Administrative Practice and Procedure, Postal Service, 50744-50786 [07-4269]

Agencies

• POSTAL REGULATORY COMMISSION

[Federal Register Volume 72, Number 170 (Tuesday, September 4, 2007)]
[Proposed Rules]
[Pages 50744-50786]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 07-4269]



[[Page 50743]]

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Part III





Postal Regulatory Commission





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39 CFR Parts 3001, 3010, 3015, and 3020



Administrative Practice and Procedure, Postal Service; Proposed Rule

Federal Register / Vol. 72, No. 170 / Tuesday, September 4, 2007 / 
Proposed Rules

[[Page 50744]]


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POSTAL REGULATORY COMMISSION

39 CFR Parts 3001, 3010, 3015 and 3020

[Docket No. RM2007-1; Order Nos. 26 and 27]


Administrative Practice and Procedure, Postal Service

AGENCY: Postal Regulatory Commission.

ACTION: Proposed rule.

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SUMMARY: A recently-enacted federal law directs the Commission to 
develop rules to implement a new postal ratemaking system. This 
proposal responds to that directive by presenting rules addressing 
market dominant and competitive products, including negotiated service 
agreements, the regulatory calendar, and product lists. This document 
incorporates a revision identified in an errata notice. Issuance of 
this document will allow the Commission to consider comments and, if 
appropriate, to make revisions prior to adoption of final rules.

DATES: Submit comments by September 24, 2007; submit reply comments by 
October 9, 2007.

ADDRESSES: Submit comments electronically via the Commission's Filing 
Online system at https://www.prc.gov.

FOR FURTHER INFORMATION CONTACT: Stephen L. Sharfman, General Counsel, 
202-789-6820 and stephen.sharfman@prc.gov.

SUPPLEMENTARY INFORMATION: 

Regulatory History

    72 FR 5230, February 5, 2007.
    72 FR 29284, May 25, 2007.
    72 FR 33261, June 15, 2007.

I. Introduction

    This is the third in a series of orders designed to establish 
regulations implementing a modern system for regulating rates and 
classes for market dominant and competitive products.\1\ In response to 
those earlier orders, the Commission received more than 100 comments 
from interested parties.\2\ The Commission has reviewed these comments 
carefully. They have been useful in clarifying the Commission's 
analysis, and the parties' contributions are appreciated.
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    \1\ PRC Order No. 2, January 30, 2007 and PRC Order No. 15, May 
17, 2007.
    \2\ Attachment A to this order contains a list of the parties 
filing comments.
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    In this order, the Commission outlines how it intends to administer 
various provisions of the Postal Accountability and Enhancement Act 
(PAEA), Pub. L. No. 109-435, 120 Stat. 3198 (December 20, 2006). The 
proposed regulations are set forth in section V. Comments are due by 
September 14, 2007. Reply comments are due by September 28, 2007.
    Although afforded 18 months, until June 19, 2008, to promulgate the 
new regulations under the PAEA, the Commission has made a concerted 
effort to accelerate that schedule considerably. The Commission views 
early implementation as beneficial to all stakeholders. Early 
implementation of a ratemaking framework prior to the statutory 
deadline will enable the Postal Service to use new, streamlined 
procedures to initiate rate (and class) changes as needed to respond to 
its financial needs and market conditions. The regulations may serve as 
a safety valve, providing an immediate means to address challenges 
faced by the Postal Service and perhaps obviate the necessity for rate 
relief through an omnibus rate case under existing procedures. The 
commenters urge that such a filing should be avoided, thereby allowing 
the Postal Service and the Commission to dedicate more resources to 
thoughtfully implementing other aspects of the reform legislation. It 
would be unfortunate if, in this reformed environment, rate changes had 
to be litigated under the old cost of service system. Having this new 
framework in place, and the Postal Service operating under the new 
framework as early as practical, would provide the Postal Service 
flexibility to respond quickly to changed conditions.
    The Commission's goal is to make this new system of rate adjustment 
advantageous for all stakeholders, enabling the Postal Service to price 
its own products, ensuring the lawfulness of competitive rates, 
providing increased transparency, and maintaining universal service at 
affordable rates. Fulfilling these objectives requires that competing 
interests be carefully balanced.
    The Commission, among other things, identifies the mail matter that 
comprises each type of mail listed in section 3631(a) and the products 
within the competitive category of mail. It also discusses generally 
the mail matter that comprises each type of mail listed in section 
3621(a). However, in lieu of identifying specific market dominant 
products, the Commission has determined that for reasons of accuracy 
and expedition, it would be preferable to accept the Postal Service 
offer to prepare and submit a draft mail classification schedule, 
which, inter alia, identifies the market dominant products it believes 
should be contained therein. This will enable the Postal Service to 
categorize its market dominant services into products that best serve 
its business needs. In addition, it will permit the Postal Service to 
fashion a draft mail classification schedule with what it believes is 
an appropriate level of detail. The Commission then will be able to 
evaluate this draft for consistency with the principles discussed in 
this order. The draft mail classification schedule is due September 14, 
2007. Comments on the draft mail classification schedule are due 
September 28, 2007.
    The proposed regulations represent the Commission's initial effort 
to establish a functional framework for regulating rates and classes 
for market dominant and competitive products. The proposed regulations 
do not seek to address every issue that might arise under the PAEA. The 
intent is that these regulations provide a reasonable starting point 
and that they will evolve over time.
    In the sections that follow, the Commission discusses proposed 
regulations governing:
     Rules Applicable to Rate Adjustments for Market Dominant 
Products (part 3010);
     Regulation of Rates for Competitive Products (part 3015); 
and
     Product Lists (part 3020).
    The Commission must also issue proposals amending the structure of 
its rules, and specific regulations applicable to complaints, reporting 
requirements, and commercially sensitive materials, as well as 
regulations to implement sections 404a and 504(f). Completing those 
tasks is complementary to the proposed regulations, which, once 
implemented, will be sufficient to enable the Postal Service to begin 
to operate as contemplated by the PAEA.

II. Market Dominant Products

A. Introduction

    Background. This segment of the rulemaking focuses on rate changes 
referred to as ``rate adjustments'' in the PAEA for market dominant 
products. The emphasis is on proposing regulations that will provide 
the Postal Service with the option of pursuing its next general round 
of price changes under the new law's ratesetting provisions, which 
feature a price cap mechanism and a streamlined advance notice and 
review, and on providing a comprehensive framework.
    Much of the discussion on this topic since the enactment of the 
PAEA has occurred in the context of a joint Postal Regulatory 
Commission-Postal Service

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summit, regional field hearings, \3\ comments filed in response to 
Commission orders, \4\ and Congressional hearings. The Commission's 
preliminary conclusions about the direction of this regulatory effort 
reflect considered review of the comments and testimony presented in 
these forums.
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    \3\ See PRC Order No. 19, Notice and Order on Field Hearings to 
Receive Testimony on Implementation of Modern System of Ratemaking, 
Docket No. RM2007-1, June 8, 2007.
    \4\ The parties have submitted several rounds of comments in 
response to the two advance notices of proposed rulemaking. As a 
matter of convenience, citations to these comments will identify the 
party's comments by filing date; reply comments will be so denoted. 
For example, the referenced Postal Service initial comments are 
cited as Postal Service Comments, June 18, 2007, at xx; reply 
comments are cited similarly, e.g., PSA Reply Comments, July 3, 
2007, at xx.
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    Commenters identify two main tasks for the Commission at this stage 
of implementation. One is reaching consensus on conceptual and 
practical aspects of the scope, depth and timeframe of Commission 
review of planned rate changes. The other is transforming numerous 
statutory requirements, objectives and factors into a new ``road map'' 
for navigating the regulatory calendar, expedited procedures, and price 
cap mechanism that are core components of the new system. Most 
commenters observe that these tasks involve balancing policy 
considerations, pragmatic concerns, and a revamped PRC/Postal Service 
partnership.\5\ They agree that the statute provides certainty on some 
key points, but point to numerous instances where other important 
issues are open to interpretation. Some urge the Commission to adopt a 
light-handed approach to the new notice-and-review process, with the 
price cap calculation being the sole focus.\6\ Others caution that 
implementation will allow price changes to occur more often than 
annually, the cap to be applied unequally to products within a class of 
mail, and the cap to be exceeded (within a certain range) under an 
exception referred to as ``unused rate adjustment authority'' or the 
banking exception. They suggest that these possibilities may have 
significant implications with respect to mailers' expectations that the 
modern system will provide predictability, certainty and stability.
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    \5\ See, for example, Advo Comments, April 6, 2007, at 2-3; MOAA 
Reply Comments, May 7, 2007, at 1-2; PSA Comments, April 6, 2007, at 
1-4; Time Warner Comments, April 6, 2007, at 1-3; and Postal Service 
Comments, April 6, 2007, at 2-4.
    \6\ Jon Mulford, for example, states: ``[the] PAEA has given the 
Commission extraordinary power to regulate the USPS. The Commission, 
in devising its system for setting rates * * * should at all costs 
avoid unnecessarily tying USPS management's hands as they attempt to 
cope with an impending financial crisis.'' Mulford Comments, March 
9, 2007, at 5.
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    The Commission appreciates the responses to its request for 
assistance in developing new regulations, and finds that the 
commenters' observations provide useful guidance. It also appreciates 
the Postal Service's efforts, outside of this rulemaking, to work with 
mailers on developing a viable regulatory calendar and on addressing 
rate implementation issues. See Postal Service Reply Comments, May 7, 
2007, at 3-4 and Appendix B. The Commission proposes basic rules 
regarding the regulatory calendar in proposed rule 3010.7.

B. Statutory Framework for Rate Changes

    Section 3622(d) of the PAEA, captioned ``Requirements,'' addresses 
some of the mandatory features the Commission must include in the 
modern regulatory system.\7\ It provides, in pertinent part:

    \7\ These requirements are not ``stand alone'' elements of the 
new system, but must be given effect in concert with certain 
statutory factors and objectives. However, unlike the 
``requirements,'' most of which are new postal ratemaking features, 
many of the factors and objectives are identical to those employed 
in the Postal Reorganization Act of 1970 (PRA) ratemaking.

    (1) In General.--The system for regulating rates and classes for 
market-dominant products shall--
    (A) include an annual limitation on the percentage changes in 
rates to be set by the Postal Regulatory Commission that will be 
equal to change in the Consumer Price Index for All Urban Consumers 
unadjusted for seasonal variation over the most recent available 12-
month period preceding the date the Postal Service files notice of 
its intention to increase rates;
    (B) establish a schedule whereby rates, when necessary and 
appropriate, would change at regular intervals by predictable 
amounts;
    (C) not later than 45 days before the implementation of any 
adjustment in rates under this section, including adjustments made 
under subsection (c)(10)-
    (i) require the Postal Service to provide public notice of the 
adjustment;
    (ii) provide an opportunity for review by the Postal Regulatory 
Commission;
    (iii) provide for the Postal Regulatory Commission to notify the 
Postal Service of any noncompliance of the adjustment with the 
limitation under subparagraph (A); and
    (iv) require the Postal Service to respond to the notice 
provided under clause (iii) and describe the actions to be taken to 
comply with the limitation under subparagraph (A);
    (D) establish procedures whereby the Postal Service may adjust 
rates not in excess of the annual limitations under subparagraph 
(A).
* * * * *
    However, the ``price cap'' in subsection 3622(d)(1)(A) is not an 
absolute limit; other provisions expressly require that the new 
system:
    (E) notwithstanding any limitation set under subparagraphs (A) 
and (C), and provided there is not sufficient unused rate authority 
under paragraph (2)(C), establish procedures whereby rates may be 
adjusted on an expedited basis due to either extraordinary or 
exceptional circumstances, provided that the Commission determines, 
after notice and opportunity for a public hearing and comment, and 
within 90 days after any request by the Postal Service, that such 
adjustment is reasonable and equitable and necessary to enable the 
Postal Service, under best practices of honest, efficient, and 
economical management, to maintain and continue the development of 
postal services of the kind and quality adapted to the needs of the 
United States.
* * * * *
    Further, the following provisions in subsection 3622(d)(2) 
authorize the annual cap to be exceeded under certain conditions:

* * * * *
    (C) Use of Unused Rate Authority.--
    (i) Definition.--In this subparagraph, the term ``unused rate 
adjustment authority'' means the difference between--
    (I) the maximum amount of a rate adjustment that the Postal 
Service is authorized to make in any year subject to the annual 
limitation under paragraph (1); and
    (II) the amount of the rate adjustment the Postal Service 
actually makes in that year.
    (ii) Authority. Subject to clause (iii), the Postal Service may 
use any unused rate adjustment authority for any of the 5 years 
following the year such authority occurred.
    Finally, the exercise of ``banking authority'' is itself subject 
to the following limitations:
    (iii) Limitations.--In exercising the authority under clause 
(ii) in any year, the Postal Service--
    (I) may use unused rate adjustment authority from more than 1 
year;
    (II) may use any part of the unused rate adjustment authority 
from any year;
    (III) shall use the unused rate adjustment authority from the 
earliest year such authority first occurred and then each following 
year; and
    (IV) for any class or service, may not exceed the annual 
limitation under paragraph (1) by more than 2 percentage points.

* * * * *
    These comprehensive provisions unequivocally establish subsection 
3622(d) as the administrative cornerstone of the new rate setting 
system for market dominant products. Collectively, streamlined advance 
review procedures, the price cap mechanism, the banking exception, and 
the exigency clause are designed to foster pricing flexibility, reduce 
burden, and facilitate quick implementation of rate changes. The 
Commission's proposed regulations are intended to fill in many of the 
details of price cap

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administration, content of rate change filings, and due process.

C. Summary of Main Issues

    The PAEA specifies use of the Bureau of Labor Statistics' widely-
known CPI-U, but does not address some related aspects of 
administration, such as how to calculate the index adjustment and how 
to calculate the base to which the adjustment applies. It also does not 
address the extent of documentation of worksharing discounts. The 
Commission sought comments on these matters in its Second Advance 
Notice of Proposed Rulemaking on Regulations Establishing a System of 
Ratemaking, May 17, 2007.
    Additional implementation issues raised in the comments include:

--whether the phrase ``not later than 45 days'' used in section 
3622(d)(1)(C) limits Commission review to this number of days, or 
allows a longer period;
--whether price change filings, other than exigent requests, involve 
``barebones'' notice and documentation or more comprehensive support;
--Whether the Commission's advance review is limited to assessing 
compliance with the price cap provisions or extends to other matters, 
such as an evaluation of worksharing discounts;
--whether the Commission should solicit public comment in routine rate 
change filings;
--whether the authority to ``bank'' unused rate adjustment authority 
for up to 5 years carries with it the ability to apply the banked 
pricing credit to a class other than the one in which it was 
accumulated; and
--whether the rules should define ``exigent circumstances'' and whether 
trial-type proceedings must or should be held.

D. Structure of New Proceedings and Rules

    Review of the comments points to interest in a new road map for 
rate changes. William Berkley usefully highlights this by observing:

    We need to keep in mind that we have to keep proceedings simple 
and rules of practice simple to avoid a system that only postal 
attorneys and economists can use. We ask when you establish these 
new rules that you remember to keep it as simple as you can. 
Proceedings before every regulator are always difficult, but let us 
also insure that we make it easy to navigate and understand the 
proceedings in this evolving system.

Berkley Testimony at 5.\8\
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    \8\ Testimony of William S. Berkley, President and CEO, Tension 
Envelope Corporation, Before the United States Postal Regulatory 
Commission Field Hearing, Kansas City, June 22, 2007.
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    United Parcel Service (UPS), addressing implementation in general, 
asserts: ``To the extent possible, the Commission should interpret PAEA 
in a way that recognizes the value of administrative simplicity and 
practicality, and that minimizes the Postal Service's burden, while 
remaining consistent with the statutory requirements.'' UPS Reply 
Comments, July 3, 2007, at 10.
    Accordingly, the Commission proposes to:

--Organize most of the rules directly affecting market dominant 
products into a largely self-contained unit;
--Standardize terms, definitions and methods to the extent feasible; 
and
--Establish streamlined proceedings to facilitate all types of price 
changes.

    The Commission proposes to establish a separate part, designated 
part 3010, Rules Applicable to Rate Adjustments for Market Dominant 
Products, in 39 CFR. This part is divided into five subparts:
    Subpart A--General Provisions.
    Subpart B--Rules for Rate Adjustments for Rates of General 
Applicability (Type 1 Rate Adjustments).
    Subpart C--Rules for Applying the Price Cap.
    Subpart D--Rules for Rate Adjustments for Negotiated Service 
Agreements (Type 2 Rate Adjustments).
    Subpart E--Rules for Rate Adjustments in Exigent Circumstances 
(Type 3 Rate Adjustments).

E. Overview of Proposed Subpart A--General Provisions

    This subpart consists of seven proposed rules. The first provision, 
proposed 3010.1, captioned ``Applicability,'' is a general 
representation that the rules in subpart A implement the ratesetting 
policies and procedures of the PAEA for market dominant products. It 
also notes a distinction between ``notice'' filings and ``request'' 
filings.
    Proposed 3010.2(a) codifies the following basic scenarios in which 
rate changes for market dominant products may be addressed: under price 
cap authority or a variation thereon, often referred to by commenters 
as the banking exception or banking authority; under a special 
contractual, or negotiated service agreement; and under an exigent 
circumstance. For ease of reference and reporting, this rule reflects 
the Commission's proposal to refer to each of these scenarios as 
``types'' of filings, similar to the approach that has been used 
successfully for six categories of library references since Docket No. 
RM98-2. The Commission notes, for example, that for purposes of 
conducting the 10-year assessment of the new ratesetting approach, it 
may prove useful to have a ready tool for determining how many 
different types of notices and requests have been filed. The Commission 
incorporates these definitions into the regulations and the 
accompanying discussion. The following table summarizes this approach.

            Table II-1.--Summary of Alternative Filing Terms
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                                                          Proposed
      Statutory source            Filing basis         alternative(s)
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39 U.S.C. 3622(d)(1)(A).....  ``annual limitation   Type 1-A Rate
                               on the percentage     Adjustment.
                               changes in rates''.
39 U.S.C. 3622(d)(2)(C)(i)..  ``unused rate         Type 1-B Rate
                               adjustment            Adjustment.
                               authority''.
39 U.S.C. 3622(c)(10).......  ``the desirability    Type 2 Rate
                               of special            Adjustment.
                               classifications . .
                               . including
                               agreements between
                               the Postal Service
                               and postal users''.
39 U.S.C. 3622(d)(1)(E).....  ``due to either       Type 3 Rate
                               extraordinary or      Adjustment.
                               exceptional
                               circumstances''.
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F. Overview of Proposed Subpart B--Rules for Rate Adjustments for Rates 
of General Applicability (Type 1 Rate Adjustments)

    This subpart consists of five rules. These rules lay out basic 
procedures and certain fundamental Commission positions. Some of the 
debate among commenters centered on the timeframe for Commission action 
in a price change proceeding and on public input. The timeframe issue 
stems from the highlighted wording in the following passage from the 
PAEA:

    (C) not later than 45 days before the implementation of any 
adjustment in rates under this section, including adjustments made 
under subsection (c)(10)--
    (i) require the Postal Service to provide public notice of the 
adjustment;
    (ii) provide an opportunity for review by the Postal Regulatory 
Commission.

    39 U.S.C. 3622(d)(1)(C)(i)-(ii).

    The crux of the issue is whether the statute intends 45 days as the 
maximum or minimum period for advance notice and review. The Postal 
Service appears to read this language as establishing a statutory 
maximum, but acknowledges that some changes, as a matter of good 
business practice, such as those involving new worksharing discounts, 
will create more implementation issues. It indicates that it intends to 
provide additional notice in these instances. Postal Service Comments, 
June 18, 2007, at 14-15. The Mail Order Association of America (MOAA) 
shares the Postal Service's view. MOAA Reply Comments, May 7, 2007, at 
14-15. Many commenters, however, see the wording in the statute as 
establishing a minimum, and therefore clearly authorizing the 
Commission to require the Postal Service to provide more notice. Time 
Warner suggests 90 days. Time Warner Comments, April 6, 2007, at 15.
    The Commission concludes that as a matter of statutory 
interpretation, the Postal Service's position reads the qualifier ``at 
least'' completely out of the statute. The conclusion more consistent 
with the statute's overall theme of transparency is that 45 days is the 
minimum period required by the statute, and the Commission may require 
a longer period in certain circumstances.\9\ At the same time, it seems 
that any extension should be in keeping with the notion of streamlined 
review; thus, the four months the OCA suggests as the routine approach 
appears excessive for the Commission's task of assessing the planned 
rate changes in terms of the price cap and/or the use of banking 
authority.
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    \9\ Based on the Postal Service's comments, it anticipates 
filing 90 days in advance of implementation with the first 45 days 
constituting the statutory period for Commission review and the 
second half for implementation.
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    The Commission concludes that for purposes of drafting an initial 
set of regulations, the language from the statute requiring notice and 
review ``not later than 45 days'' can be carried over directly into 
proposed rules 3010.10(a)(1) and (2). A provision in proposed rule 
3010.10(b) encouraging more time for review recognizes the Postal 
Service's representations on this record that it intends to provide 
additional time for review when price changes are more complicated. 
Postal Service Comments, June 18, 2007, at 9-10. Proposed rule 
3010.10(a) does not require the Postal Service to publish a Federal 
Register notice concerning a planned adjustment, but does contemplate 
broad dissemination of its intent to the mailing community and to the 
general public. This typically provides more effective notice than a 
Federal Register notice, in keeping with a modern rate setting system, 
and reduces administrative burden by freeing the Postal Service from 
the production details necessarily associated with Federal Register 
publication. The Commission notes that it imposes on itself, in 
proposed rule 3010.13(a), an obligation to publish notice of a rate 
adjustment filing in the Federal Register.
    Commenters are divided on the question of public input during the 
review period. Some, including the Postal Service, argue against it on 
grounds that the logic of the PAEA suggests that if public input is not 
expressly provided for in the statute, it is not authorized. On the 
other hand, the OCA and several others think it would be helpful. 
Newspaper Association of America (NAA), for example, asserts that 
allowing public comment would promote transparency. NAA Comments, March 
30, 2007, at 2. NAA acknowledges that the new statute expressly 
provides for public participation when rate adjustments are based on 
exigent circumstances, but asserts:

    Nothing in the PAEA, however, prohibits the Commission from 
inviting such comment also when the Postal Service purports to 
notice rate adjustments consistent with the CPI limitation. Public 
comment--which necessarily would have to be expedited and would be 
submitted in writing--would promote transparency and could provide 
information helpful to the Commission's review.

Id. at 7.

    It adds:

    Where the Postal Service's notice is straightforward, there 
likely will be relatively few comments. However, in instances when 
the Postal Service notices a more complicated set of rate changes, 
the Commission may benefit from the insights that the mailing 
community and broader public may be able to offer. The stakes of 
this review are important because the rates that will take effect 
from this process will be in effect for a substantial period of time 
before they are later reviewed by the Commission either in an annual 
review or in a complaint.

Id. at 7-8.

    The Commission agrees that the statute does not expressly provide 
for public participation during the review period as it does in the 
exigency clause (in subsection 3622(d)(1)(E)). At the same time, the 
statute gives the Commission broad discretion in deciding on how to 
conduct its review. It follows that if the Commission believes public 
input might be helpful in determining the compliance of the anticipated 
rate changes with the statutory pricing provisions, there is no 
statutory bar to incorporating this into its review proceedings/
procedures. The Commission believes this will be the case, and 
provides, in proposed rule 3010.13(a) for 20 days (from the date of 
filing of a rate adjustment notice) for the public to file written 
comments.
    Proposed rule 3010.11 addresses several ``housekeeping'' details. 
It notes the limitation on rate increases in any 12-month period, the 
existence of CPI-U as a limitation, the exception allowing annual 
recapture of unused rate authority, and the allocation of unused rate 
authority to each class of mail. The latter provision directly 
addresses some commenters' concerns about ``cross-class'' banking.
    Proposed rule 3010.12 adopts the PAEA's stated inflation measure 
(CPI-U) and describes the source as the Bureau of Labor Statistics. The 
clarity of the PAEA on this point meant that there was no debate among 
the commenters on the benchmark that is to be used.
    Proposed rules 3010.13 and 14 address the nature of proceedings and 
the content of rate adjustment filings, and are the most extensive 
rules in this subpart. The flagship proceedings under the former 
statutory structure were 10-month trial-type ``omnibus'' rate and 
classification proceedings, bookended between considerable advance 
preparation on the part of the Postal Service (and many mailers) and a 
post-decision phase encompassing review by the Governors and the 
potential for reconsideration. Commenters agree that, barring a final 
omnibus rate case under 39 U.S.C. 3622(f), the PAEA casts that 
apparatus aside and replaces it with a

[[Page 50748]]

simpler process. In keeping with the new statutory emphasis on simpler 
proceedings, the Commission does not propose formal discovery, Notices 
of Inquiry, Presiding Officer's Information Requests, testimony, and 
hearings. It anticipates handling resolution of discrepancies or other 
matters through direct communication with the Postal Service.
    There also has been considerable discussion of the statutory scope 
of the Commission's review. The main positions are that it extends to:

--Only, or primarily, the price cap;
--The price cap, plus some evaluation of worksharing; and
--The price cap, worksharing evaluation, plus consistency with 
statutory factors and objectives, plus identification of certain 
features, such as differential intra-class treatment exceeding a 
certain percentage.

    Some commenters, such as the Postal Service and MOAA, advocate 
``light-handed'' review, the OCA seeks extensive review, and some, such 
as the NAA, take a middle ground. NAA suggests that during the review 
period, the Commission has, at a minimum, legal authority:

--To review the notices of rate adjustments for compliance with the CPI 
cap;
--To review the noticed change to ensure at least facial compliance 
with the provisions of section 3622(e) regarding workshare discounts;
--To prohibit rates that are unlawful on their face from taking effect; 
and
--To review the justification for changes in rate categories within a 
class that exceed CPI by an amount set by the Commission, such as the 
CPI plus 2 percent proposed by NAA.

NAA Reply Comments, May 7, 2007, at 25-26.

    The Commission agrees that the PAEA ushers in a fundamentally 
different approach to rate regulation for market dominant products, and 
that its implementing regulations should honor the spirit and letter of 
the new law. Proposed rule 3010.13(b) limits the appropriate scope of 
public comments to compliance with the price cap formula and 
consistency with certain statutory policies; thus, they represent a 
marked shift away from PRA-style in-depth examination. The proposed 
scope of public comment is no longer open-ended. The Commission does 
not invite, and will not entertain, public comment during the 45-day 
review period on matters such as costing methods. Moreover, in proposed 
rule 3010.13(e), the Commission expedites review to determine the 
consistency of an amended notice of rate adjustment with filing 
requirements.
    Filing contents. Proposed rule 3010.14 describes the contents of 
the Postal Service's rate adjustment filings. The notice is to include 
a schedule of proposed rates, identification of the effective date(s), 
and a representation or evidence that public notice of the planned 
changes has been issued or will be issued at least 45 days before the 
effective date(s) of the proposed rates.
    In addition, proposed rule 3010.14(b)(1)-(8) identifies explanatory 
material that is to be provided. This includes the amount of the 
applicable change in CPI-U calculated under Commission rules and the 
percentage change in rates for each class, calculated as required by 
Commission rules along with supporting workpapers. It also includes the 
amount of new unused rate authority that will be generated by the 
instant notice of rate adjustment and a 5-year schedule showing unused 
rate authority for each class of mail, along with supporting 
calculations. For Type 1-B filings, which draw on recaptured pricing 
authority, the Postal Service is to identify for each affected class 
how much existing unused rate authority is used in the proposed rates 
calculated as required by Commission rules. See proposed rule 
3010.14(d). An explanation must be provided if new unused rate 
authority will be generated for a class of mail that is not expected to 
cover its attributable costs.
    Several commenters express concern about the potential for intra-
class increases to exceed the cap. NAA asserts that the Postal 
Service's authority to exceed the annual cap for a rate category is not 
unlimited, as the phrase ``predictable amounts'' is not limited to the 
aggregate change for a class, but ``on its face requires that the 
specific rate changes themselves within the class should be reasonably 
predictable.'' NAA Comments, March 30, 2007, at 9. It contends that 
objective 8, which requires that the rate schedule be ``just and 
reasonable'' supports this interpretation. Id. NAA suggests that the 
Commission impose a standard whereby, absent special justification, 
increases for a rate category beyond a pre-established range (such as 
CPI plus 2 percent) would not be considered ``predictable'' or ``just 
and reasonable.'' Id. at 9-10. It asserts that this approach, which it 
refers to as a ``soft band,'' would satisfy the statutory objective of 
providing the Postal Service with pricing flexibility, while honoring 
the provision in objective 8 allowing changes of unequal magnitude 
within, between or among class of mail. Id. at 9; NAA Reply Comments, 
May 7, 2007, at 8. In terms of proposed rules, NAA suggests that the 
Postal Service could be required to certify that no rate would change 
by more than the permitted range (when this is the case) or bring 
changes exceeding the range to the Commission's attention and provide 
additional justification. NAA Comments, March 30, 2007, at 10. It 
contends that over time, as the Commission reviews these explanations 
on a case-by-case basis, it will become evident which explanations are 
adequate to allow the rates to become effective, and which are not. NAA 
Reply Comments, May 7, 2007, at 8.
    The Parcel Shippers Association (PSA) does not suggest prohibiting 
adjustments beyond a certain level, but suggests that the Commission 
require the Postal Service to provide a written, on the record, 
justification for any market dominant rate increases that substantially 
exceed inflation. PSA Comments, April 6, 2007, at 4-5, 22-23. (Emphasis 
in original.)
    In a similar vein, OCA suggests, given the potential for large 
percentage increases in rates for individual subclasses, that subclass 
increases be capped at 50 percent above the overall class increase. OCA 
Comments, June 18, 2007, at 2, 15-19. It notes:

    Some of the principles of rate setting include continuity of 
expectations, implementation of rates that are understandable, and 
perceived and/or actual fairness. Accordingly, some level of 
subclass protection appears to be appropriate. We suggest 50 percent 
as reasonable: that is, if rates for a class of service increase by 
an overall maximum of two percent, no subclass rate would increase 
by more than three percent.

    Id. at 15.

    Discover Financial Services, LLC (DFS) asserts that the OCA's 
recommendation is ``at odds with the legislation, which nowhere 
indicates that such a cap would be permissible. Indeed, notions that 
rates should be capped in any fashion other than at the class level 
were much debated in Congress and specifically rejected as not giving 
the Postal Service sufficient rate flexibility.'' DFS Further Comments, 
July 16, 2007, at 4.
    NAA, PSA and OCA identify a clear example of where statutory 
objectives may conflict. The Commission does not view capping subclass 
increases as sanctioned by the PAEA. Requiring a separate certification 
or justification is not statutorily suspect in the same sense; however, 
adopting a rule of this sort makes the process cumbersome. It is to be 
expected that rate adjustments within a class will be both above and

[[Page 50749]]

below average. Requiring written justification for individual rates is 
contrary to the goals of a simpler, more flexible, process. The 
Commission finds that the Postal Service should be given an opportunity 
to exercise its pricing flexibility by making changes of unequal 
magnitude without having to file separate justification for what some 
might consider ``excessive'' above-cap increases within a class. Should 
the Postal Service abuse this discretion, and regularly fail to develop 
rate adjustments consistent with the statutory objective of maintenance 
of just and reasonable rate schedules, additional regulations in this 
area can be developed.
    Information supporting proposed workshare discounts. The PAEA 
charges the Commission with establishing a modern system of ratemaking 
that is designed to achieve nine specific objectives including to 
maximize incentives to reduce costs and increase efficiency. The PAEA 
also enumerates several factors which must be considered by the 
Commission in establishing this system. Two of these factors--
3622(c)(5), the degree of preparation of mail for delivery into the 
postal system performed by the mailer and its effect upon reducing 
costs to the Postal Service; and 3622(c)(12), the need for the Postal 
Service to increase its efficiency and reduce its costs--can be linked 
directly to workshare discounts. Section 3622(e)(2) directs the 
Commission to ensure that [workshare] discounts do not exceed the cost 
that the Postal Service avoids as a result of workshare activity.\10\
---------------------------------------------------------------------------

    \10\ There are four limited exceptions to this mandate: (1) When 
the discount is new and mailers must be encouraged to use it; (2) 
when the discount is already in place and reducing it will cause 
rate shock; (3) when the discount is provided in connection with 
subclasses consisting exclusively of mail matter of educational, 
cultural, scientific, or informational value; and (4) when reducing 
or eliminating the discount would cause a shift in mail mix that 
would lead to operational inefficiencies for the Postal Service. For 
the first two exceptions, the Postal Service must eventually phase 
out the excess discount.
---------------------------------------------------------------------------

    The PAEA defines workshare discounts as rate discounts provided to 
mailers for the presorting, pre-barcoding, handling, or transportation 
of mail. Both the Commission and the Postal Service have long held the 
view that setting workshare discounts in line with the Efficient 
Component Pricing Rule (ECPR) is an effective method for encouraging 
efficient mailing practices. The ECPR is the principle that workshare 
discounts should be set equal, on a per-unit basis, to the costs 
avoided by the Postal Service when the mailer performs the workshare 
activity.
    Several parties reiterated the importance of ECPR in encouraging 
efficiency and satisfying the objectives of the PAEA. Pitney Bowes 
states ``regulations should require the Postal Service to establish 
discounts that reflect the full measure of workshare-related costs 
avoided to the extent practicable.'' Pitney Bowes Comments, April 6, 
2007, at 36. In addition, Pitney Bowes sponsored the comments of John 
Panzar which focus exclusively on the merits of continued use of ECPR 
in ratemaking. The Alliance of Nonprofit Mailers, National Association 
of Presort Mailers, and National Postal Policy Council (ANM/NAPM/NPPC) 
believe that the Postal Service's rates should be presumed reasonable 
as long as the discounts satisfy the ECPR. ANM/NAPM/NPPC Comments, 
April 6, 2007, at 16-19.
    Support for efficient component pricing is also found in testimony 
received during the Commission's field hearings. Don Hall, Jr., 
President and CEO of Hallmark Cards, seeks assurance that the workshare 
discounts will reflect the true savings to the Postal Service. 
Transcript of Kansas City Field Hearing, June 22, 2007, at 29. John 
Campo, Vice President of Postal Relations for Pitney Bowes, said the 
``regulations should encourage the Postal Service to adopt pricing 
incentives or work sharing discounts to fully reward mailer activity 
that reduces total postal system costs.'' Transcript of Wilmington 
Field Hearing, July 9, 2007, at 10. John Carper, Director of Mail and 
Receiving Services, Pepperdine University, claims that ``[worksharing] 
can flourish fully only if the discounts offered by the Postal Service 
* * * he costs that the Postal Service saves.'' Transcript of Los 
Angeles Field Hearing, June 28, 2007, at 39.
    In contrast, Advo, Inc. presents three reasons why ECPR should not 
be followed in setting rates under the PAEA:

    First, the statute does not permit consideration of factors 
other than compliance with price caps in the review process. Second, 
ECP, although useful in theory as a pricing tool, is not the only 
appropriate consideration in setting discounts and is susceptible to 
being misapplied. Third, adoption of ECP as the ``gold standard'' 
will inevitably and unnecessarily impinge on the Postal Service's 
pricing flexibility--a flexibility that is imperative to its ability 
to remain viable under the price cap regime.

Advo Reply Comments, July 3, 2007, at 6.

    MOAA, NAA, and the Postal Service recognize the importance of the 
ECPR, but contend that other, perhaps competing, factors are also 
important. Therefore, they believe that ECPR should not be a 
requirement for workshare discounts.
    The Commission strongly believes that efficient component pricing 
should be used as a guiding principle in establishing and maintaining 
workshare discounts. In both sections 3622(b) and 3622(c) the statute 
stresses the need for efficient rates and efficient component pricing 
is an established method of measuring efficient ratemaking. 
Nonetheless, the Commission recognizes that other factors must also be 
considered, and that the PAEA grants the Postal Service substantial 
flexibility in setting rates. However, in the interest of transparency 
and accountability, the Postal Service has a burden to explain how its 
rates, including workshare discounts, meet the objectives and factors 
of the PAEA.
    The Postal Service has proposed that when it files its notice of 
price adjustment, it will also file, for pre-existing workshare 
discounts, a comparison of the new (or unchanged) discount price with 
the historical, Commission reviewed cost avoidances of the last Annual 
Compliance Review, and will provide appropriate justification for any 
discount that exceeds those cost avoidances. Postal Service Comments, 
June 18, 2007, at 11. The proposed rules reflect this undertaking. To 
meet its burden of ensuring that the rates are in compliance with the 
objectives and factors of the PAEA, the Postal Service must also 
identify and explain any discounts that are substantially below the 
cost avoidances.
    The Postal Service is to provide with each notice of rate 
adjustment a schedule of the workshare discounts included in the 
proposed rates, together with a companion schedule listing underlying 
avoided costs, along with supporting workpapers. The avoided cost 
figures must be developed from the most recent PRC Annual Compliance 
Report. The Postal Service is to provide a separate justification for 
all proposed workshare discounts that exceed avoided costs. The Postal 
Service shall also identify and explain discounts that are set 
substantially below avoided costs, and explain any relationship between 
discounts that are above and those that are below avoided costs.
    In addition, when new workshare discounts are established, the 
Postal Service is to include with its filing a statement explaining its 
reasons for establishing the discount; provide all data, economic 
analyses, and other information believed to justify the discount; and 
certify, based on

[[Page 50750]]

comprehensive, competent analyses that the discount will not adversely 
affect either the rates or the service levels of users of postal 
services who do not take advantage of the discount.
    Lastly, the Postal Service is to provide a discussion of how the 
proposed rates will help achieve the objectives listed in 39 U.S.C. 
3622(b) and properly take into account the factors listed in 39 U.S.C 
3622(c).

G. Overview of Subpart C--Rules for Applying the Price Cap

    This subpart consists of nine rules related primarily to 
administration of the price cap mechanism. Proposed rule 3010.21 
addresses how to calculate the statutory annual inflation-based 
limitation. A question has arisen over the

* * * an annual limitation * * * equal to the change in the Consumer 
Price Index for All Urban Consumers unadjusted for seasonal 
variation over the most recent available 12-month period preceding 
the date the Postal Service files notice of its intention to 
increase rates.

39 U.S.C. 3622(d)(1)(A). (Emphasis added.)

    Two suggestions have emerged on this record, but commenters 
generally agree that both approaches are consistent with the statute. 
One is referred to as the ``point-to-point'' method and was initially 
suggested by the Postal Service and the OCA. The other is the ``running 
average'' or ``weighted average'' method which is incorporated in the 
proposed rules.
    JPMorgan Chase & Company (Chase) comments are representative. Chase 
urges the Commission to calculate the index adjustment based on a 12-
month average of CPI levels, rather than on a ``snapshot'' of year-
over-year changes to the CPI between a single pair of beginning and end 
dates. It reasons:

    While the two approaches should achieve similar results over the 
long run, the use of the twelve-month average is likely to produce a 
much less bumpy and volatile path along the way by damping the 
short-term oscillations in the CPI index. For Chase and other 
mailers that operate on an annual budget cycle--i.e., for the 
mailers that generate most of the Postal Service's volume, reducing 
the short-term unpredictability of cost increases is extremely 
important.

Emens Testimony at 5.\11\

    \11\ Testimony of Daniel C. Emens on Behalf of JPMorgan Chase & 
Co., July 9, 2007 (Emens Testimony).
---------------------------------------------------------------------------

    Many parties commented that they prefer the moving average method 
because it provides more predictability and stability in rates. NAA 
states, the average method ``better advance[s] the statutory objective 
of creating `predictability and stability in rates' while promoting 
transparency in rates and assuring that the Postal Service is 
financially sound.'' NAA Comments, June 18, 2007, at 2. See also Advo 
Comments, June 18, 2007, at 2; Advo Reply Comments, July 3, 2007, at 1; 
GCA Reply Comments, July 3, 2007, at 1-2; Pitney Bowes Reply Comments, 
July 3, 2007, at 3; and PostCom Reply Comments, July 3, 2007, at 2.
    Contrary to these views, OCA states that the point method ``does 
not result in significantly less rate stability and predictability.'' 
OCA Reply Comments, July 3, 2007, at 6. It contends that the moving 
average method ``would have substantial lags in the updating of 
rates.'' OCA Initial Comments, June 18, 2007, at 7. See also Valpak 
Comments, June 18, 2007, at 5; and OCA Reply Comments, July 3, 2007, at 
2-4.
    The Postal Service expressed concern that using the moving average 
method includes 24 months of data rather than 12. USPS states, ``It is 
arguable that calculating the price cap by reference to CPI-U data over 
a 24-month period is counter to the statutory requirement that the CPI 
calculation be ``equal to'' the change in CPI-U ``over the most recent 
available 12-month period.'' Postal Service Comments, June 18, 2007, at 
3-4. APWU also believes that the point method better adheres to the 
plain language of the PAEA. APWU Comments, June 18, 2007, at 2-3. APWU 
and Valpak advocate the point method as providing more transparency and 
less administrative burden. APWU Comments, June 18, 2007, at 2; and 
Valpak Comments, June 18, 2007, at 4-5.
    The majority of commenters are satisfied that both the moving 
average method and point method meet the statutory requirements of the 
PAEA. MOAA states, ``The provisions of [the] PAEA are sufficiently 
broad that either the [moving average method] or the [point method] 
could be used for the purpose of calculating the CPI cap limitation as 
set forth in 3622 (b), (c) and (d).'' MOAA Comments, June 18, 2007, at 
1. See also GCA Comments, June 18, 2007, at 2; Advo Comments, June 18, 
2007, at 2; PostCom Comments, June 18, 2007, at 2; and Pitney Bowes 
Comments, June 18, 2007, at 2.
    The Commission proposes to use the moving average method of 
calculating the CPI-U limitation. This method provides mailers with 
stable and predictable rates, and also grants the Postal Service the 
same benefits. The moving average method does not impose any undue 
administrative burden on the Postal Service and does not inhibit 
transparency. The Commission finds the increased predictability and 
stability resulting from use of the moving average method are quite 
valuable, and directly further the specific objectives of the PAEA. The 
Commission derives the moving average method from Bureau of Labor 
Statistics (BLS) monthly CPI-U values. At the end of each calendar 
year, BLS calculates the annual percentage change between two years as 
the percentage change between the two years' annual averages. The only 
difference in methodology is that BLS applies this methodology to 
calendar years, and the Commission will apply it to 12-month periods.
    Calculation of the annual limitation in this method involves three 
steps. First, a simple average CPI-U index (Recent Average) is 
calculated by summing the most recently available 12 monthly CPI-U 
values from the date the Postal Service files notice of its intentions 
to increase rates, and dividing the sum by 12. Then, a second simple 
average CPI-U index (Base Average) is similarly calculated by summing 
the 12 monthly CPI-U values preceding those used in the Recent Average 
calculation and dividing the sum by 12. Finally, the percentage change 
between the Recent Average and the Base Average is computed, using the 
following formula: Annual Limitation (Moving Average Method) = (Recent 
Average/ Base Average) - 1.
    Example 1 illustrates the annual limitation calculation, using the 
moving average method, assuming that the Postal Service had filed a 
hypothetical notice of its intentions to increase rates during the 
third week of April 2006.\12\
---------------------------------------------------------------------------

    \12\ All CPI-U data is obtained from the BLS Web site at: http:/
/data.bls.gov/cpi-bin/surveymost.

---------------------------------------------------------------------------

[[Page 50751]]

[GRAPHIC] [TIFF OMITTED] TP04SE07.000

    Example 1 assumes that rate filings are 12 months apart; that is, 
that the Postal Service filed its most recent previous notice for a 
rate increase in April 2006. This assumption can be adjusted in two 
ways depending on when the Postal Service files a notice of rate 
adjustment.
    The first adjustment occurs when the Postal Service files a notice 
of rate adjustment less than one year after the previous adjustment. In 
this instance, if the calculation were to use 12 months of data, the 
Postal Service would benefit from double counting months of CPI data. 
This would violate the statutory limitation. To remedy this problem, a 
partial year limitation is calculated.
    Example 2 calculates a partial year limitation. First, a simple 12-
month average must be calculated using the most recently available 12 
months of CPI-U data from the BLS Web site (Recent Average). Then the 
partial year limitation is calculated by dividing the Recent Average by 
the Recent Average from the most recent previous notice and subtracting 
1. The formula is as follows: Partial Year Limitation = (Recent 
Average/Recent Average from most recent previous notice) - 1.
    Still assuming that the Postal Service filed its first notice of 
rate adjustment in April of 2006 (Example 1), assume now that the 
Postal Service files its second hypothetical notice of rate adjustment 
in October 2006 (six months later). Example 2 shows how the partial 
year limitation will be calculated for the October 2006 rate 
adjustment.

[[Page 50752]]

[GRAPHIC] [TIFF OMITTED] TP04SE07.001

    A corresponding adjustment can be made should the Postal Service 
file a notice of rate adjustment more than 12 months after the last 
adjustment. This scenario provides no reason to alter the calculation 
of the annual inflation-based limitation, but does present a different 
concern; there are several months of CPI-U changes that the Postal 
Service may lose. The clear intent of the statutory provision allowing 
for recapture of unused rate authority is to encourage the Postal 
Service to whenever possible refrain from imposing the maximum 
permissible rate increases. If the Postal Service can delay imposing 
increases on the public, it should not be penalized. See proposed rule 
3010.26(c). To address this concern, the interim unused rate authority 
will be added to the cumulative unused rate authority.
    Still assuming that the Postal Service filed its first notice of 
rate adjustment in April 2006 (Example 1), assume now that the Postal 
Service files its second hypothetical notice of rate adjustment in July 
2007 (15 months later). Example 3 illustrates how the price cap will be 
calculated for the July 2007 notice of rate adjustment, along with the 
calculation of the three months of interim unused rate authority. To 
calculate interim unused rate authority, divide the Base Average of the 
current notice by the Recent Average of the last notice and subtract 1. 
The formula to calculate the amount of interim unused rate authority is 
as follows: Interim Unused Rate Authority = (Base Average for Current 
Notice/ Recent Average for Last Notice) - 1.

[[Page 50753]]

[GRAPHIC] [TIFF OMITTED] TP04SE07.002

    APWU argues for cross-class application of unused rate authority 
and recommends a method of weighting the revenue. This cross-class 
application of unused rate authority would grant the Postal Service the 
ability to use unused rate authority from one class, and apply it to 
other classes of mail in later years. APWU Comments, April 6, 2007, at 
9-10. Several parties assert that this would (1) be at odds with 
section 3622(d)(2)(C), which states that the annual limitations shall 
apply to a class of mail and defines unused rate authority in terms of 
an individual class of mail; (2) be inconsistent with the legislative 
history; and (3) merge multiple class-specific baskets into a single 
basket. See ANM/MPA Reply Comments, May 7, 2007, at 3-6; ANM/NAPM/NPPC 
Reply Comments, May 7, 2007, at 9-11; MOAA Reply Comments, May 7, 2007, 
at 11; Pitney Bowes Comments, April 6, 2007, at 9; and USPS Reply 
Comments, May 7, 2007, at 16.
    The Commission agrees that unused rate authority for a given class 
of mail may only be applied to the class where it originated.
    Finally, The McGraw-Hill Companies, Inc. (McGraw-Hill) suggests 
that the rules should include a method to reduce the price cap if the 
Postal Service performance levels deteriorate, or if the Postal Service 
places costly mail preparation requirements on mailers. See McGraw-Hill 
Reply Comments, July 30, 2007, at 6-7. During the Kansas City field 
hearings, witness Stumbo of Meredith Corporation expressed a similar 
concern:

    We would submit that the critical issues regarding cost shifting 
and service reduction are [sic] the rate-setting process must 
contain a mechanism to adjust rates to reflect the shift in cost 
from the Postal Service to private industry. In addition, the rules 
should contain methodology to adjust rates to reflect the diminished 
level of service the imposition of preparation rule changes or other 
means.

Transcript of Kansas City Field Hearing, June 22, 2007, at 40.

    No commenter has suggested a method for applying such adjustments. 
The Commission is sympathetic to these concerns, yet finds the better 
course is to defer such considerations. The statute establishes a 
system of accountability through increased transparency. The Commission 
is developing separate rules providing for annual Postal Service 
reports that will include data on service achievement. Additionally, 
proposed rule 3020.91 requires the Postal Service to inform the 
Commission of changes that would alter the nature of a product through 
the imposition of preparation rule changes.
    The Commission expects that the Postal Service will operate within 
both the letter and the spirit of the PAEA. For now, it is best to 
presume that the Postal Service will do so. If experience shows that 
additional regulations in this area are necessary to achieve the 
objectives of the legislation, the Commission is obligated to develop 
such regulations, or

[[Page 50754]]

recommend to Congress appropriate additional legislation.
    Test for compliance with the annual limitation. Proposed rule 
3010.20 states that the appropriate annual limitation shall be applied 
to a measure of the rates paid by mail sent in each class for which 
rate adjustments are to be made to determine whether planned rates are 
consistent with the annual limitation.
    39 U.S.C. 3622(d) requires that the system for regulating rates and 
classes for market dominant products include a limitation on the 
percentage increase in rates. To calculate the percentage change in an 
individual rate is a simple matter, but section 3622(d)(2)(A) 
stipulates that the restriction be applied at the class level. 
Therefore, to determine compliance in the context of a pre-
implementation compliance review of a notice of rate adjustment, it is 
necessary to develop rules that provide a means of calculating the 
aggregate percentage change in rates for each class. To accomplish 
this, weights (in the form of billing determinants) must be applied to 
the set of rates that comprise a class.
    Postal Service proposal. The Postal Service proposes to apply the 
most recent available billing determinants to the current rates, then 
apply the same billing determinants to the new rates and compare the 
resulting revenues to determine the change in rates for a class. As 
acknowledged by the Postal Service, this is not ideal because an annual 
rate cycle combined with the need for advance notice dictates that the 
billing determinants will not correspond to a single set of rates, but 
will reflect mailer behavior for part of a year at the current rates 
and part at the previous rates. Postal Service Reply Comments, May 7, 
2007, Appendix C. Rather than debating the rates (current or new) to 
which the ideal billing determinants would correspond, the parties' 
comments have focused on more practical considerations regarding the 
use of historical billing determinants instead of forecast billing 
determinants.
    Parties' positions. On this, there is near universal support for 
the Postal Service's proposed approach, or some slight variation 
thereof. Pitney Bowes, OCA, MOAA, ANM/MPA, APWU, PostCom, Advo, and 
JPMorgan/Chase all support the use of historical billing determinants 
as weights in their comments. The primary rationale for this position 
is that historical data are far less likely to be controversial than 
forecasts, and given the limited time and public participation for the 
review of notices of rate adjustment, simplicity and speed of analysis 
should take precedence.
    There is some disagreement regarding the treatment of 
classification changes and negotiated service agreements. The Postal 
Service proposes to make adjustments to the historical billing 
determinants to incorporate the effects of classification changes, such 
as the creation or elimination of rates. It proposes to use known mail 
characteristics and reasonable judgments to make the necessary 
adjustments. See Postal Service Comments, June 18, 2007, at 7-10, inter 
alia. This proposal is supported by MOAA. See also MOAA Comments, April 
6, 2007 at 4-5; ANM/MPA Comments, May 7, 2007, at 1-2; and APWU 
Comments, June 18, 2007, at 3-4.
    PostCom takes the position that the effects of classification 
changes are outside the scope of the Commission's pre-implementation 
review of a notice of rate adjustment. It argues that the effects of 
such changes on compliance with the price cap may only be determined in 
a post hoc review of the new rates. PostCom concludes that, ``any 
attempt by the Commission to assess the effects of a change in rate 
design at the time that the change is proposed will entail a re-
introduction of the old cost of service methods that the Commission has 
used under the Postal Reorganization Act, including the attempt to 
establish a test year, the reintroduction of roll-forwards and volume 
and revenue forecasts, and all of the uncertainty, controversy and 
confusion that these methods entail.'' PostCom Comments, June 18, 2007, 
at 4-5.
    Commission analysis. The Commission's proposed rules calculate the 
percentage change in rates using the most recent available billing 
determinant as weights. As many parties point out, any attempt to 
develop a forecast of billing determinants would likely be 
controversial and complex, and a worthwhile analysis and resolution 
cannot realistically be achieved in the context of a pre-implementation 
review under section 3622(d)(1)(C).
    The rules also instruct the Postal Service to make reasonable 
adjustments to the billing determinants to account for the effects of 
classification changes. The Postal Service has stated that such 
adjustments will typically be straightforward and based on known mail 
characteristics. Any adjustments are to be fully explained by the 
Postal Service at the time of the notice.
    The Commission recognizes that the pre-implementation method of 
calculating the percentage change in rates in the proposed rules is not 
a perfect measure of what the actual change in rates will be. The 
billing determinants to be used will likely not correspond to a single 
set of rates, and adjustments for classification changes will be 
imperfect. Some commenters suggest that the after-the-fact review will 
be the most effective means of ensuring c