FR Doc E7-21596 [Federal Register: November 9, 2007 (Volume 72, Number 217)] [Rules and Regulations] [Page 63661-63704] From the Federal Register Online via GPO Access [wais.access.gpo.gov] [DOCID:fr09no07-15] [[Page 63661]] ----------------------------------------------------------------------- Part II Postal Regulatory Commission ----------------------------------------------------------------------- 39 CFR Parts 3001, 3010, 3015 and 3020 Administrative Practice and Procedure, Postal Service; Final Rule [[Page 63662]] ----------------------------------------------------------------------- POSTAL REGULATORY COMMISSION 39 CFR Parts 3001, 3010, 3015 and 3020 [Docket No. RM2007-1; Order No. 43] Administrative Practice and Procedure, Postal Service AGENCY: Postal Regulatory Commission. ACTION: Final rule. ----------------------------------------------------------------------- SUMMARY: A recently-enacted federal law directs the Commission to develop rules to implement a new postal ratemaking system. This document responds to that directive by adopting rules addressing market dominant and competitive products, including negotiated service agreements, the regulatory calendar, and product lists. Adoption of the rules allows the Postal Service and mailers to begin to exercise its options under the new law. DATES: Effective date: November 9, 2007. November 20, 2007: deadline for the Postal Service to provide information necessary for further development of the Mail Classification Schedule. 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 72 FR 50744, September 4, 2007 I. Introduction This order marks the end of the first phase of the Commission's efforts to develop the system of modern rate regulation contemplated by the Postal Accountability and Enhancement Act (PAEA), Public Law 109- 435, 120 Stat. 3198, December 20, 2006. The Order adopts final rules governing market dominant products, competitive products, and product lists. It represents the Commission's initial attempt to fashion a coherent set of regulations implementing the new rate-setting process, an effort that has been guided by the PAEA's bedrock principles, namely flexibility, accountability, and transparency. Throughout this rulemaking process, which began in January 2007, the parties' comments have been helpful, particularly in the latest round, sharpening the issues and suggesting alternative resolutions. The Commission appreciates the parties' contributions. The final rules focus particularly on comments and reply comments received in response to Order No. 26, which included proposed rules for regulating rates and classes under the PAEA.\1\ --------------------------------------------------------------------------- \1\ In this proceeding, the Commission has received more than 160 comments. In response to Order No. 26 alone, 58 sets of comments were filed. The Commission has carefully reviewed these comments and, where appropriate, addresses them in this Order. --------------------------------------------------------------------------- The final rules differ from the proposed rules in ways designed to clarify the rules in response to these comments. Principal highlights of the Order and final rules include: (1) Clarifying the intent of the proposed rules by specifying the content of notices of proceedings applicable to various types of filings, in lieu of uniform reliance on existing rule 3001.17; (2) Clarifying the legal implications of Commission findings in various proceedings; (3) Reaffirming the application of the rate cap to market dominant products; (4) Adopting a transition rule concerning the calculation of the annual limitation in the event of a transitional rate filing; (5) Clarifying the content of exigent rate requests; (6) Reaffirming that each negotiated service agreement (NSA) is a separate product, but noting that functionally equivalent NSAs may, upon proper showing, be grouped as one product; and (7) Adopting initial lists of market dominant and competitive products. The final rules are issued almost 8 months before the statutory deadline. The rules do not purport to address every issue that might arise under the PAEA. Nonetheless, the benefits of implementing the regulations on an accelerated basis outweigh potential refinements in the rules that might be possible if the full 18-month period provided by statute were used. See 39 U.S.C. 3622(a) and 3633(a). With experience, the rules may be modified if deemed necessary. With the first phase of implementing the PAEA at an end, the Commission intends to turn as quickly as practicable to issuing proposed regulations on related matters under the PAEA, including those involving complaints, reporting requirements, and commercially sensitive materials. With the basic framework now in place, the Postal Service is free to utilize new flexible pricing approaches. Pending implementation of regulations on these related matters, the Commission's existing rules will continue to apply. II. Regulation of Market Dominant Products: Part 3010 A. Overview The Commission appreciates the commenters' thoughtful review of proposed part 3010 and their reasoned observations. It concludes that there is a broad consensus that the proposal's overall direction comports with the PAEA's philosophy. However, it also acknowledges that commenters identify aspects of the initial effort that would benefit from clarification or correction. A considered assessment of the commenters' suggestions results, in some instances, in revisions to the rules.\2\ The Commission, on its own accord, also makes editorial and conforming changes to improve the clarity and readability of the rules or to conform them more closely to official publication requirements. --------------------------------------------------------------------------- \2\ Discussion focuses primarily on comments suggesting the need for changes. In instances where more than one commenter present similar suggestions, the discussion sometimes focuses mainly on one commenter's submission. --------------------------------------------------------------------------- 1. Note on Due Process Review of the comments indicates that there are two broad due process concerns. One pertains to the Commission's issuance of rules implementing only some aspects of the PAEA's new regulatory framework. The other focuses on the approach reflected in specific rules in the proposals that have been issued. The Postal Service and most commenters addressing finalization of part 3010 recognize that this is one of the first steps the Commission is taking to implement the PAEA, and that it is developing complementary regulations on related matters, such as annual reporting requirements and complaint proceedings. The Commission appreciates that commenters are being asked to assess the advisability of certain procedures prior to issuance of a comprehensive set of regulations. However, it finds that pragmatic considerations and the interest in promptly implementing PAEA policies dictate serial issuance of new rulemaking proposals, rather than a complete set. Moreover, the Commission believes that issuance of the proposed regulations in parts 3010, 3015 and 3020 at the same time has provided commenters with an adequate basis for assessing many essential initial issues. However, as Advo observes with respect to all of the Order No. 26 proposals, * * * the true measure of their success will come when they are applied * * * to specific issues that arise in the future.'' Advo Comments, [[Page 63663]] September 24, 2007, at 1. The Commission recognizes this, and intends to provide an opportunity to address concerns about conflicts, gaps, or the need for other adjustments as the need arises. As to the specific proposals, some are concerned that the approach the Commission has adopted with respect to notices, public participation, and Commission review either is not consistent with due process considerations or does not make clear that the Commission intends to honor pertinent requirements. See, for example, Valpak Comments, September 24, 2007, at 3-16 and 20-27; Medco Comments, September 24, 2007, at 4-10; OCA Comments, September 24, 2007, at 12- 15, and APWU Comments, September 25, 2007, at 1-4. In brief, the Commission believes that the rules, as proposed, are consistent with pertinent due process considerations. However, it appears that there are several areas where improvements can be made to make the Commission's intentions more clear, without imposing undue burden on the Postal Service or the Commission or compromising the PAEA's new regulatory approach. Accordingly, the Commission reconsiders its approach to several matters and revises or clarifies affected rules to reflect this decision. The Commission provides a single discussion of the matter here. 2. The Role of the Administrative Procedure Act As the Commission has noted in Order No. 26, there is a tension in the PAEA between its goals of facilitating rapid and flexible adjustments to rates and classifications, and increasing the transparency and accountability of those processes.\3\ The regulations that the Commission proposed to govern Postal Service notices of rate adjustment for market dominant products, as well as changes to the Mail Classification Schedule, were intended to afford opportunities for public participation that meet the basic guarantees of public participation provided for by the PAEA and the Administrative Procedure Act (APA) (chapter 5 of title 5 of the United States Code), either explicitly or implicitly. --------------------------------------------------------------------------- \3\ See PRC Order No. 26, ]] 3070, 3074. This tension is readily apparent from 39 U.S.C. 3622(b)(6), which simultaneously calls for reducing the administrative burden and increasing transparency relative to the system that prevailed under the Postal Reorganization Act. --------------------------------------------------------------------------- With respect to Type 1 rate adjustments, the essential features of the proposed regulations were requirements that the public receive notice of the proposed rate adjustment from both the Postal Service and the Commission (proposed rule 3010.10(a)), a 20-day period for public comment (proposed rule 3010.13(a)), and a 14-day period for the Commission to evaluate the consistency of the rates proposed with the relevant requirements of the PAEA and issue its findings (proposed rule 3010.13(c)). Applicability of the APA. Medco concludes that Commission orders that determine the status of the Postal Service's rate proposals are ``rulemakings'' subject to section 553 of the APA. See 5 U.S.C. 553. It argues that rate adjustments provided for in the PAEA fall unambiguously within the applicable definition of a rule for purposes of the APA, citing 5 U.S.C. 551(4): `[R]ule' means the whole or part of an agency statement of general or particular applicability and future effect designed to implement, interpret, or prescribe law or policy * * * and includes the approval or prescription for the future of rates. * * * Medco Comments, September 24, 2007, at 5. Consequently, Medco notes, Commission review of rate adjustments, such as those provided for in 39 U.S.C. 3622(d)(1)(C)(ii), is informal ``rulemaking'' that is subject to the notice and comment requirements of 5 U.S.C. 553 of the APA. Id. Because a ``rule'' can be of either ``general or particular applicability,'' the definition covers the adjustments that the Postal Service might propose to both Type 1 (general) and Type 2 (NSA) rates. Section 503 of title 39 authorizes the Commission to make such rules as are ``necessary and proper'' to carry out its duties. That section states that Commission rules, are ``subject to chapters 5 and 7 of title 5.'' (Section 553 of the APA is placed within chapter 5 of title 5.) Medco cites National Easter Seal Society v. USPS, 656 F.2d 754, 767 (D.C. Cir. 1981) as confirming this interpretation of what is now 39 U.S.C. 503. Because Commission orders that determine the status of postal rates are ``rules,'' and are subject to the requirements of 5 U.S.C. 553, Medco explains, Commission review of the Postal Service's rate adjustment proposals must satisfy the notice and public comment requirements of section 553. Id., at 3. 5 U.S.C. 553 requires that an gency: (1) Publish notice of the proposed rule in the Federal Register, and that it include ``either the terms or substance of the proposed rule or a description of the subjects and issues involved''; (2) ``[G]ive interested persons an opportunity to participate in the rulemaking through submission of written data, views, or arguments * * *''; (3) Consider ``the relevant matter presented''; and (4) ``[I]ncorporate in the rules adopted a concise general statement of their basis and purpose.'' Medco emphasizes that complying with these section 553 obligations is mandatory unless an exception can be shown to apply. Id. at 7. The public notice requirements of section 553. With respect to Type 1 notices of rate adjustment, Order No. 26 proposed that the Commission ``publish notice of the [Postal Service rate adjustment filing] in the Federal Register'' and ``post the filing on its Website.'' See proposed rule 3010.13(a)(1). The Commission intended that consistent with existing rule 3001.17(d), APA notice requirements would be satisfied.\4\ This pattern was followed in the remainder of the rules proposed in Order No. 26 that address various forms of pre- implementation review by the Commission. Valpak asserts that this set of notice requirements would not have satisfied section 553 of the APA because the proposed rules did not expressly require that they include the terms of the proposal (e.g., proposed rates) or any supporting detail. Valpak Reply Comments, October 9, 2007, at 9. --------------------------------------------------------------------------- \4\ Order No. 26 also proposed that the Postal Service ``[p]rovide public notice in a manner reasonably designed to inform the mailing community and the general public that it intends to change rates. * * *'' See proposed rule 3010.10(a)(1). This is designed to fulfill the requirement of section 3622(d)(1)(C) of the PAEA. --------------------------------------------------------------------------- Although the Commission fully expected to issue notices that complied with the content requirement of section 553, it accepts that uncertainty is diminished by specifying this intention in every applicable regulation. The Commission revises its proposed regulations governing public notices to explicitly include the categories of information that section 553 requires. Under the final rules, the public can be assured that such notices will contain summaries of the Postal Service's proposed rate and classification-related changes in sufficient detail to satisfy the notice requirements of the APA. See final rules 3010.13(a), 3010.44(a), 3010.65(a), 3020.33, 3020.53, and 3020.73.\5\ --------------------------------------------------------------------------- \5\ No party contested notice applicable to competitive products. --------------------------------------------------------------------------- The public comment requirements of 5 U.S.C. 553. The regulations proposed in Order No. 26 would have allowed the public 20 days from the filing of a proposed Type 1 rate adjustment to comment on whether the proposed rates [[Page 63664]] comply with the rate cap provisions of the Commission's proposed rules and whether they comply ``with the policies of 39 U.S.C. 3622.'' See proposed rule 3010.13(b)(2). The regulations proposed in Order No. 26 did not specifically provide for public comment on proposed Type 2 rate adjustments. See proposed rule 3010.41. Commenters' positions. Some commenters argue that the regulations proposed in Order No. 26 provided opportunities for public comment during the pre-implementation period that went beyond what the PAEA intended. Advo Reply Comments, October 9, 2007, at 3; DFS Comments, September 24, 2007, at 2-4; and PostCom Comments, September 24, 2007, at 1-3. Another group of commenters argued that these opportunities were inadequate to honor the PAEA's directive to increase transparency and accountability in the rate-setting process, and inadequate to satisfy even the minimum requirements of the APA. APWU Reply Comments, October 9, 2007, at 1-2; Medco Comments, September 24, 2007, at 2-5; McGraw-Hill Reply Comments, October 9, 2007, at 4-5; NAA Reply Comments, October 9, 2007, at 1-5; OCA Reply Comments, October 9, 2007, at 3-4; Valpak Comments, September 24, 2007, at 2-16, 20-23; and Valpak Reply Comments, October 9, 2007, at 1-34. Advo argues that Congress did not contemplate, and the Commission should not allow, any public input prior to implementation of the Type 1 or Type 2 rates. It points out the PAEA provides for public comment during pre-implementation review of proposed Type 3 rates (those prompted by ``extraordinary'' circumstances), but makes no mention of them in the context of pre-implementation review of Type 1 and Type 2 rates. From this Advo infers that Congress meant to prohibit public participation in pre-implementation review wherever it did not expressly require it. Advo Reply Comments, October 9, 2007, at 1-3. DFS contends that no issues may be commented upon or considered by the Commission at the pre-implementation stage except compliance with the rate cap. It takes the view that the objectives and factors governing postal rate setting set out in section 3622(b) and (c) are relevant only to the process by which the Commission designs a ``modern system of ratemaking'' for market dominant products. DFS Reply Comments, October 9, 2007, at 5-7. PostCom and the Postal Service offer another rationale for reaching the conclusion that public comment on any compliance issue other than the rate cap at the pre-implementation stage conflicts with the PAEA. They argue that the scope of pre-implementation review is necessarily limited by the changed role that the Commission plays in rate setting under the PAEA. They assert that it is the role of the Postal Service rather than the Commission to balance the elaborate list of largely qualitative objectives and factors that apply to the modern system of ratemaking when proposing changes in rates. They contend that Commission review is relevant only where a clear violation of one of those objectives or factors can be demonstrated. They argue that the rate cap is the only section 3622 requirement that is concrete and objective enough to be susceptible to such a finding. Therefore, in their view, compliance with the cap is the only issue upon which public comment might be relevant to Commission review. They emphasize that the rate-setting apparatus described in 39 U.S.C. 3622(d) focuses on the rate cap and its administrative details. In particular, they note that section 3622(d) provides for a feedback mechanism to resolve only the issue of non-compliance with the rate cap. This supports the conclusion that Congress intended the rate cap and its administration to be the only concern of pre-implementation review. PostCom Reply Comments, October 9, 2007, at 1-3; and Postal Service Reply Comments, October 9, 2007, at 14-17. A number of other commenters agree that pre-implementation public comment and Commission review should be confined to the issue of rate cap compliance. See ANM/ MPA Comments, September 24, 2007, at 2; NPPC Comments, September 24, 2007, at 2; Pitney Bowes Comments, September 24, 2007, at 7-8; and Time Warner Comments, September 24, 2007, at 4-5. Another group of commenters take the opposing position, namely that failing to provide an opportunity for public comment before rate or classification changes take effect, or restricting the scope of the issues that such comments may address, undermines the PAEA's objective of increasing the transparency and accountability of the rate-setting system (see 3622(b)(6)) and violates section 553 of the APA.\6\ They note that section 553(c) requires an agency to allow interested persons to ``participate'' in substantive rulemakings by submitting ``written data, views, or arguments * * *'' They note that section 553(c) also requires an agency order adopting a rule to include `` `a concise general statement of the basis and purpose''' after considering the `` `relevant matter''' that has been presented in the course of the rulemaking. Medco Comments, September 24, 2007, at 3. These commenters acknowledge that in addressing pre-implementation procedures in 39 U.S.C. 3622(d), the PAEA emphasizes compliance with the rate cap. But, they point out, there is no language in section 3622(d) or elsewhere in chapter 36 that excludes broader pre-implementation review by the Commission. Therefore, they argue, there is no legal ground for excluding either the objectives and factors listed in section 3622, or the general policy provisions of title 39, from pre-implementation review. Valpak Reply Comments, October 9, 2007, at 12, 20; Medco Comments, September 24, 2007, at 7; and McGraw-Hill Reply Comments, October 9, 2007, at 5. --------------------------------------------------------------------------- \6\ See generally Medco and Valpak comments, and the reply comments of McGraw-Hill, NAA, the OCA, and Valpak. --------------------------------------------------------------------------- These commenters also acknowledge that expedition and flexibility in rate setting are among the PAEA's goals, and that the Commission has a good deal of discretion to set priorities with respect to which compliance issues it will focus on in the limited time it has set aside for pre-implementation review. They contend, however, that prohibiting public comment outright on statutory policies, objectives, and standards that would be affected by the rates under Commission review would not allow some compliance issues to be evaluated by APA mandated procedures. This, they suggest, would have the effect of selectively reading section 503 of title 39 (which subjects substantive Commission orders to the requirements of the APA) out of the statute. See Medco Comments, September 24, 2007, at 4-5, 7. It is certain, Medco and others argue, that barring public comment altogether before adopting a substantive rule violates the notice and comment guarantee of section 553 of the APA. They note that regulations proposed in Order No. 26 do not explicitly assure an opportunity for public comment with respect to amended notices of Type 1 rate adjustments, all Type 2 rate adjustments, and significant classification changes that do not require amendments to the market dominant and competitive product lists. They argue that deferring consideration of the public's views to various post hoc forms such as the Commission's annual compliance report required by 39 U.S.C. 3653 or a complaint filed under 3662 does not preserve the interests protected by 5 U.S.C. 553. Those interests include [[Page 63665]] the chance for the public to be heard before a rule has been finalized when its comments are more likely to influence the agency's rule. See Valpak Reply Comments, October 9, 2007, at 6, 7, and 16. Commission analysis. The tension between the groups interpreting the PAEA as mandating little, if any, pre-implementation review of proposed changes in postal rates and classes, and those interpreting it as requiring that all issues be reviewable prior to implementation, is clear. It is equally clear that the Commission can interpret its responsibilities in a way that reconciles the flexibility and expedition that the PAEA requires with the public participation guarantees of the APA. A statute should be construed ``so that effect is given to all its provisions, so that no part will be inoperative or superfluous, void or insignificant.'' Pennsylvania Medical Society v. Snider, 29 F.3d 886, 895 (3d Cir. 1994). The court observed in Citizens to Save Spencer County v. EPA: [i]f inconsistent provisions point generally in a common direction, it is the task of an agency with requisite authority to pursue a middle course that vitiates neither provision but implements to the fullest extent possible directives of each, * * * 600 F.2d 844, 870 (D.C. Cir. 1979). This is particularly true if a construction can be found that will give force to and preserve all the provisions of the statute. FDA v. Brown and Williamson Tobacco Corp., 529 U.S. 120, 133 (2000). Accordingly, the Commission reconciles those provisions of the PAEA that promote flexible and expedited rate setting with those that foster transparent and accountable rate setting. To do this, it helps to clearly identify the statutory purposes that need to be reconciled. The Commission concludes that one of Congress's main motives in enacting the PAEA was to simplify and expedite the setting of postal rates. It further concludes that Congress intended to give the Postal Service wide latitude in designing specific rates and rate relationships, expecting that the Commission would alter those decisions only where disregard of particular statutory standards is clear. Consequently, the Commission now plays a different role in reviewing proposed rates prior to their implementation than it has in the past. The Commission also concludes that Congress expected that a modern system for regulating rates and classes would afford the public and the Commission only a limited period of pre-implementation comment and review. This finding is supported primarily by the 45-day period of advance notice of proposed changes in rates that is referenced in section 3622(d)(1)(C). This provision indicates that Congress viewed 45 days as an adequate review period for the compliance issues that would be raised prior to implementing new rates. This implies that the pre- implementation issues with which Congress expected the Commission to deal would be few enough, or the level of scrutiny would be light enough, to allow the Commission to evaluate them adequately within 45 days. The inference is strong that Congress contemplated that complicated or subjective compliance issues would be addressed during the annual compliance review, or through the complaint procedures of section 3662. Even though Congress intended limited pre-implementation review of postal rate changes, it must be presumed that Congress was aware of 5 U.S.C. 553 and the limits it sets on the extent to which public participation can be deferred until after a rule is finalized. That APA provision is designed to ensure that the opinion of those whose interests will be affected by an agency's rules will be heard before a rule is finalized, not after. Courts have emphasized the distinction: The EPA overlooks, however, the crucial difference between comments before and after rule promulgation. Section 553 is designed to insure that [parties affected by an agency decision] have an opportunity to participate in and influence agency decision-making at an early stage, when the agency is more likely to give real consideration to alternative ideas. United States Steel Corp. v. EPA, 595 F.2d 207, 214 (5th Cir. 1979), rehearing granted 598 F.2d 915.\7\ \7\ See also, City of New York v. Diamond, 379 F. Supp. 503, 517 (S.D.N.Y. 1974) (``Permitting the submission of views after the effective date is no substitute for the right of interested persons to make their views known to the agency in time to influence the rule making process in a meaningful way * * *''). Accord, Maryland v. EPA, 215, 222 (4th Cir. 1975); vacated on other grounds sub nom. EPA v. Brown, 431 U.S. 99 (1977). --------------------------------------------------------------------------- The Commission notes that neither the PAEA nor its legislative history explicitly define the scope of public input or Commission review of proposed rates prior to their implementation. It concludes that the weight of the inferences that may be drawn from the provisions of the PAEA itself indicate that Congress intended to leave room for Commission discretion in determining the degree of public input that would be afforded in the pre-implementation period, the form that it should take, and what priority the Commission would give to evaluating the public input that it decided to elicit. Given this, the most likely and most reasonable assumption is that Congress expected the Commission to give as much consideration as it could to the issues most capable of resolution in the brief period that the PAEA provides, without violating the minimum guarantees that 5 U.S.C. 553 provides. The Commission can give close scrutiny to only a limited number of compliance issues in the time available before rate changes are implemented, but it can not always predict in advance precisely which issues will be of highest priority. In recognition of that fact, the final rules adopted by the Commission require the Postal Service to address a broad range of relevant issues in any notice of rate adjustment, but clarify that the Commission focus must be primarily on the requirements of 39 U.S.C. chapter 36, subchapter 1. See final rules 3010.13 and 3010.14.\8\ --------------------------------------------------------------------------- \8\ Within the 45-day period contemplated for pre-implementation review, the Commission is likely to be able to scrutinize and reach definitive conclusions on compliance issues that are factually clear and straightforward-such as rate cap compliance, or compliance with formulas for calculating preferred rates. Commission review of more complex or nuanced issues within that timeframe is likely to be somewhat less thorough, and any conclusions that it reaches are likely to be of a preliminary nature. For that reason, final rule 3010.13(j) distinguishes between the effect of the Commission's pre- implementation findings concerning formula-determined caps and rates, and other issues. The Commission will treat its findings concerning the former as decided on the merits for purposes of subsequent proceedings, but will not attach comparable presumptions to findings concerning the consistency of a proposed change with complex or subjective policy factors. Final rule 3010.13(j) responds to a suggestion by GCA that this dichotomy be reflected in the Commission's rules. See GCA Comments, September 24, 2007, at 5-6. --------------------------------------------------------------------------- PRC Order No. 26, ] 2029 commented that the Commission would not entertain comments on costing methodology during the pre-implementation period. Valpak and NNA infer from this that the Commission proposed to prohibit public comments from discussing any issue that involves attributable costs. Valpak Comments, September 24, 2007, at 5; Valpak Reply Comments, October 9, 2007, at 29-34; and NNA Comments, September 24, 2007, at 8. Valpak argues that the requirement that classes and services cover their attributable costs remains a requirement of the PAEA (see 39 U.S.C. 3622(c)(2)), just as it was under the Postal Reorganization Act. Valpak goes on to identify more than a dozen basic policies, objectives, and factors in title 39 that have no force unless attributable cost levels for the various classes and services are known. Valpak argues that it is inconsistent for the rules proposed in Order No. 26 to [[Page 63666]] allow comments of section 3622 requirements generally in the pre- implementation review period, but single out costs for exclusion from consideration. The comment in Order No. 26 of which Valpak and NNA complain may not have been adequately explained. The merits of one attribution methodology relative to another is an example of an issue that is too complex to be re-evaluated in a pre-implementation context. Cost attribution methods should be reviewed in other rulemaking proceedings. Whether rates properly reflect costs will be judged using the most recently approved attribution methodologies. Final rule 3010.13 retains the 20-day period for public comment proposed in Order No. 26. Some commenters complain that Order No. 26 did not analyze the adequacy of this amount of time to afford a meaningful opportunity to respond to the issues that proposed rates might raise, as 5 U.S.C. 553 requires. Medco Comments, September 24, 2007, at 8; and Valpak Reply Comments, October 9, 2007, at 12. The adequacy of the 20-day comment period must be viewed in the context of the PAEA's goals. Major goals are to simplify and expedite the process by which rates are adjusted. Routinely enlarging the public comment period would reduce the time available to the Commission to evaluate the comments received, if it is to provide the expedition that Congress contemplated. Twenty days should be adequate to allow interested persons to identify and explain perceived failures to conform to the statutory requirements. Type 1 and Type 2 rate adjustments compared. The notice and comment guarantees of section 553 of the APA apply to both Type 1 and Type 2 rate adjustments. The Commission's final rules, however, still distinguish between Type 1 and Type 2 review. Where the scope of public comments and Commission orders addressing Type 1 rate adjustments primarily focus on the requirements of 39 U.S.C. 3622(d), the scope of comments and orders addressing Type 2 rate adjustments focus on compliance with the requirements of 39 U.S.C. 3622(c)(10). Similarly, where the period for public comments addressing Type 1 rate adjustments is 20 days from the Postal Service's filing, the period for public comments addressing Type 2 adjustments is 10 days from the Postal Service's filing. This reflects the narrower potential compliance issues that Type 2 rate adjustments raise, and a lesser need for review for such adjustments. Compare final rule 3010.13(c) with final rule 3010.44. Implementation dates under the APA. Section 553(d) of the APA states that: The required publication or service of a substantive rule shall be made not less than 30 days before its effective date, except-- [A] substantive rule which grants or recognizes an exemption or relieves a restriction; [I]nterpretative rules and statements of policy; or [A]s otherwise provided by the agency for good cause found and published with the rule. If one were to add the 20-day comment period to the 14-day period that the Commission will allow itself for issuing an order regarding a proposed rate adjustment, and add a 30-day waiting period before the order could take effect, the total number of days required before a proposed rate adjustment could take effect would exceed the 45 day pre- implementation period provided for in section 3622(d)(1)(C). Recognizing this possibility, DFS urges the Commission to routinely accompany its rate adjustment orders with findings that there is good cause to waive the 30-day waiting period. It argues that the Commission could base its finding of good cause on the generalized notion that the PAEA puts a high priority on allowing the Postal Service to change rates quickly. DFS Reply Comments, October 9, 2007, at 4. Finding good cause, however, requires a showing that a 30-day waiting period is either ``impractical, unnecessary, or contrary to the public interest.'' It is essentially an emergency procedure. See Buschmann v. Schweiker, 676 F.2d 352, 357 (9th Cir. 1982).\9\ Since the purpose of the section 553(d) waiting period is ``to give affected parties a reasonable time to adjust their behavior before the final rule takes effect'' (Omnipoint v. FCC, 78 F.3d 620, 630 (D.C. Cir. 1981)), it usually requires an analysis of specific interests that will be hurt and those that will be helped by waiver of the waiting period. See, for example, American Bankers Association v. National Credit Union Administration, 38 F. Supp. 2d 114, 139,140 (D.D.C. 1999); Buschmann v. Schweiker. Id. Accordingly, it would seem problematic for the Commission to require itself, by rule, to routinely determine that the factual circumstances surrounding a rate adjustment support a finding of ``good cause'' for waiver. The Commission properly will consider such a finding on a case-by-case basis. --------------------------------------------------------------------------- \9\ The need to meet tight statutory deadlines has been rejected as a justification for waiving the waiting period requirement. U.S. Steel Corp. v. EPA, 595 F.2d 207, 214 (5th Cir. 1979). --------------------------------------------------------------------------- Classification issues and the APA. Several commenters criticize the rules proposed in Order No. 26 for failing to explicitly provide notice and public comment opportunities before changes in the Mail Classification Schedule are put into effect. They note the Commission's proposed rules allow for public comment before the Mail Classification Schedule is adopted, but make no provision for notice or public comment for major classification changes unless they involve amendments to the lists of market dominant or competitive products that the Commission is required to maintain under 39 U.S.C. 3642. See proposed rules 3020.33, 3020.53, and 3020.73. This, they contend, violates the notice and comment guarantees of section 553 of the APA. They also note that Order No. 26 proposed rules that would require 15 days' notice from the Postal Service prior to ``updating'' product descriptions in the Mail Classification Schedule, but would not have provided an opportunity for public comment on these changes. See proposed rules 3020.90 et seq. They contend that major classification changes can potentially be imposed through such updates. Medco Comments, September 24, 2007, at 9- 10; OCA Comments, September 24, 2007, at 15-17; McGraw-Hill Reply Comments, October 9, 2007, at 2-3; and Valpak Comments, September 24, 2007, at 4, 15-16. The Commission does not contemplate engaging in pre-implementation review of the merits of any classification change. However, to preserve Postal Service flexibility yet provide assurance that the Postal Service will not misuse the system for correcting the Mail Classification Schedule, additional opportunity for mailer comment is provided in the final rules. The Postal Service notices of planned classification changes will be posted on the Commission Web site and interested persons will be afforded the opportunity to comment. See chapter IV-B and rules 3020.91 through 3020.93. 3. Transparency Concerns Several commenters assert that the rules proposed in Order No. 26 are inadequate to preserve, let alone increase, the transparency and accountability of postal rate setting under the PAEA relative to the regulatory regime under the Postal Reorganization Act. They make this assertion, in large part, because the Commission has not published proposed rules specifying the [[Page 63667]] information that the Postal Service will be required to provide to the Commission as part of its periodic reporting under 39 U.S.C. 3652, and the information and issues that will be covered by the Commission's annual compliance report under 39 U.S.C. 3653. See, for example, Valpak Comments, September 24, 2007, at 6; and Valpak Reply Comments, October 9, 2007, at 4. NAA observes that: [I]t is difficult to comment on * * * the proposed ratesetting rules without an understanding of how the Commission envisions the interplay between annual reporting requirements, the data submissions required to support notices of rate adjustments, and the respective roles of the reporting requirements and the complaint process. NAA Comments, September 24, 2007, at 13. The Commission anticipates issuing proposed rules soon after the close of this docket that specify the information that the Postal Service will provide in its periodic reporting under section 3652 to facilitate preparation of the annual compliance report that the Commission will provide pursuant to section 3653. Interested persons will have ample opportunity to identify the types of information that will best inform the Commission and the public, and assure the level of accountability and transparency contemplated by the PAEA. Data from the Postal Service's periodic reports under section 3652 will be available and provide the basis for pre-implementation analysis of the Postal Service's proposed rate adjustments, and will inform any complaints that might be filed by the public. The Commission is optimistic that the combination of pre-implementation review of rate changes, periodic reporting by the Postal Service, annual compliance reports by the Commission, and the complaint mechanism, all supported by the Commission's subpoena power, will serve to increase the level of transparency and accountability of postal rate setting under the PAEA relative to that which prevailed under the prior regulatory regime. Ex parte communications. In PRC Order No. 26, ] 2026, the Commission remarked that: [t]he 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. Valpak criticizes these remarks, observing that: PAEA-mandated transparency cannot be achieved by private communications, such as meetings or briefings held behind closed doors. Rather than achieving increased transparency, the result would be much-reduced transparency. Valpak Comments, September 24, 2007, at 11-12. Valpak misinterprets the Commission intentions for fact gathering during the pre-implementation review period. While the Commission does envision direct communications as an important method of promptly clarifying factual issues raised by the Postal Service's rate adjustment filings, it intends that the substance of those communications be made public in written memoranda placed in a public file. The Commission is aware that in formulating informal rules, which would include its orders determining compliance of proposed rate adjustments with the requirements of the PAEA, it must inform the public of the nature and substance of any exchanges with the Postal Service or other interested persons that address the merits of the proposed rate adjustment. The Commission anticipates issuing proposed rules regularizing ex parte procedures in the context of informal rulemakings soon after the conclusion of this docket. In the interim, if the Commission initiates ex parte communications concerning the merits of rate adjustment filings, including the accuracy of the data that support the filing, it will summarize the ex parte contact and place the summary in a public file shortly afterward. 4. Complaints In the context of this rulemaking, several commenters have expressed their views on certain aspects of the complaint process. PostCom argues that the Commission should not hear complaints against proposed rates during the 45-day notice period before a CPI increase takes effect. PostCom also advocates limiting the hearing of complaints under section 205 of the PAEA to the time of the annual compliance review. PostCom acknowledges that the Commission will promulgate rules governing the complaint process in the near future, yet it believes that the Commission should ``nevertheless take the opportunity in this proceeding to clarify this matter.'' PostCom Comments, September 24, 2007, at 2; see also MOAA Reply Comments, October 5, 2007, at 2, n.1. Other commenters oppose PostCom's proposed limitations on the filing of complaints on the grounds that they would unduly prejudice mail users or that the proposed limitations are contrary to the PAEA. GCA Reply Comments, October 9, 2007, at 2-5; NAA Reply Comments, October 9, 2007, at 10-13. NAA argues that the Commission should provide for expedited consideration of post-implementation complaints that allege a failure to meet the statutory conditions of 39 U.S.C. 3622(c)(10). Several commenters contend that (1) the standard for setting a complaint for proceedings should be construed generously, and (2) an expeditious complaint procedure should be adopted.\10\ Other commenters believe that the complaint procedures are outside the scope of this rulemaking and these issues should be deferred to another rulemaking.\11\ --------------------------------------------------------------------------- \10\ GCA Comments, September 24, 2007, at 2-5 (incorporating by reference: GCA Comments, April 6, 2007; Joint Comments of ABM, GCA, and NAA, April 6, 2007; GCA Reply Comments, May 7, 2007; ABM, GCA, NAA, and NNA Joint Reply Comments, May 7, 2007); see also NAA Comments, September 24, 2007, at 11-12. \11\ ANM and MPA Reply Comments, October 9, 2007, at 11; Advo Reply Comments, October 9, 2007, at 10. --------------------------------------------------------------------------- These comments on the complaint process raise important policy considerations. They are, nonetheless, beyond the scope of this current rulemaking proceeding. The Commission does not find it appropriate in this proceeding to make any pronouncements on certain isolated aspects of the complaint process. The Commission will shortly initiate a separate rulemaking to consider modifications to the existing rules governing complaints, see 39 CFR 3001.81 et seq., during which all interested persons can address all such issues. The Commission believes that the best way to make important policy decisions regarding the complaint process is by dealing with all complaint related issues together on a comprehensive basis. In its comments, GCA asks the Commission to make it the ``next item of business to propose and enact appropriate rules governing the complaint process * * *'' GCA Comments, September 24, 2007, at 5. Another commenter echoes this plea. See Valpak Comments, September 24, 2007, at 6-7. The Commission acknowledges that the complaint process is of great importance to the PAEA's statutory scheme and will shortly issue proposed rules for public comment. 5. Other Considerations Free Press and The Nation, in joint comments, raise concerns about the impact of the Commission's proposed implementation of a new ratemaking system on Periodicals. They say they [[Page 63668]] strongly reject the notion that the Commission should take a ``light- handed'' approach in pursuit of values ``held by the American people that are embodied in a free press that cultivates new ideas and fosters a robust political debate.'' Free Press and The Nation Comments, September 25, 2007, at 1-2. They urge that Periodicals be considered very carefully and that rate setting reflect the unique character of publications in this subclass and their contribution to the nation. They propose that the Commission reincorporate these values into its proceeding. Id. at 2.\12\ They also provide a summary of views on Docket No. R2006-1 to demonstrate why the Commission should ``inject historical, democratic values back into its current work.'' Id. at 2-3. This summary makes clear that they consider the outcome, for Periodicals, a reversal of public policy. --------------------------------------------------------------------------- \12\ Dow Jones opposes any revision of the rules based on the comments of Free Press and The Nation. It notes: ``There is no place in postal ratemaking to ignore proper cost-attribution, for otherwise, inefficiencies will be encouraged, not discouraged.'' Dow Jones Reply Comments, October 4, 2007, at 3. --------------------------------------------------------------------------- Free Press and The Nation do not propose specific revision to the proposed rules. The Commission does not revise the rules to effect any additional preferences for Periodicals. The Commission notes that the regulatory calendar should provide publishers and other mailers with an increased degree of certainty about when changes will occur. Similarly, the annual limitation on rate increases should provide insulation from rate shock. B. Basic Framework for Rules on Market Dominant Products No commenter takes issue with the organizational structure the Commission has proposed for rules on market dominant products. The Commission has reviewed that structure, and finds it appropriate to adopt this framework without change; however, it makes two minor editorial revisions. One is a change in the caption of part 3010 from ``Rules Applicable to Rate Adjustments for Market Dominant Products'' to ``Regulation of Rates for Market Dominant Products.'' The other is a change in the caption of subpart B.\13\ This entails revising the reference to ``Type 1'' to the more inclusive and descriptive reference to ``Type 1-A and 1-B.'' The intention is to make it readily apparent from a reading of the caption that the text addresses both types of filings. --------------------------------------------------------------------------- \13\ Two commenters address other potential changes in terminology. NPMHU takes issue with the Commission's use of the term ``exigent.'' NPMHU Comments, September 24, 2007, at 8-10. MOAA notes that the Service's use of ``customized agreement'' may be more accurate than ``negotiated service agreement.'' MOAA Reply Comments, October 5, 2007, at 2. The Commission generally finds these points well taken, but retains the terms used in the proposed rules. They lack precision, but have met with wide acceptance in the postal community. --------------------------------------------------------------------------- Accordingly, part 3010, organized into five subparts, houses the text of the final rules regulating rates for market dominant products. The Commission emphasizes that although the overall organization remains the same at the part and subpart level, the number, designation, and text within the five subparts differ in some respects from the proposal, based on revisions associated with comments, Commission decisions, or on publication requirements. For example, in subpart C as adopted, a new rule 3010.29 is added to address transitional filings. This change, and others, are identified and discussed within. Based on the foregoing considerations, the Commission adopts the following organization and captions for the final set of regulations on market dominant products in its final rules: Part 3010--Regulation of Rates for Market Dominant Products Subpart A--General Provisions Subpart B--Rules for Rate Adjustments for Rates of General Applicability (Type 1-A and 1-B 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) C. Subpart A--General Provisions 1. Overview Subpart A, as originally proposed, consists of a set of seven general provisions. These provisions include a standard statement (in rule 3010.1) noting that the rules in this subpart implement provisions in the PAEA related to market dominant products. They also provide that advance notice-and-review period for planned rate adjustments consists of a minimum of 45 days for adjustments other than those based on an exigency. They establish that exigency-based rate adjustments require the Postal Service to file a formal request with the Commission and state that they entail special procedures. There is more detailed development of these general points in subsequent rules. 2. Issues Rule 3010.1. In Order No. 26, the Commission said that the crux of the debate that had emerged over the length of time for Commission review was whether 45 days constitutes the statutory maximum or minimum. It noted that the Postal Service interpreted the language in the statute as establishing a maximum, but also had acknowledged that some changes, as a matter of good business practice, will entail considerable implementation, and that it intended to provide additional notice in these instances. PRC Order No. 26, ]] 2019-21. Some commenters viewed the wording in the statute as establishing an absolute minimum, and therefore clearly authorizing the Commission to explicitly require the Postal Service to provide more notice. The Commission concluded that the appropriate way to implement the PAEA was to require that the Postal Service provide notice of rate adjustments no later than 45 days before the intended implementation date. Rule 3010.1, as proposed, reflects this assessment. Commenters' positions. Most commenters addressing this point agree with or accept the Commission's disposition.\14\ Some, however, continue to express concerns about the impact of a short notice period on adjustments on mailers. The NPPC, for example, emphasizes ``that the minimum notice period needed for mailers and third-party vendors to implement rate changes will often be considerably longer, particularly when classification changes require substantial rewriting of software.'' NPPC Comments, September 24, 2007, at 5. (Emphasis in original.) Similarly, MMA considers the Postal Service's promised 90 days' notice insufficient, given implementation requirements. MMA Comments, September 24, 2007, at 5. It suggests addressing this problem by limiting index and exigent rate adjustments to rate changes, and not permitting other changes, such as new mail preparation requirements and transportation requirements, to be part of the proceedings. Id. at 6. --------------------------------------------------------------------------- \14\ NNA suggests consideration be given to requiring notice in public media. NNA Comments, September 24, 2007, at 5-6. --------------------------------------------------------------------------- Commission analysis; final rule. The Commission agrees that both the 45 days provided in the rule and the 90 days' notice the Postal Service intends to issue allows only a brief period for [[Page 63669]] assessing the Postal Service's notice and implementing the changes, but continues to believe that the proposed approach comports with the statutory language and strikes an appropriate initial balance between Postal Service flexibility and Commission review responsibilities. The Commission appreciates mailers' concerns in this regard, but considers revisions that would explicitly extend the period inappropriate at this time as they would reduce the flexibility the PAEA intends the Postal Service to have. Thus, MMA's suggestion is not accepted, although minor changes to improve clarity are made. Rules 3010.2 through 3010.6. This series of rules codify ``type'' and address general aspects of the PAEA-authorized scenarios for addressing rate changes for market dominant products. As explained in Order No. 26, the rationale for assigning types to the various scenarios is to facilitate future reporting and general discussion, and the proposal generally tracks an approach that has been successfully employed for filing library references since Docket No. RM98-2. PRC Order No. 26, ] 2017. Suggested revisions. No commenter takes issue with the overall approach in this series. However, OCA suggests, in the nature of a clarification, that the Commission revise rule 3010.2(b) by adding references to ``service'' and ``by class of service.'' It suggests the inclusion of similar references in other rules for consistency.\15\ OCA Comments, September 24, 2007, at 23-24. The Commission does not find that this clarification will assist administration of the new ratemaking process. --------------------------------------------------------------------------- \15\ OCA identifies the following rules as candidates for similar treatment: rules 3010.3(a); 3010.4(a) and (b); 3010.11(b); 3010.14(b)(4); 3010.26(b); 3010.27; 3010.28; and 3010.63(a) and (b). Id. --------------------------------------------------------------------------- Commenters propose two revisions in proposed rule 3010.4. The Postal Service points out that the reference to ``a rate'' in the second sentence of paragragh (a) of this section is not consistent with the language in the relevant provision in the PAEA. It suggests that substituting the phrase ``an increase for the class'' for the original wording would achieve this consistency. In addition, DMA expresses concern that the Commission has not adequately addressed the limit on application of unused rate authority for Type 1-B adjustments filed within 12 months of each other, and suggests adding language that clarifies this point. DMA Comments, September 24, 2007, at 3. The Postal Service considers this concern adequately addressed by operation of rule 3010.7. Postal Service Reply Comments, October 9, 2007, at 40. Commission analysis; final rule. The Commission finds proposed rules 3010.2 and 3010.3 achieve their intended objective and adopts them without change. The Commission finds that several revisions to rule 3010.4 are warranted, based on commenters' observations. One simply reflects redesignation of proposed paragraph (b) as final paragraph (c) to accommodate a new provision. The other revisions are substantive. The first adopts the Postal Service's suggested revision to the second sentence of rule 3010.4(a). In final form, this now reads as follows: ``A rate adjustment using unused rate adjustment authority may not result in an increase for the class that exceeds the applicable annual limitation plus 2 percentage points.'' The second change, based on DMA's suggestion, entails the addition of a new paragraph (b), which reads as follows: ``Type 1-B rate adjustments filed within 12 months of each other may not apply more than 2 percentage points of unused rate authority to any class.'' The Commission adopts rule 3010.4 as revised and explained above. The Commission adopts rule 3010.5 as proposed, without change, as no commenter took issue with it and it achieves the intended objective of providing a basic statement defining Type 2 rate adjustments. Rule 3010.6: general information about Type 3 proceedings. This provision consists of three paragraphs. The text provides in general terms for public participation in Type 3 cases and Commission review in 90 days. Subpart E addresses Type 3 requests in considerably more detail. Suggested revisions. OCA proposes revision of proposed rule 3010.6(c) to address its due process concerns and consistency with the PAEA. It suggests adding an explicit reference to notice and an opportunity for a public hearing and comment. OCA Comments, September 24, 2007, at 24-25. Commission analysis; final rule. The Commission is revising other rules in subpart E of part 3010 to make clear its intentions with respect to due process. As this rule is only a general statement, the Commission does not find that OCA's proposed revision, even if modified to reflect the Commission's approach, appropriate. Accordingly, it adopts proposed rule 3010.6 without change. Rule 3010.7. This proposed rule consists of six paragraphs addressing the regulatory calendar, which the Commission refers to as a schedule in the rules. The text provides, among other things, for development, maintenance and posting of the calendar. Suggested revisions. The Commission's proposed treatment of issues related to the regulatory calendar did not generate proposals for revisions, but Valpak expresses a concern about how exigent requests will mesh with the regulatory calendar and poses several potential scenarios. Valpak Comments, September 24, 2007, at 26-27. Commission analysis; final rule. The Commission agrees that in the event of an exigent request, it is likely the points NNA usefully raises will need to be addressed. At the same time, the Commission notes that in the interest of getting a basic framework in place for the new system, it is not practical to attempt to address every eventuality. This is especially the case with respect to exigent requests, which the Commission (and presumably most others) hope does not materialize in the near future. Accordingly, it adopts proposed rule 3010.7 without change. D. Subpart B--Rules for Rate Adjustments for Rates of General Applicability (Type 1-A and 1-B Rate Adjustments) 1. Overview Subpart B, as proposed, consists of five sections covering basic matters related to Type 1-A and Type 1-B rate adjustments. There was no objection to the proposed organization of this set of rules; therefore, the Commission carries it over into the final rules. 2. Summary The rules in this subpart, as proposed, reflect a broad range of considerations related to rate adjustments for Type 1-A and Type 1-B filings. These include, among others, the procedures to be followed by the Postal Service and the Commission (including each agency's notice requirements), the public's role, technical matters related to limits on adjustments, and the scope of Commission review. Several rules are affected by the Commission's decision on due process considerations. The impact mainly affects the text of rule 3010.13. 3. Issues Rule 3010.10: procedures. This rule, as proposed, consists of two paragraphs that set out the basic procedures associated with Type 1-A and Type 1-B rate adjustments. Paragraph (a) establishes the minimum requirements regarding the timing and nature of notices of these two types of adjustments, as well as the filing thereof [[Page 63670]] with the Commission. The notice is to be provided in a manner reasonably designed to inform the mailing community and the general public that the Postal Service intends to change rates not later than 45 days prior to the intended implementation date. Transmission of a notice of rate adjustment to the Commission is also to occur no later than 45 days prior to the intended rate implementation date. Paragraph (b) encourages the Postal Service to provide public notice and to submit its notice of rate adjustment as far in advance of the 45-day minimum as practicable, especially in instances where the intended price changes include classification changes or operations changes likely to have material impact on mailers. Suggested revisions. McGraw-Hill suggests that the Commission should allow for an extension of the 45-day review period, of its own accord, or at the request of any interested party for good cause shown to the extent reasonably necessary under the circumstances. McGraw-Hill Comments, September 24, 2007, at 5. Commission analysis; final rule. The Commission has considered the suggestion that it should impose more explicit or extensive notice requirements on the Postal Service. At this point, it continues to believe that leaving the Postal Service with the flexibility to determine the most effective way to distribute information about planned rate adjustments is the more appropriate course. This approach can be revisited if there are serious shortcomings in the Postal Service's practice. The Commission makes one minor editorial revision to rule 3010.10(a)(2). This consists of deleting the word ``rate'' in the phrase ``intended rate implementation date.'' This deletion makes this reference consistent with rule 3010.10(a)(1). Accordingly, the Commission adopts rule 3010.10 as proposed, with the referenced editorial revision. Rule 3010.11: limit on size of rate increases. This rule, as proposed, consists of an introductory phrase and three paragraphs. The introductory statement provides that rate increases for each class of market dominant products in any 12-month period are limited. Paragraph (a) notes that rates of general applicability are subject to an inflation-based limitation computed using the CPI-U values as detailed in section 3010.12. Paragraph (b) recognizes that the PAEA authorizes an exception to the inflation-based limitation by allowing the Postal Service to make a limited annual recapture of unused rate adjustment authority. It further provides that the amount of unused rate authority is measured separately for each class of mail. Paragraph (c) provides that in any 12-month period the inflation-based limitation combined with the allowable recapture of unused rate authority equals the price cap applicable to each class of mail. OCA suggests revising paragraph (c) to conform it to the description of the price cap in proposed rule 3010.28. OCA Comments, September 24, 2007, at 25. Commission analysis; final rule. The Commission has considered OCA's suggestion, but finds such a change unnecessary. Accordingly, it adopts the language of rule 3010.11 as proposed without change; however, it designates the introductory statement as paragraph (a) to conform the format to other rules, and redesignates the remaining paragraphs. Proposed addition to rate increase limitation. Some commenters pursue the Commission's decision not to attempt to develop an adjustment to CPI-U, based on service deterioration or other considerations such as mail makeup requirements. ANM/MPA and NPPC observe that there is broad consensus among mailers that an index adjustment is necessary. They note that the principle involved is straightforward, even if a method has not been presented yet. They suggest adding to the weighted average change in rates for each class the additional costs imposed by changes in Postal Service mail preparation requirements and the diminution of economic value caused by changes in the quality of service. They assert that the magnitude of the adjustment (if any) could depend on evidence developed in a complaint or annual compliance proceeding. They recognize that fleshing out the details of an adjustment mechanism will become more practical once service standards and performance measurement systems are in place. They therefore urge that the issue be revisited as soon as possible after that occurs. ANM/MPA Comments, September 24, 2007, at 4- 6; and NPPC Comments, September 24, 2007, at 7-8. Pitney Bowes notes that in addition to the need for an adjustment factor to account for service degradation and additional mail preparation requirements, the Postal Service could also unfairly charge mailers for technological or other innovative enhancements to mail that increase its value, but impose no costs on the Postal Service. It asserts that charging for ``value added'' by mailers is equivalent to a tax on innovation and should be discouraged. It notes that either path would frustrate the purpose of the annual limitation and undercut the intended discipline of the price cap on operational efficiency. Pitney Bowes Comments, September 24, 2007, at 11-12. DMA seeks inclusion of a general, but clear, statement that the CPI number upon which annual increases will be based assumes no change in service standards, actual performance, or make-up requirements, and that any such change will result in an adjustment to that number. DMA Comments, September 24, 2007, at 8-9. McGraw-Hill also seeks an affirmative indication from the Commission, to affirm in its rules that its remedial authority after an annual compliance review extends to rolling back the price cap or any unused rate adjustment authority if and as appropriate, to mitigate any wide and sustained deterioration in service (or cost shifting to mailers). McGraw-Hill Comments, September 24, 2007, at 8-9. NNA suggests that this proposal be considered in a future service standards rulemaking. NNA Comments, September 24, 2007, at 10. The Postal Service opposes any revision in the rules to address these concerns not only on the grounds the Commission expressed in Order No. 26 (relating to lack of a method and the need to develop rules on this issue), but also on grounds that the PAEA provides no legal foundation for such an adjustment. It urges the Commission to adhere to this position as well, and let experience determine whether additional regulations in this area prove necessary. USPS Reply Comments, October 9, 2007, at 45-46. Commission analysis. The Commission recognizes that this is of conern to mailers. Nevertheless, the Commission continues to conclude that any attempt to develop an adjustment factor based on service performance could be premature at this time. Rule 3010.12: source of CPI-U data. This rule, as proposed, consists of a two-sentence paragraph explaining that the source of the monthly CPI-U values for the calculation of the annual limitation is the Bureau of Labor Statistics (BLS) Consumer Price Index--All Urban Consumers, U.S. All Items, Not Seasonally Adjusted, Base Period 1982-84 = 100. It also identifies the current series identification number. No commenter suggested any revision to this rule. The Commission adopts proposed rule 3010.12 without revision. Rule 3010.13: Type 1-A and Type 1-B proceedings. This rule, as proposed, consists of five paragraphs addressing proceedings for the two referenced types of adjustment filings. It addresses a [[Page 63671]] considerable range of responsibilities on the part of the Postal Service and the Commission, and identifies the rights of the public in terms of public participation. The discussion at the outset of this order noted and addressed many commenter suggestions regarding notice and public comments. There are some additional suggestions not directly addressed in the earlier discussion. For example, OCA proposes revising rule 3010.13(b)(1) to make it clear that comments may address planned rate adjustments that exceed the annual limitation. Id. NAA suggests a revision in this same rule to include a reference to 39 U.S.C. 403(c). NAA Comments, September 24, 2007, at 13-15. MOAA opposes NAA's suggestion on grounds of redundancy. MOAA Reply Comments, October 5, 2007, at 4-5. The Commission does not adopt these suggestions. Commission analysis; final rule. Most of the revisions in rule 3010.13 flow from the Commission's decision to make its intentions with respect to ensuring adequate due process more clear. The Commission concludes that the approach it adopts is consistent with the PAEA. Proposed paragraph (a) provides that the Commission will establish a docket for each rate adjustment filing, promptly publish notice of the filing in the Federal Register, post the filing on its Web site, and allow 20 days from the date of the filing for public comment. The Commission revises this rule to make its intentions with respect to due process and related considerations more clear, based on the rationale set out previously. This paragraph, as revised and adopted, provides that the Commission's notice shall include the general nature of the proceeding; a reference to legal authority to which the proceeding is to be conducted; a concise description of the planned changes in rates, fees, and the Mail Classification Schedule; identification of an officer of the Commission to represent the interests of the general public in the docket; a period of 20 days from the date of the filing for public comment; and such other information as the Commission deems appropriate. Rules 3010.13(b) and (c) will be discussed together. Proposed rule 3010.13(b) invites public comments on whether planned rate adjustments are consistent with the annual limitation on increases (in subpart (1)) and the policies of 39 U.S.C. 3622 (in subpart (2)). Proposed rule 3010.13(c) then provided for a Commission order on whether the planned rate adjustments were consistent with the annual limitations on rate increases established in 39 U.S.C. 3622(d). Consistent with the previous discussion on APA requirements, and upon consideration of the extensive arguments presented on the proper scope of public comments and Commission action under these two rules, the Commission has determined to clarify its expectations by redrafting subparts (b) and (c) of the rule. Rule 3010.13(b) now makes more clear that the primary focus of public comment should be on the mandatory requirements of the PAEA subchapter detailing provisions relating to market dominant products. The two subparts now accurately cross- reference rules implementing the two mandatory annual limitations on rate increases established in 39 U.S.C. 3622(d). Rule 3010.13(c), as redrafted, continues to provide for a Commission decision within 14 days, and now specifies that the Commission will address the statutory requirements related to the annual limitation on rate increases, the limits on the recapture of unused rate authority, and certain statutory rate preferences codified in that subchapter. Rule 3010.13(c) is further clarified by changing ``and issue a notice and order announcing its findings'' to ``an order announcing its findings.'' An identical conforming change is made in rule 3010.13(g). The text of new paragraph (d), which was formerly a subpart under paragraph (c), in addition to reflecting the clarified scope of the Commission's review, is also revised to provide that rate adjustments that are in compliance may take effect ``pursuant to appropriate action by the Governors''. See 39 U.S.C. 404(a). Former paragraph (d) is similarly clarified and retained as new paragraph (h). New paragraph (f) reflects the Commission's decision to post any amended notice of rate adjustment on its Web site and allow a period of 10 days from the date of the filing for public comment. This reflects the Commission's decision to more clearly specify potential procedural processes. In paragraph (g), the text is revised to affirmatively note that the Commission will review the public comments, as well as the amended notice. The Commission adds a new paragraph (j) to clarify that for purposes of subsequent proceedings, certain Commission conclusions with respect to the planned adjustments will be considered findings on the merits, and others provisional and subject to challenge. Conclusive findings are those related to compliance with the annual limitation set forth in rule 3010.11; the limitations set forth in rule 3010.28; and the requirements of 39 U.S.C. 3626, 3627, and 3629. The Commission rejects the suggestion to disallow complaint filings related to the planned adjustments during the pendency of compliance reviews. This is based, in part, on the conclusion that 39 U.S.C. 3662 does not include any restriction or limitation on filing time. While a limitation may not be strictly prohibited, the Commission finds it should be hesitant to foreclose complaints. In addition, it is developing complaint rules that will provide a better forum for considering this issue. The Commission declines to adopt NAA's suggestion that an explicit reference be added in this rule to 39 U.S.C. 403(c). The same considerations are already covered in the rule. Rule 3010.14: contents of rate adjustment notice. This section, as proposed, consists of three paragraphs. Paragraph (a) is a general provision requiring a Postal Service notice of rate adjustment to include a schedule of proposed rates; the planned effective date(s) of the proposed rates; 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) for the proposed new rates; and the identity of a responsible Postal Service official who will be available to provide prompt responses to requests for clarification from the Commission. Paragraph (b) requires and describes supporting technical information and justifications that are to accompany the notice of rate adjustment. This pertains to CPI-U calculation; a schedule showing unused rate authority available for each class of mail displayed by class and available amount for each of the preceding five years; the percentage change in rates for each class of mail calculated as required by the Commission; the amount of new unused rate authority, if any, that will be generated by the rate adjustment calculated as required by the Commission; and, if new unused rate authority will be generated for a class of mail that is not expected to cover its attributable costs, an explanation of the rationale underlying this rate adjustment. It also requires a schedule of the workshare discounts included in the proposed rates; a companion schedule listing the avoided costs that underlie each such discount; a separate justification for all proposed workshare discounts that exceed avoided costs; identification and explanation of discounts that are set substantially [[Page 63672]] below avoided costs focusing on any relationship between discounts that are above and those that are below avoided costs; a discussion addressing how the planned rate adjustments 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); and such other information as the Postal Service believes will assist the Commission to issue a timely determination of whether the requested increases are consistent with applicable statutory policies. Proposed paragraph (c) addresses new workshare discounts. It provides that whenever the Postal Service establishes a new workshare discount rate, it must include with its filing a statement explaining its reasons for establishing the discount; all data, economic analyses, and other information believed to justify the discount; and a certification based on 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. Proposed paragraph (d) addresses the type of information that is required to be provided when only Type 1-B rate adjustments are proposed. It provides that the notice of rate adjustment shall identify for each affected class how much existing unused rate authority is used in the proposed rates calculated as required by rule 3010.27. It states that all calculations are to be shown, including citations to the original sources. Suggested revisions. Suggestions related to this proposal differ on the amount and type of information the Postal Service should provide in its notice of adjustment, and run in opposite directions. Some say workshare information should not be required, or language should be revised to be less sweeping. Others, based either on due process considerations or on a general interest in more information and explanation, suggest adding more requirements to rule 3010.14. One of these is a proposal to require a schedule identifying every change in the Mail Classification Schedule that will be needed to implement the planned adjustments. OCA asserts that proposed rule 3010.14(b)(4) may not sufficiently ensure that rates will satisfy the ``requirement'' of 39 U.S.C. 3622(c)(2) that each class or type of mail service bear its direct and indirect attributable costs. It expresses concern that the proposed rule may allow the requirement to be ``explained away[.]'' It proposes that the Postal Service be required to increase rates the full amount possible under the CPI-U cap, plus any allowable banked authority, for any class that fails to cover its attributable costs. OCA Comments, September 24, 2007, at 18-22. Valpak argues that the proposed rule should go further to require the Postal Service to provide more detail as to how the rates will move towards eliminating any cross-subsidy. Valpak Comments, September 24, 2007, at 17-20. In contrast to its opposition to proposals that would allow 39 U.S.C. 3622(c)(2) to trump the rate cap, ANM/MPA find OCA's proposal to require the rates for a class that is below attributable cost to increase by the maximum amount of the CPI-U cap, plus banked authority ``quite reasonable.'' ANM/MPA Reply Comments, October 9, 2007, at 7. The Postal Service sees the styling of 39 U.S.C. 3622(c)(2) as a ``requirement'' as an indication that its importance is elevated above that of the other factors of 39 U.S.C. 3622(c). It concludes that ``Sec. 3622(c)(2) should be interpreted as requiring that each `class' of market-dominant mail cover its attributable costs.'' Postal Service Reply Comments, October 9, 2007, at 46-47. Time Warner discusses the issue at length and concludes that, at least for the time being, the proposed rules adequately address it. Time Warner Reply Comments, October 9, 2007, at 11-23. APWU recommends that the Commission establish procedures for making a finding of compliance or non-compliance for workshare discounts prior to the annual compliance review. APWU acknowledges that the 45-day review period associated with notices of rate adjustments does not lend itself to an in-depth review of workshare discounts, but it recommends that the Commission ``evaluate workshare discounts early in the process[.]'' APWU Comments, September 25, 2007, at 5. On reply, several commenters oppose this suggestion on the grounds that it would undermine the streamlined rate-setting process contemplated in the PAEA. Advo Reply Comments, October 9, 2007, at 4; ANM/MPA Reply Comments, October 9, 2007, at 4; and NAPM Reply Comments, October 9, 2007, at 3. The Postal Service claims that additional procedures are not necessary because it intends to compare workshare discounts with cost avoidance numbers from the previous annual review and provide the required justifications. Postal Service Reply Comments, October 9, 2007, at 54-55. Commission analysis; final rule. The Commission does not find it necessary to develop separate procedures at this time. Rule 3010.14 will assure that interested persons can evaluate workshare discounts in a timely fashion, and the Postal Service has committed to preparing and providing appropriate justifications. If this system proves inadequate, the Commission will elicit specified suggested remedies. 39 U.S.C. 3622(e)(2)(B) provides that any discount above cost avoided must be phased out over time. Therefore, according to APWU, the regulations should require the Postal Service to explain how it will eliminate any passthroughs that are above 100 percent. APWU Comments, September 25, 2007, at 6. NAPM opposes this assertion, claiming that such a requirement would effectively ignore the limited exceptions allowed in 39 U.S.C. 3622(e)(2)(A)-(D). NAPM Comments, October 9, 2007, at 3. See also Pitney Bowes Reply Comments, October 9, 2007, at 4. The Commission views the provisions in 39 U.S.C. 3622 as a means to foster pricing flexibility, reduce burden, and facilitate swift rate changes. Requiring the Postal Service to plan specifically how it intends to reduce excess discounts in the future is inconsistent with this purpose. NPPC notes ``the Commission should clarify that the cap on worksharing discounts established by 39 U.S.C. 3622(e)(2) has five exceptions, not just the four listed in Order No. 26 ] 2037 n.10.'' NPPC Comments, September 24, 2007, at 3. Footnote 10 of Order No. 26 was intended to summarize the four specific exceptions to 39 U.S.C. 3622(e)(2): (2) Scope.--The Postal Regulatory Commission shall ensure that such discounts do not exceed the cost that the Postal Service avoids as a result of workshare activity, unless-- (A) the discount is-- (i) associated with a new postal service, a change to an existing postal service, or with a new work share initiative related to an existing postal service; and (ii) necessary to induce mailer behavior that furthers the economically efficient operation of the Postal Service and the portion of the discount in excess of the cost that the Postal Service avoids as a result of the workshare activity will be phased out over a limited period of time; (B) the amount of the discount above costs avoided-- (i) is necessary to mitigate rate shock; and (ii) will be phased out over time; (C) the discount is provided in connection with subclasses of mail consisting exclusively of mail matter of educational, cultural, scientific, or informational value; or (D) reduction or elimination of the discount would impede the efficient operation of the Postal Service. 39 U.S.C. 3622(e)(2)(A)-(D). [[Page 63673]] The Commission is quite aware that 39 U.S.C. 3622(e)(3) includes a limitation on reducing worksharing discounts that are already in place. Presumably, this limitation is the fifth exception that NPPC refers to: (3) Limitation.--Nothing in this subsection shall require that a work share discount be reduced or eliminated if the reduction or elimination of the discount would-- (A) lead to a loss of volume in the affected category or subclass of mail and reduce the aggregate contribution to the institutional costs of the Postal Service from the category or subclass subject to the discount below what it otherwise would have been if the discount had not been reduced or eliminated; or (B) result in a further increase in the rates paid by mailers not able to take advantage of the discount. Proposed rule 3010.14(b)(6) makes specific reference to the limitations contained in both 39 U.S.C. 3622(e)(2) and (3). No further clarification of this area is required. Proposed rule 3010.14(b)(6) requires the Postal Service to ``identify and explain discounts that are set substantially below avoided costs.'' Pitney Bowes suggests that the word ``substantially'' be removed from this section. It claims that this modification would encourage the use of efficient component pricing as a guiding principle and promote productive efficiency. Pitney Bowes also notes that the word ``substantially'' is open to interpretation and removing it would avoid uncertainty. Pitney Bowes Comments, September 24, 2007, at 2-3. On reply, Stamps.com concurs with Pitney Bowes while APWU and the Postal Service oppose the suggestion. Stamps.com Reply Comments, October 9, 2007, at 4; and APWU Reply Comments, October 9, 2007, at 3- 6. The Postal Service explains: [T]he Postal Service has some concerns about the Commission's proposal to require an explanation of any discounts ``substantially below'' avoided costs. * * * Understanding, however, that the Commission is attempting to navigate through a wide variety of competing concerns in developing an entirely new system, the Postal Service was willing [to] accept the rule as proposed as a practical compromise, which would still allow the Postal Service to achieve a workable balance for rate design purposes. If, however, the word ``substantially'' were removed as Pitney Bowes advocates, this balance would be upset. A system designed to presumptively lock-in all workshare passthroughs at exactly 100 percent of avoided costs would remove much of the flexibility that a price cap system is intended to achieve. Postal Service Reply Comments, October 9, 2007, at 50. The Commission purposefully included the word ``substantially'' in the rule so that the Postal Service would not be required to explain reasonable passthroughs of less than 100 percent that were due to rounding, or other similar rate design goals. Therefore, the wording will remain in the rules. If in the future the word ``substantially'' requires clarification, a more detailed and precise definition can be crafted. Pitney Bowes suggests that efficient component pricing concepts should be extended to cost differences not strictly related to worksharing. It suggests that when the Postal Service departs from cost-based rate design, it should be required to explain its reasons for doing so. Pitney Bowes Comments, September 24, 2007, at 4. The Commission has used efficient component pricing as a guiding principle in rate design; however, the PAEA does not specifically require it for rate differences not related to worksharing. NPPC suggests the Commission clarify that the term ``workshare discounts'' refers solely to presorting, prebarcoding, handling, and transportation. It argues that some discounts for cost saving activities performed by mailers should not be subject to worksharing rules. NPPC Comments, September 24, 2007, at 2-3. Pitney Bowes and NAPM support this suggestion. Pitney Bowes Reply Comments, October 9, 2007, at 3; and NAPM Reply Comments, October 9, 2007, at 2. APWU opposes this suggestion on the grounds that the suggestion seems to be designed to avoid appropriate scrutiny for some types of discounts. This could have detrimental effects on the Postal Service and other users of the mail. APWU Reply Comments, October 9, 2007, at 7. In its explanation of the proposed rules the Commission acknowledges that the PAEA defines worksharing as activities related to four broad areas. However, the Commission finds that it is unnecessary and premature to explicitly decide what types of justification beyond those provided for in rule 3010.14(b), if any, would be necessary to support other rate distinctions. In rule 3010.14(c), the Commission proposes a procedure for establishing new workshare discounts. This rule directs the Postal Service to provide certain information including the reasons for establishing the new discount, analysis supporting establishment of the new discount, and certification that the discount will not adversely affect other mailers. Section 3010.14(c)(2) requires the Postal Service to provide, ``all data, economic analysis, and other information believed to justify the discount.'' Stamps.com Comments, September 24, 2007, at 4 finds this language to be overbroad and contends that the Postal Service should only be required to provide the data that it formally relied on in developing the discount. The Commission did not contemplate that the Postal Service would have to provide a laundry list of possible justifications. Rather, the Postal Service should provide only the information it relied on in developing the discount. The word ``believed'' has been changed to ``relied on'' to clarify the intent of this subsection. NPPC asserts that the Postal Service should not be required to certify that the new worksharing discount will not adversely affect other mailers. In making this assertion, NPPC argues that nothing in the PAEA supports this regulation. It claims that new worksharing discounts are often designed to correct existing cross-subsidies and therefore do have negative impacts on other mailers' rates. NPPC Comments, September 24, 2007, at 4. See also Stamps.com Reply Comments, October 9, 2007, at 1-2. To illustrate its point, NPPC cites a discussion in the Commission's Second Opinion and Recommended Decision on Reconsideration in Docket No. R2006-1 related to the letter/flat differential. This reference is of limited value as workshare discounts, as defined in the PAEA, do not include shape-based differences. The intent of proposed rule 3010.14(c)(3) is to ensure that the Postal Service complies with 39 U.S.C. 3622(e)(4)(C) when designing new worksharing discounts. This section requires the Postal Service to certify ``that the discount will not adversely affect rates or services provided to users of postal services who do not take advantage of the discount rate.'' GCA correctly describes the intent of the rule: The phrase ``workshare discount,'' properly understood, refers to a price concession reflecting (ideally at 100 percent passthrough) cost savings to the Postal Service generated by substitution of mailer activity for work that the Postal Service would otherwise have had to perform. If the discount is properly designed, and does pass through 100 percent of the savings, then a mailer who does not take advantage of it is not enjoying an ``internal cross-subsidy.'' So far as the workshared mail is concerned, the Postal Service is shedding costs precisely equal to the revenue it gives up by reason of the discount. In other words, the Service is (as it should be under efficient component pricing) indifferent as to whether it or the mailer performs the function on which the discount is based. GCA Reply Comments, October 9, 2007, at 6. (Footnotes omitted; emphasis in original.) [[Page 63674]] Commission analysis; final rule. The Commission retains rule 3010.14 largely as proposed, but makes several revisions in response to commenters' suggestions on other matters. The first change is to rule 3010.14(b)(4). The Commission revises this provision by changing the words ``should explain'' in the last sentence to ``must provide.'' As adopted in final form, the last sentence now reads: ``If new unused rate authority will be generated for a class of mail that is not expected to cover its attributable costs, the Postal Service must provide the rationale underlying this adjustment.'' This does not precisely track OCA's suggestion that the Postal Service should be required to make an adjustment in circumstances where attributable costs are not covered, but strengthens the existing approach. The Commission anticipates that the Postal Service will make every effort to ensure that classes of mail recover their attributable costs including, if necessary, using its full authority to increase rates under the cap. The final rule allows the Postal Service to provide an explanation should it somehow not be possible to do so. The second change is to rule 3010.14(b)(7), where the Commission conforms the language to its decision on the scope of the compliance review. Accordingly, this paragraph, as adopted, reads as follows: ``A discussion that demonstrates how the planned rate adjustments are designed to 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).'' A related change, also consistent with the decision on scope of review, is the addition of new rule 3010.14(b)(8). This provision reads as follows: ``A discussion that demonstrates the planned rate adjustments are consistent with 39 U.S.C. 3626, 3627 and 3629.'' The next change is the addition of a new requirement, rule 3010.14(b)(9), that the Postal Service provide a schedule identifying every change to the Mail Classification Schedule that will be necessary to implement the planned rate adjustments. This addition responds to Valpak's suggestion. The addition of these provisions requires redesignating proposed rule 3010.14(b)(8) as rule 3010.14(b)(10). This affects only the paragraph designation, not the text. The Commission retains paragraph (c) largely as proposed, but revises rule 3010.14(c)(2) as discussed above. Accordingly, the Commission adopts proposed rule 3010.14 as final, with the referenced revisions. E. Subpart C--Rules for Applying the Price Cap Subpart C, as proposed, consists of nine rules focused primarily on essential aspects of price cap administration. These rules are more technical than the others in part 3010, as most involve calculations. The Commission has attempted to make the rules understandable to lay readers. Structure. There was no opposition to the proposed format of this subpart. However, the Commission, in response to a suggestion, adds a new rule 3010.29 to address the possibility of a transitional filing using Postal Reorganization Act procedures. Rule 3010.20: test for compliance with the annual limitation. This rule, as proposed, addresses how to calculate the statutory price cap mechanism. It resolves a debate over whether the moving average method or the point to point method should be used. The rule reflected adoption of the moving average method. It did not reflect a requested adjustment for service degradation or costs associated with mail preparation and related activities. Suggested revisions. Several commenters continue to express concern about the absence of an adjustment factor to account for the impact of certain developments. See, for example, DMA Comments, September 24, 2007, at 8-9; NPPC Comments, September 24, 2007, at 6; Pitney Bowes Comments, September 24, 2007, at 11-12; and ANM/MPA Comments, September 26, 2007, at 4-5. ANM/MPA further suggests a that could be used to make such an adjustment, thereby addressing one consideration the Commission mentioned in Order No. 26. Id. at 5. DMA also believes the cap should reflect any degradation in service. It proposes that the Commission state that the CPI number that forms the basis for the planned changes assumes no change in service standards, actual performance, or makeup requirements, and that any such changes will result in an adjustment to that factor. DMA Comments, September 6, 2007, at 7-8. Commission analysis; final rule. The Commission continues to believe that it is not appropriate to include the requested adjustment in its rules at this time. It reiterates that the statute establishes a system of accountability through increased transparency, and that an anticipated rulemaking on annual reporting requirements will include data on service achievement. It also notes that if experience shows that additional regulations are needed to achieve the objectives of the legislation, the Commission is obligated to develop appropriate regulations or recommend legislative changes to Congress. Rule 3010.21: Calculation of annual limitation. This rule, as proposed, consists of two paragraphs explaining how the annual limitation is calculated and setting out the formula. On behalf of Advo, Antoinette Crowder and William C. Miller present an alternative method of calculating the annual inflation cap (cap).\16\ Crowder and Miller calculate the cap by first computing the percentage change in the CPI-U for each of the 12 preceding months over the same period last year (SPLY), and then take the simple average of these percentages. The Commission's proposed rule calculates the cap by first computing two sequential, 12-month simple averages of the CPI-U that are 12 months apart (referred to as Recent and Base Averages), and then takes the percentage change in these averages. See rule 3010.21. Both methods utilize the preceding 24 monthly values of the CPI-U. The Crowder and Miller method can be characterized as a month-SPLY method, while the Commission's method can be characterized as a year-SPLY method. --------------------------------------------------------------------------- \16\ Statement of Antoinette Crowder and William C. Miller in Response to Commission Order No. 26, September 24, 2007 (Crowder and Miller). --------------------------------------------------------------------------- Commission analysis. Crowder and Miller contend that the Commission's method yields a biased measure of inflation and that their method is statistically superior to the Commission's method. Crowder and Miller at 11. The Commission does not find the criticism of Crowder and Miller sufficiently compelling to change its proposed cap calculation for the following reasons. First, the Commission uses the same as the Bureau of Labor Statistics to calculate the annual percentage change in the CPI-U so it is officially accepted for this purpose.\17\ Until the Commission finds that this method of calculating annual percentage changes in the CPI-U is faulty in some meaningful fashion, the Commission concurs with the Bureau of Labor Statistics on the appropriate method. --------------------------------------------------------------------------- \17\ See ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt. Note that the percentage change in the CPI-U in the ``avg-avg'' column for 2005-2006 is 3.2 percent. This is calculated as the 2006 annual average CPI-U divided by the 2005 annual average CPI-U minus 1, which is the Commission's method. --------------------------------------------------------------------------- Second, the Commission finds the basis of the assertion by Crowder and Miller that the Commission's inflation cap calculation formula is biased to be theoretically limited. Crowder and Miller arrive at this conclusion by expressing the Commission's year-SPLY [[Page 63675]] method in month-SPLY terms. In order to do this, they must multiply their own month-SPLY terms by monthly weights they have derived. Because these monthly weights are correlated with the month-SPLY inflation terms, Crowder and Miller conclude that the Commission's method yields a biased measure of inflation.\18\ While it is true that the weights needed to express the Commission's formula in month-SPLY terms are correlated with those month-SPLY terms, this does not prove that the year-SPLY method is a biased measure of inflation and the month-SPLY method is not. That would be the case only if the month-SPLY method used by Crowder and Miller was an unbiased measure of inflation. Crowder and Miller attempt to show this is the case, but they are able to do this only by assuming that month-SPLY inflation is constant across months.\19\ This unrealistic assumption undermines Crowder and Miller's claim that their method is unbiased and therefore superior to the Commission's method. All that can be said is that the Commission's method of calculating the annual inflation cap is not identical to the method used by Crowder and Miller. --------------------------------------------------------------------------- \18\ Crowder and Miller specifically attribute the cause of the bias to the interaction in month-SPLY CPI indices and a monthly weight, because they share a common term, namely. See Crowder and Miller at 14. \19\ See Crowder and Miller at 13 where they assume that the ``* * * expected value of any month-to-SPLY adjustment factor is one plus the expected value of the inflation rate, a constant (r).'' --------------------------------------------------------------------------- Third, the method used by Crowder and Miller yields no material difference in the measurement of inflation compared to the Commission's method. Employing monthly CPI-U data from the Bureau of Labor Statistics from 1962 through 2006 (a total of 540 monthly CPI-U values), the Commission calculated 516 annual percentage changes in inflation using each of the two methods. The method used by Crowder and Miller yields cumulative percentage changes in inflation just over 1 percent greater than the Commission's method for the entire 43-year period. If anything, the method used by Crowder and Miller seems to favor a higher cap on average. Moreover, there is no material difference in any one of the 516 annual percentage changes calculated by the two methods. The Commission found that there was not a single month in which the absolute inflation difference between the two methods exceeded one-tenth of one percent (0.1%).\20\ --------------------------------------------------------------------------- \20\ The Bureau of Labor Statistics has recently started to report the CPI-U index to three decimal places. For this reason, the cap is rounded to three decimal places before being expressed as a percentage change, and to one decimal place when expressed as a percentage change. --------------------------------------------------------------------------- The Postal Service reaches the same conclusions about the method used by Crowder and Miller. The Postal Service first states that the method used by Crowder and Miller appears to have de minimis practical consequences. Further, the Postal Service is unconvinced that the method used by Crowder and Miller can be considered to be statistically superior to the Commission's method. Postal Service Reply Comments, October 9, 2007, at 40, n.96. Final rule. Final rule 3010.21 remains largely as initially proposed. The Commission revises the last sentence of paragraph (a) to eliminate a potential source of confusion. The revision clarifies that rounding of the percentage referred to is to one decimal place. Rule 3010.22: Calculation of less than annual limitation. This rule, as proposed, consists of three paragraphs addressing situations where a calculation of a less than annual limitation is required. Rule 3010.23: Calculation of percentage change in rates. This rule contains four paragraphs. Commenters' positions. In discussing proposed rules 3010.22 and 3010.23, several commenters raise concerns that the proposed rules may allow the Postal Service to implement rate increases that exceed the intended limits of the cap over time. Advo Comments, September 24, 2007, at 5-6; DMA Comments, September 24, 2007, at 6-8; Pitney Bowes Comments, September 24, 2007, at 10-11; and MOAA Reply Comments, October 5, 2007, at 4. One topic of discussion is whether the cap should be applied to average revenue or to rates. DMA and Advo describe potential scenarios whereby more frequent rate increases would result in higher average revenue than what would be achieved with annual rate increases. Advo supplements its comments with a detailed technical analysis of the Commission's proposed rule 3010.22 governing Type 1 rate adjustments filed less than one year apart. The statement interprets the purpose of the rule for a partial year limitation, demonstrates that it does not achieve that purpose, concludes that it would permit excessive increases in average revenue, and proposes an alternative formulation to achieve the perceived intent of the rule. Crowder and Miller at 2-11. The Postal Service responds to these concerns with a discussion of the difference between a cap on average revenue and a cap on rates. Postal Service Reply Comments, October 9, 2007, at 30-35. It argues that the proposed rules appropriately identify the ``percentage differences between sets of rates, and not * * * total revenue or revenue per piece for particular time periods.'' Id. at 32. It applies the same logic to address the concerns of DMA and Advo that more frequent rate increases may allow the Postal Service to collect excess revenue. The Postal Service concludes that the Commission's proposed rules correctly place the restriction on rates, rather than revenue. It also points out that proposed rule 3010.7 requires the Postal Service to provide a schedule of regular rate changes, and prevents it from deviating from the schedule without some articulated rationale. Id. at 35-40. Commission analysis. The Commission finds that, by applying the CPI-U cap as a limitation on the percentage change in rates, its proposed rules are consistent with 39 U.S.C. 3622(d)(1)(A). While more frequent rate increases may produce higher revenue, other components of the rules and the PAEA, as well as practical operational and market considerations, constrain the frequency with which rates can be adjusted. The Commission also believes that its clarification of the treatment of rates of limited duration (e.g., seasonal or temporary) in rule 3010.23 may address some of the concerns of commenters who urge the use of average revenue in the application of the cap. Crowder and Miller's critique of the partial-year rate adjustment rule (3010.22) mistakenly assumes that the cap is based on the estimated increase in CPI-U for the next year. Crowder and Miller at 2. The historical increase in CPI-U that establishes the allowable increase is not assumed to be a forecast proxy. Accordingly, the partial-year rate adjustment rule is not designed to account for the difference between actual increases in CPI-U and those estimated at the beginning of the year. The rule is intended to give the Postal Service flexibility in the timing of rate adjustments. Therefore, the alternative calculation suggested in the statement is not adopted. Also, the suggested alteration to the rules for applying the cap to a subsequent adjustment is unnecessary. The Commission's proposed rule 3010.22 takes into account rate adjustments (including partial-year adjustments) within the previous year to determine the allowable increase. Commission analysis; final rule. The Commission makes one revision to this rule. It adds, in the last sentence of paragraph (b), the same limit on rounding that now appears in final rule 3010.21(a). The rationale is the same: [[Page 63676]] Eliminating a potential source of confusion. The Commission does perceive a need for a slight modification of other proposed rules governing notices of rate adjustment filed less than a year apart. The language of rules 3010.4 and 3010.28 are clarified to better reflect 39 U.S.C. 3622(d)(2)(C)(iii)(IV). The Commission remains sensitive to concerns that its untested rules successfully implement the requirements of the PAEA as intended. It will monitor and evaluate the effectiveness of the rules as they are utilized and consider modifications. Rule 3010.23: Calculation of percentage change in rates. Several commenters found the proposed language in rule 3010.23 addressing rates of limited duration (e.g., seasonal or temporary) to be potentially confusing. DMA Comments, September 24, 2007, at 7; NPPC Comments, September 24, 2007, at 6; ANM/MPA Comments, September 24, 2007, at 3-4; and GCA Reply Comments, October 9, 2007, at 12. Specifically, there is concern that the third sentence of rule 3010.23(b) may conflict with the last sentence in rule 3010.23(a) and unintentionally lead to rate increases that violate the intent of the cap. The commenters suggest either deleting the third sentence of rule 3010.23(b) or revising it to make it more clearly consistent with the last sentence in rule 3010.23(a). In its reply comments, the Postal Service suggests an interpretation of the rules whereby the third sentence of rule 3010.23(b) creates an exception to the last sentence in rule 3010.23(a). It proposes alternative wording for the third sentence of rule 3010.23(b) that would codify an exception for rates that are not ``in effect at the time of notice of proposed rate changes, and there is no expectation that [the rates] will necessarily be offered again in subsequent years[.]'' Postal Service Reply Comments, October 9, 2007, at 41. Commission analysis. To clarify the intent of the rules, the Commission deletes the third sentence of proposed rule 3010.23(b). The Postal Service's interpretation and suggested language is not consistent with the Commission's intent for the treatment of seasonal or temporary rates. Such an interpretation could imply that the introduction of a seasonal discount would be included in the test for compliance with the cap, while the subsequent elimination of the discount might not be included (depending on the timing of the notice). The intent of rule 3010.23(a) is for each rate that is either current (even if it is not available at the time of year of the notice) or planned, or both, to be treated as a rate cell and thus included in the formula in rule 3010.23(c). If a seasonal or temporary rate is to be eliminated, the volume for the rate cell will be applied to the applicable planned permanent or year-round rate in the numerator of the rule 3010.23(c) formula, and the same volume will be applied to the current seasonal or temporary rate in question in the denominator. This is to be done without regard to the timing of the notice within a calendar year. A simplified example may be helpful. Suppose a class consists of a single type of mail, with one rate (10 cents) applied from January through June and another (9 cents) applied from July through December. Further suppose that the Postal Service files a notice of rate adjustment in which the July though December rate is eliminated (making the current January through June the new year-round rate) with no other changes. Assume the volumes from the most recent available 12 months of billing determinants are 50 million pieces for each of the two rates, for a total of 100 million pieces in the class. Regardless of the time of year of the notice, the method for calculating the percentage change in rates is the same. The first step is to sum the products of the planned rates and volumes ((50,000,000 x .10 = 5,000,000) + (50,000,000 x .10 = 5,000,000) = 10,000,000)). The second step is to sum the products of the current rates and volumes ((50,000,000 x .10 = 5,000,000) + (50,000,000 x .09 = 4,500,000) = 9,500,000)). The final step is to divide the results of the first step by the results of the second step and subtract 1 from the quotient ((10,000,000 x 9,500,000 = 1.0526)-1 = 0.0526 = 5.26%)). The elimination of the July through December rate would therefore result in a 5.26 percent increase in rates for the class. Selection of volumes for weights. Time Warner proposes to add before-rates subscripts to the volume variable (V) in the formula in rule 3010.23(c), to clarify that a Laspeyres index will be used to test for compliance with the cap. Time Warner Comments, September 24, 2007, at 10. The Postal Service asserts that rule 3010.23(d) adequately identifies the volume weights to be used in the calculation. Postal Service Reply Comments, October 9, 2007, at 33-34. The Commission finds that the language of rule 3010.23(d) sufficiently defines the weights to be applied. Moreover, referring to the weights as ``before-rates'' would not be a completely accurate description, as 3010.23(d) instructs the Postal Service to adjust the billing determinants to account for classification changes. Using Time Warner's proposed language, if a new rate is introduced, its ``before- rates'' volume would be zero, and the effects of introducing it would be improperly excluded from the calculation of the percentage change in rates. For these reasons, the Commission does not incorporate the suggested modification. Commission analysis; final rule. The Commission agrees that clarification is warranted. It finds this can be achieved by deleting the third sentence in paragraph (b). The Commission, on its own accord, adds the term ``where,'' in paragraph (c) immediately after the presentation of the formula and before the key. The Commission makes no other changes in this rule. Rule 3010.24: Treatment of volume associated with negotiated service agreements. This rule, as proposed, generally 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. It also requires supporting explanations and the rationale for assumptions. There were no suggested revisions to this rule. The Commission adopts the rule with one editorial change. It eliminates the superfluous term ``non-tariff''. Rule 3010.25: Limitation on unused rate adjustment authority rate adjustments. This rule, as proposed, addresses certain limits on unused rate adjustment authority. There were no suggested revisions to this rule. The Commission adopts it as proposed. Rule 3010.26: Calculation of unused rate adjustment authority. This rule, as proposed, consists of four paragraphs addressing several matters related to the calculation of unused rate adjustment authority. Commission analysis; final rule. The Commission makes several clarifying revisions in rule 3010.26. In paragraph (a), it adds the words ``notices of'' before ``Type 1 rate adjustment'' to assist in determining the accrual period. In paragraph (b), it adds the words ``Type 1'' before rate adjustment for consistency with the previous reference. It also revises the phrase ``or .22(b)'' to ``or 3010.22(b)'' to conform to publication requirements. It makes no other revisions to this rule. Rule 3010.27: Application of unused rate adjustment authority. This rule, as proposed, consists of one paragraph addressing application of unused rate [[Page 63677]] adjustment authority. The Commission adopts it as proposed. Rule 3010.28: Maximum size of Type 1-B adjustments. This rule, as proposed, describes the limitations on size of the adjustment based on unused rate adjustment authority. Commission analysis; final rule. The Commission makes minor editorial changes in the introductory portion of this rule to improve clarity and readability and conform to publication requirements. It now reads as follows: ``Unused rate adjustment authority exercised in notices of rate adjustments for any class in any 12-month period may not exceed the applicable limitations described in rules 3010.21 or 3010.22 plus the lesser of:''. The Commission makes no changes in the following two paragraphs. The Commission adopts this rule as revised. New rule 3010.29: Transitional filings. New rule 3010.29 addresses the fact that 39 U.S.C. 3622(f) explicitly allows the Postal Service to file an omnibus rate case through December 19, 2007. The addition of this rule responds to OCA's apt assertion that neither the Commission's Order No. 26 discussion nor the accompanying proposed rules addressed the possibility of a Postal Service filing PAEA-type rate adjustments during an omnibus rate case, or the potential impact of another omnibus rate case on a rate adjustment filing. A transitional filing would have an impact on subsequent calculation of the annual limitation. Accordingly, the new rule provides: ``If the Postal Service initial exercise of its authority to file a Type 1-A notice of rate adjustment is preceded by a transitional rate case filing under 39 U.S.C. 3622(f): (a) The annual limitation as calculated in rule 3010.21 is applicable if the notice of rate adjustment is 12 months or more after the date of the Decision of the Governors approving rate changes associated with the transitional filing; and (b) The annual limitation as calculated in rule 3010.22 is applicable if the notice of rate adjustment is less than 12 months after the date of the Decision of the Governors approving rate changes associated with the transitional filing. In such circumstances, the date of the Decision of the Governors approving rate changes associated with the transitional filing is the most recent notice of rate adjustment.'' Commission analysis; final rule. The Commission agrees that the rules should be supplemented to address the consequences associated with a transitional filing. It adopts new rule 3010.29, as set out above, to address the impact on key aspects of rate adjustment filings. F. Subpart D--Rules for Rate Adjustments for Negotiated Service Agreements (Type 2 Rate Adjustments) In Order No. 26, the Commission proposes rules for evaluating and approving negotiated service agreements for both market dominant and competitive products. The proposed rules include procedures, filing requirements, and data collection requirements. Several parties have commented on these rules. Advo, Pitney Bowes, NPPC, and Time Warner find the filing requirements to be too stringent while Valpak, Newspaper Association of America (NAA), National Newspaper Association (NNA), APWU, and the Office of Consumer Advocate (OCA) believe more rigorous requirements are necessary.\21\ These commenters offer valid and compelling arguments, often in stark contrast to one another. This highlights the need for a regulatory process that balances the divergent interests of mailers. The Commission recognizes that although its rules attempt to strike this balance, modifications may be necessary as experience under the new system is gained. --------------------------------------------------------------------------- \21\ The Postal Service, Parcel Shippers Association (PSA), Discover Financial Services (DFS), and Amazon.com also provided comments on negotiated servie agreement rules. --------------------------------------------------------------------------- Order No. 26 classified negotiated service agreements, both market dominant and competitive, as separate products. PRC Order No. 26, ] 3073, n.75 and ] 3079. Several parties contend that negotiated service agreements should not be classified as separate products. The Postal Service and PSA claim that negotiated service agreements do not meet the definition of separate products because they will typically involve the provision of existing products. Postal Service Comments, September 24, 2007, at 11; and PSA Comments, September 24, 2007, at 10-11. Advo, the Postal Service, and DFS contend that classifying negotiated service agreements as separate products will lengthen the review process and subject the agreements to procedural requirements beyond the specific negotiated service agreement rules in sections 3010.40 et seq. and 3015.5. The Postal Service claims this is unnecessary. It contends that rules 3010.4 and 3010.5 provide sufficient transparency. DFS asserts this extra burden will discourage negotiated service agreements. It states: It is important for the Commission to realize that the fear of * * * indeterminate pre-implementation NSA review procedures has been one of the primary factors that has scared off mailers from entering into NSA negotiations over the last several years. The overlay of rule 3642 procedures on top of the NSA procedures 3010.40-3010.43 or 3015.5 confuses and unnecessarily complicates the NSA process and has the potential to continue that chilling effect. It also creates a procedural loophole that opponents of pricing flexibility could use to impede the development of the new system and the development of NSAs. DFS Comments, September 24, 2007, at 2-3. Advo also argues that ``[t]o the extent that the Commission's concern is that negotiated service agreements must cover attributable costs, that requirement can be achieved without designating an NSA as a separate product.'' Advo Comments, September 24, 2007, at 2. On reply, several parties agree that negotiated service agreements should not be considered separate products. Valpak, however, asserts that negotiated service agreements are separate products under the definition of ``product'' in the PAEA. See 39 U.S.C. 102(6). Valpak argues that negotiated service agreements have distinct cost and market demand characteristics and are charged rates not of general applicability. Valpak Reply Comments, October 9, 2007, at 22. NAA and UPS contend that the question of whether or not a negotiated service agreement is a product should be considered on a case-by-case basis. NAA Reply Comments, October 9, 2007, at 4; and UPS Reply Comments, October 9, 2007, at 2. Commission analysis. The Commission finds that negotiated service agreements meet the definition of separate products. To date, every proposed negotiated service agreement filed with the Commission was premised either on distinct market characteristics, distinct cost characteristics, or both.\22\ This is true even though they were applied to existing products. In the future, it may be appropriate to group functionally equivalent negotiated service agreements as a single product if it can be shown that they have similar cost and market characteristics. However, as a starting point, it is appropriate to assume new negotiated service agreements will be separate products as defined by the PAEA. --------------------------------------------------------------------------- \22\ International Customized Mailing Agreements have not yet been filed with the Commission. --------------------------------------------------------------------------- The rules regarding negotiated service agreements, rules 3010.42 and 3015.5, are intended to operate in harmony with [[Page 63678]] subpart B of part 3020. A single filing, pursuant to rule 3020.31, is sufficient when the Postal Service proposes to add a new negotiated service agreement to either the market dominant or competitive product list.\23\ If the Postal Service proposes changes in the rates of an existing negotiated service agreement, the filing would be made pursuant to rule 3010.42 or rule 3015.5, as appropriate. The Commission does not anticipate that the review process for new negotiated service agreements will cause implementation of such negotiated service agreements to be delayed appreciably. As stated in Order No. 26: --------------------------------------------------------------------------- \23\ Assuming the Postal Service indicates a preference that the negotiated service agreement be classified as market dominant or competitive, it would comply with the filing requirements of rule 3010.42 or 3015.5, as appropriate. The primary focus of the review will be on compliance with the statutory requirements for proper categorization of the Postal Service product as either market dominant or competitive. Review of the operational parameters of the product and the financial basis of --------------------------------------------------------------------------- the product typically will be minimal. PRC Order No. 26, ] 4026. Pitney Bowes is concerned that the data collection and production requirements outlined in rules 3010.42 and 3010.43 will be prohibitive to small-volume mailers. It suggests that the Commission consider allowing exceptions to these requirements for small volume mailers. The data in question-mailer specific volume, cost, and revenue data--to date, have been largely compiled from billing determinants maintained by the Postal Service and budgeting and planning data held by the co- proponents. Data of this type should be readily available regardless of the company's mail volume. Allowing mailers of any size to enter into negotiated service agreements without providing this data would hinder the Commission's ability to determine compliance with the PAEA as provided for in rule 3010.40. Therefore, at the present time, the Commission will not develop procedures for granting exceptions to its rules regarding negotiated service agreements. It should be noted that the Commission has long been concerned that negotiated service agreements be available to small mailers. Consequently, it developed a model for structuring volume-based negotiated service agreements that was designed to streamline the negotiation process.\24\ Persons interested in negotiated service agreements are encouraged to explore application of this model. --------------------------------------------------------------------------- \24\ Docket No. MC2004-3, library reference PRC-LR-2. --------------------------------------------------------------------------- Pitney Bowes also contends that ``the proposed rules are incomplete insofar as they fail to address the need to protect * * * commercially sensitive information.'' Pitney Bowes Comments, September 24, 2007, at 13. As is