Postal Pricing Methods, 34074-34076 [2010-14483]
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Federal Register / Vol. 75, No. 115 / Wednesday, June 16, 2010 / Proposed Rules
months, whichever is more frequent, for
every truss design produced; or
(ii) One test for every 4,000 trusses
produced for trusses qualified under the
ultimate load truss test procedure or
once every 6 months, whichever is more
frequent, for every truss design
produced.
(iii) Uplift load tests are also to be
conducted at the same follow-up testing
frequency in paragraph (e)(3)(i) or
paragraph (e)(3)(ii) of this section for
trusses designed for use in Wind Zones
II and III.
(4) For follow-up testing only, the full
dead load may be applied to the top
chord of the truss, when the bottom
chord dead load is 5 psf or less.
(F) In-house quality control program.
The in-house quality control program
must include, at a minimum,
procedures for quality of materials
including, but not limited to, grade(s) of
materials, allowable splits, knots, and
other applicable lumber qualities;
workmanship including, but not limited
to, plate placement and embedment
tolerances; other manufacturing
tolerances; description and calibration
of test equipment; truss re-testing
criteria; and procedures in the event of
noncomplying results.
submit their views electronically should
contact the person identified in the FOR
FURTHER INFORMATION CONTACT section
by telephone for advice on alternatives
to electronic filing.
FOR FURTHER INFORMATION CONTACT:
Stephen L. Sharfman, General Counsel,
at stephen.sharfman@prc.gov or 202–
789–6824.
SUPPLEMENTARY INFORMATION:
Dated: May 4, 2010.
David H. Stevens,
Assistant Secretary for Housing—Federal
Housing Commissioner.
II. Background
[FR Doc. 2010–14277 Filed 6–15–10; 8:45 am]
BILLING CODE 4210–67–P
POSTAL REGULATORY COMMISSION
39 CFR Part 3010
[Docket No. RM2010–9; Order No. 469]
Postal Pricing Methods
Postal Regulatory Commission.
Notice of proposed rulemaking.
AGENCY:
mstockstill on DSKH9S0YB1PROD with PROPOSALS
ACTION:
SUMMARY: The Commission is initiating
an investigation into the methodologies
for estimating volume changes due to
pricing incentive programs. If a change
in analytical principles is warranted, the
Commission may propose a specific
methodology for adoption. This
document announces establishment of a
docket to consider this investigation and
provides an opportunity for public
comment.
DATES: Initial comments are due July 16,
2010. Reply comments are due August
16, 2010.
ADDRESSES: Submit comments
electronically via the Commission’s
Filing Online system at https://
www.prc.gov. Commenters who cannot
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Table of Contents
I. Introduction
II. Background
III. Established Methodology
IV. Methodologies for Estimating Short–Term
Volume Changes
V. Comments
VI. Ordering Paragraphs
I. Introduction
The Commission is initiating this
proceeding to investigate methodologies
for estimating volume changes due to
pricing incentive programs. Upon
consideration of various methodologies,
the Commission may, if a change in
analytical principles is warranted,
propose a specific methodology for
adoption. Initial comments are due 30
days from publication of this notice in
the Federal Register.
In the past year, the Postal Service has
conducted two pricing incentive
programs, and a third program is
scheduled to begin in July. The purpose
of the incentive programs is to generate
new volume and additional revenue.
Rebates are offered to mailers who mail
more pieces than they would mail
without rebates. The first of these
programs occurred in the summer of
2009.1 This program offered rebates of
30 percent to Standard mailers who
increased their volume above the same
period in 2008 (SPLY) adjusted for each
mailer’s volume trend. The Commission
evaluated this program in the recently
issued 2009 Annual Compliance
Determination (2009 ACD). In the 2009
ACD, the Commission noted that the
Postal Service had developed a new
methodology for estimating the
profitability of the program. That
methodology produced an estimated
$24.1 million contribution to
institutional costs, while the
Commission’s traditional estimating
methodology produced a negative
contribution of $36.9 million. The
Commission announced that it would
conduct a rulemaking to ‘‘explore the
1 The second incentive program occurred in the
fall of 2010, and offered rebates of 20 percent to
bulk First–Class mailers. Docket No. R2009–5,
Order Approving First–Class Mail Incentive Pricing
Program, September 16, 2009.
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merits of these alternate
methodologies * * * .’’ 2009 ACD at
88.
On February 26, 2010, the Postal
Service filed notice of another Standard
Mail pricing incentive program. The
Commission established a docket to
consider the incentive program and
appointed a Public Representative.2 The
Public Representative proposed a third
methodology for estimating the
profitability of pricing incentive
programs.3 Another commenter, Robert
W. Mitchell, described several
qualitative adjustments to the
Commission’s established
methodology.4
Estimating the profitability of a
pricing incentive program depends on
accurately estimating what volume of
mail mailers would mail in the absence
of a rebate. Rebates for mail volume that
would have been sent without a rebate
result in a loss of contribution.
However, it is not possible to know
ahead of time what volume a mailer
would have sent without a rebate. The
Commission evaluates the profitability
of rebate programs after the fact by
applying a measure of price sensitivity
(elasticity) to volumes actually mailed
during the rebate program. This method
is described in the next section.
III. Established Methodology
The Commission’s experience with
pricing incentive programs began in
Docket No. MC2002–2.5 The Postal
Service had negotiated declining block
rates with Capital One Services, Inc.
(Capital One). The essential feature of a
declining block rate is that a customer
must purchase a minimum quantity to
be eligible for a reduced rate. The
reduced rate then applies only to
quantity in excess of the minimum. So
long as the reduced rate covers cost, the
additional volume is profitable. This
assumes that the minimum quantity (or
threshold) is set at the quantity the
customer would have purchased at
regular rates.
In fact, the Postal Service cannot
know what a mailer would have mailed
at regular rates. There is always a
possibility that the threshold is set
below the volume the mailer would
have mailed. In this situation, the Postal
Service loses revenue on pieces that
2 Docket No. R2010–3, Notice and Order
Concerning Standard Mail Volume Incentive
Pricing Program, March 2, 2010.
3 Docket No. R2010–3, Comments of the Public
Representatives, March 22, 2010, at 9–10, 15–16.
4 Docket No. R2010–3, Comments of Robert W.
Mitchell on Proposed Summer Sale 2010, March 22,
2010 (Mitchell Comments).
5 Docket No. MC2002–2, Opinion and
Recommended Decision, May 15, 2003; see also
Errata Notice, May 21, 2003.
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Federal Register / Vol. 75, No. 115 / Wednesday, June 16, 2010 / Proposed Rules
would have been mailed at regular rates
but are only charged the reduced rate.
This loss must be accounted for when
calculating the contribution (profit)
earned from the reduced rate. In the
Capital One case, the Postal Service
estimated the additional volume effect
of the volume–based discount provision
of the Capital One NSA using the
analysis of Capital One witness Elliot.6
Elliot’s analysis applied price
elasticities from the Postal Service’s
demand model to the marginal discount.
Elasticity is a measure of the volume
response to a price change. Roughly
speaking, elasticity is the percentage
change in quantity divided by the
percentage change in price. Thus, if the
elasticity, price change, and volume
(either before or after the price change)
are known, the volume change
associated with the price change can be
determined.
Beginning in Docket No. MC2004–3,
the Commission has applied an
elasticity–based approach similar to that
of witness Elliot for estimating the effect
of volume–based discounts both before
implementation, and based on after–
the–fact analysis of actual results.7 The
Commission described the accepted
analytical principle for this type of
analysis as ‘‘the analytical principle that
the financial impact of price incentives
to increase mail volume or to shift mail
volume between products should be
based on the Postal Service’s best
estimate of the price elasticity of the
discounted product.’’8
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IV. Methodologies for Estimating Short–
Term Volume Changes
In evaluating pricing initiatives that
apply to multiple eligible mailers, the
elasticity–based approach can be
applied to each discounted mailer’s
actual volume to determine its before–
rates volume. The discounts on all
pieces up to the mailer’s before–rates
volume (leakage) are then subtracted
from the contribution of the increased
volume that results from the discount
incentive. Since this approach is
dependent on the after–rates volume, it
is most readily applied ex post, when
the actual after–rates volumes is known.
Nevertheless, it can also be used to
estimate a range of potential effects ex
ante by applying the same approach to
a range of potential after–rates volumes.
6 Direct Testimony of Stuart Elliott (COS–T–2) on
Behalf of Capital One Services, Inc., September 19,
2002.
7 Docket No. MC2004–3, Opinion and Further
Recommended Decision, April 21, 2006 at 21–38.
8 Docket No. RM2008–4, Notice of Proposed
Rulemaking Prescribing Form and Content of
Periodic Reports, August 22, 2008, at 9, citing 2007
Annual Compliance Determination, March 27,
2008, at 127.
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An elasticity–based approach has
many advantages, not the least of which
is that price elasticities implicitly
control for all other variables that affect
volume. Therefore, other exogenous
variables that cause changes in volume
are held constant, thus isolating the
volume generated in response to the
discount from the volume change due to
all other factors. The most significant
weakness is the difficultly of identifying
the price elasticity that applies to the
specific details of the pricing initiative
in question. While the Postal Service
develops price elasticities annually as
part of its demand analysis, they are not
perfectly suited to the analysis of the
Postal Service’s volume–based pricing
initiatives. These initiatives have been
generally shorter in duration, larger in
magnitude, and more narrowly focused
in terms of mailer eligibility than the
historical price changes from which the
elasticities in the Postal Service’s
demand analysis are estimated.
Commenting on the 2010 summer
initiative, Robert Mitchell discussed
several ways in which a mailer’s
response to temporary volume–based
discounts that are available to both a
few mailers or one mailer might not be
properly modeled with long–term
elasticity estimates like the Postal
Service’s. He identified four factors that
would suggest a potentially smaller
volume response than the Postal
Service’s demand analysis elasticities
would indicate. These are the temporary
nature of the discounts (which might
preclude mailer investments), the
potential lag in response to the
discount, the absence of mailers
entering and leaving the market, and a
mailer’s uncertainty as to whether it
will reach the discount threshold. He
also explained that if the discount is not
available to a mailer’s competitors, the
response might be greater than indicated
by the market elasticity. Mitchell
Comments at 4–6.
Postal Service method. In its data
collection report for the 2009 Standard
Mail pricing incentive, the Postal
Service presented a new method for
estimating the portion of the discounted
volume that would have been sent in
the absence of the discount. It
calculated a ‘‘spring threshold’’ for each
mailer using the same trend used to
develop the summer thresholds for
discount eligibility. After calculating the
difference between the actual spring
2009 volume and the spring 2009
threshold for each mailer, the sum of
these differences for the mailers with
actual volume above the threshold was
divided by actual spring 2008 volume
for all participating customers. The 7.07
percent result was referred to as ‘‘loyalty
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34075
growth’’ by the Postal Service. This
percentage was then multiplied by the
total actual (after–rates) summer 2009
volume sent by participating customers
to estimate ‘‘loyalty growth’’ volume for
the 2009 pricing initiative.9 As the
source of revenue leakage (discounts
paid on before–rates volume), the
volume identified as ‘‘loyalty growth’’ is
roughly analogous to ‘‘anyhow’’ volume,
i.e., volume that would have been
mailed absent the discount.
The Postal Service’s method attempts
to control for non–price factors that
affect volume by assuming that the
extent of above–trend volume growth
that occurred in the period immediately
preceding the discount period also
occurred during the discount period.
Because the above–trend growth
occurred in the absence of the discount
incentive, this volume is deemed to be
unrelated to the incentive.
The Postal Service also used a
variation of this approach in its
development of a forward–looking
estimate of anyhow volume in its 2010
summer pricing initiative. It applied the
7.07 percent from the 2009 initiative to
the aggregate SPLY (summer 2009)
volume of mailers expected to
participate in the 2010 initiative.10 As a
practical matter, since volume data for
the period immediately preceding a
discount period are not available in
advance, the application of the Postal
Service’s ‘‘spring threshold’’ approach in
an ex ante analysis requires the use of
a ‘‘loyalty growth’’ factor developed from
a previous initiative.
Some of the details of the application
of this methodology by the Postal
Service raise potential questions that
should be explored in this case. For
example, the 7.07 percent ‘‘loyalty
growth’’ was developed as a percentage
of SPLY volumes (the period exactly 1
year prior to the discount period) and,
for the 2010 initiative, was applied to
SPLY volumes to produce the ex ante
estimate of discounted volume
attributable to exogenous (non–price)
factors. In contrast, the 7.07 percent was
applied to actual after–rates volume sent
during the discount period, rather than
SPLY, to produce the ex post estimate
of ‘‘loyalty growth’’ from the 2009
initiative.
Public Representatives’ method. The
decision to apply the trend–based
approach collectively to aggregate
volumes sent by participants, instead of
9 Docket No. ACR2009, Responses of the United
States Postal Service to Questions 1–5 of
Chairman’s Information Request No. 8, March 8,
2010, questions 1 and 2.
10 Docket No. R2010–3, Response of the United
States Postal Service to Chairman’s Information
Request No. 1, March 16, 2010, questions 1 and 3.
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Federal Register / Vol. 75, No. 115 / Wednesday, June 16, 2010 / Proposed Rules
on a mailer–by–mailer basis, was
identified as an issue by the Public
Representatives in the review of the
2010 initiative.11 In their comments,
they presented a variation of the trend–
based approach to estimate the ‘‘loyalty
growth’’ from participants in the 2009
initiative.12 While the Postal Service’s
method was applied to aggregate
participant volumes, the Public
Representatives applied the same
method to individual mailer data. For
each participant that earned discounts,
if the mailer’s actual spring 2009
volume exceeded that of its trend–based
‘‘spring threshold,’’ the difference was
divided by the mailer’s actual spring
2008 volume. The resulting percentage
(equivalent to the Postal Service’s 7.07
percent, but unique to each mailer) was
multiplied by that mailer’s actual
summer 2009 volume to estimate the
amount of anyhow volume. Id. at 8–10.
Because of the wide variation in the
volume patterns of individual
participants, the disaggregated
application of the trend–based approach
yielded results very different from the
aggregated method. Whereas the Postal
Service estimated a relatively low
amount of revenue leakage from
discounts on mail that would have been
sent absent the incentive, the Public
Representatives’ disaggregated method
estimated a larger revenue leakage and
a correspondingly smaller amount of
contribution from new mail. As a result,
the estimated net increase in
contribution was nearly 90 percent less
than the Postal Service’s estimate.13
V. Comments
The Commission invites comments
from interested persons on the volume–
estimating methodologies to be used in
connection with pricing incentive
programs. The Commission also invites
interested persons to propose other
methodologies for estimating the new
volume caused by pricing incentive
programs and alternative estimates of
price elasticity for use in evaluating
these programs.14
Initial comments are due 30 days after
publication of this notice in the Federal
Register. Reply comments, if any, are
due 60 days after publication of this
notice in the Federal Register. The
Commission will evaluate comments
and, if appropriate, propose a new
methodology for estimating volume
changes due to pricing incentive
programs. Interested persons will be
provided an opportunity to comment on
any such proposal.
John P. Klingenberg is appointed to
represent the interests of the general
public in this proceeding.
VI. Ordering Paragraphs
It is ordered:
1. The Commission establishes Docket
No. RM2010–9 to consider volume–
estimation methodologies for pricing
incentive programs.
2. Comments by interested parties are
due 30 days after publication of this
notice in the Federal Register. Reply
comments are due 60 days after
publication of this notice in the Federal
Register.
3. Pursuant to 39 U.S.C. 505, John P.
Klingenberg is appointed to serve as the
officer of the Commission (Public
Representative) to represent the
interests of the general public in these
proceedings.
4. The Secretary of the Commission
shall arrange for publication of this
notice in the Federal Register.
By the Commission.
Shoshana M. Grove,
Secretary.
[FR Doc. 2010–14483 Filed 6–15–10; 8:45 am]
BILLING CODE 7710–FW–S
ENVIRONMENTAL PROTECTION
AGENCY
40 CFR Part 761
[EPA–HQ–OPPT–2009–0757; FRL–8831–8]
mstockstill on DSKH9S0YB1PROD with PROPOSALS
11 Docket
No. R2010–3, Comments of Public
Representatives, March 22, 2010, at 15–17.
12 The Public Representatives did not present an
application of this trend–based approach to an ex
ante analysis of the 2010 initiative in the manner
that the Postal Service applied its aggregate 2009
‘‘loyalty growth’’ rate (7.07 percent) to the 2010
initiative. The Public Representatives’ estimated net
impact of the 2010 initiative on Postal Service
finances was instead based on an analysis of
historical distribution of annual mailer volume
growth rates.
13 The Public Representatives also stated that
because volume growth in the period after the sale
exceeded the volume growth during the sale period,
a ‘‘fall threshold’’ (as opposed to ‘‘spring threshold’’),
trend–based approach would lead to the conclusion
that all of the discounted volume was anyhow
volume. Using this method, the initiative generated
net contribution losses equal to the sum of
discounts awarded ($67.9 million). Id. at 9.
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RIN 2070–AJ38
Polychlorinated Biphenyls (PCBs);
Reassessment of Use Authorizations;
Extension of Comment Period and
Additional Public Meetings
AGENCY: Environmental Protection
Agency (EPA).
14 The Commission has required the Postal
Service to provide panel data on the results of each
pricing initiative. This data should allow for
improved understanding of mailers’ reactions to
these incentive programs, including quantified
measures of the response such as price elasticity.
See, e.g., Docket No. R2010–3, Order Approving
Standard Mail Volume Incentive Pricing Program,
April 7, 2010, at 23–24.
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ACTION: Advance notice of proposed
rulemaking; extension of comment
period and additional public meetings.
SUMMARY: EPA issued an advance notice
of proposed rulemaking (ANPRM) in the
Federal Register of April 7, 2010,
concerning the reassessment of the use
authorizations for PCBs. This document
extends the comment period for 45
days, from July 6, 2010, to August 20,
2010. This extension is necessary to
provide the public with an opportunity
to provide additional and more
thorough comments. Also, EPA is
holding two additional public meetings
to enable additional public comment on
the ANPRM during the comment period
extension.
DATES: Comments, identified by docket
identification (ID) number EPA–HQ–
OPPT–2009–0757, must be received on
or before August 20, 2010.
Meetings will be held on July 22,
2010, from 9 a.m. until the last speaker
has spoken or until 1 p.m., in San
Francisco, CA and on July 29, 2010,
from 6 p.m. to 9 p.m., in New York, NY.
Requests to participate in a meeting
must be received 10 days prior to the
date of the meeting.
To request accommodation of a
disability, please contact the technical
person listed under FOR FURTHER
INFORMATON CONTACT, preferably at least
10 days prior to the meeting, to give
EPA as much time as possible to process
your request.
ADDRESSES: Follow the detailed
instructions as provided under
ADDRESSES in the Federal Register
document of April 7, 2010, for
submission of comments.
The July 22, 2010 meeting will held
in the Hawaii/Palau Room, First Floor
Conference Room, 75 Hawthorne St.,
San Francisco, CA 94105 and the July
29, 2010 meeting will be held in the
Empire Room at the Hilton Times
Square, 234 West 42nd St., New York,
NY 10036. Requests to participate in the
meeting, identified by docket ID number
EPA–HQ–OPPT–2009–0757, may be
submitted to the technical person listed
under FOR FURTHER INFORMATION
CONTACT.
FOR FURTHER INFORMATION CONTACT: For
technical information contact: John H.
Smith, National Program Chemicals
Division, Office of Pollution Prevention
and Toxics, Environmental Protection
Agency, 1200 Pennsylvania Ave., NW.,
Washington, DC 20460–0001; telephone
number: (202) 566–0512; e-mail address:
smith.johnh@epa.gov.
For general information contact: The
TSCA-Hotline, ABVI-Goodwill, 422
South Clinton Ave., Rochester, NY
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]]>Agencies
[Federal Register Volume 75, Number 115 (Wednesday, June 16, 2010)]
[Proposed Rules]
[Pages 34074-34076]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-14483]
=======================================================================
-----------------------------------------------------------------------
POSTAL REGULATORY COMMISSION
39 CFR Part 3010
[Docket No. RM2010-9; Order No. 469]
Postal Pricing Methods
AGENCY: Postal Regulatory Commission.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: The Commission is initiating an investigation into the
methodologies for estimating volume changes due to pricing incentive
programs. If a change in analytical principles is warranted, the
Commission may propose a specific methodology for adoption. This
document announces establishment of a docket to consider this
investigation and provides an opportunity for public comment.
DATES: Initial comments are due July 16, 2010. Reply comments are due
August 16, 2010.
ADDRESSES: Submit comments electronically via the Commission's Filing
Online system at https://www.prc.gov. Commenters who cannot submit their
views electronically should contact the person identified in the FOR
FURTHER INFORMATION CONTACT section by telephone for advice on
alternatives to electronic filing.
FOR FURTHER INFORMATION CONTACT: Stephen L. Sharfman, General Counsel,
at stephen.sharfman@prc.gov or 202-789-6824.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
II. Background
III. Established Methodology
IV. Methodologies for Estimating Short-Term Volume Changes
V. Comments
VI. Ordering Paragraphs
I. Introduction
The Commission is initiating this proceeding to investigate
methodologies for estimating volume changes due to pricing incentive
programs. Upon consideration of various methodologies, the Commission
may, if a change in analytical principles is warranted, propose a
specific methodology for adoption. Initial comments are due 30 days
from publication of this notice in the Federal Register.
II. Background
In the past year, the Postal Service has conducted two pricing
incentive programs, and a third program is scheduled to begin in July.
The purpose of the incentive programs is to generate new volume and
additional revenue. Rebates are offered to mailers who mail more pieces
than they would mail without rebates. The first of these programs
occurred in the summer of 2009.\1\ This program offered rebates of 30
percent to Standard mailers who increased their volume above the same
period in 2008 (SPLY) adjusted for each mailer's volume trend. The
Commission evaluated this program in the recently issued 2009 Annual
Compliance Determination (2009 ACD). In the 2009 ACD, the Commission
noted that the Postal Service had developed a new methodology for
estimating the profitability of the program. That methodology produced
an estimated $24.1 million contribution to institutional costs, while
the Commission's traditional estimating methodology produced a negative
contribution of $36.9 million. The Commission announced that it would
conduct a rulemaking to ``explore the merits of these alternate
methodologies * * * .'' 2009 ACD at 88.
---------------------------------------------------------------------------
\1\ The second incentive program occurred in the fall of 2010,
and offered rebates of 20 percent to bulk First-Class mailers.
Docket No. R2009-5, Order Approving First-Class Mail Incentive
Pricing Program, September 16, 2009.
---------------------------------------------------------------------------
On February 26, 2010, the Postal Service filed notice of another
Standard Mail pricing incentive program. The Commission established a
docket to consider the incentive program and appointed a Public
Representative.\2\ The Public Representative proposed a third
methodology for estimating the profitability of pricing incentive
programs.\3\ Another commenter, Robert W. Mitchell, described several
qualitative adjustments to the Commission's established methodology.\4\
---------------------------------------------------------------------------
\2\ Docket No. R2010-3, Notice and Order Concerning Standard
Mail Volume Incentive Pricing Program, March 2, 2010.
\3\ Docket No. R2010-3, Comments of the Public Representatives,
March 22, 2010, at 9-10, 15-16.
\4\ Docket No. R2010-3, Comments of Robert W. Mitchell on
Proposed Summer Sale 2010, March 22, 2010 (Mitchell Comments).
---------------------------------------------------------------------------
Estimating the profitability of a pricing incentive program depends
on accurately estimating what volume of mail mailers would mail in the
absence of a rebate. Rebates for mail volume that would have been sent
without a rebate result in a loss of contribution. However, it is not
possible to know ahead of time what volume a mailer would have sent
without a rebate. The Commission evaluates the profitability of rebate
programs after the fact by applying a measure of price sensitivity
(elasticity) to volumes actually mailed during the rebate program. This
method is described in the next section.
III. Established Methodology
The Commission's experience with pricing incentive programs began
in Docket No. MC2002-2.\5\ The Postal Service had negotiated declining
block rates with Capital One Services, Inc. (Capital One). The
essential feature of a declining block rate is that a customer must
purchase a minimum quantity to be eligible for a reduced rate. The
reduced rate then applies only to quantity in excess of the minimum. So
long as the reduced rate covers cost, the additional volume is
profitable. This assumes that the minimum quantity (or threshold) is
set at the quantity the customer would have purchased at regular rates.
---------------------------------------------------------------------------
\5\ Docket No. MC2002-2, Opinion and Recommended Decision, May
15, 2003; see also Errata Notice, May 21, 2003.
---------------------------------------------------------------------------
In fact, the Postal Service cannot know what a mailer would have
mailed at regular rates. There is always a possibility that the
threshold is set below the volume the mailer would have mailed. In this
situation, the Postal Service loses revenue on pieces that
[[Page 34075]]
would have been mailed at regular rates but are only charged the
reduced rate. This loss must be accounted for when calculating the
contribution (profit) earned from the reduced rate. In the Capital One
case, the Postal Service estimated the additional volume effect of the
volume-based discount provision of the Capital One NSA using the
analysis of Capital One witness Elliot.\6\ Elliot's analysis applied
price elasticities from the Postal Service's demand model to the
marginal discount.
---------------------------------------------------------------------------
\6\ Direct Testimony of Stuart Elliott (COS-T-2) on Behalf of
Capital One Services, Inc., September 19, 2002.
---------------------------------------------------------------------------
Elasticity is a measure of the volume response to a price change.
Roughly speaking, elasticity is the percentage change in quantity
divided by the percentage change in price. Thus, if the elasticity,
price change, and volume (either before or after the price change) are
known, the volume change associated with the price change can be
determined.
Beginning in Docket No. MC2004-3, the Commission has applied an
elasticity-based approach similar to that of witness Elliot for
estimating the effect of volume-based discounts both before
implementation, and based on after-the-fact analysis of actual
results.\7\ The Commission described the accepted analytical principle
for this type of analysis as ``the analytical principle that the
financial impact of price incentives to increase mail volume or to
shift mail volume between products should be based on the Postal
Service's best estimate of the price elasticity of the discounted
product.''\8\
---------------------------------------------------------------------------
\7\ Docket No. MC2004-3, Opinion and Further Recommended
Decision, April 21, 2006 at 21-38.
\8\ Docket No. RM2008-4, Notice of Proposed Rulemaking
Prescribing Form and Content of Periodic Reports, August 22, 2008,
at 9, citing 2007 Annual Compliance Determination, March 27, 2008,
at 127.
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IV. Methodologies for Estimating Short-Term Volume Changes
In evaluating pricing initiatives that apply to multiple eligible
mailers, the elasticity-based approach can be applied to each
discounted mailer's actual volume to determine its before-rates volume.
The discounts on all pieces up to the mailer's before-rates volume
(leakage) are then subtracted from the contribution of the increased
volume that results from the discount incentive. Since this approach is
dependent on the after-rates volume, it is most readily applied ex
post, when the actual after-rates volumes is known. Nevertheless, it
can also be used to estimate a range of potential effects ex ante by
applying the same approach to a range of potential after-rates volumes.
An elasticity-based approach has many advantages, not the least of
which is that price elasticities implicitly control for all other
variables that affect volume. Therefore, other exogenous variables that
cause changes in volume are held constant, thus isolating the volume
generated in response to the discount from the volume change due to all
other factors. The most significant weakness is the difficultly of
identifying the price elasticity that applies to the specific details
of the pricing initiative in question. While the Postal Service
develops price elasticities annually as part of its demand analysis,
they are not perfectly suited to the analysis of the Postal Service's
volume-based pricing initiatives. These initiatives have been generally
shorter in duration, larger in magnitude, and more narrowly focused in
terms of mailer eligibility than the historical price changes from
which the elasticities in the Postal Service's demand analysis are
estimated.
Commenting on the 2010 summer initiative, Robert Mitchell discussed
several ways in which a mailer's response to temporary volume-based
discounts that are available to both a few mailers or one mailer might
not be properly modeled with long-term elasticity estimates like the
Postal Service's. He identified four factors that would suggest a
potentially smaller volume response than the Postal Service's demand
analysis elasticities would indicate. These are the temporary nature of
the discounts (which might preclude mailer investments), the potential
lag in response to the discount, the absence of mailers entering and
leaving the market, and a mailer's uncertainty as to whether it will
reach the discount threshold. He also explained that if the discount is
not available to a mailer's competitors, the response might be greater
than indicated by the market elasticity. Mitchell Comments at 4-6.
Postal Service method. In its data collection report for the 2009
Standard Mail pricing incentive, the Postal Service presented a new
method for estimating the portion of the discounted volume that would
have been sent in the absence of the discount. It calculated a ``spring
threshold'' for each mailer using the same trend used to develop the
summer thresholds for discount eligibility. After calculating the
difference between the actual spring 2009 volume and the spring 2009
threshold for each mailer, the sum of these differences for the mailers
with actual volume above the threshold was divided by actual spring
2008 volume for all participating customers. The 7.07 percent result
was referred to as ``loyalty growth'' by the Postal Service. This
percentage was then multiplied by the total actual (after-rates) summer
2009 volume sent by participating customers to estimate ``loyalty
growth'' volume for the 2009 pricing initiative.\9\ As the source of
revenue leakage (discounts paid on before-rates volume), the volume
identified as ``loyalty growth'' is roughly analogous to ``anyhow''
volume, i.e., volume that would have been mailed absent the discount.
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\9\ Docket No. ACR2009, Responses of the United States Postal
Service to Questions 1-5 of Chairman's Information Request No. 8,
March 8, 2010, questions 1 and 2.
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The Postal Service's method attempts to control for non-price
factors that affect volume by assuming that the extent of above-trend
volume growth that occurred in the period immediately preceding the
discount period also occurred during the discount period. Because the
above-trend growth occurred in the absence of the discount incentive,
this volume is deemed to be unrelated to the incentive.
The Postal Service also used a variation of this approach in its
development of a forward-looking estimate of anyhow volume in its 2010
summer pricing initiative. It applied the 7.07 percent from the 2009
initiative to the aggregate SPLY (summer 2009) volume of mailers
expected to participate in the 2010 initiative.\10\ As a practical
matter, since volume data for the period immediately preceding a
discount period are not available in advance, the application of the
Postal Service's ``spring threshold'' approach in an ex ante analysis
requires the use of a ``loyalty growth'' factor developed from a
previous initiative.
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\10\ Docket No. R2010-3, Response of the United States Postal
Service to Chairman's Information Request No. 1, March 16, 2010,
questions 1 and 3.
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Some of the details of the application of this methodology by the
Postal Service raise potential questions that should be explored in
this case. For example, the 7.07 percent ``loyalty growth'' was
developed as a percentage of SPLY volumes (the period exactly 1 year
prior to the discount period) and, for the 2010 initiative, was applied
to SPLY volumes to produce the ex ante estimate of discounted volume
attributable to exogenous (non-price) factors. In contrast, the 7.07
percent was applied to actual after-rates volume sent during the
discount period, rather than SPLY, to produce the ex post estimate of
``loyalty growth'' from the 2009 initiative.
Public Representatives' method. The decision to apply the trend-
based approach collectively to aggregate volumes sent by participants,
instead of
[[Page 34076]]
on a mailer-by-mailer basis, was identified as an issue by the Public
Representatives in the review of the 2010 initiative.\11\ In their
comments, they presented a variation of the trend-based approach to
estimate the ``loyalty growth'' from participants in the 2009
initiative.\12\ While the Postal Service's method was applied to
aggregate participant volumes, the Public Representatives applied the
same method to individual mailer data. For each participant that earned
discounts, if the mailer's actual spring 2009 volume exceeded that of
its trend-based ``spring threshold,'' the difference was divided by the
mailer's actual spring 2008 volume. The resulting percentage
(equivalent to the Postal Service's 7.07 percent, but unique to each
mailer) was multiplied by that mailer's actual summer 2009 volume to
estimate the amount of anyhow volume. Id. at 8-10.
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\11\ Docket No. R2010-3, Comments of Public Representatives,
March 22, 2010, at 15-17.
\12\ The Public Representatives did not present an application
of this trend-based approach to an ex ante analysis of the 2010
initiative in the manner that the Postal Service applied its
aggregate 2009 ``loyalty growth'' rate (7.07 percent) to the 2010
initiative. The Public Representatives' estimated net impact of the
2010 initiative on Postal Service finances was instead based on an
analysis of historical distribution of annual mailer volume growth
rates.
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Because of the wide variation in the volume patterns of individual
participants, the disaggregated application of the trend-based approach
yielded results very different from the aggregated method. Whereas the
Postal Service estimated a relatively low amount of revenue leakage
from discounts on mail that would have been sent absent the incentive,
the Public Representatives' disaggregated method estimated a larger
revenue leakage and a correspondingly smaller amount of contribution
from new mail. As a result, the estimated net increase in contribution
was nearly 90 percent less than the Postal Service's estimate.\13\
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\13\ The Public Representatives also stated that because volume
growth in the period after the sale exceeded the volume growth
during the sale period, a ``fall threshold'' (as opposed to ``spring
threshold''), trend-based approach would lead to the conclusion that
all of the discounted volume was anyhow volume. Using this method,
the initiative generated net contribution losses equal to the sum of
discounts awarded ($67.9 million). Id. at 9.
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V. Comments
The Commission invites comments from interested persons on the
volume-estimating methodologies to be used in connection with pricing
incentive programs. The Commission also invites interested persons to
propose other methodologies for estimating the new volume caused by
pricing incentive programs and alternative estimates of price
elasticity for use in evaluating these programs.\14\
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\14\ The Commission has required the Postal Service to provide
panel data on the results of each pricing initiative. This data
should allow for improved understanding of mailers' reactions to
these incentive programs, including quantified measures of the
response such as price elasticity. See, e.g., Docket No. R2010-3,
Order Approving Standard Mail Volume Incentive Pricing Program,
April 7, 2010, at 23-24.
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Initial comments are due 30 days after publication of this notice
in the Federal Register. Reply comments, if any, are due 60 days after
publication of this notice in the Federal Register. The Commission will
evaluate comments and, if appropriate, propose a new methodology for
estimating volume changes due to pricing incentive programs. Interested
persons will be provided an opportunity to comment on any such
proposal.
John P. Klingenberg is appointed to represent the interests of the
general public in this proceeding.
VI. Ordering Paragraphs
It is ordered:
1. The Commission establishes Docket No. RM2010-9 to consider
volume-estimation methodologies for pricing incentive programs.
2. Comments by interested parties are due 30 days after publication
of this notice in the Federal Register. Reply comments are due 60 days
after publication of this notice in the Federal Register.
3. Pursuant to 39 U.S.C. 505, John P. Klingenberg is appointed to
serve as the officer of the Commission (Public Representative) to
represent the interests of the general public in these proceedings.
4. The Secretary of the Commission shall arrange for publication of
this notice in the Federal Register.
By the Commission.
Shoshana M. Grove,
Secretary.
[FR Doc. 2010-14483 Filed 6-15-10; 8:45 am]
BILLING CODE 7710-FW-S
