FR Doc 07-4269 [Federal Register: September 4, 2007 (Volume 72, Number 170)] [Proposed Rules] [Page 50743-50786] From the Federal Register Online via GPO Access [wais.access.gpo.gov] [DOCID:fr04se07-10] [[Page 50743]] ----------------------------------------------------------------------- Part III Postal Regulatory Commission ----------------------------------------------------------------------- 39 CFR Parts 3001, 3010, 3015, and 3020 Administrative Practice and Procedure, Postal Service; Proposed Rule [[Page 50744]] ----------------------------------------------------------------------- POSTAL REGULATORY COMMISSION 39 CFR Parts 3001, 3010, 3015 and 3020 [Docket No. RM2007-1; Order Nos. 26 and 27] Administrative Practice and Procedure, Postal Service AGENCY: Postal Regulatory Commission. ACTION: Proposed rule. ----------------------------------------------------------------------- SUMMARY: A recently-enacted federal law directs the Commission to develop rules to implement a new postal ratemaking system. This proposal responds to that directive by presenting rules addressing market dominant and competitive products, including negotiated service agreements, the regulatory calendar, and product lists. This document incorporates a revision identified in an errata notice. Issuance of this document will allow the Commission to consider comments and, if appropriate, to make revisions prior to adoption of final rules. DATES: Submit comments by September 24, 2007; submit reply comments by October 9, 2007. ADDRESSES: Submit comments electronically via the Commission's Filing Online system at http://www.prc.gov. FOR FURTHER INFORMATION CONTACT: Stephen L. Sharfman, General Counsel, 202-789-6820 and stephen.sharfman@prc.gov. SUPPLEMENTARY INFORMATION: Regulatory History 72 FR 5230, February 5, 2007. 72 FR 29284, May 25, 2007. 72 FR 33261, June 15, 2007. I. Introduction This is the third in a series of orders designed to establish regulations implementing a modern system for regulating rates and classes for market dominant and competitive products.\1\ In response to those earlier orders, the Commission received more than 100 comments from interested parties.\2\ The Commission has reviewed these comments carefully. They have been useful in clarifying the Commission's analysis, and the parties' contributions are appreciated. --------------------------------------------------------------------------- \1\ PRC Order No. 2, January 30, 2007 and PRC Order No. 15, May 17, 2007. \2\ Attachment A to this order contains a list of the parties filing comments. --------------------------------------------------------------------------- In this order, the Commission outlines how it intends to administer various provisions of the Postal Accountability and Enhancement Act (PAEA), Pub. L. No. 109-435, 120 Stat. 3198 (December 20, 2006). The proposed regulations are set forth in section V. Comments are due by September 14, 2007. Reply comments are due by September 28, 2007. Although afforded 18 months, until June 19, 2008, to promulgate the new regulations under the PAEA, the Commission has made a concerted effort to accelerate that schedule considerably. The Commission views early implementation as beneficial to all stakeholders. Early implementation of a ratemaking framework prior to the statutory deadline will enable the Postal Service to use new, streamlined procedures to initiate rate (and class) changes as needed to respond to its financial needs and market conditions. The regulations may serve as a safety valve, providing an immediate means to address challenges faced by the Postal Service and perhaps obviate the necessity for rate relief through an omnibus rate case under existing procedures. The commenters urge that such a filing should be avoided, thereby allowing the Postal Service and the Commission to dedicate more resources to thoughtfully implementing other aspects of the reform legislation. It would be unfortunate if, in this reformed environment, rate changes had to be litigated under the old cost of service system. Having this new framework in place, and the Postal Service operating under the new framework as early as practical, would provide the Postal Service flexibility to respond quickly to changed conditions. The Commission's goal is to make this new system of rate adjustment advantageous for all stakeholders, enabling the Postal Service to price its own products, ensuring the lawfulness of competitive rates, providing increased transparency, and maintaining universal service at affordable rates. Fulfilling these objectives requires that competing interests be carefully balanced. The Commission, among other things, identifies the mail matter that comprises each type of mail listed in section 3631(a) and the products within the competitive category of mail. It also discusses generally the mail matter that comprises each type of mail listed in section 3621(a). However, in lieu of identifying specific market dominant products, the Commission has determined that for reasons of accuracy and expedition, it would be preferable to accept the Postal Service offer to prepare and submit a draft mail classification schedule, which, inter alia, identifies the market dominant products it believes should be contained therein. This will enable the Postal Service to categorize its market dominant services into products that best serve its business needs. In addition, it will permit the Postal Service to fashion a draft mail classification schedule with what it believes is an appropriate level of detail. The Commission then will be able to evaluate this draft for consistency with the principles discussed in this order. The draft mail classification schedule is due September 14, 2007. Comments on the draft mail classification schedule are due September 28, 2007. The proposed regulations represent the Commission's initial effort to establish a functional framework for regulating rates and classes for market dominant and competitive products. The proposed regulations do not seek to address every issue that might arise under the PAEA. The intent is that these regulations provide a reasonable starting point and that they will evolve over time. In the sections that follow, the Commission discusses proposed regulations governing: Rules Applicable to Rate Adjustments for Market Dominant Products (part 3010); Regulation of Rates for Competitive Products (part 3015); and Product Lists (part 3020). The Commission must also issue proposals amending the structure of its rules, and specific regulations applicable to complaints, reporting requirements, and commercially sensitive materials, as well as regulations to implement sections 404a and 504(f). Completing those tasks is complementary to the proposed regulations, which, once implemented, will be sufficient to enable the Postal Service to begin to operate as contemplated by the PAEA. II. Market Dominant Products A. Introduction Background. This segment of the rulemaking focuses on rate changes referred to as ``rate adjustments'' in the PAEA for market dominant products. The emphasis is on proposing regulations that will provide the Postal Service with the option of pursuing its next general round of price changes under the new law's ratesetting provisions, which feature a price cap mechanism and a streamlined advance notice and review, and on providing a comprehensive framework. Much of the discussion on this topic since the enactment of the PAEA has occurred in the context of a joint Postal Regulatory Commission-Postal Service [[Page 50745]] summit, regional field hearings, \3\ comments filed in response to Commission orders, \4\ and Congressional hearings. The Commission's preliminary conclusions about the direction of this regulatory effort reflect considered review of the comments and testimony presented in these forums. --------------------------------------------------------------------------- \3\ See PRC Order No. 19, Notice and Order on Field Hearings to Receive Testimony on Implementation of Modern System of Ratemaking, Docket No. RM2007-1, June 8, 2007. \4\ The parties have submitted several rounds of comments in response to the two advance notices of proposed rulemaking. As a matter of convenience, citations to these comments will identify the party's comments by filing date; reply comments will be so denoted. For example, the referenced Postal Service initial comments are cited as Postal Service Comments, June 18, 2007, at xx; reply comments are cited similarly, e.g., PSA Reply Comments, July 3, 2007, at xx. --------------------------------------------------------------------------- Commenters identify two main tasks for the Commission at this stage of implementation. One is reaching consensus on conceptual and practical aspects of the scope, depth and timeframe of Commission review of planned rate changes. The other is transforming numerous statutory requirements, objectives and factors into a new ``road map'' for navigating the regulatory calendar, expedited procedures, and price cap mechanism that are core components of the new system. Most commenters observe that these tasks involve balancing policy considerations, pragmatic concerns, and a revamped PRC/Postal Service partnership.\5\ They agree that the statute provides certainty on some key points, but point to numerous instances where other important issues are open to interpretation. Some urge the Commission to adopt a light-handed approach to the new notice-and-review process, with the price cap calculation being the sole focus.\6\ Others caution that implementation will allow price changes to occur more often than annually, the cap to be applied unequally to products within a class of mail, and the cap to be exceeded (within a certain range) under an exception referred to as ``unused rate adjustment authority'' or the banking exception. They suggest that these possibilities may have significant implications with respect to mailers' expectations that the modern system will provide predictability, certainty and stability. --------------------------------------------------------------------------- \5\ See, for example, Advo Comments, April 6, 2007, at 2-3; MOAA Reply Comments, May 7, 2007, at 1-2; PSA Comments, April 6, 2007, at 1-4; Time Warner Comments, April 6, 2007, at 1-3; and Postal Service Comments, April 6, 2007, at 2-4. \6\ Jon Mulford, for example, states: ``[the] PAEA has given the Commission extraordinary power to regulate the USPS. The Commission, in devising its system for setting rates * * * should at all costs avoid unnecessarily tying USPS management's hands as they attempt to cope with an impending financial crisis.'' Mulford Comments, March 9, 2007, at 5. --------------------------------------------------------------------------- The Commission appreciates the responses to its request for assistance in developing new regulations, and finds that the commenters' observations provide useful guidance. It also appreciates the Postal Service's efforts, outside of this rulemaking, to work with mailers on developing a viable regulatory calendar and on addressing rate implementation issues. See Postal Service Reply Comments, May 7, 2007, at 3-4 and Appendix B. The Commission proposes basic rules regarding the regulatory calendar in proposed rule 3010.7. B. Statutory Framework for Rate Changes Section 3622(d) of the PAEA, captioned ``Requirements,'' addresses some of the mandatory features the Commission must include in the modern regulatory system.\7\ It provides, in pertinent part: \7\ These requirements are not ``stand alone'' elements of the new system, but must be given effect in concert with certain statutory factors and objectives. However, unlike the ``requirements,'' most of which are new postal ratemaking features, many of the factors and objectives are identical to those employed in the Postal Reorganization Act of 1970 (PRA) ratemaking. (1) In General.--The system for regulating rates and classes for market-dominant products shall-- (A) include an annual limitation on the percentage changes in rates to be set by the Postal Regulatory Commission that will be equal to change in the Consumer Price Index for All Urban Consumers unadjusted for seasonal variation over the most recent available 12- month period preceding the date the Postal Service files notice of its intention to increase rates; (B) establish a schedule whereby rates, when necessary and appropriate, would change at regular intervals by predictable amounts; (C) not later than 45 days before the implementation of any adjustment in rates under this section, including adjustments made under subsection (c)(10)- (i) require the Postal Service to provide public notice of the adjustment; (ii) provide an opportunity for review by the Postal Regulatory Commission; (iii) provide for the Postal Regulatory Commission to notify the Postal Service of any noncompliance of the adjustment with the limitation under subparagraph (A); and (iv) require the Postal Service to respond to the notice provided under clause (iii) and describe the actions to be taken to comply with the limitation under subparagraph (A); (D) establish procedures whereby the Postal Service may adjust rates not in excess of the annual limitations under subparagraph (A). * * * * * However, the ``price cap'' in subsection 3622(d)(1)(A) is not an absolute limit; other provisions expressly require that the new system: (E) notwithstanding any limitation set under subparagraphs (A) and (C), and provided there is not sufficient unused rate authority under paragraph (2)(C), establish procedures whereby rates may be adjusted on an expedited basis due to either extraordinary or exceptional circumstances, provided that the Commission determines, after notice and opportunity for a public hearing and comment, and within 90 days after any request by the Postal Service, that such adjustment is reasonable and equitable and necessary to enable the Postal Service, under best practices of honest, efficient, and economical management, to maintain and continue the development of postal services of the kind and quality adapted to the needs of the United States. * * * * * Further, the following provisions in subsection 3622(d)(2) authorize the annual cap to be exceeded under certain conditions: * * * * * (C) Use of Unused Rate Authority.-- (i) Definition.--In this subparagraph, the term ``unused rate adjustment authority'' means the difference between-- (I) the maximum amount of a rate adjustment that the Postal Service is authorized to make in any year subject to the annual limitation under paragraph (1); and (II) the amount of the rate adjustment the Postal Service actually makes in that year. (ii) Authority. Subject to clause (iii), the Postal Service may use any unused rate adjustment authority for any of the 5 years following the year such authority occurred. Finally, the exercise of ``banking authority'' is itself subject to the following limitations: (iii) Limitations.--In exercising the authority under clause (ii) in any year, the Postal Service-- (I) may use unused rate adjustment authority from more than 1 year; (II) may use any part of the unused rate adjustment authority from any year; (III) shall use the unused rate adjustment authority from the earliest year such authority first occurred and then each following year; and (IV) for any class or service, may not exceed the annual limitation under paragraph (1) by more than 2 percentage points. * * * * * These comprehensive provisions unequivocally establish subsection 3622(d) as the administrative cornerstone of the new rate setting system for market dominant products. Collectively, streamlined advance review procedures, the price cap mechanism, the banking exception, and the exigency clause are designed to foster pricing flexibility, reduce burden, and facilitate quick implementation of rate changes. The Commission's proposed regulations are intended to fill in many of the details of price cap [[Page 50746]] administration, content of rate change filings, and due process. C. Summary of Main Issues The PAEA specifies use of the Bureau of Labor Statistics' widely- known CPI-U, but does not address some related aspects of administration, such as how to calculate the index adjustment and how to calculate the base to which the adjustment applies. It also does not address the extent of documentation of worksharing discounts. The Commission sought comments on these matters in its Second Advance Notice of Proposed Rulemaking on Regulations Establishing a System of Ratemaking, May 17, 2007. Additional implementation issues raised in the comments include: --whether the phrase ``not later than 45 days'' used in section 3622(d)(1)(C) limits Commission review to this number of days, or allows a longer period; --whether price change filings, other than exigent requests, involve ``barebones'' notice and documentation or more comprehensive support; --Whether the Commission's advance review is limited to assessing compliance with the price cap provisions or extends to other matters, such as an evaluation of worksharing discounts; --whether the Commission should solicit public comment in routine rate change filings; --whether the authority to ``bank'' unused rate adjustment authority for up to 5 years carries with it the ability to apply the banked pricing credit to a class other than the one in which it was accumulated; and --whether the rules should define ``exigent circumstances'' and whether trial-type proceedings must or should be held. D. Structure of New Proceedings and Rules Review of the comments points to interest in a new road map for rate changes. William Berkley usefully highlights this by observing: We need to keep in mind that we have to keep proceedings simple and rules of practice simple to avoid a system that only postal attorneys and economists can use. We ask when you establish these new rules that you remember to keep it as simple as you can. Proceedings before every regulator are always difficult, but let us also insure that we make it easy to navigate and understand the proceedings in this evolving system. Berkley Testimony at 5.\8\ --------------------------------------------------------------------------- \8\ Testimony of William S. Berkley, President and CEO, Tension Envelope Corporation, Before the United States Postal Regulatory Commission Field Hearing, Kansas City, June 22, 2007. --------------------------------------------------------------------------- United Parcel Service (UPS), addressing implementation in general, asserts: ``To the extent possible, the Commission should interpret PAEA in a way that recognizes the value of administrative simplicity and practicality, and that minimizes the Postal Service's burden, while remaining consistent with the statutory requirements.'' UPS Reply Comments, July 3, 2007, at 10. Accordingly, the Commission proposes to: --Organize most of the rules directly affecting market dominant products into a largely self-contained unit; --Standardize terms, definitions and methods to the extent feasible; and --Establish streamlined proceedings to facilitate all types of price changes. The Commission proposes to establish a separate part, designated part 3010, Rules Applicable to Rate Adjustments for Market Dominant Products, in 39 CFR. This part is divided into five subparts: Subpart A--General Provisions. Subpart B--Rules for Rate Adjustments for Rates of General Applicability (Type 1 Rate Adjustments). Subpart C--Rules for Applying the Price Cap. Subpart D--Rules for Rate Adjustments for Negotiated Service Agreements (Type 2 Rate Adjustments). Subpart E--Rules for Rate Adjustments in Exigent Circumstances (Type 3 Rate Adjustments). E. Overview of Proposed Subpart A--General Provisions This subpart consists of seven proposed rules. The first provision, proposed 3010.1, captioned ``Applicability,'' is a general representation that the rules in subpart A implement the ratesetting policies and procedures of the PAEA for market dominant products. It also notes a distinction between ``notice'' filings and ``request'' filings. Proposed 3010.2(a) codifies the following basic scenarios in which rate changes for market dominant products may be addressed: under price cap authority or a variation thereon, often referred to by commenters as the banking exception or banking authority; under a special contractual, or negotiated service agreement; and under an exigent circumstance. For ease of reference and reporting, this rule reflects the Commission's proposal to refer to each of these scenarios as ``types'' of filings, similar to the approach that has been used successfully for six categories of library references since Docket No. RM98-2. The Commission notes, for example, that for purposes of conducting the 10-year assessment of the new ratesetting approach, it may prove useful to have a ready tool for determining how many different types of notices and requests have been filed. The Commission incorporates these definitions into the regulations and the accompanying discussion. The following table summarizes this approach. Table II-1.--Summary of Alternative Filing Terms ------------------------------------------------------------------------ Proposed Statutory source Filing basis alternative(s) ------------------------------------------------------------------------ 39 U.S.C. 3622(d)(1)(A)..... ``annual limitation Type 1-A Rate on the percentage Adjustment. changes in rates''. 39 U.S.C. 3622(d)(2)(C)(i).. ``unused rate Type 1-B Rate adjustment Adjustment. authority''. 39 U.S.C. 3622(c)(10)....... ``the desirability Type 2 Rate of special Adjustment. classifications . . . including agreements between the Postal Service and postal users''. 39 U.S.C. 3622(d)(1)(E)..... ``due to either Type 3 Rate extraordinary or Adjustment. exceptional circumstances''. ------------------------------------------------------------------------ [[Page 50747]] F. Overview of Proposed Subpart B--Rules for Rate Adjustments for Rates of General Applicability (Type 1 Rate Adjustments) This subpart consists of five rules. These rules lay out basic procedures and certain fundamental Commission positions. Some of the debate among commenters centered on the timeframe for Commission action in a price change proceeding and on public input. The timeframe issue stems from the highlighted wording in the following passage from the PAEA: (C) not later than 45 days before the implementation of any adjustment in rates under this section, including adjustments made under subsection (c)(10)-- (i) require the Postal Service to provide public notice of the adjustment; (ii) provide an opportunity for review by the Postal Regulatory Commission. 39 U.S.C. 3622(d)(1)(C)(i)-(ii). The crux of the issue is whether the statute intends 45 days as the maximum or minimum period for advance notice and review. The Postal Service appears to read this language as establishing a statutory maximum, but acknowledges that some changes, as a matter of good business practice, such as those involving new worksharing discounts, will create more implementation issues. It indicates that it intends to provide additional notice in these instances. Postal Service Comments, June 18, 2007, at 14-15. The Mail Order Association of America (MOAA) shares the Postal Service's view. MOAA Reply Comments, May 7, 2007, at 14-15. Many commenters, however, see the wording in the statute as establishing a minimum, and therefore clearly authorizing the Commission to require the Postal Service to provide more notice. Time Warner suggests 90 days. Time Warner Comments, April 6, 2007, at 15. The Commission concludes that as a matter of statutory interpretation, the Postal Service's position reads the qualifier ``at least'' completely out of the statute. The conclusion more consistent with the statute's overall theme of transparency is that 45 days is the minimum period required by the statute, and the Commission may require a longer period in certain circumstances.\9\ At the same time, it seems that any extension should be in keeping with the notion of streamlined review; thus, the four months the OCA suggests as the routine approach appears excessive for the Commission's task of assessing the planned rate changes in terms of the price cap and/or the use of banking authority. --------------------------------------------------------------------------- \9\ Based on the Postal Service's comments, it anticipates filing 90 days in advance of implementation with the first 45 days constituting the statutory period for Commission review and the second half for implementation. --------------------------------------------------------------------------- The Commission concludes that for purposes of drafting an initial set of regulations, the language from the statute requiring notice and review ``not later than 45 days'' can be carried over directly into proposed rules 3010.10(a)(1) and (2). A provision in proposed rule 3010.10(b) encouraging more time for review recognizes the Postal Service's representations on this record that it intends to provide additional time for review when price changes are more complicated. Postal Service Comments, June 18, 2007, at 9-10. Proposed rule 3010.10(a) does not require the Postal Service to publish a Federal Register notice concerning a planned adjustment, but does contemplate broad dissemination of its intent to the mailing community and to the general public. This typically provides more effective notice than a Federal Register notice, in keeping with a modern rate setting system, and reduces administrative burden by freeing the Postal Service from the production details necessarily associated with Federal Register publication. The Commission notes that it imposes on itself, in proposed rule 3010.13(a), an obligation to publish notice of a rate adjustment filing in the Federal Register. Commenters are divided on the question of public input during the review period. Some, including the Postal Service, argue against it on grounds that the logic of the PAEA suggests that if public input is not expressly provided for in the statute, it is not authorized. On the other hand, the OCA and several others think it would be helpful. Newspaper Association of America (NAA), for example, asserts that allowing public comment would promote transparency. NAA Comments, March 30, 2007, at 2. NAA acknowledges that the new statute expressly provides for public participation when rate adjustments are based on exigent circumstances, but asserts: Nothing in the PAEA, however, prohibits the Commission from inviting such comment also when the Postal Service purports to notice rate adjustments consistent with the CPI limitation. Public comment--which necessarily would have to be expedited and would be submitted in writing--would promote transparency and could provide information helpful to the Commission's review. Id. at 7. It adds: Where the Postal Service's notice is straightforward, there likely will be relatively few comments. However, in instances when the Postal Service notices a more complicated set of rate changes, the Commission may benefit from the insights that the mailing community and broader public may be able to offer. The stakes of this review are important because the rates that will take effect from this process will be in effect for a substantial period of time before they are later reviewed by the Commission either in an annual review or in a complaint. Id. at 7-8. The Commission agrees that the statute does not expressly provide for public participation during the review period as it does in the exigency clause (in subsection 3622(d)(1)(E)). At the same time, the statute gives the Commission broad discretion in deciding on how to conduct its review. It follows that if the Commission believes public input might be helpful in determining the compliance of the anticipated rate changes with the statutory pricing provisions, there is no statutory bar to incorporating this into its review proceedings/ procedures. The Commission believes this will be the case, and provides, in proposed rule 3010.13(a) for 20 days (from the date of filing of a rate adjustment notice) for the public to file written comments. Proposed rule 3010.11 addresses several ``housekeeping'' details. It notes the limitation on rate increases in any 12-month period, the existence of CPI-U as a limitation, the exception allowing annual recapture of unused rate authority, and the allocation of unused rate authority to each class of mail. The latter provision directly addresses some commenters' concerns about ``cross-class'' banking. Proposed rule 3010.12 adopts the PAEA's stated inflation measure (CPI-U) and describes the source as the Bureau of Labor Statistics. The clarity of the PAEA on this point meant that there was no debate among the commenters on the benchmark that is to be used. Proposed rules 3010.13 and 14 address the nature of proceedings and the content of rate adjustment filings, and are the most extensive rules in this subpart. The flagship proceedings under the former statutory structure were 10-month trial-type ``omnibus'' rate and classification proceedings, bookended between considerable advance preparation on the part of the Postal Service (and many mailers) and a post-decision phase encompassing review by the Governors and the potential for reconsideration. Commenters agree that, barring a final omnibus rate case under 39 U.S.C. 3622(f), the PAEA casts that apparatus aside and replaces it with a [[Page 50748]] simpler process. In keeping with the new statutory emphasis on simpler proceedings, the Commission does not propose formal discovery, Notices of Inquiry, Presiding Officer's Information Requests, testimony, and hearings. It anticipates handling resolution of discrepancies or other matters through direct communication with the Postal Service. There also has been considerable discussion of the statutory scope of the Commission's review. The main positions are that it extends to: --Only, or primarily, the price cap; --The price cap, plus some evaluation of worksharing; and --The price cap, worksharing evaluation, plus consistency with statutory factors and objectives, plus identification of certain features, such as differential intra-class treatment exceeding a certain percentage. Some commenters, such as the Postal Service and MOAA, advocate ``light-handed'' review, the OCA seeks extensive review, and some, such as the NAA, take a middle ground. NAA suggests that during the review period, the Commission has, at a minimum, legal authority: --To review the notices of rate adjustments for compliance with the CPI cap; --To review the noticed change to ensure at least facial compliance with the provisions of section 3622(e) regarding workshare discounts; --To prohibit rates that are unlawful on their face from taking effect; and --To review the justification for changes in rate categories within a class that exceed CPI by an amount set by the Commission, such as the CPI plus 2 percent proposed by NAA. NAA Reply Comments, May 7, 2007, at 25-26. The Commission agrees that the PAEA ushers in a fundamentally different approach to rate regulation for market dominant products, and that its implementing regulations should honor the spirit and letter of the new law. Proposed rule 3010.13(b) limits the appropriate scope of public comments to compliance with the price cap formula and consistency with certain statutory policies; thus, they represent a marked shift away from PRA-style in-depth examination. The proposed scope of public comment is no longer open-ended. The Commission does not invite, and will not entertain, public comment during the 45-day review period on matters such as costing methods. Moreover, in proposed rule 3010.13(e), the Commission expedites review to determine the consistency of an amended notice of rate adjustment with filing requirements. Filing contents. Proposed rule 3010.14 describes the contents of the Postal Service's rate adjustment filings. The notice is to include a schedule of proposed rates, identification of the effective date(s), and a representation or evidence that public notice of the planned changes has been issued or will be issued at least 45 days before the effective date(s) of the proposed rates. In addition, proposed rule 3010.14(b)(1)-(8) identifies explanatory material that is to be provided. This includes the amount of the applicable change in CPI-U calculated under Commission rules and the percentage change in rates for each class, calculated as required by Commission rules along with supporting workpapers. It also includes the amount of new unused rate authority that will be generated by the instant notice of rate adjustment and a 5-year schedule showing unused rate authority for each class of mail, along with supporting calculations. For Type 1-B filings, which draw on recaptured pricing authority, the Postal Service is to identify for each affected class how much existing unused rate authority is used in the proposed rates calculated as required by Commission rules. See proposed rule 3010.14(d). An explanation must be provided if new unused rate authority will be generated for a class of mail that is not expected to cover its attributable costs. Several commenters express concern about the potential for intra- class increases to exceed the cap. NAA asserts that the Postal Service's authority to exceed the annual cap for a rate category is not unlimited, as the phrase ``predictable amounts'' is not limited to the aggregate change for a class, but ``on its face requires that the specific rate changes themselves within the class should be reasonably predictable.'' NAA Comments, March 30, 2007, at 9. It contends that objective 8, which requires that the rate schedule be ``just and reasonable'' supports this interpretation. Id. NAA suggests that the Commission impose a standard whereby, absent special justification, increases for a rate category beyond a pre-established range (such as CPI plus 2 percent) would not be considered ``predictable'' or ``just and reasonable.'' Id. at 9-10. It asserts that this approach, which it refers to as a ``soft band,'' would satisfy the statutory objective of providing the Postal Service with pricing flexibility, while honoring the provision in objective 8 allowing changes of unequal magnitude within, between or among class of mail. Id. at 9; NAA Reply Comments, May 7, 2007, at 8. In terms of proposed rules, NAA suggests that the Postal Service could be required to certify that no rate would change by more than the permitted range (when this is the case) or bring changes exceeding the range to the Commission's attention and provide additional justification. NAA Comments, March 30, 2007, at 10. It contends that over time, as the Commission reviews these explanations on a case-by-case basis, it will become evident which explanations are adequate to allow the rates to become effective, and which are not. NAA Reply Comments, May 7, 2007, at 8. The Parcel Shippers Association (PSA) does not suggest prohibiting adjustments beyond a certain level, but suggests that the Commission require the Postal Service to provide a written, on the record, justification for any market dominant rate increases that substantially exceed inflation. PSA Comments, April 6, 2007, at 4-5, 22-23. (Emphasis in original.) In a similar vein, OCA suggests, given the potential for large percentage increases in rates for individual subclasses, that subclass increases be capped at 50 percent above the overall class increase. OCA Comments, June 18, 2007, at 2, 15-19. It notes: Some of the principles of rate setting include continuity of expectations, implementation of rates that are understandable, and perceived and/or actual fairness. Accordingly, some level of subclass protection appears to be appropriate. We suggest 50 percent as reasonable: that is, if rates for a class of service increase by an overall maximum of two percent, no subclass rate would increase by more than three percent. Id. at 15. Discover Financial Services, LLC (DFS) asserts that the OCA's recommendation is ``at odds with the legislation, which nowhere indicates that such a cap would be permissible. Indeed, notions that rates should be capped in any fashion other than at the class level were much debated in Congress and specifically rejected as not giving the Postal Service sufficient rate flexibility.'' DFS Further Comments, July 16, 2007, at 4. NAA, PSA and OCA identify a clear example of where statutory objectives may conflict. The Commission does not view capping subclass increases as sanctioned by the PAEA. Requiring a separate certification or justification is not statutorily suspect in the same sense; however, adopting a rule of this sort makes the process cumbersome. It is to be expected that rate adjustments within a class will be both above and [[Page 50749]] below average. Requiring written justification for individual rates is contrary to the goals of a simpler, more flexible, process. The Commission finds that the Postal Service should be given an opportunity to exercise its pricing flexibility by making changes of unequal magnitude without having to file separate justification for what some might consider ``excessive'' above-cap increases within a class. Should the Postal Service abuse this discretion, and regularly fail to develop rate adjustments consistent with the statutory objective of maintenance of just and reasonable rate schedules, additional regulations in this area can be developed. Information supporting proposed workshare discounts. The PAEA charges the Commission with establishing a modern system of ratemaking that is designed to achieve nine specific objectives including to maximize incentives to reduce costs and increase efficiency. The PAEA also enumerates several factors which must be considered by the Commission in establishing this system. Two of these factors-- 3622(c)(5), the degree of preparation of mail for delivery into the postal system performed by the mailer and its effect upon reducing costs to the Postal Service; and 3622(c)(12), the need for the Postal Service to increase its efficiency and reduce its costs--can be linked directly to workshare discounts. Section 3622(e)(2) directs the Commission to ensure that [workshare] discounts do not exceed the cost that the Postal Service avoids as a result of workshare activity.\10\ --------------------------------------------------------------------------- \10\ There are four limited exceptions to this mandate: (1) When the discount is new and mailers must be encouraged to use it; (2) when the discount is already in place and reducing it will cause rate shock; (3) when the discount is provided in connection with subclasses consisting exclusively of mail matter of educational, cultural, scientific, or informational value; and (4) when reducing or eliminating the discount would cause a shift in mail mix that would lead to operational inefficiencies for the Postal Service. For the first two exceptions, the Postal Service must eventually phase out the excess discount. --------------------------------------------------------------------------- The PAEA defines workshare discounts as rate discounts provided to mailers for the presorting, pre-barcoding, handling, or transportation of mail. Both the Commission and the Postal Service have long held the view that setting workshare discounts in line with the Efficient Component Pricing Rule (ECPR) is an effective method for encouraging efficient mailing practices. The ECPR is the principle that workshare discounts should be set equal, on a per-unit basis, to the costs avoided by the Postal Service when the mailer performs the workshare activity. Several parties reiterated the importance of ECPR in encouraging efficiency and satisfying the objectives of the PAEA. Pitney Bowes states ``regulations should require the Postal Service to establish discounts that reflect the full measure of workshare-related costs avoided to the extent practicable.'' Pitney Bowes Comments, April 6, 2007, at 36. In addition, Pitney Bowes sponsored the comments of John Panzar which focus exclusively on the merits of continued use of ECPR in ratemaking. The Alliance of Nonprofit Mailers, National Association of Presort Mailers, and National Postal Policy Council (ANM/NAPM/NPPC) believe that the Postal Service's rates should be presumed reasonable as long as the discounts satisfy the ECPR. ANM/NAPM/NPPC Comments, April 6, 2007, at 16-19. Support for efficient component pricing is also found in testimony received during the Commission's field hearings. Don Hall, Jr., President and CEO of Hallmark Cards, seeks assurance that the workshare discounts will reflect the true savings to the Postal Service. Transcript of Kansas City Field Hearing, June 22, 2007, at 29. John Campo, Vice President of Postal Relations for Pitney Bowes, said the ``regulations should encourage the Postal Service to adopt pricing incentives or work sharing discounts to fully reward mailer activity that reduces total postal system costs.'' Transcript of Wilmington Field Hearing, July 9, 2007, at 10. John Carper, Director of Mail and Receiving Services, Pepperdine University, claims that ``[worksharing] can flourish fully only if the discounts offered by the Postal Service * * * he costs that the Postal Service saves.'' Transcript of Los Angeles Field Hearing, June 28, 2007, at 39. In contrast, Advo, Inc. presents three reasons why ECPR should not be followed in setting rates under the PAEA: First, the statute does not permit consideration of factors other than compliance with price caps in the review process. Second, ECP, although useful in theory as a pricing tool, is not the only appropriate consideration in setting discounts and is susceptible to being misapplied. Third, adoption of ECP as the ``gold standard'' will inevitably and unnecessarily impinge on the Postal Service's pricing flexibility--a flexibility that is imperative to its ability to remain viable under the price cap regime. Advo Reply Comments, July 3, 2007, at 6. MOAA, NAA, and the Postal Service recognize the importance of the ECPR, but contend that other, perhaps competing, factors are also important. Therefore, they believe that ECPR should not be a requirement for workshare discounts. The Commission strongly believes that efficient component pricing should be used as a guiding principle in establishing and maintaining workshare discounts. In both sections 3622(b) and 3622(c) the statute stresses the need for efficient rates and efficient component pricing is an established method of measuring efficient ratemaking. Nonetheless, the Commission recognizes that other factors must also be considered, and that the PAEA grants the Postal Service substantial flexibility in setting rates. However, in the interest of transparency and accountability, the Postal Service has a burden to explain how its rates, including workshare discounts, meet the objectives and factors of the PAEA. The Postal Service has proposed that when it files its notice of price adjustment, it will also file, for pre-existing workshare discounts, a comparison of the new (or unchanged) discount price with the historical, Commission reviewed cost avoidances of the last Annual Compliance Review, and will provide appropriate justification for any discount that exceeds those cost avoidances. Postal Service Comments, June 18, 2007, at 11. The proposed rules reflect this undertaking. To meet its burden of ensuring that the rates are in compliance with the objectives and factors of the PAEA, the Postal Service must also identify and explain any discounts that are substantially below the cost avoidances. The Postal Service is to provide with each notice of rate adjustment a schedule of the workshare discounts included in the proposed rates, together with a companion schedule listing underlying avoided costs, along with supporting workpapers. The avoided cost figures must be developed from the most recent PRC Annual Compliance Report. The Postal Service is to provide a separate justification for all proposed workshare discounts that exceed avoided costs. The Postal Service shall also identify and explain discounts that are set substantially below avoided costs, and explain any relationship between discounts that are above and those that are below avoided costs. In addition, when new workshare discounts are established, the Postal Service is to include with its filing a statement explaining its reasons for establishing the discount; provide all data, economic analyses, and other information believed to justify the discount; and certify, based on [[Page 50750]] comprehensive, competent analyses that the discount will not adversely affect either the rates or the service levels of users of postal services who do not take advantage of the discount. Lastly, the Postal Service is to provide a discussion of how the proposed rates will help achieve the objectives listed in 39 U.S.C. 3622(b) and properly take into account the factors listed in 39 U.S.C 3622(c). G. Overview of Subpart C--Rules for Applying the Price Cap This subpart consists of nine rules related primarily to administration of the price cap mechanism. Proposed rule 3010.21 addresses how to calculate the statutory annual inflation-based limitation. A question has arisen over the * * * an annual limitation * * * equal to the change in the Consumer Price Index for All Urban Consumers unadjusted for seasonal variation over the most recent available 12-month period preceding the date the Postal Service files notice of its intention to increase rates. 39 U.S.C. 3622(d)(1)(A). (Emphasis added.) Two suggestions have emerged on this record, but commenters generally agree that both approaches are consistent with the statute. One is referred to as the ``point-to-point'' method and was initially suggested by the Postal Service and the OCA. The other is the ``running average'' or ``weighted average'' method which is incorporated in the proposed rules. JPMorgan Chase & Company (Chase) comments are representative. Chase urges the Commission to calculate the index adjustment based on a 12- month average of CPI levels, rather than on a ``snapshot'' of year- over-year changes to the CPI between a single pair of beginning and end dates. It reasons: While the two approaches should achieve similar results over the long run, the use of the twelve-month average is likely to produce a much less bumpy and volatile path along the way by damping the short-term oscillations in the CPI index. For Chase and other mailers that operate on an annual budget cycle--i.e., for the mailers that generate most of the Postal Service's volume, reducing the short-term unpredictability of cost increases is extremely important. Emens Testimony at 5.\11\ \11\ Testimony of Daniel C. Emens on Behalf of JPMorgan Chase & Co., July 9, 2007 (Emens Testimony). --------------------------------------------------------------------------- Many parties commented that they prefer the moving average method because it provides more predictability and stability in rates. NAA states, the average method ``better advance[s] the statutory objective of creating `predictability and stability in rates' while promoting transparency in rates and assuring that the Postal Service is financially sound.'' NAA Comments, June 18, 2007, at 2. See also Advo Comments, June 18, 2007, at 2; Advo Reply Comments, July 3, 2007, at 1; GCA Reply Comments, July 3, 2007, at 1-2; Pitney Bowes Reply Comments, July 3, 2007, at 3; and PostCom Reply Comments, July 3, 2007, at 2. Contrary to these views, OCA states that the point method ``does not result in significantly less rate stability and predictability.'' OCA Reply Comments, July 3, 2007, at 6. It contends that the moving average method ``would have substantial lags in the updating of rates.'' OCA Initial Comments, June 18, 2007, at 7. See also Valpak Comments, June 18, 2007, at 5; and OCA Reply Comments, July 3, 2007, at 2-4. The Postal Service expressed concern that using the moving average method includes 24 months of data rather than 12. USPS states, ``It is arguable that calculating the price cap by reference to CPI-U data over a 24-month period is counter to the statutory requirement that the CPI calculation be ``equal to'' the change in CPI-U ``over the most recent available 12-month period.'' Postal Service Comments, June 18, 2007, at 3-4. APWU also believes that the point method better adheres to the plain language of the PAEA. APWU Comments, June 18, 2007, at 2-3. APWU and Valpak advocate the point method as providing more transparency and less administrative burden. APWU Comments, June 18, 2007, at 2; and Valpak Comments, June 18, 2007, at 4-5. The majority of commenters are satisfied that both the moving average method and point method meet the statutory requirements of the PAEA. MOAA states, ``The provisions of [the] PAEA are sufficiently broad that either the [moving average method] or the [point method] could be used for the purpose of calculating the CPI cap limitation as set forth in 3622 (b), (c) and (d).'' MOAA Comments, June 18, 2007, at 1. See also GCA Comments, June 18, 2007, at 2; Advo Comments, June 18, 2007, at 2; PostCom Comments, June 18, 2007, at 2; and Pitney Bowes Comments, June 18, 2007, at 2. The Commission proposes to use the moving average method of calculating the CPI-U limitation. This method provides mailers with stable and predictable rates, and also grants the Postal Service the same benefits. The moving average method does not impose any undue administrative burden on the Postal Service and does not inhibit transparency. The Commission finds the increased predictability and stability resulting from use of the moving average method are quite valuable, and directly further the specific objectives of the PAEA. The Commission derives the moving average method from Bureau of Labor Statistics (BLS) monthly CPI-U values. At the end of each calendar year, BLS calculates the annual percentage change between two years as the percentage change between the two years' annual averages. The only difference in methodology is that BLS applies this methodology to calendar years, and the Commission will apply it to 12-month periods. Calculation of the annual limitation in this method involves three steps. First, a simple average CPI-U index (Recent Average) is calculated by summing the most recently available 12 monthly CPI-U values from the date the Postal Service files notice of its intentions to increase rates, and dividing the sum by 12. Then, a second simple average CPI-U index (Base Average) is similarly calculated by summing the 12 monthly CPI-U values preceding those used in the Recent Average calculation and dividing the sum by 12. Finally, the percentage change between the Recent Average and the Base Average is computed, using the following formula: Annual Limitation (Moving Average Method) = (Recent Average/ Base Average) - 1. Example 1 illustrates the annual limitation calculation, using the moving average method, assuming that the Postal Service had filed a hypothetical notice of its intentions to increase rates during the third week of April 2006.\12\ --------------------------------------------------------------------------- \12\ All CPI-U data is obtained from the BLS Web site at: http://data.bls.gov/cpi-bin/surveymost . --------------------------------------------------------------------------- [[Page 50751]] [GRAPHIC] [TIFF OMITTED] TP04SE07.000 Example 1 assumes that rate filings are 12 months apart; that is, that the Postal Service filed its most recent previous notice for a rate increase in April 2006. This assumption can be adjusted in two ways depending on when the Postal Service files a notice of rate adjustment. The first adjustment occurs when the Postal Service files a notice of rate adjustment less than one year after the previous adjustment. In this instance, if the calculation were to use 12 months of data, the Postal Service would benefit from double counting months of CPI data. This would violate the statutory limitation. To remedy this problem, a partial year limitation is calculated. Example 2 calculates a partial year limitation. First, a simple 12- month average must be calculated using the most recently available 12 months of CPI-U data from the BLS Web site (Recent Average). Then the partial year limitation is calculated by dividing the Recent Average by the Recent Average from the most recent previous notice and subtracting 1. The formula is as follows: Partial Year Limitation = (Recent Average/Recent Average from most recent previous notice) - 1. Still assuming that the Postal Service filed its first notice of rate adjustment in April of 2006 (Example 1), assume now that the Postal Service files its second hypothetical notice of rate adjustment in October 2006 (six months later). Example 2 shows how the partial year limitation will be calculated for the October 2006 rate adjustment. [[Page 50752]] [GRAPHIC] [TIFF OMITTED] TP04SE07.001 A corresponding adjustment can be made should the Postal Service file a notice of rate adjustment more than 12 months after the last adjustment. This scenario provides no reason to alter the calculation of the annual inflation-based limitation, but does present a different concern; there are several months of CPI-U changes that the Postal Service may lose. The clear intent of the statutory provision allowing for recapture of unused rate authority is to encourage the Postal Service to whenever possible refrain from imposing the maximum permissible rate increases. If the Postal Service can delay imposing increases on the public, it should not be penalized. See proposed rule 3010.26(c). To address this concern, the interim unused rate authority will be added to the cumulative unused rate authority. Still assuming that the Postal Service filed its first notice of rate adjustment in April 2006 (Example 1), assume now that the Postal Service files its second hypothetical notice of rate adjustment in July 2007 (15 months later). Example 3 illustrates how the price cap will be calculated for the July 2007 notice of rate adjustment, along with the calculation of the three months of interim unused rate authority. To calculate interim unused rate authority, divide the Base Average of the current notice by the Recent Average of the last notice and subtract 1. The formula to calculate the amount of interim unused rate authority is as follows: Interim Unused Rate Authority = (Base Average for Current Notice/ Recent Average for Last Notice) - 1. [[Page 50753]] [GRAPHIC] [TIFF OMITTED] TP04SE07.002 APWU argues for cross-class application of unused rate authority and recommends a method of weighting the revenue. This cross-class application of unused rate authority would grant the Postal Service the ability to use unused rate authority from one class, and apply it to other classes of mail in later years. APWU Comments, April 6, 2007, at 9-10. Several parties assert that this would (1) be at odds with section 3622(d)(2)(C), which states that the annual limitations shall apply to a class of mail and defines unused rate authority in terms of an individual class of mail; (2) be inconsistent with the legislative history; and (3) merge multiple class-specific baskets into a single basket. See ANM/MPA Reply Comments, May 7, 2007, at 3-6; ANM/NAPM/NPPC Reply Comments, May 7, 2007, at 9-11; MOAA Reply Comments, May 7, 2007, at 11; Pitney Bowes Comments, April 6, 2007, at 9; and USPS Reply Comments, May 7, 2007, at 16. The Commission agrees that unused rate authority for a given class of mail may only be applied to the class where it originated. Finally, The McGraw-Hill Companies, Inc. (McGraw-Hill) suggests that the rules should include a method to reduce the price cap if the Postal Service performance levels deteriorate, or if the Postal Service places costly mail preparation requirements on mailers. See McGraw-Hill Reply Comments, July 30, 2007, at 6-7. During the Kansas City field hearings, witness Stumbo of Meredith Corporation expressed a similar concern: We would submit that the critical issues regarding cost shifting and service reduction are [sic] the rate-setting process must contain a mechanism to adjust rates to reflect the shift in cost from the Postal Service to private industry. In addition, the rules should contain methodology to adjust rates to reflect the diminished level of service the imposition of preparation rule changes or other means. Transcript of Kansas City Field Hearing, June 22, 2007, at 40. No commenter has suggested a method for applying such adjustments. The Commission is sympathetic to these concerns, yet finds the better course is to defer such considerations. The statute establishes a system of accountability through increased transparency. The Commission is developing separate rules providing for annual Postal Service reports that will include data on service achievement. Additionally, proposed rule 3020.91 requires the Postal Service to inform the Commission of changes that would alter the nature of a product through the imposition of preparation rule changes. The Commission expects that the Postal Service will operate within both the letter and the spirit of the PAEA. For now, it is best to presume that the Postal Service will do so. If experience shows that additional regulations in this area are necessary to achieve the objectives of the legislation, the Commission is obligated to develop such regulations, or [[Page 50754]] recommend to Congress appropriate additional legislation. Test for compliance with the annual limitation. Proposed rule 3010.20 states that the appropriate annual limitation shall be applied to a measure of the rates paid by mail sent in each class for which rate adjustments are to be made to determine whether planned rates are consistent with the annual limitation. 39 U.S.C. 3622(d) requires that the system for regulating rates and classes for market dominant products include a limitation on the percentage increase in rates. To calculate the percentage change in an individual rate is a simple matter, but section 3622(d)(2)(A) stipulates that the restriction be applied at the class level. Therefore, to determine compliance in the context of a pre- implementation compliance review of a notice of rate adjustment, it is necessary to develop rules that provide a means of calculating the aggregate percentage change in rates for each class. To accomplish this, weights (in the form of billing determinants) must be applied to the set of rates that comprise a class. Postal Service proposal. The Postal Service proposes to apply the most recent available billing determinants to the current rates, then apply the same billing determinants to the new rates and compare the resulting revenues to determine the change in rates for a class. As acknowledged by the Postal Service, this is not ideal because an annual rate cycle combined with the need for advance notice dictates that the billing determinants will not correspond to a single set of rates, but will reflect mailer behavior for part of a year at the current rates and part at the previous rates. Postal Service Reply Comments, May 7, 2007, Appendix C. Rather than debating the rates (current or new) to which the ideal billing determinants would correspond, the parties' comments have focused on more practical considerations regarding the use of historical billing determinants instead of forecast billing determinants. Parties' positions. On this, there is near universal support for the Postal Service's proposed approach, or some slight variation thereof. Pitney Bowes, OCA, MOAA, ANM/MPA, APWU, PostCom, Advo, and JPMorgan/Chase all support the use of historical billing determinants as weights in their comments. The primary rationale for this position is that historical data are far less likely to be controversial than forecasts, and given the limited time and public participation for the review of notices of rate adjustment, simplicity and speed of analysis should take precedence. There is some disagreement regarding the treatment of classification changes and negotiated service agreements. The Postal Service proposes to make adjustments to the historical billing determinants to incorporate the effects of classification changes, such as the creation or elimination of rates. It proposes to use known mail characteristics and reasonable judgments to make the necessary adjustments. See Postal Service Comments, June 18, 2007, at 7-10, inter alia. This proposal is supported by MOAA. See also MOAA Comments, April 6, 2007 at 4-5; ANM/MPA Comments, May 7, 2007, at 1-2; and APWU Comments, June 18, 2007, at 3-4. PostCom takes the position that the effects of classification changes are outside the scope of the Commission's pre-implementation review of a notice of rate adjustment. It argues that the effects of such changes on compliance with the price cap may only be determined in a post hoc review of the new rates. PostCom concludes that, ``any attempt by the Commission to assess the effects of a change in rate design at the time that the change is proposed will entail a re- introduction of the old cost of service methods that the Commission has used under the Postal Reorganization Act, including the attempt to establish a test year, the reintroduction of roll-forwards and volume and revenue forecasts, and all of the uncertainty, controversy and confusion that these methods entail.'' PostCom Comments, June 18, 2007, at 4-5. Commission analysis. The Commission's proposed rules calculate the percentage change in rates using the most recent available billing determinant as weights. As many parties point out, any attempt to develop a forecast of billing determinants would likely be controversial and complex, and a worthwhile analysis and resolution cannot realistically be achieved in the context of a pre-implementation review under section 3622(d)(1)(C). The rules also instruct the Postal Service to make reasonable adjustments to the billing determinants to account for the effects of classification changes. The Postal Service has stated that such adjustments will typically be straightforward and based on known mail characteristics. Any adjustments are to be fully explained by the Postal Service at the time of the notice. The Commission recognizes that the pre-implementation method of calculating the percentage change in rates in the proposed rules is not a perfect measure of what the actual change in rates will be. The billing determinants to be used will likely not correspond to a single set of rates, and adjustments for classification changes will be imperfect. Some commenters suggest that the after-the-fact review will be the most effective means of ensuring compliance with the rate cap. Id. at 4-6; see also Transcript of Wilmington Field Hearing, July 9, 2007, at 47. (Emens).\13\ The statute requires the Commission to monitor the effectiveness of these rules and consider modifications to improve their effectiveness as events warrant. --------------------------------------------------------------------------- \13\ See also Campbell James, An Analysis of Provisions of the Postal Accountability and Enhancement Act Relating to the Regulation of Postal Rates and Services. August 3, 2007, at 52-55. --------------------------------------------------------------------------- Proposed rule 3010.23, captioned ``Calculation of percentage change in rates,'' explains in paragraph (b) that for each class of mail, the percentage change in rates is calculated in three steps. The first step involves multiplying the volume of each rate cell in the class by the current rate for that cell and summing the resulting products. (In the case of seasonal or temporary rates, the most recently applied rate shall be considered the current rate.) The second step involves multiplying the same set of rate cell volumes by the corresponding planned rate for each cell and summing the resulting products. The third step involves calculating the percentage change in rates by dividing the results of the first step by the results of the second step and subtracting 1 from the quotient. The result is expressed as a percentage. Paragraph (c) sets out the formula. Treatment of volume associated with negotiated service agreements. Advo and Pitney Bowes advocate the exclusion of negotiated service agreements from the determination of percentage changes in rates. They assert that including the lower rates offered to negotiated service agreement partners will allow for offsetting larger increases for non- negotiated service agreement mail, thus undermining the price cap protection afforded to non-participating mailers. See Advo Comments, June 18, 2007, at 4; Pitney Bowes Comments, June 18, 2007, at 4. The Postal Service disagrees, arguing that in certain situations, some negotiated service agreement mailers may pay prices higher than list prices. If this occurs, excluding negotiated service agreements from the calculation of change in revenue would deny non-negotiated service agreement mailers the opportunity for potentially lower [[Page 50755]] increases. Postal Service Reply Comments, July 3, 2007, at 6-7. The proposed rules exclude the effects of negotiated service agreements from the calculation of percentage change in rates. The foundational argument in support of negotiated service agreements is that they can be structured to benefit the participating mailer and the Postal Service, while not harming (and hopefully, benefiting) non- participating mailers. Pitney Bowes and Advo are correct in their conclusion that including negotiated service agreements in the test for compliance with the rate cap may lead to rates for non-participating mailers that exceed the rate cap. This would undermine the rationale for permitting negotiated service agreements. Proposed section 3010.24 addresses volume associated with negotiated service agreements. Paragraph (a) provides that mail volumes sent at non-tariff rates under negotiated service agreements are to be included in the calculation of percentage change in rates as though they paid the appropriate rates of general applicability. Where it is impractical to identify the rates of general applicability, the volumes associated with the mail sent under the terms of the negotiated service agreement shall be excluded from the calculation of percentage change in rates. Paragraph (b) requires related support in the form of identification and explanation of all assumptions made with respect to the treatment of negotiated service agreements in the calculation of the percentage change in rates and the rationale for assumptions. Limit on application of banking exception. Proposed rule 3010.25 addresses certain limits on unused rate adjustment authority. It provides that these adjustments may only be applied together with inflation-based limitation rate adjustments or when inflation-based limitation rate adjustments are not possible. It further provides that unused rate adjustment authority may not be used in lieu of an inflation-based limitation rate adjustment. H. Overview of Subpart D--Rules for Rate Adjustments for Negotiated Service Agreements (Type 2 Rate Adjustments) Section 3622(c)(10) of the PAEA requires consideration of the desirability of special classifications for both postal users and the Postal Service. Subsections 3622(c)(10)(A) and (B) mandate that such agreements must improve the net finances of the Postal Service or enhance operational performance while not causing unreasonable harm to the marketplace. Section 3622(d)(1)(C) further details the review period that will begin ``not later than 45 days before the implementation'' of any agreement made under subsection (c)(10). These subsections of the PAEA provide the basis and criteria for evaluating and approving negotiated service agreements. In their comments, parties have expressed a range of views on how the Commission should implement the legislative framework for negotiated service agreement regulation. The level of review described in these diverse comments can be summarized into two groups: Parties who consider the current negotiated service agreement process amenable with the PAEA, and parties who assert that the PAEA calls for a significantly streamlined process. Parties who support a continuation of the current process, and in some instances, the regulations as currently written, include Valpak, NAA, Jon Mulford Associates, and APWU. This viewpoint was summarized by NAA, stating [t]he Commission should continue to adhere to its established, balanced approach to considering special classifications in the form of negotiated services agreements or niche classifications. This includes conducting a thorough public and prior review, which results in a determination that the proposed mailer-specific agreement may or may not take effect. In keeping with the new statutory approach giving the Commission the final say, that determination should be subject to judicial review. NAA Reply Comments, May 7, 2007, at 13. Parties supporting a simplified and minimal review of negotiated service agreements include Advo, Discover Financial Services, LLC (DFS), MOAA, Pitney Bowes, and Time Warner. This viewpoint was summarized by Pitney Bowes stating, ``The elimination of advance, on- the-record Commission review of NSAs should significantly enhance the Postal Service's ability to meet the needs of mailers * * *.'' Pitney Bowes Reply Comments, May 7, 2007, at 13. The Commission finds that the statute requires a regulatory approach that combines elements of the divergent views among parties. The legislation seeks to provide the Postal Service with added flexibility to enhance producer and consumer surplus through negotiated service agreements. The proposed rules will decrease the administrative and economic burden in implementing such agreements. However, arguments such as those presented in the comments of Jon Mulford, stating ``[t]he Commission should insure that periodic audits verify that claimed benefits persist through the duration of the NSA'' also reflect the policies of the PAEA. See Jon Mulford Associates Comments, March 14, 2007, at 4. Combining flexibility and accountability is the essence of the new legislation, and the Commission attempts to achieve the proper balance in the subpart D rules. This subpart consists of four rules. Proposed rule 3010.40 expresses the Commission's objective in administering the implementation of negotiated service agreements. It clarifies that this objective is directly tied to statutory requirements in 39 U.S.C. 3622(c)(10) mandating that special classifications either improve the net financial position of the Postal Service or enhance the performance of operational functions and do not cause unreasonable harm to the marketplace. Timing of notice and review. Proposed rule 3010.41 addresses procedures. Paragraphs (a)(1) and (2) reflect the requirements for Type 2 changes that public notice and notice to the Commission occur not later than 45 days prior to the intended rate implementation date. Contents of filing. Proposed rule 3010.42 addresses the contents of a notice in support of a negotiated settlement agreement. It indicates that this should include, at a minimum, a copy of the negotiated service agreement and a statement identifying all parties and a description explaining the operative components. It is also to include the estimated mailer-specific costs, volumes and revenues of the Postal Service absent the implementation of the agreement; the estimated mailer-specific costs, volumes and revenues of the Postal Service which result from implementation; and an analysis of the effects of the agreement on the contribution to institutional costs from mailers not party to the agreement. If mailer-specific costs are not available, the source and derivation of the costs that are used shall be provided, together with a discussion of the currency and reliability of those costs, and their suitability as a proxy for the mailer-specific costs. The Postal Service is also to identify each component of the agreement expected to enhance the performance of mail preparation, processing, transportation or other functions in each year of the agreement, and a discussion of the nature and expected impact of each such agreement. Furthermore, it is to provide details regarding any and all actions to assure that the agreement will not result in unreasonable harm to the marketplace. [[Page 50756]] Finally, the Postal Service is to collect and provide annual data that are intended to enable the Commission and interested persons to evaluate whether each negotiated service agreement has met, and is likely to meet in the future, the expectations that caused the Postal Service to enter the agreement. It is understood that not every agreement will meet Postal Service expectations. Nonetheless, continuing periodic review is the best way to assure that flaws in Postal Service projection techniques are recognized and remedied. I. Overview of Subpart E--Rules for Rate Adjustments in Exigent Circumstances (Type 3 Rate Adjustments) The PAEA also requires that the Commission establish procedures to allow rate adjustments in excess of the annual limitation on an expedited basis due to either extraordinary or exceptional circumstances, provided: [T]here is not sufficient unused rate authority as defined in 39 U.S.C. 3622(d)(2)(C); and [T]he Commission determines, after notice and opportunity for a public hearing and comment, and within 90 days after any request by the Postal Service, that such adjustment is reasonable and equitable and necessary to enable the Postal Service, under best practices of honest, efficient, and economical management, to maintain and continue the development of postal services of the kind and quality adapted to the needs of the United States. See 39 U.S.C. 3622(d)(1)(E). There are several significant differences between a Type 3 change and the other three types. First, based on the legislative history, a Type 3 change is expected to be an atypical occurrence, while the other types are considered more routine. Types 1-A, 1-B and 2 changes follow the streamlined 45-day notice-and-review process, while a Type 3 filing occurs pursuant to a request and a hearing, with up to 90 days for consideration. Commenters addressing implementation of the exigency clause in 39 U.S.C. 3622(d)(1)(E) focus mainly on the extent to which Commission rules should define ``exigent circumstances'' for purposes of rate adjustments; the related possibility, if the definition is too broad, that frequent requests for exigent increases could undermine the intended discipline of the price cap mechanism; and the nature and extent of public participation in exigent request filings. The Postal Service describes the PAEA's exigency clause as a safety valve for those ``extraordinary or exceptional situations in which the [price] cap cannot be met even through honest, efficient, and economical management.'' Postal Service Comments, April 6, 2007, at 16. It does not address the content of an exigent rate filing or the role of the public, but asserts, with respect to defining exigent circumstances, that it is not necessary or prudent for the Commission to attempt to specify in this rulemaking the situations that might be covered in advance of an actual need to do so. Postal Service Reply Comments, May 7, 2007, at 15. Pitney Bowes and Time Warner share the Postal Service's view that the Commission should not attempt to define qualifying circumstances at this time. Pitney Bowes suggests addressing the question on a case-by- case basis as circumstances arise. Pitney Bowes Comments, April 6, 2007, at 10. Similarly, Time Warner says: * * * the Commission need not and should not attempt to determine a substantive standard for granting Postal Service requests under the exigent circumstances provision (other than the standard set out in Sec. 3622(d)(1)(E) itself) until presented with the concrete circumstances attending an actual Postal Service request under that provision; the kind of judgment that the Commission is called on to make in deciding whether to grant such a request cannot be exercised well in the abstract or upon hypotheticals; moreover, to the extent that such a standard might err on the side of leniency, it would undermine the discipline that the price caps are intended to instill, and to the extent that it might err on the side of stringency, it could create perverse incentives to find alternative ways of circumventing the caps. Time Warner Comments, April 6, 2007, at 22-23. Several other commenters echo Time Warner's concern about the relationship between the exigency clause and the price cap mechanism. The Alliance of Nonprofit Mailers, National Association of Presort Mailers, and National Postal Policy Council jointly state: ``* * * the exigency provision for ``extraordinary or exceptional'' services must be drawn very narrowly; otherwise the availability of this mechanism will undermine the index as a constraint on costs and efficiency.'' ANM/NAPM/NPPC Comments, April 6, 2007, at 2 and 11; see also ANM/NAPM/ NPPC Reply Comments, May 7, 2007, at 8. They urge the Commission to make it clear that exigent financial consequences should have to be large enough to threaten the Postal Service's financial integrity, and must not be due to an unreasonable failure to hedge and insure against risk or any other form of inefficient or uneconomical management. ANM/ NAPM/NPPC Comments, April 6, 2007, at 11. Randy Stumbo, representing Meredith Corporation, says: ``An easy out provided by a liberal exigency provision would seriously damage the cost control incentive created by a rate cap.'' Stumbo Testimony at 3.\14\ --------------------------------------------------------------------------- \14\ Testimony of Randy Stumbo, Director of Distributoin and Postal Affairs for Meredith Corporation, Postal Regulatory Commission Field Hearing, Kansas City, June 22, 2007 (Stumbo Testimony). --------------------------------------------------------------------------- Don Hall, Jr., representing Hallmark, also cautions: ``* * * [I]f the exigency provision is over-used, mail users in all classes will have to conclude that the price cap scheme is not going to succeed-- and, as the Act also provides, after 10 years this Commission will have to devise something better.'' Hall Testimony at 7.\15\ --------------------------------------------------------------------------- \15\ Testimony of Don Hall, Jr., President and CEO, Hallmark Cards, Inc., June 22, 2007 (Hall Testimony). --------------------------------------------------------------------------- Mr. Hall also asserts that it is imperative that the Commission clarify what circumstances warrant the rate cap to be pierced and to make certain that the Postal Service exhaust all other resources provided by its ability to retain earnings before seeking rate increases above the cap. Id. at 12. Mr. Stumbo seeks more specific direction, as he suggests: While it seems premature and imprudent to explicitly define in the abstract the events under which exigency may be exercised, it is necessary to define what it is not. Attributable cost shortfalls at the class or subclass level do not constitute exigent circumstances. Nor should the exigency clause be used to re-apportion rates in any way. Stumbo Testimony at 3. The Magazine Publishers Association (MPA) and the Alliance of Nonprofit Mailers (ANM) agree that the failure of a class to cover its attributable costs should be affirmatively identified as not qualifying as an exigent circumstances. ANM/MPA Comments, April 6, 2007, at 11-12. Time Warner, however, claims that the Commission need not and should not decide that failure of a class to recover attributable costs could never constitute exigent circumstances justifying above-cap increases. Time Warner Reply Comments, May 2, 2007, at 33. The Greeting Card Association (GCA) suggests that the Commission could clarify the scope of the exigency clause by defining ``extraordinary or exceptional circumstances'' to exclude matters that, under the Postal Reorganization Act of 1970, would have been dealt with under the provision for contingencies. GCA Comments, April 6, 2007, at 9. It says the Commission should provide guidance on how the nature of the ``extraordinary or exceptional'' circumstances motivating the adjustment relates to the allocation [[Page 50757]] of burdens among mail users. Id. at 11-12. GCA also concludes, after addressing the potential impact of external and internal events, that the Commission: * * * should make clear in setting up the subparagraph (E) [exigency clause] procedures that the Postal Service, in first presenting its proposed adjustment, must explain fully (i) the nature of the extraordinary or exceptional circumstances claimed to justify the rate change, and (ii) the theory on which it considers its proposed rate changes appropriate to reflect (i). Id. at 13. Moreover, it asserts that this explanation should be required to be part of the initial filing, as the Commission must make its required findings in 90 days or less. Id. Commenters differ on the nature and extent of public comment. Advo, for example, simply notes, in contrasting the types of public input called for in the PAEA, that the statute requires that the Commission provide ``notice and opportunity for public hearing and comment,'' but does not address the nature and scope of the public hearing. Advo Comments, April 6, 2007, at 5. GCA and Time Warner note that the PAEA provides an opportunity for public participation when the Postal Service files an exigent request, but do not contend that this mandates formal trial-type hearings. GCA, instead, asserts that the procedures must provide ``some opportunity'' for parties to raise challenges to the bases of the proposed increase, and that the Postal Service must overcome such challenges to meet the burden of justifying exigent increases. GCA Comments, April 6, 2007, at 14-15. Others suggest that the PAEA's reference to an ``opportunity for public participation and comment'' means that the Commission must establish trial-type proceedings for exigent requests. See, for example, ANM/NAPM/NPPC Comments, May 7, 2007, at 11. Discussion. The Commission appreciates commenters' concerns that the exigency clause, if invoked too frequently, could undermine the statutory price cap mechanism. At this point, it should be assumed that the Postal Service's intent is to honor the clear import of the PAEA's overarching ratesetting philosophy that exigent requests are meant to be a safety net for dealing with unforeseeable emergencies. The Commission believes that the commenters' concerns can largely be addressed by requiring, as proposed rule 3010.61 does, that the Postal Service provide focused explanation in support of any exigent request. This includes a full discussion of the circumstances giving rise to the filing, the reasons why the requested increases are necessary, and why the specific proposed increases are reasonable and equitable as between the types of users of market dominant products. The Postal Service will be required to provide considerable additional context, such as an explanation of how long the exigent increases are intended to be in effect, the circumstances under which rescission of the increases might occur, a justification addressing the foreseeability or avoidability of the circumstances giving rise to the request, and other information that would assist the Commission in reaching a decision. The Commission reserves the right, in proposed rule 3010.62, to require the Postal Service to clarify or further supplement its request. These provisions do not explicitly define ``exigent circumstances,'' and unmistakably convey the message that exigent requests are indeed ``extraordinary or exceptional.'' The proposed rules provide that upon receipt of an exigent request, the Commission will conduct an expedited review, including a public hearing, that allows for resolution within 90 days. The rulemaking record is relatively slim on this aspect of PAEA implementation, perhaps due to the focus on filings considered more routine. The Commission has carefully considered the nature and extent of public input for exigent requests, and preliminarily has concluded that while the PAEA would not preclude reviving the trial-type proceedings that held sway in the past, it also does not require them. The fact that the statute does not explicitly refer to a hearing ``on the record,'' which is universally associated with trial-type hearings under the Administrative Procedure Act (APA), provides support for this conclusion. The drafters were well aware that the system they were replacing had included APA-style formal proceedings, and could have mandated equivalent proceedings for exigent requests by including an unmistakable reference to ``on the record'' proceedings, but did not. Additional support is drawn from the period of time (90 days) allowed for review, which is inconsistent with overly-elaborate hearings; and as the Postal Service and some joint commenters suggest, the likelihood that issues will not simply require adjudication of facts, but also may involve significant policy considerations. Given these considerations, the Commission proposes a written process, without cross-examination, to facilitate public participation, coupled with public hearings at which one or more responsible Postal Service official would appear for questioning by the Commission. This mechanism strikes an appropriate balance between assuring transparency and accountability in keeping with the statute, while facilitating completion of review within 90 days. These provisions appear in proposed subpart E. III. Competitive Products Subchapter II of chapter 36 of 39 U.S.C., 39 U.S.C. 3631-34, sets forth the provisions applicable to competitive products, which, pursuant to Sec. 3631(a), initially include priority mail, expedited mail, bulk parcel post, bulk international mail, and mailgrams.\16\ Section 3631(c) provides that ``[m]ail matter referred to in [Sec. 3631(a)] shall, for purposes of this subchapter, be considered to have the meaning given to such mail matter under the mail classification schedule.'' In Order No. 15, the Commission solicited the parties' views on ``mail matter'' comprising each of the foregoing types of mail and on the meaning of the phrase ``mail classification schedule.'' PRC Order No. 15, May 17, 2007, at 6. Several parties addressed these issues. See, e.g., Postal Service Comments, June 18, 2007, at 11-16; UPS Comments, June 18, 2007, at 2-4; OCA Comments, June 18, 2007 at 22- 27; and PSA Comments, June 18, 2007, at 1-3. --------------------------------------------------------------------------- \16\ Pursuant to section 3642, the Commission may change the lists of competitive products under section 3631 and market dominant products under section 3621 by adding new products to or removing products from the lists, or transferring products between the lists. --------------------------------------------------------------------------- A. Mail Classification Schedule OCA and UPS contend that ``mail classification schedule'' as used in section 3631(c) refers to the Domestic Mail Classification Schedule (DMCS).\17\ For several reasons, the Commission is not persuaded by this construction. First, section 3631(a) includes mail matter not subject to the DMCS, i.e., bulk international mail. Second, when Congress intended that the DMCS be used, it was specific. See section 3622(d)(2)(A), applying the price cap limit to ``a class of mail, as defined in the Domestic Mail Classification Schedule as in effect on the date of enactment of the [PAEA].'' Thus, the failure to specify the DMCS in section 3631(c) suggests that something else is intended. Third, while the DMCS may be useful in initially determining mail matter comprising the competitive products, the mail classification [[Page 50758]] schedule has a continuing, if somewhat new, role under the statute. Among other things, the mail classification schedule incorporates international mail (both single-piece and bulk) and is subject to section 3642, which authorizes the Commission to modify the makeup of competitive and market dominant products. --------------------------------------------------------------------------- \17\ OCA Comments, June 18, 2007, at 23; UPS Comments, June 18, 2007, at 2. --------------------------------------------------------------------------- The Postal Service recognizes that the PAEA contemplates a mail classification schedule, suggesting that it would contain ``a level of detail equivalent to the current DMCS,'' with additional language added to account for international mail. Postal Service Comments, June 18, 2007, at 16. The Postal Service advocates that separate classification schedules be established for market dominant and competitive products. Id. In supplemental comments, the Postal Service offers its views on what it calls the classification process.\18\ Regarding competitive products, it argues that the Commission has no role in developing or overseeing the mail classification schedule other than determining, pursuant to section 3642, what products are in the competitive category of mail. Id. at 14. The Postal Service asserts that ``the Governors will maintain the ``Competitive Products Classification Schedule,''' with changes made pursuant to section 3632(b). Id. The Commission interprets its responsibilities under the PAEA differently, concluding that the mail classification schedule falls within its purview. --------------------------------------------------------------------------- \18\ Postal Service Supplemental Comments, June 19, 2007. The bulk of these comments relate to market dominant products, with the Postal Service suggesting a framework for classification changes and development of a mail classification schedule. Id. at 1-14. --------------------------------------------------------------------------- The Postal Service states that ``the PAEA clearly vests classification authority with the Governors[.]'' Id. To a point, this statement is unobjectionable. Notably, however, it overlooks limitations on the Governors' authority, namely, that it is subject to subchapter II (of chapter 36 of title 39) and regulations promulgated by the Commission under section 3633. Moreover, the Governors' authority to change rates or classes (pursuant to section 3632) cannot reasonably be read to encompass the wholly separate power to develop and maintain a mail classification schedule for competitive products. If the Governors were intended to have such authority, there would be no reason for the process mandated by section 3631 or for subjecting the Governors' authority to change rates or classes to the Commission's regulations. Nor would there be any reason for the separate provision, section 3642, for establishing new products. Section 3631(a) identifies the initial list of competitive mail matter, including priority mail, expedited mail, bulk parcel post, and bulk international mail.\19\ None of these terms is defined in the statute. To establish what each of the foregoing means section 3631(c) instructs that the ``[m]ail matter referred to in subsection (a) shall, for purposes of this subchapter, be considered to have the meaning given to such mail matter under the mail classification schedule.'' Pursuant to this rulemaking, the Commission will identify the mail matter, including the products, in the (competitive) mail classification schedule that initially comprise each type of mail listed in section 3631(a). This process is integral to the Commission fulfilling its responsibilities under the PAEA, which requires, among other things, that each competitive product cover its attributable costs. --------------------------------------------------------------------------- \19\ The list also includes ``mailgrams,'' a service which was terminated on August 17, 2006. See Postal Bulletin 22192, October 26, 2006, at 5; see also letter from Daniel J. Foucheaux, Jr. to Steven W. Williams, Secretary, Postal Rate Commission, filed November 2, 2006. --------------------------------------------------------------------------- Commission maintenance of the mail classification schedule does not deprive the Governors of any flexibility to change rates or classes or offer new products. It does, however, assure non-discriminatory service and transparency in a manner contemplated by the statute.\20\ The mail classification schedule identifies the products subject to the Commission's oversight, a task which does not fall to the Governors.\21\ --------------------------------------------------------------------------- \20\ The Commission concurs with the Postal Service's position that the mail classification schedule should provide a level of detail similar to the DMCS. The Commission also agrees with the Postal Service that maintaining separate classification schedules for market dominant products and competitive products is reasonable. Nonetheless, for administrative convenience and clarity, the Commission intends to initially combine the separate lists for market dominant and competitive products in a single mail classification schedule. \21\ The mail classification schedule also serves as the source of the list of competitive products maintained by the Commission pursuant to section 3642. --------------------------------------------------------------------------- B. Competitive Mail Matter Not unreasonably, parties addressing the issue define mail matter, in the first instance, by reference to the existing materials, namely, the DMCS and International Mail Manual (IMM). This works reasonably well for ``priority mail'' and ``expedited mail,'' both of which appear in the DMCS. Thus, for example, the Postal Service suggests that ``priority mail'' consists of mail within the ``Priority Mail'' subclass (DMCS section 223) and ``expedited mail'' consists of Express Mail entered under the ``Expedited Mail Classification Schedule'' (DMCS section 110 et seq.). Postal Service Comments, June 18, 2007, at 11- 12.\22\ --------------------------------------------------------------------------- \22\ See also OCA Comments, June 18, 2007, at 22; PSA Comments, April 6, 2007, at 8, n.8; PSA Comments, June 18, 2007, at 2; and UPS Comments, June 18, 2007, at 2. --------------------------------------------------------------------------- For purposes of promulgating the initial regulations applicable to competitive products, the Commission agrees that, at a minimum, mail matter qualifying as priority mail and expedited mail is that described in the DMCS. There are three features to this initial classification: each represents only domestic mail; each is a separate product; and the rates for each product are rates of general applicability. OCA notes that the listing of priority mail and expedited mail in section 3631(a) does not distinguish between domestic and international mail or between single-piece and bulk. OCA Comments, June 18, 2007, at 23. Thus, it asserts that priority mail and expedited mail should include both domestic and international in the competitive mail classification schedule.\23\ This position is not unreasonable and the Commission proposes to include outbound international priority mail (Priority Mail International) and expedited mail (Global Express Guaranteed and Express Mail International) as separate products within the priority mail and expedited mail classifications respectively. As discussed below, inbound shipments would be classified as market dominant. --------------------------------------------------------------------------- \23\ Id. Elsewhere, however, OCA appears to suggest that other than two ``bulk international mail'' services all remaining international mail should be categorized as market dominant. Id. at 26. --------------------------------------------------------------------------- Reference to the DMCS and IMM works less well for ``bulk parcel post'' and ``bulk international mail'' since neither is clearly delineated.\24\ The parties addressing the issue agree generally that ``bulk parcel post'' consists of the following mail matter: Parcel Select (DMCS sections 521.23-26); Parcel Select Return Service (DMCS sections 521.27-28); Inter-BMC qualifying for OBMC and BMC discounts (DMCS sections 521.41-42); and Inter-BMC and Intra-BMC qualifying for a barcode discount (DMCS section 521.5). See Postal Service Comments, June 18, 2007, at 12-13; PSA Comments, June 18, 2007, at 3; [[Page 50759]] OCA Comments, June 18, 2007, at 24; and UPS Comments, June 18, 2007, at 2-3. --------------------------------------------------------------------------- \24\ As PSA points out, the listing of ``Bulk Parcel Post'' among the rate categories of the Parcel Post subclass (DMCS section 521.3) is an anachronism since there is no current rate associated with that rate category which preceded the Parcel Select rate categories. PSA Comments, June 18, 2007, at 2. --------------------------------------------------------------------------- The Commission agrees with the consensus view that ``bulk parcel post'' consists of the following mail matter: Parcel Select, Parcel Return Service, and Parcel Post mail qualifying for OBMC, BMC, and barcode discounts. Initially, therefore, bulk parcel post would be comprised of these three products. UPS and the Postal Service also suggest that bulk parcel post include additional mail matter. UPS would include mail entered as Inter-BMC or Intra-BMC Parcel Post by commercial mailers in quantities greater than one. UPS Comments, June 18, 2007, at 3; see also UPS Reply Comments, July 3, 2007, at 1. PSA opposes UPS's proposal as contrary to the commonly accepted use of the terms ``bulk'' and ``single-piece'' in the DMCS. PSA Reply Comments, July 3, 2007, at 2-3. To qualify for various current Parcel Post discounts, mailers must deposit at least 50 properly prepared pieces. See, e.g., DMCS sections 521.23-26 and 521.41-42. This minimum quantity is a prerequisite for mailing at discounted (or non-single-piece) rates. UPS offers no justification for reducing that minimum volume threshold to two. Accordingly, the Commission will not adopt that suggestion.\25\ --------------------------------------------------------------------------- \25\ Should experience prove otherwise, mail matter defined as single-piece parcel post may, if appropriate, be transferred to the competitive products classification pursuant to section 3642. --------------------------------------------------------------------------- The Postal Service suggests that ``bulk parcel post'' include Inter- and Intra-BMC Parcel Post pieces if postage is paid using a Merchandise Return Service permit. Postal Service Comments, June 18, 2007, at 12-13. Merchandise Return Service is a special service enabling the permit holder to authorize a mailer to mail parcels, including Parcel Post mail, with the postage and fees paid by the permit holder. Merchandise Return Service is also available for sending First-Class Mail parcels. No party commented on this proposal specifically.\26\ --------------------------------------------------------------------------- \26\ In its reply comments, UPS notes that it agrees generally with the Postal Service's definition of bulk parcel post. UPS Reply Comments, July 3, 2007, at 1. --------------------------------------------------------------------------- Although the proposal has some appeal, the Commission will not adopt it at this juncture. Under the PAEA, special services are classified as market dominant as are First-Class Mail parcels. The availability of Merchandise Return Service as both a market dominant and competitive service raises practical difficulties that are unexplored in this docket. Moreover, there may well be other special services that would be better categorized as competitive. Thus, to consider one in isolation may lead to results with unintended consequences. The better practice is to utilize the procedures for transferring items between the market dominant and competitive product lists once these lists have been established as specified by Congress in the PAEA. The parties' attempts to define the term ``bulk international mail'' are handicapped by the lack of a long-standing mail classification schedule. Instead, they turn to the IMM for guidance. It is a useful tool, but does not eliminate uncertainty surrounding the meaning of the term ``bulk international mail.'' Based on the parties'' comments, there appears to be little dispute that, at a minimum, bulk international mail consists of the following: \27\ International Priority Airmail Service (IPA), which is available to bulk mailers of all international letter items (IMM section 292); International Surface Airlift Service (ISAL), which is a bulk mailing system for the delivery of letter items (IMM section 293); and International Customized Mailing Agreements (ICMs), which are mailer-specific agreements subject to minimum revenue or quantity requirements (IMM section 297).\28\ There is, however, some controversy over the characterization of the remaining international mail services. --------------------------------------------------------------------------- \27\ See Postal Service Reply Comments, May 7, 2007, at 32-33; Postal Service Comments, June 18, 2007, at 13-14; UPS Comments, June 18, 2007, at 4; OCA Comments, June 18, 2007, at 26; and PSA Comments, April 6, 2007, at 8, n.8; see also Pitney Bowes Comments, June 18, 2007, at 12-13. \28\ OCA contends that ICMs involving single-piece international mail should be characterized as a market dominant product. OCA Comments, June 18, 2007, at 56-57. --------------------------------------------------------------------------- The Postal Service suggests that bulk international mail should be interpreted to include ``multi-item mailings tendered by a single mailer.'' \29\ The Postal Service indicates that multiple quantities may be satisfied by volume commitments or other types of annual guarantees. Id. at 13. Thus, in addition to the foregoing international services, the Postal Service proposes that the following be characterized as bulk international mail: Global Bulk Economy, which it indicates provides for surface transportation of bulk First-Class Mail international items; Global Direct, which it indicates provides for direct entry of bulk mailings sent through the Postal Service bearing the indicia, postal markings, and return address of the destination country; and direct sacks of printed matter sent to a single foreign addressee, also known as M-bags. Id. at 14.\30\ --------------------------------------------------------------------------- \29\ Postal Service Comments, June 18, 2007, at 13. In an earlier round of comments, the Postal Service endorsed the views of PSA and the International Mailers' Advisory Group (IMAG) that certain single-piece international mail should be categorized as competitive products, but on different grounds, namely, that the products, e.g., Global Express Guaranteed, Priority Mail International, and Express Mail International, are ``subject to fierce competition[.]'' Postal Service Reply Comments, May 7, 2007, at 32. In its more recent comments, the Postal Service's position on what constitutes bulk international mail appears to be limited to multi-item mailings tendered by a single mailer. See Postal Service Reply Comments, July 3, 2007, at 38-39. As an exception to this, the Postal Service indicates that because costs and revenues associated with Global Package Discount service are not separately collected, Express International Mail would need to be categorized as a competitive product. Postal Service Comments, June 18, 2007, at 15, n.17. \30\ In its discussion of ICMs, the Postal Service refers to Global Shipping Solutions and Global Package Discounts. Postal Service Comments, June 18, 2007, at 15, see also id. at n.17. Whether these are separate services or marketing programs in the form of ICMs is unclear. In its comments, the Postal Service should clarify their status. --------------------------------------------------------------------------- No party filed comments opposing the Postal Service's view of bulk international mail.\31\ UPS agrees with it. UPS Reply Comments, July 3, 2007, at 1. For purposes of promulgating these initial regulations, the Commission proposes to define bulk international mail by reference to bulk commercial services, which may be satisfied by volume commitments or other types of annual guarantees. This would include IPA, ISAL, ICMs, and M-bags.\32\ The Commission proposes to define IPA, ISAL, and M-bags as separate products and, at least initially, each ICM as a product. --------------------------------------------------------------------------- \31\ As noted above, in earlier comments OCA contends that an ICM involving single-piece international mail, such as Priority Mail International, should be categorized as a market dominant product. OCA Comments, June 18, 2007, at 56-57. \32\ The Postal Service identifies Global Bulk Economy and Global Direct as candidates for inclusion in the bulk international mail category. Postal Service Comments, June 18, 2007, at 15. It indicates that these services are available through an ICM. Whether these services are available only as an ICM or if they represent a separate category of international mail similar to IPA and ISAL is unclear. In its comments, the Postal Service should clarify their status. --------------------------------------------------------------------------- Regarding international mail determined by the Commission to be a competitive product, the PAEA amends title 39 by adding section 407(e)(2) as follows: \33\ --------------------------------------------------------------------------- \33\ The Express Delivery & Logistics Association filed a white paper concerning section 407(e) taking issue with the Postal Service position on inbound mail. White Paper by Express Delivery & Logistics Association Regarding Implementation of Section 405 of the Postal Accountability and Enhancement Act of 2006, July 20, 2007, at 2. See also FedEx Comments, April 6, 2007, at 4-5. --------------------------------------------------------------------------- With respect to shipments of international mail that are competitive products within the meaning of section 3631 that are exported or imported by [[Page 50760]] the Postal Service, the Customs Service and other appropriate Federal agencies shall apply the customs laws of the United States and all other laws relating to the importation or exportation of such shipments in the same manner to both shipments by the Postal Service and similar --------------------------------------------------------------------------- shipments by private companies. Section 407(e)(1) defines the term ``private company'' as one ``substantially owned or controlled by persons who are citizens of the United States.'' Thus, the Commission's findings regarding international mail classified as competitive products are relevant to the application of customs and related laws to the importation and exportation of such shipments, requiring that such laws be applied ``in the same manner to both shipments by the Postal Service and similar shipments by private companies.'' Regarding outbound international mail classified as competitive products, e.g., IPA, ISAL, and ICMs, section 407(e)(2) would apply to shipments by the Postal Service and similar shipments by private companies.\34\ --------------------------------------------------------------------------- \34\ The Commission's interpretation of section 407(e) concerns only its role as the arbiter of international mail to be classified as a competitive product. It is not intended to suggest how other federal agencies may apply the customs laws and other laws relating to the importation and exportation of mail. --------------------------------------------------------------------------- Regarding inbound international mail, there are two issues. First, the demarcation between bulk and single-piece international mail is less clear. The Universal Postal Union (UPU) identifies three types of mail: Letter Post, Express, and Parcel Post. The issues of inbound international mail have not been addressed sufficiently to enable the Commission to determine what inbound international mail qualifies as ``bulk international mail.'' Given the UPU's designations, one possibility would be to classify Letter Post as market dominant with the other types of mail classified as competitive products. The Commission, however, has no data indicating that either Express or Parcel Post is properly considered to be ``bulk international mail.'' Second, it is not apparent that classifying any inbound international mail as a competitive product has the same significance it does for outbound mail. To be sure, section 407(e) applies to the importation of shipments deemed competitive. More specifically, however, it applies to such shipments by the Postal Service and private companies owned by U.S. citizens. The Postal Service does not operate ETOEs (extra-territorial offices of exchange). Thus, there are no foreign-originating mail shipments by the Postal Service. Currently, shipments of inbound mail are handled by foreign posts and by private carriers. Foreign posts are not defined as private companies for purposes of section 407(e). In addition, although the Postal Service receives inbound mail from foreign posts at various customs locations, whether such mail is, within the meaning of section 407(e), ``imported by the Postal Service'' is unclear. Finally, even if shipments received by the Postal Service from foreign posts are construed as shipments by the Postal Service, there may be good reason to view such inbound mail as market dominant. The record is not sufficiently developed to enable the Commission to determine what inbound international mail is appropriately classified as ``bulk international'' and, therefore, a competitive product. The parties commenting on the foregoing discussion should thoroughly address the law and facts supporting their position and, in particular, the application of section 407(e) to inbound mail. Lastly, regarding competitive products, section 3632(b)(3) permits rate (or class) changes not of general applicability for competitive products. In recognition of this, the Commission is initially of the view that negotiated service agreements for mail classified as competitive are within the competitive products category and that each such agreement should be classified as a separate product. C. General Applicability of Rates and Classes Section 3632(b) identifies two types of rates or classes--those of general applicability and those not of general applicability. Each is qualified by the phrase ``in the Nation as a whole or in any substantial region of the Nation[.]'' Sections 3632(b)(2) and (b)(3). Section 3632(b)(4) provides that the Commission shall establish by regulation the criteria for determining whether a rate or class is or is not of general applicability in the nation or any substantial part of the nation. Three parties address the ``general applicability'' of rates or classes largely by reference to their availability. The Postal Service suggests that a rate (or class) is of general applicability if it is ``publicly available throughout the nation[.]'' Postal Service Comments, June 18, 2007, at 19. UPS advocates a generally similar standard, contending that a rate or class is of general applicability ``if it is available to all mailers equally,'' even if not all mailers satisfy the conditions for the rate or class. UPS Comments, June 18, 2007, at 7. At the other end of the spectrum, the parties suggest that rates or classes negotiated between the Postal Service and individual mailers are not of general applicability. See Postal Service Comments, June 18, 2007, at 19; UPS Comments, June 18, 2007, at 7; and PSA Comments, June 18, 2007, at 4. Defining whether a rate or class is ``of general applicability'' by reference to its availability is a reasonable means for establishing the outer bounds of the term. The Commission will adopt that standard. Thus, a rate (or class) of general applicability is one that is available nationwide to all mailers equally, i.e., on the same terms. That some mailers may not be able to qualify for the rate, e.g., for failure to satisfy the preparation requirements, or because it is not available in all geographic areas, does not alter the nature of the rate as one of general applicability.\35\ --------------------------------------------------------------------------- \35\ Express Mail is not available to or from certain difficult- to-access locations. Nonetheless, it is available in the nation as a whole. --------------------------------------------------------------------------- On the other hand, a contract rate (negotiated service agreement) negotiated between the Postal Service and an individual mailer would not be of general applicability.\36\ Between these parameters, however, determining whether a rate or class is or is not of general applicability throughout the nation or in any substantial region of the nation is less exact and, in all likelihood, would turn on the facts. In those situations, availability will continue to serve as a reasonable touchstone for determining the general applicability of the rate or class. --------------------------------------------------------------------------- \36\ A ``negotiated service agreement'' is a contract negotiated between the Postal Service and another entity, most likely the mailer, for service and rates different from those of general applicability. --------------------------------------------------------------------------- Only the Postal Service addresses the meaning of the term ``substantial region,'' suggesting that it be defined by the size of the population of the relevant region. Postal Service Comments, June 18, 2007, at 19-20. That standard is one of several that might be appropriate.\37\ Rather than address the issue in the abstract, the Commission concludes that whether a rate or class is or is not of general applicability in any substantial [[Page 50761]] region of the country is, at least at the outset, best determined on a case-by-case basis based on the facts presented. Currently, with the possible exception of Alaska bypass, the Postal Service does not provide any non-nationwide service.\38\ Among other things, section 3642 concerns the establishment of new products. Thus, to the extent the Postal Service chooses to offer a product on a less-than-nationwide basis, there will be an opportunity to consider the phrase ``substantial region of the nation'' in the context of a specific proposal. --------------------------------------------------------------------------- \37\ The Census Bureau, for example, divides the country into four regions, which are further subdivided into divisions. The geographic area of the nine states that comprise the West Region's Mountain Division is more than three times greater than that occupied by the South Region's South Atlantic Division, which is comprised of eight states and the District of Columbia stretching from Delaware to Florida (856.1 thousand square miles versus 266.1 thousand square miles). However, the population in the South Atlantic Division is more than 2.5 times greater than that of the Mountain Division (57.1 million versus 20.8 million based on July 2006 estimates). \38\ Although Express Mail service is not available at every post office, unquestionably the service would be fairly characterized as being of general applicability throughout the nation. --------------------------------------------------------------------------- D. Information Supporting Rate and Class Decisions The Governors' authority to establish rates and classes for competitive products is subject to subchapter II of chapter 36 of title 39 and the regulations promulgated by the Commission under section 3633 to: (a) Prohibit cross-subsidies of competitive products by market dominant products, (b) require each competitive product to cover its attributable costs, and (c) ensure that collectively competitive products cover an appropriate share of the institutional costs of the Postal Service. In Order No. 15, the Commission solicited the parties' views on what information is needed to support changes in rates or classes whether of general applicability or not. PRC Order No. 15, May 17, 2007, at 6-7. In addition, the Commission asked whether the information needed to support a rate decrease differed from that for a rate increase. Id. at 6. The parties offer starkly contrasting views on the information needed to support changes in rates. Advo, PSA, and the Postal Service contend that nothing need be filed with the Commission, other than the notice required under section 3632(b)(3), at the time rate changes are announced.\39\ These parties assert that competitive products' compliance with section 3633 should be considered only in the annual compliance review under section 3653. Id. UPS, on the other hand, contends that rate changes should be accompanied by the following information: Volumes, revenues, billing determinants, attributable costs, including an explanation of substantial cost changes; prior fiscal year audited data; projected data for the period when the rates are in effect; and unaudited data for the current fiscal year.\40\ UPS concludes that pre-implementation review is a prerequisite for determining competitive products' compliance with section 3633. Id. --------------------------------------------------------------------------- \39\ Advo Comments, June 18, 2007, at 10-11; PSA Comments, June 18, 2007, at 4; and Postal Service Comments, June 18, 2007, at 18- 19. \40\ UPS Comments, June 18, 2007, at 4-5. In its reply comments, UPS appears to modify its position, indicating, among other things, that it is not suggesting the Postal Service be required to file test year projections and that fiscal year data included in the annual report may be sufficient for rate changes noticed relatively shortly after the filing of the annual report. UPS Reply Comments, July 3, 2007, at 3-4. --------------------------------------------------------------------------- The Postal Service asserts that the ``structure of the statute, including, the nature of the data required to show compliance with 3633, suggests that there is no prior review by the Commission.'' Postal Service Comments, June 18, 2007, at 18. In support, it points to the different notice requirements associated with rate changes of general applicability (Federal Register notice no less than 30 days prior to the effective date) and rate changes of less than general applicability (filing with the Commission not less than 15 days prior to the effective date). Id. at 18-19. It argues that the former suggests that any substantive review is limited to the annual compliance review, whereas the latter seemingly is intended to protect the confidentiality of customized agreements. Id. at 19. This argument is not persuasive. The statutory provisions governing competitive products, 39 U.S.C. 3631-34, neither explicitly provide for nor prohibit pre-implementation review of rate changes by the Commission. Section 3633 directs the Commission to promulgate regulations to: (a) Prohibit cross-subsidies of competitive products by market dominant products; (b) ensure that each competitive product covers its attributable costs; and (c) that collectively competitive products make an appropriate contribution to the Postal Service's overhead. To fulfill these responsibilities, the Commission cannot turn a blind eye to changes which may not be in compliance with those requirements. The different notice/filing requirements prescribed by section 3632 suggest the need for closer scrutiny of certain types of rate changes. Section 3632(b)(2) requires that, for rate (or class) changes of general applicability, the Governors publish each rate (or class) decision and the record of the Governors' proceeding in the Federal Register at least 30 days before the effective date of any new rates or classes.\41\ Rates (or classes) of general applicability are available to all mailers equally, i.e., those satisfying the eligibility standards for the rate (or class). So, for example, Parcel Select rates would be available to all mailers meeting the eligibility requirements for such service. In essence, rates of general applicability are the published (or tariff) rates for the particular service. When a carrier's published rates (those of general applicability) are changed, experience suggests that they are likely to be increased.\42\ As a general rule, anytime competitive prices are increased concern over unfair competition is diminished. Likewise, increases in postal rates of general applicability above those found in compliance with section 3633 can, for purposes of these implementing regulations, be deemed to be presumptively reasonable. In that situation, the annual review would appear to be adequate to assure compliance with section 3633. The complaint process would be available as well. --------------------------------------------------------------------------- \41\ Pursuant to the proposed regulations, the Postal Service will also be required to file the notice of all proposed rate (and class) changes of general applicability with the Commission no later than the date such notice is published in the Federal Register. \42\ See, e.g., FedEx Corporation's press releases of December 4, 2006, announcing a 4.9 percent increase in certain ``standard list rates;'' and of November 3, 2006, announcing a 3.5 percent increase in the net average shipping rate for FedEx Express, both of which may be accessed at: http://www.fedex.com/us/about/news/pressreleases/?link=4 . --------------------------------------------------------------------------- An identical presumption of reasonableness cannot fairly be presumed for rate decreases of general applicability, which, at a minimum, intensify concerns about potentially unfair competition. This is not to suggest any limitation on the Governors' authority to change rates. Unlike its private enterprise counterparts, however, the Postal Service has no residual claimants, i.e., stockholders, to shoulder the consequences of an improvident decision to change rates. The Commission's role is to ensure that rates and classes comply with section 3633. By doing so, the Commission preserves fair competition. The change in circumstances giving rise to the decrease, resulting in a reduction from the pre-existing presumptively lawful rates, justifies the pre-implementation review to ensure continued compliance with section 3633. Thus, the Commission proposes that for decreases in rates of general applicability the Postal Service will be required to demonstrate the change is in compliance with section 3633. See section 3015.3(c) of the proposed regulations. The Commission does not anticipate that the regulations will either unduly burden the Postal Service [[Page 50762]] or delay the effectiveness of changes satisfying the minimal standards of lawfulness. Section 3632(b)(3) authorizes the Governors to establish rates (or classes) not of general applicability, i.e., to execute negotiated service agreements with mailers providing for rates different from the published rates (of general applicability). Notably, negotiated service agreements are subject to different filing requirements than are rate changes of general applicability. Specifically, each such negotiated service agreement (rate or class decision not of general applicability) and the record of proceedings in connection with such decision must be filed with the Commission not less than 15 days prior to the effective date of any new rate or class. There is good reason for the different filing requirements depending upon the type of rate change involved.\43\ --------------------------------------------------------------------------- \43\ The Postal Service's suggestion that customized agreements are required to be filed with the Commission, as opposed to simply being noticed in the Federal Register, to protect the confidentiality of such agreements (Postal Service Comments, June 18, 2007, at 19), is only one aspect of this issue. The Postal Service is aw