postal regulatory commission

Postal RegulatoryCommission

Postal Pricing Regulation in the U.S.

October 4, 2011 Charles J. Robinson

Assistant Director Office of Accountability

and Compliance

2

Postal eras

Commission organization

Pricing regulation

Introduction

3

Post Office Department (1775)

Postal Service (1970)

Postal Reorganization Act

Postal Service (2006)

Postal Accountability and Enhancement Act

U.S. Postal Eras

4

Postal Reorganization Act of 1970

Created U.S. Postal Service – Independent agency of executive branch of government

Breakeven mandate – Postal Service funded by postage not taxes

Created Postal Rate Commission – Oversight of rate setting

Social compact – To bind the nation together through the personal, educational, literary, and

business correspondence of the people

5

Postal Accountability and Enhancement Act (PAEA) of 2006

Flexibility to compete, innovate, and respond to the market

Postal Service allowed to earn and retain profits

Postal products separated into market dominant and competitive products

Greater Postal Service accountability and transparency

Created Postal Regulatory Commission with strengthened regulation and oversight

6

Postal Regulatory Commission

Independent Federal Agency

Regulator of U.S. Postal Service only

Five commissioners appointed by the President and confirmed by the U.S. Senate

Mission: Ensure transparency and accountability of the U.S. Postal Service and foster a vital

and efficient universal mail system

7


Organization

Tony Hammond,

CommissionerMark Acton, Vice-Chairman Ruth Goldway, Chairman

Office of Accountability &

Compliance

Director

Assistant Director

Office of the General

Counsel

General Counsel

Assistant

General Counsel

Office of Public Affairs &

Government Relations

Director

Office of the Secretary &

Administration

Secretary and Chief

Administrative Officer

Assistant Secretary &

Administrative Officer

Office of the Inspector

General

Inspector General

Nanci Langley,

CommissionerVacant, Commissioner

§505 Officer of the

Commission

representing the

general public

8


Pricing Regulation Generally

Congress divided postal products into two groups

Market Dominant (monopoly products)

Competitive

Market Dominant products are subject to a price cap that should protect mailers of market

dominant products

Competition should protect mailers of competitive products

9

Market Dominant Products (1)

Five Classes of Mail

First-Class (letters, bills, statements, personal)

Periodicals (magazines and newspapers)

Standard Mail (advertising and light weight parcels)

Package Services (Single-piece parcel post and bound printed matter)

Special Services (e.g., certified mail, return receipt, money orders, insurance)

10


Each class contains products

First-Class products

Single-piece letters and cards

Presort Letters and cards

Flats

Parcels

International First-Class Mail – Outbound

International First-Class Mail – Inbound

11


The Postal Service Can Charge Any Price It Wants Subject to Three

Caps

Cap on class prices

Cap on workshare discounts

Cap on rates for preferred mail category (Mostly nonprofit mailers)

12

Market Dominant Products

Price Cap Regulation (1)

Annual price changes for each class cannot exceed inflation as measured by the Consumer

Price Index (CPI)

Percentage change in rates by product and within product may exceed CPI

For example, the percentage increase for the single-piece letter first-ounce rate could be

above the CPI, while the percentage increase for the extra-ounce rate could be less than the

CPI

The Commission uses a 12-month simple moving average

13



14



Classification hierarchy

Class

oProduct

• Price Category (Bulk Mail)

Price

15



Congress could have chosen to apply the price cap to

all classes as whole (most flexibility)

oThe average increase for some classes could exceed the CPI

each class (actual law)

each product

each price category

each price (most restrictive)

16



Unused Rate Authority

The Postal Service does not have to use all of the available CPI

It may bank any unused portion and use it later

If it uses any banked amounts in a future case, the amount above the applicable 12-month

CPI cannot exceed 2% (CPI + 2%)

If there are multiple years with banked amounts, the Postal Service must use them in the

order they were banked

Unused rate authority can be banked for only 5 years

17



Unused Rate Authority-Example

Assume Price Cap = 5%

Assume requested price increase = 4.3%

Unused Rate Adjustment Authority (Banked Authority) =

5% - 4.3% - 0.7%

18



Variations on Rate Increase Requests

If the Postal Service requests a price increase less than 12 months since the last CPI increase

It is only entitled to the CPI increase since the last request plus any banked amount it chooses to use

If the Postal Service requests a price increase more than 12 months since the last CPI increase

It is entitled to the most recent 12-month CPI plus any banked amounts

The interim period becomes unused banked amount, but it cannot be used until previous year banked amounts are

used

19


First CPI Price Change Under the New Law

Filed February 11, 2008

Scheduled to take effect May 2, 2008

CPI = 2.9%

Approved all rates, except for one barcode discount that exceeded avoided cost by substantial

amount

20


Second CPI Price Change Under the New Law

Filed February 10, 2009

12 months after last price change was filed

Scheduled to take effect May 11, 2009

CPI = 3.8%

Approved, except for two rates for mail tracking service found to be discriminatory

21


Third CPI Price Change Under the New Law

Filed January 13, 2011

23 months after last price change was filed

11-month interim period

Scheduled to take effect April 17, 2011

12-month CPI = 1.741

Approved

Created negative banked amount (-.577%)

22

Competitive Products (1)

Express Mail (domestic and international)

Priority Mail (domestic and international)

Parcel Select and Parcel Return Service

Negotiated Service Agreements (domestic and International)

23


Three Tests in the Law

Market dominant products, as a whole, must not cross-subsidize competitive products, as

a whole

The Commission uses incremental cost

The revenues for each competitive product must cover the corresponding attributable

cost

Competitive products must pay a fair share of the institutional cost of the Postal Service

Institutional costs are primarily fixed costs

24


Types of Cost Supporting the Three Tests

Attributable Cost

Attributable cost equals volume variable cost plus product specific cost

Volume variable cost = marginal cost x volume

Product specific cost

Does not vary with volume

“But for” the existence of the product, the expense would not be incurred

For example, the advertising expense for Express Mail

25


Types of Cost Supporting the Three Tests

Incremental Cost

Incremental cost equals the difference between the total cost of the Postal Service now

and the total cost without, for example, First-Class mail

This is equivalent to the total variable cost of a product plus any product specific costs

Note the use of the term variable cost rather than “volume variable cost”

Variable cost includes the cost imposed on the system by each piece of mail not just the

last piece

To comply with the law, incremental costs for competitive products as a whole are

estimated

Attributable cost plus

Group-specific cost

26


Appropriate Share of Institutional Costs

The Commission determined that the appropriate share is 5.5 percent

Based on history

By law, to be re-evaluated at the end of this calendar year

Retain

Change

Eliminate

27

Contact Information

www.prc.gov

[email protected]

http://www.prc.gov/

mailto:[email protected]

postal regulatory commission

Documents

postal accountability

marketpostal service

class letters

profitspostal products

certified mail

strengthened regulation

class pricescap

cpithe commission