-percent mandatory
contribution to institutional costs, which was the appropriate share
mandated at the time of the FTC's review. See supra at 56 n.91. Given
that competitive products' appropriate share of institutional costs is
currently 5.5 percent, it is unnecessary to update the low-end figures
estimated by the FTC. See 39 CFR 3015.7(c).
The FTC's estimates of the high-end cost impact of the quantifiable
implicit subsidies and legal constraints on competitive products was
based on competitive product revenue, which at the time of the FTC's
review was 13 percent of total Postal Service revenue. FTC Report at
55-57. Over the past 10 years, the Postal Service's competitive product
revenue has increased, in part due to the increased number of
competitive product offerings as a result of product transfers from the
market dominant product list.\104\ In FY 2017, competitive products
made up 29.69 percent of total Postal Service revenue. USPS-FY17-1.
Table V-3 shows the updated figures based on 29.69 percent of total
revenue currently attributed to competitive products.
---------------------------------------------------------------------------
\104\ The Public Representative contends the transfer of market
dominant products to the competitive product list should be
considered a subsequent event by the Commission as part of its
section 703(d) analysis. See section V.B.3, supra. The Commission
finds product transfers are outside the scope of its section 703(d)
analysis, as product transfers do not relate to a legal change for
either a quantifiable implicit subsidy or legal constraint discussed
by the FTC. See FTC Report at 55-77. However, it should be noted
that, in updating the high-end estimates of both the quantifiable
implicit subsidies and legal constraints, the value of product
transfers is reflected in those estimates as competitive product
revenue captures all current competitive product offerings.
Table V-3--Updated Estimates Based on Current Postal Service Revenue
----------------------------------------------------------------------------------------------------------------
Estimate (in millions)
-----------------------------------------------
5.5% 13% 29.69%
----------------------------------------------------------------------------------------------------------------
FTC's Legal Constraints Total................................... $330 $782 $1,785
International Air Transportation................................ -5 -13 -29
Updated Legal Constraints Total................................. 325 769 1,756
FTC's Total Implicit Subsidies.................................. 39 117 267
-----------------------------------------------
Updated Total Range \105\................................... 92 .............. 1,717
----------------------------------------------------------------------------------------------------------------
While the low-end estimated value of the implicit subsidies remains
at $39 million, the adjusted high-end estimated value of implicit
subsidies is $267 million, based on FY 2017 Postal Service competitive
product revenue. The low-end estimated cost of the legal constraints
continues to be $330 million, and the adjusted high-end estimated cost
is $1,785 million, based on FY 2017 Postal Service competitive product
revenue. As shown in Table V-3, when the high-end figure of the
international mail air transportation legal constraint is updated to
$29 million, and then both the low-end figure of $5 million and the
updated high-end figure of $29 million are removed from the legal
constraints total range, the impact is nominal, as the remaining legal
constraints imposed on the Postal Service range from $325 million to
$1,756 million. In combining the two ranges, using the same methodology
as the FTC did in its report, the legal constraints imposed on the
Postal Service continue to cause it to incur an estimated net economic
disadvantage between $92 million and slightly more than $1.7 billion.
---------------------------------------------------------------------------
\105\ See supra at 65 n.103.
---------------------------------------------------------------------------
The updated range of the implicit subsidies and legal constraints
support the Commission's determination that the FTC's initial estimate
of a Postal Service net economic disadvantage remains valid.
D. Conclusion
In considering the effect of the sole subsequent event since the
FTC Report's issuance, the Commission concludes the legal change to the
Postal Service's ability to negotiate terms for international air mail
transportation does not affect the continuing validity of the FTC's
finding that the Postal Service operates at a net economic
disadvantage.
VI. Comments and Analysis
To the extent comments and reply comments are directly applicable
to the Commission's proposed approach or analysis above, the Commission
summarizes and discusses them in the applicable sections, supra. In
this
[[Page 6779]]
section, the Commission discusses the remaining comments and reply
comments received in response to Order No. 3624.
A. Increase the Appropriate Share
UPS, Sidak, Carlton, GCA, and FUR recommend that the Commission
increase the appropriate share.\106\ The Public Representative, the
Postal Service, Amazon, Panzar, MDMCS, NAPM, NPPC, and BOS filed
comments opposing an increase in the appropriate share.\107\ Comments
advocating to increase the appropriate share not previously discussed
in this Notice of Proposed Rulemaking generally addressed two topics:
(1) The question of whether the Postal Service has a competitive
advantage and the risks associated with a low appropriate share and (2)
approaches for setting the appropriate share. Following a summary of
the comments, the Commission discusses the issues raised in the context
of its proposed formula-based approach.
---------------------------------------------------------------------------
\106\ See, e.g., UPS Comments at 13-40; Sidak Decl. at 1;
Carlton Reply Decl. at 31; GCA Comments at 6-7; FUR Comments at 13-
14.
\107\ See, e.g., PR Reply Comments at 7; Postal Service Reply
Comments at 6-37; Amazon Reply Comments at 35-48; Panzar Reply Decl.
at 10-13; MDMCS Reply Comments at 1-3; NAPM Reply Comments at 2-3;
NPPC Reply Comments at 5; BOS Reply Comments at 11-14.
---------------------------------------------------------------------------
1. Competitive Advantage and Risks Associated With a Low Appropriate
Share
a. Comments in Favor of Increasing the Appropriate Share
UPS and Sidak assert that the Postal Service possesses a
competitive advantage over its competitors as a result of the economies
of scale and scope arising from the postal monopoly.\108\ UPS states
that, given the Postal Service's increasing focus on the parcels
market, the necessity of ensuring a ``fair playing field'' is even more
vital today than it was during previous Commission appropriate share
determinations. UPS Reply Comments at 7-8. UPS notes this is
particularly important in the context of this proceeding because the
appropriate share is the only provision to ensure the Postal Service
competes on a level playing field. UPS Comments at 11-13.
---------------------------------------------------------------------------
\108\ UPS Comments at 13-14; Sidak Decl. at 5-9.
---------------------------------------------------------------------------
UPS notes that, in terms of both volume and revenue, competitive
products comprise a much larger part of the Postal Service's business
today than they did in 2007, when the 5.5-percent level was initially
set. Id. at 19, 22-24. UPS asserts that competitive products' share of
the Postal Service's total volume has more than tripled since the
PAEA's enactment, and that competitive products currently make up 26.6
percent of the Postal Service's total revenue. Id. at 22-23. Sidak
echoes this, stating competitive volumes and revenues have
substantially increased in recent years. Sidak Decl. at 9-10. UPS and
Carlton further contend that overall institutional costs have increased
even as market dominant volumes and revenues have decreased, suggesting
that the growth of competitive product volume is driving the growth of
overall institutional costs.\109\
---------------------------------------------------------------------------
\109\ UPS Comments at 2-3, 9, 29-33; Carlton Reply Decl. at 26-
27.
---------------------------------------------------------------------------
In addition, multiple commenters emphasize what they view to be
risks associated with maintaining a low appropriate share requirement.
UPS asserts that the growth of Postal Service competitive products
dissuades entry and expansion of competitors and disincentivizes
competitor innovation and investment. UPS Comments at 25-26. Sidak
opines that the Postal Service is incentivized to underprice its
competitive products in order to increase the scale of its operations.
Sidak Decl. at 11-12. He states that increasing the appropriate share
is necessary to protect market dominant consumers and ensure financial
stability for the Postal Service. Id. at 10, 14-16. In the short term,
Sidak contends that the institutional cost recovery burden that a low
appropriate share requirement places on market dominant products puts
pressure on the Postal Service to make market dominant service cuts,
effectively increasing the price of market dominant products. Id. at
15. He suggests that the Postal Service's ability to effectively
increase prices (by reducing service) is strongest for market dominant
products because demand for them is less elastic than demand for
competitive products. Id.
FUR echoes this, stating that under assigning institutional costs
burdens market dominant mailers and distorts the competitive market.
FUR Comments at 3. FUR asserts that the current appropriate share
requirement bears no relationship to any actual cost or revenue
numbers, which is particularly problematic given the Postal Service's
high level of institutional costs. This lack of a relationship
heightens the potential for the Postal Service to cross-subsidize
competitive products with market dominant products. FUR Comments at 11-
12.
Sidak and Carlton also take the position that a low appropriate
share requirement inhibits dynamic efficiency, wherein firms compete by
introducing new products, entering new markets, or developing cost-
reducing innovations, in favor of static efficiency, which lacks such
innovation.\110\ In particular, Carlton states that the dynamic
efficiency of the parcel industry is threatened because incentives to
invest in research and development by competitors are reduced due to
the Postal Service's inefficiencies. Carlton Reply Decl. at 14. Carlton
finds this to be concerning because in his view competitors are better
innovators than the Postal Service.\111\
---------------------------------------------------------------------------
\110\ Sidak Decl. at 16-17; Carlton Reply Decl. at 14-16.
Dynamic efficiency exists, in a macroeconomic context, when an
economy invests less than the return to capital. See Andrew B. Abel
et al., Assessing Dynamic Efficiency: Theory and Evidence, The
Review of Economic Studies, at 2 (1989), available at: http://scholar.harvard.edu/files/mankiw/files/assessing_dynamic_efficiency.pdf. Applied to a microeconomic
context, dynamic efficiency exists when a market is growing because
of entry and innovation. Static efficiency exists when a market is
in equilibrium (prices are close to marginal cost, and supply is
equal to demand), but not exhibiting growth.
\111\ Id. at 14-16. Carlton asserts these views are widely
supported by economic literature. See, e.g., id. at 17-18.
---------------------------------------------------------------------------
b. Comments in Opposition to Increasing the Appropriate Share
As discussed in the sections below, most commenters advocate that
the appropriate share requirement be either left at its current level
or eliminated entirely.\112\ In response to UPS's assertion that the
Postal Service has a competitive advantage, the Postal Service, Panzar,
and Amazon deny that the postal monopoly or any other aspect of the
Postal Service's unique legal status provides it with any competitive
advantage relative to private carriers.\113\ BOS maintains that the
Postal Service remains at a competitive disadvantage relative to its
competitors. BOS Reply Comments at 10.
---------------------------------------------------------------------------
\112\ See, e.g., PR Comments at 2; Stamps.com Comments at 5;
MDMCS Comments at 1; Amazon Comments at 1; ACMA Comments at 3.
\113\ See Postal Service Reply Comments at 17-28; Panzar Reply
Decl. at 6; Amazon Reply Comments at 23-27.
---------------------------------------------------------------------------
Amazon, the Postal Service, and the Public Representative disagree
with UPS's concerns about an unlevel playing field, contending those
concerns lack evidentiary support, especially in light of the Postal
Service's modest market share and its competitors' financial health and
investments in innovation.\114\ Amazon and the Public Representative
also note that economies of scale and scope benefit both the Postal
Service and its competitors. They
[[Page 6780]]
assert that many of the benefits competitors have are in the provision
of services that the Postal Service is legally barred from providing,
and that competitors benefit from the Postal Service's economies of
scale and scope by using the Postal Service for last-mile
delivery.\115\ Panzar asserts that while some statutory provisions
confer scale economies on the Postal Service, raising the appropriate
share would not eliminate them and would instead transfer their
benefits to profitable competitors. Panzar Reply Decl. at 6.
---------------------------------------------------------------------------
\114\ See Amazon Reply Comments at 29-32; Postal Service Reply
Comments at 15; PR Reply Comments at 2-3.
\115\ Amazon Reply Comments at 27-29, 34-35; PR Reply Comments
at 2-3, 7-8.
---------------------------------------------------------------------------
With regard to Sidak's assertions concerning the Postal Service's
incentives to underprice competitive products to gain scale at the
expense of profit, Amazon, Panzar, and the Postal Service all maintain
that such arguments are unfounded.\116\ The Postal Service asserts that
Sidak's view is not factually supported and that if the Postal Service
were to increase scale at the expense of profit, it would likely start
with market dominant operations, which ``dwarf[ ] the scale of
competitive operations.'' Postal Service Reply Comments at 29. Amazon
and Panzar state that both trends (including price and contribution
increases associated with competitive products) and theory disprove
Sidak's position.\117\ The Public Representative asserts that there has
been no demonstration that the Postal Service is underpricing its
competitive products or attempting to expand the scale of its
operations at its rivals' expense using unfair tactics, and that it is
``highly unlikely'' that the Postal Service could leverage the postal
monopoly in order to underprice its competitors. PR Reply Comments at
4, 10. He maintains that Sidak's argument, which focuses on the
incentives of management in regulated industries, does not apply to the
Postal Service's competitive products because those products have been
specifically deregulated to allow the Postal Service to maximize
profits. Id. at 10. He also posits that ``due to the Postal Service's
precarious finances, it does not have the luxury of trading scale for
profits.'' Id.
---------------------------------------------------------------------------
\116\ Amazon Reply Comments at 20; Panzar Reply Decl. at 7-9;
Postal Service Reply Comments at 28-29.
\117\ Amazon Reply Comments at 10-13, 20-22; Panzar Reply Decl.
at 7-9.
---------------------------------------------------------------------------
With regard to Sidak's and FUR's arguments regarding the
institutional cost recovery burden placed on market dominant products,
the Public Representative asserts that such arguments are misleading.
Id. at 5. He maintains that the appropriate share requirement for
competitive products has no impact on rates for market dominant
products. Id. at 6, 9. BOS echoes this, stating as long as incremental
costs are properly categorized, institutional costs cannot be caused by
competitive products alone. BOS Reply Comments at 8.
With regard to UPS's, Sidak's, and Carlton's assertions that
competitive products have driven increases in institutional costs, the
Postal Service responds that institutional costs have risen due to the
growth in delivery points, an increase in the Federal Employees
Retirement System (FERS) supplemental liability payment, and a
methodology change for city carriers--not the growth of competitive
products. Postal Service Reply Comments at 32-33. With regard to
Sidak's and Carlton's assertions concerning the effects of a low
appropriate share requirement on dynamic efficiency, Amazon and Panzar
both maintain that such arguments are unsound because there is evidence
of both innovation and new entrants into the market.\118\
---------------------------------------------------------------------------
\118\ Amazon Reply Comments at 34; Panzar Reply Decl. at 9-10.
---------------------------------------------------------------------------
c. Commission Analysis
The Commission addresses UPS's and Sidak's comments asserting that
the Postal Service has a competitive advantage and that the playing
field is not level in section V, supra. The Commission concludes that
the FTC's finding that the Postal Service operates at a net competitive
disadvantage relative to its competitors remains valid. See section V,
supra. However, the Commission agrees with UPS that competitive volume
and revenue has grown over the past 11 years. As the Commission
explains in section IV.A, supra, the Commission considers these changes
as among the reasons it proposes a new approach to calculating the
appropriate share. Further, the formula-based approach itself directly
takes into account the growth in revenue and market share. Under the
proposed approach, the appropriate share will increase during periods
of Postal Service competitive product growth. See section IV.B and C,
supra.
Concerning UPS's, Sidak's, and Carlton's assertions that
competitive volume is driving a larger percentage of the Postal
Service's institutional costs, the Commission finds that this assertion
misconstrues the nature of institutional costs, which, by definition,
do not have a reliably identifiable causal relationship with any
specific Postal Service product(s). Therefore, an increase in
institutional costs cannot be driven by competitive products because if
such a cost increase could be attributed to competitive products then
it would not be an institutional cost. The Commission further discusses
the distinction between attributable and institutional costs in section
IV.C.2, supra. The Commission also agrees with the Postal Service that
other known sources are driving the increase in institutional costs.
See Postal Service Reply Comments at 32-33.
With regard to Sidak's view that the Postal Service is incentivized
to underprice its competitive products in order to increase the scale
of its operations, the Commission finds that given the low volume of
competitive products relative to the Postal Service's overall
operations, underpricing competitive products would not be effective in
significantly expanding the Postal Service's scale. Additionally, the
incremental cost test restricts the extent to which the Postal Service
can underprice competitive products by ensuring that competitive
products recover, at a minimum, their incremental costs. See 39 U.S.C.
3633(a)(1). Further, there is no evidence that the Postal Service has
attempted to expand its scale at the expense of profit. Instead, the
record shows the Postal Service actively competing. See section IV,
supra. For example, as Table IV-7 in section IV.C.3.d, supra shows, the
contribution of competitive products as a percentage of institutional
cost has grown substantially since FY 2007.
With regard to Sidak's and FUR's assertions that a higher
appropriate share is necessary to protect market dominant mailers, the
Commission notes that the commenters representing the interests of
market dominant mailers in this proceeding do not have the same
concerns and generally take an opposite view on if and by how much the
appropriate share should be changed.\119\ Some express concern that
setting the appropriate share too high will harm market dominant
mailers by making it more difficult for the Postal Service to
contribute to institutional costs, as well as harm the overall finances
of the Postal Service.\120\ The Commission's proposed approach protects
market dominant mailers because it ensures that competitive products
are contributing an amount to institutional costs that is reflective of
market conditions.
---------------------------------------------------------------------------
\119\ See e.g., NPPC Reply Comments at 2; PostCom Comments at 2;
Stamps.com Comments at 5; MDMCS Comments at 1; ACMA Comments at 3;
GCA Reply Comments at 2.
\120\ See NPPC Reply Comments at 5; MDMCS Comments at 7; ACMA
Comments at 3.
---------------------------------------------------------------------------
With regard to FUR's assertion that the lack of any specific
connection
[[Page 6781]]
between the appropriate share and the actual revenue or costs of
competitive products is problematic due to the risk of cross-subsidy,
this concern is obviated by the fact that the Commission employs an
incremental cost test to prevent market dominant products from cross-
subsidizing competitive products.\121\
---------------------------------------------------------------------------
\121\ This test ensures that competitive products cover their
incremental costs, or the costs avoided by not providing competitive
products. See, e.g., Docket No. ACR2016, Annual Compliance
Determination, March 28, 2017, at 79; Order No. 3506 at 8.
---------------------------------------------------------------------------
With regard to Sidak's and Carlton's comments concerning dynamic
efficiency, the Commission finds that the market itself does not appear
to be lacking innovation. The delivery industry since the enactment of
the PAEA has been defined by innovation and entry, including the
introduction of more efficient vehicles, improved dynamic routing
algorithms, Sunday delivery by the Postal Service, and the growth of
Amazon as both a customer of, and competitor to, other delivery
services.\122\ Furthermore, the Commission's proposed formula-based
approach is designed to address changes in both static and dynamic
efficiency because it raises the appropriate share in response to both
increases in the Postal Service's market power and growth in the
overall market, whether such growth is based on increases in demand,
entry of new firms, or innovations in the industry.
---------------------------------------------------------------------------
\122\ See PR Comments at 15-17; Amazon Comments at 23-28.
---------------------------------------------------------------------------
2. Proposed Methodology for Setting the Appropriate Share
a. Comments in Favor of Increasing Appropriate Share
UPS contends that the appropriate share level should ideally be
based on the stand-alone costs of the Postal Service's competitive
services. UPS Comments at 33. In the alternative, UPS asserts that the
best proxy for the appropriate share level would be attributable cost
shares--i.e., for competitive products to contribute to institutional
costs in the same proportion at which they contribute to total
attributable costs. Id. at 34-35. UPS suggests that its approach is the
one used by the European Commission in its regulation of European Union
postal operators. Id. at 37-39. Suggesting a 3-year average be used,
UPS states that the average of the last 3 years' attributable cost
shares for competitive products was 29.4 percent. Id. at 35. Therefore,
UPS contends that the appropriate share should be set at approximately
29 percent.\123\
---------------------------------------------------------------------------
\123\ Id. at 33; UPS Reply Comments at 19. UPS also notes that,
if necessary, the increase could be phased in by setting the
requirement as a weighted average of the 3-year average attributable
cost share and the current appropriate share level. UPS Comments at
36-37.
---------------------------------------------------------------------------
As an alternative to this proposal, UPS states that if the
Commission is not inclined to use attributable cost shares, then it
should use revenue shares--i.e., set the appropriate share equal to the
revenue from competitive products as a percentage of the Postal
Service's total revenue. Id. at 39. Under this approach, the
appropriate share would be 24.2 percent. Id. UPS also urges the
Commission to set the appropriate share to adjust annually to mitigate
the risk of it ``becoming outdated shortly after it is set.'' Id. at
39-40.
GCA also proposes a methodology for increasing the appropriate
share, which is based on an average of the actual contribution
competitive products have made to institutional costs since FY 2010.
GCA Comments at 6-7. GCA's proposed methodology would yield an
appropriate share level of between 10.5 and 11 percent. Id. at 6.
b. Comments in Opposition to Increasing Appropriate Share
All reply commenters not affiliated with UPS generally oppose UPS's
proposed approaches. Panzar specifically objects to UPS's proposal of a
stand-alone competitive enterprise measure because he asserts it is a
method for determining the maximum price and is inappropriate for
setting a price floor. Panzar Reply Decl. at 6.
Several commenters object to UPS's proposed attributable cost
shares approach. Amazon asserts that UPS's proposal is unfair to
mailers, shippers, and consumers and would tilt the playing field in
the marketplace against the Postal Service. Amazon Reply Comments at
22, 33-34. Amazon, Panzar, MDMCS, and GCA all assert that UPS's
proposal essentially amounts to fully-allocated costing, an approach
which the Commission has previously rejected.\124\ Amazon maintains
that fully-allocated costing is arbitrary because it assigns costs
without a basis in causation and has been widely rejected by
economists, Congress, and the courts. Amazon Reply Comments at 3, 36-
47.
---------------------------------------------------------------------------
\124\ Amazon Reply Comments at 35-47; Panzar Reply Decl. at 10-
13; MDMCS Reply Comments at 2; GCA Reply Comments at 1-2.
---------------------------------------------------------------------------
The Postal Service maintains that UPS's proposal is ``illogical and
unworkable'' because in order for market dominant products to pay their
attributable cost share, market dominant rates would have to be raised
significantly, likely in violation of 39 U.S.C. 3622(d)'s price cap.
Postal Service Reply Comments at 12-13. Additionally, the Postal
Service asserts that UPS's proposal amounts to an equal markup
requirement which fails to account for prevailing market conditions,
and as such contradicts the underlying purpose of the appropriate share
provision.\125\ The Public Representative suggests that a fairer method
than UPS's would be to look at the true proportion of institutional
costs actually covered by competitive products because the Postal
Service does not recover all of its institutional costs in a given
year. PR Reply Comments at 8.
---------------------------------------------------------------------------
\125\ Id. at 7-12. A markup requirement constitutes a minimum
amount the Postal Service would have to charge beyond the cost of a
product or set of products. An equal markup requirement is a markup
for one product or for a set of products designed to ensure the
product's contribution (or cost coverage) is as high as that of
another product or set of products.
---------------------------------------------------------------------------
The Postal Service contends that UPS's proposal would fail to
account for the asymmetric distribution of worksharing, which results
in market dominant products having a higher cost coverage than
competitive products and thus being better positioned to contribute
more to institutional costs. Postal Service Reply Comments at 13-14.
The Postal Service asserts that UPS's proposed methodology is arbitrary
because competitive products' attributable costs are disproportionately
concentrated in transportation, which competitive products consume more
of than market dominant products. The Postal Service maintains that
there is no reason to conclude that institutional costs should be
allocated on the same basis. Id. at 14-15.
Several commenters are concerned that UPS's proposal would harm
competition. NPPC characterizes an appropriate share of 29.4 percent as
``wholly unrealistic, not to mention noncompetitive (and probably
unachievable).'' NPPC Reply Comments at 5. MDMCS asserts that UPS's
proposal would require substantial competitive product price increases,
which could jeopardize the Postal Service's position in the market and
undermine the contribution that competitive products currently make to
institutional costs. MDMCS Reply Comments at 1. NAPM contends that a
substantial increase in the appropriate share would compel the Postal
Service to raise competitive product prices substantially, jeopardizing
its position in the market and, derivatively, the
[[Page 6782]]
contribution that competitive products currently make to institutional
costs. NAPM Reply Comments at 2. BOS echoes this, citing concerns that
the Postal Service would have to increase competitive product prices,
which would substantially harm the market. BOS Reply Comments at 2.
The Public Representative asserts that ``[r]egardless of the method
used to calculate the benchmark contribution requirement, if the
minimum contribution level is continually revised upward based on the
most recent contribution level, the required contribution will increase
as competitive product profits increase to ever higher levels until
they become, in effect, a ceiling.'' PR Reply Comments at 7. He warns
that such a scenario could ``increase competitive product prices in the
near future to a level higher than the market will bear and thus . . .
reduce [competitive products'] revenue and contribution.'' Id.
The Public Representative criticizes UPS's proposed revenue shares
methodology, stating that such an approach ignores the fact that the
increasing share of total revenue derived from competitive products is
partially based on the decline in market dominant volumes. Id. at 5. As
a result, he asserts that basing the appropriate share level on such
methodology would overstate competitive products' share of
institutional costs. Id. GCA is also opposed to the revenue shares
methodology and asserts that it constitutes a form of fully-allocated
costing. GCA Reply Comments at 1-2.
Several reply commenters were also opposed to GCA's proposed
approach. The Postal Service asserts that historic institutional cost
contribution levels do not yield a meaningful analysis of the market
and would be unsupported by the PAEA and Commission precedent. Postal
Service Reply Comments at 34-37. Amazon criticizes GCA's proposal on
the ground that it ``would still be below the actual contribution from
competitive products in any year since [FY] 2013 . . . .'' Amazon Reply
Comments at 47. Amazon asserts that the non-binding nature of GCA's
proposal illustrates why the Commission should eliminate the
appropriate share requirement. Id. at 48.
c. Commission Analysis
With regard to UPS's proposal that the appropriate share be based
on the stand-alone cost of the Postal Service's competitive business,
the Commission finds that UPS appears to misconstrue the nature of
stand-alone costs. Stand-alone costs are the costs used in evaluating
the maximum price that can be charged to customers in order to avoid
cross-subsidizing other products offered by a firm. See Panzar Reply
Decl. at 6. Although stand-alone costs for Postal Service's competitive
products could be used to develop maximum prices for those products to
ensure there is no cross-subsidization of market dominant products,
this is not required by the PAEA.\126\ In addition, the Commission has
and continues to view the appropriate share as a minimum requirement.
As a result, an approach designed to develop a maximum price or ceiling
would be inappropriate for setting a minimum price or floor.
---------------------------------------------------------------------------
\126\ The PAEA does, however, prohibit the cross-subsidization
of competitive products by market dominant products. See 39 U.S.C.
3633(a)(1).
---------------------------------------------------------------------------
With regard to UPS's proposal that the appropriate share be based
on attributable cost shares, the Commission notes multiple issues with
UPS's proposed approach. First, using attributable cost shares alone
fails to take into account the relevant circumstances and prevailing
competitive conditions in the market, as required by section 3633(b).
The Postal Service's attributable cost shares do not provide any
insight into its market power, the size of the overall competitive
market, or any other prevailing competitive conditions. Although
changes in attributable cost shares partly reflect transfers to the
competitive product list from the market dominant product list, they
are also affected to a much larger degree by the decline in market
dominant mail volumes and costs.
Second, UPS's attributable cost shares proposal is tantamount to
fully-allocated costing. Such an approach, which would allocate
institutional costs to products based on those products' relative
shares of total attributable costs, has long been rejected by the
Commission and by economists in general as being inherently
arbitrary.\127\ Assigning costs in that manner does not reasonably
reflect causation and can lead to widely different results depending on
whether total volume or total attributable cost shares are used.\128\
In addition, such an approach fails to maximize economic efficiency
because it is not based on marginal cost and does not yield prices
reflecting market demand. Id. The approach also violates the
Commission's long-standing approach to cost attribution that
necessitates attribution be established through reliably identified
causal relationships.\129\
---------------------------------------------------------------------------
\127\ See, e.g., Docket No. R94-1, Opinion and Recommended
Decision, November 30, 1994, Appendix F at 7; Docket No. R84-1,
Opinion and Recommended Decision, Vol. I, September 7, 1984, at 143
(Docket No. R84-1 Opinion).
\128\ Id. In its comments, UPS demonstrates this with the
differing appropriate share percentages it calculates as a result of
its attributable cost shares and revenue shares approaches.
\129\ See 39 U.S.C. 3622(c)(2); Docket No. R84-1 Opinion at 140
(citing Nat'l Ass'n of Greeting Card Publishers v. United States
Postal Service, 462 U.S. 810 (1983)). In Nat'l Ass'n of Greeting
Card Publishers, the Supreme Court addressed UPS arguments similar
to those it makes in this proceeding, stating: ``[p]etitioner [UPS]
argues that extended use of cost-of-service principles is necessary
to avoid subsidization of those classes of mail for which the Postal
Service has competition . . . by other classes of mail for which the
Postal Service enjoys a statutory monopoly . . . [,] [b]ut Congress
adopted the . . . conclusion that, unless a reliable connection is
established between a class of service and a cost, allocation of
costs on cost-of-service principles is entirely arbitrary.'' Nat'l
Ass'n of Greeting Card Publishers, 462 U.S. at 829 n.24.
---------------------------------------------------------------------------
With regard to UPS's alternate proposal that the appropriate share
be based on revenue shares, the Commission finds it suffers from
similar weaknesses to the attributable cost shares proposal. First,
considering revenue alone does not take into account the statutory
criteria and Commission precedent. Moreover, the Postal Service's total
revenue is also driven by its market dominant revenue, and market
dominant mail has experienced declining demand since FY 2007 and a
reduction in its revenue share relative to competitive product revenue.
Should those trends continue, declines in market dominant revenue would
increase the appropriate share for competitive products under the UPS
proposal. The substantial impact that unrelated factors (e.g., a
decline in market dominant revenue) can have on the appropriate share
under this approach demonstrates the major flaw with this and other
approaches that assign costs based on non-causation factors.
The Commission agrees with UPS's suggestion that the appropriate
share should adjust annually. At this time, the Commission finds that
an annual adjustment would better reflect market conditions and
mitigate the risks of the appropriate share being set too high or too
low. As a result, the proposed formula-based approach would adjust the
minimum appropriate share annually.
With regard to GCA's proposal that the appropriate share be based
on an average of the actual contribution competitive products have made
to institutional costs, the Commission finds it also suffers from
several deficiencies. First, as with UPS's other proposals, relying on
historic contribution alone does not address the prevailing competitive
conditions in the market or the other required elements of
[[Page 6783]]
section 3633(b). See 39 U.S.C. 3633(b). Second, it is unclear why GCA
proposes to use the average historic contribution since FY 2010, rather
than FY 2007 when the PAEA was enacted. Finally, relying on a rolling
average of historic contribution levels can result in an appropriate
share that does not react easily to economic changes. For example, if
the Postal Service were to experience several years of high
contribution, followed by a significant recessionary shock, an
appropriate share level based on average historic contribution may
become difficult for the Postal Service to achieve in the face of
adverse market conditions. Similarly, if demand for Postal Service
competitive products were to decline over time, it would take years for
an appropriate share based on average historic contribution to
incorporate the effect of this decline. In the meantime, the Postal
Service may be unable to both respond to the decline through altering
its pricing and meet the appropriate share. Because the Commission's
proposed approach adapts to changes in market conditions, it mitigates
the risks associated with changes in the market.
B. Maintain the Appropriate Share
The Public Representative, NPPC, and PostCom \130\ recommend that
the Commission maintain or slightly increase the appropriate
share.\131\ UPS and Carlton filed comments in opposition.\132\
Following a summary of the comments, the Commission discusses the
issues raised in the context of its proposed formula-based approach.
---------------------------------------------------------------------------
\130\ Although PostCom does not advocate for a particular
appropriate share level, PostCom recommends that the Commission
maintain a moderate approach. As a result, the Commission discusses
PostCom's comments in this section.
\131\ See, e.g., PR Comments at 2; NPPC Reply Comments at 2;
PostCom Comments at 2. The Postal Service and NALC make alternative
arguments that if the Commission is not inclined to eliminate the
appropriate share then it should be maintained at its current level.
See Postal Service Comments at 1; NALC Comments at 4. Stamps.com
takes the position that the appropriate share should be eliminated
or retained. Stamps.com Comments at 5. The Commission includes
Stamps.com's comments in section VI.C.1, infra.
\132\ See, e.g., UPS Reply Comments at 1-2; Carlton Reply Decl.
at 5.
---------------------------------------------------------------------------
1. Comments in Favor of Maintaining the Appropriate Share
Although there are minor divergences in the commenters' views, the
Public Representative, NPPC, and PostCom generally advocate that the
Commission maintain or slightly increase the appropriate share.\133\
---------------------------------------------------------------------------
\133\ PR Comments at 2 (``the Commission should retain the
current 5.5 percent requirement''); NPPC Reply Comments at 2 (``the
Commission should either retain the current 5.5 percent minimum or
raise it only modestly . . .''); PostCom Comments at 2 (``the PRC
should follow a moderate approach. . .'').
---------------------------------------------------------------------------
All three commenters discuss why they see the competitive market as
functioning correctly. For example, the Public Representative maintains
that UPS's and FedEx's profits indicate healthy competition in the
competitive market. PR Comments at 17. He asserts that UPS and FedEx
together comprise roughly 84 percent of the total competitive market,
while the Postal Service comprises only about 15 percent. Id. at 11. He
maintains that relative market share for the 3 largest delivery
companies--UPS, FedEx, and the Postal Service--has been stable for
years, indicating strong competitive conditions in the market. Id. at
14. In advocating for a moderate approach, PostCom supports maintaining
``the stable structure'' that has allowed the Postal Service to grow
its competitive products while safeguarding against predatory pricing
and cross-subsidization. PostCom Comments at 6-7. NPPC and PostCom
emphasize the appropriate share's effectiveness in allowing the Postal
Service's competitive products to compete and be profitable.\134\
---------------------------------------------------------------------------
\134\ NPPC Reply Comments at 6; PostCom Comments at 4, 6.
---------------------------------------------------------------------------
Despite advocating for the appropriate share to be maintained at
5.5 percent, the commenters acknowledge the changes that have occurred
in the competitive market. For example, the Public Representative
identifies changes to the market, including the growth of e-commerce
and the rise of Amazon, and notes that the Postal Service's financial
condition remains precarious. PR Comments at 15. He acknowledges that
competitive volumes have increased relative to market dominant volumes,
but he states that competitive volumes remain a minor share of overall
volume. Id. at 16. Similarly, PostCom also states that despite
``impressive growth in volumes, revenues, and contribution,''
competitive products have remained a small share of overall volume.
PostCom Comments at 2, 5. NPPC discusses the growth in the package and
overnight delivery markets, stating that a ``modest upward adjustment
would not be unreasonable.'' NPPC Reply Comments at 5-6. However, NPPC
cautions that any upward adjustment should not disrupt competitive
products' pricing. Id. at 6.
All three commenters also raise concerns about the risks of setting
the appropriate share too high and harming competition. The Public
Representative asserts that if the Commission were to raise the
appropriate share level, it could fuel industry-wide price increases
for competitive products that solely benefit competitors. PR Comments
at 17, 18. He is also concerned that ``there is simply too little
margin for error,'' and that too high of an appropriate share would
``cause a loss of otherwise profitable volumes'' for the Postal
Service. Id. at 18.
PostCom urges the Commission to avoid ``radical action that could
serve to unfairly hamstring the Postal Service's pricing flexibility
and endanger its ability to compete in the competitive marketplace.''
PostCom Comments at 1. PostCom asserts that the current appropriate
share has not impeded the Postal Service's ability to compete, but it
is concerned that a large increase in the appropriate share would be
disruptive to the Postal Service and overall market. Id. at 6.
Similarly, NPPC is concerned that too high of an appropriate share
would ``[choke] off business in the Competitive Products area,'' which
it states is not in the interests of market dominant mailers and would
reduce overall competitiveness. NPPC Reply Comments at 5.
2. Comments in Opposition to Maintaining the Appropriate Share
As discussed in the sections above and below, many commenters
advocate for a much larger increase in the appropriate share or for the
appropriate share to be eliminated.\135\ A few of those commenters
voice general opposition to maintaining the appropriate share at 5.5
percent.\136\ UPS and Carlton are the only commenters to respond
directly to the positions of those who advocate for the appropriate
share to be maintained or slightly increased.
---------------------------------------------------------------------------
\135\ See, e.g., UPS Comments at 4; Amazon Comments at 1.
\136\ See, e.g., FUR Comments at 9-12; (stating that the current
appropriate share is too low in light of similar network type
industries, competitive products' growth and increasing revenue, the
lack of relationship between the current appropriate share and
actual costs and revenues, and the high percentage of costs
designated as institutional); Amazon Comments at 54-55 (citing to
costs and risks the appropriate share imposes and stating that sound
policy calls for removing unnecessary and non-binding rules); MDMCS
Comments at 1-2 (stating that ``[e]ven leaving the required minimum
contribution in place at its current level would be a needless
invitation to mischief.'').
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UPS states the current 5.5-percent appropriate share does not
ensure a level playing field, fails to account for competitive
products' growth, and ``bears no rational relationship to current
market conditions.'' UPS Comments at 1-2. UPS takes the position that
competitive products are
[[Page 6784]]
driving up the Postal Service's costs and investments, but have little
responsibility to fund them. UPS Reply Comments at 1, 26. For this
reason, UPS maintains that ``[c]urrent regulatory requirements . . .
provide the Postal Service with an artificial advantage over the
private sector,'' because private sector companies cannot ``avoid
covering the costs and investments associated with selling [their]
products.'' Id. at 1, 2. In UPS's view, the current 5.5-percent
requirement ``is so low and outdated that it is effectively meaningless
today.'' Id. at 2. UPS asserts that there will not be a level playing
field unless the Postal Service sets prices high enough to produce
sufficient revenue to cover all costs, which it states the current 5.5-
percent appropriate share fails to do. Id. at 3.
Carlton states that maintaining the current 5.5-percent appropriate
share ``would promote the inefficient expansion of USPS' competitive
products, as well as harm innovation and the dynamic efficiency of the
parcel delivery industry.'' Carlton Reply Decl. at 5. UPS dismisses the
concerns raised by other commenters that raising the appropriate share
would be detrimental to consumers and the Postal Service. It asserts
that such arguments fail to consider the harm the Postal Service causes
to dynamic efficiency, and asserts that no commenter demonstrated that
the Postal Service's ability to compete would be harmed by an increase
in the appropriate share. UPS Reply Comments at 34-35.
3. Commission Analysis
As discussed in detail in section IV, supra, the Commission finds
that its proposed formula-based approach best captures the prevailing
competitive conditions in the market and other relevant circumstances
under 39 U.S.C. 3633(b).
Although several commenters advocating for the appropriate share to
be maintained or slightly increased assert that the current appropriate
share has been successful at preserving competition and has allowed the
Postal Service to grow its competitive business, those commenters also
acknowledge the substantial changes that the competitive market has
experienced over the past 11 years. As the Commission discusses in
section IV.A, supra, these changes render a change in approach
appropriate at this time. The Commission agrees with the Public
Representative and PostCom that competitive volume remains a minor
share of overall volume. See section IV.C.3.b, supra. However, as the
Commission discusses in sections IV.B and IV.C.1, the prevailing
competitive conditions in the market have changed, with the Postal
Service's market power and market share, as well as the competitive
market as a whole, all growing since FY 2007.
Although under current market conditions the minimum appropriate
share provided by the formula would increase over the current 5.5-
percent requirement, the operation of the formula and the proposed
annual adjustment of the appropriate share should mitigate many of the
concerns raised by the commenters who advocate for the Commission to
maintain or slightly increase the appropriate share. For example,
several commenters express concern that the appropriate share will be
set too high and harm the Postal Service's ability to compete (which
they assert, in turn, will hurt competition as a whole and the Postal
Service's finances). In section IV.C.3.d, supra, the Commission
considers concerns with setting the appropriate share too high and
discusses how the proposed formula limits increases to no higher than
needed to account for growth in the Postal Service's market power or
growth in the market as a whole. The proposed formula-based approach
also mitigates this risk by adjusting annually to reflect market
conditions. As a result, if the Postal Service were to lose market
share and the competitive market were to retract, those changes would
be reflected in a future decrease in the appropriate share. Further, as
demonstrated by Table IV-7 in section IV.C.3.d, supra, the proposed
formula-based approach should not force the Postal Service to raise
prices or harm its ability to compete.
C. Eliminate the Appropriate Share
Amazon, Panzar, the Postal Service, Stamps.com, NALC, MDMCS, ACMA,
eBay, and BOS recommend that the Commission eliminate the appropriate
share.\137\ UPS, Carlton, and Sidak filed comments opposing elimination
of the appropriate share.\138\ Following a summary of the comments, the
Commission discusses the issues raised in the context of its proposed
formula-based approach.
---------------------------------------------------------------------------
\137\ See, e.g., Amazon Comments at 1; Panzar Decl. at 2; Postal
Service Comments at 1; Stamps.com Comments at 1; NALC Comments at 1;
MDMCS Comments at 1; ACMA Comments at 3; eBay Reply Comments at 2;
BOS Reply Comments at 14. The Commission notes that Stamps.com
advocates for the appropriate share to be eliminated or retained at
5.5 percent. Stamps.com Comments at 5.
\138\ See, e.g., UPS Reply Comments at 3; Carlton Reply Decl. at
5; Sidak Reply Decl. at 1.
---------------------------------------------------------------------------
1. Comments in Favor of Eliminating the Appropriate Share
Several commenters cite the competitive nature of the market as a
reason for eliminating the appropriate share. The Postal Service
asserts that the current market is competitive--even more competitive
than it was when the appropriate share was last reviewed--and that the
Postal Service's competitors are profitable and growing. Postal Service
Comments at 6-7, 17. It represents that its market position has
remained relatively unchanged since the last review, although it
acknowledges that the market has grown overall. Id. at 10-12. ACMA
asserts that there is considerable competition in the delivery sector,
despite each competitor having unique strengths and weaknesses. ACMA
Comments at 1-2. Stamps.com states that the market is ``workably
competitive,'' with many factors other than price affecting the market.
Stamps.com Comments at 1-3. Amazon asserts that the Postal Service's
competitors have ``undeniably thrived.'' Amazon Comments at 7-8.
Among the commenters advocating for elimination of the appropriate
share, commenters generally maintain that the Postal Service does not
have a competitive advantage, and many assert that the Postal Service
is operating at a competitive disadvantage. The Postal Service, ACMA,
and BOS state that the Postal Service remains at a competitive
disadvantage relative to its competitors.\139\ The Postal Service
asserts that if the playing field is level or otherwise not tilted in
favor of the Postal Service, ``the importance of the [appropriate
share] provision is diminished, and the appropriate share requirement
should at the very least be reduced, if not eliminated.'' Postal
Service Comments at 4-5. Amazon maintains that on the whole, a balanced
assessment of the benefits and burdens accruing to the Postal Service
as a result of its unique governmental status shows that it receives no
unfair advantage. Amazon Comments at 41.
---------------------------------------------------------------------------
\139\ Postal Service Comments at 6-10; ACMA Comments at 2; BOS
Reply Comments at 8-10.
---------------------------------------------------------------------------
Several commenters assert that the Postal Service is engaging in
fair competition and, as a result, the appropriate share is
unnecessary. MDMCS states the requirement is ``an irrelevant
anachronism,'' because it is unnecessary to level the playing field,
prohibit cross subsidization, or ensure that competitive products
contribute to institutional costs. MDMCS Comments at 1. Similarly,
Amazon and Panzar take the position that the appropriate share
requirement is not necessary to provide
[[Page 6785]]
a ``level playing field'' for the Postal Service's competitors.\140\
Amazon asserts that any unique legal treatment which the Postal Service
receives is the result of deliberate policy choices made by Congress.
Amazon Comments at 39. Moreover, Amazon maintains that the Postal
Service's competitors have their own unique economies of scale and
scope which are unavailable to the Postal Service, and that the
economies of scale and scope in last-mile delivery which the Postal
Service possesses are shared with its competitors, who are permitted to
access the Postal Service's network. Id. at 34-42.
---------------------------------------------------------------------------
\140\ Amazon Comments at 34-43; Panzar Decl. at 7-8.
---------------------------------------------------------------------------
ACMA, MDMCS, Stamps.com, and Panzar assert that the Postal Service
is behaving appropriately in the market, as it tries to maximize
profits while retaining customers.\141\ Stamps.com and Amazon maintain
that contribution to institutional costs is an outcome of the Postal
Service's pursuit of profits and pricing.\142\ As a result, both assert
that the minimum contribution has no role to play.\143\ Similarly, eBay
takes the position that the appropriate share requirement is
unnecessary because historical experience has shown that the Postal
Service prices its competitive products so as to increase contribution
levels to institutional costs.\144\
---------------------------------------------------------------------------
\141\ ACMA Comments at 3; MDMCS Comments at 2; Stamps.com
Comments at 3; Panzar Reply Decl. at 7-9.
\142\ Stamps.com Comments at 4; Amazon Comments at 6.
\143\ Stamps.com Comments at 5; Amazon Comments at 6.
\144\ eBay Reply Comments at 2. eBay also notes that it posted a
petition on its website, which received 32,805 signatures supporting
elimination of the appropriate share from its online community. Id.
at 3-4, App. A.
---------------------------------------------------------------------------
Panzar, NALC, and MDMCS assert that there is no need for a minimum
appropriate share because the Postal Service has increased competitive
prices, the contribution of competitive products to institutional costs
has exceeded the minimum appropriate share, and there has been no
evidence of predatory pricing or unfair subsidization on the part of
the Postal Service.\145\ Similarly, Amazon asserts that the fact that
the actual contribution level from competitive products has
consistently exceeded the required level renders the appropriate share
requirement effectively irrelevant as a pricing constraint. Amazon
Comments at 29.
---------------------------------------------------------------------------
\145\ See Panzar Decl. at 10-11; NALC Comments at 2, 3; MDMCS
Comments at 2-6.
---------------------------------------------------------------------------
Amazon and MDMCS assert that the minimum share requirement is not
necessary to protect against cross-subsidization of competitive
products by market dominant products because the Commission already
employs its incremental cost test to prevent cross-subsidization. This
test ensures that competitive products cover their incremental costs,
and these commenters maintain that as long as competitive product
prices cover those products' incremental costs, there is no risk of
cross-subsidization.\146\ For the same reason, Amazon and Panzar
maintain that the appropriate share requirement is not necessary to
prevent predatory pricing by the Postal Service, because prices which
cover their incremental costs, by definition, cannot be predatory.\147\
The Postal Service states that there is no basis to find that it has
engaged in predatory pricing. Postal Service Comments at 10.
---------------------------------------------------------------------------
\146\ Amazon Comments at 30-32; MDMCS Comments at 3.
\147\ Amazon Comments at 32-33; Panzar Decl. at 5-6.
---------------------------------------------------------------------------
Amazon asserts that the Postal Service ``is aggressively pursuing
contribution from competitive products, not trying to minimize it.''
Amazon Comments at 19. Amazon explains that this has resulted in the
growth of contribution to institutional costs by competitive products
since the last review of the appropriate share, and it posits that much
of this growth has been the result of above-inflation price increases.
Id. at 19-20, 22-23. Amazon maintains that the Postal Service's
competitors have also been able to impose above-inflation price
increases for their products, and that they are profitable and are
investing heavily in expansion and improved technology. Id. at 23, 28.
Amazon and Panzar take the position that the appropriate share
requirement is not necessary to provide a margin of safety with regard
to the Postal Service's cost estimates.\148\ Amazon notes that current
cost coverage levels for competitive products are high, and it
maintains that the Postal Service's cost estimation methods have been
demonstrated to be reliable. Amazon Comments at 33-34. Panzar maintains
that the Postal Service should be permitted to price its competitive
products down to the level of incremental costs. Panzar Decl. at 5-11.
---------------------------------------------------------------------------
\148\ Amazon Comments at 33-34; Panzar Decl. at 6-7.
---------------------------------------------------------------------------
Amazon, Panzar, Stamps.com, MDMCS, and NALC are concerned that if
the appropriate share were set too high, both the Postal Service's
finances and consumers would be harmed.\149\ MDMCS and Amazon assert
that shippers and ultimately consumers would be harmed through higher
prices and shipping costs, and MDMCS, Amazon, Panzar, and ACMA suggest
that all Postal Service customers would be hurt if declining finances
resulted in service declines.\150\ In addition, Amazon suggests that
rural customers and customers who receive packages at residences would
be most harmed. Amazon Comments at 47-51. Amazon maintains that the
only winners in the case of a substantial price increase would be the
Postal Service's competitors, which would gain additional pricing
power. Id. at 10, 45-46.
---------------------------------------------------------------------------
\149\ See Amazon Comments at 4-5, 9; Panzar Decl. at 11-12;
Stamps.com Comments at 5; MDMCS Comments at 1-2, 6-7; NALC Comments
at 4.
\150\ MDMCS Comments at 7; Amazon Comments at 9-10, 43-46;
Panzar Decl. at 14; ACMA Comments at 2.
---------------------------------------------------------------------------
MDMCS also expresses concern that having any appropriate share
requirement is risky because market conditions could change
unexpectedly (e.g., a competitor could shift a portion of package
volume from the Postal Service to its own delivery network). MDMCS
Comments at 7. The Postal Service echoes this concern, stating that
setting the appropriate share too high would injure consumers by
pricing the Postal Service out of the market, lessening overall price
and service competitiveness in the market and harming the Postal
Service's ability to fund necessary network infrastructure. Postal
Service Comments at 4-5. It also discusses the growth of last-mile
delivery, which has been largely driven by three major customers. Id.
at 12. The Postal Service asserts that a substantial reduction in
packages from these three customers could impact its ability to
maintain current levels of contribution, and it asserts that the risk
of losing this volume ``cannot be dismissed as mere conjecture.'' Id.
The Postal Service also discusses several changes to the market that it
asserts may threaten the Postal Service's competitive position. Id. at
14. These changes include steadily increasing customer demands and
expectations, major e-commerce retailers taking more logistics and
delivery operations in-house, and new competition providing last-mile
delivery. Id. at 14-16.
2. Comments in Opposition to Eliminating the Appropriate Share
Several commenters state generally that they are opposed to
eliminating the appropriate share.\151\ UPS, Sidak, and
[[Page 6786]]
Carlton are the only commenters to respond directly to the positions of
those who advocate for the appropriate share to be eliminated.
---------------------------------------------------------------------------
\151\ See, e.g., PostCom Comments at 4, 6 (stating that
``dispensing with the appropriate share requirement does not appear
to be a viable option,'' and that the appropriate share continues to
have an important protective role against the possibility of cross
subsidization or predatory pricing); NPPC Reply Comments at 3-4
(calling on the Commission to reject elimination of the appropriate
share altogether and voicing concern that it could cause market
dominant mailers to bear all institutional costs).
---------------------------------------------------------------------------
UPS asserts that the appropriate share is critical to ensuring the
Postal Service competes on a level playing field. UPS Reply Comments at
7. UPS takes the position that ``without a significant contribution
requirement, the playing field is artificially tilted in the Postal
Service's favor.'' Id. at 19. As discussed in section V.B, supra, UPS
and Sidak both maintain this is due in large part to the advantages of
the postal monopoly.\152\ UPS views the bar on the Postal Service's
ability to sell non-postal products as insufficient to overcome the
advantages of the postal monopoly. UPS Reply Comments at 24-26.
---------------------------------------------------------------------------
\152\ See UPS Reply Comments at 19-24; Sidak Reply Decl. at 12.
---------------------------------------------------------------------------
UPS opposes several of the views held by other commenters. UPS
disagrees with the Postal Service's characterization that its position
in the market has remained unchanged since the Commission last reviewed
the appropriate share. Id. at 29. UPS provides an alternative analysis
that shows that the Postal Service has ``achieved significant gains in
ground-based services in recent years.'' Id. at 31. UPS contends that
the Postal Service has rapidly gained market share in recent years in
``critical segments.'' Id. at 32. UPS also objects to the
characterization by several commenters that price increases on
competitive products alleviate concerns of market distortion. Id. at
32-33. UPS alleges that because the Postal Service's competitive
products have been historically underpriced, the Postal Service is able
to raise prices and undercut competitors at the same time. Id. at 33.
UPS disputes the view that the appropriate share is not needed because
the Postal Service has incentives to exceed it and advocates that the
Commission not give weight to competitors' profitability. Id. at 33-34.
Carlton asserts that the problems with the current 5.5-percent
appropriate share would be exacerbated if the appropriate share were
eliminated. Carlton Reply Decl. at 5. He states that the Postal
Service's incentives differ from those of the private firms because the
Postal Service has less incentive to decrease costs, use capital assets
wisely, maximize profits, and innovate. Id. at 7-8. As a result,
Carlton views the Postal Service as having ``a long track record of
inefficiency and excess capacity.'' Id. at 8. Sidak echoes this,
stating that Panzar incorrectly assumes the Postal Service to be profit
maximizing, and asserting that this assumption impacts the overall
reliability of Panzar's analysis.\153\ Sidak asserts that the Postal
Service has the incentive to sacrifice profit in order to expand its
scale, and he is concerned that this creates a further incentive for
the Postal Service to underprice competitive products, engage in
predatory pricing, and harm competitors and market dominant customers.
Id. at 3-4, 5-6, 10-11, 13-14. He suggests that market dominant
products are unable to bear higher costs and that the Postal Service
will need to recover more institutional costs from competitive products
``[t]o avoid financial collapse.'' Id. at 14. Carlton and Sidak
directly contest Amazon's and Panzar's view that requiring coverage of
incremental costs alone is sufficient to preserve competition.\154\
Sidak cites concerns that Amazon and other large shippers are
incentivized to engage in rent-seeking behavior at the expense of
market dominant customers and taxpayers. Sidak Reply Decl. at 2, 34-41.
Carlton asserts that the incremental costs test for cross-subsidy only
applies when the firm at issue operates efficiently. Carlton Reply
Decl. at 7, 11. Carlton maintains that the Postal Service's
inefficiency and excess capacity allow the Postal Service to expand
competitive products and provide them at a lower incremental cost than
if the Postal Service were efficient. Id. at 10-13. This is because
underutilized labor and facilities, which would not exist if the Postal
Service operated efficiently, can be used for competitive products. Id.
---------------------------------------------------------------------------
\153\ Sidak Reply Decl. at 2. Sidak asserts that much of
Panzar's declaration would be inadmissible in federal court and
urges the Commission to hold declarations to the same admissibility
standard. Sidak encourages the Commission to disregard much of
Panzar's declaration under a federal court standard. Id. at 16-34.
\154\ Carlton Reply Decl. at 5; Sidak Reply Decl. at 2. UPS
echoes Carlton's views throughout its reply comments. See UPS Reply
Comments at 4-6, 8-12, 14-19.
---------------------------------------------------------------------------
UPS echoes this, stating if the Postal Service downsized its
operations as market dominant mail volumes declined, it would have been
more expensive to add competitive products. UPS Reply Comments at 10.
However, because it did not, UPS sees the Postal Service's low
incremental costs as reflecting ``its high fixed costs rather than
genuine economic efficiency.'' Id. at 11. Carlton asserts that this
displaces activities by more efficient competitors, harms economic
efficiency, and distorts competition. Carlton Reply Decl. at 11.
Carlton also takes the position that the framework for estimating
incremental costs is flawed because incremental costs are consistently
understated due to a different view than the standard economic view,
misattribution of costs, and implicit subsidies due to the Postal
Service's government status. Id. at 19-30.
3. Commission Analysis
Several commenters contend that the market has become sufficiently
competitive such that the appropriate share is no longer necessary. The
Commission's analysis, however, demonstrates that the market continues
to develop and change. As the Commission discusses in sections IV.B and
IV.C.1, the Postal Service has gained some market power and increased
its market share since the Commission's last review of the appropriate
share, while the market as a whole has grown. As discussed in detail in
section IV, supra, the Commission finds that its proposed formula-based
approach best captures the prevailing competitive conditions in the
market and other relevant circumstances under 39 U.S.C. 3633(b).
Many commenters take the position that either the playing field is
level or the Postal Service operates at a competitive disadvantage,
which they maintain supports elimination of the appropriate share.
Those commenters point to a lack of predatory pricing on the part of
the Postal Service, above-inflation price increases by both the Postal
Service and its competitors, and increased contribution from
competitive products to institutional costs. UPS and its
representatives take the opposite view, maintaining that the playing
field is not level, that the Postal Service's price increases are
insufficient to alleviate concerns, that the Postal Service has made
significant gains in areas like last-mile delivery, and that competitor
profitability is irrelevant.
As discussed in section V, supra, the Commission concludes that the
FTC's finding that the Postal Service operates with a net economic
disadvantage in offering competitive products continues to be valid.
However, the Commission does not find that the appropriate share should
be eliminated as a result. Instead, the Commission contends that the
proposed formula-based approach best captures the statutory criteria of
39 U.S.C. 3633(b) and balances the concerns of all groups--customers,
competitors, market dominant mailers, shippers, and the general public.
As explained in section IV.C.1.a, supra, the inclusion of the
Postal
[[Page 6787]]
Service Lerner Index in the proposed formula-based approach actively
takes into account many of the considerations raised by commenters. For
example, sudden large increases in the Postal Service Lerner Index may
indicate a competitive advantage under certain circumstances, and under
the proposed formula-based approach, an increase in the Postal Service
Lerner Index will result in an increased appropriate share, assuming
all else remains constant. In section IV.C.1.a, supra, the Commission
also explains how the Postal Service Lerner Index can be used to test
whether the Postal Service has engaged in predatory pricing for
competitive products as a whole, which the Commission's analysis shows
has not occurred over the past 11 years in Figure IV-1.
Although UPS asserts that competitor performance is not relevant to
the Commission's inquiry, the Commission disagrees. Section 3633(b)
requires the Commission to consider ``the prevailing competitive
conditions in the market,'' which necessitates that the scope of the
Commission's review look at the competitive market in which the Postal
Service operates. The Commission includes the Competitive Market Output
in the proposed formula to capture changes in the competitive market as
whole. See section IV.B, supra.
Panzar advocates that the Postal Service be permitted to price its
competitive products at their incremental costs. While setting price at
marginal cost (or, for multi-product firms such as the Postal Service
and its competitors, average incremental costs), is the economically
efficient point, the Postal Service and its competitors have priced
well above this point since FY 2007, and there is no evidence that
competition has significantly suffered. As discussed in sections IV.B
and IV.C, supra, the Postal Service has gained some market share and
some additional market power, but its competitors have also become more
profitable, and the market itself has grown through increased demand
and new entrants. These above-cost prices are, therefore, a result of
the inherent imperfect competition in the market. As competition in the
market grows and circumstances change, evidence may arise which would
warrant a further change to the appropriate share.
Although the Commission does not find that elimination of the
appropriate share is the most appropriate course of action in light of
current market conditions, the Commission will consider it in future
reviews as one of the options set forth in the plain language of 39
U.S.C. 3633(b). The competitive market remains in a state of flux,
innovation, and growth, with more efficient vehicles, dynamic routing
algorithms, and Sunday delivery becoming increasingly common, and
alternative forms of delivery (e.g., drone delivery) being explored.
Given this, the Commission finds that retaining the appropriate share
and modifying it to capture market changes on an annual basis is the
best approach at this time.
VII. Proposed Rules
In order to implement the Commission's proposed formula-based
approach, existing Sec. 3015.7(c), which describes the appropriate
share, must be revised.
Proposed Sec. 3015.7(c)(1) establishes the formula to be used in
calculating the appropriate share and defines each term, as discussed
above. See section IV.B.3, supra. Existing Sec. 3015.7(c) states that
the appropriate share of institutional costs to be covered by
competitive products set forth in that rule is a minimum or floor.
Proposed Sec. 3015.7(c)(1) retains this concept.
Proposed Sec. 3015.7(c)(2) describes the process by which the
Commission shall update the appropriate share for each fiscal year. As
discussed in section IV.B.3, supra, the Commission proposes to annually
use the formula to calculate the minimum appropriate share for the
upcoming fiscal year. Because the data necessary to calculate the
appropriate share for an upcoming fiscal year (which begins each
October 1st) is not final until the most recent ACD issues (typically
at the end of the prior March), the Commission proposes to report the
new minimum appropriate share level for the upcoming fiscal year as
part of its ACD. For example, under the proposal, the Commission would
calculate and report the appropriate share for FY 2020 as part of the
FY 2018 ACD.
As indicated above, both components of the Commission's proposed
formula-based approach rely on CRA data that is submitted by the Postal
Service as part of its ACR. See section IV.B.3, supra. The timing of
the availability of the CRA data makes the ACD an appropriate vehicle
for calculating and reporting competitive products' appropriate share
for the upcoming fiscal year. In addition, reporting the appropriate
share for the upcoming fiscal year in the ACD would give the Postal
Service time to incorporate any resulting changes into its proposed
rates for the following fiscal year.
VIII. Administrative Actions
Additional information concerning this rulemaking may be accessed
via the Commission's website at http://www.prc.gov. Interested persons
may submit comments on this Notice of Proposed Rulemaking no later than
60 days after the date of publication of this Notice of Proposed
Rulemaking in the Federal Register. Pursuant to 39 U.S.C. 505, Kenneth
R. Moeller continues to be designated as an officer of the Commission
(Public Representative) to represent the interests of the general
public in this proceeding.
IX. Ordering Paragraphs
It is ordered:
1. Interested persons may submit comments no later than 60 days
from the date of the publication of this document in the Federal
Register.
2. Pursuant to 39 U.S.C. 505, Kenneth R. Moeller continues to be
appointed to serve as the Public Representative in this proceeding.
3. The Secretary shall arrange for publication of this Order in the
Federal Register.
By the Commission.
Stacy L. Ruble,
Secretary.
List of Subjects for 39 CFR Part 3015
Administrative practice and procedure.
For the reasons stated in the preamble, the Commission proposes to
amend chapter III of title 39 of the Code of Federal Regulations as
follows:
PART 3015--REGULATION OF RATES FOR COMPETITIVE PRODUCTS
0
1. The authority citation for part 3015 continues to read as follows:
Authority: 39 U.S.C. 503; 3633.
0
2. Amend Sec. 3015.7 by revising paragraph (c) to read as follows:
Sec. 3015.7 Standards for compliance.
* * * * *
(c)(1) Annually, on a fiscal year basis, the appropriate share of
institutional costs to be recovered from competitive products
collectively, at a minimum, will be calculated using the following
formula:
ASt+1 = ASt * (1 + %[Delta]LIt-1 + %[Delta]CMOt-1)
Where,
AS = Appropriate Share, expressed as a percentage and rounded to one
decimal place
LI = Postal Service Competitive Lerner Index
CMO = Competitive Market Output
t = Fiscal Year
If t = 0 = FY 2007, AS = 5.5 percent
(2) The Commission shall, as part of each Annual Compliance
Determination, calculate and report
[[Page 6788]]
competitive products' appropriate share for the upcoming fiscal year
using the formula set forth in paragraph (c)(1) of this section.
[FR Doc. 2018-02932 Filed 2-13-18; 8:45 am]
BILLING CODE 7710-FW-P