Association of Alternate Postal Systems Update

Postal Regulatory CommissionMark Acton, Vice-Chairman

Alex Cooper, Special AssistantMay 6, 2014

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Table of Contents

2013 Annual Compliance Determination.……..…3Financial Analysis.…………………………………...........5N2014-1 Advisory Opinion, Load Leveling..………72013 Exigent Rate Case………………………………….102017 Ratemaking Study.…………………………………12Legislative Update……….…………………………………17

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FY 2013 Annual Compliance Determination

• Completed on March 27, 2014• Majority of products found to be in compliance• Financial Analysis for FY 2013 was broken out

into a separate document for the first time• Postal Service has made improvements in the

areas of customized service agreements and increased cost coverage and contribution from competitive products

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FY 2013 Annual Compliance Determination, Cont’d.

• Commission identified several compliance issues the Postal Service must address in FY 2014:• 18 workshare discounts did not comply with section 3622(e), which requires the

Commission to ensure that workshare discounts do not exceed the costs avoided by the Postal Service as a result of mailers preparing the mail

• Rates for Parcel Return Service Contract 4, International Priority Mail, International Air Parcel Post, and International Money Transfer Service-Outbound were not in compliance because they did not cover attributable costs

• Despite overall improvements, the Commission found that a majority of market dominant mail products did not reach their annual service performance targets

• In the FY 2014 ACR, the Postal Service must provide a detailed analysis of the progress made in improving Periodicals cost coverage that includes the impact of leveraging its pricing flexibility and implementing operational strategies

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Financial Analysis

• The Analysis includes a more in-depth discussion of the cost savings the Postal Service has generated, the financial impact of the various classes of mail, and a review of its assets and liabilities

• Separated from the ACD this year for greater clarity and transparency

• USPS suffered its seventh consecutive financial loss, amassing a total net deficit of $46.2 billion since FY 2007

• The total net loss for the year was $10.9 billion less than the total net loss in FY 2012 and $1 billion better than expected under the Financial Plan• This significant improvement was due almost entirely to higher than

expected volumes, but USPS also reduced expenses

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Financial Analysis, cont’d.

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N2014-1 Advisory Opinion: Load Leveling

• On December 27, 2013, the United States Postal Service filed an Advisory Opinion request with the Postal Regulatory Commission indicating its intent to change the manner by which it processes and dispatches Standard Mail dropped off at Destination Sectional Center Facilities (DSCFs) on Fridays and Saturdays

• The Postal Service identifies potential benefits of the Load Leveling Plan as: • a reduction in mail processing work hours and carrier overtime hours• earlier completion of carrier routes and return of mail collected on

carrier routes• an improvement in downstream operations and service for mail

collected on carrier routes

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N2014-1 Advisory Opinion: Load Leveling, cont’d.

• The Postal Service has the authority to move ahead with a Change in the Nature of Service such as this, regardless of the PRC’s opinion. However, the PRC found the Postal Service:• should perform a cost-benefit analysis at the national level to ensure

that the Load Leveling Plan is cost effective, while providing the anticipated benefits;

• should assess the Plan’s impact on volume and co-mailing/co-palletization activities;

• should perform additional field testing, since the results of the limited testing may not be representative at the national level

• should further analyze the Plan’s effect on service performance• should conduct more extensive customer outreach to obtain a

clearer understanding of mailer’s questions and concerns

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N2014-1 Advisory Opinion: Load Leveling, cont’d.

• The PRC felt it was important to provide this Advisory Opinion in a timely way. In the March 5 Federal Register, the Postal Service posted its Final Rule which stated its intent to implement the proposed changes starting on April 10. This was the first Advisory Opinion issued by the PRC in less than 90 days• There were obvious disparities between USPS and customers as to the

degree of outreach USPS had conducted on this change • Customers remarked on their perception that the Load Leveling Plan

would proceed regardless of objections from the mailers despite the Postal Service’s solicitation for input

• The Commission found that the plan has the potential to ameliorate this problem, or at least merit further studies. However, the Postal Service must also be mindful that from the mailers’ perspective, the Load Leveling Plan may cause inconveniences that detract from the value of the mail

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R2013-11:Exigent Rate Case

• On September 26, 2013, the Postal Service filed a request for an average 4.3% increase above the CPI-cap for market dominant products

• “Exigent” circumstances are defined as “Due to extraordinary or exceptional circumstances”

• The Postal Service justified the need for an exigent rate increase as being the result of the Great Recession

• This was the second Exigent request filed by USPS as a result of the Great Recession

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R2013-11:Exigent Rate Case, cont’d.

• In the 2010 Exigent Rate case, the PRC denied the USPS’s request because they had failed to quantify losses as due to the Great Recession

• In this case, USPS was better able to quantify its volume losses as being a result of the Great Recession. As a result, the PRC granted the request, but only in part• USPS was not given the entirety of its request, which would have

been an indefinite rate increase on Market Dominant Products, because they conflated the effects of the Great Recession with other factors, such as electronic diversion

• As a consequence, USPS is entitled to collect losses attributable to the Great Recession, which total roughly $2.8 billion, and should take less than 2 years to do so

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2017 Ratemaking Study

• As per the 2006 Postal Accountability and Enhancement Act, the PRC is required to review the system for regulating rates and classes for market-dominant products ten years after the date of enactment of that legislation (December 20, 2016)

• 39 U.S.C. 3622(d)(3) provides that the Commission must evaluate if the system is achieving the objectives of the section, while taking into account the factors• If the Commission determines the system is not achieving the

objectives while taking into account the factors, it may, after a notice and comment procedure and by regulation, establish a new system as necessary

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2017 Ratemaking Study

The following slides (in addition to the slide on page 6) will demonstrate that the CPI-based price cap has been effective in promoting cost reductions and constraining price increases. It will also show the challenges in maintaining adequate revenues to cover costs in light of macroeconomic changes, technological innovation, and aggressively amortized prefunding for retiree health benefits

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2017 Ratemaking Study

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2017 Ratemaking Study

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2017 Ratemaking Study

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Legislative Update

• Both the House Oversight and Government Reform Committee and the Senate Homeland Security and Governmental Affairs Committee have introduced legislation aimed at large scale reform to the Postal Service (H.R. 2748 and S. 1486)

• While the language of the bills is very different, they both have provisions which would eliminate Saturday delivery (although the Senate bill would delay any transition to 5 or fewer days of delivery for 12 months)

• Both of these bills face obstacles to passage this year because of the lack of remaining days in the legislative calendar and the upcoming elections, however, it may be possible to enact more basic reform as part of a lame duck omnibus package

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Legislative Update, cont’d.

• Oversight Committee Chairman Darrell Issa (R-CA) in an April 8 hearing stated his intent to introduce another bill which more closely mirrors the President’s Postal Budget

• Democrats in the House appear to be opposed to many of the provisions laid out by the White House, which would put them at odds with the President

• Congress generally appears disinclined to address Postal reform in an election year, as well as in a year which USPS has estimated they will not run out of money

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QUESTIONS?

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www.prc.gov