System for Regulating Market Dominant Rates and Classifications, 58280-58328 [2017-26307]

Download as PDF 58280 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules POSTAL REGULATORY COMMISSION 39 CFR Parts 3010, 3020, 3050, and 3055 [Docket No. RM2017–3; Order No. 4258] System for Regulating Market Dominant Rates and Classifications Postal Regulatory Commission. Proposed rule. AGENCY: ACTION: The Commission is proposing rules related to the current system of regulating rates and classes for market dominant products. Proposed rules are the result of a Commission statutory review wherein the Commission was required to review whether the system was achieving the objectives, taking into account the factors, established by Congress under the Postal Accountability and Enhancement Act of 2006. This notice informs the public of the proposed rules, invites public comment, and takes other administrative steps. DATES: Comments are due: March 1, 2018; Reply Comments are due: March 30, 2018. FOR FURTHER INFORMATION CONTACT: David A. Trissell, General Counsel, at 202–789–6820. SUPPLEMENTARY INFORMATION: SUMMARY: Table of Contents I. Introduction and Procedural History II. Statutory Authority III. Proposed Regulatory Changes IV. Description of Proposed Changes to Rules Appearing in the Code of Federal Regulations V. Administrative Actions VI. Ordering Paragraphs daltland on DSKBBV9HB2PROD with PROPOSALS I. Introduction and Procedural History Pursuant to 39 U.S.C. 3622(d)(3), 10 years after the enactment of the Postal Accountability and Enhancement Act (PAEA),1 the Commission was required to initiate a review of the system for regulating rates and classes for market dominant products to determine if the ratemaking system has achieved the objectives of 39 U.S.C. 3622(b), taking into account the factors enumerated in 39 U.S.C. 3622(c). On December 20, 2016, the Commission initiated its review by issuing an advance notice of proposed rulemaking (ANPR).2 The ANPR 1 Postal Accountability and Enhancement Act (PAEA), Public Law 109–435, 120 Stat. 3198 (2006). 2 Advance Notice of Proposed Rulemaking on the Statutory Review of the System for Regulating Rates and Classes for Market Dominant Products, VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 established a framework for the review, appointed an officer of the Commission to represent the interests of the general public, and provided an opportunity for public comment. On December 1, 2017, the Commission issued its findings concerning the review.3 The findings are based on the Commission’s review of the system’s performance during the 10 years following the passage of the PAEA with full consideration of comments received on topics relevant to the review. In short, based on its review of whether the existing ratemaking system has achieved the objectives of 39 U.S.C. 3622(b), taking into account the factors enumerated in 39 U.S.C. 3622(c), the Commission finds the system has not achieved the objectives of the PAEA. Order No. 4257 at 275. Since the review concludes that the system for regulating rates and classes has not achieved the objectives, taking into account the factors, the Commission is initiating the instant rulemaking. The purpose of this rulemaking is to propose such modifications to existing regulations or adopt such an alternative system through new regulations that the Commission deems necessary to achieve the objectives of 39 U.S.C. 3622(b). As explained more fully below, 39 U.S.C. 3622(d)(3) authorizes this rulemaking for the purpose of modifying existing regulations or adopting an alternative system as necessary to meet the objectives. The Commission also has standing authority to revise the existing system for regulating rates and classes as necessary. 39 U.S.C. 3622(a). Additionally, the Commission has general authority to promulgate rules and regulations, establish procedures, and take any other action deemed necessary and proper to carry out its functions and obligations, as prescribed under title 39 of the United States Code. 39 U.S.C. 503. This rulemaking proposes changes to title 39 of the Code of Federal Regulations. The rules in 39 CFR part 3010, subparts A, B, C, and E (existing §§ 3010.1 et seq., 3010.10 et seq., 3010.20 et seq., and 3010.60 et seq.) are replaced in their entirety by new rules in new subparts A, B, C, D, E, F, G, H, and I (proposed §§ 3010.100 et seq., 3010.120 et seq., 3010.140 et seq., 3010.160 et seq., 3010.180 et seq., 3010.200 et seq., 3010.220 et seq., 3010.240 et seq., and 3010.260 et seq.). December 20, 2016 (Order No. 3673); see also 81 FR 95071 (December 27, 2016) (to be codified at 39 CFR parts 3010 and 3020). 3 Order on the Findings and Determination of the 39 U.S.C. 3622 Review, December 1, 2017 (Order No. 4257). PO 00000 Frm 00002 Fmt 4701 Sfmt 4702 Rules specific to negotiated service agreements (NSAs) appearing in 39 CFR part 3010, subpart D (existing § 3010.40 et seq.) are moved to new 39 CFR part 3020, subpart G (proposed § 3020.120 et seq.). Minor changes are proposed in existing §§ 3050.20(c) and 3055.2(c). The proposed rules appear after the signature of this Order in Attachment A. The next step in this rulemaking process is critical to the Commission’s responsibility under the PAEA—seeking informed community participation and insight. The Commission has implemented a robust comment and reply period designed to elicit sound criticism of, concurrence with, or alternatives to the Commission’s proposed approach. II. Statutory Authority A. Introduction Section 3622(d)(3) of title 39 of the United States Code directs the Commission to conduct a review of the market dominant ratemaking system 10 years after the enactment of the PAEA in order to determine whether the system is achieving the objectives enumerated at 39 U.S.C. 3622(b), taking into account the factors enumerated at 39 U.S.C. 3622(c). This provision prescribes a two-step process. First, the Commission must determine whether the current ratemaking system is achieving the PAEA’s objectives, taking into account its factors. [The text of 39 U.S.C. 3622(d)(3) was removed to comply with the Federal Register Document Drafting Handbook, section 2.6. See 39 U.S.C. 3622(d)(3).]. The Commission completed the first step of this process on December 1, 2017, when it issued an order announcing its findings with regard to the current ratemaking system. See Order No. 4257. The Commission specifically determined that the ratemaking system has not achieved the objectives, taking into account the factors. Id. at 275. The Commission now proceeds to the second step of the process established by section 3622(d)(3). This provision authorizes the Commission to promulgate rules either modifying the current ratemaking system or adopting an alternative ratemaking system, ‘‘as necessary to achieve the objectives.’’ [The text of 39 U.S.C. 3622(d)(3) was removed to comply with the Federal Register Document Drafting Handbook, section 2.6. See 39 U.S.C. 3622(d)(3).]. The Commission interprets this provision as providing broad authority to make changes to the market dominant ratemaking system. The authority to make changes to the system provided by E:\FR\FM\11DEP2.SGM 11DEP2 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules section 3622(d)(3) expands upon the statutory authority provided by section 3622(a). [The text of 39 U.S.C. 3622(a) was removed to comply with the Federal Register Document Drafting Handbook, section 2.6. See 39 U.S.C. 3622(a).]. Finally, the Commission has general authority, pursuant to section 503, to promulgate rules and regulations and establish procedures. [The text of 39 U.S.C. 503 was removed to comply with the Federal Register Document Drafting Handbook, section 2.6. See 39 U.S.C. 503.]. B. Comments The comments received in response to the ANPR that discuss the Commission’s rulemaking authority primarily focus on two aspects of that authority pursuant to section 3622(d)(3): The authority to eliminate or modify the price cap and the authority to modify workshare discount provisions. The Appendix to this Order provides a list of commenters and citations to the comments filed in this docket in response to Order No. 3673. daltland on DSKBBV9HB2PROD with PROPOSALS 1. Authority To Eliminate or Modify the Price Cap a. Plain Language With regard to the price cap, multiple commenters take the position that the plain language of 39 U.S.C. 3622 constrains the Commission’s ability to eliminate, modify, or replace the price cap. ANM et al. contend that the mandatory ‘‘shall’’ language used by Congress in establishing the consumer price index (CPI) price cap and its central role in the PAEA ratemaking scheme forecloses any claim that the statute makes the price cap merely optional.4 Commenters also advance a number of structural arguments for why section 3622 precludes any changes to the price cap. ANM et al., MMA et al., and GCA all assert that the scope of section 3622(d)(3) is limited by the title of section 3622(d)—‘‘Requirements.’’ 5 ABA focuses on the use of the word ‘‘system’’ throughout section 3622, arguing that ‘‘the consistent use of the word ‘system’ throughout the section, rather than qualifiers such as ‘first system’ or ‘initial system’ or ‘system preceding the 10 year review,’ suggests Congress contemplated the same 4 ANM et al. Comments at 9–10 n.2 (asserting that the Commission lacks authority to substantially modify the price cap) (citing ANM et al., Limitations on the Commission’s Authority Under Section 3622(d)(3), October 28, 2014, at 6 (ANM et al. 2014 White Paper)). 5 ANM et al. 2014 White Paper at 4–7; MMA et al. Comments at 14–15; GCA Comments at 29–31. VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 requirements applying to any and all rate structures the Commission would create.’’ ABA Comments at 8–10. GCA focuses on the use of the phrase ‘‘requirement,’’ arguing that ‘‘[w]hen a particular phrase is used repeatedly in the same enactment, it is customary to give it the same meaning each time it appears . . . [which] suggests that . . . if a feature of the existing system is present because [section] 3622(d) makes it a ‘requirement,’ then it must remain in any modified or alternative system which emerges from the tenth-year review.’’ 6 Other commenters focus on the purported primacy of quantitative pricing standards over other provisions of the PAEA. ANM et al. and MMA et al. assert that three quantitative pricing standards rest at the top of the hierarchy of PAEA provisions—the CPI–U based price cap imposed by section 3622(d)(1)(A) and (d)(2); the workshare discount provisions imposed by section 3622(e); and the constraints on rate relationships between regular and preferred mail imposed by section 3626—and that the objectives and factors enumerated in section 3622(b) and (c) are subordinate to these quantitative pricing standards.7 MMA et al. posit that because Congress created the objectives and factors at the same time as the price cap, it must be concluded that only a system utilizing the price cap can achieve the objectives and factors. MMA et al. Comments at 15–16. Similarly, GCA asserts that both section 3622(a) and section 3622(d)(3) are supposed to effectuate the objectives and factors, so Congress must have concluded that the price cap was necessary to effectuate the objectives and factors. GCA Comments at 30–31. ANM et al. assert that under general canons of statutory construction, specific provisions, such as the price cap provision at section 3622(d)(1)(A), trump general provisions, such as section 3622(d)(3).8 Finally, these commenters highlight prior instances where the Commission is alleged to have ratified this view. ABA cites a prior order by the Commission where the Commission observed that ‘‘the role of the price cap is central to ratemaking, and the integrity of the price cap is indispensable if the incentive to reduce 6 GCA Comments at 30 (citing Ratzlaf v. United States, 510 U.S. 135, 143 (1994)). 7 ANM et al. 2014 White Paper at 12; MMA et al. Comments at 15–16. 8 ANM et al. 2014 White Paper at 15 (citing Navarro-Miranda v. Ashcroft, 330 F.3d 672, 676 (5th Cir. 2003)). PO 00000 Frm 00003 Fmt 4701 Sfmt 4702 58281 costs is to remain effective.’’ 9 ANM et al. also point to language from a prior Commission order purportedly recognizing that the PAEA’s objectives and factors are subordinate to the statute’s quantitative pricing standards.10 Additionally, ANM et al. assert that the Commission is bound in the instant proceeding by prior holdings in its FY 2010 and FY 2011 Annual Compliance Determinations (ACDs) that the price cap takes precedence over the statutory factors.11 ABA, ANM et al., and MMA et al. all take the position that the Commission’s authority to review the ratemaking system and engage in rulemaking under section 3622(d)(3) is limited to the scope of the Commission’s initial rulemaking authority under section 3622(a).12 ANM et al. assert that section 3622(d)(3) mirrors section 3622(a), and as a result the Commission’s authority to modify or replace regulations under section 3622(d)(3) is coextensive with the Commission’s authority to establish those regulations in the first instance under section 3622(a). ANM et al. Comments at 10–11. Hence, according to ANM et al., nothing in the language or structure of the PAEA suggests that the Commission’s rulemaking authority under section 3622(d)(3) is broader than it was under section 3622(a). Id. Based on this interpretation, MMA et al. assert that the Commission can modify regulations implementing the price cap but cannot change the fundamental requirements of the ratemaking system. MMA et al. Comments at 15. In MMA et al.’s view, ‘‘[a]s an administrative agency, the Commission already has inherent authority to revise regulations that it has previously promulgated . . . [and section 3622(d)(3)] merely directs the Commission to use its normal administrative powers.’’ Id. at 14. GCA suggests that while the Commission cannot abolish the price cap, it can 9 ABA Comments at 8 (citing Docket No. R2010– 4, Order No. 547, Order Denying Request for Exigent Rate Adjustments, September 30, 2010, at 49–50). 10 ANM et al. 2014 White Paper at 13 (citing Docket No. RM2009–3, Order Adopting Analytical Principles Regarding Workshare Discount Methodology, September 14, 2010, at 36 (Order No. 536)); see also MMA et al. Comments at 15–16 (citing Docket No. ACR2010, Annual Compliance Determination, March 29, 2011, at 19 (FY 2010 ACD)). 11 ANM et al. 2014 White Paper at 14–15 (quoting FY 2010 ACD at 18–19; Docket No. ACR2010R, Order No. 1427, Order on Remand, August 9, 2012; Docket No. ACR2011, Annual Compliance Determination, March 28, 2012, at 17 (FY 2011 ACD)). The specific factor at issue was Factor 2 (39 U.S.C. 3622(c)(2)), which requires coverage of attributable costs. 12 ABA Comments at 9; ANM et al. 2014 White Paper at 9–11; MMA et al. Comments at 14. E:\FR\FM\11DEP2.SGM 11DEP2 58282 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules ‘‘identify and specify features of the . . . price cap which do not adequately effectuate the objectives and factors, point out and analyze the particular shortcomings, identify the objective(s) or factor(s) they are hindering, and find ways to correct them in detail without hindering any other objective.’’ GCA Comments at 31–32. Other commenters assert that the plain language of section 3622 permits the Commission to modify or replace the price cap.13 The Postal Service takes the position that the ‘‘system’’ for purposes of section 3622 includes all provisions within section 3622(d), including the price cap provision. Postal Service Comments at 19. The Postal Service asserts that ‘‘[s]ection 3622(d) plainly states at the outset that its provisions are part of the ‘system for regulating rates and classes for marketdominant products.’ ’’ Id. Furthermore, the Postal Service asserts that ‘‘whatever the precise scope of ‘modification’ might be, the fact that the Commission is also authorized to adopt an ‘alternative system’ demonstrates that [s]ection 3622(d)(3) imposes no limitations on the Commission’s authority regarding the design of a replacement regulatory system, other than the requirement that any such replacement achieve the objectives.’’ Id. at 19–20. daltland on DSKBBV9HB2PROD with PROPOSALS b. Legislative History Multiple commenters also base their arguments with regard to the price cap on the PAEA’s legislative history. ANM et al. and GCA note that an early version of the PAEA had referred to the price cap as an ‘‘allowable provision,’’ but that by the time the final bill was enacted it had become a ‘‘requirement.’’ 14 ANM et al. assert that nothing in the PAEA’s legislative history suggests that Congress intended for the Commission to have broader rulemaking authority under section 3622(d)(3) than it had under section 3622(a). ANM et al. Comments at 11–12. ANM et al. and MMA et al. contend that elimination or relaxation of the price cap would be contrary to the spirit of the PAEA.15 On the other hand, the Postal Service, NALC, and APWU all cite to a floor statement by Senator Susan Collins to the effect that the PAEA would provide 10 years of rate stability, after which the Commission would review the ratemaking system and, if necessary, 13 PR Comments at 29–30; NALC Comments at 16. et al. 2014 White Paper at 16; GCA Comments at 30–31. 15 ANM et al. 2014 White Paper at 5–7; MMA et al. Comments at 16. 14 ANM VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 modify it or adopt an alternative system.16 The Postal Service asserts that the House version of what became the PAEA would have permitted the Commission to choose a regulatory system, while the Senate version contained a permanent price cap; hence, the final version of the PAEA was a compromise that contained elements of both. Postal Service Comments at 20–21. The Postal Service maintains that it is clear that Congress intended for the Commission to review the ratemaking system in order to determine if it was actually achieving the objectives and factors specified by Congress and, if not, to design a system which would achieve the objectives. Id. at 22–23. The Postal Service maintains that the purpose of section 3622(d)(3) was to give the Commission authority to respond to changed circumstances subsequent to the PAEA’s enactment. Id. at 22–24. The Postal Service contends that it is clear from reviewing the legislative history that if Congress had desired to make the price cap irrevocable, it could have done so. Id. at 26–27. c. Constitutional Concerns Multiple commenters take the position that interpreting section 3622(d)(3) broadly would produce unconstitutional results. ANM et al. and MMA et al. assert that a broad interpretation of section 3622(d)(3) would violate the Presentment Clause of the Constitution, which prohibits a bill from becoming law without first passing both houses of Congress and then being ‘‘presented’’ to the President.17 ANM et al. also assert that a broad interpretation of section 3622(d)(3) would violate the non-delegation doctrine, under which Congress may not delegate legislative power to an administrative agency where such delegation contains no standards to guide the agency’s discretion.18 MMA et al. echo this argument, asserting that the PAEA’s objectives and factors do not provide an intelligible principle to guide the Commission’s discretion which would be sufficient to permit such a delegation. MMA et al. Comments at 15–16. MMA et al. assert that a broad interpretation of section 3622(d)(3) could potentially violate constitutional 16 Postal Service Comments at 21–22; NALC Comments at 16; APWU Comments at 5–6. 17 ANM et al. 2014 White Paper at 18 (citing Clinton v. City of New York, 524 U.S. 417 (1998)); MMA et al. Comments at 15. 18 ANM et al. 2014 White Paper at 20 (citing Mistretta v. United States, 488 U.S. 361, 371–79 (1989); Panama Ref. Co. v. Ryan, 293 U.S. 388, 430 (1935); A.L.A. Schechter Poultry Corp. v. United States, 295 U.S. 495, 529–31 (1935)). PO 00000 Frm 00004 Fmt 4701 Sfmt 4702 principles of separation of powers, based on the phrase ‘‘and as appropriate thereafter’’ in section 3622(d)(3). Id. at 16–17. MMA et al. maintain that ‘‘[i]f [the Commission] could change the fundamental nature of the system . . . anytime ‘appropriate thereafter,’ then it would have received an unprecedented grant to an Executive Branch agency of perpetual power to rewrite legislation.’’ Id. at 16. Based on all of the foregoing, ANM et al. contend that a broad interpretation of section 3622(d)(3) would violate the canon of constitutional doubt, which prohibits agencies from construing statutes in such a way as to raise serious doubts about their constitutionality.19 This is because, in ANM et al.’s view, ‘‘[t]here is a serious doubt that construing [s]ection 3622(d)(3) to authorize the Commission to rescind the CPI cap would pass muster under the Presentment Clause of the Constitution . . . or the constitutional limits on the delegation of legislative authority.’’ ANM et al. 2014 White Paper at 18. The Postal Service, on the other hand, disagrees that a broad interpretation of Commission authority would present a concern with regard to constitutional separation of powers principles. Postal Service Comments at 25. The Postal Service deems section 3622(d)(3)’s delegation of authority to the Commission to be ‘‘unremarkable.’’ Id. 2. Authority To Modify Workshare Discount Provisions The second major topic addressed is the workshare discount provisions contained in 39 U.S.C. 3622(e). Most commenters addressing workshare discounts presume worksharing is within the scope of this proceeding and suggest worksharing related changes.20 In contrast, a handful of commenters object to the review of the workshare discount provisions of section 3622(e).21 The Postal Service contends that the ‘‘system’’ of ratemaking subject to review and possible rulemaking under section 3622(d)(3) does not include the workshare discount provisions. Postal Service Comments at 19, 28. The Postal Service bases this argument, first, on the PAEA’s plain language. The Postal 19 ANM et al. 2014 White Paper at 17 (citing United States v. Delaware & Hudson Co., 213 U.S. 366, 408 (1909); Lowe v. SEC, 472 U.S. 181, 227 (1985); Edward J. DeBartolo Corp. v. Fla. Gulf Coast Bldg. & Constr. Trades Council, 485 U.S. 568, 575 (1988)). 20 See, e.g., ABA Comments at 11; ANM et al. Comments at 11–12, 82; Chairman Chaffetz and Chairman Meadows Comments at 2; MMA et al. Comments at 19, 71; Pitney Bowes Comments at 3– 4; and PSA Comments at 6. 21 See, e.g., APWU Comments at 5; Postal Service Comments at 28–30; and GCA Comments at 36–37. E:\FR\FM\11DEP2.SGM 11DEP2 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules daltland on DSKBBV9HB2PROD with PROPOSALS Service asserts that ‘‘[s]ubsections (a) through (d) of [s]ection 3622 expressly set forth the parameters of the ‘system’ . . . [and] [a]t the end of these provisions comes [s]ection 3622(d)(3), with its provision for the Commission’s 10-year review of the ‘system’. . . .’’ Postal Service Comments at 28–29. However, it states that ‘‘[t]he workshare discount standards in subsection (e) follow[ ] the 10-year review provision . . . [and] subsection (e) does not specify that its standards are an aspect of the ‘system.’ ’’ Id. at 29. APWU similarly contends that the structure of the PAEA suggests Congress did not intend for workshare discount provisions to be subject to modification under section 3622(d)(3). APWU Comments at 5. GCA also takes the position that workshare provisions are not part of the ‘‘system’’ which section 3622(d)(3) authorizes the Commission to modify. GCA Comments at 37–38. The Postal Service also asserts that the PAEA’s legislative history demonstrates that Congress intended the requirement that workshare discounts not exceed avoided costs to apply regardless of the regulatory system promulgated by the Commission under section 3622(a). Postal Service Comments at 30–31. GCA likewise asserts that when enacting the PAEA, Congress codified the Commission’s long-standing practice on workshare discounts into a set of statutory requirements, which GCA contends the Commission lacks authority to change. GCA Comments at 34. Finally, the Postal Service and GCA assert that the Commission has previously affirmed the view that the workshare discount standards are separate and distinct from other provisions of section 3622, including the objectives and factors that underlie the review mandated by section 3622(d)(3).22 C. Commission Analysis The Commission’s determination that the system has not achieved the objectives, taking into account the factors, triggered the applicability of the second step of the system review contemplated by section 3622(d)(3). See Order No. 4257 at 275. This provision grants the Commission discretion regarding whether and how to promulgate regulations as necessary to achieve the PAEA’s objectives. 39 U.S.C. 3622(d)(3). Section 3622(d)(3) provides the Commission with two discrete options. 22 Postal Service Comments at 32 (citing Order No. 536 at 16–19, 34–37); see also GCA Comments at 36. VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 The Commission ‘‘may, by regulation, make such modification or adopt such alternative system. . . .’’ 39 U.S.C. 3622(d)(3) (emphasis added). The use of ‘‘may,’’ rather than ‘‘shall,’’ demonstrates that Congress intended for the Commission to have discretion to decide whether to act at all.23 Because ‘‘or’’ is disjunctive, the two options on either side of the ‘‘or’’ must have a different meaning from each other.24 Therefore, the use of ‘‘may,’’ followed by two options connected by ‘‘or,’’ demonstrates that if the Commission does determine to act, then Congress granted the Commission the discretion to choose from two options with different meanings. The first option is to ‘‘make such modification . . . as necessary to achieve the objectives.’’ 39 U.S.C. 3622(d)(3). This language connotes moderate change.25 The second option grants authority to ‘‘adopt such alternative system for regulating rates and classes for market-dominant products as necessary to achieve the objectives.’’ 39 U.S.C. 3622(d)(3). This language contemplates replacement of the existing system.26 The scope of the term ‘‘alternative system’’ is given meaning by the statutory context in which the provision arises. For instance, section 3622(c)(4) limits the scope of ‘‘alternative means of sending and receiving letters and other mail matter at reasonable costs’’ to alternative means that are ‘‘available.’’ 39 U.S.C. 3622(c)(4). By contrast, the only limit section 3622(d)(3) imposes on the Commission’s ability to adopt an alternative system is that it must be ‘‘as necessary to achieve the objectives.’’ 39 U.S.C. 3622(d)(3). This comparison confirms that the usage of the term ‘‘alternative system’’ is intentionally broad. Congress knew how to impose express limits on the scope of ‘‘alternative system’’ but chose not to do so with respect to the Commission’s authority under section 3622(d)(3). 23 See Lopez v. Davis, 531 U.S. 230, 239 (2001) (if certain statutory prerequisites are met, the Bureau of Prisons ‘‘ ‘may,’ but also may not, grant early release.’’ (emphasis in original)). 24 Chao v. Day, 436 F.3d 234, 236 (D.C. Cir. 2006) (terms connected using the disjunctive ‘‘or’’ must be given separate meanings). 25 See MCI Telecomm. Corp. v. Am. Tel. & Tel. Co., 512 U.S. 218, 228 (1994); see also MerriamWebster Dictionary, available at https:// www.merriam-webster.com/dictionary/modification (‘‘modification’’ defined as ‘‘the making of a limited change in something’’). 26 See Merriam-Webster Dictionary, available at https://www.merriam-webster.com/dictionary/ adopt (‘‘adopt’’ defined as ‘‘to accept formally and put into effect’’); https://www.merriamwebster.com/dictionary/alternative (‘‘alternative’’ defined as ‘‘a proposition or situation offering a choice between two or more things only one of which may be chosen’’). PO 00000 Frm 00005 Fmt 4701 Sfmt 4702 58283 The plain language of section 3622(d)(3) leaves it to the Commission’s discretion to determine what regulatory changes, if any, are logically required to achieve the PAEA’s objectives.27 Subsection (b) of section 3622 provides that the system ‘‘shall be designed to achieve the following objectives, each of which shall be applied in conjunction with the others. . . .’’ 39 U.S.C. 3622(b). If Congress intended to further limit the scope of the section 3622 review or any related regulatory changes, it could have prescribed it. Instead, the PAEA set forth nine objectives to be balanced by the Commission. Although some commenters focus on the title of section 3622(d)— ‘‘Requirements’’—as precluding changes to the existing price cap, the plain meaning of the statute confirms that section 3622(d)(3) confers broad authority. The ‘‘Requirements’’ title alone is not dispositive. A statute’s title can aid in resolving ambiguity but has no power to enlarge the text or confer powers.28 The argument that the scope of subsection (a) limits the scope of subsection (d)(3) is contrary to the plain meaning and purpose of both subsections. First, the two subsections employ different language. The use of a parenthetical and the conjunction ‘‘and’’ in subsection (a) confirms the connection between the meanings of ‘‘establish’’ and ‘‘revise’’ as referring to the setup and periodic recalibration of the initial ratemaking system.29 Subsection (a) requires the Commission to set up the initial regulatory system within a specific period. Subsection (a) also permits the Commission to improve or correct that system ‘‘from time to time thereafter’’ through normal rulemaking procedures. When doing so, the Commission must apply the objectives in conjunction with each other and take into account the factors. 39 U.S.C. 3622(b) and (c). By contrast, subsection (d)(3) is not triggered until several separate and specific requirements are met. Subsection (d)(3) requires a review of the ratemaking system to take place 10 27 See Merriam-Webster Dictionary, available at https://www.merriam-webster.com/dictionary/ necessary (‘‘necessary’’ defined as ‘‘logically unavoidable’’). 28 Pa. Dept. of Corr. v. Yeskey, 524 U.S. 206, 212 (1998). 29 See Merriam-Webster Dictionary, available at https://www.merriam-webster.com/dictionary/ establish (‘‘establish’’ defined as ‘‘to institute (something, such as a law) permanently by enactment or agreement’’); id., available at https:// www.merriam-webster.com/dictionary/revise (‘‘revise’’ defined as ‘‘to look over again in order to correct or improve’’). E:\FR\FM\11DEP2.SGM 11DEP2 58284 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules daltland on DSKBBV9HB2PROD with PROPOSALS years after the PAEA’s enactment, following notice and an opportunity for comment. Additionally, no regulatory changes may be made under subsection (d)(3) unless the Commission first determines that the system has not achieved the objectives, taking into account the factors. The scope of permissible action under subsection (d)(3), which is to ‘‘make such modification or adopt such alternative system,’’ differs from the authority to ‘‘revise’’ the initial system. The different language used demonstrates that Congress intended to create two separate but complementary processes: The Commission’s general authority to set up and periodically recalibrate the initial ratemaking system under subsection (a); and the Commission’s specific authority to review the initial system after 10 years and modify or replace any part of the system as necessary to achieve the objectives of the PAEA. Moreover, the two subsections serve different purposes. Subsection (a) confers ‘‘authority generally’’ to the Commission regarding its duty to establish new regulations within a set timeframe and revise them as appropriate. Subsection (a) was necessary to address the pre-PAEA view that the Postal Rate Commission had ‘‘a very important, but expressly limited, role.’’ 30 The PAEA transformed the Postal Rate Commission into the Postal Regulatory Commission, a separate independent agency with regulatory oversight of the Postal Service.31 As discussed below, subsection (d)(3) was the result of a legislative compromise to achieve 10 years of rate stability, followed by a Commission-led review of the ratemaking system and, if warranted, modification or adoption of an alternative system to achieve the PAEA’s objectives. Reading section 3622(d)(3) to confer authority to the Commission that is limited to the scope of section 3622(a) would be contrary to this purpose. And, any suggested 30 Gov. of U.S. Postal Serv. v. Postal Rate Comm’n, 654 F.2d 108, 112 (D.C. Cir. 1981). Under the Postal Reorganization Act, the Postal Rate Commission’s responsibilities were limited to ‘‘review of rate, classification, and major service changes, unadorned by the overlay of broad FCCesque responsibility for industry guidance and of wide discretion in choosing the appropriate manner and means of pursuing its statutory objective.’’ Mail Order Ass’n of Am. v. U.S. Postal Serv., 2 F.3d. 408, 415 (D.C. Cir. 1993) (quoting Gov. of U.S. Postal Serv., 654 F.2d at 117). ‘‘As a ‘partner’ of the Board [of Governors of the United States Postal Service] the Postal Rate Commission was assigned the duty and authority to make recommendations with respect to rates and classifications.’’ Gov. of U.S. Postal Serv., 654 F.2d at 114. 31 U.S. Postal Serv. v. Postal Regulatory Comm’n, 717 F. 3d 209, 210 (D.C. Cir. 2013). VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 interpretation of the plain language must give way if it would conflict with Congress’ manifest purposes.32 The reliance commenters place on Commission precedent is misplaced. None of the cited precedent involved an interpretation of the scope of 39 U.S.C. 3622(d)(3). Because subsection (d)(3) is not even triggered until after the 10-year anniversary of the enactment of the PAEA, the cited precedent merely served to acknowledge the bounds of Commission authority during the first 10 years under the PAEA. The cited statements were made in accordance with the Commission’s authority to ‘‘establish’’ and ‘‘revise’’ the initial ratemaking system promulgated under subsection (a). However, subsection (d)(3) confers broader rulemaking authority than subsection (a). In accordance with its authority under section 3622(d)(3), and with the benefit of having conducted an extensive review following 10 years of experience in the operation of the initial ratemaking system, the Commission has now determined that the system has not achieved the PAEA’s objectives, taking into account the statutory factors. Order No. 4257 at 275. Therefore, these prior statements made in a separate context do not in any way serve to limit the Commission’s broader authority under section 3622(d)(3) to promulgate proposed rules. With regard to the workshare discount provisions contained within section 3622(e), which a handful of commenters assert are not part of the ratemaking system, the Commission finds that the phrase ‘‘established under this section’’ in section 3622(d)(3) refers to section 3622 in its entirety, including the workshare discount provisions in section 3622(e). This conclusion derives from both the plain meaning of the term ‘‘section,’’ as well as the fact that within section 3622(d)(3) there is a clear differentiation made between ‘‘sections’’ and ‘‘subsections.’’ 33 Further, in its review of the system under section 3622(d)(3), the Commission is tasked with taking into account ‘‘the degree of preparation of mail for delivery into the 32 See Sullivan v. Hudson, 490 U.S. 877, 890 (1989) (‘‘Congress cannot lightly be assumed to have intended’’ a result that would ‘‘frustrat[e] . . . the very purposes’’ of the statute). No sound approach to statutory interpretation would attribute to Congress an intent to ‘‘subvert the statutory plan.’’ Dep’t of Revenue of Or. v. ACF Indus. Inc., 510 U.S. 332, 340 (1994). 33 See 39 U.S.C. 3622(d)(3) (‘‘[T]he Commission shall review the system for regulating rates and classes for market-dominant products established under this section to determine if the system is achieving the objectives in subsection (b), taking into account the factors in subsection (c).’’ (emphasis added)). PO 00000 Frm 00006 Fmt 4701 Sfmt 4702 postal system performed by the mailer and its effect upon reducing costs to the Postal Service . . . .’’ 39 U.S.C. 3622(c)(5). Section 3622 defines workshare discounts as the discounts mailers receive for additional preparation of mailpieces, such as presorting, prebarcoding, handling, or transportation. See 39 U.S.C. 3622(e)(1). Therefore, workshare discount provisions are plainly part of the ratemaking system subject to review and possible rulemaking. In sum, the plain meaning of the PAEA grants the Commission broad authority to engage in rulemaking in order to modify or replace the current ratemaking system. The scope of that authority is limited only by what is necessary to achieve the PAEA’s objectives. With regard to legislative history, the PAEA was designed to balance several objectives, including the Postal Service’s financial needs and mailers’ need for predictable and stable rates. To achieve 10 years of rate stability, the ratemaking system was intended to operate in accordance with specific statutory requirements and limitations. As previously described, after 10 years, the initial system would be subject to Commission review. If the Commission determined that the system did not achieve the PAEA’s objectives taking into account its factors, then the Commission would have the authority to modify or replace the system as necessary to achieve the objectives. The legislative history confirms this structured approach. Specifically, the final version of the PAEA, H.R. 6407, represented a compromise between two bills—H.R. 22 and S. 662. The first bill, H.R. 22, was introduced by Representative John McHugh on January 4, 2005, and reported back to the House with amendments on April 28, 2005. 151 Cong. Rec. H72 (daily ed. Jan. 4, 2005); 151 Cong. Rec. H2734 (daily ed. Apr. 28, 2005). On July 26, 2005, H.R. 22, as amended, was passed by the House of Representatives. 151 Cong. Rec. H6511, H6548–H6549 (daily ed. Jul. 26. 2005) (Roll Call No. 430). As discussed by GCA and ANM et al., 34 under H.R. 22 as passed by the House of Representatives, proposed section 3622(d) was titled ‘‘Allowable Provisions.’’ 151 Cong. Rec. H6523 (daily ed. Jul. 26. 2005). This bill provided that the ratemaking system could include one or more of several types of systems: Incentive regulation (e.g., price caps, revenue targets); costof-service regulation; or any other form 34 ANM et al. 2014 White Paper at 16; GCA Comments at 30–31; ANM et al. Comments at 21. E:\FR\FM\11DEP2.SGM 11DEP2 daltland on DSKBBV9HB2PROD with PROPOSALS Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules of regulation that the Commission considered appropriate to achieve the objectives, consistent with the factors. Id. Proposed section 3622(e) under this bill was titled ‘‘Limitation.’’ Id. This provision would have prohibited the Commission from permitting the average rate for any product to increase at an annual rate greater than the comparable increase in the CPI unless the Commission determined, after public notice and comment, that the increase was reasonable, equitable, and necessary. Id. The second bill, S. 622, was introduced by Senator Collins on March 17, 2005, and reported back to the Senate with amendments on July 14, 2005. 151 Cong. Rec. S2994, S3012– S3031 (daily ed. Mar. 17, 2005); 151 Cong. Rec. S8301 (daily ed. Jul. 14, 2005). On February 9, 2006, the Senate considered those amendments and additional amendments to S. 662 by unanimous consent. 152 Cong. Rec. S898–S927 (daily ed. Feb. 9, 2006). Under this bill, proposed section 3622(d) was titled ‘‘Requirements,’’ and was subdivided into subsections titled ‘‘In general’’ and ‘‘Limitations.’’ Id. at S913–S914. The content of proposed section 3622(d)(1) and (2) under S. 662 employed similar language to that which was eventually used in the final version of the PAEA. Compare id. with 39 U.S.C. 3622(d)(1) and (2). Also on February 9, 2006, through unanimous consent, the Senate passed H.R. 22,35 by replacing the text of H.R. 22 with all the text of S. 662. 152 Cong. Rec. at S927–S942 (daily ed. Feb. 9, 2006). Therefore, as passed by the Senate, H.R. 22 contained the same title structure as S. 662, with proposed section 3622(d)—titled ‘‘Requirements’’—being subdivided into two subsections titled ‘‘In General’’ and ‘‘Limitations.’’ Id. at S929. Then, the Senate sent H.R. 22, as amended and passed by the Senate, back to the House and requested a conference to resolve the differences between the two versions. Id. at S927, S942. For instance, as passed by the House on July 26, 2005, H.R. 22 provided for the ratemaking system to achieve seven objectives and for the Commission to take into account 11 factors. 151 Cong. Rec. H6523 (daily ed. Jul. 26, 2005). By contrast, as passed by the Senate on February 9, 2006, H.R. 22 provided for the ratemaking system to achieve 8 objectives and for the Commission to take into account 13 35 H.R. 22 had been pending in the Senate since July 27, 2005. 151 Cong. Rec. S9155, S9156 (daily ed. Jul. 27, 2005). VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 factors. 152 Cong. Rec. at S928–S929 (daily ed. Feb. 9, 2006). None of the versions of the bills described above included the review provision that would eventually be codified at 39 U.S.C. 3622(d)(3). Nor was this provision referenced in hearings, committee reports, or the presidential signing statement. Instead, 39 U.S.C. 3622(d)(3) was included only in the final version of the PAEA introduced on December 7, 2006. H.R. 6407, 109th Cong., at 7 (2006). Pursuant to a compromise between the Senate and the House, H.R. 6407 blended together concepts appearing in the separate versions of the bills described above, including combining the objectives and factors. There is only one statement in the Congressional Record about the review provision, and it was made upon receipt of the final version of the postal reform bill on December 8, 2006. Senator Collins, the Senate sponsor of postal reform, remarked: The Postal Service will have much more flexibility, but the rates will be capped at the CPI. That is an important element of providing 10 years of predictable, affordable rates, which will help every customer of the Postal Service plan. After 10 years, the Postal Regulatory Commission will review the rate cap and, if necessary, and following a notice and comment period, the Commission will be authorized to modify or adopt an alternative system. While this bill provides for a decade of rate stability, I continue to believe that the preferable approach was the permanent flexible rate cap that was included in the Senate-passed version of this legislation. But, on balance, this bill is simply too important, and that is why we have reached this compromise to allow it to pass. We at least will see a decade of rate stability, and I believe the Postal Rate Commission, at the end of that decade, may well decide that it is best to continue with a CPI rate cap in place. It is also, obviously, possible for Congress to act to reimpose the rate cap after it expires. But this legislation is simply too vital to our economy to pass on a decade of stability. The consequences of no legislation would be disastrous for the Postal Service, its employees, and its customers. 152 Cong. Rec. S11674, S11675 (daily ed. Dec. 8, 2006) (statement of Sen. Collins). This statement confirms that section 3622(d)(3) was a part of a legislative compromise that required the price cap ‘‘Requirements,’’ as contained in the PAEA, to remain in place for 10 years, and then allowed the Commission the opportunity to review the effectiveness of this ratemaking system and potentially design a modified or alternative system.36 This statement also 36 It is worth noting that Senator Collins introduced the initial bill in the Senate which PO 00000 Frm 00007 Fmt 4701 Sfmt 4702 58285 confirms that the congressional sponsors of the PAEA contemplated that the Commission would have broad discretion after the section 3622 review—including deciding whether to continue the price cap in its current form, modify it, or replace it. That Congress believed it might need to ‘‘reimpose the rate cap after it expires’’ clearly evidences its intent that the Commission had the authority, after its review, to eliminate the price cap through the potential modification or adoption of an alternative system. The statement also confirms that Congress did not consider the current price cap to be a permanent or immutable requirement of the system. Senator Collins further stated: This compromise is not perfect and, indeed, earlier tonight, there were issues raised by the appropriators—legitimate issues—that threatened at one point to derail the bill again. It has been a delicate compromise to satisfy all of the competing concerns. Everyone has had to compromise, but I think we have come up with a good bill. This compromise will help ensure a strong financial future for the U.S. Postal Service and the many sectors of our economy that rely on its services, and it reaffirms our commitment to the principle of universal service that I believe is absolutely vital to this institution. Id. (emphasis added). Senator Thomas Carper also confirmed that the final bill was ‘‘a difficult compromise.’’ 152 Cong. Rec. S11675 (daily ed. Dec. 8, 2006) (statement of Sen. Carper). Congress passed the PAEA, amending title 39, to ensure the financial viability of the Postal Service.37 Senator Collins stated that ‘‘[w]ith this landmark reform legislation, we will put the Postal Service on a firm financial footing.’’ 152 Cong. Rec. S11674 (daily ed. Dec. 8, 2006) (statement of Sen. Collins). The legislative history confirms that Congress intended to empower the Commission to modify or replace the system following the section 3622 review as necessary to achieve the objectives. Finally, with regard to the constitutional infirmities alleged by some commenters, the scope of the Commission’s authority under section 3622(d)(3) does not raise separation of powers issues because section 3622(d)(3) meaningfully constrains the Commission’s authority. Under the nondelegation doctrine, Congress cannot delegate legislative contained the ‘‘requirement’’ language with regard to the price cap. As a result, the statement in the Congressional Record is particularly probative as to the existence of a compromise. 37 See Newspaper Ass’n of Am. v. Postal Regulatory Comm’n, 734 F.3d 1208, 1217 (D.C. Cir. 2013) (citing S. Rep. No. 108–318, at 2–4 (2004)). E:\FR\FM\11DEP2.SGM 11DEP2 58286 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules daltland on DSKBBV9HB2PROD with PROPOSALS power to the Executive Branch.38 However, Congress does not violate the nondelegation doctrine merely because it legislates in broad terms and leaves a certain degree of discretion to an Executive Branch actor, so long as Congress sets forth ‘‘an intelligible principle’’ to which the actor must conform.39 The Supreme Court has routinely upheld delegations to the Executive Branch ‘‘under standards phrased in sweeping terms.’’ See Loving, 517 U.S. at 771. Congress may permissibly delegate authority to the Executive Branch to regulate in a manner that is necessary to adhere to policy objectives in a statute.40 In this instance, the statute gave clear direction to the Commission about how to exercise its legal authority to make modifications or adopt an alternative system. Any modifications or the adoption of an alternative system must be necessary for the system to achieve the objectives in 39 U.S.C. 3622(b), and it is with those objectives in mind that the Commission proposes the regulations below. With regard to the Presentment Clause, the comparison made by some commenters to the Line Item Veto Act which was struck down in Clinton v. City of New York is inapt. First, the President’s exercise of cancellation authority under the Line Item Veto Act, 5 days after legislation’s enactment, was ‘‘necessarily [ ] based on the same conditions that Congress evaluated when it passed those statutes.’’ Clinton, 524 U.S. at 443. By contrast, Congress’ delegation to the Commission under section 3622(d)(3) is meaningfully constrained by several separate conditions that must occur after the enactment of the PAEA: The passage of 10 years; a comprehensive review of the ratemaking system by the Commission; notice to the public and an opportunity for comment; and a determination by the Commission that the system is not achieving the PAEA’s objectives, taking into account the statutory factors. Second, whereas the impermissible Line Item Veto Act required the 38 See, e.g., Loving v. United States, 517 U.S. 748, 758 (1996). 39 Id. at 771–72 (citing J.W. Hampton, Jr. & Co. v. United States, 276 U.S. 394, 409 (1928); Touby v. United States, 500 U.S. 160, 165 (1991)). 40 See, e.g., Touby v. United States, 500 U.S. at 163, 165 (statute authorizing Attorney General to schedule controlled substance on temporary basis as ‘‘necessary to avoid an imminent hazard to the public safety’’ did not violate nondelegation doctrine because it contained an intelligible principle); National Broadcasting Co. v. United States, 319 U.S. 190, 217, 225–26 (1943) (upholding delegation to the Federal Communications Commission to regulate radio broadcasting according to ‘‘public interest, convenience, or necessity’’). VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 President to make certain determinations before cancelling a provision, those determinations did not qualify his discretion as to whether to cancel or not. Id. at 443–44. By contrast, the Commission’s discretion under section 3622(d)(3) to either modify the ratemaking system, adopt an alternative system, or do neither is contingent on a determination that the system did not achieve the PAEA’s objectives, taking into account the statutory factors. If the Commission determined that the system had achieved the objectives, taking into account the factors, the Commission’s authority under section 3622(d)(3) to either modify the system or adopt an alternative system would not have been triggered. Third, the impermissible Line Item Veto Act allowed the President to override the policy objectives contained in a cancelled statute, which were developed by Congress, with his own policy objectives, which were developed unilaterally. Id. at 444. By contrast, section 3622(d)(3)’s delegation of rulemaking authority to the Commission is limited because it is required to effectuate the nine objectives embodied in the PAEA, which were developed by Congress. Therefore, the Commission’s authority to modify or adopt an alternative system under section 3622(d)(3) remains within the permissible bounds of the separation of powers between the Legislative Branch and the Executive Branch. In conclusion, the Commission has broad authority to either modify or replace the existing market dominant ratemaking system. This authority extends to modification of regulations currently in place and the statutory rate setting requirements of section 3622 (including those applicable to workshare discounts in 39 U.S.C. 3622(e)). The constraint on the Commission’s authority is that the system as implemented must be designed to achieve the objectives of section 3622(b). III. Proposed Regulatory Changes A. Introduction In Order No. 4257, the Commission concluded that the system for regulating rates and classes did not achieve the objectives, taking into account the factors. Therefore, the Commission is proposing new regulations that it deems necessary to achieve the objectives of 39 U.S.C. 3622(b). The reasons that certain objectives were not achieved, taking into account the factors, and the proposed solutions to address these issues fall within the following broad areas. PO 00000 Frm 00008 Fmt 4701 Sfmt 4702 The medium-term financial stability of the Postal Service is addressed in section C—Supplemental Rate Authority. The changes presented in this section provide the Postal Service with an additional 2 percentage points of rate authority per calendar year. This authority is available only for the first 5 full calendar years following the effective date of these regulations. The long-term financial stability of the Postal Service is addressed in section D—Performance-Based Rate Authority. The changes presented in this section make up to an additional 1 percentage point of rate authority available per calendar year. Of this rate authority, 0.75 percentage points is allocated based on meeting operational efficiency-based rate authority requirements, and 0.25 percentage points is allocated based on meeting service quality-based rate authority requirements. Issues related to non-compensatory classes and products are addressed in section E—Non-Compensatory Classes and Products. The changes presented in this section impose rate design requirements on non-compensatory products. The changes also provide the Postal Service with an additional 2 percentage points of rate authority per calendar year for non-compensatory classes of mail. Issues related to inefficient rate design concerning workshare discounts are addressed in section F—Workshare Discounts. The changes presented in this section employ rate design concepts based on efficient component pricing (ECP). The proposed regulations establish bands that set the percentages of avoided costs that may be reflected in the discounts. The proposed regulations include a 3-year grace period. Miscellaneous issues related to the rate adjustment process are addressed in section G—Enhancements to the Ratemaking Process. The changes presented in this section increase visibility into future planned rate adjustments by proposing changes to the Schedule for Regular and Predictable Rate Adjustments requirements. Changes are also proposed for the rate adjustment process, including a proposal to extend the notification period for planned rate adjustments from 45 to 90 days. Prior to addressing these broad areas and the related proposed solutions, the Commission first provides background related to the Postal Service’s financial stability in section B below. This background material provides context and supports the Commission’s proposed solutions described in more detail in sections C and D. E:\FR\FM\11DEP2.SGM 11DEP2 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules B. The Path to Financial Stability 1. Background The existing ratemaking system did not achieve the PAEA’s objectives during the 10 years following the PAEA’s enactment. See generally Order No. 4257. The Postal Service is in poor financial health. Id. at 274. The market dominant ratemaking system established under 39 U.S.C. 3622 did not assure ‘‘adequate revenues, including retained earnings, to maintain financial stability,’’ as required by Objective 5. Id. at 178 (quoting 39 U.S.C. 3622(b)(5)). In Order No. 4257, the Commission discussed financial stability using a three-tiered analysis: short-term, medium-term, and longterm. Id. at 151–78. Because the three tiers build upon each other, this analysis found that all three tiers must be achieved in order to support a finding that the system maintained financial stability. Id. at 159. As set forth in Order No. 4257, although the short-term financial measure was generally achieved, medium-term and long-term financial stability measures were not achieved. Id. at 274. Moreover, although costs were reduced and operational efficiency was increased during the PAEA era, these cost reductions and operational efficiency increases were not maximized, as required by Objective 1. Id. at 222, 248; 39 U.S.C. 3622(b)(1). The Commission found that the cost reductions and operational efficiency gains experienced under the existing ratemaking system have been insufficient to contribute to the financial stability of the Postal Service. Order No. 4257 at 222, 248. Therefore, the Commission considers regulatory proposals aimed to put the Postal Service on the path to financial stability. daltland on DSKBBV9HB2PROD with PROPOSALS 2. Comments Most of the comments received with regard to the Postal Service’s financial stability discuss the Postal Service’s finances within the context of whether the Commission should keep, modify, or eliminate the current consumer price index for all urban consumers (CPI–U) price cap. a. Comments in Support of Retaining the Price Cap Most of the commenters in favor of keeping the CPI–U price cap generally contend that the Postal Service’s current revenue is adequate to provide necessary services. ANM et al., for example, assert that the Postal Service’s revenue and earnings are improving, that mail volume has stabilized, and VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 that operating income has been positive for several years and is projected to remain so. ANM et al. Comments at 3– 4, 23–25, 32–33. MMA et al., DMA et al., and LSC contend that the Postal Service’s revenue is adequate to meet controllable and operating costs.41 ANM et al. and MMA et al. both note that competitive products are now generating a large share of the Postal Service’s revenue, and that expected growth in competitive package services is increasing.42 ANM et al. assert that the Postal Service’s liquidity is healthy. ANM et al. Comments at 4, 34–35. MMA et al. contend that the Postal Service faces no serious risk of insolvency. MMA et al. Comments at 31–32. MMA et al. assert that cash flow is the most appropriate measure of the Postal Service’s financial stability, and that by this metric, the Postal Service is ‘‘quite stable.’’ Id. at 37. Furthermore, MMA et al. maintain that the Postal Service’s finances are well-positioned in the long run, when all of its assets are fairly valuated.43 ANM et al. and MMA et al. both assert that the Postal Service’s finances are better than they appear, because the Postal Service significantly undervalues its real estate holdings.44 ANM et al., MMA et al., and DMA et al. all maintain that the Postal Service’s pension and benefit funds are well-funded.45 MMA et al., in particular, dispute many of the metrics used to assess the Postal Service’s financial stability. MMA et al. Comments at 31–32. They contend that the Postal Service’s finances are not comparable to those of a private firm, and that the financial ratios used to measure private firms are not generally applicable to the Postal Service. Id. at 32, 41. Although many of these commenters acknowledge that the Postal Service’s net earnings remain negative, they generally attribute this to the PAEA’s requirement to prefund the Postal Service Retiree Health Benefits Fund (PSRHBF) and assert that this requirement is not part of the PAEA’s ratemaking system.46 Noting that Congress mandated the PSRHBF 41 DMA et al. Comments at 3; MMA et al. Comments at 31; LSC Comments at 3. 42 ANM et al. Comments at 28; MMA et al. Comments at 36–37. 43 Id. MMA et al. also assert that even if financial stability is measured by controllable income, the Postal Service is doing well. Id. at 40. 44 ANM et al. Comments at 5–6, 44; MMA et al. Comments at 43. 45 ANM et al. Comments at 4–5, 40–41; MMA et al. Comments at 44; DMA et al. Comments at 3. 46 ANM et al. Comments at 4, 38; DMA et al. Comments at 3; MMA et al. Comments at 40–41, 47–48; Netflix Comments at 18; NNA Comments at 31; LSC Comments at 3; ACMA Comments at 5. PO 00000 Frm 00009 Fmt 4701 Sfmt 4702 58287 prefunding requirement, many of these commenters assert that the problem should be addressed through a legislative fix—not through a price increase.47 ANM et al. and MMA et al. raise concerns regarding whether any additional revenue would be used appropriately by the Postal Service. ANM et al. assert that any additional revenue would be ‘‘squandered through laxer control of costs.’’ ANM et al. Comments at 9. MMA et al. contend that the precise nature of the Postal Service’s ‘‘needs’’ in terms of capital is an issue that requires critical assessment by the Commission. MMA et al. Comments at 38–39. Several commenters state that raising the price cap would undermine rate predictability and stability. ANM et al. assert that the price cap provides ‘‘the only effective protection . . . to mailers and consumers . . . against abuse of the Postal Service’s market power.’’ ANM et al. Comments at 8. They maintain that relaxing the price cap would lead to a loss of credibility for the Commission and hamper the ability of Postal Service management to bargain effectively with labor and other interest groups that might seek to raise the Postal Service’s costs. Id. at 8–9. DMA et al. maintain that raising the price cap would be a burden to mailers. DMA et al. Comments at 3. Other commenters, including ANM et al., DMA et al., and GCA, maintain the raising the price cap would undermine operational efficiency.48 GCA specifically states that any upward adjustment in the price cap would reduce incentives for efficiency and cost reduction. GCA Comments at 21. NNA cautions that lifting the price cap to improve the Postal Service’s financial condition could dissuade Congress from providing legislative relief, tempt future legislators to add costs to the system, or make privatization of the Postal Service more attractive. NNA Comments at 32– 33. b. Comments in Support of Modifying the Price Cap Another group of commenters suggests keeping a price cap system but modifying its form. For instance, the Public Representative contends that the Postal Service’s revenue under the price cap must be increased. PR Comments at 33. He proposes modifying the price cap formula to account for changes in demand (i.e., for declining mail 47 DMA et al. Comments at 3; LSC Comments at 3; NNA Comments at 4–5. 48 ANM et al. Comments at 9; DMA et al. Comments at 3; GCA Comments at 20–21. E:\FR\FM\11DEP2.SGM 11DEP2 58288 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules daltland on DSKBBV9HB2PROD with PROPOSALS volumes) and to reflect the PSRHBF payment obligation. Id. at 33, 35–47. MH and NAAD, on the other hand, advocate that the Commission cease using CPI–U as a price index and return to a more cost-based approach to ratemaking. MH and NAAD Comments at 10. c. Comments in Support of Eliminating the Price Cap The third group of commenters consists primarily of the Postal Service and the postal unions, who advocate that the Commission should eliminate the price cap altogether. These commenters generally take the position that revenue under the existing ratemaking system is insufficient to enable the Postal Service to maintain financial stability.49 Some of these commenters assert that current revenue levels are not sufficient to cover costs or allow for investments in infrastructure.50 The Postal Service asserts that it has experienced a net loss every year since the PAEA was enacted, primarily due to declining mail volume. Postal Service Comments at 84–86. APWU asserts that when instituting the CPI–U price cap Congress did not foresee the changes and market forces over the past decade, including mail volume declines, an increase in the number of mail delivery points, changes in the mail mix, and an economic recession. APWU Comments at 29. NALC maintains that by depriving the Postal Service of revenue and causing it to reduce the quality and availability of its services, the price cap risks driving away even more customers. NALC Comments at 8. The Postal Service asserts that it has dangerously low liquidity and lacks the ability to meet all of its financial obligations. Postal Service Comments at 87. It represents that it only has enough cash reserves to sustain it for approximately 29 days. Postal Service Comments at 87. NALC notes that with the Postal Service’s borrowing authority exhausted and with no access to capital markets, the only source of liquidity available to the Postal Service has been its meager cash reserves. NALC Comments at 7. It asserts that this state of constrained liquidity renders the Postal Service vulnerable to an economic downturn or crisis. Id. The Postal Service states that constrained liquidity has prevented it from investing adequately in capital expenditures. Postal Service Comments 49 See, e.g., Postal Service Comments at 82–83; APWU Comments at 29; NALC Comments at 4–6; NPMHU Comments at 3. 50 NALC Comments at 4–6, 7; APWU Comments at 23–24. VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 at 88. APWU, NALC, and NPHMU echo this assertion.51 The Postal Service and NALC contend that the Postal Service’s level of capital expenditures is far lower than that of its competitors.52 NALC asserts that insufficient capital investments could undercut the Postal Service’s long-term performance. NALC Comments at 12. With regard to operational efficiency, the Postal Service maintains that deferral of capital expenditures has become a major drag on the Postal Service’s efficiency improvement efforts. Postal Service Comments at 88– 90. The Postal Service asserts that despite having made significant efficiency gains and cost cuts, the available remaining efficiency gains and/or cost cuts come nowhere close to enabling the Postal Service to maintain financial stability under the existing price cap. Id. at 83–84. NALC concurs with this conclusion, maintaining that the Postal Service has made significant strides in containing and reducing costs but is running out of feasible costcutting opportunities. NALC Comments at 6–9. In addition to eliminating the price cap, APWU and NALC both suggest permitting a one-time true-up rate proceeding to reset the rate base for all classes.53 3. Commission Analysis As the Commission concluded in Order No. 4257, the Postal Service is not financially stable because the current ratemaking system has not assured ‘‘adequate revenues, including retained earnings, to maintain financial stability,’’ as required by Objective 5. Order No. 4257 at 178 (quoting 39 U.S.C. 3622(b)(5)). Therefore, the Commission determines that it would be inappropriate to retain the existing ratemaking system unchanged. Doing so would not only be contrary to Objective 5, it would negatively impact the mailing industry as a whole. According to the 2015 Envelope Manufacturing Association’s U.S. Mailing Industry Jobs and Revenue Study (EMA Study), in FY 2014, the latest year data are available, the nation’s mailing industry employed 7.5 million workers and generated $1.4 trillion in revenues. February 24, 2017 EMA Comments at 2. The EMA study states: 51 APWU Comments at 23–24; NALC Comments at 9; NPHMU Comments at 3; see also MH and NAAD Comments at 7–8. 52 Postal Service Comments at 88–89; NALC Comments at 10. 53 APWU Comments at 30; NALC Comments at 17. PO 00000 Frm 00010 Fmt 4701 Sfmt 4702 [A]lmost 85 percent of mailing industry jobs depend[] upon the delivery sector, of which the USPS is the center. However, if one analyzes further between the public and private sector components of the delivery network (i.e. separating the USPS from its private sector competitors), the dependence of the US economy on the USPS becomes even clearer. Some 6.9 million private sector jobs depend on the 617,000 jobs of the USPS. This distribution of jobs impact clearly shows (as would a similar comparison of revenues) that the Postal Service’s importance to the economy is substantially greater than one might assume if the Postal Service were examined in isolation. Id. at 6. At the other extreme, however, the Commission determines that it would be inappropriate to design a system that lacks a mechanism to limit the magnitude of price adjustments. Such a mechanism is necessary to create predictability and stability, as required by Objective 2. Order No. 4257 at 103; 39 U.S.C. 3622(b)(2). The Commission finds, as discussed further below, that additional pricing authority is necessary to achieve the objectives of the PAEA. The Commission seeks to complement, rather than replace, the CPI–U price cap by providing discrete, clearly-defined amounts of additional rate authority. This additional rate adjustment authority is designed to put the Postal Service on the path toward generating positive net income and retained earnings. Accordingly, the Commission aims to design a ratemaking system that will put the Postal Service on the path to financial stability required by Objective 5 in a way that is consistent with the other objectives, such as Objectives 1 and 3, of the PAEA. Below the Commission describes its methodology to determine the amount and mechanism to provide that additional rate adjustment authority. a. The Commission’s Methodology In order to estimate the appropriate amount of revenue to put the Postal Service on the path to financial stability, the Commission relies upon its threetiered analysis detailed in Order No. 4257 as its starting point. The Postal Service has been able to operate continuously without service interruption, consistent with the Commission’s analysis demonstrating that the Postal Service has met the threshold of short-term financial stability. Order No. 4257 at 165. Beyond the short-term, however, the Postal Service’s financial health is in jeopardy. See generally id. at 165–78. The medium-term financial stability analysis details that the Postal Service E:\FR\FM\11DEP2.SGM 11DEP2 daltland on DSKBBV9HB2PROD with PROPOSALS Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules experienced a net loss in every year during the PAEA era because total revenue generated was inadequate to cover total costs. Id. at 168. The longterm financial stability analysis shows that the Postal Service did not attain retained earnings during the PAEA era. Id. at 171. Additionally, during the PAEA era the Postal Service exhausted its borrowing authority and reduced its capital investments. See id. at 169–77. Consistent with its financial stability analysis in Order No. 4257, the Commission derives reference points for how much additional revenue would be needed to put the Postal Service on the path to medium-term financial stability and for how much additional revenue would be needed to put the Postal Service on the path to long-term financial stability. In line with this twopronged methodology, there are two components of additional rate authority: The first to address medium-term financial stability and the second to address long-term financial stability. Although the financial stability discussion in this Order generally parallels Order No. 4257’s division into the medium-term and long-term tiers, the medium-term and long-term financial stability concepts are interrelated. As detailed in section III.D.1, infra, the path to financial stability is cyclical. Adequate revenues build up net income (which demonstrates medium-term financial stability) and over time should lead to retained earnings (which demonstrate long-term financial stability). Retained earnings may be used to fund capital investment, which should lead to operational efficiency gains and help maintain high quality service standards. Operational efficiency gains and maintenance of high quality service standards should in turn lead to increased revenues and reduced costs, which should build up net income. Because the Postal Service’s financial health is poor, it is necessary to try to make progress on multiple aspects of this cycle simultaneously. Although the cycle above is centered around medium- and long-term financial stability (Objective 5), the cycle also affects several other objectives. In particular, the cycle also includes the goals underlying Objective 1 (maximize incentives to reduce costs and increase operational efficiency) and Objective 3 (maintain high quality service standards). In Order No. 4257, the Commission found that the system did not achieve the goals of the PAEA related to each of these objectives. See Order No. 4257 at 274–75. The Commission’s proposed solution is structured to not only put the Postal VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 Service on the path to medium- and long-term financial stability, but also to address Objective 1’s requirement that the system maximize incentives to increase operational efficiency and Objective 3’s requirement that the high quality service standards are maintained. Several commenters express concerns regarding the appropriate use of additional revenue by the Postal Service and the effects of any revenue increases on the Postal Service’s incentives to cut costs and increase operational efficiency.54 In order to ensure appropriate incentives, it is necessary to make the long-term additional rate authority contingent on the Postal Service meeting or exceeding an operational efficiency-based standard and adhering to service standard quality criteria. The Commission expects that its proposal will incentivize the Postal Service to take necessary steps to reduce costs. As discussed in more detail in the remainder of this section, the Postal Service will need to realize cost reductions in order for the system to achieve financial stability. The Commission also expects its proposed solution to support continued cost reduction. As demonstrated by the cycle discussed above and in more detail in section III.D.1, infra, improvements in medium- and long-term financial stability and increased operational efficiency should lead to cost reductions when the cycle is functioning normally. The Commission intends to review the proposed regulatory changes to the market dominant ratemaking system after the supplemental rate authority expires as explained in more detail below. This time period is consistent with the recommendations for another review in the near-term made by the Public Representative (suggesting to review in 4 years) 55 and the Postal Service (suggesting to review in 5 years).56 It is critical under a price cap regime to be able to revisit a plan’s performance quickly enough to prevent either persistent windfalls to the firm that harm consumers or persistent revenue shortfalls that damage the producer. See Kwoka Declaration at 11– 12. At the same time, however, reviewing the system too frequently can undermine the incentives towards efficiency that the price cap was intended to foster. See id. at 8. The Commission determines that reviewing the system after the supplemental rate 54 See, e.g., ANM et al. Comments at 9; DMA et al. Comments at 3; GCA Comments at 20–21. 55 PR Comments at 60–61. 56 Postal Service Comments at 219 n.430. PO 00000 Frm 00011 Fmt 4701 Sfmt 4702 58289 authority expires is reasonable and appropriate. The Commission discusses the expiration of the supplemental rate authority in more detail in section III.C.3, infra. b. The Commission’s Proposed Approach Based on the methodology described above, the Commission proposes a twopronged solution designed to place the Postal Service on the path to financial stability by providing rate adjustment authority in addition to the CPI–U rate authority. The Commission proposes to make available both: (1) Supplemental rate authority to put the Postal Service on the path to medium-term financial stability and (2) performance-based rate authority (contingent on the Postal Service meeting or exceeding an operational efficiency-based standard and adhering to service standard quality criteria) to put the Postal Service on the path to long-term financial stability. The reminder of this section summarizes the purpose, amount, and mechanization of each type of rate authority. The Commission provides more detailed explanations of the supplemental rate authority and performance-based rate authority, infra, in sections III.C and III.D, respectively. First, the proposed supplemental rate authority aims to put the Postal Service on the path to medium-term financial stability by providing the Postal Service the opportunity to generate additional revenue to cover its obligations. In determining the amount of supplemental rate authority, the Commission uses the $2.7 billion FY 2017 net loss as its reference point.57 Providing a discrete amount of supplemental rate authority on a steady and regular annual basis for 5 years should put the Postal Service on the path to medium-term financial stability while also taking into account pricing predictability and stability. Therefore, the Commission provides for 2 percentage points of rate authority per class of mail per calendar year for each of the first 5 full calendar years following the effective date of these proposed rules. This proposed supplemental rate authority is necessary to achieve Objective 5. The detailed justifications relating to the purpose, amount, and mechanism to allocate the proposed supplemental rate authority are addressed in section III.C, infra. Second, the proposed performancebased rate authority aims to put the Postal Service on the path to long-term 57 United States Postal Service, 2017 Report on Form 10–K, November 14, 2017, at 16 (Postal Service FY 2017 Form 10–K). E:\FR\FM\11DEP2.SGM 11DEP2 58290 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules financial stability by providing the Postal Service the opportunity to generate retained earnings. These earnings would fund adequate levels of capital investment. In determining the amount of performance-based rate authority, the Commission uses several reference points related to capital investment, capital assets, and borrowing authority. Making the availability of this performance-based rate authority contingent on the Postal Service meeting or exceeding an operational efficiency-based standard and adhering to service standard quality criteria should put the Postal Service on the path to long-term financial stability while also providing for accountability. Therefore, the Commission provides for up to 1 percentage point of rate authority per class of mail per calendar year, contingent on the Postal Service meeting or exceeding an operational efficiency-based standard and adhering to service standard quality criteria. This proposed performance-based rate authority is necessary to achieve Objectives 1, 3, and 5. The detailed justifications relating to the purpose, amount, and mechanism to allocate the proposed performance-based rate authority are addressed in section III.D, infra. daltland on DSKBBV9HB2PROD with PROPOSALS C. Supplemental Rate Authority 1. Background In the three-tiered financial stability analysis used in Order No. 4257, the Commission determined that although short-term stability was achieved under the PAEA, medium- and long-term stability were not. This section discusses the medium-term tier of the financial stability test. To be deemed financially stable in the medium-term, the Postal Service’s total revenue should cover total cost (both attributable and institutional). Order No. 4257 at 165. The Commission measured this by analyzing net income, which consists of (total revenue ¥ [attributable costs + institutional costs]). Id. The Commission found that the Postal Service experienced a net loss in every year of the PAEA era, as total revenue generated was inadequate to cover total costs. Id. at 168. As a result, the Commission determined that the Postal Service did not achieve medium-term financial stability. Id. This was compounded because the existing ratemaking system did not achieve cost reductions and operational efficiency gains sufficient to contribute to the financial stability of the Postal Service. See id. at 274. Therefore, the Commission aims to design a ratemaking system that will put VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 the Postal Service on the path to generating positive net income. The Commission uses Order No. 4257’s medium-term stability framework for its analysis, but utilizes the FY 2017 net loss as a starting point for its calculation to put the Postal Service on the path towards medium-term financial stability. In the remainder of this section, the Commission discusses how it estimates the amount of the proposed supplemental rate authority necessary to address this net loss. The Commission then discusses how it proposes to allocate this proposed supplemental rate authority in a manner that balances the PAEA’s objectives. medium-term stability in future years. Such precision is not necessary to effectuate the Commission’s proposal because the proposed supplemental rate authority is not designed to provide sufficient revenue to cover costs in the same way as the revenue requirement of the Postal Reorganization Act’s breakeven regime. Instead, the proposed supplemental rate authority is designed to provide the opportunity to generate additional revenue that is sufficient, when combined with cost reductions and operational efficiency gains, to improve the financial stability of the Postal Service. 2. Amount of Supplemental Rate Authority a. Proposed Commission Solution To estimate the amount of additional revenue that would be needed in order to put the Postal Service on the path to medium-term financial stability, the Commission uses as its starting point the FY 2017 net loss. During the first 10 years under the PAEA, the Postal Service’s net loss ranged from $2.8 billion to $15.9 billion. Order No. 4257 at 168, Table II–10. The net losses experienced over this period show that the rate adjustment authority under the existing market dominant ratemaking system was insufficient. The Commission determines that an adjustment to the system is necessary to provide the Postal Service with tools to address its ongoing net income shortfall. Based on the FY 2017 net loss of $2.7 billion, the Postal Service would need additional revenue of $2.7 billion to achieve medium-term stability (i.e., to have total revenue equal to all attributable and institutional costs).58 This represents 5.7 percent of FY 2017 market dominant revenue. While the Commission relies on the FY 2017 net loss as a reference point, it also looks to additional considerations in determining the amount of proposed supplemental rate authority. The Postal Service’s future financial position will be affected by a multitude of influences such as changes in inflation, the cost of inputs, changes in operational efficiency, secular volume trends, and mailers’ responses to price changes. As a result, it is not possible to precisely calculate the exact amount of additional pricing authority that will achieve 58 For purposes of determining the amount of supplemental rate authority, competitive products are assumed to maintain the current level of contribution to institutional costs. In the 10 years following the enactment of the PAEA, revenue generated from competitive products has covered those products’ attributable costs and has exceeded those products’ required contribution to institutional costs. PO 00000 Frm 00012 Fmt 4701 Sfmt 4702 3. Phase-in Mechanism Taking this $2.7-billion revenue increase developed using the FY 2017 net loss as its reference point, the Commission has considered how to authorize the proposed supplemental rate authority in a manner that will put the Postal Service on the path to generating sufficient revenue to meet its medium-term obligations balancing all of the PAEA’s objectives. The Commission has given weight to the commenters’ concerns regarding the timing and magnitude of rate increases. Based on these concerns and the analysis in Order No. 4257, the Commission proposes to design the ratemaking system to allow for this proposed supplemental rate authority on an annual basis over a finite period. Given the magnitude of the FY 2017 loss, the Commission finds that the most appropriate means of putting the Postal Service on a path to medium-term financial stability is to provide 2 percentage points of supplemental rate authority each year for a 5-year period, after which it ends. As discussed in section III.B.3, supra, the Commission determines that 5 years is a reasonable and appropriate time period to allow the Postal Service the opportunity to achieve medium-term financial stability, after which time the Commission will review the Postal Service’s financial performance. Specifically, the Commission proposes to make available to the Postal Service 2 percentage points of supplemental rate authority per class of mail per calendar year for each of the first 5 full calendar years following the effective date of these proposed rules. This proposal is structured to encourage regular and stable timing and magnitude of rate increases—that is the same amount of supplemental rate authority, provided on an annual basis at the same time each year, over a finite period of years. This proposed magnitude and 5- E:\FR\FM\11DEP2.SGM 11DEP2 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules year phasing schedule will allow mailers to plan their operations and budgets over this period. Applying this proposed supplemental rate authority in addition to the CPI–U price cap for 5 years produces estimated revenues with a net present value equal to that of a one-time rate increase of 5.7 percent above CPI–U followed by 4 years of inflation-only increases. These estimates of future revenues are developed by applying the future rate increases to current mail volumes. Market dominant product volumes have been declining overall and shifting toward lower-priced products and rates. Given these recent volume trends and the effects of price elasticity,59 the assumption of constant mail volumes results in revenue estimates the Commission reasonably anticipates will be higher than the revenues that the proposed rate adjustment authority would actually generate. Accordingly, the Commission intends for the Postal Service to achieve cost reductions and operational efficiency gains sufficient to close the gap between total revenue and total costs. daltland on DSKBBV9HB2PROD with PROPOSALS 59 See Order No. 4257 at 127–30. VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 This proposed approach is consistent with the Commission’s analyses and the resulting conclusions reached in Order No. 4257. See generally id. at 142–46, 247–49, 274–75. At the same time, the proposal is necessary to achieve Objective 5, as the supplemental rate authority will put the Postal Service on the path to medium-term financial stability. b. Commission Analysis of the Alternatives The Commission evaluated an alternative approach that would grant the Postal Service supplemental rate authority for use on a one-time basis. Specifically, this one-time rate adjustment would provide for 5.7 percentage points of rate authority for use during the first year following the effective date of these proposed rules.60 Ultimately, the Commission determines that phasing in 2 percentage points of supplemental rate authority over 5 years better balances the PAEA’s objectives. 60 Under this option, the proposed performancebased rate authority, intended to put the Postal Service on the path to long-term financial stability, would not be available until the second year following the effective date of these proposed rules. PO 00000 Frm 00013 Fmt 4701 Sfmt 4702 58291 Both the Commission’s proposal and the one-time rate adjustment option would put the Postal Service on the path to medium-term financial stability. In light of commenter views, the difficultly in forecasting the potential effects of a oneoff rate adjustment, and the complications involved in correcting those potential effects, the Commission determines that spreading increases out over a longer period of time is more prudent. Spreading the increases allows the Commission, Postal Service, and stakeholders to monitor the evolving financial health, efficiency gains, cost reductions, and other goals of the ratemaking system over a period of years. Therefore, the Commission proposes to allow 2 percentage points of supplemental rate authority per year over 5 years. This determination is illustrated in Figure III–1, which illustrates that over a 5-year period, the rate increases under the Commission’s proposal would be more smooth and steady than the alternative approach of providing 5.7 percentage points of rate authority in year 1. BILLING CODE 7710–FW–P E:\FR\FM\11DEP2.SGM 11DEP2 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules In Figure III–1, CPI–U is estimated to be 2.05 percent each year for the next 5 years.61 One-time supplemental authority of 5.7 percent, combined with a CPI–U authority pricing increase of 2.05 percent would lead to pricing authority of 7.75 percent for each class of mail. Such an increase would be well outside the industry’s experience under the PAEA system of ratemaking. See Order No. 4257 at 106, Table II–3. The Commission notes that predicting the impacts of such a change would therefore be difficult, and the Commission, the Postal Service, and mailers would have limited opportunity to make adjustments for those impacts. On the other hand, moderated increases spread across a longer period should allow the Commission, the Postal Service, and mailers to monitor the 61 This is consistent with the medium-term forecast by the Bureau of Labor Statistics. Bureau of Labor Statistics Employment and Economic Projections for 2016 to 2026 (as of October 2017), Excel file ‘‘historicmacro.xls,’’ tab I, row 40, available at https://www.bls.gov/emp/ep_data_ aggregate_economy.htm. VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 evolving financial health, efficiency gains, cost reductions, and other goals of the ratemaking system over a period of years. As a result, the Commission proposes a series of five CPI–U price adjustments with the additional supplemental authority and finds such approach is most consistent with the metrics developed and employed by the Commission in Order No. 4257. c. Proposed Regulatory Changes The Commission has considered the comments and the foregoing analysis in developing proposed subpart D to 39 CFR part 3010. The Commission proposes to allocate 2 percentage points of supplemental rate authority per class of mail per calendar year for each of the first 5 full calendar years following the effective date of these proposed rules. d. Conclusion This proposed supplemental rate authority will address the Postal Service’s ongoing financial instability by providing the opportunity for the Postal Service to generate adequate PO 00000 Frm 00014 Fmt 4701 Sfmt 4702 revenue and put the Postal Service on the path to financial stability which is necessary to achieve Objective 5. See 39 U.S.C. 3622(b)(5). D. Performance-Based Rate Authority 1. Background As discussed in Order No. 4257, the existing ratemaking system did not achieve the objectives during the first 10 years following the PAEA’s enactment. The Commission identifies three interrelated deficiencies of the existing ratemaking system, which the Commission proposes to address through the performance-based rate authority. The PAEA intended the market dominant ratemaking system to enable the Postal Service to achieve financial stability. Order No. 4257 at 146. To maintain financial stability, the ratemaking system must enable the Postal Service to ‘‘assure adequate revenues, including retained earnings,’’ as required by Objective 5. Id. at 147 (quoting 39 U.S.C. 3622(b)(5)). Moreover, as detailed in Order No. E:\FR\FM\11DEP2.SGM 11DEP2 EP11DE17.002</GPH> daltland on DSKBBV9HB2PROD with PROPOSALS 58292 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules 58293 help maintain high quality service standards. Maintenance of high quality service standards promotes demand for postal products, which leads to increased revenue. Increased revenue and decreased costs lead to sustained net incomes, which results in retained earnings. A related but separate component to this cycle is borrowing. Retained earnings can be used to pay down debt and borrowing can be used to finance capital investments. Figure III–2 illustrates this cycle. resulted in an accumulated deficit rather than retained earnings. Starting from the baseline FY 2006, Figure III– 3 illustrates the Postal Service’s recurring net losses and accumulated deficit during the PAEA era. VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 PO 00000 Frm 00015 Fmt 4701 Sfmt 4702 E:\FR\FM\11DEP2.SGM 11DEP2 EP11DE17.003</GPH> Id. at 261–62 (citing 39 U.S.C. 3622(b)(3)). Ideally, these three objectives would function in a harmonious cycle. The cycle begins with the path to financial stability. A financially healthy Postal Service generates adequate revenues to ensure net income, which provide retained earnings. Retained earnings enable the Postal Service to make the kinds of capital investments needed to improve operational efficiency. Capital investments that improve efficiency will also likely lead to cost reductions and However, this cycle has broken down under the existing ratemaking system because consecutive net losses have daltland on DSKBBV9HB2PROD with PROPOSALS 4257, the PAEA intended that the Postal Service’s financial health would be maintained in conjunction with other objectives of the PAEA. See id. at 274. The ratemaking system must ‘‘maximize incentives to reduce costs and increase efficiency,’’ as required by Objective 1. Id. at 178 (quoting 39 U.S.C. 3622(b)(1)). Further, the PAEA intended that the ratemaking system would encourage the maintenance of high quality service standards, as required by Objective 3. 58294 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules The Postal Service has no shareholders and may not invest in stocks, bonds, or other financial instruments. Therefore, without retained earnings, its only means of financing capital investments is through revenue or borrowing. As accumulated deficit increased in the early years under the PAEA, the Postal Service began relying heavily on borrowing. It reached its $15 billion borrowing authority limit in FY 2012—5 years after the PAEA was enacted. See Order No. 4257 at 164, Table II–8. After that, the Postal Service began offsetting its lack of borrowing authority by increasing cashon-hand. See id. at 163–64. Although the Postal Service has been unable to generate net income since the PAEA was enacted, it has been able to generate operating profits. Thus, while the Postal Service has not paid all of its obligations, as noted in Order No. 4257, it has been able to increase its cash reserves. See id. at 164, Table II–8. Figure III–4 shows the Postal Service’s outstanding debt and cash on hand for FY 2006 through FY 2016. 62 See Docket No. R2013–11, Order No. 1926, Order Granting Exigent Price Increase, December 24, 2013; Docket No. R2013–11, Order No. 3186, Order on Removal of the Exigent Surcharge and Related Changes to the Mail Classification Schedule, March 29, 2016. 63 United States Postal Service, 2016 Report on Form 10–K, November 15, 2016, at 58 (Postal Service FY 2016 Form 10–K). VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 PO 00000 Frm 00016 Fmt 4701 Sfmt 4702 E:\FR\FM\11DEP2.SGM 11DEP2 EP11DE17.004</GPH> daltland on DSKBBV9HB2PROD with PROPOSALS As shown in Figure III–3, the recurring net losses resulted in accumulated deficit in every year since the PAEA was enacted in FY 2007. Between FY 2008 and FY 2012, the accumulated deficit increased from $4.7 billion to $38 billion. After FY 2012, the accumulated deficit continued to grow, but at a slower rate. This was due, in part, to the exigent surcharge in place from January 2014 to April 2016.62 The accumulated deficit of $59.1 billion in FY 2016 includes $54.8 billion in expenses related to prefunding the RHBF.63 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules 58295 these commitments are called capital outlays.68 Because needs and budgets vary by year, the amount of capital commitments and outlays fluctuate annually.69 As its accumulated deficit increased, the Postal Service began to decrease its capital commitments and subsequent outlays. Figure III–5 illustrates the change in capital commitments and outlays throughout the PAEA era.70 Capital outlays were severely curtailed in FY 2012, FY 2013, and FY 2014.71 This reflected the Postal Service’s lack of capital commitments in the preceding years and was due in part to the Postal Service reaching its borrowing authority limit in FY 2012. In FY 2015 and FY 2016, capital outlays began to increase as the Postal Service made capital commitments based on additional revenue generated by the exigent rate increase.72 64 Postal Service FY 2016 Form 10–K at 10, 32; see also 2015 Report on Form 10–K United States Postal Service, November 13, 2015, at 9, 46 (Postal Service FY 2015 Form 10–K); 2014 Report on Form 10–K United States Postal Service, December 5, 2014, at 9 (Postal Service FY 2014 Form 10–K). 65 See Postal Service FY 2015 Form 10–K at 31 (‘‘We continued to employ a discretionary capital expenditure plan for priority projects that are essential to conserve cash.’’); id. (‘‘Priority has been given to projects: 1. Needed for safety and/or health or legal requirements; 2. Required to provide service to our customers; and 3. Initiatives with a high return on investment and a short payback period.’’); id. (‘‘To save cash, we have also deferred facilities maintenance, which has no impact on health and safety issues.’’); see also Postal Service FY 2014 Form 10–K at 32. 66 See Postal Service FY 2015 Form 10–K at 32 n.4 (‘‘Capital commitments pertain to purchases of equipment, building improvements, and vehicles for legally binding obligations.’’). 67 See id. at 31 (‘‘The source of funds needed to fulfill these commitments was generated from our operating activities.’’). 68 See United States Postal Service, 2008 Report on Form 10–K, September 26, 2008, at 24 (Postal Service FY 2008 Form 10–K) (‘‘Our capital cash outlays consist of the funds invested for new facilities, new automation equipment, and new services.’’). 69 See Postal Service FY 2014 Form 10–K at 9 (‘‘If our operations do not generate the liquidity we require, we may be forced to reduce, delay or cancel investments in technology, facilities and/or transportation equipment, as we have done in the recent past.’’). 70 As seen in Figure III–5, the decrease in capital outlays lagged the decrease in capital commitments, as the Postal Service continued to fund capital commitments made in prior years. 71 U.S. Postal Service Five-Year Strategic Plan, Fiscal Years 2017 to 2021, September 30, 2016, at 23 (FY 2017–2021 Strategic Plan). 72 The Postal Service stated that ‘‘[i]n 2016, [it] invested $1.4 billion in the purchase of property and equipment, an increase of $206 million over 2015, as [it] used additional cash on hand to fund some of [its] much-needed investments in building improvements, vehicles, equipment and other capital projects. In 2015, [it] invested $1.2 billion in the purchase of property and equipment, an increase of $441 million over 2014.’’ Postal Service FY 2016 Form 10–K at 32. It also stated that ‘‘[a]vailable liquidity (cash and short-term investments, plus available borrowing capacity) has increased by approximately $6 billion from the reported 2012 low. This improvement would not have occurred had the Postal Service not defaulted on the annual PSRHBF prefunding payments in 2012 and subsequent years. Aside from the defaults, the improvement is largely attributable to the temporary exigent surcharge . . . which generated approximately $4.6 billion in incremental revenue from January 2014 through April 10, 2016, as well as to aggressively managing capital expenditures and operating expenses under management’s control.’’ Id. at 47. VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 PO 00000 Frm 00017 Fmt 4701 Sfmt 4702 E:\FR\FM\11DEP2.SGM 11DEP2 EP11DE17.005</GPH> daltland on DSKBBV9HB2PROD with PROPOSALS The accumulated deficit and lack of borrowing authority has severely restricted the Postal Service’s ability to make capital improvements.64 The Postal Service selects its capital improvements based on need and budget.65 Capital commitments are made for the projects selected.66 The Postal Service makes commitments for capital investments based, in part, on the availability of cash flow from its operations.67 The funds used to pay for 58296 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules Postal Service’s net asset holdings decreased substantially during the PAEA era.73 As shown in Table III–1 property and equipment declined by $7.8 billion, or 33.8 percent between FY 2006 and FY 2016. 73 Net asset holdings are property and equipment recorded at cost, including interest on borrowings used to pay for the construction of major capital additions, less accumulated depreciation. FY 2016 USPS Form 10K at 44. VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 PO 00000 Frm 00018 Fmt 4701 Sfmt 4702 E:\FR\FM\11DEP2.SGM 11DEP2 EP11DE17.006</GPH> daltland on DSKBBV9HB2PROD with PROPOSALS However, even with the increase in capital commitments and outlays in FY 2015 and FY 2016, the value of the daltland on DSKBBV9HB2PROD with PROPOSALS BILLING CODE 7710–FW–C The Postal Service’s sharp decline in capital investments contributed to the system not achieving Objective 1 (‘‘maximize incentives to reduce costs and increase efficiency’’), Objective 3 (‘‘maintain high quality service standards established under section 3691’’), and Objective 5 (‘‘assure adequate revenues, including retained earnings, to maintain financial stability’’). 39 U.S.C. 3622(b)(1), (3), and (5). The lack of financial stability, insufficient levels of efficiency gains and cost reductions, and inability to adequately encourage the maintenance of service standard quality were interrelated causes and effects of the deficiencies experienced under the existing ratemaking system. To address these interrelated deficiencies, the ratemaking system must provide the Postal Service the opportunity to generate additional revenue coupled with incentives to increase operational efficiency and maintain high quality service standards. Therefore, the Commission determines that it is necessary to provide additional rate authority to put the Postal Service on the path to long-term financial stability, contingent on the Postal Service meeting particular performancebased thresholds. VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 2. Amount of Performance-Based Rate Authority After balancing the objectives of the ratemaking system, the Commission determines that the best course of action is not to provide the Postal Service a specific level of retained earnings or a set amount of funding for capital investment but rather to put the Postal Service on a path to long-term financial stability while providing meaningful incentives for the Postal Service to increase operational efficiency and maintain high quality service standards. Given the importance of capital investment to the cycle shown in Figure III–2, supra, the Commission finds that capital investment data from the PAEA era are appropriate reference points. As a result of its analysis below, the Commission determines that the appropriate amount of performancebased rate authority is 1 percentage point per annum. This amount was determined by analyzing net asset holdings, capital outlays, and borrowing authority. The $7.8 billion needed to replace the net asset holdings that declined in the PAEA era represents approximately 16 percent of FY 2017 market dominant revenue. Capital outlays were approximately $1.2 billion less in FY 2016 than in FY 2006, the last fiscal year before PAEA was enacted. The PO 00000 Frm 00019 Fmt 4701 Sfmt 4702 58297 reduction in the annual capital outlays that occurred during the PAEA era represents approximately 2.5 percent of FY 2017 market dominant revenue. The $15 billion in borrowing authority that the Postal Service exhausted during the PAEA era represents approximately 31 percent of FY 2017 market dominant revenue. Taking into account these reference points, the impact of the proposed supplemental rate authority, and the rate increases experienced during the PAEA era, the Commission applies its expert judgment in postal matters to determine that 1 percentage point per annum is the appropriate amount of performance-based rate authority. All other things being equal, the 1 percentage point of proposed performance-based rate authority would allow the Postal Service to return to prePAEA levels of capital outlays in just over 2 years. In approximately 5 years, the proposed performance-based rate authority would produce enough cumulative additional revenue to allow the Postal Service to replace the $7.8 billion decrease in net capital assets that occurred in the PAEA era. It would take approximately 9 years of accumulated additional revenue at a 1-percent rate of increase in prices to also pay off the $15 billion in borrowing authority the Postal Service exhausted during the PAEA. E:\FR\FM\11DEP2.SGM 11DEP2 EP11DE17.007</GPH> Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules 58298 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules daltland on DSKBBV9HB2PROD with PROPOSALS These calculations assume that all of the future rate increases are applied to FY 2017 volumes. As noted in section III.C.2, supra, market dominant product volumes have been declining overall, as well as shifting toward lower-priced products and rates. Given these trends, and the mailers predicted responses to price increases, the Commission anticipates that the amount of additional revenue generated by this proposed performance-based rate authority will be less than these calculations suggest. As noted above, the Postal Service will need to improve operational efficiency to achieve financial stability. Given the uncertainty as to the exact amount of revenues the performance-based rate authority will produce and how much improvement in efficiency the Postal Service will achieve under this approach, the Commission will review the Postal Service’s long-term financial stability after the supplemental rate authority expires and consider whether adjustments to the performance-based rate authority should be made. See section III.B.3, supra. Because of the interdependence of long-term financial stability, operational efficiency, and service quality, the Commission addresses these jointly by linking the availability of this additional rate authority to efficiency and service standard metrics. To facilitate this combined approach, the additional rate authority is structured as an annual amount that is conditioned on the achievement of efficiency gains and the maintenance of service standards. The full amount of the proposed performance-based rate authority will not be available if the Postal Service does not meet or exceed an operational efficiency-based standard and adhere to service standard quality criteria. The magnitude, timing, and conditional design of this mechanism balances the need to ensure the long-term financial stability of the Postal Service (Objective 5), maximize incentives to reduce costs and increase efficiency (Objective 1), and maintain high quality service standards (Objective 3) with the other statutory objectives of the PAEA consistent with the analysis in Order No. 4257. additional rate authority in a manner that will address the interrelated systemic deficiencies. The Commission finds that although additional revenue is needed, additional revenue, alone, is insufficient to address the need to also increase operational efficiency and maintain high quality service standards. As discussed in Order No. 4257, all of these are necessary in order for the system to achieve the objectives of 39 U.S.C. 3622(b). Therefore, the Commission proposes to address these interrelated issues through the creation of a Performance Incentive Mechanism (PIM). Generally, a PIM takes the form of either a bonus (e.g., additional rate authority) or a penalty (e.g., reduction in rate authority) tied to performance criteria. The use of PIMs may be particularly appropriate where the regulated entity, such as the Postal Service, is subject to cost-cutting pressures.74 3. Performance Incentive Mechanism The Commission has carefully considered how to allocate this a. Proposed Commission Solution Consistent with the analysis in Order No. 4257, the solution proposed by the Commission is necessary to achieve several of the PAEA’s objectives. In fashioning the incentive mechanism, the Commission has specifically focused on Objective 1 (maximizing incentives to reduce costs and increase efficiency), Objective 3 (maintaining high quality service standards), and Objective 5 (assuring adequate revenues, including retained earnings, to maintain financial stability), and the Commission’s related analysis in Order No. 4257. See 39 U.S.C. 3622(b)(1), (3), and (5). The Commission proposes to make this performance-based rate authority conditional on the Postal Service meeting or exceeding an operational efficiency-based standard and adhering to service standard quality criteria. Using a performance-based approach should encourage the Postal Service to maintain service standard quality and maximize incentives to increase efficiency—thereby addressing areas where the existing ratemaking system was deficient in the 10 years following the enactment of the PAEA. In line with the general premise that improved operational efficiency should help to improve service, the Commission determines that it is appropriate to attach more weight to the operational efficiency aspect of the incentive mechanism. Therefore, the Commission 74 See Mark Newton Lowry & Tim Woolf, Performance-Based Regulation in High Distributed Energy Resources Future, Lawrence Berkley National Laboratory, Report No. 3, January 2, 2016; see also Melisa Whited, Tim Woolf, & Alice Napoleon, Utility Performance Incentive VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 PO 00000 Frm 00020 Fmt 4701 Sfmt 4702 divides this 1 percentage point of performance-based rate authority between an operational efficiency-based standard (0.75 percentage points), and service quality-related criteria (0.25 percentage points). b. Proposed Regulatory Changes The Commission has considered the comments and the foregoing analysis in developing proposed subpart E to 39 CFR part 3010, which sets forth the criteria for the availability of performance-based rate authority. The Commission proposes to allocate up to 1 percentage point of rate authority based on the Postal Service meeting or exceeding an operational efficiencybased standard and adhering to service standard quality criteria. c. Conclusion This proposed performance-based rate authority will address three interrelated deficiencies in the existing ratemaking system: Generating sufficient revenue to assure long-term financial stability, maximizing incentives to reduce costs and increase efficiency, and maintaining high quality service standards. This proposed performance-based rate authority is necessary to achieve Objectives 1, 3, and 5. In sections III.D.4 and III.D.5, infra, the Commission details the specifics of the operational efficiency and service aspects of the incentive mechanism. 4. Operational Efficiency a. Introduction The existing market dominant ratemaking system did not maximize incentives to increase operational efficiency in accordance with Objective 1. Order No. 4257 at 222; 39 U.S.C. 3622(b)(1). Consistent with Order No. 4257, the Commission uses total factor productivity (TFP) as its determinative metric for operational efficiency because it is the best available measure of efficiency. Order No. 4257 at 206. Because TFP contains all of the components needed to determine the efficiency of a multi-product firm and comprehensively accounts for both the inputs and outputs of the Postal Service, TFP reflects the efficiency changes that occur in a given year. Id. To arrive at the final TFP figure, the model divides the workload index by the input index as follows: Mechanisms: A Handbook for Regulators, Western Interstate Energy Board, March 9, 2015. E:\FR\FM\11DEP2.SGM 11DEP2 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules b. Comments The Postal Service and the Public Representative include detailed evaluations of operational efficiency in their comments. The Postal Service retained Christensen Associates (Christensen) to provide an evaluation of TFP as a measure of operational efficiency. Postal Service Comments at 57 (citing Postal Service Comments, Appendix D). The TFP methodology as used by the Postal Service was initially developed by Christensen in 1983. Postal Service Comments, Appendix D at 2. In an appendix attached to the Postal Service’s comments, Christensen explains the calculation of TFP, compares TFP to other potential ways of measuring efficiency gains, and discusses how TFP results should be assessed. See id. Appendix D. Christensen concludes that TFP is a more comprehensive measure of operational efficiency than the other measures considered by the Commission, but Christensen cautions that the TFP measurement is subject to 75 See, e.g., USPS Annual Tables, FY 2016 TFP (Total Factor Productivity), March 1, 2017. 76 See Docket No. N2010–1, Responses of the United States Postal Service to MPA Interrogatories MPA/USPS–T2–2–7.a.–c., 8–12, Redirected from Witness Corbett, June 23, 2010, file ‘‘MPA.T2.3.b.TFP.Formulas.pdf.’’ VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 substantial year-to-year variation. Id. at 4–5. Christensen recommends analyzing TFP trends over multi-year periods when evaluating TFP improvements. Id. at 6. The Postal Service echoes Christensen’s concern that if TFP is to be used an evaluation tool, it is important to look at TFP trends over several years, rather than at annual TFP results in isolation. Postal Service Comments at 57, 197. The Postal Service suggests that the price cap is no longer necessary to incentivize the Postal Service to aggressively focus on increasing operational efficiency and reducing costs. Id. at 190. The Postal Service maintains that the efficiency gains that have occurred during the PAEA era were driven more by the Postal Service’s strategy to respond to volume declines presented by the ‘‘new normal’’ marketplace than by the discipline imposed by the price cap. Id. Therefore, the Postal Service states that even without a price cap, it has strong incentives to reduce costs and increase efficiency in order to restrain price increases and thereby minimize further volume decline. Id. Moreover, the Postal Service asserts that a lack of financial stability, which it attributes to the price cap, inhibits its ability to ensure the efficiency of its operations by limiting its ability to make capital investments. Id. at 193. Further, the Postal Service acknowledges that ‘‘after 17 years of substantial efficiency gains and cost reductions, it must be recognized that the ability to achieve additional reduction in those costs that are within the Postal Service’s control will be more difficult moving forward.’’ Id. at 194 (emphasis in original). In support of this premise, Christensen observes ‘‘in order to continually increase TFP, the Postal Service must continue to find new ways to reduce costs.’’ Id. Appendix D at 6. The Public Representative suggests that there is a high level of uncertainty associated with measuring the efficiency of the Postal Service. PR Comments at 28. In her declaration in support of the Public Representative, Dr. Lyudmila Y. Bzhilyanskaya acknowledges that TFP has been widely used to assess productive efficiency in service industries but comments that she has reservations regarding the utilization of TFP as an exhaustive measure of efficiency. Bzhilyanskaya Decl. at 8. She states that technological progress and other aspects of efficiency (such as scale PO 00000 Frm 00021 Fmt 4701 Sfmt 4702 efficiency, allocative efficiency, and/or dynamic efficiency), may not be fully reflected in the TFP metric but are still important for the Postal Service. Id. She also states that annual TFP indexes focus more on short-term productivity and do not always consider long-term productivity, which is better reflected by cumulative TFP indexes and/or TFP trends. Id. at 9. Moreover, she expresses concern that TFP is not capable of capturing changes in product and/or service quality. Id. at 12. She suggests improvements to the transparency of information related to the TFP indexes, exploration of alternative indexing procedures, and adjustments when new products are introduced or a product is transferred from the market dominant to the competitive products list. Id. at 5–7, 10–11. Other commenters discuss operational efficiency more generally. ANM et al. assert that the Postal Service’s productivity has been stagnant. ANM et al. Comments at 6. They maintain that the Postal Service ‘‘needs to revive its cost saving efforts and make serious progress in network rationalization and delivery mode conversion.’’ ANM et al. Comments at 6–7, 51–53. NNA recommends encouraging specific practices to increase operational efficiency for newspapers such as more efficient container preparation and increased use of Intelligent Mail barcodes. NNA Comments at 3–4. APWU maintains that the Postal Service has largely realized all of the efficiencies that it can, forcing it to turn to service cuts and forestall capital investments for efficiency improvements and new product development. APWU Comments at 10. It asserts that the TFP gains occurring after 2007 came at the expense of service. Id. at 26. c. Proposed Commission Solution Based on the comments and the Commission’s analysis in Order No. 4257, the Commission proposes to use a performance-based mechanism to encourage the Postal Service to maximize the incentives to increase operational efficiency by allocating 0.75 percentage points of performance-based rate authority based on the Postal Service meeting or exceeding an operational efficiency-based standard. The Commission refers to this proposed rate authority as the operational efficiency-based rate authority. E:\FR\FM\11DEP2.SGM 11DEP2 EP11DE17.008</GPH> daltland on DSKBBV9HB2PROD with PROPOSALS The Postal Service calculates TFP annually and files that figure and the supporting data with the Commission.75 The Postal Service detailed the current TFP methodology in Docket No. N2010– 1.76 The Commission considers this methodology an accepted analytical principle. Order No. 4257 at 207. As such, any future changes to this methodology are subject to Commission review and approval through the rulemaking process appearing in existing § 3050.11. Id. TFP generally increased during the PAEA era. Id. at 208. However, the system was: (1) Unable to achieve operational efficiency gains sufficient to contribute to the financial stability of the Postal Service; and (2) unable to achieve increases in efficiency at a greater rate than in the relevant comparable time period (the 10 years prior to implementation of the PAEA). Id. at 222–26. Therefore, the Commission proposes modifications to the ratemaking system to incentivize the Postal Service to address these deficiencies. 58299 daltland on DSKBBV9HB2PROD with PROPOSALS 58300 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules Consistent with its analysis in Order No. 4257, the Commission proposes to measure operational efficiency for purposes of this incentive mechanism using TFP. Conditioning rate authority on increases in TFP incentivizes the Postal Service to maximize output while minimizing costs, leading to improvements in operational efficiency. Using a performance-based approach to incentivize continued TFP growth will help incentivize the Postal Service to overcome the challenges to finding new ways to increase efficiency referenced by the Postal Service and Christensen. The Commission proposes to evaluate as part of its ACD whether average TFP growth for the most recent 5-year period has met or exceeded 0.606 percent. The standard of 0.606 percent reflects the average growth for TFP over the most recent 5 fiscal years of the PAEA era, i.e., for the 5-year period from FY 2011 to FY 2016.77 If the Commission finds that such is the case, then the 0.75 percentage points of operational efficiency-based rate authority shall be allocated to each class of mail for the next calendar year. If the Commission finds that average TFP growth for the most recent 5-year period has not met or exceeded 0.606 percent, then the 0.75 percentage points of operational efficiency-based rate authority shall not be made available to the Postal Service. This proposed procedure will give the Postal Service and ratepayers adequate advance notice of whether the 0.75 percentage points of operational efficiency-based rate authority will be available to the Postal Service to use for the next calendar year. The Commission anticipates that the Postal Service’s operational efficiency for the next 5 years will continue to increase at least at the same rate that it has over the most recent 5 years of the PAEA era. The Commission may reevaluate this standard after the expiration of the proposed supplemental rate authority. Use of a rolling 5-year average for TFP growth should allow enough time for the effects of any long-term investments to appear in the TFP calculation. This also minimizes the possibility raised by both the Postal Service and Christensen of an isolated annual result being unrepresentative. Moreover, this approach is consistent with the Commission’s maximization analysis in Order No. 4257, which compared the pace of efficiency gains by comparing the 10 years of experience in the PAEA era and the 10 years immediately preceding implementation of the PAEA. 77 The 5-year average is 0.605656, which the Commission rounds to 0.606. VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 See Order No. 4257 at 248. This approach, therefore, should incentivize the Postal Service to achieve efficiency gains sufficient to contribute to the financial stability of the Postal Service. Existing § 3050.60(e) requires the Postal Service to provide the input data and calculations used to product the annual TFP estimates by March 1 of each year. This rule facilitates the Commission’s ability to evaluate proposed methodological changes under existing § 3050.11 and the public’s ability to access and understand such changes. Additionally, to increase the transparency of TFP, the Commission intends to use existing § 3050.2, which requires documentation of periodic reports (e.g., calculations and links within and between spreadsheets) to ensure that TFP is measured and calculated in a transparent manner. Order No. 4257 at 207. d. Commission Analysis of Alternatives Although the Public Representative and the Postal Service noted the limitations of TFP as a measurement of operational efficiency, no commenter proposed an alternative measurement. Christensen evaluated other measurements proposed by the Commission in Order No. 3673, such as real unit operating costs, simpler productivity measures, and total workhours. Postal Service Comments, Appendix D at 4. Christensen concluded that these measures do not fully capture the complexity of Postal Service efficiency in comparison to TFP. Id. The Commission agrees with these conclusions. Moreover, Order No. 4257 discusses several other ways to measure efficiency and concludes that TFP is the best metric available to assess the Postal Service’s efficiency. See Order No. 4257 at 206. The Postal Service comments that the price cap affects its ability to raise capital to make necessary improvements. Postal Service Comments at 130. However, removing the price cap entirely might further weaken the Postal Service’s existing incentives to maximize operational efficiency. Conditioning the availability of the operational efficiency-based rate authority on measurable TFP growth should ensure that improving the Postal Service’s financial stability does not occur at the expense of continuing to increase operational efficiency. Therefore, the proposed solution is necessary to achieve efficiency gains sufficient to contribute to the financial stability of the Postal Service. PO 00000 Frm 00022 Fmt 4701 Sfmt 4702 e. Proposed Regulatory Changes The Commission has considered the comments and the foregoing analysis in developing proposed subpart E to 39 CFR part 3010, which sets forth the criteria for the availability of performance-based rate authority. Proposed § 3010.180 describes the applicability of both the operational efficiency-based rate authority and the service quality-based rate authority. Proposed § 3010.181 outlines the procedure for allocation of the operational efficiency-based rate authority. f. Conclusion The Commission proposes to allocate 0.75 percentage points of rate authority based on the Postal Service meeting or exceeding an operational efficiencybased standard. This proposed operational efficiency-based rate authority will address that the existing ratemaking system did not maximize the incentives to increase efficiency, as required by Objective 1. Therefore, this proposed operational efficiency-based rate authority is necessary to achieve Objective 1. The proposal balances the need to provide the Postal Service with the opportunity to generate additional revenue necessary to attain long-term financial stability and the danger that increased revenue might weaken the Postal Service’s incentives to operate more efficiently. 5. Service a. Introduction The existing ratemaking system limits rate increases, and by extension, revenue (assuming volume for market dominant products does not significantly increase). Therefore, as discussed above, cost reduction and operational efficiency improvements are critical to putting the Postal Service on the path to financial stability and retained earnings. However, without adequate incentives requiring service to be maintained, reducing service may be a means of reducing costs. Therefore, the PAEA intended that the system should be designed to encourage the maintenance of high quality service standards (established under 39 U.S.C. 3691) and to hold the Postal Service accountable for consistently achieving those standards, as required by Objective 3. Order No. 4257 at 250 (citing 39 U.S.C. 3622(b)(3)). The PAEA required the Postal Service to establish, in consultation with the Commission, an initial set of service standards for market dominant products to take effect within 1 year of the PAEA’s enactment. Id. at 42 (citing 39 E:\FR\FM\11DEP2.SGM 11DEP2 daltland on DSKBBV9HB2PROD with PROPOSALS Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules U.S.C. 3691(a)). The Postal Service may adjust service standards from time to time, subject to the requirement that it seek an advisory opinion from the Commission before doing so on a substantially nationwide basis. Id. at 251 n.366 (citing 39 U.S.C. 3661(b); 39 U.S.C. 3691(a)). Service standards are determined by two components: A ‘‘delivery day range,’’ which comprises the range of days within which all mail eligible for the service standard can be expected to be delivered (e.g., between 1 and 5 days for First-Class Mail); and ‘‘business rules,’’ which determine eligibility for each specific service standard (e.g., 1-Day (referred to as ‘‘overnight’’); 2-Day; and 3–5-Day for First-Class Mail). Id. at 250. The initial service standards were reduced during the PAEA era through two major sets of revisions made by the Postal Service. Id. at 266. The first set of revisions began in FY 2012 when the Postal Service implemented its ‘‘Mail Processing Network Rationalization’’ initiative (Network Rationalization).78 Network Rationalization substantially affected the level of service for multiple mail classes multiple market-dominant mail classes, including First-Class Mail, Standard Mail, Periodicals, and Package Services. Order No. 4257 at 266. Most significantly, Network Rationalization eliminated overnight service for all First-Class Mail pieces sent by retail customers (First-Class Mail Single-Piece Letters/Postcards). Network Rationalization Revisions at 31, 194. The second set of revisions began in FY 2014 when the Postal Service implemented its ‘‘Standard Mail Load Leveling’’ initiative (Load Leveling), which added 1 day to the applicable delivery day range for certain Standard Mail pieces.79 The Postal Service asserted that both sets of revisions to the service standards were undertaken to improve operational efficiency. Network Rationalization Revisions at 31,191; Load Leveling Revisions at 12,390. Both sets of revisions increased the expected daysto-delivery for the affected mailpieces. Order No. 4257 at 268–69. The Commission issued an advisory opinion applicable to Network Rationalization concluding that it was possible for the Postal Service to undertake significant network rationalization and to realize substantial cost savings while preserving most of 78 See Revised Service Standards for MarketDominant Mail Products, 77 FR 31190 (May 25, 2012) (Network Rationalization Revisions). 79 See Service Standards for Destination Sectional Center Facility Rate Standard Mail, 79 FR 12390, 12393 (March 5, 2014) (Load Leveling Revisions). VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 the initial service levels.80 The Commission issued an advisory opinion applicable to Load Leveling recommending that the Postal Service perform additional analysis of ‘‘operational changes that could potentially result in unintended consequences,’’ such as diminished service performance, before proceeding with a nationwide rollout.81 Despite these advisory opinions issued by the Commission, the Postal Service proceeded with both sets of revisions. Order No. 4257 at 266. The decline of service standards during the PAEA era demonstrates that the existing ratemaking system did not effectively encourage the Postal Service to maintain service quality. See id. at 269. This creates a danger that the Postal Service could reduce service standards below the high quality level required by Objective 3. Id. Therefore, the Commission considers what, if any, action is appropriate with respect to service. b. Comments Many commenters express dissatisfaction with their current service. See, e.g., NNA Comments at 3. The comments also contain a range of proposed solutions related to service, which the Commission summarizes below. Because the majority of comments concerning service are incorporated within proposals to eliminate, modify, or retain the existing price cap, the Commission subdivides its summary of the comments into three corresponding subsets. Proposals related to service that are suggested independent of a proposal to eliminate, modify, or retain the price cap are summarized in a fourth subset below. (1) Comments in Support of Eliminating the Price Cap To Improve Service The Postal Service and the unions suggest that eliminating the price cap will allow the Postal Service to collect more revenue and thereby improve service. The Postal Service contends that having sufficient resources to ensure financial integrity is a prerequisite to maintaining high quality service. Postal Service Comments at 44–45. The Postal Service asserts that the lack of financial liquidity has caused it to defer capital investments needed to sustain service. Id. at 89. The Postal Service cautions 80 Docket No. N2012–1, Advisory Opinion on Mail Processing Network Rationalization Service Changes, September 28, 2012, at 45 (Network Rationalization Advisory Opinion). 81 Docket No. N2014–1, Advisory Opinion on Service Changes Associated With Standard Mail Load Leveling, March 26, 2014, at 49–50. PO 00000 Frm 00023 Fmt 4701 Sfmt 4702 58301 that continued deferral of capital investment would be inconsistent with ‘‘providing appropriate levels of service in an efficient manner.’’ Id. Therefore, the Postal Service recommends that the Commission, in conjunction with eliminating the price cap, monitor service performance. Id. at 218–19, 221– 22. The Postal Service opposes the application of a quality of service factor (Q-Factor) to the price cap as needlessly complex and counter-productive to remediating service issues. Id. at 222 at n.435. Similarly, NALC favors eliminating the price cap based on its contention that adequate revenues are necessary to fulfill the Postal Service’s fundamental mission to provide prompt and reliable postal services nationwide. NALC Comments at 1. APWU asserts that the price cap pressures the Postal Service to reduce costs at the expense of service. APWU Comments at 26. Stating that ‘‘Congress did not anticipate a decrease in mail volume, an increase i[n] delivery points, a recession, and [a] change in [the] mail mix,’’ APWU recommends that the Commission move away from the price cap system to a more flexible system that will allow the Postal Service to better ‘‘respond to varied and unexpected changes.’’ Id. at 29. Eighteen officers of local chapters of the APWU also recommend eliminating the price cap and assert that the financial harms flowing from the price cap have reduced the quality of service standards and service performance.82 (2) Comments in Support of Incentivizing Service Improvements Under a Modified Price Cap Other commenters suggest improving service under a modified price cap. Although the Public Representative asserts that the Commission could modify the price cap to include a QFactor to link service and rates directly, he cautions that imposing a Q-Factor would be premature, especially if the Commission significantly changes other aspects of the system that may positively affect service. PR Comments at 59. Therefore, he recommends that in the short-term, the Commission continue to monitor service performance. Id. at 60. He suggests that the Commission focus this proceeding 82 Thomas Comments at 1; Whalen Comments at 1; Oldt Comments at 1; VanScyoc Comments at 1; Corley Comments at 1; Rathore Comments at 1; Fallacara Comments at 1; Cliche Comments at 1; Landry Comments at 1; Fawcett Comments at 1; Bieberitz Comments at 1; Collins Comments at 1; Sarcone Comments at 1; Preminger Comments at 1; Bates Comments at 1–2; Casselli Comments at 1; Athanaskos at 1; Pagaduan Comments at 1. E:\FR\FM\11DEP2.SGM 11DEP2 58302 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules on adjusting the price cap to relieve the financial pressure on the Postal Service. Id. If those changes to the system improve the Postal Service’s financial stability and service performance still fails to improve, then he suggests considering a penalty-style Q-Factor that would adjust the price cap downward. Id. MH and NAAD suggest that the Commission consider potential service consequences when evaluating proposed rate changes. MH and NAAD Comments at 11. They also advise that the Commission ensure that cost-control (or revenue-limitation) does not lead to unavoidable Postal Service management decisions that decrease achievement of service objectives. Id. UPS, which proposes to retain the price cap, suggests that any proposals to relax the price cap should be counterbalanced by raising and enforcing service standards. UPS Comments at 6. daltland on DSKBBV9HB2PROD with PROPOSALS (3) Comments in Support of Retaining the Price Cap To Maintain Service Several commenters contend that eliminating or relaxing the price cap may negatively affect service because the price cap has incentivized the Postal Service to make needed service-related changes in order to improve operational efficiency. For instance, Minnesota Power asserts that ‘‘[t]he CPI cap is a necessary tool to encourage the Postal Service to improve service and further reduce costs.’’ Minnesota Power Comments at 2. AF&PA agrees that ‘‘[r]emoving or raising the CPI price cap would remove these important incentives, resulting in a less efficient Postal Service with lower quality service . . . .’’ AF&PA Comments at 6. MMA et al. question whether increased revenues would improve service by suggesting that there is inadequate evidence to determine whether rate increases positively affect service. MMA et al. Comments at 25–26. Similarly, SIIA asserts that there is no reason to expect that increased rates would improve service. SIIA Comments at 8. GCA asserts that service problems have been attributable to decisions to realign the Postal Service’s networks rather than the price cap. GCA Comments, Appendix B at 1. (4) Other Proposals Related to Service Performance Multiple commenters focus on improving service performance. Several commenters discuss the importance of consistent and reliable on-time service VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 performance.83 Some commenters discuss the need to improve service performance measurement and monitoring.84 Connecting service performance with operational efficiency, some commenters suggest operational improvements that the Postal Service could consider to improve efficient service performance.85 c. Proposed Commission Solution Based on the comments and the Commission’s analysis in Order No. 4257, the Commission proposes to use a performance-based mechanism to encourage the Postal Service to maintain service standard quality by allocating 0.25 percentage points of the performance-based rate authority based on the Postal Service adhering to service standard quality criteria. The Commission refers to this proposed rate authority as the service quality-based rate authority. The Commission proposes that the service quality-based rate authority be allocated for a class of mail if all of the Postal Service’s service standards (including applicable business rules) for that class for the applicable year met or exceeded the service standards in place during the prior fiscal year on a nationwide or substantially nationwide basis. To facilitate this review, the Commission proposes to require the Postal Service to provide in its Annual Compliance Report (ACR) a description of and reason for any changes to service standards, or to certify that no changes to service standards have been made, since the last ACR. Under the proposed rules, the Commission would issue a preliminary determination, specific to each class of mail, at the time of the ACD. Under the proposed rules, any interested person will have 30 days to challenge this preliminary determination. The subject matter of the challenge is limited to changes in the service standards, including the business rules, that occur on a national or substantially nationwide basis. If no timely challenge is filed, the preliminary determination shall become final. If a timely challenge is filed, then the Commission will rule on any challenge within 60 days after the filing of the challenge. Any service qualitybased rate authority allocated under this 83 AF&PA Comments at 9; ANM et al. Comments at 53 n. 34; SIIA Comments at 7. 84 NNA Comments at 19; GCA Comments, Appendix B at 6. 85 Furka Comments at 7–9 (suggesting zoning changes); Yao Comments at 2, 4 (addressing staffing and capacity concerns); NNA Comments at 3 (recommending ‘‘continuous improvement in operations’’ to improve service). PO 00000 Frm 00024 Fmt 4701 Sfmt 4702 process would be available to the Postal Service for the upcoming calendar year. This proposed procedure will give the Postal Service and ratepayers adequate advance notice of whether, for each class, the 0.25 percentage points of service quality-based rate authority will be available to the Postal Service to use for the next calendar year. This service quality-based rate authority is linked to the service standards and the business rules rather than actual service performance such as on-time delivery performance. Service performance issues are most appropriately dealt with in the ACD. Order No. 4257 at 273. d. Commission Analysis of Alternatives Ultimately, the Commission strives to balance competing policy concerns in a manner that will encourage the Postal Service ‘‘[t]o maintain high quality service standards established under section 3691,’’ as required by Objective 3. 39 U.S.C. 3622(b)(3). On the one hand, the Commission has considered comments contending that the operation of the price cap over the past 10 years has placed extreme financial pressure on the Postal Service to cut costs, resulting in the failure to maintain service standards. The Commission also has given weight to other comments cautioning that relaxing or eliminating the price cap may weaken incentives to provide efficient and reliable service. Moreover, the Commission has considered the commenters’ concerns regarding the Postal Service’s use of its revenues and resources with respect to service. Therefore, the Commission proposes rules to strike a balance between relieving the financial pressure to allow the Postal Service the opportunity to improve service and incentivizing the Postal Service to maintain high quality service standards for its market dominant products. The Commission agrees with the comments proposing to continue the existing approach to address service performance issues. The Commission also agrees with the Public Representative that introduction of a QFactor is premature given the other changes being proposed that may affect service. Overall, the Commission encourages the Postal Service to continue its efforts to improve service performance. The Commission recommends that the Postal Service consider the operational and monitoring improvements suggested by the commenters in this proceeding and continue its work with stakeholders on these issues outside of this proceeding. E:\FR\FM\11DEP2.SGM 11DEP2 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules e. Proposed Regulatory Changes The Commission has considered the comments and the foregoing analysis in developing proposed subpart E to 39 CFR part 3010, which sets forth the criteria for the availability of performance-based rate authority. Proposed § 3010.180 describes the applicability of both the operational efficiency-based rate authority and the service quality-based rate authority. Proposed § 3010.182 outlines the procedure for allocation of the service quality-based rate authority. Changes are proposed to existing § 3055.2 to require that the Postal Service provide in its ACR a description of and reason for any changes to service standards, or to certify that no changes to service standards have been made, since the last ACR. f. Conclusion The Commission proposes to allocate 0.25 percentage points of rate authority based on the Postal Service’s adhering to service standard quality criteria. This will encourage the Postal Service to maintain high quality service standards, as necessary to achieve Objective 3. This approach balances the need to assure Postal Service’s long-term financial stability and encourage the Postal Service to maintain high quality service standards. E. Non-Compensatory Classes and Products 1. Introduction As explained in Order No. 4257, noncompensatory products threaten the financial integrity of the Postal Service because the revenue from these products does not cover their attributable cost. Order No. 4257 at 234– 35. During the PAEA era, multiple market dominant products did not recover their attributable costs. Moreover, the Periodicals class has not covered its attributable costs since the enactment of the PAEA. In this section, the Commission discusses these issues and proposes a solution to put the Postal Service on the path to having fully compensatory products and classes. (formerly called Standard Mail Parcels); (5) Stamp Fulfillment Services; (6) Money Orders; (7) Collect on Delivery; (8) Stamped Envelopes; (9) Inbound Letter Post; 86 and (10) Media Mail/ Library Mail. See FY 2016 ACD at 42– 71. Table III–2 below shows the percentage of total attributable costs recovered by each of these products respectively (i.e., their ‘‘cost coverage’’). TABLE III–2—NON-COMPENSATORY PRODUCTS IN FY 2016 FY 2016 cost coverage (%) Classes: Products Periodicals: In-County .......... Periodicals: Outside County USPS Marketing Mail: Flats USPS Marketing Mail: Parcels .................................... Special Services: Stamp Fulfillment Services ................ Special Services: Money Orders ................................... Special Services: Collect on Delivery ............................. Special Services: Stamped Envelopes ......................... First-Class Mail: Inbound Letter Post ......................... Package Services: Media Mail/Library Mail ................ 70.0 73.5 79.4 64.6 87.3 91.1 41.1 92.3 66.4 75.2 SOURCE: FY 2016 ACD at 42–71; Docket No. ACR2016, Library Reference PRC–LR– ACR2016/5, March 28, 2017. With the exception of the two Periodicals products—In-County Periodicals and Outside County Periodicals, which will be addressed subsequently in this Order—all of these non-compensatory products are included within classes of mail for which the overall class revenue exceeds overall class attributable cost. Products such as USPS Marketing Mail Flats, Stamp Fulfillment Services,87 and Media Mail/Library Mail have historically failed to cover their attributable costs. See id. at 48, 60, 70. Other products, such as Money Orders have only recently become noncompensatory. See id. at 60–62. In Order No. 4257, the Commission found that non-compensatory products are not reasonably or efficiently priced and may threaten the financial integrity daltland on DSKBBV9HB2PROD with PROPOSALS 2. Non-Compensatory Products a. Introduction Non-compensatory products are those products for which attributable costs exceed revenue. In the FY 2016 ACD, the Commission identified 10 noncompensatory products: (1) In-County Periodicals; (2) Outside County Periodicals; (3) USPS Marketing Mail Flats (formerly called Standard Mail Flats); (4) USPS Marketing Mail Parcels VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 86 The Commission also found that other market dominant International Mail products did not cover costs in FY 2016: Three agreements within the Inbound Market Dominant Multi-Service Agreements with Foreign Postal Operators product and Inbound Registered Mail (within the International Ancillary Services product). See FY 2016 ACD at 63. 87 The Stamp Fulfillment Services product provides for the fulfillment of stamp orders placed by mail, phone, fax, or online to the Stamp Fulfillment Services Center in Kansas City, Missouri. See FY 2016 ACD at 59. PO 00000 Frm 00025 Fmt 4701 Sfmt 4702 58303 of the Postal Service because revenue from these products fails to cover costs. See Order No. 4257 at 235, 139–42. Accordingly, the Commission proposes modifications to the system of ratemaking that will require price increases to improve the cost coverage for non-compensatory products. b. Comments The primary commenter with regard to non-compensatory products was the Postal Service. The Postal Service comments that the price cap inhibits its ability to make rational and efficient pricing decisions. Postal Service Comments at 131. The Postal Service uses the USPS Marketing Mail Flats product as an example. Cost coverage for this product has declined since passage of the PAEA. Id. at 134. The Postal Service asserts that while it has the ability to rebalance rates among products within the USPS Marketing Mail class in order to improve USPS Marketing Mail Flats’ cost coverage, and it has done so to some extent, volumes for this product are in ‘‘autonomous decline’’ relative to other products in the USPS Marketing Mail class. Id. As a result, the Postal Service maintains that if it were to maximize price increases for USPS Marketing Mail Flats, any temporary increase in unit contribution might be offset if volume declines as a result of the price increases led to decreased overall contribution. Id. at 134–35. Meanwhile, according to the Postal Service, it would have foregone the opportunity to increase contribution from USPS Marketing Mail products with stable or increasing volumes. Id. at 135. The Postal Service takes the position that in a time of limited class-level price increase authority, it would be imprudent for it to pursue such a strategy. Id. The Postal Service urges the Commission to remove the price cap from the ratemaking system altogether, stating that the price cap has failed to meet most of the PAEA’s objectives. Id. at 138. c. Proposed Commission Solution The Commission proposes to define ‘‘non-compensatory products’’ as products for which attributable cost exceeds revenue, as determined by the most recent ACD. As a starting point, the Commission proposes to prohibit the reduction of rates for noncompensatory products. Also, for non-compensatory products in classes for which attributable costs for the entire class do not exceed revenue for the class, the Commission proposes to require minimum productlevel price increases. Under the E:\FR\FM\11DEP2.SGM 11DEP2 58304 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules products is for the cost coverage of these products to move toward, and eventually above, 100 percent. The Commission performed a scenario-based analysis to determine the appropriate level of additional price increases for non-compensatory products. In Table III–3, the most recent CPI–U projections were combined with unit attributable cost growth rates from the most recent 8 years to estimate changes in cost coverage assuming that prices are increased by 1 percent, 2 percent, or 3 percent above the average rate increase for the class.88 The CPI–U change is projected to be 2.05 percent for the next 5 years, while the change in the unit attributable cost of USPS Marketing Mail Flats was 2.6 percent per year for the last 8 years. Table III–3 assumes that the next 5 years will experience the same unit attributable cost change and that CPI–U will conform to projections. Each year, in addition to the CPI–U rate authority, the 2 percent of supplemental authority and either 1 percent, 2 percent, or 3 percent of additional rate authority is applied to estimate the increase in revenue. The following table details the resulting estimated cost coverages for USPS Marketing Mail Flats. In the scenarios detailed in Table III– 3, USPS Marketing Mail Flats would experience 5-year cumulative price increases of between 27.93 and 40.58 percent.89 Even in the scenario where prices are increased 7.05 percent per year the estimated cost coverage remains below 100 percent 5 years after implementation. As explained above, the prior table contains the assumption, based on historical data, that unit attributable costs will continue to increase at a higher rate than the CPI– U. The Commission changes this assumption in its calculation in Table III–4 below. 88 The unit attributable costs by product are only available for the most recent 8 years due to the product list change associated with the PAEA and concurrent changes to cost reporting. The Postal Service did not report the unit attributable costs for each and every PAEA product until FY 2008. See Docket No. ACR2008 Library Reference USPS–LR– FY08–1. 89 The 5-year cumulative increases are greater than the sum of the annual increases due to the effects of compounding. daltland on DSKBBV9HB2PROD with PROPOSALS d. Commission Analysis of Alternatives VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 PO 00000 Frm 00026 Fmt 4701 Sfmt 4702 E:\FR\FM\11DEP2.SGM 11DEP2 EP11DE17.009</GPH> The Commission recognizes that the proposed solution places some limitation on the Postal Service’s pricing flexibility. Consistent with the analysis in Order No. 4257, the solution proposed by the Commission allows for continued achievement of Objective 4 (allowing the Postal Service pricing flexibility) while making changes necessary to achieve Objective 1 (maximize incentives to increase pricing efficiency) and Objective 8 (establishing and maintaining reasonable rates). See 39 U.S.C. 3622(b)(1), (4), and (8). The Commission’s proposal does not mandate immediate full cost coverage for non-compensatory products, but it does seek to narrow the coverage gap and move non-compensatory products toward full cost coverage over time. Given the substantial increase needed for some non-compensatory products to cover their attributable costs, a 2percentage point rate increase represents an appropriate mechanism for improving cost coverage while simultaneously maintaining stability and predictability in rates, as required by Objective 2. See 39 U.S.C. 3622(b)(2). Both the Postal Service and the mailing community will have notice, through the ACD, of the products that are noncompensatory and thus subject to an additional 2-percentage point rate increase. The purpose of the pricing requirements for non-compensatory Commission’s proposal, whenever the Postal Service files a request for the Commission to review a notice of rate adjustment applicable to any class of mail, it will be required to propose to increase the rate for any noncompensatory product within that class by a minimum of 2 percentage points above the percentage increase for the class. This proposed rate increase does not create additional rate authority for the entire class. The proposed rate increase must comply with the other rate setting criteria appearing in the proposed rules accompanying this Order: CPI (proposed subpart C), supplemental (proposed subpart D), performance-based (proposed subpart E), and banked rate authority (proposed subpart G). After addressing any noncompensatory product(s), the Postal Service will retain pricing flexibility with regard to use of the remaining authority under the price cap for that class. Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules e. Proposed Regulatory Changes Proposed subpart F is added to 39 CFR part 3010 to address the issue of non-compensatory products and classes. Proposed § 3010.200 defines noncompensatory products as those for which the attributable costs for the product exceeded the product’s revenue as determined by the most recent ACD. Proposed § 3010.201 sets forth the rate setting criteria for non-compensatory products in classes for which overall class revenue exceeds overall class attributable cost. Existing § 3010.20(e) is replaced by proposed §§ 3010.127(b) and 3010.129(g), which prohibit the reduction of rates of non-compensatory products. daltland on DSKBBV9HB2PROD with PROPOSALS f. Conclusion The proposed rate setting criteria applicable to non-compensatory products is necessary to achieve Objectives 1 and 8. Products that do not generate revenues that cover their attributable costs contribute to the system’s inability to achieve reasonable and efficient prices. Gradual aboveaverage increases to the prices of non- VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 compensatory products will bring those products to full cost coverage over time and thereby achieve reasonable and efficient rates as envisioned by the PAEA. This proposed approach will also allow for continued pricing flexibility and consistent with the Commission’s evaluation of the ratemaking system in Order No. 4257. 3. Non-Compensatory Classes a. Introduction The Periodicals class has not covered its attributable costs since the enactment of the PAEA. FY 2016 ACD at 42. This is because the Periodicals class consists of only two products—In-County Periodicals and Outside County Periodicals—and each of those products is non-compensatory. Id. at 45. Over the course of the PAEA era, cost coverage for the Periodicals class has generally declined—from 83.0 percent in FY 2007 to 73.7 percent in FY 2016. Id. at 42. The insufficient cost coverage for the Periodicals class has resulted in a negative contribution of more than $5 billion since FY 2007. Id. at 44. Also, the Package Services class contribution was negative from FY 2009 through FY 2012. Order No. 4257 at 232–33. As a class, Package Services did not cover its attributable costs for 4 years during the PAEA era. Id. Non-compensatory products are not reasonably or efficiently priced and may threaten the financial integrity of the Postal Service because revenue from these products fails to cover costs. See id. 234–35, 139– 142. Non-compensatory classes are noncompensatory because they are dominated by non-compensatory products. Non-compensatory classes create unique problems in a ratemaking system that is limited to inflation-based increases applied at the class level. 39 U.S.C. 3622(d)(3)(A). Unless the Postal Service is able to constrain class costs PO 00000 Frm 00027 Fmt 4701 Sfmt 4702 to below the level of inflation, the coverage for the class cannot improve. If a non-compensatory product forms part of a class that is compensatory on the whole, then the rates for the noncompensatory product can be increased by a greater percentage than the compensatory products in that class while keeping the overall class increase within the price cap. But if, as with Periodicals, the entire class is non-compensatory, there is no opportunity to rebalance rates among products, because increasing the rates for one product generally requires offsetting decreases to the rates for other products, and there are no products with positive cost coverage against which such offsets can be made.90 In Order No. 4257, the Commission stated that non-compensatory mail classes threaten the financial integrity of the Postal Service. Order No. 4257 at 274. Accordingly, the Commission proposes modifications to the system of ratemaking that will grant additional rate authority to non-compensatory classes of mail in order to achieve the same goal articulated for noncompensatory products, i.e., to improve the cost coverage for such classes and to put the Postal Service on the path to having fully compensatory classes. b. Comments Several commenters proposed solutions for non-compensatory mail classes. The Postal Service asserts that the cost-coverage problems with regard to the Periodicals class are the result of a 90 As the Public Representative recognizes, the only exception to this general rule occurs when changes in the CPI–U index result in an increase in the cap for the class. PR Comments at 23. However, for the Periodicals class, in particular, these relatively small increases in the cap do not provide enough headroom for price increases that could provide meaningful improvement to the overall cost coverage for the class. Id. E:\FR\FM\11DEP2.SGM 11DEP2 EP11DE17.010</GPH> In Table III–4, unit attributable costs are assumed to increase at 1.0 percent per year, or 1.6 percent below the historical average. If the Postal Service increases prices at 2 percent above the class average and reduces the growth in unit attributable cost, the cost coverage exceeds 100 percent after 5 years. The Commission determines that requiring the Postal Service to increase the rate for any non-compensatory product by a minimum of 2 percentage points above the percentage increase for the class is appropriate because it balances the need for mailers to pay reasonable rates with the need for the Postal Service to achieve cost reductions. 58305 daltland on DSKBBV9HB2PROD with PROPOSALS 58306 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules complex set of factors, including the fact that the Periodicals class was already non-compensatory at the advent of the PAEA era when the price cap was imposed, mail volumes and density with regard to Periodicals is declining, and changes in mailer behavior have lowered unit revenue (such as reducing the weight and advertising content of mailings). Postal Service Comments at 132. The Postal Service asserts that the price cap has failed to supply pricing tools necessary for the Postal Service to face these challenges. Id. at 136. Because the price cap is imposed at the class level, the Postal Service maintains that it does not allow for the correction of an entire class which is noncompensatory, such as Periodicals. Id. Therefore, the Postal Service urges the Commission to remove the price cap system altogether. Id. at 138. The Public Representative recommends that the Commission ‘‘[a]djust the price cap for Periodicals to give the Postal Service the opportunity to attempt improvements in cost coverages.’’ PR Comments at 33. The Public Representative states that raising the price cap for Periodicals would provide the Postal Service ‘‘the pricing flexibility that Objective 4 [of the PAEA] was intended to achieve,’’ without relieving the Postal Service of its ‘‘obligation . . . to reduce costs or to increase efficiency.’’ Id. at 56–57 (citing 39 U.S.C. 3622(b)(4)). NNA states that in lieu of ‘‘punitive’’ price increases for the noncompensatory Periodicals class, both the In-County and Outside County Periodicals mail products could be made more efficient. NNA Comments at 24–25. NNA proposes specific revision to the worksharing price structure. Id. NNA opines that better data with regard to Periodicals are necessary before making any sweeping rate changes. Id. at 29. NNA does not recommend any changes to the price cap for noncompensatory mail classes such as Periodicals. PSA maintains that the Periodicals class is being subsidized by other mail classes, resulting in rates which are not just and reasonable. PSA Comments at 4–5. SIIA maintains that ‘‘any efforts to enhance pricing flexibility should take into consideration the impact this has on mailers, particularly if the flexibility is not strategically applied to accommodate the goals of rate predictability and long-term, sustainable cost-coverage objectives . . . .’’ SIIA Comments at 8. ANM et al. state that ‘‘[c]reating a blanket exception to the CPI cap for classes of mail or products merely VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 because they reportedly fail to cover attributable costs would be undesirable and unfair . . . .’’ ANM et al. Comments at 75. ANM et al. maintain that ‘‘the inability of certain products to recover their attributable costs is not evidence that the current system is failing to properly apportion costs . . . [because] the ‘underwater’ condition of the [Periodicals] class is a function of excessive costs, not overly-constrained prices . . . .’’ Id. at 76. According to ANM et al., ‘‘[n]o system of ratemaking can entirely protect against poor business decisions . . . .’’ Id. Moreover, ANM et al. urge the Commission to ‘‘recognize that the ‘underwater’ products and other products with higher coverage ratios are often complementary goods.’’ Id. at 77. By way of example, ANM et al. state that ‘‘subscriptions to periodicals mailed at Periodicals Mail rates generate large volumes of allied mailings (e.g., acknowledgments, renewal notices, invoices, and solicitations) that have much higher reported coverage ratios . . . [and which] offset[ ] most of the reported shortfall from Periodicals Mail.’’ Id. c. Proposed Commission Solution Because improved cost coverage for products within non-compensatory classes cannot be attained by rebalancing rates among products within such classes, the Commission proposes a solution that expands pricing authority for non-compensatory classes in order to allow for additional productlevel rate increases within such classes. If the attributable cost for an entire class exceeds revenue for that class, the Commission proposes to provide 2 percentage points of additional rate authority for the class. Under the Commission’s proposal, as part of the first generally applicable rate adjustment in a calendar year, the Postal Service, when seeking to raise rates for a non-compensatory class, must use all available rate authority for noncompensatory classes. This includes all CPI (proposed subpart C of 39 CFR part 3010), supplemental (proposed subpart D of 39 CFR part 3010), performancebased (proposed subpart E of 39 CFR part 3010), and banked rate authority up to the 2-percent maximum (proposed subpart G of 39 CFR part 3010), plus the additional 2 percentage points provided for non-compensatory classes (proposed subpart F of 39 CFR part 3010). This proposal applies only if the Postal Service chooses to adjust rates for the non-compensatory class. If there are any products within a non-compensatory class for which product-level revenue exceeds the product-level attributable cost, then PO 00000 Frm 00028 Fmt 4701 Sfmt 4702 prices for such products may only be increased up to the amount of the class average. Moreover, the Commission proposes to prohibit the reduction of rates for non-compensatory products. d. Commission Analysis of Alternatives Although the existing ratemaking system limits the Postal Service’s pricing flexibility and ability to make efficient pricing decisions with respect to non-compensatory classes, removal of the price cap is not an appropriate solution. To create pricing predictability and stability, the ratemaking system must contain a mechanism that limits the magnitude of price adjustments. See Order No. 4257 at 103. Nevertheless, the Commission finds that to make no change to the price cap structure for the non-compensatory classes would continue the trend of negative class contribution and continue to hinder the achievement of Objective 1 (maximize incentives to increase pricing efficiency), Objective 5 (assure adequate revenues, including retained earnings, to maintain financial stability), and Objective 8 (establishing and maintaining reasonable rates). See 39 U.S.C. 3622(b)(1), (5), and (8). The Commission’s proposed solution does not mandate immediate full cost coverage for non-compensatory classes, but it does seek to narrow the coverage gap and move prices towards full cost coverage over time. Further, given the substantial increase needed for the Periodicals class to cover its attributable cost, the proposed 2-percentage point increase represents an appropriate mechanism for improving cost coverage while simultaneously maintaining stability and predictability in rates, as required by Objective 2. See 39 U.S.C. 3622(b)(2). Both the Postal Service and the mailing community will know, through the ACD, which classes are non-compensatory and thus subject to a 2-percentage point rate increase in classlevel rate authority. The Commission determines that a requirement that the Postal Service increase the rates for any noncompensatory class by an additional 2 percentage points is appropriate because it balances the need for mailers to pay a more reasonable rate with the need for the Postal Service to achieve cost reductions and improvements in operational efficiency. e. Proposed Regulatory Changes Proposed subpart F is added to 39 CFR part 3010 to address the issue of non-compensatory products and classes. Proposed § 3010.200 defines noncompensatory classes of mail as those for which attributable costs for the class E:\FR\FM\11DEP2.SGM 11DEP2 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules exceed revenue derived from the class as determined by the most recent ACD. Proposed § 3010.202(a) provides for 2 percentage points of additional rate authority for a non-compensatory class. Proposed § 3010.202(b) sets forth the rate setting criteria that applies if the Postal Service chooses to adjust rates for a non-compensatory class. Proposed § 3010.202(c) describes the requirements applicable to the availability, calculation, and use of the 2 percentage points of additional rate authority for a non-compensatory class. Existing § 3010.20(e) is replaced by proposed §§ 3010.127(b) and 3010.129(g), which prohibit the reduction of rates of non-compensatory products. f. Conclusion The proposed increase in class-level rate authority applicable to noncompensatory classes is necessary to achieve Objectives 1 and 8. Noncompensatory classes are dominated by non-compensatory products. For these classes to generate revenues that cover their attributable costs, the products within them must have prices that are reasonable and efficient prices. However, non-compensatory classes could not be addressed with the same solution as for non-compensatory products in compensatory classes because the price cap is applied at the class level. An increase in the classlevel rate authority for noncompensatory classes will gradually move the prices of non-compensatory products within non-compensatory classes to the cost coverage over time, thereby achieving reasonable and efficient rates as envisioned by the PAEA. This proposed approach is necessary to achieve Objectives 1 and 8 and is consistent with the Commission’s analysis of the other objectives in Order No. 4257. F. Workshare Discounts daltland on DSKBBV9HB2PROD with PROPOSALS 1. Introduction The PAEA aimed to allow the Postal Service pricing flexibility while increasing pricing efficiency. See Order No. 4257 at 48, 144–45. Pricing efficiency is required by Objective 1’s directive to ‘‘maximize incentives to reduce costs and increase efficiency.’’ Id. at 130 (quoting 39 U.S.C. 3622(b)(1)). The ratemaking system achieves pricing efficiency when prices adhere as closely as practicable to ECP. Id. at 136. Under ECP, price differences should equal as closely as practicable cost differences. See id. at 130–31. Although the Postal Service had the ability to adhere to ECP, even under a price cap, the VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 Commission’s analysis demonstrates that during the PAEA era, the Postal Service chose not to price according to ECP. Id. at 139. Specifically, the Postal Service failed to set most workshare discounts in accordance with ECP during the 10 years following enactment of the PAEA. Id. at 136–38. In the remainder of this section, the Commission summarizes the existing requirements relating to workshare discounts and discusses how the existing ratemaking system did not produce workshare discounts that adhere to ECP. Workshare discounts are rate discounts that the Postal Service provides to mailers for presorting, prebarcoding, handling, or transporting mail. 39 U.S.C. 3622(e)(1). Workshare discounts reduce prices for mailpieces that are prepared or inducted in a manner that allows the Postal Service to avoid certain activities that it would have otherwise performed. The Commission must ‘‘ensure that [workshare] discounts do not exceed the cost that the Postal Service avoids as a result of workshare activity’’ (avoided cost) unless certain exceptions are met. 39 U.S.C. 3622(e)(2). The Commission reviews workshare discounts for compliance with section 3622(e) both before and after their implementation. The Commission’s preimplementation review of proposed workshare discounts occurs during rate adjustment proceedings. Existing § 3010.12(b)(6) requires the Postal Service to justify that a statutory exception applies to any proposed workshare discount that exceeds its avoided costs. Under this existing rule, the Postal Service must 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. The Commission completes its postimplementation review for compliance with 39 U.S.C. 3622(e) in the ACD at the end of each fiscal year. Existing § 3050.20(c) requires the Postal Service’s ACR to address discounts greater than avoided costs. Existing § 3050.24 requires the Postal Service to file documentation that supports its avoided cost estimates. In both pre- and post-implementation reviews, the Commission ascertains compliance with 39 U.S.C. 3622(e) by evaluating the workshare discount’s passthrough.91 When a workshare 91 Passthroughs represent the relationship between the amount of the workshare discount and the avoided cost as a percentage. A workshare discount’s passthrough percentage is determined by PO 00000 Frm 00029 Fmt 4701 Sfmt 4702 58307 discount equals avoided cost, the passthrough equals 100 percent. If a workshare discount is less than the avoided cost, then the passthrough is below 100 percent. Conversely, if a workshare discount is greater than the avoided cost, then the passthrough is above 100 percent. To adhere to ECP, workshare discounts should be set equal, on a perunit basis, to the costs avoided by the Postal Service when the mailer performs the workshare activity. Order No. 4257 at 131. Using ECP to set workshare discounts would produce passthroughs equal to 100 percent. Id. However, most workshare discounts during the PAEA era have been set substantially above or substantially below 100 percent. Id. at 136–38. The Postal Service’s failure to set workshare discounts in accordance with ECP demonstrates that the existing ratemaking system has not increased pricing efficiency, as intended by the PAEA. Id. at 145. Workshare discounts set substantially above or substantially below avoided costs are problematic because they send inefficient price signals to mailers and therefore reduce productive efficiency in the postal sector.92 Specifically, inefficient pricing signals disrupt two sets of incentives—the incentives to the Postal Service to right-size its network and the incentives to mailers to enter volume that best conforms to that network. See id. at 216–19. This disruption may take volume away from the least-cost producer, which may result in less efficient volume and decreased revenue for the Postal Service.93 dividing the workshare discount by costs avoided and expressing the result as a percentage. For example, if the Postal Service offers a discount of $0.05 for mailers to presort mailpieces and this presorting permits the Postal Service to avoid $0.04 in cost, then the worksharing passthrough is 125 percent (0.05/0.04 = 1.25 = 125 percent). 92 See, e.g., FY 2016 ACD at 1 (‘‘Workshare discounts that exceed avoided costs adversely affect Postal Service finances because they incentivize mailers to perform worksharing that the Postal Service could have done on a less costly basis.’’); Docket No. ACR2009, Annual Compliance Determination, March 29, 2010, at 76 (observing that ‘‘the combination of low and differential passthroughs [for Periodicals] may send conflicting price signals to mailers and prevent them from entering mail in a way that reduces the end-to-end cost’’); Docket No. R2012–3, Order No. 987, Order on Price Adjustments for Market Dominant Products and Related Mail Classification Changes, November 22, 2011, at 12–13 (expressing concern that setting passthroughs inefficiently, by pricing to excess capacity, may ultimately send inefficient price signals and harm efficient Postal Service operations). 93 ‘‘[A]n integrated mail service will be produced most efficiently if its various components are provided by the least-cost producer.’’ Order No. 4257 at 131 n.231 (quoting Docket No. RM2010–13, Order No. 1320, Order Resolving Technical Issues E:\FR\FM\11DEP2.SGM Continued 11DEP2 58308 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules daltland on DSKBBV9HB2PROD with PROPOSALS 2. Comments Several commenters recommend that the Commission require all workshare discount passthroughs to be set at or near 100 percent. Other commenters recommend retaining the existing requirements or suggest changes to accepted analytical principles. a. Comments in Support of Setting all Workshare Discount Passthroughs Closer to 100 Percent Several commenters recommend that the Commission require the Postal Service to set workshare discounts at or near 100 percent of avoided costs. Pitney Bowes comments extensively on this issue and favors the Commission establishing a soft floor for workshare discounts to provide additional incentives for the Postal Service to reduce costs and increase efficiency. Pitney Bowes Comments at 3. Specifically, Pitney Bowes recommends that the soft floor require the Postal Service to set workshare discounts at, or as close as possible to, avoided costs subject to clearly defined and limited exceptions. Id. It asserts that a soft floor would promote productive efficiency by incentivizing the least cost provider to perform the work. Id. at 19. It contends that a soft floor would ensure that mailers and mail service providers were fully compensated for the work they perform and send more efficient pricing signals that will help grow mail and reduce costs. Id. at 13–14. It maintains that establishing a soft floor for workshare discounts would help achieve several objectives and factors appearing in 39 U.S.C. 3622(b) and (c) without unduly conflicting with or affecting others. Id. at 16–22. It notes that the Commission made a similar recommendation in its most recent Section 701 Report. Id. at 4, 10, 20. In support of Pitney Bowes’ proposal, Professor John C. Panzar recommends that the Commission require the Postal Service to adhere to ECP by setting workshare discounts equal to, or as close as practicable to, 100 percent of avoided costs. Panzar Statement at 14. He asserts that doing so would promote efficiency and just and reasonable rates without unduly limiting the Postal Service’s pricing flexibility. Id. at 1, 2, 14. Other commenters also support the Commission tightening requirements for the Postal Service to set workshare discounts at or near 100 percent of avoided costs. PSA also favors establishing a soft floor. PSA Comments at 5. MMA et al. suggest that the Concerning the Calculation of Workshare Discounts, April 20, 2012, at 3). VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 Commission modify existing § 3010.2(b)(6) to require the Postal Service to pass through 100 percent of costs avoided unless a sound justification exists for not doing so. MMA et al. Comments at 70–72. They contend that this rule change would be consistent with ECP and would maximize efficiency and reduce costs. Id. at 71–72. Similarly, ABA asserts that setting workshare discounts at 100 percent of avoided costs promotes efficiency and a more just and reasonable rate schedule without unduly constraining the Postal Service’s pricing flexibility. ABA Comments at 11. Chairman of the House Oversight and Government Reform Committee Jason Chaffetz and Chairman of the Government Operations Subcommittee Mark Meadows comment that both the Postal Service and the mailing industry would benefit by having workshare discounts set equal to avoided costs. Chairman Chaffetz and Chairman Meadows Comments at 2. They assert that setting discounts below avoided costs ‘‘discourages the mailing industry from performing work more costeffectively than the Postal Service.’’ Id. LSC also recommends moving many existing workshare discounts as close to 100 percent passthrough as is feasible to incentivize mailer participation and reduce the Postal Service’s costs. LSC Comments at 1. ANM et al. recommend setting workshare discounts at 100 percent of avoided costs to encourage more co-mailing and co-binding, which would help enable Periodicals and flatshaped USPS Marketing Mail to cover their attributable costs. ANM et al. Comments at 11–12, 56, 82. b. Comments in Support of Retaining the Existing Rules Other commenters recommend against changing workshare discount requirements in this proceeding. The Postal Service asserts that there is inadequate economic justification to base workshare discounts solely on ECP cost avoidances. Postal Service Comments at 232. It contends that ‘‘[w]hile ECP may advance the achievement of Objective 1 in some respects (as well as take into account Factor 5),’’ requiring all workshare discounts to fully conform to ECP would not appropriately balance the objectives because it would ‘‘largely vitiate the Postal Service’s pricing flexibility.’’ Id. at 230, 232. Similarly, GCA states that ‘‘those objectives and factors [in section 3622(b) and (c)] would be best served by preserving the Commission’s treatment of worksharing.’’ GCA Comments at 50. PO 00000 Frm 00030 Fmt 4701 Sfmt 4702 c. Comments Suggesting Changes to Accepted Analytical Principles Related to Workshare Discounts Some commenters suggest changes to accepted analytical principles relating to workshare discounts. MMA et al. recommend applying workshare discounts only within a product— specifically to sever the link between First-Class Mail Single-Piece Letters/ Postcards and workshare discounts for First-Class Mail Presorted Letters/ Postcards. MMA et al. Comments at 66– 70. GCA recommends that the Commission consider using a 3-year moving average of cost avoidances to smooth out cost fluctuations. GCA Comments at 15. Expressing concern with the accuracy of the accepted postal cost accounting system, ACMA recommends considering the volatility of passthroughs when determining how close to 100 percent a workshare discount is set. ACMA Comments at 2–3. 3. Proposed Commission Solution The Commission proposes rules to phase out two practices that harm pricing efficiency: Workshare discounts set substantially below avoided costs and workshare discounts set substantially above avoided costs. Therefore, the proposed rules establish bands—ranges with upper and lower limits—for workshare discount passthroughs. A passthrough must fall within the applicable band to be compliant. All passthroughs that fall outside of the applicable band would be noncompliant, subject to a 3-year grace period commencing from the effective date of these rules or when a new workshare discount is established. The proposed rules promote ECP and help the ratemaking system to maximize incentives to increase efficiency by incentivizing the Postal Service to set workshare discount passthroughs closer to 100 percent in accordance with Objective 1. See 39 U.S.C. 3622(b)(1). Also, consistent with Objective 4 (to allow pricing flexibility), the bands allow the Postal Service discretion to set passthroughs within the applicable band. See 39 U.S.C. 3622(b)(4). The bands also accommodate the concerns related to excessive workshare discounts referenced in the PAEA. See 39 U.S.C. 3622(e)(2). As described below, the proposed upper and lower limits applicable to each band provide a sufficient range for compliant passthroughs to encompass most fluctuations in cost avoidance and mitigate rate shock. The Commission proposes two bands—one for Periodicals and one for E:\FR\FM\11DEP2.SGM 11DEP2 daltland on DSKBBV9HB2PROD with PROPOSALS Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules all other classes. For Periodicals, passthroughs must range between 75 percent and 125 percent. For all other classes, passthroughs must range between 85 percent and 115 percent. The wider band for Periodicals takes into account the wider variance observed in passthroughs for Periodicals and ‘‘the educational, cultural, scientific, or informational value’’ of those mailpieces. See 39 U.S.C. 3622(c)(11) and (e)(2)(C). The proposed ranges for each band are supported by an empirical analysis. Comparing the passthroughs in the first proceeding (Docket No. R2008–1) and in the most recent proceeding (Docket No. R2017–1) to adjust rates for all classes in the PAEA era demonstrates how passthroughs have become increasingly inconsistent with ECP over the PAEA era, especially for Periodicals. With respect to passthroughs for Periodicals, in Docket No. R2008–1, 14 of 27 conformed to the proposed Periodicals band, ranging from 75 to 125 percent. Eleven of 27 Periodicals passthroughs set in that proceeding fell below the proposed band, and 2 of 27 were above the proposed band. By contrast, in Docket No. R2017–1, most passthroughs for Periodicals did not conform to the proposed band. In Docket No. R2017–1, 7 of 28 of the passthroughs for Periodicals conformed to the proposed band. Fourteen of 28 of the Periodicals passthroughs set in Docket No. R2017–1 fell below the proposed band and 7 of 28 were above the proposed band. With respect to passthroughs for all other classes with workshare discounts—First-Class Mail, USPS Marketing Mail, and Package Services— in Docket No. R2008–1, 46 of 69 passthroughs conformed to the proposed band, ranging from 85 to 115 percent. The passthroughs outside of the proposed band were nearly evenly distributed. Eleven of 69 of the passthroughs fell below the proposed band, and 12 of 69 were above the proposed band. By contrast, in Docket No. R2017–1, most passthroughs for First-Class Mail, USPS Marketing Mail, and Package Services did not conform to the proposed band. In Docket No. R2017–1, 20 of 75 these passthroughs conformed to the proposed band. Thirty-seven of 75 of the passthroughs fell below the proposed band, and 18 of 75 were above the proposed band. Comparing the passthroughs set in these two proceedings also demonstrates that more passthroughs have moved below 100 percent. The median passthrough for Periodicals declined from 89 percent in Docket No. R2008–1 to 75 percent in Docket No. VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 R2017–1. The median passthrough for all other classes declined from 97 percent in Docket No. R2008–1 to 85 percent in Docket No. R2017–1. Because most workshare discount passthroughs fell within the proposed bands during the first rate proceeding under the PAEA, phasing out passthroughs that fall outside the range for each proposed band over a limited period of time appears to be a reasonable and achievable method to promote ECP. Moreover, based on an analysis of the percentage change in cost avoidances between ACDs, the Commission found that a majority of these changes fell within the proposed bands. This confirms that the ranges for the proposed bands are sufficient to encompass most fluctuations in cost avoidance. Therefore, the Commission proposes the bands with ranges of plus or minus 25 percent for Periodicals and plus or minus 15 percent for all other classes, subject to a 3-year grace period. The 3-year grace period is consistent with the PAEA’s direction to phase out excessive workshare discounts over a limited period of time. See 39 U.S.C. 3622(e)(2). Based on an analysis of current workshare discounts and projections of potential outcomes, the Commission determines that 3 years is an appropriate amount of time for the Postal Service to phase out workshare discounts set substantially above or substantially below avoided costs without creating rate shock. For all existing passthroughs, the Postal Service will have 3 years after the proposed rules go into effect to adjust the passthroughs to comply with the applicable band. If the Postal Service establishes a new workshare discount after the proposed rules become effective that does not comply with the applicable band, the Postal Service will have 3 years after establishing the new workshare discount to adjust the passthrough to comply with the applicable band.94 A grace period for workshare discounts established after the proposed rules go into effect is necessary because new workshare discounts would be based on estimated avoided cost data that will become more reliable in later years. For both current and new workshare discounts, the proposed rules require the Postal Service to submit a plan to bring passthroughs into compliance with the applicable band in each rate adjustment filed during the grace period. After the grace period expires, any workshare discounts outside the 94 The Postal Service must also continue to submit a detailed report to the Commission as required by 39 U.S.C. 3622(e)(4). PO 00000 Frm 00031 Fmt 4701 Sfmt 4702 58309 applicable band would be noncompliant. 4. Commission Analysis of Alternatives Based on a determination that the existing ratemaking system did not achieve pricing efficiency, the Commission declines to retain the existing rules relating to workshare discounts. The Commission also declines to require that all passthroughs be set at exactly 100 percent. Although such a rule would be consistent with ECP, the proposed rules incorporate the concerns of commenters regarding fluctuations in cost avoidance and continue to allow the Postal Service some pricing flexibility with regard to workshare discounts by establishing bands of compliant passthroughs. Establishing bands (plus or minus 25 percent for Periodicals and plus or minus 15 percent for all other classes) incorporates the suggestions of commenters to incentivize the Postal Service to set workshare discounts closer to 100 percent of avoided costs. The lower limits applicable to the proposed bands (75 percent for Periodicals and 85 percent for all other classes) incorporate the suggestions that passthroughs adhere to a ‘‘soft floor.’’ The suggested changes to accepted analytical principles related to workshare discounts fall outside of the scope of this proceeding. This proceeding focuses on proposing rules as necessary for the ratemaking system to achieve the objectives in 39 U.S.C. 3622(b). The standard for changing accepted analytical principles differs. Accepted analytical principles may be changed to improve the quality, accuracy, or completeness of the Postal Service data or analysis underlying the ACR. 39 CFR 3050.11(a). Any interested person may petition the Commission to initiate a proceeding to consider changing accepted analytical principles. Id. The proponent of the change must identify the accepted analytical principal for review, explain any perceived deficiencies, and suggest remedies. 39 CFR 3050.11(b). The Commission declines to adopt GCA’s suggestion to use a 3-year moving average of cost avoidances to smooth out cost fluctuations. This approach would place too much emphasis on avoiding rate shock while failing to produce workshare discounts that are calculated based on current prices and costs. Instead, the Commission’s approach proposed in this proceeding— bands for passthrough compliance after a 3-year grace period—will encompass most cost avoidance fluctuations and E:\FR\FM\11DEP2.SGM 11DEP2 58310 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules encourage the improvement of costing data. 5. Proposed Regulatory Changes The Commission has considered the comments and the foregoing analysis in developing proposed subpart I to 39 CFR part 3010. Proposed § 3010.260 explains the applicability of proposed subpart I. Proposed § 3010.261 sets forth the upper and lower limits for passthroughs applicable to each class. Proposed § 3010.262 provides for a 3year grace period to bring noncompliant passthroughs (existing and new) into compliance with the applicable band. Proposed § 3010.262 also requires the Postal Service to submit a plan to bring the noncompliant passthroughs into compliance with the applicable band. To conform with this proposed change, the Commission proposes to delete existing § 3010.12(b)(6). To reflect the deletion of § 3010.12(b)(6), the Commission also proposes a conforming deletion in § 3050.20(c). Proposed § 3010.123(f) retains existing § 3010.12(b)(5)’s requirements for the schedule of workshare discounts. Proposed § 3010.123(g) retains existing § 3010.12(c)’s requirements pertaining to the contents of a Postal Service’s request to review a notice of rate adjustment that establishes a new workshare discount. 6. Conclusion The proposal to require that workshare discount passthroughs conform to the applicable bands, subject to a 3-year grace period, is necessary to achieve Objective 1. Workshare discounts set substantially above or below avoided costs send inefficient pricing signals and are inconsistent with ECP. Such discounts contribute to the system having not achieved efficient prices, which may have contributed to the Postal Service’s poor financial health by disrupting incentives for the Postal Service to right size its network and for mailers to enter volume that best conforms to the network. Proposed subpart I requires the Postal Service to gradually phase out these problematic practices and set more efficient prices. This proposed approach will also allow for continued pricing flexibility for the Postal Service. G. Procedural Improvements 1. Introduction The Commission proposes two procedural changes to improve the ratemaking process relating to planned rate adjustments of general applicability. These proposed changes are within the scope of the Commission’s general authority to revise its regulations. 39 U.S.C. 3622(a); 39 U.S.C. 503. These proposed procedural changes are consistent with the Commission’s review in Order No. 4257 and take into account the comments received in this proceeding. Therefore, the Commission sees no detriment to proposing these procedural changes in this docket. First, the Commission proposes to improve the requirements relating to the schedule for regular and predictable rate adjustments. Second, the Commission proposes to lengthen the notice period for rate adjustments and make conforming adjustments to the timing of comments and the Commission’s decision. 2. Schedule for Regular and Predictable Rate Adjustments a. Introduction In Order No. 4257, the Commission determined that the ratemaking system must have a mechanism that limits the magnitude of price adjustments and is sufficiently transparent to allow for mailers to understand how the limitation mechanism works. Order No. 4257 at 103. Existing § 3010.9(e) requires the schedule for regular and predictable rate adjustments to be updated ‘‘[w]henever the Postal Service deems it appropriate.’’ 39 CFR 3010.9(e). Over the past 10 years, the Postal Service has, for the most part, filed its notices of rate adjustments on predictable and consistent schedules. Order No. 4257 at 61, 143. Where it has deviated from those schedules, such deviations have been based on external factors from which a mailer or postal customer could reasonably forecast the potential effect on the timing of price adjustments. Id. In this section, the Commission considers potential procedural improvements. b. Comments In conjunction with its recommendation to eliminate the price cap, the Postal Service suggests that the Commission require the Postal Service to give mailers guidance regarding the timing and magnitude of rate increases at the class and product level, before filing a specific rate docket. Postal Service Comments at 14, 202. Under its proposed forward guidance regime, the Postal Service proposes to provide information in accordance with the following schedule: TABLE III–5—PROPOSED POSTAL SERVICE SCHEDULE OF INFORMATION RELATING TO PLANNED RATE INCREASES Months before implementation of rate increase Stage 12 2 ...................................................................................................................................................... 9 3 ...................................................................................................................................................... 6 4 ...................................................................................................................................................... daltland on DSKBBV9HB2PROD with PROPOSALS 1 ...................................................................................................................................................... 3 Id. at 204–05. At stages 2 through 4, the Postal Service also proposes to address the prior information provided by either affirming or revising (and explaining the reason for any deviations). Id. Other commenters did not put forth specific proposals concerning the VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 schedule of rate adjustments. Generally, commenters discuss the business need to accurately budget for postage rate increases. For instance, Publishers Clearing House notes that it attempts to forecast postage increases to establish 3- PO 00000 Frm 00032 Fmt 4701 Sfmt 4702 Information to be provided by the Postal Service Planned target date of planned rate change. Planned percentage change in rates by class. Planned percentage change in rates by product and structural changes. Notice of specific rates and structural changes. year budget outlooks.95 SMC observes that annual rate adjustments have created consistency in budget planning 95 Joint Declarations, Declaration of Wendy Smith on Behalf of Publishers Clearing House, at 2. E:\FR\FM\11DEP2.SGM 11DEP2 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules for advertising mailers. SMC Comments at 7. daltland on DSKBBV9HB2PROD with PROPOSALS c. Proposed Commission Solution The Commission proposes to enhance the schedule of regular and predictable rate adjustments. The Commission proposes to require the Postal Service to update the schedule at least once a year (at a minimum, at the time of filing the ACR). The Commission proposes to require that the schedule contain plans to adjust rates that may occur over the next 3 years, at a minimum. Specifically, the Postal Service must include the estimated filing and implementation dates (month and year) and an explanation that will allow mailers to predict with reasonable accuracy, by class, the amounts of planned rate adjustments. The Postal Service will retain the flexibility to provide a new schedule at any time. It may also deviate from the anticipated rate changes if it explains the reason for the deviation in its request to the Commission to review its notice of rate adjustment. Requiring regular annual updates of the planned timing and magnitude of rate adjustments over a 3-year period would improve the mailing community’s ability to plan budgets. The proposed changes to the schedule are also consistent with the Postal Service’s current business practices to keep key stakeholders informed of planned rate changes outside of the ratemaking process. For instance, the Postal Service issued a press release in November 2009 announcing that it would not adjust market dominant rates in Calendar Year 2010.96 Also, in July 2016, the Postal Service shared its plans to implement price adjustments in January 2017 with members of the industry.97 Consistent with those continuing efforts, the proposed rule aims to improve accessibility of information for all mailers and minimize the need for mailers to refer to other materials. Therefore, the proposed changes also improve transparency by ensuring that the Commission and the public are aware of the Postal Service’s current intent concerning future rate adjustments. The changes are also consistent with the Commission’s review of the ratemaking process in Order No. 4257. See Order No. 4257 at 52–85, 142–46. 96 U.S. Postal Service Announces 2010 Shipping Prices: Price of First-Class Postage Will Not Change, November 4, 2009, at 1. 97 USPS 2017 Postal Pricing Considerations, QuadGraphics, July 25, 2016, available at https:// www.qg.com/blog/usps-2017-postal-pricingconsiderations. VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 d. Commission Analysis of Alternatives The Commission proposes to improve the transparency of planned rate adjustments while retaining a mechanism that limits the magnitude of price adjustments. The Commission considers the Postal Service’s representations about its capability to predict rate adjustments and the needs of mailers to have helpful information to plan their budgets in proposing this rule. e. Proposed Regulatory Changes The Commission proposes to replace existing § 3010.9 with proposed § 3010.102. f. Conclusion Pursuant to its general authority to revise its regulations under 39 U.S.C. 3622(a) and 503, the Commission proposes changes to the schedule to improve transparency. 3. Revised Procedural Schedule for Rate Adjustment Proceedings a. Introduction In Order No. 4257, the Commission determined that rate adjustment proceedings were able to be consistently adjudicated within 90 days. Order No. 4257 at 72. In each of the eight proceedings requesting to adjust rates for all classes during the PAEA era, the Postal Service filed its initial request to the Commission to review its notice of rate adjustment at least 90 days before the planned implementation date of each rate adjustment. Id. at 63. On average, the duration of Commission review of the eight large-scale rate proceedings in the PAEA era has been 62 days. Id. at 72. In six of these eight large-scale rate proceedings, there were significant issues with the Postal Service’s rate adjustment filings resulting in durations of between 58 and 112 days. Id. On average, the Commission sought additional information at least once in small-scale rate proceedings, resulting in an average duration of 37 days for Commission review of small-scale rate proceedings in the PAEA era. Id. at 75, 98. Longer review periods were due to the deficiencies in the Postal Service’s filings that required correction to resolve the proceedings. Id. at 98. In the remainder of this section, the Commission considers potential procedural improvements. b. Comments In conjunction with its recommendation to eliminate the price cap, the Postal Service committed to continuing to provide at least 90 days’ PO 00000 Frm 00033 Fmt 4701 Sfmt 4702 58311 advance notice of planned rate adjustments. Postal Service Comments at 202, 206 n.398. Specifically, the Postal Service proposes establishing a requirement to provide notice of specific rate and structural changes 3 months prior to the planned implementation date. Id. at 205. Other commenters did not put forth specific proposals concerning the notice requirement. While urging the Commission to retain a price cap system, MMA et al. favor the Postal Service’s practice of providing more than 45 days advance notice of planned rate increases. MMA et al. Comments at 27. Similarly, SMC observes that the 90day notice period corresponds with mailers’ budget planning. SMC Comments at 7. Also, SIIA notes that its members plan their budgets early in the year. SIIA Comments at 7. c. Proposed Commission Solution To facilitate the administration of rate adjustment proceedings, the Commission proposes to extend the notice period from 45 days to 90 days prior to the planned implementation of rates. This proposed change codifies the existing practice. Requiring 90-days’ advance notice of the specific rate and structural changes should facilitate mailers’ ability to generate budgets. It also allows adequate time for the proceeding to be adjudicated, including potential changes, while still giving mailers time to implement the planned rates on the planned date. Commensurate with extending the notice period, the Commission also proposes to extend the deadline to comment on an initial request from 20 days to 30 days. Allowing commenters 10 additional days to formulate comments will facilitate meaningful and intelligent participation by interested persons. The Commission also extends the deadline to comment on an amended request from 7 days to 10 days. These proposed durations are consistent with extensions to the comment period made in prior proceedings. Commensurate with extending the notice period and the comment period, the Commission also proposes to lengthen the time for the Commission to render its decision from 14 days to 21 days after the conclusion of the comment period (for both an initial and an amended request). These proposed changes will better allow the Commission to evaluate each rate proceeding. The Commission also proposes to enumerate potential actions that it may take if the Commission determines that the Postal Service’s request fails to E:\FR\FM\11DEP2.SGM 11DEP2 58312 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules contain the information required by the rules appearing in proposed §§ 3010.122 and 3010.123, which prescribe the contents of a request and the required supporting technical documentation. The Commission may: inform the Postal Service of the deficiencies and provide an opportunity for the Postal Service to take corrective action, toll or otherwise modify the procedural schedule until the Postal Service takes corrective action, dismiss the request without prejudice, or take other appropriate action. This proposed change codifies existing Commission practice, which will facilitate the Commission’s ability to ensure that the initial Postal Service request complies with the relevant statutory and regulatory requirements. This proposed change will also better ensure that commenters and the Commission have accurate and complete information at the beginning of a rate proceeding. Cumulatively, these changes remain consistent with the streamlined duration of rate review in the PAEA era. The changes are also consistent with the Commission’s review of the ratemaking process in Order No. 4257. See Order No. 4257 at 52–85, 142–46. Rate adjustments that only propose to establish or change rates for market dominant NSAs (denoted as Type 2 Rate Adjustments under existing § 3010.7) or only to adjust rates due to extraordinary or exceptional circumstances (denoted as Type 3 Rate Adjustments under existing § 3010.8) remain unaffected by these proposed procedural changes. d. Commission Analysis of Alternatives The Commission proposes to improve the transparency of planned rate adjustments while retaining a mechanism that limits the magnitude of price adjustments. The Commission has considered the Postal Service’s commitments to providing at least 90 days’ advance notice of planned rate adjustments and the needs of mailers to have helpful information to plan their budgets in proposing this rule. daltland on DSKBBV9HB2PROD with PROPOSALS e. Proposed Regulatory Changes The Commission proposes to replace existing §§ 3010.10 and 3010.11, which contain the existing timing requirements for notice, comments, and Commission decision, with the following proposed rules. Proposed § 3010.121 extends the periods for the Postal Service to provide public notice and submit a request to the Commission to review its notice of rate adjustment from 45 days to 90 days. Proposed § 3010.122(b) contains a conforming change concerning the VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 representation of compliance with the public notice requirement. Proposed § 3010.124(f) contains the revised timeframe allowing 30 days for public comment on the initial request. Proposed § 3010.126(b) contains the revised timeframe stating that the Commission decision will be issued within 21 days after the conclusion of the comment period. Proposed § 3010.126(a) states that if the Commission determines that the Postal Service’s request fails to contain the required information, the Commission may: Provide an opportunity for the Postal Service to take corrective action, toll or otherwise modify the procedural schedule until the Postal Service takes corrective action, dismiss the request without prejudice, or take other action as deemed appropriate by the Commission. Proposed § 3010.126(f) contains the revised timeframe allowing 10 days for public comment on an amended request. Proposed § 3010.126(g) contains the revised timeframe stating that the Commission decision will be issued within 21 days after the conclusion of the comment period. Proposed § 3010.126(h) provides that no amended rate may take effect until 45 days after the Postal Service’s amended request. f. Conclusion Pursuant to its general authority to revise its regulations under 39 U.S.C. 3622(a) and 503, the Commission proposes changes to the notice requirement (and the conforming changes to other procedural requirements) to facilitate the administration of rate proceedings. IV. Description of Proposed Changes to Rules Appearing in the Code of Federal Regulations A. Introduction 1. Affected Sections The rules in 39 CFR part 3010, subparts A, B, C, and E. (existing §§ 3010.1 et seq., 3010.10 et seq., 3010.20 et seq., and 3010.60 et seq.) are replaced in their entirety by new rules that appear in new subparts A, B, C, D, E, F, G, H, and I (proposed §§ 3010.100 et seq., 3010.120 et seq., 3010.140 et seq., 3010.160 et seq., 3010.180 et seq., 3010.200 et seq., 3010.220 et seq., 3010.240 et seq., and 3010.260 et seq.). Rules specific to NSAs appearing in 39 CFR part 3010, subpart D (existing § 3010.40 et seq.) are moved to new 39 CFR part 3020, subpart G (proposed § 3020.120 et seq.). Minor changes are proposed in existing §§ 3050.20(c) and 3055.2(c). The proposed rules appear PO 00000 Frm 00034 Fmt 4701 Sfmt 4702 after the signature of this Order in Attachment A. 2. General Restructuring The new rules, as proposed, perform two functions: they implement the findings of this docket, and they utilize a simpler format that should be more readable, and thus, more user-friendly than the current rules. The discussions of the structure of the proposed rules and the line-by-line descriptions of the proposed rules explain how the findings of this docket have been implemented. See section IV, infra. The steps taken to simplify the format of the rules are addressed first. The most significant simplification is a change in terminology. The current rules classify rate adjustments as either Type 1–A, 1–B, 1–C, 2, or 3. These rate adjustment types are associated with rate adjustments based on: the annual limitation only, the annual limitation and unused rate authority, a rate decrease only, an NSA, or an exigent circumstance. The use of the ‘‘Type’’ terminology, which is pervasive throughout the rules, both lengthens the rules (because each of these types must be defined) and makes the rules more difficult to understand (because the reader has to continuously refer back to the definitions to understand the rules). Furthermore, it is also apparent that the differences between Type 1–A, 1–B, and 1–C are in some instances nuanced and difficult to understand, and in some instances immaterial to the application of the rules. Thus, the proposed rules replace the ‘‘Type’’ terminology with straightforward descriptions that identify the intent of the proceeding. The rules replace the Type 1–A, 1–B, and 1–C terminology with a single type of proceeding simply referred to as ‘‘rate adjustments’’ (which include a limitation on rate increases). The Type 3 terminology is replaced by rules governing ‘‘rate adjustments due to extraordinary and exceptional circumstances.’’ The Type 2 terminology is replaced by rules governing ‘‘requests for market dominant [NSAs].’’ The use of descriptive terms, instead of the ‘‘Type’’ terminology, is intended to improve the readability of the rules and make them more easily comprehendible. The other significant simplification is to remove most rules concerning market dominant NSAs from 39 CFR part 3010. This proposal is based on the substance of the current NSA rules. Except for rules regulating the treatment of volumes used in general rate adjustment calculations, the majority of the rules concern the Commission’s initial review E:\FR\FM\11DEP2.SGM 11DEP2 daltland on DSKBBV9HB2PROD with PROPOSALS Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules of an NSA and do not directly address potential adjustments to existing NSA rates. Under the current rules, whenever the Postal Service proposes a new product (including a new NSA), it must first request that the product be added to the appropriate product list pursuant to the rules appearing in 39 CFR part 3020. Then, the NSA rules appearing in 39 CFR part 3010 are applied in addition to those already imposed by 39 CFR part 3020. Thus, it appears logical to combine both sets of rules within that same part, i.e., 39 CFR part 3020. This further allows for deletion of duplicative material that currently appears in both 39 CFR parts 3010 and 3020. In the event of rate adjustments for existing NSAs, under the proposed rules, the Postal Service should file pursuant to 39 CFR part 3020, and not 39 CFR part 3010. These rate adjustments typically do not implicate the requirements of 39 CFR part 3010. The focus of the review will generally be on the statutory requirements of 39 U.S.C. 3622(c)(10), which are implemented through the rules appearing in 39 CFR part 3020. Several other minor simplifications are proposed. Some existing rules espouse aspirational goals, but fall short of imposing a requirement. For example, existing § 3010.10(b) encourages the Postal Service to provide more than 45 days for public notice of rate adjustments. Other rules merely repeat statutory requirements without imposing any new regulatory requirements. For example, existing § 3010.40 merely restates the special classifications requirements appearing in 39 U.S.C. 3622(c)(10). The proposed rules attempt to eliminate this type of aspirational and duplicative language throughout the regulations. In certain areas, terminology is changed. For example, the current rules refer to each Postal Service request to review its notice as a ‘‘notice.’’ The proposed rules only refer to a ‘‘notice’’ when referring to a document that is directed towards the public. This includes, for example, a ‘‘notice’’ published in the Federal Register alerting the public to a Commission proceeding, or the Postal Service’s ‘‘notice’’ to the public that it is adjusting rates. The term ‘‘request’’ is used in the proposed rules to refer to the material submitted by the Postal Service to the Commission pursuant to rate adjustments. This material in fact acts as a Postal Service ‘‘request’’ for the Commission to review the Postal Service’s ‘‘notice’’ of rate adjustment. VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 The proposed modifications attempt to make other terminology consistent. An example is in the usage of the terminology ‘‘unused rate authority,’’ ‘‘banked rate authority,’’ and ‘‘interim rate authority.’’ Unused rate authority is the remaining amount of the maximum rate adjustment authority not used in any one rate adjustment proceeding. Banked rate adjustment authority is rate authority available for future rate adjustments. Interim rate authority is excess rate authority created when rate adjustments fall more than 12 months apart. Upon calculation of interim rate adjustment authority, it is immediately added to the bank for future use. Thus, it immediately becomes banked rate adjustment authority upon calculation. 3. Structure of the Proposed Rules Proposed 39 CFR part 3010, the rules governing the Regulation of Rates for Market Dominant Products, is organized into the following nine subparts: • Subpart A—General Provisions; • Subpart B—Rate Adjustments; • Subpart C—Consumer Price Index Rate Authority; • Subpart D—Supplemental Rate Authority; • Subpart E—Performance-Based Rate Authority; • Subpart F—Non-Compensatory Classes or Products; • Subpart G—Accumulation of Unused and Disbursement of Banked Rate Adjustment Authority; • Subpart H—Rate Adjustments Due to Extraordinary and Exceptional Circumstances; and • Subpart I—Workshare Discounts. Proposed subpart A of 39 CFR part 3010 directs the reader to the appropriate starting point depending on the specific request of the Postal Service. For example, the reader is directed to proposed subpart B of 39 CFR part 3010 as the starting point to adjust market dominant rates of general applicability subject to the periodic limitations in rate increases. These are the typical, generally annual, rate adjustment proceedings. Proposed subpart B of 39 CFR part 3010 directs the reader to proposed subparts C through G of 39 CFR part 3010 to calculate the availability of rate adjustment authority in any one of these proceedings. There are five possible sources of rate adjustment authority: CPI (proposed subpart C of 39 CFR part 3010), supplemental (proposed subpart D of 39 CFR part 3010), performancebased (proposed subpart E of 39 CFR part 3010), non-compensatory (proposed subpart F of 39 CFR part 3010), and banked rate (proposed subpart G of 39 CFR part 3010). PO 00000 Frm 00035 Fmt 4701 Sfmt 4702 58313 For rate adjustments due to extraordinary and exceptional circumstances, the reader is directed to proposed subpart H of 39 CFR part 3010 as the starting point. Subject to the special procedures and requirements appearing in proposed subpart H of 39 CFR part 3010, however, the concepts espoused in proposed subparts B through G of 39 CFR part 3010 should be followed. For example, when calculating the percentage change in rates for an extraordinary or exceptional rate request, the Postal Service should apply the methodology of proposed § 3010.128, Calculation of percentage change in rates. Proposed subpart I of 39 CFR part 3010 provides new rules concerning workshare discounts. These rules apply any time a rate that is associated with a workshare discount is adjusted, i.e., for both market dominant rates of general applicability subject to the periodic limitations in rate increases, and rate adjustments due to extraordinary and exceptional circumstances. The following new subpart is added to existing 39 CFR part 3020, Product Lists: Subpart G—Requests for Market Dominant Negotiated Service Agreements. The rules in this subpart are to be applied any time the Postal Service proposes the addition of a new market dominant NSA to the market dominant product list. Any time the Postal Service proposes to modify an existing market dominant NSA (either a rate or another term of the contract), the Commission will review the modifications based on an update to the material originally provided as required by proposed subpart G of 39 CFR part 3010. B. Line-by-Line Discussion of Changes 1. Section 3010, Subpart A—General Provisions Section 3010.100 Applicability. Paragraph (a) of proposed § 3010.100 identifies 39 CFR part 3010 as being applicable to rate adjustments for market dominant rates of general applicability. It also identifies the Mail Classification Schedule (MCS) posted on the Commission’s Web site as a source for current rates. Paragraph (b) of proposed § 3010.100 acts as an index to direct the reader to the rules for periodic rate adjustments subject to regulatory limitations, the calculations of the regulatory limitations, rate adjustment due to extraordinary or exceptional circumstances, and special rules for workshare discounts. E:\FR\FM\11DEP2.SGM 11DEP2 58314 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules daltland on DSKBBV9HB2PROD with PROPOSALS Section 3010.101 Definitions. Proposed § 3010.101 replaces the definitions currently appearing in existing § 3010.1. For the most part, the purported definitions in existing § 3010.1 act more as a table of contents than as a source for definitions. This may have been necessary to give meaning to the Type 1–A, 1–B, and 1– C terminology appearing in the current rules. However, it is no longer necessary due to the elimination of this terminology. Proposed § 3010.101 provides definitions for: annual limitation, banked rate authority, class, maximum rate adjustment authority, performance-based rate authority, rate authority applicable to noncompensatory classes, rate cell (existing § 3010.23(a)(2)), rate incentive (existing § 3010. 23(a)(3)), rate of general applicability (existing § 3010.1(g)), and seasonal or temporary rate. Section 3010.102 Schedule for regular and predictable rate adjustments. The rules currently appearing in existing § 3010.9, concerning the Schedule for Regular and Predictable Rate Adjustments, are moved to proposed § 3010.102. Several changes are made to the current rule. To improve transparency, and ensure both the mailers and the Commission are aware of the Postal Service’s current intent concerning future rate adjustments, the new rules require the Postal Service to specifically address plans to adjust rates that may occur over the next 3 years, at a minimum. The schedule that the Postal Service provides will be posted to the Commission’s Web site, as is currently the case. The rules also require the Postal Service to update and file a schedule annually at the time it files its ACR pursuant to 39 U.S.C. 3652. For convenience, the Commission would prefer that the schedule be filed as part of the Annual Compliance Review docket, i.e., under the applicable Annual Compliance Review docket number. As before, the Postal Service must update the schedule when necessary. 2. Section 3010, Subpart B—Rate Adjustments Section 3010.120 General. This section identifies the rules in proposed subpart B of 39 CFR part 3010 as applicable to periodic rate adjustments subject to regulatory limitations. Section 3010.121 Postal Service request. This section specifies the public notice requirement (paragraph c of proposed § 3010.121) and the requirement to submit a request to the Commission to review the Postal Service notice of rate adjustment VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 (paragraph d of proposed § 3010.121). These rules currently appear in existing §§ 3010.10(a)(1) and (2). The current rules are changed to extend the notice and filing periods from 45 to 90 days. With this extension, the aspirational goal of providing a longer notice, currently appearing in existing § 3010.10(b), is deleted because it is no longer necessary. The current requirement to take into consideration how planned rate adjustments are designed to help achieve the objectives listed in 39 U.S.C. 3622(b) and take into account the factors listed in 39 U.S.C. 3622(c), appearing in existing § 3010.12(b)(7), is moved to proposed § 3010.121(b). There is no reporting requirement for this paragraph. However, planned rates that are inconsistent with this provision may be returned to the Postal Service for reconsideration. Section 3010.122 Contents of a request. This section specifies the general contents of the Postal Service’s request to adjust rates. Existing § 3010.12, which includes these requirements, is being divided into two separate sections. Proposed § 3010.122 will provide requirements for the general contents of a Postal Service request. The rules currently appearing in existing § 3010.12(a), (b)(8), (b)(10), (b)(11), and (b)(12), concerning the general content of a Postal Service request, are moved to proposed § 3010.122, Contents of a request. Proposed § 3010.123 will provide requirements for the technical data (calculations) necessary to support the request. Proposed § 3010.122(f) ties the general requirements of proposed § 3010.122 to the technical requirements of proposed § 3010.123. Proposed § 3010.123 encompasses the remaining items currently appearing in existing § 3010.12. There are two notable changes from the current rules. First, the public notice period is extended from at least 45 days to at least 90 days (proposed § 3010.122(b)). Second, the Postal Service will be required to certify that it has used the most recently approved analytical principles in its request (proposed § 3010.122(h)). Currently, the Postal Service must do so, but there is no certification requirement (existing § 3010.12(f)). This change will act as reinforcement to the current requirement, and provide the Postal Service with an opportunity to identify any challenges or limitations on complying with this requirement. Section 3010.123 Supporting technical documentation. This section specifies the supporting technical documentation that the Postal Service is PO 00000 Frm 00036 Fmt 4701 Sfmt 4702 to provide with its request. The section begins with a description of the form for any workpapers that must be submitted with the request, e.g., show all calculations, identify sources, submit in machine-readable, electronic format, link to spreadsheet cells (paragraph (a) of proposed § 3010.123). Similar requirements are currently spread throughout the rules. Then, the remaining paragraphs describe the technical documentation that is to be provided with each request. The rules currently appearing in existing § 3010.12(b)(1), (b)(2), (b)(3), (b)(4), (b)(5), (b)(9), (c), (d), and (e), which specify technical supporting data to be filed with the Postal Service’s request, are moved to proposed § 3010.123(b) through (i). These sections address the provision of data concerning: The calculation of the maximum rate adjustment authority; the schedule of banked rate authority; the calculation of the percentage change in rates; the calculation of unused rate adjustment authority; a schedule of workshare discounts; material concerning new workshare discounts; material concerning new discounts or surcharges not considered a workshare discount; and material concerning rate incentives. A proposed § 3010.123(j) is added to require the provision of information associated with products or classes where the attributable cost for that class or product exceeded the revenue from that class or product as determined by the most recent ACD made pursuant to 39 U.S.C. 3653. The requirements of existing § 3010.12(b)(6) concerning justifications for workshare discounts that exceed attributable costs are replaced by the material appearing in proposed subpart I of 39 CFR part 3010, Rates Applicable to Workshare Discounts and do not appear in proposed § 3010.123. Section 3010.124 Docket and notice. The rules currently appearing in existing § 3010.11(a), concerning the establishment of a docket and the Commission’s notice of proceedings, are moved to proposed § 3010.124. The content is unchanged except for the extension of the public comment period from 20 to 30 days. Section 3010.125 Opportunity for comments. Similar rules concerning the opportunity for comment appear in existing § 3010.11(b) and (c). The wording is revised to simply allow comments on whether the planned rate adjustments comport with applicable statutory and regulatory requirements. As always, the Commission reserves the right to limit comments to those E:\FR\FM\11DEP2.SGM 11DEP2 daltland on DSKBBV9HB2PROD with PROPOSALS Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules relevant to the rate adjustment proceeding before the Commission. Section 3010.126 Proceedings. This section specifies the general flow of a proceeding applicable to a request to review a notice of rate adjustment. A new rule appearing in proposed § 3010.126(a) prescribes potential Commission action when the Postal Service’s request does not substantially comply with the filing requirements concerning the contents of a request and the required supporting technical documentation. The Commission may inform the Postal Service of the deficiencies and provide an opportunity for the Postal Service to take corrective action, the Commission may toll or otherwise modify the procedural schedule until such time as the Postal Service takes corrective action, it may dismiss the request without prejudice, or take other action as deemed appropriate by the Commission. The rules currently appearing in existing § 3010.11(d) through (k), concerning the general procedures for reviewing rate adjustments, are moved to proposed § 3010.126(b) through (j). Within this material, several time periods are modified. The time period from the conclusion of the comment period to the Commission issuing a determination is increased from 14 to 21 days. The comment period concerning any amended notice is increased from 7 to 10 days. The time period from the receipt of an amended notice to the Commission issuing a determination is increased from 14 to 21 days. Section 3010.127 Maximum rate adjustment authority. This section specifies the calculation of the maximum rate adjustment authority, and imposes limitations on certain rate decreases. Proposed § 3010.127 replaces the rules currently appearing in existing § 3010.20. The fundamental differences between the current rules and the new rules are the expanded sources for potential rate adjustment authority available under the new rules. The current rules determine a maximum allowable rate adjustment based upon an annual limitation (CPI rate authority), or if the annual limitation is entirely used, the annual limitation plus available banked rate authority (up to 2 percent). The new rules add three sources of potential rate adjustment authority to the CPI rate authority (proposed subpart C of 39 CFR part 3010) and the banked rate authority (proposed subpart G of 39 CFR part 3010) when determining the maximum allowable rate adjustment: Supplemental rate authority (proposed subpart D of 39 CFR part 3010), performance-based rate authority VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 (proposed subpart E of 39 CFR part 3010), and non-compensatory rate authority (proposed subpart F of 39 CFR part 3010). The availability of each of these sources is subject to limitations appearing in each of the new subparts. The maximum rate adjustment authority available to the Postal Service for each class of market dominant mail is limited to the sum of the percentage points developed in each of these subparts. Existing § 3010.20(e) imposed no limitation on the amount of a rate decrease. This provision is replaced by a requirement that the rates for noncompensatory products may not be reduced. There is no limitation on the amount of a rate decrease for any other product. Section 3010.128 Calculation of percentage change in rates. This section specifies the calculation of percentage change in rates. The rules currently appearing in existing § 3010.23, concerning the calculation of percentage change in rates, and existing § 3010.24, concerning the treatment of volumes associated with NSAs and rate incentives not of general applicability, are moved to proposed § 3010.128. There is no intent to change the meaning or operation of the rules currently in place. Paragraph (a) of proposed § 3010.128 provides the meaning of ‘‘current rate’’ for the purpose of this section and provides two exceptions to the definition. This material previously appeared in existing § 3010.23(a)(1).98 The definitions for ‘‘rate cell’’ and ‘‘rate incentive’’ currently appearing in existing § 3010.23(a)(2) and (3) are added to other definitions appearing in proposed § 3010.101. Paragraph (b) of proposed § 3010.128 describes the determination of volumes associated with each rate cell. This material currently appears in existing § 3010.23(d). Paragraph (c) of proposed § 3010.128 describes the process for calculating the percentage change in rates when rates are being increased. This material currently appears in existing § 3010.23(b)(1). Paragraph (d) of proposed § 3010.128 describes the process for calculating the percentage change in rates when rates are being decreased. This explanation currently appears in existing § 3010.23(b)(2). Paragraph (e) of proposed § 3010.128 provides the formula for calculating the percentage change in rates. The formula 98 The example included in existing § 3010.23(a)(1)(iii) is being omitted because it more appropriately belonged in a description of the rule, and not in the rule itself. The example remains factually accurate. PO 00000 Frm 00037 Fmt 4701 Sfmt 4702 58315 currently appears in existing § 3010.23(c). Paragraph (f) of proposed § 3010.128 describes the treatment of volume associated with rate incentives where the rates are not of general applicability. This material currently appears in existing § 3010.23(e). Paragraph (g) of proposed § 3010.128 describes the treatment of volume associated with NSAs and rate incentives not of general applicability. This material currently appears in existing § 3010.24. Section 3010.129 Exceptions for de minimis rate increases. This section provides exceptions to the requirements to immediately calculate the maximum rate adjustment authority and bank unused rate adjustment authority in the case of de minimis rate increases. The rules currently appearing in existing § 3010.30 concerning de minimis rate increases are moved to proposed § 3010.129. There is no intent to change the meaning or operation of the rules currently in place. Additionally, paragraph (g) of proposed § 3010.129 is added as a reminder that rates may not be reduced for non-compensatory products. 3. Section 3010, Subpart C—Consumer Price Index Rate Authority Section 3010.140 Applicability. This section informs the reader that rate adjustment authority is available based upon changes in the CPI. Rate adjustment authority is calculated differently depending on whether the rate adjustment is being filed 12 or more months from the previous rate adjustment (proposed § 3010.142), or less than 12 months from the previous rate adjustment (proposed § 3010.143). Section 3010.141 CPI–U data source. The duplicate rules currently appearing in existing §§ 3010.21(a) and 3010.22(b), concerning the source of data for CPI– U values, are combined and moved to proposed § 3010.141. Section 3010.142 CPI–U rate authority when requests are 12 or more months apart. The rules currently appearing in existing § 3010.21(b), concerning calculation of CPI–U rate authority when notices of rate adjustments are 12 or more months apart, are moved to proposed § 3010.142. Section 3010.143 CPI–U rate authority when requests are less than 12 months apart. The rules currently appearing in existing § 3010.2(b) through (d), concerning calculation of CPI–U rate authority when notices of rate adjustments are less than 12 months apart, are moved to proposed § 3010.143. E:\FR\FM\11DEP2.SGM 11DEP2 58316 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules 4. Section 3010, Subpart D— Supplemental Rate Authority Section 3010.160 Applicability. This section informs the reader of the availability of 2 percentage points of rate authority per class of mail per calendar year for each of the first 5 full calendar years following the effective date of these rules. The rate authority must be applied, if at all, to the first generally applicable rate increase filed within a calendar year. For each of the 5 calendar years, the rate authority becomes effective on January 1 and lapses on December 31 if unused. The unused portion may not be banked for future use. The Commission intends to also apply the no banking rule (proposed § 3010.160(b)(5)) to any attempt to circumvent the intent of this provision, such as filing a rate increase immediately followed by the filing of a rate decrease in order to create banked rate authority. daltland on DSKBBV9HB2PROD with PROPOSALS 5. Section 3010, Subpart E— Performance-Based Rate Authority Section 3010.180 Applicability. This section informs the reader of the availability of up to 1 percentage point of rate authority per class of mail per calendar year based upon the Postal Service meeting or exceeding an operational efficiency-based standard and adhering to service quality-related criteria. The Commission shall review both operational efficiency and service quality in the ACD. If the Commission determines that the requirements are met, 0.75 percentage points shall be allocated for operational efficiency, and 0.25 percentage points shall be allocated for service quality. Each determination (and allocation) is independent of the other. The rate authority must be applied, if at all, to the first generally applicable rate increase filed within a calendar year. The rate authority becomes effective on January 1 and lapses on December 31 if unused. If unused, or if not fully used, the unused portion may not be banked for future use. The Commission intends to also apply the no banking rule (proposed § 3010.180(b)(5)) to any attempt to circumvent the intent of this provision, such as filing a rate increase immediately followed by the filing of a rate decrease in order to create banked rate authority. Section 3010.181 Operational efficiency-based rate authority. This section provides the criteria for allocating 0.75 percentage points of rate authority based on operational efficiency. This rate authority shall be allocated if the average annual TFP VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 growth over the most recent 5 years met or exceeded 0.606 percent. Section 3010.182 Service qualitybased rate authority. This section provides the criteria for allocating 0.25 percentage points of rate authority based on service quality. This rate authority shall be allocated for each class of mail if the Commission finds in the appropriate ACD that all of the Postal Service’s service standards (including applicable business rules) for that class during the applicable year met or exceeded the service standards in place during the prior fiscal year on a nationwide or substantially nationwide basis. This test examines the service standards and the business rules. It does not examine actual service performance such as time-to-delivery. The Commission’s finding in the ACD may be challenged. Any interested person may challenge the finding within 30 days of the ACD being issued. Once challenged, the Commission shall rule on the challenge within 60 days of the challenge being filed. The subject matter of the challenge is limited to changes in service standards or business rules that occur on a national or substantially nationwide basis. Whether or not the Postal Service is meeting its service standards shall not be the subject of this form of challenge. 6. Section 3010, Subpart F—NonCompensatory Classes or Products Section 3010.200 Applicability. This section informs the reader that proposed subpart F of 39 CFR part 3010 prescribes rate setting criteria for products where the attributable cost for that product exceeded the revenue from that product, i.e., the product is non-compensatory. It also prescribes rate setting criteria for any class of mail where the attributable cost for that class exceeded the revenue from that class, i.e., the class is noncompensatory. The Commission shall review whether or not a class or a product is compensatory in the ACD. If the Commission determines that a class or a product is non-compensatory, this subpart applies. Section 3010.201 Individual product requirement. For non-compensatory products, the Postal Service shall increase the rate of the product by a minimum of 2 percentage points above the percentage increase of the class that includes the non-compensatory product. Rates for the compensatory products in the class shall be adjusted accordingly. This section does not create additional rate adjustment authority for the class. Section 3010.202 Class requirement and additional class rate authority. Paragraph (a) of proposed § 3010.202 provides 2 percentage points of PO 00000 Frm 00038 Fmt 4701 Sfmt 4702 additional rate authority for noncompensatory classes. Paragraph (b) of proposed § 3010.202 prescribes rate setting criteria, which requires the Postal Service to use all available rate setting authority when adjusting rates for non-compensatory classes. This includes all CPI, supplemental, performance-based, and banked (up to the 2-percent maximum) rate authority plus the additional 2 percentage points specified in proposed § 3010.202(a). This section applies only it the Postal Service chooses to adjust rates for the non-compensatory class. Paragraph (c) of proposed § 3010.202 prescribes that the rate authority must be applied, if at all, to the first generally applicable rate increase filed within a calendar year. The rate authority becomes effective on January 1 and lapses on December 31 if unused. If unused, or if not fully used, the unused portion may not be banked for future use. The Commission intends to also apply the no banking rule (proposed § 3010.202(c)(4)) to any attempt to circumvent the intent of this provision, such as filing a rate increase immediately followed by the filing of a rate decrease in order to create banked rate authority. 7. Section 3010, Subpart G— Accumulation of Unused and Disbursement of Banked Rate Adjustment Authority Section 3010.220 General. This section requires the Postal Service to calculate unused rate adjustment authority, and, if applicable, revise the schedule of banked rate adjustment authority, whenever it plans to adjust rates. Limited exceptions to this rule apply, such as when the Postal Service requests review of a de minimis rate adjustment. Section 3010.221 Schedule of banked rate adjustment authority. The rule currently appearing in existing § 3010.26(f), concerning the schedule of banked rate adjustment authority, is moved to proposed § 3010.221. The rule has been expanded to include a list of items that should be tracked within the schedule. The schedule should include the availability of banked rate adjustment authority (before and after filing rate adjustments), along with the sources, amounts, and dates associated with any changes to the schedule. Section 3010.222 Calculation of unused rate adjustment authority for rate adjustments that involve a rate increase which are filed 12 months apart or less. The rules currently appearing in existing § 3010.26(b), concerning the calculation of unused rate adjustment authority, are moved to E:\FR\FM\11DEP2.SGM 11DEP2 daltland on DSKBBV9HB2PROD with PROPOSALS Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules proposed § 3010.222(a). The calculation is changed to reflect that the maximum rate adjustment authority may include CPI, supplemental, performance-based, and non-compensatory rate authority, whereas CPI rate authority is currently the only source of new rate adjustment authority. Otherwise, there is no intent to change the meaning or operation of the rules currently in place. Paragraph (b) of proposed § 3010.222 imposes a requirement where a class of mail is non-compensatory. In that instance, unused rate adjustment authority cannot be generated or banked. Potential unused rate adjustment authority that may be banked is assumed to be zero. This also forecloses the possibility of banking negative rate authority in times of deflation. Paragraph (c) of proposed § 3010.222 limits the maximum amount of unused rate adjustment authority that can be banked to the unused portion of the CPI rate authority. Section 3010.223 Calculation of unused rate adjustment authority for rate adjustments that involve a rate increase which are filed more than 12 months apart. The rules currently appearing in existing § 3010.26(c), concerning the calculation of unused rate adjustment authority for rate adjustments that involve a rate increase which are filed more than 12 months apart, are moved to proposed § 3010.223(a) through (c). The rules are restructured to make it clear that interim rate adjustment authority must be calculated first and that amount immediately added to the bank. Then, unused rate adjustment authority may be calculated. The material currently appearing in existing § 3010.26(c)(2), which provides the formula for calculating the interim rate adjustment authority, is moved to proposed § 3010.223(b). There is no intent to change the meaning or operation of this rule. The rules currently appearing in existing § 3010.26(b), concerning the calculation of unused rate adjustment authority, are moved to proposed § 3010.223(c) (Note that this is essentially the same calculation as appears in proposed § 3010.222(a) above). The calculation is changed to reflect that the maximum rate adjustment authority may include CPI, supplemental, performance-based, and non-compensatory rate authority, whereas CPI rate authority is currently the only source of new rate adjustment authority. Otherwise, there is no intent to change the meaning or operation of the rules currently in place. VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 Paragraph (d) of proposed § 3010.222 imposes a requirement where a class of mail is non-compensatory. In that instance, unused rate adjustment authority cannot be generated or banked. Potential unused rate adjustment that may be banked is assumed to be zero. This also forecloses the possibility of banking negative rate authority in times of deflation. Paragraph (e) of proposed § 3010.222 limits the maximum amount of unused rate adjustment authority that can be banked to the unused portion of the CPI rate authority. Section 3010.224 Calculation of unused rate adjustment authority for rate adjustments that only include rate decreases. The rules currently appearing in existing § 3010.27, concerning the calculation of unused rate adjustment authority for rate adjustments that only include rate decreases, are moved to proposed § 3010.224. The calculation is changed to reflect that the maximum rate adjustment authority may include CPI, supplemental, performance-based, and non-compensatory rate authority, whereas CPI rate authority is currently the only source of new rate adjustment authority. Otherwise, there is no intent to change the meaning or operation of the rules currently in place. Paragraph (c) in proposed § 3010.224 limits the maximum amount of unused rate adjustment authority that can be banked to the unused portion of the CPI rate authority, referenced back to the most recent rate adjustment filing that involved a rate increase. Paragraph (f) of proposed § 3010.224 concerning possible interactions with exigent rate requests, currently appearing in existing § 3010.6(b)(2), is added to this rule. Section 3010.225 Application of banked rate authority. This section explains how previously banked rate authority may be applied to a rate adjustment request. The current rule appearing in existing § 3010.25, which states that all CPI rate authority must be used before banked rate authority can be used, is moved to proposed § 3010.225(b). The rule is changed to reflect that the proposed rate adjustment authority may include CPI, supplemental, performance-based, and non-compensatory rate authority, whereas CPI rate authority is currently the only source of new rate adjustment authority. Otherwise, there is no intent to change the meaning or operation of the rule currently in place. The rule currently appearing in existing § 3010.29, which limits use of banked rate adjustment authority to 2 percent in any 12-month period, is moved to proposed § 3010.225(c). PO 00000 Frm 00039 Fmt 4701 Sfmt 4702 58317 Direction is added to modify the schedule of banked rate adjustment authority, whenever this authority is used, as of the date of the final order accepting the rates. The rule currently appearing in existing § 3010.26(d), which explains how interim rate authority may be used, is moved to proposed § 3010.225(d). The rule currently appearing in existing § 3010.28, which explains that banked rate adjustment authority must be used utilizing the first-in-first-out method beginning 5 years before the filing date of the instant notice, is moved to proposed § 3010.225(e). The wording is changed for consistency with other paragraphs of this section. The rule currently appearing in existing § 3010.26(e), which explains that banked rate adjustment authority lapses 5 years from the filing date of the request leading to its calculation, is moved to proposed § 3010.225(f). 8. Section 3010, Subpart H—Rate Adjustments Due to Extraordinary and Exceptional Circumstances The rules currently appearing in 39 CFR part 3010, subpart E (existing § 3010.60 et seq.), concerning exigent rate increases, are moved to 39 CFR part 3010, subpart H (proposed § 3010.240 et seq.). There is no intent to change the meaning or operation of the rules currently in place. However, the order in which the material appears has changed, along with some material being reorganized amongst paragraphs. 9. Section 3010, Subpart I—Workshare Discounts Section 3010.260 Applicability. This subpart establishes rate design criteria for workshare discounts. The percentages of avoided costs that may be passed through to a customer in the form of a workshare discount are limited, and must fall within defined bands. The percentage passed through is defined as the workshare discount offered by the Postal Service divided by the cost avoided by the Postal Service for not providing the applicable service. Section 3010.261 Passthrough requirement. Two passthrough bands are established, one for Periodicals (75 to 125 percent), and one for all other classes (85 to 115 percent). Workshare passthroughs that fall within the applicable bands are accepted without further justification. Workshare passthroughs that fall outside the applicable bands, and that do not fall within one of the exceptions discussed below, are subject to return to the Postal Service for adjustment. See proposed § 3010.126(d). E:\FR\FM\11DEP2.SGM 11DEP2 58318 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules daltland on DSKBBV9HB2PROD with PROPOSALS Section 3010.262 Exceptions for noncompliant discounts. This section establishes a grace period of 3 years to bring existing workshare passthroughs, and newly created future, workshare passthroughs into compliance with this subpart. If the Postal Service asserts that either grace period applies, it also must submit a plan (with each request to review a notice of rate adjustment) explaining how the applicable passthrough will be brought into compliance with this subpart before the expiration of the grace period. Failure to submit a plan where it can be reasonably concluded that rates will be brought into compliance before the end of the grace period, will result in the remand of the discount. See proposed § 3010.126(d). 10. Section 3020, Subpart G—Requests for Market Dominant Negotiated Service Agreements Whenever a new NSA is proposed, a primary consideration is whether the agreement is properly classified as either market dominant or competitive. The starting point for considering the proper classification is the rules appearing in 39 CFR part 3020. Those rules govern the MCS and the addition, deletion, or transfer of a product to either the market dominant product list or the competitive product list. The rules currently appearing in 39 CFR part 3010, subpart D generally assist in the analysis required by 39 CFR part 3020. The remainder of the rules governing the regulation of rates appearing in 39 CFR part 3010 are generally not implicated. Thus, the rules currently appearing in existing 39 CFR part 3010, subpart D, concerning NSAs, are moved to proposed 39 CFR part 3020, subpart G. In several instances, the rules currently appearing in 39 CFR part 3010, subpart D are duplicative of the rules appearing in 39 CFR part 3020. Moving these provisions allows for streamlining of the rules. There is no intent to change the meaning or operation of the rules currently in place. The move should clarify that a proposal to add a new NSA is to be filed pursuant to 39 CFR part 3020. Furthermore, in most instances adjustments to rates for existing NSAs require a review of the material previously provided pursuant to 39 CFR part 3020. Again, the rules governing the regulation of rates appearing in 39 CFR part 3010 are generally not implicated. Thus, requests concerning the adjustment of rates for NSAs should be filed as a contract update pursuant to 39 CFR part 3020. Existing § 3010.40 Negotiated service agreements. This rule merely VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 repeats the statutory requirements of 39 U.S.C. 3622(c)(10) and is being deleted. This statutory requirement is effectively analyzed using the supporting material that will be provided under proposed § 3020.121. Existing § 3010.41 Notice. This rule is duplicative of the notice requirements currently appearing in 39 CFR part 3020 applicable to new NSAs and is being deleted. Existing § 3010.44 Proceedings for type 2 rate adjustments. Paragraph (a) of existing § 3010.44 is duplicative of the docketing and notice requirements currently appearing in 39 CFR part 3020 applicable to new NSAs and is being deleted. The requirements appearing in existing § 3010.44(b) and (c) are being incorporated into the general requirements of proposed § 3020.120. Section 3020.120 General. This rule explains that the requirements of 39 CFR part 3020, subpart G, which are specific to market dominant NSAs, impose requirements in addition to those appearing elsewhere in 39 CFR part 3020, which are applicable to adding products to a product list. It also incorporates the existing requirements currently appearing in existing § 3010.44(b) and (c) as discussed above.99 Section 3020.121 Additional supporting justification for negotiated service agreements. The rules currently appearing in existing § 3010.42, concerning additional supporting information, are moved to proposed § 3020.121 with the following changes. The requirement for the availability of similar NSAs to similarly situated mailers, currently appearing in existing § 3010.40(c), is included in the new rule. The requirement to produce evidence that the Postal Service has provided notice at least 45 days before a new rate can go into effect, currently appearing in existing § 3010.42(c), has been deleted. Section 3020.122 Data collection plan and report for negotiated service agreements. The rules currently appearing in existing § 3010.43, concerning a data collection plan, are moved to proposed § 3020.122 without change. 11. Section 3050, Periodic Reporting Section 3050.20 Compliance and other analyses in the Postal Service’s section 3652 report. The workshare 99 Note that there is a requirement for the Postal Service to provide at least a 45-day notice whenever it adds, removes, or adjusts a rate applicable to an NSA. There is no similar statutory requirement governing the Commission’s time for consideration of the addition, removal, or transfer of an NSA to a product list. PO 00000 Frm 00040 Fmt 4701 Sfmt 4702 discount provision in § 3050.20(c) has been superseded by the provisions of proposed 39 CFR part 3010, subpart I— Workshare Discounts. Paragraph (c) of existing § 3050.20 is modified by removing the phrase ‘‘discounts greater than avoided costs,’’ from the sentence ‘‘It shall address such matters as noncompensatory rates, discounts greater than avoided costs, and failures to achieve stated goals for on-time delivery standards.’’ 12. Section 3055, Subpart A—Annual Reporting of Service Performance Section 3055.2 Contents of the annual report of service performance achievements. Paragraph (c) of existing § 3055.2 currently requires the reporting of the applicable service standard(s) for each product. This paragraph is expanded to require the Postal Service to also provide a description of and reason for any changes to service standards, or to certify that no changes to service standards have been made, since the last report. V. Administrative Actions A. Assignment of Public Representative Pursuant to 39 U.S.C. 505, Richard A. Oliver shall continue to serve as an officer of the Commission (Public Representative) to represent the interests of the general public in this proceeding. See Order No. 3673 at 11. B. Request for Comments and Reply Comments The Commission will accept comments and reply comments concerning whether the proposed changes outlined by this rulemaking achieves the objectives in 39 U.S.C. 3622(b). Comments are due no later than March 1, 2018. Reply comments are due no later than March 30, 2018. Commission rules require that comments (including reply comments) be filed online according to the process outlined at 39 CFR 3001.9(a), unless a waiver is obtained. Additional information regarding how to submit comments online can be found at: https://www.prc.gov/how-to-participate. All comments accepted will be made available on the Commission’s Web site (https://www.prc.gov). VI. Ordering Paragraphs It is ordered: 1. Pursuant to 39 U.S.C. 505, Richard A. Oliver shall continue to serve as an officer of the Commission (Public Representative) to represent the interests of the general public in this proceeding. E:\FR\FM\11DEP2.SGM 11DEP2 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules 2. Comments regarding the proposed rulemaking are due no later than March 1, 2018. 3. Reply comments regarding the proposed rulemaking are due no later than March 30, 2018. 4. The Secretary shall arrange for publication of this order in the Federal Register. By the Commission. Stacy L. Ruble, Secretary. daltland on DSKBBV9HB2PROD with PROPOSALS Supplemental Views of Vice Chairman Mark Acton, Supplemental Views of Commissioner Nanci E. Langley, Commissioner Tony Hammond Dissenting. Supplemental Views of Vice Chairman Mark Acton The United States Postal Service faces tests in nearly every conceivable scenario as it, a venerable institution instrumental in the founding of our Nation, moves further into the 21st century. Many of the Postal Service’s greatest challenges are not a primary result of the rates that it charges its customers and partners. Comprehensive legislative reform is best suited for brokering compromise and tailoring outcomes in this landscape where such divergent interests must coexist. The last few years have seen significant bipartisan efforts in Congress to craft such reform, and it has yet to come to fruition. The Commission does not have the ability to allow the Postal Service to re-amortize unfunded liabilities, administer employee benefits differently, change the frequency of delivery, or deliver profitable items restricted by statute. In short, there is no action the Commission can take to substitute for meaningful legislative reform, and I urge Congress to continue to work toward that goal. The Commission, however, cannot shirk its lawful responsibility to review and, if necessary, propose and implement regulations to address flaws in the market dominant ratemaking system. If the Commission determines that the PAEA’s range of objectives are not being met, the law empowers the Commission to attempt improvements via the use of one tool alone—reform to the system for regulating rates and classes for market dominant products. In other words, this singular device— the ratemaking system—may be wielded by the regulator in an effort to achieve these objectives. The Commission, including its expert legal and technical staff, has undertaken a time and resource intensive effort to review the previous 10 years’ experience under the PAEA and chart a VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 path forward that is responsive to its statutory duty. I have the highest regard for the Postal Service and its customers. As a Postal Rate and Postal Regulatory Commissioner, my record is replete with examples of my concern for postal customers’ interests and sensitivity to rate adjustments. I look forward to hearing from the mailing community with comments that demonstrate, based on solid quantitative technical and wellsupported legal analysis, how the Commission’s proposal may be improved. Mark Acton. Supplemental Views of Commissioner Nanci E. Langley As the Commission has recognized in its annual reports to the President and Congress, there is a tension between the restrictions of an inflation-based price cap on market dominant price increases and the objectives established in section 3622(b), in particular, the objective that the Postal Service has adequate revenues and retained earnings in order to maintain financial stability.100 This instant rulemaking proposes one approach to regulating market dominant rates, which may satisfy the objectives of the PAEA. However, it is only one of many possible approaches. Interested parties, especially users of the mail, now have an opportunity to critique this approach and/or propose alternative solutions through the comment and reply comment periods. For this reason, I approve moving forward with this rulemaking and will continue to work actively in establishing a ratemaking system that provides the necessary balance to ensure the financial viability of the Postal Service with affordable and predictable rates for ratepayers. Nanci E. Langley. Dissenting Views of Commissioner Tony Hammond I respectfully disagree with the Commission’s decision to propose the changes contained in this Order because, rather than balancing all the objectives of 39 U.S.C. 3622, the proposed changes elevate the financial stability objective above the others. As I explained in my concurring statement to Order No. 4257, the existing ratemaking system has not provided the Postal Service with 100 Postal Regulatory Commission, Annual Report to the President and Congress, Fiscal Year 2016, January 12, 2017, at 24; Postal Regulatory Commission, Annual Report to the President and Congress, Fiscal Year 2015, January 6, 2016, at 22; and Postal Regulatory Commission, Annual Report to the President and Congress, Fiscal Year 2014, January 5, 2015, at 20. PO 00000 Frm 00041 Fmt 4701 Sfmt 4702 58319 revenues adequate to maintain financial stability. However, I have also concluded that a significant portion of the Postal Service’s financial instability results from an overly aggressive retiree health benefits prefunding schedule— which warrants a legislative solution— and from the Postal Service’s decision in 2007 not to pursue the final cost-ofservice rate increase authorized by the PAEA. Therefore, I would propose a one-time price increase that raises the Postal Service’s finances to the level needed to ensure stability absent those two factors, while leaving the price cap intact for future rate adjustments. In contrast, the changes proposed in this Order essentially constitute a return to the PRA’s cost-of-service rates, but without any of the protections of the PRA framework. The PRA afforded the Postal Service the ability to recover all its costs through price increases, but accordingly made it forgo pricing flexibility and subjected it to significant regulatory scrutiny. The PAEA freed up the Postal Service’s flexibility to set prices as it sees fit. But, it also simultaneously imposed the constraint of an overall price cap to protect customers. The changes proposed in this Order would grant the Postal Service the benefits of both systems and require of it the sacrifices of neither. I am especially troubled by what effect these changes may have if the Postal Service’s finances deteriorate in unforeseen ways. This Order is committed to price increases that deliver revenues equaling the sum of all the Postal Service’s costs, whatever they may be, with additional revenues to cover long-term capital expenditures. This is a laudable goal. But, if the Postal Service’s costs (particularly its structural costs) increase unexpectedly, the logic of this Order would require ever-increasing prices, even if that would drive away mail volume at a rate that could put the Postal Service out of business. A second concern I have is the questionable regulatory complexity that this Order seeks to overlay on what has been, until now, a straightforward and pragmatic ratemaking system. For example, tying 0.75 percent of pricing authority to Commission-approved efficiency and 0.25 percent of pricing authority to Commission-approved service performance creates unnecessary regulatory hurdles. Of course, we must go through a formal process seeking public input in order to replace the current system and this proposal is no more than a starting point. All the Commissioners agree that some change is needed to the E:\FR\FM\11DEP2.SGM 11DEP2 58320 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules ratemaking system. But, we disagree on the exact changes that would be most prudent. I look forward to comments on how to craft a balanced change, one that provides the Postal Service with a fair level of additional revenue while continuing to ensure that all of the objectives of 39 U.S.C. 3622 are met. In this regard, I note that the exigent surcharges that were in effect from 2014 to 2016 appeared not to result in any significant volume loss. Therefore, they may serve as a useful starting point for analyses. I am hopeful that, with the input of all stakeholders, the Commission can arrive at a balanced resolution to this review process. Tony Hammond. List of Subjects 39 CFR Part 3010 Administrative practice and procedure, Postal Service. 39 CFR Part 3020 Administrative practice and procedure. 39 CFR Part 3050 Administrative practice and procedure, Reporting and recordkeeping requirements. 39 CFR Part 3055 Administrative practice and procedure, Reporting and recordkeeping requirements. For the reasons discussed in the preamble, the Commission proposes to amend Chapter III of title 39 of the Code of Federal Regulations as follows: ■ 1. Revise part 3010 to read as follows: PART 3010—REGULATION OF RATES FOR MARKET DOMINANT PRODUCTS daltland on DSKBBV9HB2PROD with PROPOSALS Subpart A—General Provisions Sec. 3010.100 Applicability. 3010.101 Definitions. 3010.102 Schedule for regular and predictable rate adjustments. Subpart B—Rate Adjustments 3010.120 General. 3010.121 Postal Service request. 3010.122 Contents of a request. 3010.123 Supporting technical documentation. 3010.124 Docket and notice. 3010.125 Opportunity for comments. 3010.126 Proceedings. 3010.127 Maximum rate adjustment authority. 3010.128 Calculation of percentage change in rates. 3010.129 Exceptions for de minimis rate increases. VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 Subpart C—Consumer Price Index Rate Authority 3010.140 Applicability. 3010.141 CPI–U data source. 3010.142 CPI–U rate authority when requests are 12 or more months apart. 3010.143 CPI–U rate authority when requests are less than 12 months apart. Subpart D—Supplemental Rate Authority 3010.160 Applicability. Subpart E—Performance-Based Rate Authority 3010.180 Applicability. 3010.181 Operational efficiency-based rate authority. 3010.182 Service quality-based rate authority. Subpart F—Non-compensatory Classes or Products 3010.200 Applicability. 3010.201 Individual product requirement. 3010.202 Class requirement and additional class rate authority. Subpart G—Accumulation of Unused and Disbursement of Banked Rate Adjustment Authority 3010.220 General. 3010.221 Schedule of banked rate adjustment authority. 3010.222 Calculation of unused rate adjustment authority for rate adjustments that involve a rate increase which are filed 12 months apart or less. 3010.223 Calculation of unused rate adjustment authority for rate adjustments that involve a rate increase which are filed more than 12 months apart. 3010.224 Calculation of unused rate adjustment authority for rate adjustments that only include rate decreases. 3010.225 Application of banked rate authority. Subpart H—Rate Adjustments Due to Extraordinary and Exceptional Circumstances 3010.240 General. 3010.241 Contents of a request. 3010.242 Supplemental information. 3010.243 Docket and notice. 3010.244 Public hearing. 3010.245 Opportunity for comments. 3010.246 Deadline for Commission decision. 3010.247 Treatment of banked rate adjustment authority. Subpart I—Workshare Discounts 3010.260 Applicability. 3010.261 Passthrough band requirement. 3010.262 Exceptions for noncompliant discounts. Authority: 39 U.S.C. 503; 3622. Subpart A—General Provisions. § 3010.100 Applicability. (a) The rules in this part implement provisions in 39 U.S.C. chapter 36, subchapter I, establishing the system of ratemaking for market dominant products. These rules are applicable PO 00000 Frm 00042 Fmt 4701 Sfmt 4702 whenever the Postal Service proposes to adjust a rate of general applicability for any market dominant product, which includes the addition of a new rate, the removal of an existing rate, or a change to an existing rate. Current rates may be found in the Mail Classification Schedule appearing on the Commission’s Web site at www.prc.gov. (b) Rates may be adjusted either subject to the rules appearing in subpart B of this part, which includes a limitation on rate increases, or subject to the rules appearing in subpart H of this part, which does not include a limitation on rate increases, but requires either extraordinary or exceptional circumstances. The rules applicable to the calculation of the limitations on rate increases appear in subparts C through G of this part. The rules for workshare discounts, which are applicable whenever market dominant rates are adjusted, appear in subpart I of this part. § 3010.101 Definitions. (a) The definitions in paragraphs (b) through (k) of this section apply in this part. (b) ‘‘Annual limitation’’ means the annual limitation on the percentage change in rates 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 a request to review rate adjustments as determined by the Commission. (c) ‘‘Banked rate authority’’ means unused rate adjustment authority accumulated for future use pursuant to these rules. (d) A ‘‘class’’ of mail means the FirstClass Mail, USPS Marketing Mail, Periodicals, Package Services, or Special Services groupings of market dominant Postal Service products or services. Generally, the regulations in this part are applicable to individual classes of mail. (e) ‘‘Maximum rate adjustment authority’’ means the maximum percentage change in rates available to a class for any planned increase in rates. It is based upon the consumer price index rate authority, and any available supplemental rate authority, banked rate authority, performance-based rate authority, and rate authority applicable to non-compensatory classes. (f) ‘‘Performance-based rate authority’’ means rate authority which is available to all classes where the Postal Service meets or exceeds operational efficiencybased standards or adheres to service quality-related criteria as determined in the most recent Annual Compliance Determination. E:\FR\FM\11DEP2.SGM 11DEP2 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules (g) ‘‘Rate authority applicable to noncompensatory classes’’ means rate authority available to classes where revenue was insufficient to cover attributable costs as determined in the most recent Annual Compliance Determination. (h) ‘‘Rate cell’’ means each and every separate rate identified in any planned rate adjustment for rates of general applicability. (i) ‘‘Rate incentive’’ means a discount that is not a workshare discount and that is designed to increase or retain volume, improve the value of mail for mailers, or improve the operations of the Postal Service. (j) ‘‘Rate of general applicability’’ means a rate applicable to all mail meeting standards established by the Mail Classification Schedule, the Domestic Mail Manual, and the International Mail Manual. A rate is not a rate of general applicability if eligibility for the rate is dependent on factors other than the characteristics of the mail to which the rate applies. A rate is not a rate of general applicability if it benefits a single mailer. A rate that is only available upon the written agreement of both the Postal Service and a mailer, a group of mailers, or a foreign postal operator is not a rate of general applicability. (k) A ‘‘seasonal or temporary rate’’ is a rate that is in effect for a limited and defined period of time. daltland on DSKBBV9HB2PROD with PROPOSALS § 3010.102 Schedule for regular and predictable rate adjustments. (a) The Postal Service shall develop a Schedule for Regular and Predictable Rate Adjustments applicable to rate adjustments subject to this part. The Schedule for Regular and Predictable Rate Adjustments shall: (1) Schedule rate adjustments at specific regular intervals, (2) provide estimated filing and implementation dates (month and year) for future rate adjustments for each class of mail expected over a minimum of the next 3 years, and (3) provide an explanation that will allow mailers to predict with reasonable accuracy, by class, the amounts of future scheduled rate adjustments. (b) The Postal Service shall file a current Schedule for Regular and Predictable Rate Adjustments annually with the Commission at the time it files its Annual Compliance Determination Report pursuant to 39 U.S.C. 3652. The Commission shall post the current schedule on the Commission’s Web site at www.prc.gov. (c) Whenever the Postal Service deems it appropriate to change the Schedule for Regular and Predictable VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 Rate Adjustments, it shall file a revised schedule. (d) The Postal Service may vary the magnitude of rate adjustments from those estimated by the Schedule for Regular and Predictable Rate Adjustments. In such case, the Postal Service shall provide an explanation for such variation with its rate adjustment filing. Subpart B—Rate Adjustments § 3010.120 General. This subpart describes the process for the periodic adjustment of rates subject to the percentage limitations specified in § 3010.127 which are applicable to each class of mail. § 3010.121 Postal Service request. (a) In every instance in which the Postal Service determines to exercise its statutory authority to adjust rates for a class of mail, the Postal Service shall comply with the requirements specified in paragraphs (b) through (d) of this section. (b) The Postal Service shall take into consideration how the planned rate adjustments are designed to help achieve the objectives listed in 39 U.S.C. 3622(b) and take into account the factors listed in 39 U.S.C. 3622(c). (c) The Postal Service shall provide public notice of its request and planned rates in a manner reasonably designed to inform the mailing community and the general public that it intends to adjust rates no later than 90 days prior to the intended implementation date of the rate adjustment. (d) The Postal Service shall transmit a request to review its notice of rate adjustment to the Commission no later than 90 days prior to the intended implementation date of the rate adjustment. § 3010.122 Contents of a request. (a) The request shall include the items specified in paragraphs (b) through (j) of this section. (b) A representation or evidence that public notice of the planned changes has been issued or will be issued at least 90 days before the effective date(s) for the planned rates. (c) The intended effective date(s) of the planned rates. (d) A schedule of the planned rates, including a schedule identifying every change to the Mail Classification Schedule that will be necessary to implement the planned rate adjustments. (e) The identity of a responsible Postal Service official who will be available to provide prompt responses to requests for clarification from the Commission. PO 00000 Frm 00043 Fmt 4701 Sfmt 4702 58321 (f) The supporting technical documentation as described in § 3010.123. (g) A demonstration that the planned rate adjustments are consistent with 39 U.S.C. 3626, 3627, and 3629. (h) A certification that all cost, avoided cost, volume, and revenue figures submitted with the request are developed from the most recent applicable Commission approved analytical principles. (i) For a rate adjustment that only includes a decrease in rates, a statement of whether the Postal Service elects to generate unused rate adjustment authority. (j) Such other information as the Postal Service believes will assist the Commission to issue a timely determination of whether the planned rate adjustments are consistent with applicable statutory policies. § 3010.123 Supporting technical documentation. (a) Supporting technical documentation shall include the items specified in paragraphs (b) through (j) of this section, as applicable to the specific request. This information must be supported by workpapers in which all calculations are shown and all relevant values (e.g., rates, CPI–U values, billing determinants) are identified with citations to original sources. The information must be submitted in machine readable, electronic format. Spreadsheet cells must be linked to underlying data sources or calculations (not hard coded), as appropriate. (b) The maximum rate adjustment authority, by class, as summarized by § 3010.127 and calculated separately for each of subparts C through G of this part, as appropriate. (c) A schedule showing the banked rate adjustment authority available, by class, and the available amount for each of the preceding 5 years calculated as required by subpart G of this part. (d) The calculation of the percentage change in rates, by class, calculated as required by § 3010.128. (e) The amount of new unused rate adjustment authority, by class, if any, that will be generated by the rate adjustment calculated as required by subpart G of this part, as applicable. (f) A schedule of the workshare discounts included with the planned rates, and a companion schedule listing the avoided costs that underlie each such discount. (g) Whenever the Postal Service establishes a new workshare discount rate, it must include with its filing: (1) A statement explaining its reasons for establishing the discount; E:\FR\FM\11DEP2.SGM 11DEP2 58322 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules (2) All data, economic analyses, and other information relied on to justify the discount; and (3) A certification based on comprehensive, competent analyses that the discount will not adversely affect either the rates or the service levels of users of postal services who do not take advantage of the discount. (h) Whenever the Postal Service establishes a new discount or surcharge rate it does not view as creating a workshare discount, it must include with its filing: (1) An explanation of the basis for its view that the discount or surcharge rate is not a workshare discount; and (2) A certification that the Postal Service applied approved analytical principles to the discount or surcharge rate. (i) Whenever the Postal Service includes a rate incentive with its planned rate adjustment, it must include with its filing: (1) If the rate incentive is a rate of general applicability, sufficient information to demonstrate that the rate incentive is a rate of general applicability; and (2) A statement of whether the Postal Service has excluded the rate incentive from the calculation of the percentage change in rates under § 3010.128. (j) For each class or product where the attributable cost for that class or product exceeded the revenue from that class or product as determined by the most recent Annual Compliance Determination issued pursuant to 39 U.S.C. 3653, a demonstration that the planned rates comply with the requirements in subpart F of this part. daltland on DSKBBV9HB2PROD with PROPOSALS § 3010.124 Docket and notice. (a) The Commission will establish a docket for each rate adjustment filed by the Postal Service, promptly publish notice of the filing in the Federal Register, and post the filing on its Web site. The notice shall include the items specified in paragraphs (b) through (g) of this section. (b) The general nature of the proceeding. (c) A reference to legal authority under which the proceeding is to be conducted. (d) A concise description of the planned changes in rates, fees, and the Mail Classification Schedule. (e) The identification of an officer of the Commission to represent the interests of the general public in the docket. (f) A period of 30 days from the date of the filing for public comment. (g) Such other information as the Commission deems appropriate. VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 § 3010.125 Opportunity for comments. Public comments should focus on whether planned rate adjustments comport with applicable statutory and regulatory requirements. § 3010.126 Proceedings. (a) If the Commission determines that the request does not substantially comply with the requirements of §§ 3010.122 and 3010.123, the Commission may: (1) Inform the Postal Service of the deficiencies and provide an opportunity for the Postal Service to take corrective action; (2) Toll or otherwise modify the procedural schedule until such time the Postal Service takes corrective action; (3) Dismiss the request without prejudice; or (4) Take other action as deemed appropriate by the Commission. (b) Within 21 days of the conclusion of the public comment period the Commission will determine, at a minimum, whether the planned rate adjustments are consistent with applicable law, e.g., the maximum rate adjustment authority as summarized by § 3010.127, and calculated pursuant to subparts C through G of this part, as applicable, the non-compensatory classes and products requirements pursuant to subpart F of this part, the workshare discount limitations pursuant to subpart I of this part, and 39 U.S.C. 3626, 3627, and 3629, and issue an order announcing its findings. (c) If the planned rate adjustments are found consistent with applicable law, they may take effect. (d) If planned rate adjustments are found inconsistent with applicable law, the Commission will notify and require the Postal Service to respond to any issues of noncompliance. (e) Following the Commission’s notice of noncompliance, the Postal Service may submit an amended request that describes the modifications to its planned rate adjustments that will bring its rate adjustments into compliance. An amended request shall be accompanied by sufficient explanatory information to show that all deficiencies identified by the Commission have been corrected. (f) The Commission will allow a period of 10 days from the date of the filing of an amended request for public comment. (g) The Commission will review the amended request together with any comments filed for compliance and within 21 days issue an order announcing its findings. (h) If the planned rate adjustments as amended are found to be consistent with applicable law, they may take PO 00000 Frm 00044 Fmt 4701 Sfmt 4702 effect. However, no amended rate shall take effect until 45 days after the Postal Service files its request specifying that rate. (i) If the planned rate adjustments in an amended request are found to be inconsistent with applicable law, the Commission shall explain the basis of its determination and suggest an appropriate remedy. Noncompliant rates may not go into effect. (j) A Commission finding that a planned rate adjustment is in compliance with the maximum rate adjustment authority as summarized by § 3010.127 and calculated pursuant to subparts C through G of this part, as applicable, the workshare discount limitations pursuant to subpart I of this part, and 39 U.S.C. 3626, 3627, and 3629 is decided on the merits. A Commission finding that a planned rate adjustment does not contravene other policies of 39 U.S.C. chapter 36, subchapter I is provisional and subject to subsequent review. § 3010.127 authority. Maximum rate adjustment (a) The maximum rate adjustment authority available to the Postal Service for each class of market dominant mail is limited to the sum of the percentage points developed in: (1) Subpart C— Consumer Price Index Rate Authority; (2) Subpart D—Supplemental Rate Authority; (3) Subpart E—Performance-Based Rate Authority; (4) Subpart F—Non-compensatory Classes or Products; and (5) Subpart G—Accumulation of Unused and Disbursement of Banked Rate Adjustment Authority. (b) For any product where the attributable cost for that product exceeded the revenue from that product as determined in the most recent Annual Compliance Determination, rates may not be reduced. § 3010.128 Calculation of percentage change in rates. (a) For the purpose of calculating the percentage change in rates, the current rate is the rate in effect when the Postal Service files the request with the following exceptions. (1) A seasonal or temporary rate shall be identified and treated as a rate cell separate and distinct from the corresponding non-seasonal or permanent rate. When used with respect to a seasonal or temporary rate, the current rate is the most recent rate in effect for the rate cell, regardless of whether the seasonal or temporary rate is available at the time the Postal Service files the request. E:\FR\FM\11DEP2.SGM 11DEP2 (2) When used with respect to a rate cell that corresponds to a rate incentive that was previously excluded from the calculation of the percentage change in rates, the current rate is the full undiscounted rate in effect for the rate cell at the time of the filing of the request, not the discounted rate in effect for the rate cell at such time. (b) For the purpose of calculating the percentage change in rates, the volumes for each rate cell shall be obtained from the most recent available 12 months of Postal Service billing determinants with the following permissible adjustments. (1) The Postal Service shall make reasonable adjustments to the billing determinants to account for the effects of classification changes such as the introduction, deletion, or redefinition of rate cells. The Postal Service shall identify and explain all adjustments. All information and calculations relied upon to develop the adjustments shall be provided together with an explanation of why the adjustments are appropriate. (2) Whenever possible, adjustments shall be based on known mail characteristics or historical volume data, as opposed to forecasts of mailer behavior. (3) For an adjustment accounting for the effects of the deletion of a rate cell when an alternate rate cell is not available, the Postal Service should adjust the billing determinants associated with the rate cell to zero. If the Postal Service does not adjust the billing determinants for the rate cell to zero, the Postal Service shall include a rationale for its treatment of the rate cell with the information required under paragraph (b)(1) of this section. (c) For a rate adjustment that involves a rate increase, for each class of mail and product within the class, the percentage change in rates is calculated in three steps. First, the volume of each rate cell in the class is multiplied by the planned rate for the respective cell and the resulting products are summed. Second, the same set of rate cell volumes are multiplied by the corresponding current rate for each cell and the resulting products are summed. Third, the percentage change in rates is calculated by dividing the results of the first step by the results of the second step and subtracting 1 from the quotient. The result is expressed as a percentage. (d) For rate adjustments that only involve a rate decrease, for each class of mail and product within the class, the percentage change in rates is calculated by amending the workpapers attached to the Commission’s order relating to the most recent request to adjust rates that involved a rate increase to replace the VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 planned rates under the most recent request that involves a rate increase with the corresponding planned rates applicable to the class from the request involving only a rate decrease. (e) The formula for calculating the percentage change in rates for a class described in paragraph (c) of this section is as follows: Percentage change in rates = 58323 agreement or the rate incentive that is not a rate of general applicability shall be excluded from the calculation of percentage change in rates. (2) The Postal Service shall identify and explain all assumptions it makes with respect to the treatment of negotiated service agreements and rate incentives that are not rates of general applicability in the calculation of the percentage change in rates and provide the rationale for its assumptions. § 3010.129 Exceptions for de minimis rate increases. Where: N = number of rate cells in the class i = denotes a rate cell (i = 1, 2,. . ., N) Ri,n = planned rate of rate cell i Ri,c = current rate of rate cell i (for rate adjustment involving a rate increase) or rate from most recent rate adjustment involving a rate increase for rate cell i (for a rate adjustment only involving a rate decrease) Vi = volume of rate cell i (f) Treatment of rate incentives. (1) Rate incentives may be excluded from a percentage change in rates calculation. If the Postal Service elects to exclude a rate incentive from a percentage change in rates calculation, the rate incentive shall be treated in the same manner as a rate under a negotiated service agreement (as described in § 3010.128(g)). (2) A rate incentive may be included in a percentage change in rates calculation if it meets the following criteria: (i) The rate incentive is in the form of a discount or can be easily translated into a discount; (ii) Sufficient billing determinants are available for the rate incentive to be included in the percentage change in rate calculation for the class, which may be adjusted based on known mail characteristics or historical volume data (as opposed to forecasts of mailer behavior); and (iii) The rate incentive is a rate of general applicability. (g) Treatment of volume associated with negotiated service agreements and rate incentives that are not rates of general applicability. (1) Mail volumes sent at rates under a negotiated service agreement or a rate incentive that is not a rate of general applicability are to be included in the calculation of percentage change in rates under this section as though they paid the appropriate rates of general applicability. Where it is impractical to identify the rates of general applicability (e.g., because unique rate categories are created for a mailer), the volumes associated with the mail sent under the terms of the negotiated service PO 00000 Frm 00045 Fmt 4701 Sfmt 4702 (a) The Postal Service may request review of a de minimis rate increase without immediately calculating the maximum rate adjustment authority or banking unused rate adjustment authority. For this exception to apply, requests to review de minimis rate adjustments must be filed separately from any other request to adjust rates. (b) Rate adjustments resulting in rate increases are de minimis if: (1) For each affected class, the rate increases do not result in the percentage change in rates for the class equaling or exceeding 0.001 percent; and (2) For each affected class, the sum of all rate increases included in de minimis rate increases since the most recent rate adjustment resulting in a rate increase, or the most recent rate adjustment due to extraordinary and exceptional circumstances, that was not a de minimis rate increase does not result in the percentage change in rates for the class equaling or exceeding 0.001 percent. (c) If the rate adjustments are de minimis, no unused rate adjustment authority will be added to the schedule of banked rate adjustment authority maintained under subpart G of this part as a result of the de minimis rate increase. (d) If the rate adjustments are de minimis, no rate decreases may be taken into account when determining whether rate increases comply with paragraphs (b)(1) and (2) of this section. (e) In the next request proposing to increase rates for a class that is not a de minimis rate increase: (1) The maximum rate adjustment authority shall be calculated as if the de minimis rate increase had not been filed; and (2) For purposes of calculating the percentage change in rates, the current rate shall be the current rate from the de minimis rate increase. (f) The Postal Service shall file supporting workpapers with each request to review a de minimis rate increase that demonstrate that the sum of all rate increases included in de E:\FR\FM\11DEP2.SGM 11DEP2 EP11DE17.011</GPH> daltland on DSKBBV9HB2PROD with PROPOSALS Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules 58324 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules minimis rate increases since the most recent rate adjustment resulting in a rate increase that was not de minimis, or the most recent rate adjustment due to extraordinary and exceptional circumstances, does not result in a percentage change in rates for the class equaling or exceeding 0.001 percent. (g) For any product where the attributable cost for that product exceeded the revenue from that product as determined in the most recent Annual Compliance Determination, rates may not be reduced. Subpart C—Consumer Price Index Rate Authority § 3010.140 Applicability. The Postal Service may adjust rates based upon changes in the consumer price index identified in § 3010.141. If requests involving rate increases are filed 12 or more months apart, rate adjustments are subject to a full year limitation calculated pursuant to § 3010.142. If requests involving rate increases are filed less than 12 months apart, rate adjustments are subject to a partial year limitation calculated pursuant to § 3010.143. § 3010.141 CPI–U data source. The monthly CPI–U values needed for the calculation of rate adjustment limitations under this section shall be obtained from the Bureau of Labor Statistics (BLS) Consumer Price Index— All Urban Consumers, U.S. All Items, Not Seasonally Adjusted, Base Period 1982–84 = 100. The current Series ID for the index is ‘‘CUUR0000SA0.’’ daltland on DSKBBV9HB2PROD with PROPOSALS (a) If a request involving a rate increase is filed 12 or more months after the most recent request involving a rate increase, then the calculation of an annual limitation for the class (full year limitation) involves three steps. First, a simple average CPI–U index is calculated by summing the most recently available 12 monthly CPI–U values from the date the Postal Service files its request and dividing the sum by 12 (Recent Average). Second, a second simple average CPI–U index is similarly calculated by summing the 12 monthly CPI–U values immediately preceding the Recent Average and dividing the sum by 12 (Base Average). Third, the full year limitation is calculated by dividing the Recent Average by the Base Average and subtracting 1 from the quotient. The result is expressed as a percentage, rounded to three decimal places. (b) The formula for calculating a full year limitation for a request filed 12 or 18:41 Dec 08, 2017 Jkt 244001 (5) May not be used to generate unused rate authority, nor shall it affect existing banked rate authority. § 3010.143 CPI–U rate authority when requests are less than 12 months apart. Subpart E—Performance-Based Rate Authority (a) If a request involving a rate increase is filed less than 12 months after the most recent request involving a rate increase, then the annual limitation for the class (partial year limitation) will recognize the rate increases that have occurred during the preceding 12 months. When the effects of those increases are removed, the remaining partial year limitation is the applicable restriction on rate increases. (b) The applicable partial year limitation is calculated in two steps. First, a simple average CPI–U index is calculated by summing the 12 most recently available monthly CPI–U values from the date the Postal Service files its request and dividing the sum by 12 (Recent Average). Second, the partial year limitation is then calculated by dividing the Recent Average by the Recent Average from the most recent previous request (Previous Recent Average) applicable to each affected class of mail and subtracting 1 from the quotient. The result is expressed as a percentage, rounded to three decimal places. (c) The formula for calculating the partial year limitation for a request filed less than 12 months after the last request is as follows: Partial Year Limitation = (Recent Average/Previous Recent Average) ¥ 1. Subpart D—Supplemental Rate Authority § 3010.142 CPI–U rate authority when requests are 12 or more months apart. VerDate Sep<11>2014 more months after the last request is as follows: Full Year Limitation = (Recent Average/Base Average)¥1. § 3010.160 Applicability. (a) This subpart allocates supplemental rate authority of 2 percentage points per class per annum. The rate authority provided in this subpart is available in each of the first 5 full calendar years following the effective date of these rules. (b) Any rate authority allocated under this subpart: (1) Shall be made available to the Postal Service as of January 1 of each calendar year; (2) Must be included in the calculation of the maximum rate adjustment authority in the first generally applicable rate adjustment filed in any calendar year; (3) Shall lapse if not used in the first generally applicable rate adjustment filed in any calendar year; (4) Shall lapse if unused, on December 31 of the applicable calendar year; and PO 00000 Frm 00046 Fmt 4701 Sfmt 4702 § 3010.180 Applicability. (a) This subpart allocates performance-based rate authority of up to 1 percentage point for each class of mail, which is available upon meeting or exceeding an operational efficiencybased standard and adhering to service quality-related criteria as determined by the most recent Annual Compliance Determination issued pursuant to 39 U.S.C. 3653. Of this rate authority, 0.75 percentage points is allocated based on meeting the operational efficiency-based rate authority requirements appearing in § 3010.181. Of this rate authority, 0.25 percentage points is allocated based on meeting the service quality-based rate authority requirements appearing in § 3010.182. (b) Any rate authority allocated under this subpart: (1) Shall be made available to the Postal Service as of January 1 of each calendar year as determined by the most recent Annual Compliance Determination; (2) Must be included in the calculation of the maximum rate adjustment authority in the first generally applicable rate adjustment filed in any calendar year; (3) Shall lapse if not used in the first generally applicable rate adjustment filed in any calendar year; (4) Shall lapse if unused, on December 31 of the applicable calendar year; and (5) May not be used to generate unused rate authority, nor shall it affect existing banked rate authority. § 3010.181 Operational efficiency-based rate authority. Operational efficiency-based rate authority shall be allocated for each class of mail if the Postal Service’s average annual total factor productivity growth over the most recent 5 years meets or exceeds 0.6 percent as determined by the most recent Annual Compliance Determination issued pursuant to 39 U.S.C. 3653. § 3010.182 authority. Service quality-based rate (a) Service quality-based rate authority shall be allocated for a class of mail if all of the Postal Service’s service standards (including applicable business rules) for that class during the applicable fiscal year meet or exceed the service standards in place for the prior fiscal year on a nationwide or E:\FR\FM\11DEP2.SGM 11DEP2 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules substantially nationwide basis as determined by the most recent Annual Compliance Determination issued pursuant to 39 U.S.C. 3653. (b) Any interested person may file a challenge to the Commission’s determination to allocate service quality-based rate authority within 30 days of the Commission issuing the Annual Compliance Determination. The scope of such a challenge shall be limited to whether or not the Postal Service’s service standards (including applicable business rules) during the applicable fiscal year met or exceeded the service standards in place for the prior fiscal year on a nationwide or substantially nationwide basis. The Commission shall issue an order which rules on any challenge within 60 days of the filing of the challenge. The order shall specify how much, if any, service quality-based rate authority is authorized for the upcoming calendar year. Subpart F—Non-Compensatory Classes or Products § 3010.200 Applicability. This subpart is applicable to a class or product where the attributable cost for that class or product exceeded the revenue from that class or product as determined by the most recent Annual Compliance Determination issued pursuant to 39 U.S.C. 3653. Section 3010.201 is applicable where the attributable cost for a product within a class, exceeded the revenue from that particular product. Section 3010.202 is applicable where the attributable cost for an entire class exceeded the revenue from that class. § 3010.201 Individual product requirement. daltland on DSKBBV9HB2PROD with PROPOSALS Whenever the Postal Service files a request affecting a class of mail which includes a product where the attributable cost for that product exceeded the revenue from that product, as determined by the most recent Annual Compliance Determination issued pursuant to 39 U.S.C. 3653, the Postal Service shall increase the rates for that product by a minimum of 2 percentage points above the percentage increase for that class. This section does not create additional rate authority applicable to any class of mail. § 3010.202 Class requirement and additional class rate authority. (a) This section provides 2 percentage points of additional rate authority for any class of mail where the attributable cost for that class exceeded the revenue from that class as determined by the most recent Annual Compliance VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 Determination issued pursuant to 39 U.S.C. 3653. (b) When the Postal Service files the first generally applicable rate adjustment in any calendar year affecting a class of mail where the attributable cost for that class exceeded the revenue from that class, the Postal Service must use all available rate authority, including consumer price index rate authority, supplemental rate authority, performance-based rate authority and banked rate authority, plus an additional 2 percentage points. (c) Any rate authority allocated under this subpart: (1) Shall be made available to the Postal Service as of January 1 of each calendar year as determined by the most recent Annual Compliance Determination; (2) Must be included in the calculation of the maximum rate adjustment authority change in rates in the first generally applicable rate adjustment filed in any calendar year; (3) Shall lapse if unused, on December 31 of the applicable calendar year; and (4) May not be used to generate unused rate authority, nor shall it affect existing banked rate authority. Subpart G—Accumulation of Unused and Disbursement of Banked Rate Adjustment Authority § 3010.220 General. Unless a specific exception applies, unused rate adjustment authority, on a class-by-class basis, shall be calculated for each request filed by the Postal Service. Unused rate adjustment authority shall be added to the schedule of banked rate authority in each instance, and be available for application to rate adjustments pursuant to the requirements of this subpart. § 3010.221 Schedule of banked rate adjustment authority. Upon the establishment of unused rate adjustment authority, the Postal Service shall devise and maintain a schedule that tracks the establishment and subsequent use of banked rate authority on a class-by-class basis. At a minimum, the schedule must track the amount of banked rate authority available immediately prior to the filing of a request and the amount of banked rate authority available upon acceptance of the rates included in the request. It shall also track all changes to the schedule, including the docket numbers of Commission decisions affecting the schedule, the dates and amounts that any rate authority was generated or subsequently expended, and the PO 00000 Frm 00047 Fmt 4701 Sfmt 4702 58325 expiration dates of all rate adjustment authority. The schedule shall be included with any request purporting to modify the amount of banked rate adjustment authority. § 3010.222 Calculation of unused rate adjustment authority for rate adjustments that involve a rate increase which are filed 12 months apart or less. (a) When requests that involve a rate increase are filed 12 months apart or less, unused rate adjustment authority for a class is equal to the difference between the maximum rate adjustment authority as summarized by § 3010.127 and calculated pursuant to subparts C through G of this part, as appropriate, and the percentage change in rates for the class calculated pursuant to § 3010.128, subject to the limitations described in paragraphs (b) and (c) of this section. (b) Unused rate adjustment authority cannot be generated and is assumed to be 0 percent for classes subject to § 3010.202, Class requirement and additional class rate authority. (c) For requests that involve a rate increase, unused rate adjustment authority cannot exceed the unused portion of rate authority determined pursuant to subpart C of this part, Consumer Price Index Rate Authority. § 3010.223 Calculation of unused rate adjustment authority for rate adjustments that involve a rate increase which are filed more than 12 months apart. (a) When requests that involve a rate increase are filed more than 12 months apart, any interim rate adjustment authority must first be added to the schedule of banked rate authority before the unused rate adjustment authority is calculated. (b) Interim rate adjustment authority for a class is equal to the Base Average applicable to the second request (as developed pursuant to § 3010.142) divided by the Recent Average utilized in the first request (as developed pursuant to § 3010.142) and subtracting 1 from the quotient. The result is expressed as a percentage and immediately added to the schedule of banked rate authority as of the date the request is filed. (c) Unused rate adjustment authority for a class is equal to the difference between the maximum rate adjustment authority as summarized by § 3010.127 and calculated pursuant to subparts C through G of this part, as appropriate, and the percentage change in rates for the class calculated pursuant to § 3010.128, subject to the limitations described in paragraphs (d) and (e) of this section. E:\FR\FM\11DEP2.SGM 11DEP2 58326 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules (d) Unused rate adjustment authority cannot be generated and is assumed to be 0 percent for classes subject to § 3010.202, Class requirement and additional class rate authority. (e) For requests that involve a rate increase, unused rate adjustment authority cannot exceed the unused portion of rate authority determined pursuant to subpart C of this part, Consumer Price Index Rate Authority. daltland on DSKBBV9HB2PROD with PROPOSALS § 3010.224 Calculation of unused rate adjustment authority for rate adjustments that only include rate decreases. (a) For requests that only include rate decreases, unused rate adjustment authority for a class is calculated in two steps. First, the difference between the maximum rate adjustment authority as summarized by § 3010.127 and calculated pursuant to subparts C through G of this part, as appropriate for the most recent rate adjustment that involves a rate increase and the percentage change in rates for the class calculated pursuant to § 3010.128(d) is calculated. Second, the unused rate adjustment authority generated in the most recent rate adjustment that involves a rate increase is subtracted from that result. (b) Unused rate adjustment authority generated under paragraph (a) of this section for a class shall be added to the unused rate adjustment authority generated in the most recent rate adjustment that involves a rate increase on the schedule maintained under § 3010.221. For purposes of § 3010.224, the unused rate adjustment authority generated under paragraph (a) of this section for a class shall be deemed to have been added to the schedule maintained under § 3010.221 on the same date as the most recent request that involves a rate increase. (c) For requests that only include rate decreases, the sum of unused rate adjustment authority generated under paragraph (a) of this section and the unused rate adjustment authority generated in the most recent rate adjustment that involves a rate increase cannot exceed the unused portion of rate adjustment authority determined pursuant to subpart C of this part, Rate Authority Based Upon Consumer Price Index in the most recent rate adjustment that involves a rate increase. (d) Unused rate adjustment authority generated under paragraph (a) of this section shall be subject to the limitation under § 3010.225, regardless of whether it is used alone or in combination with other existing unused rate adjustment authority. (e) For requests that only include rate decreases, unused rate adjustment VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 authority generated under this section lapses 5 years from the date of filing of the most recent request that involves a rate increase. (f) A request that only includes rate decreases that is filed immediately after a rate adjustment due to extraordinary or exceptional circumstances (i.e., without an intervening rate adjustment involving a rate increase) may not generate unused rate adjustment authority. § 3010.225 authority. Application of banked rate (a) Banked rate authority may be applied to any planned rate adjustment subject to the limitations appearing in (b) through (f) of this section. (b) Banked rate authority may only be applied to a proposal to adjust rates after applying rate authority based upon the consumer price index pursuant to subpart C of this part, supplemental rate authority subject to subpart D of this part, the performance-based rate authority pursuant to subpart E of this part, and the rate authority applicable to non-compensatory classes pursuant to subpart F of this part. (c) A maximum of 2 percentage points of banked rate authority may be applied to a rate adjustment for any class in any 12-month period. If banked rate authority is used, it shall be subtracted from the schedule of banked rate adjustment authority as of the date of the final order accepting the rates. (d) Subject to (b) and (c) of this section, interim rate adjustment authority may be used to make a rate adjustment pursuant to the request that led to its calculation. If interim rate adjustment authority is used to make such a rate adjustment, the interim rate adjustment authority generated pursuant to the request shall first be added to the schedule of banked rate adjustment authority pursuant to § 3010.221 as the most recent entry. Then, any interim rate adjustment authority used in accordance with this paragraph shall be subtracted from the existing banked rate adjustment authority using a first-in, first-out (FIFO) method, beginning 5 years before the instant request. (e) Banked rate authority for a class must be applied, using a first-in, firstout (FIFO) method, beginning 5 years before the instant request. (f) Banked rate adjustment authority calculated under this section shall lapse 5 years from the date of filing of the request leading to its calculation. PO 00000 Frm 00048 Fmt 4701 Sfmt 4702 Subpart H—Rate Adjustments Due to Extraordinary and Exceptional Circumstances § 3010.240 General. The Postal Service may request to adjust rates for market dominant products due to extraordinary or exceptional circumstances pursuant to 39 U.S.C. 3622(d)(1)(E). The rate adjustments are not subject to rate adjustment limitations or the restrictions on the use of unused rate adjustment authority. The rate adjustment request may not include material classification changes. The request is subject to public participation and Commission review within 90 days. § 3010.241 Contents of a request. (a) Each exigent request shall include the items specified in paragraphs (b) through (i) of this section. (b) A schedule of the planned rates. (c) Calculations quantifying the increase for each affected product and class. (d) A full discussion of the extraordinary or exceptional circumstances giving rise to the request, and a complete explanation of how both the requested overall increase and the specific rate adjustments requested relate to those circumstances. (e) A full discussion of why the requested rate adjustments are 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. (f) A full discussion of why the requested rate adjustments are reasonable and equitable as among types of users of market dominant products. (g) An explanation of when, or under what circumstances, the Postal Service expects to be able to rescind the exigent rate adjustments in whole or in part. (h) An analysis of the circumstances giving rise to the exigent request, which should, if applicable, include a discussion of whether the circumstances were foreseeable or could have been avoided by reasonable prior action. (i) Such other information as the Postal Service believes will assist the Commission to issue a timely determination of whether the requested rate adjustments are consistent with applicable statutory policies. § 3010.242 Supplemental information. The Commission may require the Postal Service to provide clarification of its request or to provide additional information in order to gain a better understanding of the circumstances E:\FR\FM\11DEP2.SGM 11DEP2 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules leading to the request or the justification for the specific rate adjustments requested. The Postal Service shall include within its request the identification of one or more knowledgeable Postal Service official(s) who will be available to provide prompt responses to Commission requests for clarification or additional information. § 3010.243 Docket and notice. (a) The Commission will establish a docket for each request to adjust rates due to extraordinary or exceptional circumstances, publish notice of the request in the Federal Register, and post the filing on its Web site. The notice shall include the items specified in paragraphs (b) through (g) of this section. (b) The general nature of the proceeding. (c) A reference to legal authority under which the proceeding is to be conducted. (d) A concise description of the proposals for changes in rates, fees, and the Mail Classification Schedule. (e) The identification of an officer of the Commission to represent the interests of the general public in the docket. (f) A specified period for public comment. (g) Such other information as the Commission deems appropriate. daltland on DSKBBV9HB2PROD with PROPOSALS § 3010.244 Public hearing. (a) The Commission will hold a public hearing on the Postal Service request. During the public hearing, responsible Postal Service officials will appear and respond under oath to questions from the Commissioners or their designees addressing previously identified aspects of the Postal Service’s request and supporting information. (b) Interested persons will be given an opportunity to submit to the Commission suggested relevant questions that might be posed during the public hearing. Such questions, and any explanatory materials submitted to clarify the purpose of the questions, should be filed in accordance with § 3001.9 of this chapter, and will become part of the administrative record of the proceeding. (c) The timing and length of the public hearing will depend on the nature of the circumstances giving rise to the request and the clarity and completeness of the supporting materials provided with the request. (d) If the Postal Service is unable to provide adequate explanations during the public hearing, supplementary written or oral responses may be required. VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 § 3010.245 Opportunity for comments. (a) Following the conclusion of the public hearings and submission of any supplementary materials, interested persons will be given the opportunity to submit written comments on: (1) The sufficiency of the justification for an exigent rate adjustment; (2) The adequacy of the justification for adjustments in the amounts requested by the Postal Service; and (3) Whether the specific rate adjustments requested are reasonable and equitable. (b) An opportunity to submit written reply comments will be given to the Postal Service and other interested persons. § 3010.246 decision. Deadline for Commission Requests under this subpart seek rate relief required by extraordinary or exceptional circumstances and will be treated with expedition at every stage. It is Commission policy to provide appropriate relief as quickly as possible consistent with statutory requirements and procedural fairness. The Commission will act expeditiously on the Postal Service request, taking into account all written comments. In every instance a Commission decision will be issued within 90 days of the filing of an exigent request. § 3010.247 Treatment of banked rate adjustment authority. (a) Each request will identify the banked rate adjustment authority available as of the date of the request for each class of mail and the available amount for each of the preceding 5 years. (b) Rate adjustments may use existing banked rate adjustment authority in amounts greater than the limitations described in § 3010.225. (c) Increases will exhaust all banked rate adjustment authority for each class of mail before imposing additional rate adjustments in excess of the maximum rate adjustment for any class of mail. Subpart I—Workshare Discounts § 3010.260 Applicability. This subpart establishes bands for the percentages of avoided costs that may be passed through to a customer in the form of a workshare discount. For the purpose of this subpart, the percentage passthrough for any workshare discount shall be calculated by dividing the workshare discount by the cost avoided by the Postal Service for not providing the applicable service and expressing the result as a percentage. PO 00000 Frm 00049 Fmt 4701 Sfmt 4702 § 3010.261 58327 Passthrough requirement. (a) Except as provided in § 3010.262, all percentage passthroughs for workshare discounts must be set within the bands as specified in paragraphs (b) through (c) of this section. (b) 75 percent to 125 percent for Periodicals. (c) 85 percent to 115 percent for all other classes. § 3010.262 Exceptions for noncompliant discounts. (a) For workshare discounts in existence on the effective date of this subpart that do not comply with the requirements of § 3010.261, there shall be a 3 year grace period from the effective date of this subpart to bring the applicable percentage passthroughs into compliance with the requirements of § 3010.261. (b) For new workshare discounts established after the effective date of this subpart that do not comply with the requirements of § 3010.261, there shall be a 3 year grace period from the establishment of the new workshare discount to bring the applicable percentage passthroughs into compliance with the requirements of § 3010.261. (c) In each request proposing to adjust a rate associated with a workshare discount subject to the exceptions in paragraphs (a) or (b) of this section, the Postal Service shall submit a plan to bring the percentage passthroughs into compliance with the requirements of § 3010.261 prior to the expiration of the exception. PART 3020—PRODUCT LISTS 2. The authority citation for part 3020 continues to read as follows: ■ Authority: 39 U.S.C. 503; 3622; 3631; 3642; 3682. ■ 3. Add subpart G to read as follows: Subpart G—Requests for Market Dominant Negotiated Service Agreements Sec. 3020.120 General. 3020.121 Additional supporting justification for negotiated service agreements. 3020.122 Data collection plan and report for negotiated service agreements. § 3020.120 General. This subpart imposes additional requirements whenever there is a request to add a negotiated service agreement to the market dominant product list. The additional supporting justification appearing in § 3020.121 also should be provided whenever the E:\FR\FM\11DEP2.SGM 11DEP2 58328 Federal Register / Vol. 82, No. 236 / Monday, December 11, 2017 / Proposed Rules Postal Service proposes to modify the terms of an existing market dominant negotiated service agreement. Commission findings that the addition of a special classification is not inconsistent with 39 U.S.C. 3622 are provisional and subject to subsequent review. No rate(s) shall take effect until 45 days after the Postal Service files a request for review of a notice of a new rate or rate(s) adjustment specifying the rate(s) and the effective date. daltland on DSKBBV9HB2PROD with PROPOSALS § 3020.121 Additional supporting justification for negotiated service agreements. (a) Each request shall also include the items specified in paragraphs (b) through (j) of this section. (b) A copy of the negotiated service agreement. (c) The planned effective date(s) of the planned rates. (d) The identity of a responsible Postal Service official who will be available to provide prompt responses to requests for clarification from the Commission. (e) A statement identifying all parties to the agreement and a description clearly explaining the operative components of the agreement. (f) Details regarding the expected improvements in the net financial position or operations of the Postal Service (39 U.S.C. 3622(c)(10)(A)(i) and (ii)). The projection of change in net financial position as a result of the agreement shall be based on accepted analytical principles. The projection of change in net financial position as a result of the agreement shall include for each year of the agreement: (1) The estimated mailer-specific costs, volumes, and revenues of the Postal Service absent the implementation of the negotiated service agreement; (2) The estimated mailer-specific costs, volumes, and revenues of the Postal Service which result from implementation of the negotiated service agreement; (3) An analysis of the effects of the negotiated service agreement on the contribution to institutional costs from mailers not party to the agreement; (4) If mailer-specific costs are not available, the source and derivation of the costs that are used shall be provided, together with a discussion of the currency and reliability of those costs and their suitability as a proxy for the mailer-specific costs; and (5) If the Postal Service believes the Commission’s accepted analytical VerDate Sep<11>2014 18:41 Dec 08, 2017 Jkt 244001 principles are not the most accurate and reliable methodology available: (i) An explanation of the basis for that belief; and (ii) A projection of the change in net financial position resulting from the agreement made using the Postal Service’s alternative methodology. (g) An identification of each component of the agreement expected to enhance the performance of mail preparation, processing, transportation, or other functions in each year of the agreement, and a discussion of the nature and expected impact of each such enhancement. (h) Details regarding any and all actions (performed or to be performed) to assure that the agreement will not result in unreasonable harm to the marketplace (39 U.S.C. 3622(c)(10)(B)). (i) A discussion in regard to how functionally similar negotiated service agreements will be made available on public and reasonable terms to similarly situated mailers. (j) Such other information as the Postal Service believes will assist the Commission to issue a timely determination of whether the requested changes are consistent with applicable statutory policies. § 3020.122 Data collection plan and report for negotiated service agreements. (a) The Postal Service shall include with any request concerning a negotiated service agreement a detailed plan for providing data or information on actual experience under the agreement sufficient to allow evaluation of whether the negotiated service agreement operates in compliance with 39 U.S.C. 3622(c)(10). (b) A data report under the plan is due 60 days after each anniversary date of implementation and shall include, at a minimum, the following information for each 12-month period the agreement has been in effect: (1) The change in net financial position of the Postal Service as a result of the agreement. This calculation shall include for each year of the agreement: (i) The actual mailer-specific costs, volumes, and revenues of the Postal Service; (ii) An analysis of the effects of the negotiated service agreement on the net overall contribution to the institutional costs of the Postal Service; and (iii) If mailer-specific costs are not available, the source and derivation of the costs that are used shall be provided, including a discussion of the currency and reliability of those costs, PO 00000 Frm 00050 Fmt 4701 Sfmt 9990 and their suitability as a proxy for the mailer-specific costs. (2) A discussion of the changes in operations of the Postal Service that have resulted from the agreement. This shall include, for each year of the agreement, identification of each component of the agreement known to enhance the performance of mail preparation, processing, transportation, or other functions in each year of the agreement. (3) An analysis of the impact of the negotiated service agreement on the marketplace, including a discussion of any and all actions taken to protect the marketplace from unreasonable harm. PART 3050—PERIODIC REPORTING 4. The authority citation for part 3050 continues to read as follows: ■ Authority: 39 U.S.C. 503; 3651; 3652; 3653. 5. Amend § 3050.20 by revising paragraph (c) to read as follows: ■ § 3050.20 Compliance and other analyses in the Postal Service’s section 3652 report. * * * * * (c) It shall address such matters as non-compensatory rates and failures to achieve stated goals for on-time delivery standards. A more detailed analysis is required when the Commission observed and commented upon the same matter in its Annual Compliance Determination for the previous fiscal year. PART 3055—SERVICE PERFORMANCE AND CUSTOMER SATISFACTION REPORTING 6. The authority citation for part 3055 continues to read as follows: ■ Authority: 39 U.S.C. 503; 3622(a); 3652(d) and (e); 3657(c). 7. Amend § 3055.2 by revising paragraph (c) to read as follows: ■ § 3055.2 Contents of the annual report of service performance achievements. * * * * * (c) The applicable service standard(s) for each product. If there has been a change to a service standard(s) since the previous report, a description of and reason for the change shall be provided. If there have been no changes to service standard(s) since the previous report, a certification stating this fact shall be provided. * * * * * [FR Doc. 2017–26307 Filed 12–8–17; 8:45 am] BILLING CODE 7710–FW–P E:\FR\FM\11DEP2.SGM 11DEP2

Agencies

[Federal Register Volume 82, Number 236 (Monday, December 11, 2017)]
[Proposed Rules]
[Pages 58280-58328]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-26307]



[[Page 58279]]

Vol. 82

Monday,

No. 236

December 11, 2017

Part II





Postal Regulatory Commission





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





39 CFR Parts 3010, 3020, 3050, et al.





System for Regulating Market Dominant Rates and Classifications; 
Proposed Rule

Federal Register / Vol. 82 , No. 236 / Monday, December 11, 2017 / 
Proposed Rules

[[Page 58280]]


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

POSTAL REGULATORY COMMISSION

39 CFR Parts 3010, 3020, 3050, and 3055

[Docket No. RM2017-3; Order No. 4258]


System for Regulating Market Dominant Rates and Classifications

AGENCY: Postal Regulatory Commission.

ACTION: Proposed rule.

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

SUMMARY: The Commission is proposing rules related to the current 
system of regulating rates and classes for market dominant products. 
Proposed rules are the result of a Commission statutory review wherein 
the Commission was required to review whether the system was achieving 
the objectives, taking into account the factors, established by 
Congress under the Postal Accountability and Enhancement Act of 2006. 
This notice informs the public of the proposed rules, invites public 
comment, and takes other administrative steps.

DATES: Comments are due: March 1, 2018; Reply Comments are due: March 
30, 2018.

FOR FURTHER INFORMATION CONTACT: David A. Trissell, General Counsel, at 
202-789-6820.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Introduction and Procedural History

II. Statutory Authority

III. Proposed Regulatory Changes

IV. Description of Proposed Changes to Rules Appearing in the Code of 
Federal Regulations

V. Administrative Actions

VI. Ordering Paragraphs

I. Introduction and Procedural History

    Pursuant to 39 U.S.C. 3622(d)(3), 10 years after the enactment of 
the Postal Accountability and Enhancement Act (PAEA),\1\ the Commission 
was required to initiate a review of the system for regulating rates 
and classes for market dominant products to determine if the ratemaking 
system has achieved the objectives of 39 U.S.C. 3622(b), taking into 
account the factors enumerated in 39 U.S.C. 3622(c).
---------------------------------------------------------------------------

    \1\ Postal Accountability and Enhancement Act (PAEA), Public Law 
109-435, 120 Stat. 3198 (2006).
---------------------------------------------------------------------------

    On December 20, 2016, the Commission initiated its review by 
issuing an advance notice of proposed rulemaking (ANPR).\2\ The ANPR 
established a framework for the review, appointed an officer of the 
Commission to represent the interests of the general public, and 
provided an opportunity for public comment.
---------------------------------------------------------------------------

    \2\ Advance Notice of Proposed Rulemaking on the Statutory 
Review of the System for Regulating Rates and Classes for Market 
Dominant Products, December 20, 2016 (Order No. 3673); see also 81 
FR 95071 (December 27, 2016) (to be codified at 39 CFR parts 3010 
and 3020).
---------------------------------------------------------------------------

    On December 1, 2017, the Commission issued its findings concerning 
the review.\3\ The findings are based on the Commission's review of the 
system's performance during the 10 years following the passage of the 
PAEA with full consideration of comments received on topics relevant to 
the review. In short, based on its review of whether the existing 
ratemaking system has achieved the objectives of 39 U.S.C. 3622(b), 
taking into account the factors enumerated in 39 U.S.C. 3622(c), the 
Commission finds the system has not achieved the objectives of the 
PAEA. Order No. 4257 at 275.
---------------------------------------------------------------------------

    \3\ Order on the Findings and Determination of the 39 U.S.C. 
3622 Review, December 1, 2017 (Order No. 4257).
---------------------------------------------------------------------------

    Since the review concludes that the system for regulating rates and 
classes has not achieved the objectives, taking into account the 
factors, the Commission is initiating the instant rulemaking. The 
purpose of this rulemaking is to propose such modifications to existing 
regulations or adopt such an alternative system through new regulations 
that the Commission deems necessary to achieve the objectives of 39 
U.S.C. 3622(b).
    As explained more fully below, 39 U.S.C. 3622(d)(3) authorizes this 
rulemaking for the purpose of modifying existing regulations or 
adopting an alternative system as necessary to meet the objectives. The 
Commission also has standing authority to revise the existing system 
for regulating rates and classes as necessary. 39 U.S.C. 3622(a). 
Additionally, the Commission has general authority to promulgate rules 
and regulations, establish procedures, and take any other action deemed 
necessary and proper to carry out its functions and obligations, as 
prescribed under title 39 of the United States Code. 39 U.S.C. 503.
    This rulemaking proposes changes to title 39 of the Code of Federal 
Regulations. The rules in 39 CFR part 3010, subparts A, B, C, and E 
(existing Sec. Sec.  3010.1 et seq., 3010.10 et seq., 3010.20 et seq., 
and 3010.60 et seq.) are replaced in their entirety by new rules in new 
subparts A, B, C, D, E, F, G, H, and I (proposed Sec. Sec.  3010.100 et 
seq., 3010.120 et seq., 3010.140 et seq., 3010.160 et seq., 3010.180 et 
seq., 3010.200 et seq., 3010.220 et seq., 3010.240 et seq., and 
3010.260 et seq.). Rules specific to negotiated service agreements 
(NSAs) appearing in 39 CFR part 3010, subpart D (existing Sec.  3010.40 
et seq.) are moved to new 39 CFR part 3020, subpart G (proposed Sec.  
3020.120 et seq.). Minor changes are proposed in existing Sec. Sec.  
3050.20(c) and 3055.2(c). The proposed rules appear after the signature 
of this Order in Attachment A.
    The next step in this rulemaking process is critical to the 
Commission's responsibility under the PAEA--seeking informed community 
participation and insight. The Commission has implemented a robust 
comment and reply period designed to elicit sound criticism of, 
concurrence with, or alternatives to the Commission's proposed 
approach.

II. Statutory Authority

A. Introduction

    Section 3622(d)(3) of title 39 of the United States Code directs 
the Commission to conduct a review of the market dominant ratemaking 
system 10 years after the enactment of the PAEA in order to determine 
whether the system is achieving the objectives enumerated at 39 U.S.C. 
3622(b), taking into account the factors enumerated at 39 U.S.C. 
3622(c). This provision prescribes a two-step process. First, the 
Commission must determine whether the current ratemaking system is 
achieving the PAEA's objectives, taking into account its factors.
    [The text of 39 U.S.C. 3622(d)(3) was removed to comply with the 
Federal Register Document Drafting Handbook, section 2.6. See 39 U.S.C. 
3622(d)(3).].
    The Commission completed the first step of this process on December 
1, 2017, when it issued an order announcing its findings with regard to 
the current ratemaking system. See Order No. 4257. The Commission 
specifically determined that the ratemaking system has not achieved the 
objectives, taking into account the factors. Id. at 275.
    The Commission now proceeds to the second step of the process 
established by section 3622(d)(3). This provision authorizes the 
Commission to promulgate rules either modifying the current ratemaking 
system or adopting an alternative ratemaking system, ``as necessary to 
achieve the objectives.''
    [The text of 39 U.S.C. 3622(d)(3) was removed to comply with the 
Federal Register Document Drafting Handbook, section 2.6. See 39 U.S.C. 
3622(d)(3).].
    The Commission interprets this provision as providing broad 
authority to make changes to the market dominant ratemaking system. The 
authority to make changes to the system provided by

[[Page 58281]]

section 3622(d)(3) expands upon the statutory authority provided by 
section 3622(a).
    [The text of 39 U.S.C. 3622(a) was removed to comply with the 
Federal Register Document Drafting Handbook, section 2.6. See 39 U.S.C. 
3622(a).].
    Finally, the Commission has general authority, pursuant to section 
503, to promulgate rules and regulations and establish procedures.
    [The text of 39 U.S.C. 503 was removed to comply with the Federal 
Register Document Drafting Handbook, section 2.6. See 39 U.S.C. 503.].

B. Comments

    The comments received in response to the ANPR that discuss the 
Commission's rulemaking authority primarily focus on two aspects of 
that authority pursuant to section 3622(d)(3): The authority to 
eliminate or modify the price cap and the authority to modify workshare 
discount provisions. The Appendix to this Order provides a list of 
commenters and citations to the comments filed in this docket in 
response to Order No. 3673.
1. Authority To Eliminate or Modify the Price Cap
a. Plain Language
    With regard to the price cap, multiple commenters take the position 
that the plain language of 39 U.S.C. 3622 constrains the Commission's 
ability to eliminate, modify, or replace the price cap. ANM et al. 
contend that the mandatory ``shall'' language used by Congress in 
establishing the consumer price index (CPI) price cap and its central 
role in the PAEA ratemaking scheme forecloses any claim that the 
statute makes the price cap merely optional.\4\
---------------------------------------------------------------------------

    \4\ ANM et al. Comments at 9-10 n.2 (asserting that the 
Commission lacks authority to substantially modify the price cap) 
(citing ANM et al., Limitations on the Commission's Authority Under 
Section 3622(d)(3), October 28, 2014, at 6 (ANM et al. 2014 White 
Paper)).
---------------------------------------------------------------------------

    Commenters also advance a number of structural arguments for why 
section 3622 precludes any changes to the price cap. ANM et al., MMA et 
al., and GCA all assert that the scope of section 3622(d)(3) is limited 
by the title of section 3622(d)--``Requirements.'' \5\
---------------------------------------------------------------------------

    \5\ ANM et al. 2014 White Paper at 4-7; MMA et al. Comments at 
14-15; GCA Comments at 29-31.
---------------------------------------------------------------------------

    ABA focuses on the use of the word ``system'' throughout section 
3622, arguing that ``the consistent use of the word `system' throughout 
the section, rather than qualifiers such as `first system' or `initial 
system' or `system preceding the 10 year review,' suggests Congress 
contemplated the same requirements applying to any and all rate 
structures the Commission would create.'' ABA Comments at 8-10. GCA 
focuses on the use of the phrase ``requirement,'' arguing that ``[w]hen 
a particular phrase is used repeatedly in the same enactment, it is 
customary to give it the same meaning each time it appears . . . 
[which] suggests that . . . if a feature of the existing system is 
present because [section] 3622(d) makes it a `requirement,' then it 
must remain in any modified or alternative system which emerges from 
the tenth-year review.'' \6\
---------------------------------------------------------------------------

    \6\ GCA Comments at 30 (citing Ratzlaf v. United States, 510 
U.S. 135, 143 (1994)).
---------------------------------------------------------------------------

    Other commenters focus on the purported primacy of quantitative 
pricing standards over other provisions of the PAEA. ANM et al. and MMA 
et al. assert that three quantitative pricing standards rest at the top 
of the hierarchy of PAEA provisions--the CPI-U based price cap imposed 
by section 3622(d)(1)(A) and (d)(2); the workshare discount provisions 
imposed by section 3622(e); and the constraints on rate relationships 
between regular and preferred mail imposed by section 3626--and that 
the objectives and factors enumerated in section 3622(b) and (c) are 
subordinate to these quantitative pricing standards.\7\
---------------------------------------------------------------------------

    \7\ ANM et al. 2014 White Paper at 12; MMA et al. Comments at 
15-16.
---------------------------------------------------------------------------

    MMA et al. posit that because Congress created the objectives and 
factors at the same time as the price cap, it must be concluded that 
only a system utilizing the price cap can achieve the objectives and 
factors. MMA et al. Comments at 15-16. Similarly, GCA asserts that both 
section 3622(a) and section 3622(d)(3) are supposed to effectuate the 
objectives and factors, so Congress must have concluded that the price 
cap was necessary to effectuate the objectives and factors. GCA 
Comments at 30-31. ANM et al. assert that under general canons of 
statutory construction, specific provisions, such as the price cap 
provision at section 3622(d)(1)(A), trump general provisions, such as 
section 3622(d)(3).\8\
---------------------------------------------------------------------------

    \8\ ANM et al. 2014 White Paper at 15 (citing Navarro-Miranda v. 
Ashcroft, 330 F.3d 672, 676 (5th Cir. 2003)).
---------------------------------------------------------------------------

    Finally, these commenters highlight prior instances where the 
Commission is alleged to have ratified this view. ABA cites a prior 
order by the Commission where the Commission observed that ``the role 
of the price cap is central to ratemaking, and the integrity of the 
price cap is indispensable if the incentive to reduce costs is to 
remain effective.'' \9\ ANM et al. also point to language from a prior 
Commission order purportedly recognizing that the PAEA's objectives and 
factors are subordinate to the statute's quantitative pricing 
standards.\10\ Additionally, ANM et al. assert that the Commission is 
bound in the instant proceeding by prior holdings in its FY 2010 and FY 
2011 Annual Compliance Determinations (ACDs) that the price cap takes 
precedence over the statutory factors.\11\
---------------------------------------------------------------------------

    \9\ ABA Comments at 8 (citing Docket No. R2010-4, Order No. 547, 
Order Denying Request for Exigent Rate Adjustments, September 30, 
2010, at 49-50).
    \10\ ANM et al. 2014 White Paper at 13 (citing Docket No. 
RM2009-3, Order Adopting Analytical Principles Regarding Workshare 
Discount Methodology, September 14, 2010, at 36 (Order No. 536)); 
see also MMA et al. Comments at 15-16 (citing Docket No. ACR2010, 
Annual Compliance Determination, March 29, 2011, at 19 (FY 2010 
ACD)).
    \11\ ANM et al. 2014 White Paper at 14-15 (quoting FY 2010 ACD 
at 18-19; Docket No. ACR2010R, Order No. 1427, Order on Remand, 
August 9, 2012; Docket No. ACR2011, Annual Compliance Determination, 
March 28, 2012, at 17 (FY 2011 ACD)). The specific factor at issue 
was Factor 2 (39 U.S.C. 3622(c)(2)), which requires coverage of 
attributable costs.
---------------------------------------------------------------------------

    ABA, ANM et al., and MMA et al. all take the position that the 
Commission's authority to review the ratemaking system and engage in 
rulemaking under section 3622(d)(3) is limited to the scope of the 
Commission's initial rulemaking authority under section 3622(a).\12\ 
ANM et al. assert that section 3622(d)(3) mirrors section 3622(a), and 
as a result the Commission's authority to modify or replace regulations 
under section 3622(d)(3) is coextensive with the Commission's authority 
to establish those regulations in the first instance under section 
3622(a). ANM et al. Comments at 10-11. Hence, according to ANM et al., 
nothing in the language or structure of the PAEA suggests that the 
Commission's rulemaking authority under section 3622(d)(3) is broader 
than it was under section 3622(a). Id.
---------------------------------------------------------------------------

    \12\ ABA Comments at 9; ANM et al. 2014 White Paper at 9-11; MMA 
et al. Comments at 14.
---------------------------------------------------------------------------

    Based on this interpretation, MMA et al. assert that the Commission 
can modify regulations implementing the price cap but cannot change the 
fundamental requirements of the ratemaking system. MMA et al. Comments 
at 15. In MMA et al.'s view, ``[a]s an administrative agency, the 
Commission already has inherent authority to revise regulations that it 
has previously promulgated . . . [and section 3622(d)(3)] merely 
directs the Commission to use its normal administrative powers.'' Id. 
at 14. GCA suggests that while the Commission cannot abolish the price 
cap, it can

[[Page 58282]]

``identify and specify features of the . . . price cap which do not 
adequately effectuate the objectives and factors, point out and analyze 
the particular shortcomings, identify the objective(s) or factor(s) 
they are hindering, and find ways to correct them in detail without 
hindering any other objective.'' GCA Comments at 31-32.
    Other commenters assert that the plain language of section 3622 
permits the Commission to modify or replace the price cap.\13\ The 
Postal Service takes the position that the ``system'' for purposes of 
section 3622 includes all provisions within section 3622(d), including 
the price cap provision. Postal Service Comments at 19. The Postal 
Service asserts that ``[s]ection 3622(d) plainly states at the outset 
that its provisions are part of the `system for regulating rates and 
classes for market-dominant products.' '' Id. Furthermore, the Postal 
Service asserts that ``whatever the precise scope of `modification' 
might be, the fact that the Commission is also authorized to adopt an 
`alternative system' demonstrates that [s]ection 3622(d)(3) imposes no 
limitations on the Commission's authority regarding the design of a 
replacement regulatory system, other than the requirement that any such 
replacement achieve the objectives.'' Id. at 19-20.
---------------------------------------------------------------------------

    \13\ PR Comments at 29-30; NALC Comments at 16.
---------------------------------------------------------------------------

b. Legislative History
    Multiple commenters also base their arguments with regard to the 
price cap on the PAEA's legislative history. ANM et al. and GCA note 
that an early version of the PAEA had referred to the price cap as an 
``allowable provision,'' but that by the time the final bill was 
enacted it had become a ``requirement.'' \14\ ANM et al. assert that 
nothing in the PAEA's legislative history suggests that Congress 
intended for the Commission to have broader rulemaking authority under 
section 3622(d)(3) than it had under section 3622(a). ANM et al. 
Comments at 11-12. ANM et al. and MMA et al. contend that elimination 
or relaxation of the price cap would be contrary to the spirit of the 
PAEA.\15\
---------------------------------------------------------------------------

    \14\ ANM et al. 2014 White Paper at 16; GCA Comments at 30-31.
    \15\ ANM et al. 2014 White Paper at 5-7; MMA et al. Comments at 
16.
---------------------------------------------------------------------------

    On the other hand, the Postal Service, NALC, and APWU all cite to a 
floor statement by Senator Susan Collins to the effect that the PAEA 
would provide 10 years of rate stability, after which the Commission 
would review the ratemaking system and, if necessary, modify it or 
adopt an alternative system.\16\ The Postal Service asserts that the 
House version of what became the PAEA would have permitted the 
Commission to choose a regulatory system, while the Senate version 
contained a permanent price cap; hence, the final version of the PAEA 
was a compromise that contained elements of both. Postal Service 
Comments at 20-21. The Postal Service maintains that it is clear that 
Congress intended for the Commission to review the ratemaking system in 
order to determine if it was actually achieving the objectives and 
factors specified by Congress and, if not, to design a system which 
would achieve the objectives. Id. at 22-23. The Postal Service 
maintains that the purpose of section 3622(d)(3) was to give the 
Commission authority to respond to changed circumstances subsequent to 
the PAEA's enactment. Id. at 22-24. The Postal Service contends that it 
is clear from reviewing the legislative history that if Congress had 
desired to make the price cap irrevocable, it could have done so. Id. 
at 26-27.
---------------------------------------------------------------------------

    \16\ Postal Service Comments at 21-22; NALC Comments at 16; APWU 
Comments at 5-6.
---------------------------------------------------------------------------

c. Constitutional Concerns
    Multiple commenters take the position that interpreting section 
3622(d)(3) broadly would produce unconstitutional results. ANM et al. 
and MMA et al. assert that a broad interpretation of section 3622(d)(3) 
would violate the Presentment Clause of the Constitution, which 
prohibits a bill from becoming law without first passing both houses of 
Congress and then being ``presented'' to the President.\17\ ANM et al. 
also assert that a broad interpretation of section 3622(d)(3) would 
violate the non-delegation doctrine, under which Congress may not 
delegate legislative power to an administrative agency where such 
delegation contains no standards to guide the agency's discretion.\18\ 
MMA et al. echo this argument, asserting that the PAEA's objectives and 
factors do not provide an intelligible principle to guide the 
Commission's discretion which would be sufficient to permit such a 
delegation. MMA et al. Comments at 15-16.
---------------------------------------------------------------------------

    \17\ ANM et al. 2014 White Paper at 18 (citing Clinton v. City 
of New York, 524 U.S. 417 (1998)); MMA et al. Comments at 15.
    \18\ ANM et al. 2014 White Paper at 20 (citing Mistretta v. 
United States, 488 U.S. 361, 371-79 (1989); Panama Ref. Co. v. Ryan, 
293 U.S. 388, 430 (1935); A.L.A. Schechter Poultry Corp. v. United 
States, 295 U.S. 495, 529-31 (1935)).
---------------------------------------------------------------------------

    MMA et al. assert that a broad interpretation of section 3622(d)(3) 
could potentially violate constitutional principles of separation of 
powers, based on the phrase ``and as appropriate thereafter'' in 
section 3622(d)(3). Id. at 16-17. MMA et al. maintain that ``[i]f [the 
Commission] could change the fundamental nature of the system . . . 
anytime `appropriate thereafter,' then it would have received an 
unprecedented grant to an Executive Branch agency of perpetual power to 
rewrite legislation.'' Id. at 16.
    Based on all of the foregoing, ANM et al. contend that a broad 
interpretation of section 3622(d)(3) would violate the canon of 
constitutional doubt, which prohibits agencies from construing statutes 
in such a way as to raise serious doubts about their 
constitutionality.\19\ This is because, in ANM et al.'s view, ``[t]here 
is a serious doubt that construing [s]ection 3622(d)(3) to authorize 
the Commission to rescind the CPI cap would pass muster under the 
Presentment Clause of the Constitution . . . or the constitutional 
limits on the delegation of legislative authority.'' ANM et al. 2014 
White Paper at 18.
---------------------------------------------------------------------------

    \19\ ANM et al. 2014 White Paper at 17 (citing United States v. 
Delaware & Hudson Co., 213 U.S. 366, 408 (1909); Lowe v. SEC, 472 
U.S. 181, 227 (1985); Edward J. DeBartolo Corp. v. Fla. Gulf Coast 
Bldg. & Constr. Trades Council, 485 U.S. 568, 575 (1988)).
---------------------------------------------------------------------------

    The Postal Service, on the other hand, disagrees that a broad 
interpretation of Commission authority would present a concern with 
regard to constitutional separation of powers principles. Postal 
Service Comments at 25. The Postal Service deems section 3622(d)(3)'s 
delegation of authority to the Commission to be ``unremarkable.'' Id.
2. Authority To Modify Workshare Discount Provisions
    The second major topic addressed is the workshare discount 
provisions contained in 39 U.S.C. 3622(e). Most commenters addressing 
workshare discounts presume worksharing is within the scope of this 
proceeding and suggest worksharing related changes.\20\ In contrast, a 
handful of commenters object to the review of the workshare discount 
provisions of section 3622(e).\21\ The Postal Service contends that the 
``system'' of ratemaking subject to review and possible rulemaking 
under section 3622(d)(3) does not include the workshare discount 
provisions. Postal Service Comments at 19, 28. The Postal Service bases 
this argument, first, on the PAEA's plain language. The Postal

[[Page 58283]]

Service asserts that ``[s]ubsections (a) through (d) of [s]ection 3622 
expressly set forth the parameters of the `system' . . . [and] [a]t the 
end of these provisions comes [s]ection 3622(d)(3), with its provision 
for the Commission's 10-year review of the `system'. . . .'' Postal 
Service Comments at 28-29. However, it states that ``[t]he workshare 
discount standards in subsection (e) follow[ ] the 10-year review 
provision . . . [and] subsection (e) does not specify that its 
standards are an aspect of the `system.' '' Id. at 29. APWU similarly 
contends that the structure of the PAEA suggests Congress did not 
intend for workshare discount provisions to be subject to modification 
under section 3622(d)(3). APWU Comments at 5. GCA also takes the 
position that workshare provisions are not part of the ``system'' which 
section 3622(d)(3) authorizes the Commission to modify. GCA Comments at 
37-38.
---------------------------------------------------------------------------

    \20\ See, e.g., ABA Comments at 11; ANM et al. Comments at 11-
12, 82; Chairman Chaffetz and Chairman Meadows Comments at 2; MMA et 
al. Comments at 19, 71; Pitney Bowes Comments at 3-4; and PSA 
Comments at 6.
    \21\ See, e.g., APWU Comments at 5; Postal Service Comments at 
28-30; and GCA Comments at 36-37.
---------------------------------------------------------------------------

    The Postal Service also asserts that the PAEA's legislative history 
demonstrates that Congress intended the requirement that workshare 
discounts not exceed avoided costs to apply regardless of the 
regulatory system promulgated by the Commission under section 3622(a). 
Postal Service Comments at 30-31. GCA likewise asserts that when 
enacting the PAEA, Congress codified the Commission's long-standing 
practice on workshare discounts into a set of statutory requirements, 
which GCA contends the Commission lacks authority to change. GCA 
Comments at 34.
    Finally, the Postal Service and GCA assert that the Commission has 
previously affirmed the view that the workshare discount standards are 
separate and distinct from other provisions of section 3622, including 
the objectives and factors that underlie the review mandated by section 
3622(d)(3).\22\
---------------------------------------------------------------------------

    \22\ Postal Service Comments at 32 (citing Order No. 536 at 16-
19, 34-37); see also GCA Comments at 36.
---------------------------------------------------------------------------

C. Commission Analysis
    The Commission's determination that the system has not achieved the 
objectives, taking into account the factors, triggered the 
applicability of the second step of the system review contemplated by 
section 3622(d)(3). See Order No. 4257 at 275. This provision grants 
the Commission discretion regarding whether and how to promulgate 
regulations as necessary to achieve the PAEA's objectives. 39 U.S.C. 
3622(d)(3).
    Section 3622(d)(3) provides the Commission with two discrete 
options. The Commission ``may, by regulation, make such modification or 
adopt such alternative system. . . .'' 39 U.S.C. 3622(d)(3) (emphasis 
added). The use of ``may,'' rather than ``shall,'' demonstrates that 
Congress intended for the Commission to have discretion to decide 
whether to act at all.\23\ Because ``or'' is disjunctive, the two 
options on either side of the ``or'' must have a different meaning from 
each other.\24\ Therefore, the use of ``may,'' followed by two options 
connected by ``or,'' demonstrates that if the Commission does determine 
to act, then Congress granted the Commission the discretion to choose 
from two options with different meanings.
---------------------------------------------------------------------------

    \23\ See Lopez v. Davis, 531 U.S. 230, 239 (2001) (if certain 
statutory prerequisites are met, the Bureau of Prisons `` `may,' but 
also may not, grant early release.'' (emphasis in original)).
    \24\ Chao v. Day, 436 F.3d 234, 236 (D.C. Cir. 2006) (terms 
connected using the disjunctive ``or'' must be given separate 
meanings).
---------------------------------------------------------------------------

    The first option is to ``make such modification . . . as necessary 
to achieve the objectives.'' 39 U.S.C. 3622(d)(3). This language 
connotes moderate change.\25\ The second option grants authority to 
``adopt such alternative system for regulating rates and classes for 
market-dominant products as necessary to achieve the objectives.'' 39 
U.S.C. 3622(d)(3). This language contemplates replacement of the 
existing system.\26\
---------------------------------------------------------------------------

    \25\ See MCI Telecomm. Corp. v. Am. Tel. & Tel. Co., 512 U.S. 
218, 228 (1994); see also Merriam-Webster Dictionary, available at 
https://www.merriam-webster.com/dictionary/modification 
(``modification'' defined as ``the making of a limited change in 
something'').
    \26\ See Merriam-Webster Dictionary, available at https://www.merriam-webster.com/dictionary/adopt (``adopt'' defined as ``to 
accept formally and put into effect''); https://www.merriam-webster.com/dictionary/alternative (``alternative'' defined as ``a 
proposition or situation offering a choice between two or more 
things only one of which may be chosen'').
---------------------------------------------------------------------------

    The scope of the term ``alternative system'' is given meaning by 
the statutory context in which the provision arises. For instance, 
section 3622(c)(4) limits the scope of ``alternative means of sending 
and receiving letters and other mail matter at reasonable costs'' to 
alternative means that are ``available.'' 39 U.S.C. 3622(c)(4). By 
contrast, the only limit section 3622(d)(3) imposes on the Commission's 
ability to adopt an alternative system is that it must be ``as 
necessary to achieve the objectives.'' 39 U.S.C. 3622(d)(3). This 
comparison confirms that the usage of the term ``alternative system'' 
is intentionally broad. Congress knew how to impose express limits on 
the scope of ``alternative system'' but chose not to do so with respect 
to the Commission's authority under section 3622(d)(3).
    The plain language of section 3622(d)(3) leaves it to the 
Commission's discretion to determine what regulatory changes, if any, 
are logically required to achieve the PAEA's objectives.\27\ Subsection 
(b) of section 3622 provides that the system ``shall be designed to 
achieve the following objectives, each of which shall be applied in 
conjunction with the others. . . .'' 39 U.S.C. 3622(b). If Congress 
intended to further limit the scope of the section 3622 review or any 
related regulatory changes, it could have prescribed it. Instead, the 
PAEA set forth nine objectives to be balanced by the Commission.
---------------------------------------------------------------------------

    \27\ See Merriam-Webster Dictionary, available at https://www.merriam-webster.com/dictionary/necessary (``necessary'' defined 
as ``logically unavoidable'').
---------------------------------------------------------------------------

    Although some commenters focus on the title of section 3622(d)--
``Requirements''--as precluding changes to the existing price cap, the 
plain meaning of the statute confirms that section 3622(d)(3) confers 
broad authority. The ``Requirements'' title alone is not dispositive. A 
statute's title can aid in resolving ambiguity but has no power to 
enlarge the text or confer powers.\28\
---------------------------------------------------------------------------

    \28\ Pa. Dept. of Corr. v. Yeskey, 524 U.S. 206, 212 (1998).
---------------------------------------------------------------------------

    The argument that the scope of subsection (a) limits the scope of 
subsection (d)(3) is contrary to the plain meaning and purpose of both 
subsections. First, the two subsections employ different language. The 
use of a parenthetical and the conjunction ``and'' in subsection (a) 
confirms the connection between the meanings of ``establish'' and 
``revise'' as referring to the setup and periodic recalibration of the 
initial ratemaking system.\29\ Subsection (a) requires the Commission 
to set up the initial regulatory system within a specific period. 
Subsection (a) also permits the Commission to improve or correct that 
system ``from time to time thereafter'' through normal rulemaking 
procedures. When doing so, the Commission must apply the objectives in 
conjunction with each other and take into account the factors. 39 
U.S.C. 3622(b) and (c).
---------------------------------------------------------------------------

    \29\ See Merriam-Webster Dictionary, available at https://www.merriam-webster.com/dictionary/establish (``establish'' defined 
as ``to institute (something, such as a law) permanently by 
enactment or agreement''); id., available at https://www.merriam-webster.com/dictionary/revise (``revise'' defined as ``to look over 
again in order to correct or improve'').
---------------------------------------------------------------------------

    By contrast, subsection (d)(3) is not triggered until several 
separate and specific requirements are met. Subsection (d)(3) requires 
a review of the ratemaking system to take place 10

[[Page 58284]]

years after the PAEA's enactment, following notice and an opportunity 
for comment. Additionally, no regulatory changes may be made under 
subsection (d)(3) unless the Commission first determines that the 
system has not achieved the objectives, taking into account the 
factors. The scope of permissible action under subsection (d)(3), which 
is to ``make such modification or adopt such alternative system,'' 
differs from the authority to ``revise'' the initial system.
    The different language used demonstrates that Congress intended to 
create two separate but complementary processes: The Commission's 
general authority to set up and periodically recalibrate the initial 
ratemaking system under subsection (a); and the Commission's specific 
authority to review the initial system after 10 years and modify or 
replace any part of the system as necessary to achieve the objectives 
of the PAEA.
    Moreover, the two subsections serve different purposes. Subsection 
(a) confers ``authority generally'' to the Commission regarding its 
duty to establish new regulations within a set timeframe and revise 
them as appropriate. Subsection (a) was necessary to address the pre-
PAEA view that the Postal Rate Commission had ``a very important, but 
expressly limited, role.'' \30\ The PAEA transformed the Postal Rate 
Commission into the Postal Regulatory Commission, a separate 
independent agency with regulatory oversight of the Postal Service.\31\ 
As discussed below, subsection (d)(3) was the result of a legislative 
compromise to achieve 10 years of rate stability, followed by a 
Commission-led review of the ratemaking system and, if warranted, 
modification or adoption of an alternative system to achieve the PAEA's 
objectives. Reading section 3622(d)(3) to confer authority to the 
Commission that is limited to the scope of section 3622(a) would be 
contrary to this purpose. And, any suggested interpretation of the 
plain language must give way if it would conflict with Congress' 
manifest purposes.\32\
---------------------------------------------------------------------------

    \30\ Gov. of U.S. Postal Serv. v. Postal Rate Comm'n, 654 F.2d 
108, 112 (D.C. Cir. 1981). Under the Postal Reorganization Act, the 
Postal Rate Commission's responsibilities were limited to ``review 
of rate, classification, and major service changes, unadorned by the 
overlay of broad FCC-esque responsibility for industry guidance and 
of wide discretion in choosing the appropriate manner and means of 
pursuing its statutory objective.'' Mail Order Ass'n of Am. v. U.S. 
Postal Serv., 2 F.3d. 408, 415 (D.C. Cir. 1993) (quoting Gov. of 
U.S. Postal Serv., 654 F.2d at 117). ``As a `partner' of the Board 
[of Governors of the United States Postal Service] the Postal Rate 
Commission was assigned the duty and authority to make 
recommendations with respect to rates and classifications.'' Gov. of 
U.S. Postal Serv., 654 F.2d at 114.
    \31\ U.S. Postal Serv. v. Postal Regulatory Comm'n, 717 F. 3d 
209, 210 (D.C. Cir. 2013).
    \32\ See Sullivan v. Hudson, 490 U.S. 877, 890 (1989) 
(``Congress cannot lightly be assumed to have intended'' a result 
that would ``frustrat[e] . . . the very purposes'' of the statute). 
No sound approach to statutory interpretation would attribute to 
Congress an intent to ``subvert the statutory plan.'' Dep't of 
Revenue of Or. v. ACF Indus. Inc., 510 U.S. 332, 340 (1994).
---------------------------------------------------------------------------

    The reliance commenters place on Commission precedent is misplaced. 
None of the cited precedent involved an interpretation of the scope of 
39 U.S.C. 3622(d)(3). Because subsection (d)(3) is not even triggered 
until after the 10-year anniversary of the enactment of the PAEA, the 
cited precedent merely served to acknowledge the bounds of Commission 
authority during the first 10 years under the PAEA. The cited 
statements were made in accordance with the Commission's authority to 
``establish'' and ``revise'' the initial ratemaking system promulgated 
under subsection (a). However, subsection (d)(3) confers broader 
rulemaking authority than subsection (a). In accordance with its 
authority under section 3622(d)(3), and with the benefit of having 
conducted an extensive review following 10 years of experience in the 
operation of the initial ratemaking system, the Commission has now 
determined that the system has not achieved the PAEA's objectives, 
taking into account the statutory factors. Order No. 4257 at 275. 
Therefore, these prior statements made in a separate context do not in 
any way serve to limit the Commission's broader authority under section 
3622(d)(3) to promulgate proposed rules.
    With regard to the workshare discount provisions contained within 
section 3622(e), which a handful of commenters assert are not part of 
the ratemaking system, the Commission finds that the phrase 
``established under this section'' in section 3622(d)(3) refers to 
section 3622 in its entirety, including the workshare discount 
provisions in section 3622(e). This conclusion derives from both the 
plain meaning of the term ``section,'' as well as the fact that within 
section 3622(d)(3) there is a clear differentiation made between 
``sections'' and ``subsections.'' \33\ Further, in its review of the 
system under section 3622(d)(3), the Commission is tasked with taking 
into account ``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 . . . .'' 39 U.S.C. 3622(c)(5). Section 
3622 defines workshare discounts as the discounts mailers receive for 
additional preparation of mailpieces, such as presorting, prebarcoding, 
handling, or transportation. See 39 U.S.C. 3622(e)(1). Therefore, 
workshare discount provisions are plainly part of the ratemaking system 
subject to review and possible rulemaking.
---------------------------------------------------------------------------

    \33\ See 39 U.S.C. 3622(d)(3) (``[T]he Commission shall review 
the system for regulating rates and classes for market-dominant 
products established under this section to determine if the system 
is achieving the objectives in subsection (b), taking into account 
the factors in subsection (c).'' (emphasis added)).
---------------------------------------------------------------------------

    In sum, the plain meaning of the PAEA grants the Commission broad 
authority to engage in rulemaking in order to modify or replace the 
current ratemaking system. The scope of that authority is limited only 
by what is necessary to achieve the PAEA's objectives.
    With regard to legislative history, the PAEA was designed to 
balance several objectives, including the Postal Service's financial 
needs and mailers' need for predictable and stable rates. To achieve 10 
years of rate stability, the ratemaking system was intended to operate 
in accordance with specific statutory requirements and limitations. As 
previously described, after 10 years, the initial system would be 
subject to Commission review. If the Commission determined that the 
system did not achieve the PAEA's objectives taking into account its 
factors, then the Commission would have the authority to modify or 
replace the system as necessary to achieve the objectives. The 
legislative history confirms this structured approach. Specifically, 
the final version of the PAEA, H.R. 6407, represented a compromise 
between two bills--H.R. 22 and S. 662.
    The first bill, H.R. 22, was introduced by Representative John 
McHugh on January 4, 2005, and reported back to the House with 
amendments on April 28, 2005. 151 Cong. Rec. H72 (daily ed. Jan. 4, 
2005); 151 Cong. Rec. H2734 (daily ed. Apr. 28, 2005). On July 26, 
2005, H.R. 22, as amended, was passed by the House of Representatives. 
151 Cong. Rec. H6511, H6548-H6549 (daily ed. Jul. 26. 2005) (Roll Call 
No. 430). As discussed by GCA and ANM et al., \34\ under H.R. 22 as 
passed by the House of Representatives, proposed section 3622(d) was 
titled ``Allowable Provisions.'' 151 Cong. Rec. H6523 (daily ed. Jul. 
26. 2005). This bill provided that the ratemaking system could include 
one or more of several types of systems: Incentive regulation (e.g., 
price caps, revenue targets); cost-of-service regulation; or any other 
form

[[Page 58285]]

of regulation that the Commission considered appropriate to achieve the 
objectives, consistent with the factors. Id. Proposed section 3622(e) 
under this bill was titled ``Limitation.'' Id. This provision would 
have prohibited the Commission from permitting the average rate for any 
product to increase at an annual rate greater than the comparable 
increase in the CPI unless the Commission determined, after public 
notice and comment, that the increase was reasonable, equitable, and 
necessary. Id.
---------------------------------------------------------------------------

    \34\ ANM et al. 2014 White Paper at 16; GCA Comments at 30-31; 
ANM et al. Comments at 21.
---------------------------------------------------------------------------

    The second bill, S. 622, was introduced by Senator Collins on March 
17, 2005, and reported back to the Senate with amendments on July 14, 
2005. 151 Cong. Rec. S2994, S3012-S3031 (daily ed. Mar. 17, 2005); 151 
Cong. Rec. S8301 (daily ed. Jul. 14, 2005). On February 9, 2006, the 
Senate considered those amendments and additional amendments to S. 662 
by unanimous consent. 152 Cong. Rec. S898-S927 (daily ed. Feb. 9, 
2006). Under this bill, proposed section 3622(d) was titled 
``Requirements,'' and was subdivided into subsections titled ``In 
general'' and ``Limitations.'' Id. at S913-S914. The content of 
proposed section 3622(d)(1) and (2) under S. 662 employed similar 
language to that which was eventually used in the final version of the 
PAEA. Compare id. with 39 U.S.C. 3622(d)(1) and (2).
    Also on February 9, 2006, through unanimous consent, the Senate 
passed H.R. 22,\35\ by replacing the text of H.R. 22 with all the text 
of S. 662. 152 Cong. Rec. at S927-S942 (daily ed. Feb. 9, 2006). 
Therefore, as passed by the Senate, H.R. 22 contained the same title 
structure as S. 662, with proposed section 3622(d)--titled 
``Requirements''--being subdivided into two subsections titled ``In 
General'' and ``Limitations.'' Id. at S929. Then, the Senate sent H.R. 
22, as amended and passed by the Senate, back to the House and 
requested a conference to resolve the differences between the two 
versions. Id. at S927, S942. For instance, as passed by the House on 
July 26, 2005, H.R. 22 provided for the ratemaking system to achieve 
seven objectives and for the Commission to take into account 11 
factors. 151 Cong. Rec. H6523 (daily ed. Jul. 26, 2005). By contrast, 
as passed by the Senate on February 9, 2006, H.R. 22 provided for the 
ratemaking system to achieve 8 objectives and for the Commission to 
take into account 13 factors. 152 Cong. Rec. at S928-S929 (daily ed. 
Feb. 9, 2006).
---------------------------------------------------------------------------

    \35\ H.R. 22 had been pending in the Senate since July 27, 2005. 
151 Cong. Rec. S9155, S9156 (daily ed. Jul. 27, 2005).
---------------------------------------------------------------------------

    None of the versions of the bills described above included the 
review provision that would eventually be codified at 39 U.S.C. 
3622(d)(3). Nor was this provision referenced in hearings, committee 
reports, or the presidential signing statement. Instead, 39 U.S.C. 
3622(d)(3) was included only in the final version of the PAEA 
introduced on December 7, 2006. H.R. 6407, 109th Cong., at 7 (2006). 
Pursuant to a compromise between the Senate and the House, H.R. 6407 
blended together concepts appearing in the separate versions of the 
bills described above, including combining the objectives and factors.
    There is only one statement in the Congressional Record about the 
review provision, and it was made upon receipt of the final version of 
the postal reform bill on December 8, 2006. Senator Collins, the Senate 
sponsor of postal reform, remarked:

    The Postal Service will have much more flexibility, but the 
rates will be capped at the CPI. That is an important element of 
providing 10 years of predictable, affordable rates, which will help 
every customer of the Postal Service plan. After 10 years, the 
Postal Regulatory Commission will review the rate cap and, if 
necessary, and following a notice and comment period, the Commission 
will be authorized to modify or adopt an alternative system.
    While this bill provides for a decade of rate stability, I 
continue to believe that the preferable approach was the permanent 
flexible rate cap that was included in the Senate-passed version of 
this legislation. But, on balance, this bill is simply too 
important, and that is why we have reached this compromise to allow 
it to pass. We at least will see a decade of rate stability, and I 
believe the Postal Rate Commission, at the end of that decade, may 
well decide that it is best to continue with a CPI rate cap in 
place. It is also, obviously, possible for Congress to act to 
reimpose the rate cap after it expires. But this legislation is 
simply too vital to our economy to pass on a decade of stability. 
The consequences of no legislation would be disastrous for the 
Postal Service, its employees, and its customers.

152 Cong. Rec. S11674, S11675 (daily ed. Dec. 8, 2006) (statement of 
Sen. Collins).
    This statement confirms that section 3622(d)(3) was a part of a 
legislative compromise that required the price cap ``Requirements,'' as 
contained in the PAEA, to remain in place for 10 years, and then 
allowed the Commission the opportunity to review the effectiveness of 
this ratemaking system and potentially design a modified or alternative 
system.\36\ This statement also confirms that the congressional 
sponsors of the PAEA contemplated that the Commission would have broad 
discretion after the section 3622 review--including deciding whether to 
continue the price cap in its current form, modify it, or replace it. 
That Congress believed it might need to ``reimpose the rate cap after 
it expires'' clearly evidences its intent that the Commission had the 
authority, after its review, to eliminate the price cap through the 
potential modification or adoption of an alternative system. The 
statement also confirms that Congress did not consider the current 
price cap to be a permanent or immutable requirement of the system. 
Senator Collins further stated:
---------------------------------------------------------------------------

    \36\ It is worth noting that Senator Collins introduced the 
initial bill in the Senate which contained the ``requirement'' 
language with regard to the price cap. As a result, the statement in 
the Congressional Record is particularly probative as to the 
existence of a compromise.

    This compromise is not perfect and, indeed, earlier tonight, 
there were issues raised by the appropriators--legitimate issues--
that threatened at one point to derail the bill again. It has been a 
delicate compromise to satisfy all of the competing concerns. 
Everyone has had to compromise, but I think we have come up with a 
good bill. This compromise will help ensure a strong financial 
future for the U.S. Postal Service and the many sectors of our 
economy that rely on its services, and it reaffirms our commitment 
to the principle of universal service that I believe is absolutely 
---------------------------------------------------------------------------
vital to this institution.

Id. (emphasis added). Senator Thomas Carper also confirmed that the 
final bill was ``a difficult compromise.'' 152 Cong. Rec. S11675 (daily 
ed. Dec. 8, 2006) (statement of Sen. Carper).
    Congress passed the PAEA, amending title 39, to ensure the 
financial viability of the Postal Service.\37\ Senator Collins stated 
that ``[w]ith this landmark reform legislation, we will put the Postal 
Service on a firm financial footing.'' 152 Cong. Rec. S11674 (daily ed. 
Dec. 8, 2006) (statement of Sen. Collins). The legislative history 
confirms that Congress intended to empower the Commission to modify or 
replace the system following the section 3622 review as necessary to 
achieve the objectives.
---------------------------------------------------------------------------

    \37\ See Newspaper Ass'n of Am. v. Postal Regulatory Comm'n, 734 
F.3d 1208, 1217 (D.C. Cir. 2013) (citing S. Rep. No. 108-318, at 2-4 
(2004)).
---------------------------------------------------------------------------

    Finally, with regard to the constitutional infirmities alleged by 
some commenters, the scope of the Commission's authority under section 
3622(d)(3) does not raise separation of powers issues because section 
3622(d)(3) meaningfully constrains the Commission's authority.
    Under the nondelegation doctrine, Congress cannot delegate 
legislative

[[Page 58286]]

power to the Executive Branch.\38\ However, Congress does not violate 
the nondelegation doctrine merely because it legislates in broad terms 
and leaves a certain degree of discretion to an Executive Branch actor, 
so long as Congress sets forth ``an intelligible principle'' to which 
the actor must conform.\39\ The Supreme Court has routinely upheld 
delegations to the Executive Branch ``under standards phrased in 
sweeping terms.'' See Loving, 517 U.S. at 771. Congress may permissibly 
delegate authority to the Executive Branch to regulate in a manner that 
is necessary to adhere to policy objectives in a statute.\40\ In this 
instance, the statute gave clear direction to the Commission about how 
to exercise its legal authority to make modifications or adopt an 
alternative system. Any modifications or the adoption of an alternative 
system must be necessary for the system to achieve the objectives in 39 
U.S.C. 3622(b), and it is with those objectives in mind that the 
Commission proposes the regulations below.
---------------------------------------------------------------------------

    \38\ See, e.g., Loving v. United States, 517 U.S. 748, 758 
(1996).
    \39\ Id. at 771-72 (citing J.W. Hampton, Jr. & Co. v. United 
States, 276 U.S. 394, 409 (1928); Touby v. United States, 500 U.S. 
160, 165 (1991)).
    \40\ See, e.g., Touby v. United States, 500 U.S. at 163, 165 
(statute authorizing Attorney General to schedule controlled 
substance on temporary basis as ``necessary to avoid an imminent 
hazard to the public safety'' did not violate nondelegation doctrine 
because it contained an intelligible principle); National 
Broadcasting Co. v. United States, 319 U.S. 190, 217, 225-26 (1943) 
(upholding delegation to the Federal Communications Commission to 
regulate radio broadcasting according to ``public interest, 
convenience, or necessity'').
---------------------------------------------------------------------------

    With regard to the Presentment Clause, the comparison made by some 
commenters to the Line Item Veto Act which was struck down in Clinton 
v. City of New York is inapt. First, the President's exercise of 
cancellation authority under the Line Item Veto Act, 5 days after 
legislation's enactment, was ``necessarily [ ] based on the same 
conditions that Congress evaluated when it passed those statutes.'' 
Clinton, 524 U.S. at 443. By contrast, Congress' delegation to the 
Commission under section 3622(d)(3) is meaningfully constrained by 
several separate conditions that must occur after the enactment of the 
PAEA: The passage of 10 years; a comprehensive review of the ratemaking 
system by the Commission; notice to the public and an opportunity for 
comment; and a determination by the Commission that the system is not 
achieving the PAEA's objectives, taking into account the statutory 
factors.
    Second, whereas the impermissible Line Item Veto Act required the 
President to make certain determinations before cancelling a provision, 
those determinations did not qualify his discretion as to whether to 
cancel or not. Id. at 443-44. By contrast, the Commission's discretion 
under section 3622(d)(3) to either modify the ratemaking system, adopt 
an alternative system, or do neither is contingent on a determination 
that the system did not achieve the PAEA's objectives, taking into 
account the statutory factors. If the Commission determined that the 
system had achieved the objectives, taking into account the factors, 
the Commission's authority under section 3622(d)(3) to either modify 
the system or adopt an alternative system would not have been 
triggered.
    Third, the impermissible Line Item Veto Act allowed the President 
to override the policy objectives contained in a cancelled statute, 
which were developed by Congress, with his own policy objectives, which 
were developed unilaterally. Id. at 444. By contrast, section 
3622(d)(3)'s delegation of rulemaking authority to the Commission is 
limited because it is required to effectuate the nine objectives 
embodied in the PAEA, which were developed by Congress.
    Therefore, the Commission's authority to modify or adopt an 
alternative system under section 3622(d)(3) remains within the 
permissible bounds of the separation of powers between the Legislative 
Branch and the Executive Branch.
    In conclusion, the Commission has broad authority to either modify 
or replace the existing market dominant ratemaking system. This 
authority extends to modification of regulations currently in place and 
the statutory rate setting requirements of section 3622 (including 
those applicable to workshare discounts in 39 U.S.C. 3622(e)). The 
constraint on the Commission's authority is that the system as 
implemented must be designed to achieve the objectives of section 
3622(b).

III. Proposed Regulatory Changes

A. Introduction

    In Order No. 4257, the Commission concluded that the system for 
regulating rates and classes did not achieve the objectives, taking 
into account the factors. Therefore, the Commission is proposing new 
regulations that it deems necessary to achieve the objectives of 39 
U.S.C. 3622(b). The reasons that certain objectives were not achieved, 
taking into account the factors, and the proposed solutions to address 
these issues fall within the following broad areas.
    The medium-term financial stability of the Postal Service is 
addressed in section C--Supplemental Rate Authority. The changes 
presented in this section provide the Postal Service with an additional 
2 percentage points of rate authority per calendar year. This authority 
is available only for the first 5 full calendar years following the 
effective date of these regulations.
    The long-term financial stability of the Postal Service is 
addressed in section D--Performance-Based Rate Authority. The changes 
presented in this section make up to an additional 1 percentage point 
of rate authority available per calendar year. Of this rate authority, 
0.75 percentage points is allocated based on meeting operational 
efficiency-based rate authority requirements, and 0.25 percentage 
points is allocated based on meeting service quality-based rate 
authority requirements.
    Issues related to non-compensatory classes and products are 
addressed in section E--Non-Compensatory Classes and Products. The 
changes presented in this section impose rate design requirements on 
non-compensatory products. The changes also provide the Postal Service 
with an additional 2 percentage points of rate authority per calendar 
year for non-compensatory classes of mail.
    Issues related to inefficient rate design concerning workshare 
discounts are addressed in section F--Workshare Discounts. The changes 
presented in this section employ rate design concepts based on 
efficient component pricing (ECP). The proposed regulations establish 
bands that set the percentages of avoided costs that may be reflected 
in the discounts. The proposed regulations include a 3-year grace 
period.
    Miscellaneous issues related to the rate adjustment process are 
addressed in section G--Enhancements to the Ratemaking Process. The 
changes presented in this section increase visibility into future 
planned rate adjustments by proposing changes to the Schedule for 
Regular and Predictable Rate Adjustments requirements. Changes are also 
proposed for the rate adjustment process, including a proposal to 
extend the notification period for planned rate adjustments from 45 to 
90 days.
    Prior to addressing these broad areas and the related proposed 
solutions, the Commission first provides background related to the 
Postal Service's financial stability in section B below. This 
background material provides context and supports the Commission's 
proposed solutions described in more detail in sections C and D.

[[Page 58287]]

B. The Path to Financial Stability

1. Background
    The existing ratemaking system did not achieve the PAEA's 
objectives during the 10 years following the PAEA's enactment. See 
generally Order No. 4257. The Postal Service is in poor financial 
health. Id. at 274. The market dominant ratemaking system established 
under 39 U.S.C. 3622 did not assure ``adequate revenues, including 
retained earnings, to maintain financial stability,'' as required by 
Objective 5. Id. at 178 (quoting 39 U.S.C. 3622(b)(5)). In Order No. 
4257, the Commission discussed financial stability using a three-tiered 
analysis: short-term, medium-term, and long-term. Id. at 151-78. 
Because the three tiers build upon each other, this analysis found that 
all three tiers must be achieved in order to support a finding that the 
system maintained financial stability. Id. at 159. As set forth in 
Order No. 4257, although the short-term financial measure was generally 
achieved, medium-term and long-term financial stability measures were 
not achieved. Id. at 274.
    Moreover, although costs were reduced and operational efficiency 
was increased during the PAEA era, these cost reductions and 
operational efficiency increases were not maximized, as required by 
Objective 1. Id. at 222, 248; 39 U.S.C. 3622(b)(1). The Commission 
found that the cost reductions and operational efficiency gains 
experienced under the existing ratemaking system have been insufficient 
to contribute to the financial stability of the Postal Service. Order 
No. 4257 at 222, 248.
    Therefore, the Commission considers regulatory proposals aimed to 
put the Postal Service on the path to financial stability.
2. Comments
    Most of the comments received with regard to the Postal Service's 
financial stability discuss the Postal Service's finances within the 
context of whether the Commission should keep, modify, or eliminate the 
current consumer price index for all urban consumers (CPI-U) price cap.
a. Comments in Support of Retaining the Price Cap
    Most of the commenters in favor of keeping the CPI-U price cap 
generally contend that the Postal Service's current revenue is adequate 
to provide necessary services. ANM et al., for example, assert that the 
Postal Service's revenue and earnings are improving, that mail volume 
has stabilized, and that operating income has been positive for several 
years and is projected to remain so. ANM et al. Comments at 3-4, 23-25, 
32-33. MMA et al., DMA et al., and LSC contend that the Postal 
Service's revenue is adequate to meet controllable and operating 
costs.\41\
---------------------------------------------------------------------------

    \41\ DMA et al. Comments at 3; MMA et al. Comments at 31; LSC 
Comments at 3.
---------------------------------------------------------------------------

    ANM et al. and MMA et al. both note that competitive products are 
now generating a large share of the Postal Service's revenue, and that 
expected growth in competitive package services is increasing.\42\ ANM 
et al. assert that the Postal Service's liquidity is healthy. ANM et 
al. Comments at 4, 34-35. MMA et al. contend that the Postal Service 
faces no serious risk of insolvency. MMA et al. Comments at 31-32.
---------------------------------------------------------------------------

    \42\ ANM et al. Comments at 28; MMA et al. Comments at 36-37.
---------------------------------------------------------------------------

    MMA et al. assert that cash flow is the most appropriate measure of 
the Postal Service's financial stability, and that by this metric, the 
Postal Service is ``quite stable.'' Id. at 37. Furthermore, MMA et al. 
maintain that the Postal Service's finances are well-positioned in the 
long run, when all of its assets are fairly valuated.\43\
---------------------------------------------------------------------------

    \43\ Id. MMA et al. also assert that even if financial stability 
is measured by controllable income, the Postal Service is doing 
well. Id. at 40.
---------------------------------------------------------------------------

    ANM et al. and MMA et al. both assert that the Postal Service's 
finances are better than they appear, because the Postal Service 
significantly undervalues its real estate holdings.\44\ ANM et al., MMA 
et al., and DMA et al. all maintain that the Postal Service's pension 
and benefit funds are well-funded.\45\ MMA et al., in particular, 
dispute many of the metrics used to assess the Postal Service's 
financial stability. MMA et al. Comments at 31-32. They contend that 
the Postal Service's finances are not comparable to those of a private 
firm, and that the financial ratios used to measure private firms are 
not generally applicable to the Postal Service. Id. at 32, 41.
---------------------------------------------------------------------------

    \44\ ANM et al. Comments at 5-6, 44; MMA et al. Comments at 43.
    \45\ ANM et al. Comments at 4-5, 40-41; MMA et al. Comments at 
44; DMA et al. Comments at 3.
---------------------------------------------------------------------------

    Although many of these commenters acknowledge that the Postal 
Service's net earnings remain negative, they generally attribute this 
to the PAEA's requirement to prefund the Postal Service Retiree Health 
Benefits Fund (PSRHBF) and assert that this requirement is not part of 
the PAEA's ratemaking system.\46\ Noting that Congress mandated the 
PSRHBF prefunding requirement, many of these commenters assert that the 
problem should be addressed through a legislative fix--not through a 
price increase.\47\
---------------------------------------------------------------------------

    \46\ ANM et al. Comments at 4, 38; DMA et al. Comments at 3; MMA 
et al. Comments at 40-41, 47-48; Netflix Comments at 18; NNA 
Comments at 31; LSC Comments at 3; ACMA Comments at 5.
    \47\ DMA et al. Comments at 3; LSC Comments at 3; NNA Comments 
at 4-5.
---------------------------------------------------------------------------

    ANM et al. and MMA et al. raise concerns regarding whether any 
additional revenue would be used appropriately by the Postal Service. 
ANM et al. assert that any additional revenue would be ``squandered 
through laxer control of costs.'' ANM et al. Comments at 9. MMA et al. 
contend that the precise nature of the Postal Service's ``needs'' in 
terms of capital is an issue that requires critical assessment by the 
Commission. MMA et al. Comments at 38-39.
    Several commenters state that raising the price cap would undermine 
rate predictability and stability. ANM et al. assert that the price cap 
provides ``the only effective protection . . . to mailers and consumers 
. . . against abuse of the Postal Service's market power.'' ANM et al. 
Comments at 8. They maintain that relaxing the price cap would lead to 
a loss of credibility for the Commission and hamper the ability of 
Postal Service management to bargain effectively with labor and other 
interest groups that might seek to raise the Postal Service's costs. 
Id. at 8-9. DMA et al. maintain that raising the price cap would be a 
burden to mailers. DMA et al. Comments at 3.
    Other commenters, including ANM et al., DMA et al., and GCA, 
maintain the raising the price cap would undermine operational 
efficiency.\48\ GCA specifically states that any upward adjustment in 
the price cap would reduce incentives for efficiency and cost 
reduction. GCA Comments at 21. NNA cautions that lifting the price cap 
to improve the Postal Service's financial condition could dissuade 
Congress from providing legislative relief, tempt future legislators to 
add costs to the system, or make privatization of the Postal Service 
more attractive. NNA Comments at 32-33.
---------------------------------------------------------------------------

    \48\ ANM et al. Comments at 9; DMA et al. Comments at 3; GCA 
Comments at 20-21.
---------------------------------------------------------------------------

b. Comments in Support of Modifying the Price Cap
    Another group of commenters suggests keeping a price cap system but 
modifying its form. For instance, the Public Representative contends 
that the Postal Service's revenue under the price cap must be 
increased. PR Comments at 33. He proposes modifying the price cap 
formula to account for changes in demand (i.e., for declining mail

[[Page 58288]]

volumes) and to reflect the PSRHBF payment obligation. Id. at 33, 35-
47. MH and NAAD, on the other hand, advocate that the Commission cease 
using CPI-U as a price index and return to a more cost-based approach 
to ratemaking. MH and NAAD Comments at 10.
c. Comments in Support of Eliminating the Price Cap
    The third group of commenters consists primarily of the Postal 
Service and the postal unions, who advocate that the Commission should 
eliminate the price cap altogether. These commenters generally take the 
position that revenue under the existing ratemaking system is 
insufficient to enable the Postal Service to maintain financial 
stability.\49\ Some of these commenters assert that current revenue 
levels are not sufficient to cover costs or allow for investments in 
infrastructure.\50\
---------------------------------------------------------------------------

    \49\ See, e.g., Postal Service Comments at 82-83; APWU Comments 
at 29; NALC Comments at 4-6; NPMHU Comments at 3.
    \50\ NALC Comments at 4-6, 7; APWU Comments at 23-24.
---------------------------------------------------------------------------

    The Postal Service asserts that it has experienced a net loss every 
year since the PAEA was enacted, primarily due to declining mail 
volume. Postal Service Comments at 84-86. APWU asserts that when 
instituting the CPI-U price cap Congress did not foresee the changes 
and market forces over the past decade, including mail volume declines, 
an increase in the number of mail delivery points, changes in the mail 
mix, and an economic recession. APWU Comments at 29. NALC maintains 
that by depriving the Postal Service of revenue and causing it to 
reduce the quality and availability of its services, the price cap 
risks driving away even more customers. NALC Comments at 8.
    The Postal Service asserts that it has dangerously low liquidity 
and lacks the ability to meet all of its financial obligations. Postal 
Service Comments at 87. It represents that it only has enough cash 
reserves to sustain it for approximately 29 days. Postal Service 
Comments at 87. NALC notes that with the Postal Service's borrowing 
authority exhausted and with no access to capital markets, the only 
source of liquidity available to the Postal Service has been its meager 
cash reserves. NALC Comments at 7. It asserts that this state of 
constrained liquidity renders the Postal Service vulnerable to an 
economic downturn or crisis. Id.
    The Postal Service states that constrained liquidity has prevented 
it from investing adequately in capital expenditures. Postal Service 
Comments at 88. APWU, NALC, and NPHMU echo this assertion.\51\ The 
Postal Service and NALC contend that the Postal Service's level of 
capital expenditures is far lower than that of its competitors.\52\ 
NALC asserts that insufficient capital investments could undercut the 
Postal Service's long-term performance. NALC Comments at 12.
---------------------------------------------------------------------------

    \51\ APWU Comments at 23-24; NALC Comments at 9; NPHMU Comments 
at 3; see also MH and NAAD Comments at 7-8.
    \52\ Postal Service Comments at 88-89; NALC Comments at 10.
---------------------------------------------------------------------------

    With regard to operational efficiency, the Postal Service maintains 
that deferral of capital expenditures has become a major drag on the 
Postal Service's efficiency improvement efforts. Postal Service 
Comments at 88-90. The Postal Service asserts that despite having made 
significant efficiency gains and cost cuts, the available remaining 
efficiency gains and/or cost cuts come nowhere close to enabling the 
Postal Service to maintain financial stability under the existing price 
cap. Id. at 83-84. NALC concurs with this conclusion, maintaining that 
the Postal Service has made significant strides in containing and 
reducing costs but is running out of feasible cost-cutting 
opportunities. NALC Comments at 6-9.
    In addition to eliminating the price cap, APWU and NALC both 
suggest permitting a one-time true-up rate proceeding to reset the rate 
base for all classes.\53\
---------------------------------------------------------------------------

    \53\ APWU Comments at 30; NALC Comments at 17.
---------------------------------------------------------------------------

3. Commission Analysis
    As the Commission concluded in Order No. 4257, the Postal Service 
is not financially stable because the current ratemaking system has not 
assured ``adequate revenues, including retained earnings, to maintain 
financial stability,'' as required by Objective 5. Order No. 4257 at 
178 (quoting 39 U.S.C. 3622(b)(5)). Therefore, the Commission 
determines that it would be inappropriate to retain the existing 
ratemaking system unchanged. Doing so would not only be contrary to 
Objective 5, it would negatively impact the mailing industry as a 
whole. According to the 2015 Envelope Manufacturing Association's U.S. 
Mailing Industry Jobs and Revenue Study (EMA Study), in FY 2014, the 
latest year data are available, the nation's mailing industry employed 
7.5 million workers and generated $1.4 trillion in revenues. February 
24, 2017 EMA Comments at 2. The EMA study states:

    [A]lmost 85 percent of mailing industry jobs depend[] upon the 
delivery sector, of which the USPS is the center.
    However, if one analyzes further between the public and private 
sector components of the delivery network (i.e. separating the USPS 
from its private sector competitors), the dependence of the US 
economy on the USPS becomes even clearer. Some 6.9 million private 
sector jobs depend on the 617,000 jobs of the USPS. This 
distribution of jobs impact clearly shows (as would a similar 
comparison of revenues) that the Postal Service's importance to the 
economy is substantially greater than one might assume if the Postal 
Service were examined in isolation.

Id. at 6.
    At the other extreme, however, the Commission determines that it 
would be inappropriate to design a system that lacks a mechanism to 
limit the magnitude of price adjustments. Such a mechanism is necessary 
to create predictability and stability, as required by Objective 2. 
Order No. 4257 at 103; 39 U.S.C. 3622(b)(2).
    The Commission finds, as discussed further below, that additional 
pricing authority is necessary to achieve the objectives of the PAEA. 
The Commission seeks to complement, rather than replace, the CPI-U 
price cap by providing discrete, clearly-defined amounts of additional 
rate authority. This additional rate adjustment authority is designed 
to put the Postal Service on the path toward generating positive net 
income and retained earnings. Accordingly, the Commission aims to 
design a ratemaking system that will put the Postal Service on the path 
to financial stability required by Objective 5 in a way that is 
consistent with the other objectives, such as Objectives 1 and 3, of 
the PAEA. Below the Commission describes its methodology to determine 
the amount and mechanism to provide that additional rate adjustment 
authority.
a. The Commission's Methodology
    In order to estimate the appropriate amount of revenue to put the 
Postal Service on the path to financial stability, the Commission 
relies upon its three-tiered analysis detailed in Order No. 4257 as its 
starting point.
    The Postal Service has been able to operate continuously without 
service interruption, consistent with the Commission's analysis 
demonstrating that the Postal Service has met the threshold of short-
term financial stability. Order No. 4257 at 165. Beyond the short-term, 
however, the Postal Service's financial health is in jeopardy. See 
generally id. at 165-78. The medium-term financial stability analysis 
details that the Postal Service

[[Page 58289]]

experienced a net loss in every year during the PAEA era because total 
revenue generated was inadequate to cover total costs. Id. at 168. The 
long-term financial stability analysis shows that the Postal Service 
did not attain retained earnings during the PAEA era. Id. at 171. 
Additionally, during the PAEA era the Postal Service exhausted its 
borrowing authority and reduced its capital investments. See id. at 
169-77.
    Consistent with its financial stability analysis in Order No. 4257, 
the Commission derives reference points for how much additional revenue 
would be needed to put the Postal Service on the path to medium-term 
financial stability and for how much additional revenue would be needed 
to put the Postal Service on the path to long-term financial stability. 
In line with this two-pronged methodology, there are two components of 
additional rate authority: The first to address medium-term financial 
stability and the second to address long-term financial stability.
    Although the financial stability discussion in this Order generally 
parallels Order No. 4257's division into the medium-term and long-term 
tiers, the medium-term and long-term financial stability concepts are 
interrelated. As detailed in section III.D.1, infra, the path to 
financial stability is cyclical. Adequate revenues build up net income 
(which demonstrates medium-term financial stability) and over time 
should lead to retained earnings (which demonstrate long-term financial 
stability). Retained earnings may be used to fund capital investment, 
which should lead to operational efficiency gains and help maintain 
high quality service standards. Operational efficiency gains and 
maintenance of high quality service standards should in turn lead to 
increased revenues and reduced costs, which should build up net income. 
Because the Postal Service's financial health is poor, it is necessary 
to try to make progress on multiple aspects of this cycle 
simultaneously.
    Although the cycle above is centered around medium- and long-term 
financial stability (Objective 5), the cycle also affects several other 
objectives. In particular, the cycle also includes the goals underlying 
Objective 1 (maximize incentives to reduce costs and increase 
operational efficiency) and Objective 3 (maintain high quality service 
standards). In Order No. 4257, the Commission found that the system did 
not achieve the goals of the PAEA related to each of these objectives. 
See Order No. 4257 at 274-75. The Commission's proposed solution is 
structured to not only put the Postal Service on the path to medium- 
and long-term financial stability, but also to address Objective 1's 
requirement that the system maximize incentives to increase operational 
efficiency and Objective 3's requirement that the high quality service 
standards are maintained.
    Several commenters express concerns regarding the appropriate use 
of additional revenue by the Postal Service and the effects of any 
revenue increases on the Postal Service's incentives to cut costs and 
increase operational efficiency.\54\ In order to ensure appropriate 
incentives, it is necessary to make the long-term additional rate 
authority contingent on the Postal Service meeting or exceeding an 
operational efficiency-based standard and adhering to service standard 
quality criteria.
---------------------------------------------------------------------------

    \54\ See, e.g., ANM et al. Comments at 9; DMA et al. Comments at 
3; GCA Comments at 20-21.
---------------------------------------------------------------------------

    The Commission expects that its proposal will incentivize the 
Postal Service to take necessary steps to reduce costs. As discussed in 
more detail in the remainder of this section, the Postal Service will 
need to realize cost reductions in order for the system to achieve 
financial stability. The Commission also expects its proposed solution 
to support continued cost reduction. As demonstrated by the cycle 
discussed above and in more detail in section III.D.1, infra, 
improvements in medium- and long-term financial stability and increased 
operational efficiency should lead to cost reductions when the cycle is 
functioning normally.
    The Commission intends to review the proposed regulatory changes to 
the market dominant ratemaking system after the supplemental rate 
authority expires as explained in more detail below. This time period 
is consistent with the recommendations for another review in the near-
term made by the Public Representative (suggesting to review in 4 
years) \55\ and the Postal Service (suggesting to review in 5 
years).\56\ It is critical under a price cap regime to be able to 
revisit a plan's performance quickly enough to prevent either 
persistent windfalls to the firm that harm consumers or persistent 
revenue shortfalls that damage the producer. See Kwoka Declaration at 
11-12. At the same time, however, reviewing the system too frequently 
can undermine the incentives towards efficiency that the price cap was 
intended to foster. See id. at 8. The Commission determines that 
reviewing the system after the supplemental rate authority expires is 
reasonable and appropriate. The Commission discusses the expiration of 
the supplemental rate authority in more detail in section III.C.3, 
infra.
---------------------------------------------------------------------------

    \55\ PR Comments at 60-61.
    \56\ Postal Service Comments at 219 n.430.
---------------------------------------------------------------------------

b. The Commission's Proposed Approach
    Based on the methodology described above, the Commission proposes a 
two-pronged solution designed to place the Postal Service on the path 
to financial stability by providing rate adjustment authority in 
addition to the CPI-U rate authority. The Commission proposes to make 
available both: (1) Supplemental rate authority to put the Postal 
Service on the path to medium-term financial stability and (2) 
performance-based rate authority (contingent on the Postal Service 
meeting or exceeding an operational efficiency-based standard and 
adhering to service standard quality criteria) to put the Postal 
Service on the path to long-term financial stability. The reminder of 
this section summarizes the purpose, amount, and mechanization of each 
type of rate authority. The Commission provides more detailed 
explanations of the supplemental rate authority and performance-based 
rate authority, infra, in sections III.C and III.D, respectively.
    First, the proposed supplemental rate authority aims to put the 
Postal Service on the path to medium-term financial stability by 
providing the Postal Service the opportunity to generate additional 
revenue to cover its obligations. In determining the amount of 
supplemental rate authority, the Commission uses the $2.7 billion FY 
2017 net loss as its reference point.\57\ Providing a discrete amount 
of supplemental rate authority on a steady and regular annual basis for 
5 years should put the Postal Service on the path to medium-term 
financial stability while also taking into account pricing 
predictability and stability. Therefore, the Commission provides for 2 
percentage points of rate authority per class of mail per calendar year 
for each of the first 5 full calendar years following the effective 
date of these proposed rules. This proposed supplemental rate authority 
is necessary to achieve Objective 5. The detailed justifications 
relating to the purpose, amount, and mechanism to allocate the proposed 
supplemental rate authority are addressed in section III.C, infra.
---------------------------------------------------------------------------

    \57\ United States Postal Service, 2017 Report on Form 10-K, 
November 14, 2017, at 16 (Postal Service FY 2017 Form 10-K).
---------------------------------------------------------------------------

    Second, the proposed performance-based rate authority aims to put 
the Postal Service on the path to long-term

[[Page 58290]]

financial stability by providing the Postal Service the opportunity to 
generate retained earnings. These earnings would fund adequate levels 
of capital investment. In determining the amount of performance-based 
rate authority, the Commission uses several reference points related to 
capital investment, capital assets, and borrowing authority. Making the 
availability of this performance-based rate authority contingent on the 
Postal Service meeting or exceeding an operational efficiency-based 
standard and adhering to service standard quality criteria should put 
the Postal Service on the path to long-term financial stability while 
also providing for accountability. Therefore, the Commission provides 
for up to 1 percentage point of rate authority per class of mail per 
calendar year, contingent on the Postal Service meeting or exceeding an 
operational efficiency-based standard and adhering to service standard 
quality criteria. This proposed performance-based rate authority is 
necessary to achieve Objectives 1, 3, and 5. The detailed 
justifications relating to the purpose, amount, and mechanism to 
allocate the proposed performance-based rate authority are addressed in 
section III.D, infra.

C. Supplemental Rate Authority

1. Background
    In the three-tiered financial stability analysis used in Order No. 
4257, the Commission determined that although short-term stability was 
achieved under the PAEA, medium- and long-term stability were not. This 
section discusses the medium-term tier of the financial stability test. 
To be deemed financially stable in the medium-term, the Postal 
Service's total revenue should cover total cost (both attributable and 
institutional). Order No. 4257 at 165. The Commission measured this by 
analyzing net income, which consists of (total revenue - [attributable 
costs + institutional costs]). Id. The Commission found that the Postal 
Service experienced a net loss in every year of the PAEA era, as total 
revenue generated was inadequate to cover total costs. Id. at 168. As a 
result, the Commission determined that the Postal Service did not 
achieve medium-term financial stability. Id. This was compounded 
because the existing ratemaking system did not achieve cost reductions 
and operational efficiency gains sufficient to contribute to the 
financial stability of the Postal Service. See id. at 274.
    Therefore, the Commission aims to design a ratemaking system that 
will put the Postal Service on the path to generating positive net 
income. The Commission uses Order No. 4257's medium-term stability 
framework for its analysis, but utilizes the FY 2017 net loss as a 
starting point for its calculation to put the Postal Service on the 
path towards medium-term financial stability. In the remainder of this 
section, the Commission discusses how it estimates the amount of the 
proposed supplemental rate authority necessary to address this net 
loss. The Commission then discusses how it proposes to allocate this 
proposed supplemental rate authority in a manner that balances the 
PAEA's objectives.
2. Amount of Supplemental Rate Authority
    To estimate the amount of additional revenue that would be needed 
in order to put the Postal Service on the path to medium-term financial 
stability, the Commission uses as its starting point the FY 2017 net 
loss.
    During the first 10 years under the PAEA, the Postal Service's net 
loss ranged from $2.8 billion to $15.9 billion. Order No. 4257 at 168, 
Table II-10. The net losses experienced over this period show that the 
rate adjustment authority under the existing market dominant ratemaking 
system was insufficient. The Commission determines that an adjustment 
to the system is necessary to provide the Postal Service with tools to 
address its ongoing net income shortfall.
    Based on the FY 2017 net loss of $2.7 billion, the Postal Service 
would need additional revenue of $2.7 billion to achieve medium-term 
stability (i.e., to have total revenue equal to all attributable and 
institutional costs).\58\ This represents 5.7 percent of FY 2017 market 
dominant revenue. While the Commission relies on the FY 2017 net loss 
as a reference point, it also looks to additional considerations in 
determining the amount of proposed supplemental rate authority. The 
Postal Service's future financial position will be affected by a 
multitude of influences such as changes in inflation, the cost of 
inputs, changes in operational efficiency, secular volume trends, and 
mailers' responses to price changes. As a result, it is not possible to 
precisely calculate the exact amount of additional pricing authority 
that will achieve medium-term stability in future years. Such precision 
is not necessary to effectuate the Commission's proposal because the 
proposed supplemental rate authority is not designed to provide 
sufficient revenue to cover costs in the same way as the revenue 
requirement of the Postal Reorganization Act's break-even regime. 
Instead, the proposed supplemental rate authority is designed to 
provide the opportunity to generate additional revenue that is 
sufficient, when combined with cost reductions and operational 
efficiency gains, to improve the financial stability of the Postal 
Service.
---------------------------------------------------------------------------

    \58\ For purposes of determining the amount of supplemental rate 
authority, competitive products are assumed to maintain the current 
level of contribution to institutional costs. In the 10 years 
following the enactment of the PAEA, revenue generated from 
competitive products has covered those products' attributable costs 
and has exceeded those products' required contribution to 
institutional costs.
---------------------------------------------------------------------------

3. Phase-in Mechanism
a. Proposed Commission Solution
    Taking this $2.7-billion revenue increase developed using the FY 
2017 net loss as its reference point, the Commission has considered how 
to authorize the proposed supplemental rate authority in a manner that 
will put the Postal Service on the path to generating sufficient 
revenue to meet its medium-term obligations balancing all of the PAEA's 
objectives. The Commission has given weight to the commenters' concerns 
regarding the timing and magnitude of rate increases. Based on these 
concerns and the analysis in Order No. 4257, the Commission proposes to 
design the ratemaking system to allow for this proposed supplemental 
rate authority on an annual basis over a finite period.
    Given the magnitude of the FY 2017 loss, the Commission finds that 
the most appropriate means of putting the Postal Service on a path to 
medium-term financial stability is to provide 2 percentage points of 
supplemental rate authority each year for a 5-year period, after which 
it ends. As discussed in section III.B.3, supra, the Commission 
determines that 5 years is a reasonable and appropriate time period to 
allow the Postal Service the opportunity to achieve medium-term 
financial stability, after which time the Commission will review the 
Postal Service's financial performance.
    Specifically, the Commission proposes to make available to the 
Postal Service 2 percentage points of supplemental rate authority per 
class of mail per calendar year for each of the first 5 full calendar 
years following the effective date of these proposed rules. This 
proposal is structured to encourage regular and stable timing and 
magnitude of rate increases--that is the same amount of supplemental 
rate authority, provided on an annual basis at the same time each year, 
over a finite period of years. This proposed magnitude and 5-

[[Page 58291]]

year phasing schedule will allow mailers to plan their operations and 
budgets over this period. Applying this proposed supplemental rate 
authority in addition to the CPI-U price cap for 5 years produces 
estimated revenues with a net present value equal to that of a one-time 
rate increase of 5.7 percent above CPI-U followed by 4 years of 
inflation-only increases. These estimates of future revenues are 
developed by applying the future rate increases to current mail 
volumes. Market dominant product volumes have been declining overall 
and shifting toward lower-priced products and rates. Given these recent 
volume trends and the effects of price elasticity,\59\ the assumption 
of constant mail volumes results in revenue estimates the Commission 
reasonably anticipates will be higher than the revenues that the 
proposed rate adjustment authority would actually generate. 
Accordingly, the Commission intends for the Postal Service to achieve 
cost reductions and operational efficiency gains sufficient to close 
the gap between total revenue and total costs.
---------------------------------------------------------------------------

    \59\ See Order No. 4257 at 127-30.
---------------------------------------------------------------------------

    This proposed approach is consistent with the Commission's analyses 
and the resulting conclusions reached in Order No. 4257. See generally 
id. at 142-46, 247-49, 274-75. At the same time, the proposal is 
necessary to achieve Objective 5, as the supplemental rate authority 
will put the Postal Service on the path to medium-term financial 
stability.
b. Commission Analysis of the Alternatives
    The Commission evaluated an alternative approach that would grant 
the Postal Service supplemental rate authority for use on a one-time 
basis. Specifically, this one-time rate adjustment would provide for 
5.7 percentage points of rate authority for use during the first year 
following the effective date of these proposed rules.\60\ Ultimately, 
the Commission determines that phasing in 2 percentage points of 
supplemental rate authority over 5 years better balances the PAEA's 
objectives. Both the Commission's proposal and the one-time rate 
adjustment option would put the Postal Service on the path to medium-
term financial stability. In light of commenter views, the difficultly 
in forecasting the potential effects of a one-off rate adjustment, and 
the complications involved in correcting those potential effects, the 
Commission determines that spreading increases out over a longer period 
of time is more prudent. Spreading the increases allows the Commission, 
Postal Service, and stakeholders to monitor the evolving financial 
health, efficiency gains, cost reductions, and other goals of the 
ratemaking system over a period of years. Therefore, the Commission 
proposes to allow 2 percentage points of supplemental rate authority 
per year over 5 years. This determination is illustrated in Figure III-
1, which illustrates that over a 5-year period, the rate increases 
under the Commission's proposal would be more smooth and steady than 
the alternative approach of providing 5.7 percentage points of rate 
authority in year 1.
---------------------------------------------------------------------------

    \60\ Under this option, the proposed performance-based rate 
authority, intended to put the Postal Service on the path to long-
term financial stability, would not be available until the second 
year following the effective date of these proposed rules.
---------------------------------------------------------------------------

BILLING CODE 7710-FW-P

[[Page 58292]]

[GRAPHIC] [TIFF OMITTED] TP11DE17.002

    In Figure III-1, CPI-U is estimated to be 2.05 percent each year 
for the next 5 years.\61\ One-time supplemental authority of 5.7 
percent, combined with a CPI-U authority pricing increase of 2.05 
percent would lead to pricing authority of 7.75 percent for each class 
of mail. Such an increase would be well outside the industry's 
experience under the PAEA system of ratemaking. See Order No. 4257 at 
106, Table II-3. The Commission notes that predicting the impacts of 
such a change would therefore be difficult, and the Commission, the 
Postal Service, and mailers would have limited opportunity to make 
adjustments for those impacts. On the other hand, moderated increases 
spread across a longer period should allow the Commission, the Postal 
Service, and mailers to monitor the evolving financial health, 
efficiency gains, cost reductions, and other goals of the ratemaking 
system over a period of years. As a result, the Commission proposes a 
series of five CPI-U price adjustments with the additional supplemental 
authority and finds such approach is most consistent with the metrics 
developed and employed by the Commission in Order No. 4257.
---------------------------------------------------------------------------

    \61\ This is consistent with the medium-term forecast by the 
Bureau of Labor Statistics. Bureau of Labor Statistics Employment 
and Economic Projections for 2016 to 2026 (as of October 2017), 
Excel file ``historicmacro.xls,'' tab I, row 40, available at 
https://www.bls.gov/emp/ep_data_aggregate_economy.htm.
---------------------------------------------------------------------------

c. Proposed Regulatory Changes
    The Commission has considered the comments and the foregoing 
analysis in developing proposed subpart D to 39 CFR part 3010. The 
Commission proposes to allocate 2 percentage points of supplemental 
rate authority per class of mail per calendar year for each of the 
first 5 full calendar years following the effective date of these 
proposed rules.
d. Conclusion
    This proposed supplemental rate authority will address the Postal 
Service's ongoing financial instability by providing the opportunity 
for the Postal Service to generate adequate revenue and put the Postal 
Service on the path to financial stability which is necessary to 
achieve Objective 5. See 39 U.S.C. 3622(b)(5).

D. Performance-Based Rate Authority

1. Background
    As discussed in Order No. 4257, the existing ratemaking system did 
not achieve the objectives during the first 10 years following the 
PAEA's enactment. The Commission identifies three interrelated 
deficiencies of the existing ratemaking system, which the Commission 
proposes to address through the performance-based rate authority.
    The PAEA intended the market dominant ratemaking system to enable 
the Postal Service to achieve financial stability. Order No. 4257 at 
146. To maintain financial stability, the ratemaking system must enable 
the Postal Service to ``assure adequate revenues, including retained 
earnings,'' as required by Objective 5. Id. at 147 (quoting 39 U.S.C. 
3622(b)(5)). Moreover, as detailed in Order No.

[[Page 58293]]

4257, the PAEA intended that the Postal Service's financial health 
would be maintained in conjunction with other objectives of the PAEA. 
See id. at 274. The ratemaking system must ``maximize incentives to 
reduce costs and increase efficiency,'' as required by Objective 1. Id. 
at 178 (quoting 39 U.S.C. 3622(b)(1)). Further, the PAEA intended that 
the ratemaking system would encourage the maintenance of high quality 
service standards, as required by Objective 3. Id. at 261-62 (citing 39 
U.S.C. 3622(b)(3)).
    Ideally, these three objectives would function in a harmonious 
cycle. The cycle begins with the path to financial stability. A 
financially healthy Postal Service generates adequate revenues to 
ensure net income, which provide retained earnings. Retained earnings 
enable the Postal Service to make the kinds of capital investments 
needed to improve operational efficiency. Capital investments that 
improve efficiency will also likely lead to cost reductions and help 
maintain high quality service standards. Maintenance of high quality 
service standards promotes demand for postal products, which leads to 
increased revenue. Increased revenue and decreased costs lead to 
sustained net incomes, which results in retained earnings. A related 
but separate component to this cycle is borrowing. Retained earnings 
can be used to pay down debt and borrowing can be used to finance 
capital investments. Figure III-2 illustrates this cycle.
[GRAPHIC] [TIFF OMITTED] TP11DE17.003

    However, this cycle has broken down under the existing ratemaking 
system because consecutive net losses have resulted in an accumulated 
deficit rather than retained earnings. Starting from the baseline FY 
2006, Figure III-3 illustrates the Postal Service's recurring net 
losses and accumulated deficit during the PAEA era.

[[Page 58294]]

[GRAPHIC] [TIFF OMITTED] TP11DE17.004

    As shown in Figure III-3, the recurring net losses resulted in 
accumulated deficit in every year since the PAEA was enacted in FY 
2007. Between FY 2008 and FY 2012, the accumulated deficit increased 
from $4.7 billion to $38 billion. After FY 2012, the accumulated 
deficit continued to grow, but at a slower rate. This was due, in part, 
to the exigent surcharge in place from January 2014 to April 2016.\62\ 
The accumulated deficit of $59.1 billion in FY 2016 includes $54.8 
billion in expenses related to prefunding the RHBF.\63\
---------------------------------------------------------------------------

    \62\ See Docket No. R2013-11, Order No. 1926, Order Granting 
Exigent Price Increase, December 24, 2013; Docket No. R2013-11, 
Order No. 3186, Order on Removal of the Exigent Surcharge and 
Related Changes to the Mail Classification Schedule, March 29, 2016.
    \63\ United States Postal Service, 2016 Report on Form 10-K, 
November 15, 2016, at 58 (Postal Service FY 2016 Form 10-K).
---------------------------------------------------------------------------

    The Postal Service has no shareholders and may not invest in 
stocks, bonds, or other financial instruments. Therefore, without 
retained earnings, its only means of financing capital investments is 
through revenue or borrowing. As accumulated deficit increased in the 
early years under the PAEA, the Postal Service began relying heavily on 
borrowing. It reached its $15 billion borrowing authority limit in FY 
2012--5 years after the PAEA was enacted. See Order No. 4257 at 164, 
Table II-8. After that, the Postal Service began offsetting its lack of 
borrowing authority by increasing cash-on-hand. See id. at 163-64. 
Although the Postal Service has been unable to generate net income 
since the PAEA was enacted, it has been able to generate operating 
profits. Thus, while the Postal Service has not paid all of its 
obligations, as noted in Order No. 4257, it has been able to increase 
its cash reserves. See id. at 164, Table II-8. Figure III-4 shows the 
Postal Service's outstanding debt and cash on hand for FY 2006 through 
FY 2016.

[[Page 58295]]

[GRAPHIC] [TIFF OMITTED] TP11DE17.005

    The accumulated deficit and lack of borrowing authority has 
severely restricted the Postal Service's ability to make capital 
improvements.\64\ The Postal Service selects its capital improvements 
based on need and budget.\65\ Capital commitments are made for the 
projects selected.\66\ The Postal Service makes commitments for capital 
investments based, in part, on the availability of cash flow from its 
operations.\67\ The funds used to pay for these commitments are called 
capital outlays.\68\ Because needs and budgets vary by year, the amount 
of capital commitments and outlays fluctuate annually.\69\
---------------------------------------------------------------------------

    \64\ Postal Service FY 2016 Form 10-K at 10, 32; see also 2015 
Report on Form 10-K United States Postal Service, November 13, 2015, 
at 9, 46 (Postal Service FY 2015 Form 10-K); 2014 Report on Form 10-
K United States Postal Service, December 5, 2014, at 9 (Postal 
Service FY 2014 Form 10-K).
    \65\ See Postal Service FY 2015 Form 10-K at 31 (``We continued 
to employ a discretionary capital expenditure plan for priority 
projects that are essential to conserve cash.''); id. (``Priority 
has been given to projects: 1. Needed for safety and/or health or 
legal requirements; 2. Required to provide service to our customers; 
and 3. Initiatives with a high return on investment and a short 
payback period.''); id. (``To save cash, we have also deferred 
facilities maintenance, which has no impact on health and safety 
issues.''); see also Postal Service FY 2014 Form 10-K at 32.
    \66\ See Postal Service FY 2015 Form 10-K at 32 n.4 (``Capital 
commitments pertain to purchases of equipment, building 
improvements, and vehicles for legally binding obligations.'').
    \67\ See id. at 31 (``The source of funds needed to fulfill 
these commitments was generated from our operating activities.'').
    \68\ See United States Postal Service, 2008 Report on Form 10-K, 
September 26, 2008, at 24 (Postal Service FY 2008 Form 10-K) (``Our 
capital cash outlays consist of the funds invested for new 
facilities, new automation equipment, and new services.'').
    \69\ See Postal Service FY 2014 Form 10-K at 9 (``If our 
operations do not generate the liquidity we require, we may be 
forced to reduce, delay or cancel investments in technology, 
facilities and/or transportation equipment, as we have done in the 
recent past.'').
---------------------------------------------------------------------------

    As its accumulated deficit increased, the Postal Service began to 
decrease its capital commitments and subsequent outlays. Figure III-5 
illustrates the change in capital commitments and outlays throughout 
the PAEA era.\70\ Capital outlays were severely curtailed in FY 2012, 
FY 2013, and FY 2014.\71\ This reflected the Postal Service's lack of 
capital commitments in the preceding years and was due in part to the 
Postal Service reaching its borrowing authority limit in FY 2012. In FY 
2015 and FY 2016, capital outlays began to increase as the Postal 
Service made capital commitments based on additional revenue generated 
by the exigent rate increase.\72\
---------------------------------------------------------------------------

    \70\ As seen in Figure III-5, the decrease in capital outlays 
lagged the decrease in capital commitments, as the Postal Service 
continued to fund capital commitments made in prior years.
    \71\ U.S. Postal Service Five-Year Strategic Plan, Fiscal Years 
2017 to 2021, September 30, 2016, at 23 (FY 2017-2021 Strategic 
Plan).
    \72\ The Postal Service stated that ``[i]n 2016, [it] invested 
$1.4 billion in the purchase of property and equipment, an increase 
of $206 million over 2015, as [it] used additional cash on hand to 
fund some of [its] much-needed investments in building improvements, 
vehicles, equipment and other capital projects. In 2015, [it] 
invested $1.2 billion in the purchase of property and equipment, an 
increase of $441 million over 2014.'' Postal Service FY 2016 Form 
10-K at 32. It also stated that ``[a]vailable liquidity (cash and 
short-term investments, plus available borrowing capacity) has 
increased by approximately $6 billion from the reported 2012 low. 
This improvement would not have occurred had the Postal Service not 
defaulted on the annual PSRHBF prefunding payments in 2012 and 
subsequent years. Aside from the defaults, the improvement is 
largely attributable to the temporary exigent surcharge . . . which 
generated approximately $4.6 billion in incremental revenue from 
January 2014 through April 10, 2016, as well as to aggressively 
managing capital expenditures and operating expenses under 
management's control.'' Id. at 47.

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

[[Page 58296]]

[GRAPHIC] [TIFF OMITTED] TP11DE17.006

    However, even with the increase in capital commitments and outlays 
in FY 2015 and FY 2016, the value of the Postal Service's net asset 
holdings decreased substantially during the PAEA era.\73\ As shown in 
Table III-1 property and equipment declined by $7.8 billion, or 33.8 
percent between FY 2006 and FY 2016.
---------------------------------------------------------------------------

    \73\ Net asset holdings are property and equipment recorded at 
cost, including interest on borrowings used to pay for the 
construction of major capital additions, less accumulated 
depreciation. FY 2016 USPS Form 10K at 44.

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

[[Page 58297]]

[GRAPHIC] [TIFF OMITTED] TP11DE17.007

BILLING CODE 7710-FW-C
    The Postal Service's sharp decline in capital investments 
contributed to the system not achieving Objective 1 (``maximize 
incentives to reduce costs and increase efficiency''), Objective 3 
(``maintain high quality service standards established under section 
3691''), and Objective 5 (``assure adequate revenues, including 
retained earnings, to maintain financial stability''). 39 U.S.C. 
3622(b)(1), (3), and (5). The lack of financial stability, insufficient 
levels of efficiency gains and cost reductions, and inability to 
adequately encourage the maintenance of service standard quality were 
interrelated causes and effects of the deficiencies experienced under 
the existing ratemaking system.
    To address these interrelated deficiencies, the ratemaking system 
must provide the Postal Service the opportunity to generate additional 
revenue coupled with incentives to increase operational efficiency and 
maintain high quality service standards. Therefore, the Commission 
determines that it is necessary to provide additional rate authority to 
put the Postal Service on the path to long-term financial stability, 
contingent on the Postal Service meeting particular performance-based 
thresholds.
2. Amount of Performance-Based Rate Authority
    After balancing the objectives of the ratemaking system, the 
Commission determines that the best course of action is not to provide 
the Postal Service a specific level of retained earnings or a set 
amount of funding for capital investment but rather to put the Postal 
Service on a path to long-term financial stability while providing 
meaningful incentives for the Postal Service to increase operational 
efficiency and maintain high quality service standards. Given the 
importance of capital investment to the cycle shown in Figure III-2, 
supra, the Commission finds that capital investment data from the PAEA 
era are appropriate reference points. As a result of its analysis 
below, the Commission determines that the appropriate amount of 
performance-based rate authority is 1 percentage point per annum.
    This amount was determined by analyzing net asset holdings, capital 
outlays, and borrowing authority. The $7.8 billion needed to replace 
the net asset holdings that declined in the PAEA era represents 
approximately 16 percent of FY 2017 market dominant revenue. Capital 
outlays were approximately $1.2 billion less in FY 2016 than in FY 
2006, the last fiscal year before PAEA was enacted. The reduction in 
the annual capital outlays that occurred during the PAEA era represents 
approximately 2.5 percent of FY 2017 market dominant revenue. The $15 
billion in borrowing authority that the Postal Service exhausted during 
the PAEA era represents approximately 31 percent of FY 2017 market 
dominant revenue. Taking into account these reference points, the 
impact of the proposed supplemental rate authority, and the rate 
increases experienced during the PAEA era, the Commission applies its 
expert judgment in postal matters to determine that 1 percentage point 
per annum is the appropriate amount of performance-based rate 
authority.
    All other things being equal, the 1 percentage point of proposed 
performance-based rate authority would allow the Postal Service to 
return to pre-PAEA levels of capital outlays in just over 2 years. In 
approximately 5 years, the proposed performance-based rate authority 
would produce enough cumulative additional revenue to allow the Postal 
Service to replace the $7.8 billion decrease in net capital assets that 
occurred in the PAEA era. It would take approximately 9 years of 
accumulated additional revenue at a 1-percent rate of increase in 
prices to also pay off the $15 billion in borrowing authority the 
Postal Service exhausted during the PAEA.

[[Page 58298]]

    These calculations assume that all of the future rate increases are 
applied to FY 2017 volumes. As noted in section III.C.2, supra, market 
dominant product volumes have been declining overall, as well as 
shifting toward lower-priced products and rates. Given these trends, 
and the mailers predicted responses to price increases, the Commission 
anticipates that the amount of additional revenue generated by this 
proposed performance-based rate authority will be less than these 
calculations suggest. As noted above, the Postal Service will need to 
improve operational efficiency to achieve financial stability. Given 
the uncertainty as to the exact amount of revenues the performance-
based rate authority will produce and how much improvement in 
efficiency the Postal Service will achieve under this approach, the 
Commission will review the Postal Service's long-term financial 
stability after the supplemental rate authority expires and consider 
whether adjustments to the performance-based rate authority should be 
made. See section III.B.3, supra.
    Because of the interdependence of long-term financial stability, 
operational efficiency, and service quality, the Commission addresses 
these jointly by linking the availability of this additional rate 
authority to efficiency and service standard metrics. To facilitate 
this combined approach, the additional rate authority is structured as 
an annual amount that is conditioned on the achievement of efficiency 
gains and the maintenance of service standards. The full amount of the 
proposed performance-based rate authority will not be available if the 
Postal Service does not meet or exceed an operational efficiency-based 
standard and adhere to service standard quality criteria. The 
magnitude, timing, and conditional design of this mechanism balances 
the need to ensure the long-term financial stability of the Postal 
Service (Objective 5), maximize incentives to reduce costs and increase 
efficiency (Objective 1), and maintain high quality service standards 
(Objective 3) with the other statutory objectives of the PAEA 
consistent with the analysis in Order No. 4257.
3. Performance Incentive Mechanism
    The Commission has carefully considered how to allocate this 
additional rate authority in a manner that will address the 
interrelated systemic deficiencies. The Commission finds that although 
additional revenue is needed, additional revenue, alone, is 
insufficient to address the need to also increase operational 
efficiency and maintain high quality service standards. As discussed in 
Order No. 4257, all of these are necessary in order for the system to 
achieve the objectives of 39 U.S.C. 3622(b). Therefore, the Commission 
proposes to address these interrelated issues through the creation of a 
Performance Incentive Mechanism (PIM). Generally, a PIM takes the form 
of either a bonus (e.g., additional rate authority) or a penalty (e.g., 
reduction in rate authority) tied to performance criteria. The use of 
PIMs may be particularly appropriate where the regulated entity, such 
as the Postal Service, is subject to cost-cutting pressures.\74\
---------------------------------------------------------------------------

    \74\ See Mark Newton Lowry & Tim Woolf, Performance-Based 
Regulation in High Distributed Energy Resources Future, Lawrence 
Berkley National Laboratory, Report No. 3, January 2, 2016; see also 
Melisa Whited, Tim Woolf, & Alice Napoleon, Utility Performance 
Incentive Mechanisms: A Handbook for Regulators, Western Interstate 
Energy Board, March 9, 2015.
---------------------------------------------------------------------------

a. Proposed Commission Solution
    Consistent with the analysis in Order No. 4257, the solution 
proposed by the Commission is necessary to achieve several of the 
PAEA's objectives. In fashioning the incentive mechanism, the 
Commission has specifically focused on Objective 1 (maximizing 
incentives to reduce costs and increase efficiency), Objective 3 
(maintaining high quality service standards), and Objective 5 (assuring 
adequate revenues, including retained earnings, to maintain financial 
stability), and the Commission's related analysis in Order No. 4257. 
See 39 U.S.C. 3622(b)(1), (3), and (5).
    The Commission proposes to make this performance-based rate 
authority conditional on the Postal Service meeting or exceeding an 
operational efficiency-based standard and adhering to service standard 
quality criteria. Using a performance-based approach should encourage 
the Postal Service to maintain service standard quality and maximize 
incentives to increase efficiency--thereby addressing areas where the 
existing ratemaking system was deficient in the 10 years following the 
enactment of the PAEA. In line with the general premise that improved 
operational efficiency should help to improve service, the Commission 
determines that it is appropriate to attach more weight to the 
operational efficiency aspect of the incentive mechanism. Therefore, 
the Commission divides this 1 percentage point of performance-based 
rate authority between an operational efficiency-based standard (0.75 
percentage points), and service quality-related criteria (0.25 
percentage points).
b. Proposed Regulatory Changes
    The Commission has considered the comments and the foregoing 
analysis in developing proposed subpart E to 39 CFR part 3010, which 
sets forth the criteria for the availability of performance-based rate 
authority. The Commission proposes to allocate up to 1 percentage point 
of rate authority based on the Postal Service meeting or exceeding an 
operational efficiency-based standard and adhering to service standard 
quality criteria.
c. Conclusion
    This proposed performance-based rate authority will address three 
interrelated deficiencies in the existing ratemaking system: Generating 
sufficient revenue to assure long-term financial stability, maximizing 
incentives to reduce costs and increase efficiency, and maintaining 
high quality service standards. This proposed performance-based rate 
authority is necessary to achieve Objectives 1, 3, and 5. In sections 
III.D.4 and III.D.5, infra, the Commission details the specifics of the 
operational efficiency and service aspects of the incentive mechanism.
4. Operational Efficiency
a. Introduction
    The existing market dominant ratemaking system did not maximize 
incentives to increase operational efficiency in accordance with 
Objective 1. Order No. 4257 at 222; 39 U.S.C. 3622(b)(1). Consistent 
with Order No. 4257, the Commission uses total factor productivity 
(TFP) as its determinative metric for operational efficiency because it 
is the best available measure of efficiency. Order No. 4257 at 206.
    Because TFP contains all of the components needed to determine the 
efficiency of a multi-product firm and comprehensively accounts for 
both the inputs and outputs of the Postal Service, TFP reflects the 
efficiency changes that occur in a given year. Id. To arrive at the 
final TFP figure, the model divides the workload index by the input 
index as follows:

[[Page 58299]]

[GRAPHIC] [TIFF OMITTED] TP11DE17.008

    The Postal Service calculates TFP annually and files that figure 
and the supporting data with the Commission.\75\ The Postal Service 
detailed the current TFP methodology in Docket No. N2010-1.\76\ The 
Commission considers this methodology an accepted analytical principle. 
Order No. 4257 at 207. As such, any future changes to this methodology 
are subject to Commission review and approval through the rulemaking 
process appearing in existing Sec.  3050.11. Id.
---------------------------------------------------------------------------

    \75\ See, e.g., USPS Annual Tables, FY 2016 TFP (Total Factor 
Productivity), March 1, 2017.
    \76\ See Docket No. N2010-1, Responses of the United States 
Postal Service to MPA Interrogatories MPA/USPS-T2-2-7.a.-c., 8-12, 
Redirected from Witness Corbett, June 23, 2010, file 
``MPA.T2.3.b.TFP.Formulas.pdf.''
---------------------------------------------------------------------------

    TFP generally increased during the PAEA era. Id. at 208. However, 
the system was: (1) Unable to achieve operational efficiency gains 
sufficient to contribute to the financial stability of the Postal 
Service; and (2) unable to achieve increases in efficiency at a greater 
rate than in the relevant comparable time period (the 10 years prior to 
implementation of the PAEA). Id. at 222-26. Therefore, the Commission 
proposes modifications to the ratemaking system to incentivize the 
Postal Service to address these deficiencies.
b. Comments
    The Postal Service and the Public Representative include detailed 
evaluations of operational efficiency in their comments.
    The Postal Service retained Christensen Associates (Christensen) to 
provide an evaluation of TFP as a measure of operational efficiency. 
Postal Service Comments at 57 (citing Postal Service Comments, Appendix 
D). The TFP methodology as used by the Postal Service was initially 
developed by Christensen in 1983. Postal Service Comments, Appendix D 
at 2. In an appendix attached to the Postal Service's comments, 
Christensen explains the calculation of TFP, compares TFP to other 
potential ways of measuring efficiency gains, and discusses how TFP 
results should be assessed. See id. Appendix D. Christensen concludes 
that TFP is a more comprehensive measure of operational efficiency than 
the other measures considered by the Commission, but Christensen 
cautions that the TFP measurement is subject to substantial year-to-
year variation. Id. at 4-5. Christensen recommends analyzing TFP trends 
over multi-year periods when evaluating TFP improvements. Id. at 6. The 
Postal Service echoes Christensen's concern that if TFP is to be used 
an evaluation tool, it is important to look at TFP trends over several 
years, rather than at annual TFP results in isolation. Postal Service 
Comments at 57, 197.
    The Postal Service suggests that the price cap is no longer 
necessary to incentivize the Postal Service to aggressively focus on 
increasing operational efficiency and reducing costs. Id. at 190. The 
Postal Service maintains that the efficiency gains that have occurred 
during the PAEA era were driven more by the Postal Service's strategy 
to respond to volume declines presented by the ``new normal'' 
marketplace than by the discipline imposed by the price cap. Id. 
Therefore, the Postal Service states that even without a price cap, it 
has strong incentives to reduce costs and increase efficiency in order 
to restrain price increases and thereby minimize further volume 
decline. Id.
    Moreover, the Postal Service asserts that a lack of financial 
stability, which it attributes to the price cap, inhibits its ability 
to ensure the efficiency of its operations by limiting its ability to 
make capital investments. Id. at 193. Further, the Postal Service 
acknowledges that ``after 17 years of substantial efficiency gains and 
cost reductions, it must be recognized that the ability to achieve 
additional reduction in those costs that are within the Postal 
Service's control will be more difficult moving forward.'' Id. at 194 
(emphasis in original). In support of this premise, Christensen 
observes ``in order to continually increase TFP, the Postal Service 
must continue to find new ways to reduce costs.'' Id. Appendix D at 6.
    The Public Representative suggests that there is a high level of 
uncertainty associated with measuring the efficiency of the Postal 
Service. PR Comments at 28. In her declaration in support of the Public 
Representative, Dr. Lyudmila Y. Bzhilyanskaya acknowledges that TFP has 
been widely used to assess productive efficiency in service industries 
but comments that she has reservations regarding the utilization of TFP 
as an exhaustive measure of efficiency. Bzhilyanskaya Decl. at 8. She 
states that technological progress and other aspects of efficiency 
(such as scale efficiency, allocative efficiency, and/or dynamic 
efficiency), may not be fully reflected in the TFP metric but are still 
important for the Postal Service. Id. She also states that annual TFP 
indexes focus more on short-term productivity and do not always 
consider long-term productivity, which is better reflected by 
cumulative TFP indexes and/or TFP trends. Id. at 9. Moreover, she 
expresses concern that TFP is not capable of capturing changes in 
product and/or service quality. Id. at 12. She suggests improvements to 
the transparency of information related to the TFP indexes, exploration 
of alternative indexing procedures, and adjustments when new products 
are introduced or a product is transferred from the market dominant to 
the competitive products list. Id. at 5-7, 10-11.
    Other commenters discuss operational efficiency more generally. ANM 
et al. assert that the Postal Service's productivity has been stagnant. 
ANM et al. Comments at 6. They maintain that the Postal Service ``needs 
to revive its cost saving efforts and make serious progress in network 
rationalization and delivery mode conversion.'' ANM et al. Comments at 
6-7, 51-53.
    NNA recommends encouraging specific practices to increase 
operational efficiency for newspapers such as more efficient container 
preparation and increased use of Intelligent Mail barcodes. NNA 
Comments at 3-4.
    APWU maintains that the Postal Service has largely realized all of 
the efficiencies that it can, forcing it to turn to service cuts and 
forestall capital investments for efficiency improvements and new 
product development. APWU Comments at 10. It asserts that the TFP gains 
occurring after 2007 came at the expense of service. Id. at 26.
c. Proposed Commission Solution
    Based on the comments and the Commission's analysis in Order No. 
4257, the Commission proposes to use a performance-based mechanism to 
encourage the Postal Service to maximize the incentives to increase 
operational efficiency by allocating 0.75 percentage points of 
performance-based rate authority based on the Postal Service meeting or 
exceeding an operational efficiency-based standard. The Commission 
refers to this proposed rate authority as the operational efficiency-
based rate authority.

[[Page 58300]]

    Consistent with its analysis in Order No. 4257, the Commission 
proposes to measure operational efficiency for purposes of this 
incentive mechanism using TFP. Conditioning rate authority on increases 
in TFP incentivizes the Postal Service to maximize output while 
minimizing costs, leading to improvements in operational efficiency. 
Using a performance-based approach to incentivize continued TFP growth 
will help incentivize the Postal Service to overcome the challenges to 
finding new ways to increase efficiency referenced by the Postal 
Service and Christensen.
    The Commission proposes to evaluate as part of its ACD whether 
average TFP growth for the most recent 5-year period has met or 
exceeded 0.606 percent. The standard of 0.606 percent reflects the 
average growth for TFP over the most recent 5 fiscal years of the PAEA 
era, i.e., for the 5-year period from FY 2011 to FY 2016.\77\ If the 
Commission finds that such is the case, then the 0.75 percentage points 
of operational efficiency-based rate authority shall be allocated to 
each class of mail for the next calendar year. If the Commission finds 
that average TFP growth for the most recent 5-year period has not met 
or exceeded 0.606 percent, then the 0.75 percentage points of 
operational efficiency-based rate authority shall not be made available 
to the Postal Service. This proposed procedure will give the Postal 
Service and ratepayers adequate advance notice of whether the 0.75 
percentage points of operational efficiency-based rate authority will 
be available to the Postal Service to use for the next calendar year.
---------------------------------------------------------------------------

    \77\ The 5-year average is 0.605656, which the Commission rounds 
to 0.606.
---------------------------------------------------------------------------

    The Commission anticipates that the Postal Service's operational 
efficiency for the next 5 years will continue to increase at least at 
the same rate that it has over the most recent 5 years of the PAEA era. 
The Commission may reevaluate this standard after the expiration of the 
proposed supplemental rate authority.
    Use of a rolling 5-year average for TFP growth should allow enough 
time for the effects of any long-term investments to appear in the TFP 
calculation. This also minimizes the possibility raised by both the 
Postal Service and Christensen of an isolated annual result being 
unrepresentative. Moreover, this approach is consistent with the 
Commission's maximization analysis in Order No. 4257, which compared 
the pace of efficiency gains by comparing the 10 years of experience in 
the PAEA era and the 10 years immediately preceding implementation of 
the PAEA. See Order No. 4257 at 248. This approach, therefore, should 
incentivize the Postal Service to achieve efficiency gains sufficient 
to contribute to the financial stability of the Postal Service.
    Existing Sec.  3050.60(e) requires the Postal Service to provide 
the input data and calculations used to product the annual TFP 
estimates by March 1 of each year. This rule facilitates the 
Commission's ability to evaluate proposed methodological changes under 
existing Sec.  3050.11 and the public's ability to access and 
understand such changes. Additionally, to increase the transparency of 
TFP, the Commission intends to use existing Sec.  3050.2, which 
requires documentation of periodic reports (e.g., calculations and 
links within and between spreadsheets) to ensure that TFP is measured 
and calculated in a transparent manner. Order No. 4257 at 207.
d. Commission Analysis of Alternatives
    Although the Public Representative and the Postal Service noted the 
limitations of TFP as a measurement of operational efficiency, no 
commenter proposed an alternative measurement. Christensen evaluated 
other measurements proposed by the Commission in Order No. 3673, such 
as real unit operating costs, simpler productivity measures, and total 
workhours. Postal Service Comments, Appendix D at 4. Christensen 
concluded that these measures do not fully capture the complexity of 
Postal Service efficiency in comparison to TFP. Id. The Commission 
agrees with these conclusions. Moreover, Order No. 4257 discusses 
several other ways to measure efficiency and concludes that TFP is the 
best metric available to assess the Postal Service's efficiency. See 
Order No. 4257 at 206.
    The Postal Service comments that the price cap affects its ability 
to raise capital to make necessary improvements. Postal Service 
Comments at 130. However, removing the price cap entirely might further 
weaken the Postal Service's existing incentives to maximize operational 
efficiency. Conditioning the availability of the operational 
efficiency-based rate authority on measurable TFP growth should ensure 
that improving the Postal Service's financial stability does not occur 
at the expense of continuing to increase operational efficiency. 
Therefore, the proposed solution is necessary to achieve efficiency 
gains sufficient to contribute to the financial stability of the Postal 
Service.
e. Proposed Regulatory Changes
    The Commission has considered the comments and the foregoing 
analysis in developing proposed subpart E to 39 CFR part 3010, which 
sets forth the criteria for the availability of performance-based rate 
authority. Proposed Sec.  3010.180 describes the applicability of both 
the operational efficiency-based rate authority and the service 
quality-based rate authority. Proposed Sec.  3010.181 outlines the 
procedure for allocation of the operational efficiency-based rate 
authority.
f. Conclusion
    The Commission proposes to allocate 0.75 percentage points of rate 
authority based on the Postal Service meeting or exceeding an 
operational efficiency-based standard. This proposed operational 
efficiency-based rate authority will address that the existing 
ratemaking system did not maximize the incentives to increase 
efficiency, as required by Objective 1. Therefore, this proposed 
operational efficiency-based rate authority is necessary to achieve 
Objective 1. The proposal balances the need to provide the Postal 
Service with the opportunity to generate additional revenue necessary 
to attain long-term financial stability and the danger that increased 
revenue might weaken the Postal Service's incentives to operate more 
efficiently.
5. Service
a. Introduction
    The existing ratemaking system limits rate increases, and by 
extension, revenue (assuming volume for market dominant products does 
not significantly increase). Therefore, as discussed above, cost 
reduction and operational efficiency improvements are critical to 
putting the Postal Service on the path to financial stability and 
retained earnings. However, without adequate incentives requiring 
service to be maintained, reducing service may be a means of reducing 
costs. Therefore, the PAEA intended that the system should be designed 
to encourage the maintenance of high quality service standards 
(established under 39 U.S.C. 3691) and to hold the Postal Service 
accountable for consistently achieving those standards, as required by 
Objective 3. Order No. 4257 at 250 (citing 39 U.S.C. 3622(b)(3)).
    The PAEA required the Postal Service to establish, in consultation 
with the Commission, an initial set of service standards for market 
dominant products to take effect within 1 year of the PAEA's enactment. 
Id. at 42 (citing 39

[[Page 58301]]

U.S.C. 3691(a)). The Postal Service may adjust service standards from 
time to time, subject to the requirement that it seek an advisory 
opinion from the Commission before doing so on a substantially 
nationwide basis. Id. at 251 n.366 (citing 39 U.S.C. 3661(b); 39 U.S.C. 
3691(a)). Service standards are determined by two components: A 
``delivery day range,'' which comprises the range of days within which 
all mail eligible for the service standard can be expected to be 
delivered (e.g., between 1 and 5 days for First-Class Mail); and 
``business rules,'' which determine eligibility for each specific 
service standard (e.g., 1-Day (referred to as ``overnight''); 2-Day; 
and 3-5-Day for First-Class Mail). Id. at 250.
    The initial service standards were reduced during the PAEA era 
through two major sets of revisions made by the Postal Service. Id. at 
266. The first set of revisions began in FY 2012 when the Postal 
Service implemented its ``Mail Processing Network Rationalization'' 
initiative (Network Rationalization).\78\ Network Rationalization 
substantially affected the level of service for multiple mail classes 
multiple market-dominant mail classes, including First-Class Mail, 
Standard Mail, Periodicals, and Package Services. Order No. 4257 at 
266. Most significantly, Network Rationalization eliminated overnight 
service for all First-Class Mail pieces sent by retail customers 
(First-Class Mail Single-Piece Letters/Postcards). Network 
Rationalization Revisions at 31, 194. The second set of revisions began 
in FY 2014 when the Postal Service implemented its ``Standard Mail Load 
Leveling'' initiative (Load Leveling), which added 1 day to the 
applicable delivery day range for certain Standard Mail pieces.\79\
---------------------------------------------------------------------------

    \78\ See Revised Service Standards for Market-Dominant Mail 
Products, 77 FR 31190 (May 25, 2012) (Network Rationalization 
Revisions).
    \79\ See Service Standards for Destination Sectional Center 
Facility Rate Standard Mail, 79 FR 12390, 12393 (March 5, 2014) 
(Load Leveling Revisions).
---------------------------------------------------------------------------

    The Postal Service asserted that both sets of revisions to the 
service standards were undertaken to improve operational efficiency. 
Network Rationalization Revisions at 31,191; Load Leveling Revisions at 
12,390. Both sets of revisions increased the expected days-to-delivery 
for the affected mailpieces. Order No. 4257 at 268-69.
    The Commission issued an advisory opinion applicable to Network 
Rationalization concluding that it was possible for the Postal Service 
to undertake significant network rationalization and to realize 
substantial cost savings while preserving most of the initial service 
levels.\80\ The Commission issued an advisory opinion applicable to 
Load Leveling recommending that the Postal Service perform additional 
analysis of ``operational changes that could potentially result in 
unintended consequences,'' such as diminished service performance, 
before proceeding with a nationwide rollout.\81\ Despite these advisory 
opinions issued by the Commission, the Postal Service proceeded with 
both sets of revisions. Order No. 4257 at 266.
---------------------------------------------------------------------------

    \80\ Docket No. N2012-1, Advisory Opinion on Mail Processing 
Network Rationalization Service Changes, September 28, 2012, at 45 
(Network Rationalization Advisory Opinion).
    \81\ Docket No. N2014-1, Advisory Opinion on Service Changes 
Associated With Standard Mail Load Leveling, March 26, 2014, at 49-
50.
---------------------------------------------------------------------------

    The decline of service standards during the PAEA era demonstrates 
that the existing ratemaking system did not effectively encourage the 
Postal Service to maintain service quality. See id. at 269. This 
creates a danger that the Postal Service could reduce service standards 
below the high quality level required by Objective 3. Id. Therefore, 
the Commission considers what, if any, action is appropriate with 
respect to service.
b. Comments
    Many commenters express dissatisfaction with their current service. 
See, e.g., NNA Comments at 3. The comments also contain a range of 
proposed solutions related to service, which the Commission summarizes 
below. Because the majority of comments concerning service are 
incorporated within proposals to eliminate, modify, or retain the 
existing price cap, the Commission subdivides its summary of the 
comments into three corresponding subsets. Proposals related to service 
that are suggested independent of a proposal to eliminate, modify, or 
retain the price cap are summarized in a fourth subset below.
(1) Comments in Support of Eliminating the Price Cap To Improve Service
    The Postal Service and the unions suggest that eliminating the 
price cap will allow the Postal Service to collect more revenue and 
thereby improve service.
    The Postal Service contends that having sufficient resources to 
ensure financial integrity is a prerequisite to maintaining high 
quality service. Postal Service Comments at 44-45. The Postal Service 
asserts that the lack of financial liquidity has caused it to defer 
capital investments needed to sustain service. Id. at 89. The Postal 
Service cautions that continued deferral of capital investment would be 
inconsistent with ``providing appropriate levels of service in an 
efficient manner.'' Id. Therefore, the Postal Service recommends that 
the Commission, in conjunction with eliminating the price cap, monitor 
service performance. Id. at 218-19, 221-22. The Postal Service opposes 
the application of a quality of service factor (Q-Factor) to the price 
cap as needlessly complex and counter-productive to remediating service 
issues. Id. at 222 at n.435.
    Similarly, NALC favors eliminating the price cap based on its 
contention that adequate revenues are necessary to fulfill the Postal 
Service's fundamental mission to provide prompt and reliable postal 
services nationwide. NALC Comments at 1.
    APWU asserts that the price cap pressures the Postal Service to 
reduce costs at the expense of service. APWU Comments at 26. Stating 
that ``Congress did not anticipate a decrease in mail volume, an 
increase i[n] delivery points, a recession, and [a] change in [the] 
mail mix,'' APWU recommends that the Commission move away from the 
price cap system to a more flexible system that will allow the Postal 
Service to better ``respond to varied and unexpected changes.'' Id. at 
29. Eighteen officers of local chapters of the APWU also recommend 
eliminating the price cap and assert that the financial harms flowing 
from the price cap have reduced the quality of service standards and 
service performance.\82\
---------------------------------------------------------------------------

    \82\ Thomas Comments at 1; Whalen Comments at 1; Oldt Comments 
at 1; VanScyoc Comments at 1; Corley Comments at 1; Rathore Comments 
at 1; Fallacara Comments at 1; Cliche Comments at 1; Landry Comments 
at 1; Fawcett Comments at 1; Bieberitz Comments at 1; Collins 
Comments at 1; Sarcone Comments at 1; Preminger Comments at 1; Bates 
Comments at 1-2; Casselli Comments at 1; Athanaskos at 1; Pagaduan 
Comments at 1.
---------------------------------------------------------------------------

(2) Comments in Support of Incentivizing Service Improvements Under a 
Modified Price Cap
    Other commenters suggest improving service under a modified price 
cap. Although the Public Representative asserts that the Commission 
could modify the price cap to include a Q-Factor to link service and 
rates directly, he cautions that imposing a Q-Factor would be 
premature, especially if the Commission significantly changes other 
aspects of the system that may positively affect service. PR Comments 
at 59. Therefore, he recommends that in the short-term, the Commission 
continue to monitor service performance. Id. at 60. He suggests that 
the Commission focus this proceeding

[[Page 58302]]

on adjusting the price cap to relieve the financial pressure on the 
Postal Service. Id. If those changes to the system improve the Postal 
Service's financial stability and service performance still fails to 
improve, then he suggests considering a penalty-style Q-Factor that 
would adjust the price cap downward. Id.
    MH and NAAD suggest that the Commission consider potential service 
consequences when evaluating proposed rate changes. MH and NAAD 
Comments at 11. They also advise that the Commission ensure that cost-
control (or revenue-limitation) does not lead to unavoidable Postal 
Service management decisions that decrease achievement of service 
objectives. Id.
    UPS, which proposes to retain the price cap, suggests that any 
proposals to relax the price cap should be counterbalanced by raising 
and enforcing service standards. UPS Comments at 6.
(3) Comments in Support of Retaining the Price Cap To Maintain Service
    Several commenters contend that eliminating or relaxing the price 
cap may negatively affect service because the price cap has 
incentivized the Postal Service to make needed service-related changes 
in order to improve operational efficiency. For instance, Minnesota 
Power asserts that ``[t]he CPI cap is a necessary tool to encourage the 
Postal Service to improve service and further reduce costs.'' Minnesota 
Power Comments at 2. AF&PA agrees that ``[r]emoving or raising the CPI 
price cap would remove these important incentives, resulting in a less 
efficient Postal Service with lower quality service . . . .'' AF&PA 
Comments at 6. MMA et al. question whether increased revenues would 
improve service by suggesting that there is inadequate evidence to 
determine whether rate increases positively affect service. MMA et al. 
Comments at 25-26. Similarly, SIIA asserts that there is no reason to 
expect that increased rates would improve service. SIIA Comments at 8. 
GCA asserts that service problems have been attributable to decisions 
to realign the Postal Service's networks rather than the price cap. GCA 
Comments, Appendix B at 1.
(4) Other Proposals Related to Service Performance
    Multiple commenters focus on improving service performance. Several 
commenters discuss the importance of consistent and reliable on-time 
service performance.\83\ Some commenters discuss the need to improve 
service performance measurement and monitoring.\84\ Connecting service 
performance with operational efficiency, some commenters suggest 
operational improvements that the Postal Service could consider to 
improve efficient service performance.\85\
---------------------------------------------------------------------------

    \83\ AF&PA Comments at 9; ANM et al. Comments at 53 n. 34; SIIA 
Comments at 7.
    \84\ NNA Comments at 19; GCA Comments, Appendix B at 6.
    \85\ Furka Comments at 7-9 (suggesting zoning changes); Yao 
Comments at 2, 4 (addressing staffing and capacity concerns); NNA 
Comments at 3 (recommending ``continuous improvement in operations'' 
to improve service).
---------------------------------------------------------------------------

c. Proposed Commission Solution
    Based on the comments and the Commission's analysis in Order No. 
4257, the Commission proposes to use a performance-based mechanism to 
encourage the Postal Service to maintain service standard quality by 
allocating 0.25 percentage points of the performance-based rate 
authority based on the Postal Service adhering to service standard 
quality criteria. The Commission refers to this proposed rate authority 
as the service quality-based rate authority.
    The Commission proposes that the service quality-based rate 
authority be allocated for a class of mail if all of the Postal 
Service's service standards (including applicable business rules) for 
that class for the applicable year met or exceeded the service 
standards in place during the prior fiscal year on a nationwide or 
substantially nationwide basis. To facilitate this review, the 
Commission proposes to require the Postal Service to provide in its 
Annual Compliance Report (ACR) a description of and reason for any 
changes to service standards, or to certify that no changes to service 
standards have been made, since the last ACR. Under the proposed rules, 
the Commission would issue a preliminary determination, specific to 
each class of mail, at the time of the ACD.
    Under the proposed rules, any interested person will have 30 days 
to challenge this preliminary determination. The subject matter of the 
challenge is limited to changes in the service standards, including the 
business rules, that occur on a national or substantially nationwide 
basis. If no timely challenge is filed, the preliminary determination 
shall become final. If a timely challenge is filed, then the Commission 
will rule on any challenge within 60 days after the filing of the 
challenge. Any service quality-based rate authority allocated under 
this process would be available to the Postal Service for the upcoming 
calendar year. This proposed procedure will give the Postal Service and 
ratepayers adequate advance notice of whether, for each class, the 0.25 
percentage points of service quality-based rate authority will be 
available to the Postal Service to use for the next calendar year.
    This service quality-based rate authority is linked to the service 
standards and the business rules rather than actual service performance 
such as on-time delivery performance. Service performance issues are 
most appropriately dealt with in the ACD. Order No. 4257 at 273.
d. Commission Analysis of Alternatives
    Ultimately, the Commission strives to balance competing policy 
concerns in a manner that will encourage the Postal Service ``[t]o 
maintain high quality service standards established under section 
3691,'' as required by Objective 3. 39 U.S.C. 3622(b)(3). On the one 
hand, the Commission has considered comments contending that the 
operation of the price cap over the past 10 years has placed extreme 
financial pressure on the Postal Service to cut costs, resulting in the 
failure to maintain service standards. The Commission also has given 
weight to other comments cautioning that relaxing or eliminating the 
price cap may weaken incentives to provide efficient and reliable 
service. Moreover, the Commission has considered the commenters' 
concerns regarding the Postal Service's use of its revenues and 
resources with respect to service. Therefore, the Commission proposes 
rules to strike a balance between relieving the financial pressure to 
allow the Postal Service the opportunity to improve service and 
incentivizing the Postal Service to maintain high quality service 
standards for its market dominant products.
    The Commission agrees with the comments proposing to continue the 
existing approach to address service performance issues. The Commission 
also agrees with the Public Representative that introduction of a Q-
Factor is premature given the other changes being proposed that may 
affect service. Overall, the Commission encourages the Postal Service 
to continue its efforts to improve service performance. The Commission 
recommends that the Postal Service consider the operational and 
monitoring improvements suggested by the commenters in this proceeding 
and continue its work with stakeholders on these issues outside of this 
proceeding.

[[Page 58303]]

e. Proposed Regulatory Changes
    The Commission has considered the comments and the foregoing 
analysis in developing proposed subpart E to 39 CFR part 3010, which 
sets forth the criteria for the availability of performance-based rate 
authority. Proposed Sec.  3010.180 describes the applicability of both 
the operational efficiency-based rate authority and the service 
quality-based rate authority. Proposed Sec.  3010.182 outlines the 
procedure for allocation of the service quality-based rate authority. 
Changes are proposed to existing Sec.  3055.2 to require that the 
Postal Service provide in its ACR a description of and reason for any 
changes to service standards, or to certify that no changes to service 
standards have been made, since the last ACR.
f. Conclusion
    The Commission proposes to allocate 0.25 percentage points of rate 
authority based on the Postal Service's adhering to service standard 
quality criteria. This will encourage the Postal Service to maintain 
high quality service standards, as necessary to achieve Objective 3. 
This approach balances the need to assure Postal Service's long-term 
financial stability and encourage the Postal Service to maintain high 
quality service standards.

E. Non-Compensatory Classes and Products

1. Introduction
    As explained in Order No. 4257, non-compensatory products threaten 
the financial integrity of the Postal Service because the revenue from 
these products does not cover their attributable cost. Order No. 4257 
at 234-35. During the PAEA era, multiple market dominant products did 
not recover their attributable costs. Moreover, the Periodicals class 
has not covered its attributable costs since the enactment of the PAEA. 
In this section, the Commission discusses these issues and proposes a 
solution to put the Postal Service on the path to having fully 
compensatory products and classes.
2. Non-Compensatory Products
a. Introduction
    Non-compensatory products are those products for which attributable 
costs exceed revenue. In the FY 2016 ACD, the Commission identified 10 
non-compensatory products: (1) In-County Periodicals; (2) Outside 
County Periodicals; (3) USPS Marketing Mail Flats (formerly called 
Standard Mail Flats); (4) USPS Marketing Mail Parcels (formerly called 
Standard Mail Parcels); (5) Stamp Fulfillment Services; (6) Money 
Orders; (7) Collect on Delivery; (8) Stamped Envelopes; (9) Inbound 
Letter Post; \86\ and (10) Media Mail/Library Mail. See FY 2016 ACD at 
42-71. Table III-2 below shows the percentage of total attributable 
costs recovered by each of these products respectively (i.e., their 
``cost coverage'').
---------------------------------------------------------------------------

    \86\ The Commission also found that other market dominant 
International Mail products did not cover costs in FY 2016: Three 
agreements within the Inbound Market Dominant Multi-Service 
Agreements with Foreign Postal Operators product and Inbound 
Registered Mail (within the International Ancillary Services 
product). See FY 2016 ACD at 63.

            Table III-2--Non-Compensatory Products in FY 2016
------------------------------------------------------------------------
                                                           FY 2016 cost
                    Classes: Products                      coverage (%)
------------------------------------------------------------------------
Periodicals: In-County..................................            70.0
Periodicals: Outside County.............................            73.5
USPS Marketing Mail: Flats..............................            79.4
USPS Marketing Mail: Parcels............................            64.6
Special Services: Stamp Fulfillment Services............            87.3
Special Services: Money Orders..........................            91.1
Special Services: Collect on Delivery...................            41.1
Special Services: Stamped Envelopes.....................            92.3
First-Class Mail: Inbound Letter Post...................            66.4
Package Services: Media Mail/Library Mail...............            75.2
------------------------------------------------------------------------
Source: FY 2016 ACD at 42-71; Docket No. ACR2016, Library Reference PRC-
  LR-ACR2016/5, March 28, 2017.

    With the exception of the two Periodicals products--In-County 
Periodicals and Outside County Periodicals, which will be addressed 
subsequently in this Order--all of these non-compensatory products are 
included within classes of mail for which the overall class revenue 
exceeds overall class attributable cost. Products such as USPS 
Marketing Mail Flats, Stamp Fulfillment Services,\87\ and Media Mail/
Library Mail have historically failed to cover their attributable 
costs. See id. at 48, 60, 70. Other products, such as Money Orders have 
only recently become non-compensatory. See id. at 60-62.
---------------------------------------------------------------------------

    \87\ The Stamp Fulfillment Services product provides for the 
fulfillment of stamp orders placed by mail, phone, fax, or online to 
the Stamp Fulfillment Services Center in Kansas City, Missouri. See 
FY 2016 ACD at 59.
---------------------------------------------------------------------------

    In Order No. 4257, the Commission found that non-compensatory 
products are not reasonably or efficiently priced and may threaten the 
financial integrity of the Postal Service because revenue from these 
products fails to cover costs. See Order No. 4257 at 235, 139-42. 
Accordingly, the Commission proposes modifications to the system of 
ratemaking that will require price increases to improve the cost 
coverage for non-compensatory products.
b. Comments
    The primary commenter with regard to non-compensatory products was 
the Postal Service. The Postal Service comments that the price cap 
inhibits its ability to make rational and efficient pricing decisions. 
Postal Service Comments at 131. The Postal Service uses the USPS 
Marketing Mail Flats product as an example. Cost coverage for this 
product has declined since passage of the PAEA. Id. at 134. The Postal 
Service asserts that while it has the ability to rebalance rates among 
products within the USPS Marketing Mail class in order to improve USPS 
Marketing Mail Flats' cost coverage, and it has done so to some extent, 
volumes for this product are in ``autonomous decline'' relative to 
other products in the USPS Marketing Mail class. Id. As a result, the 
Postal Service maintains that if it were to maximize price increases 
for USPS Marketing Mail Flats, any temporary increase in unit 
contribution might be offset if volume declines as a result of the 
price increases led to decreased overall contribution. Id. at 134-35. 
Meanwhile, according to the Postal Service, it would have foregone the 
opportunity to increase contribution from USPS Marketing Mail products 
with stable or increasing volumes. Id. at 135. The Postal Service takes 
the position that in a time of limited class-level price increase 
authority, it would be imprudent for it to pursue such a strategy. Id. 
The Postal Service urges the Commission to remove the price cap from 
the ratemaking system altogether, stating that the price cap has failed 
to meet most of the PAEA's objectives. Id. at 138.
c. Proposed Commission Solution
    The Commission proposes to define ``non-compensatory products'' as 
products for which attributable cost exceeds revenue, as determined by 
the most recent ACD. As a starting point, the Commission proposes to 
prohibit the reduction of rates for non-compensatory products.
    Also, for non-compensatory products in classes for which 
attributable costs for the entire class do not exceed revenue for the 
class, the Commission proposes to require minimum product-level price 
increases. Under the

[[Page 58304]]

Commission's proposal, whenever the Postal Service files a request for 
the Commission to review a notice of rate adjustment applicable to any 
class of mail, it will be required to propose to increase the rate for 
any non-compensatory product within that class by a minimum of 2 
percentage points above the percentage increase for the class. This 
proposed rate increase does not create additional rate authority for 
the entire class. The proposed rate increase must comply with the other 
rate setting criteria appearing in the proposed rules accompanying this 
Order: CPI (proposed subpart C), supplemental (proposed subpart D), 
performance-based (proposed subpart E), and banked rate authority 
(proposed subpart G). After addressing any non-compensatory product(s), 
the Postal Service will retain pricing flexibility with regard to use 
of the remaining authority under the price cap for that class.
d. Commission Analysis of Alternatives
    The Commission recognizes that the proposed solution places some 
limitation on the Postal Service's pricing flexibility. Consistent with 
the analysis in Order No. 4257, the solution proposed by the Commission 
allows for continued achievement of Objective 4 (allowing the Postal 
Service pricing flexibility) while making changes necessary to achieve 
Objective 1 (maximize incentives to increase pricing efficiency) and 
Objective 8 (establishing and maintaining reasonable rates). See 39 
U.S.C. 3622(b)(1), (4), and (8).
    The Commission's proposal does not mandate immediate full cost 
coverage for non-compensatory products, but it does seek to narrow the 
coverage gap and move non-compensatory products toward full cost 
coverage over time. Given the substantial increase needed for some non-
compensatory products to cover their attributable costs, a 2-percentage 
point rate increase represents an appropriate mechanism for improving 
cost coverage while simultaneously maintaining stability and 
predictability in rates, as required by Objective 2. See 39 U.S.C. 
3622(b)(2). Both the Postal Service and the mailing community will have 
notice, through the ACD, of the products that are non-compensatory and 
thus subject to an additional 2-percentage point rate increase.
    The purpose of the pricing requirements for non-compensatory 
products is for the cost coverage of these products to move toward, and 
eventually above, 100 percent. The Commission performed a scenario-
based analysis to determine the appropriate level of additional price 
increases for non-compensatory products. In Table III-3, the most 
recent CPI-U projections were combined with unit attributable cost 
growth rates from the most recent 8 years to estimate changes in cost 
coverage assuming that prices are increased by 1 percent, 2 percent, or 
3 percent above the average rate increase for the class.\88\ The CPI-U 
change is projected to be 2.05 percent for the next 5 years, while the 
change in the unit attributable cost of USPS Marketing Mail Flats was 
2.6 percent per year for the last 8 years. Table III-3 assumes that the 
next 5 years will experience the same unit attributable cost change and 
that CPI-U will conform to projections. Each year, in addition to the 
CPI-U rate authority, the 2 percent of supplemental authority and 
either 1 percent, 2 percent, or 3 percent of additional rate authority 
is applied to estimate the increase in revenue. The following table 
details the resulting estimated cost coverages for USPS Marketing Mail 
Flats.
---------------------------------------------------------------------------

    \88\ The unit attributable costs by product are only available 
for the most recent 8 years due to the product list change 
associated with the PAEA and concurrent changes to cost reporting. 
The Postal Service did not report the unit attributable costs for 
each and every PAEA product until FY 2008. See Docket No. ACR2008 
Library Reference USPS-LR-FY08-1.
[GRAPHIC] [TIFF OMITTED] TP11DE17.009

    In the scenarios detailed in Table III-3, USPS Marketing Mail Flats 
would experience 5-year cumulative price increases of between 27.93 and 
40.58 percent.\89\ Even in the scenario where prices are increased 7.05 
percent per year the estimated cost coverage remains below 100 percent 
5 years after implementation. As explained above, the prior table 
contains the assumption, based on historical data, that unit 
attributable costs will continue to increase at a higher rate than the 
CPI-U. The Commission changes this assumption in its calculation in 
Table III-4 below.
---------------------------------------------------------------------------

    \89\ The 5-year cumulative increases are greater than the sum of 
the annual increases due to the effects of compounding.

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

[[Page 58305]]

[GRAPHIC] [TIFF OMITTED] TP11DE17.010

    In Table III-4, unit attributable costs are assumed to increase at 
1.0 percent per year, or 1.6 percent below the historical average. If 
the Postal Service increases prices at 2 percent above the class 
average and reduces the growth in unit attributable cost, the cost 
coverage exceeds 100 percent after 5 years.
    The Commission determines that requiring the Postal Service to 
increase the rate for any non-compensatory product by a minimum of 2 
percentage points above the percentage increase for the class is 
appropriate because it balances the need for mailers to pay reasonable 
rates with the need for the Postal Service to achieve cost reductions.
e. Proposed Regulatory Changes
    Proposed subpart F is added to 39 CFR part 3010 to address the 
issue of non-compensatory products and classes. Proposed Sec.  3010.200 
defines non-compensatory products as those for which the attributable 
costs for the product exceeded the product's revenue as determined by 
the most recent ACD.
    Proposed Sec.  3010.201 sets forth the rate setting criteria for 
non-compensatory products in classes for which overall class revenue 
exceeds overall class attributable cost.
    Existing Sec.  3010.20(e) is replaced by proposed Sec. Sec.  
3010.127(b) and 3010.129(g), which prohibit the reduction of rates of 
non-compensatory products.
f. Conclusion
    The proposed rate setting criteria applicable to non-compensatory 
products is necessary to achieve Objectives 1 and 8. Products that do 
not generate revenues that cover their attributable costs contribute to 
the system's inability to achieve reasonable and efficient prices. 
Gradual above-average increases to the prices of non-compensatory 
products will bring those products to full cost coverage over time and 
thereby achieve reasonable and efficient rates as envisioned by the 
PAEA. This proposed approach will also allow for continued pricing 
flexibility and consistent with the Commission's evaluation of the 
ratemaking system in Order No. 4257.
3. Non-Compensatory Classes
a. Introduction
    The Periodicals class has not covered its attributable costs since 
the enactment of the PAEA. FY 2016 ACD at 42. This is because the 
Periodicals class consists of only two products--In-County Periodicals 
and Outside County Periodicals--and each of those products is non-
compensatory. Id. at 45. Over the course of the PAEA era, cost coverage 
for the Periodicals class has generally declined--from 83.0 percent in 
FY 2007 to 73.7 percent in FY 2016. Id. at 42. The insufficient cost 
coverage for the Periodicals class has resulted in a negative 
contribution of more than $5 billion since FY 2007. Id. at 44. Also, 
the Package Services class contribution was negative from FY 2009 
through FY 2012. Order No. 4257 at 232-33. As a class, Package Services 
did not cover its attributable costs for 4 years during the PAEA era. 
Id. Non-compensatory products are not reasonably or efficiently priced 
and may threaten the financial integrity of the Postal Service because 
revenue from these products fails to cover costs. See id. 234-35, 139-
142. Non-compensatory classes are non-compensatory because they are 
dominated by non-compensatory products.
    Non-compensatory classes create unique problems in a ratemaking 
system that is limited to inflation-based increases applied at the 
class level. 39 U.S.C. 3622(d)(3)(A). Unless the Postal Service is able 
to constrain class costs to below the level of inflation, the coverage 
for the class cannot improve.
    If a non-compensatory product forms part of a class that is 
compensatory on the whole, then the rates for the non-compensatory 
product can be increased by a greater percentage than the compensatory 
products in that class while keeping the overall class increase within 
the price cap.
    But if, as with Periodicals, the entire class is non-compensatory, 
there is no opportunity to rebalance rates among products, because 
increasing the rates for one product generally requires offsetting 
decreases to the rates for other products, and there are no products 
with positive cost coverage against which such offsets can be made.\90\ 
In Order No. 4257, the Commission stated that non-compensatory mail 
classes threaten the financial integrity of the Postal Service. Order 
No. 4257 at 274. Accordingly, the Commission proposes modifications to 
the system of ratemaking that will grant additional rate authority to 
non-compensatory classes of mail in order to achieve the same goal 
articulated for non-compensatory products, i.e., to improve the cost 
coverage for such classes and to put the Postal Service on the path to 
having fully compensatory classes.
---------------------------------------------------------------------------

    \90\ As the Public Representative recognizes, the only exception 
to this general rule occurs when changes in the CPI-U index result 
in an increase in the cap for the class. PR Comments at 23. However, 
for the Periodicals class, in particular, these relatively small 
increases in the cap do not provide enough headroom for price 
increases that could provide meaningful improvement to the overall 
cost coverage for the class. Id.
---------------------------------------------------------------------------

b. Comments
    Several commenters proposed solutions for non-compensatory mail 
classes.
    The Postal Service asserts that the cost-coverage problems with 
regard to the Periodicals class are the result of a

[[Page 58306]]

complex set of factors, including the fact that the Periodicals class 
was already non-compensatory at the advent of the PAEA era when the 
price cap was imposed, mail volumes and density with regard to 
Periodicals is declining, and changes in mailer behavior have lowered 
unit revenue (such as reducing the weight and advertising content of 
mailings). Postal Service Comments at 132. The Postal Service asserts 
that the price cap has failed to supply pricing tools necessary for the 
Postal Service to face these challenges. Id. at 136. Because the price 
cap is imposed at the class level, the Postal Service maintains that it 
does not allow for the correction of an entire class which is non-
compensatory, such as Periodicals. Id. Therefore, the Postal Service 
urges the Commission to remove the price cap system altogether. Id. at 
138.
    The Public Representative recommends that the Commission ``[a]djust 
the price cap for Periodicals to give the Postal Service the 
opportunity to attempt improvements in cost coverages.'' PR Comments at 
33. The Public Representative states that raising the price cap for 
Periodicals would provide the Postal Service ``the pricing flexibility 
that Objective 4 [of the PAEA] was intended to achieve,'' without 
relieving the Postal Service of its ``obligation . . . to reduce costs 
or to increase efficiency.'' Id. at 56-57 (citing 39 U.S.C. 
3622(b)(4)).
    NNA states that in lieu of ``punitive'' price increases for the 
non-compensatory Periodicals class, both the In-County and Outside 
County Periodicals mail products could be made more efficient. NNA 
Comments at 24-25. NNA proposes specific revision to the worksharing 
price structure. Id. NNA opines that better data with regard to 
Periodicals are necessary before making any sweeping rate changes. Id. 
at 29. NNA does not recommend any changes to the price cap for non-
compensatory mail classes such as Periodicals.
    PSA maintains that the Periodicals class is being subsidized by 
other mail classes, resulting in rates which are not just and 
reasonable. PSA Comments at 4-5.
    SIIA maintains that ``any efforts to enhance pricing flexibility 
should take into consideration the impact this has on mailers, 
particularly if the flexibility is not strategically applied to 
accommodate the goals of rate predictability and long-term, sustainable 
cost-coverage objectives . . . .'' SIIA Comments at 8.
    ANM et al. state that ``[c]reating a blanket exception to the CPI 
cap for classes of mail or products merely because they reportedly fail 
to cover attributable costs would be undesirable and unfair . . . .'' 
ANM et al. Comments at 75. ANM et al. maintain that ``the inability of 
certain products to recover their attributable costs is not evidence 
that the current system is failing to properly apportion costs . . . 
[because] the `underwater' condition of the [Periodicals] class is a 
function of excessive costs, not overly-constrained prices . . . .'' 
Id. at 76. According to ANM et al., ``[n]o system of ratemaking can 
entirely protect against poor business decisions . . . .'' Id. 
Moreover, ANM et al. urge the Commission to ``recognize that the 
`underwater' products and other products with higher coverage ratios 
are often complementary goods.'' Id. at 77. By way of example, ANM et 
al. state that ``subscriptions to periodicals mailed at Periodicals 
Mail rates generate large volumes of allied mailings (e.g., 
acknowledgments, renewal notices, invoices, and solicitations) that 
have much higher reported coverage ratios . . . [and which] offset[ ] 
most of the reported shortfall from Periodicals Mail.'' Id.
c. Proposed Commission Solution
    Because improved cost coverage for products within non-compensatory 
classes cannot be attained by rebalancing rates among products within 
such classes, the Commission proposes a solution that expands pricing 
authority for non-compensatory classes in order to allow for additional 
product-level rate increases within such classes. If the attributable 
cost for an entire class exceeds revenue for that class, the Commission 
proposes to provide 2 percentage points of additional rate authority 
for the class. Under the Commission's proposal, as part of the first 
generally applicable rate adjustment in a calendar year, the Postal 
Service, when seeking to raise rates for a non-compensatory class, must 
use all available rate authority for non-compensatory classes. This 
includes all CPI (proposed subpart C of 39 CFR part 3010), supplemental 
(proposed subpart D of 39 CFR part 3010), performance-based (proposed 
subpart E of 39 CFR part 3010), and banked rate authority up to the 2-
percent maximum (proposed subpart G of 39 CFR part 3010), plus the 
additional 2 percentage points provided for non-compensatory classes 
(proposed subpart F of 39 CFR part 3010). This proposal applies only if 
the Postal Service chooses to adjust rates for the non-compensatory 
class.
    If there are any products within a non-compensatory class for which 
product-level revenue exceeds the product-level attributable cost, then 
prices for such products may only be increased up to the amount of the 
class average. Moreover, the Commission proposes to prohibit the 
reduction of rates for non-compensatory products.
d. Commission Analysis of Alternatives
    Although the existing ratemaking system limits the Postal Service's 
pricing flexibility and ability to make efficient pricing decisions 
with respect to non-compensatory classes, removal of the price cap is 
not an appropriate solution. To create pricing predictability and 
stability, the ratemaking system must contain a mechanism that limits 
the magnitude of price adjustments. See Order No. 4257 at 103. 
Nevertheless, the Commission finds that to make no change to the price 
cap structure for the non-compensatory classes would continue the trend 
of negative class contribution and continue to hinder the achievement 
of Objective 1 (maximize incentives to increase pricing efficiency), 
Objective 5 (assure adequate revenues, including retained earnings, to 
maintain financial stability), and Objective 8 (establishing and 
maintaining reasonable rates). See 39 U.S.C. 3622(b)(1), (5), and (8).
    The Commission's proposed solution does not mandate immediate full 
cost coverage for non-compensatory classes, but it does seek to narrow 
the coverage gap and move prices towards full cost coverage over time. 
Further, given the substantial increase needed for the Periodicals 
class to cover its attributable cost, the proposed 2-percentage point 
increase represents an appropriate mechanism for improving cost 
coverage while simultaneously maintaining stability and predictability 
in rates, as required by Objective 2. See 39 U.S.C. 3622(b)(2). Both 
the Postal Service and the mailing community will know, through the 
ACD, which classes are non-compensatory and thus subject to a 2-
percentage point rate increase in class-level rate authority.
    The Commission determines that a requirement that the Postal 
Service increase the rates for any non-compensatory class by an 
additional 2 percentage points is appropriate because it balances the 
need for mailers to pay a more reasonable rate with the need for the 
Postal Service to achieve cost reductions and improvements in 
operational efficiency.
e. Proposed Regulatory Changes
    Proposed subpart F is added to 39 CFR part 3010 to address the 
issue of non-compensatory products and classes. Proposed Sec.  3010.200 
defines non-compensatory classes of mail as those for which 
attributable costs for the class

[[Page 58307]]

exceed revenue derived from the class as determined by the most recent 
ACD.
    Proposed Sec.  3010.202(a) provides for 2 percentage points of 
additional rate authority for a non-compensatory class. Proposed Sec.  
3010.202(b) sets forth the rate setting criteria that applies if the 
Postal Service chooses to adjust rates for a non-compensatory class.
    Proposed Sec.  3010.202(c) describes the requirements applicable to 
the availability, calculation, and use of the 2 percentage points of 
additional rate authority for a non-compensatory class.
    Existing Sec.  3010.20(e) is replaced by proposed Sec. Sec.  
3010.127(b) and 3010.129(g), which prohibit the reduction of rates of 
non-compensatory products.
f. Conclusion
    The proposed increase in class-level rate authority applicable to 
non-compensatory classes is necessary to achieve Objectives 1 and 8. 
Non-compensatory classes are dominated by non-compensatory products. 
For these classes to generate revenues that cover their attributable 
costs, the products within them must have prices that are reasonable 
and efficient prices. However, non-compensatory classes could not be 
addressed with the same solution as for non-compensatory products in 
compensatory classes because the price cap is applied at the class 
level. An increase in the class-level rate authority for non-
compensatory classes will gradually move the prices of non-compensatory 
products within non-compensatory classes to the cost coverage over 
time, thereby achieving reasonable and efficient rates as envisioned by 
the PAEA. This proposed approach is necessary to achieve Objectives 1 
and 8 and is consistent with the Commission's analysis of the other 
objectives in Order No. 4257.

F. Workshare Discounts

1. Introduction
    The PAEA aimed to allow the Postal Service pricing flexibility 
while increasing pricing efficiency. See Order No. 4257 at 48, 144-45. 
Pricing efficiency is required by Objective 1's directive to ``maximize 
incentives to reduce costs and increase efficiency.'' Id. at 130 
(quoting 39 U.S.C. 3622(b)(1)). The ratemaking system achieves pricing 
efficiency when prices adhere as closely as practicable to ECP. Id. at 
136. Under ECP, price differences should equal as closely as 
practicable cost differences. See id. at 130-31. Although the Postal 
Service had the ability to adhere to ECP, even under a price cap, the 
Commission's analysis demonstrates that during the PAEA era, the Postal 
Service chose not to price according to ECP. Id. at 139. Specifically, 
the Postal Service failed to set most workshare discounts in accordance 
with ECP during the 10 years following enactment of the PAEA. Id. at 
136-38. In the remainder of this section, the Commission summarizes the 
existing requirements relating to workshare discounts and discusses how 
the existing ratemaking system did not produce workshare discounts that 
adhere to ECP.
    Workshare discounts are rate discounts that the Postal Service 
provides to mailers for presorting, prebarcoding, handling, or 
transporting mail. 39 U.S.C. 3622(e)(1). Workshare discounts reduce 
prices for mailpieces that are prepared or inducted in a manner that 
allows the Postal Service to avoid certain activities that it would 
have otherwise performed. The Commission must ``ensure that [workshare] 
discounts do not exceed the cost that the Postal Service avoids as a 
result of workshare activity'' (avoided cost) unless certain exceptions 
are met. 39 U.S.C. 3622(e)(2).
    The Commission reviews workshare discounts for compliance with 
section 3622(e) both before and after their implementation. The 
Commission's pre-implementation review of proposed workshare discounts 
occurs during rate adjustment proceedings. Existing Sec.  3010.12(b)(6) 
requires the Postal Service to justify that a statutory exception 
applies to any proposed workshare discount that exceeds its avoided 
costs. Under this existing rule, the Postal Service must 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.
    The Commission completes its post-implementation review for 
compliance with 39 U.S.C. 3622(e) in the ACD at the end of each fiscal 
year. Existing Sec.  3050.20(c) requires the Postal Service's ACR to 
address discounts greater than avoided costs. Existing Sec.  3050.24 
requires the Postal Service to file documentation that supports its 
avoided cost estimates.
    In both pre- and post-implementation reviews, the Commission 
ascertains compliance with 39 U.S.C. 3622(e) by evaluating the 
workshare discount's passthrough.\91\ When a workshare discount equals 
avoided cost, the passthrough equals 100 percent. If a workshare 
discount is less than the avoided cost, then the passthrough is below 
100 percent. Conversely, if a workshare discount is greater than the 
avoided cost, then the passthrough is above 100 percent.
---------------------------------------------------------------------------

    \91\ Passthroughs represent the relationship between the amount 
of the workshare discount and the avoided cost as a percentage. A 
workshare discount's passthrough percentage is determined by 
dividing the workshare discount by costs avoided and expressing the 
result as a percentage. For example, if the Postal Service offers a 
discount of $0.05 for mailers to presort mailpieces and this 
presorting permits the Postal Service to avoid $0.04 in cost, then 
the worksharing passthrough is 125 percent (0.05/0.04 = 1.25 = 125 
percent).
---------------------------------------------------------------------------

    To adhere to ECP, 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. Order No. 4257 at 131. Using 
ECP to set workshare discounts would produce passthroughs equal to 100 
percent. Id. However, most workshare discounts during the PAEA era have 
been set substantially above or substantially below 100 percent. Id. at 
136-38. The Postal Service's failure to set workshare discounts in 
accordance with ECP demonstrates that the existing ratemaking system 
has not increased pricing efficiency, as intended by the PAEA. Id. at 
145.
    Workshare discounts set substantially above or substantially below 
avoided costs are problematic because they send inefficient price 
signals to mailers and therefore reduce productive efficiency in the 
postal sector.\92\ Specifically, inefficient pricing signals disrupt 
two sets of incentives--the incentives to the Postal Service to right-
size its network and the incentives to mailers to enter volume that 
best conforms to that network. See id. at 216-19. This disruption may 
take volume away from the least-cost producer, which may result in less 
efficient volume and decreased revenue for the Postal Service.\93\
---------------------------------------------------------------------------

    \92\ See, e.g., FY 2016 ACD at 1 (``Workshare discounts that 
exceed avoided costs adversely affect Postal Service finances 
because they incentivize mailers to perform worksharing that the 
Postal Service could have done on a less costly basis.''); Docket 
No. ACR2009, Annual Compliance Determination, March 29, 2010, at 76 
(observing that ``the combination of low and differential 
passthroughs [for Periodicals] may send conflicting price signals to 
mailers and prevent them from entering mail in a way that reduces 
the end-to-end cost''); Docket No. R2012-3, Order No. 987, Order on 
Price Adjustments for Market Dominant Products and Related Mail 
Classification Changes, November 22, 2011, at 12-13 (expressing 
concern that setting passthroughs inefficiently, by pricing to 
excess capacity, may ultimately send inefficient price signals and 
harm efficient Postal Service operations).
    \93\ ``[A]n integrated mail service will be produced most 
efficiently if its various components are provided by the least-cost 
producer.'' Order No. 4257 at 131 n.231 (quoting Docket No. RM2010-
13, Order No. 1320, Order Resolving Technical Issues Concerning the 
Calculation of Workshare Discounts, April 20, 2012, at 3).

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

[[Page 58308]]

2. Comments
    Several commenters recommend that the Commission require all 
workshare discount passthroughs to be set at or near 100 percent. Other 
commenters recommend retaining the existing requirements or suggest 
changes to accepted analytical principles.
a. Comments in Support of Setting all Workshare Discount Passthroughs 
Closer to 100 Percent
    Several commenters recommend that the Commission require the Postal 
Service to set workshare discounts at or near 100 percent of avoided 
costs.
    Pitney Bowes comments extensively on this issue and favors the 
Commission establishing a soft floor for workshare discounts to provide 
additional incentives for the Postal Service to reduce costs and 
increase efficiency. Pitney Bowes Comments at 3. Specifically, Pitney 
Bowes recommends that the soft floor require the Postal Service to set 
workshare discounts at, or as close as possible to, avoided costs 
subject to clearly defined and limited exceptions. Id. It asserts that 
a soft floor would promote productive efficiency by incentivizing the 
least cost provider to perform the work. Id. at 19. It contends that a 
soft floor would ensure that mailers and mail service providers were 
fully compensated for the work they perform and send more efficient 
pricing signals that will help grow mail and reduce costs. Id. at 13-
14. It maintains that establishing a soft floor for workshare discounts 
would help achieve several objectives and factors appearing in 39 
U.S.C. 3622(b) and (c) without unduly conflicting with or affecting 
others. Id. at 16-22. It notes that the Commission made a similar 
recommendation in its most recent Section 701 Report. Id. at 4, 10, 20. 
In support of Pitney Bowes' proposal, Professor John C. Panzar 
recommends that the Commission require the Postal Service to adhere to 
ECP by setting workshare discounts equal to, or as close as practicable 
to, 100 percent of avoided costs. Panzar Statement at 14. He asserts 
that doing so would promote efficiency and just and reasonable rates 
without unduly limiting the Postal Service's pricing flexibility. Id. 
at 1, 2, 14.
    Other commenters also support the Commission tightening 
requirements for the Postal Service to set workshare discounts at or 
near 100 percent of avoided costs. PSA also favors establishing a soft 
floor. PSA Comments at 5. MMA et al. suggest that the Commission modify 
existing Sec.  3010.2(b)(6) to require the Postal Service to pass 
through 100 percent of costs avoided unless a sound justification 
exists for not doing so. MMA et al. Comments at 70-72. They contend 
that this rule change would be consistent with ECP and would maximize 
efficiency and reduce costs. Id. at 71-72. Similarly, ABA asserts that 
setting workshare discounts at 100 percent of avoided costs promotes 
efficiency and a more just and reasonable rate schedule without unduly 
constraining the Postal Service's pricing flexibility. ABA Comments at 
11.
    Chairman of the House Oversight and Government Reform Committee 
Jason Chaffetz and Chairman of the Government Operations Subcommittee 
Mark Meadows comment that both the Postal Service and the mailing 
industry would benefit by having workshare discounts set equal to 
avoided costs. Chairman Chaffetz and Chairman Meadows Comments at 2. 
They assert that setting discounts below avoided costs ``discourages 
the mailing industry from performing work more cost-effectively than 
the Postal Service.'' Id. LSC also recommends moving many existing 
workshare discounts as close to 100 percent passthrough as is feasible 
to incentivize mailer participation and reduce the Postal Service's 
costs. LSC Comments at 1. ANM et al. recommend setting workshare 
discounts at 100 percent of avoided costs to encourage more co-mailing 
and co-binding, which would help enable Periodicals and flat-shaped 
USPS Marketing Mail to cover their attributable costs. ANM et al. 
Comments at 11-12, 56, 82.
b. Comments in Support of Retaining the Existing Rules
    Other commenters recommend against changing workshare discount 
requirements in this proceeding. The Postal Service asserts that there 
is inadequate economic justification to base workshare discounts solely 
on ECP cost avoidances. Postal Service Comments at 232. It contends 
that ``[w]hile ECP may advance the achievement of Objective 1 in some 
respects (as well as take into account Factor 5),'' requiring all 
workshare discounts to fully conform to ECP would not appropriately 
balance the objectives because it would ``largely vitiate the Postal 
Service's pricing flexibility.'' Id. at 230, 232. Similarly, GCA states 
that ``those objectives and factors [in section 3622(b) and (c)] would 
be best served by preserving the Commission's treatment of 
worksharing.'' GCA Comments at 50.
c. Comments Suggesting Changes to Accepted Analytical Principles 
Related to Workshare Discounts
    Some commenters suggest changes to accepted analytical principles 
relating to workshare discounts. MMA et al. recommend applying 
workshare discounts only within a product--specifically to sever the 
link between First-Class Mail Single-Piece Letters/Postcards and 
workshare discounts for First-Class Mail Presorted Letters/Postcards. 
MMA et al. Comments at 66-70. GCA recommends that the Commission 
consider using a 3-year moving average of cost avoidances to smooth out 
cost fluctuations. GCA Comments at 15. Expressing concern with the 
accuracy of the accepted postal cost accounting system, ACMA recommends 
considering the volatility of passthroughs when determining how close 
to 100 percent a workshare discount is set. ACMA Comments at 2-3.
3. Proposed Commission Solution
    The Commission proposes rules to phase out two practices that harm 
pricing efficiency: Workshare discounts set substantially below avoided 
costs and workshare discounts set substantially above avoided costs.
    Therefore, the proposed rules establish bands--ranges with upper 
and lower limits--for workshare discount passthroughs. A passthrough 
must fall within the applicable band to be compliant. All passthroughs 
that fall outside of the applicable band would be noncompliant, subject 
to a 3-year grace period commencing from the effective date of these 
rules or when a new workshare discount is established.
    The proposed rules promote ECP and help the ratemaking system to 
maximize incentives to increase efficiency by incentivizing the Postal 
Service to set workshare discount passthroughs closer to 100 percent in 
accordance with Objective 1. See 39 U.S.C. 3622(b)(1). Also, consistent 
with Objective 4 (to allow pricing flexibility), the bands allow the 
Postal Service discretion to set passthroughs within the applicable 
band. See 39 U.S.C. 3622(b)(4). The bands also accommodate the concerns 
related to excessive workshare discounts referenced in the PAEA. See 39 
U.S.C. 3622(e)(2). As described below, the proposed upper and lower 
limits applicable to each band provide a sufficient range for compliant 
passthroughs to encompass most fluctuations in cost avoidance and 
mitigate rate shock.
    The Commission proposes two bands--one for Periodicals and one for

[[Page 58309]]

all other classes. For Periodicals, passthroughs must range between 75 
percent and 125 percent. For all other classes, passthroughs must range 
between 85 percent and 115 percent. The wider band for Periodicals 
takes into account the wider variance observed in passthroughs for 
Periodicals and ``the educational, cultural, scientific, or 
informational value'' of those mailpieces. See 39 U.S.C. 3622(c)(11) 
and (e)(2)(C).
    The proposed ranges for each band are supported by an empirical 
analysis. Comparing the passthroughs in the first proceeding (Docket 
No. R2008-1) and in the most recent proceeding (Docket No. R2017-1) to 
adjust rates for all classes in the PAEA era demonstrates how 
passthroughs have become increasingly inconsistent with ECP over the 
PAEA era, especially for Periodicals.
    With respect to passthroughs for Periodicals, in Docket No. R2008-
1, 14 of 27 conformed to the proposed Periodicals band, ranging from 75 
to 125 percent. Eleven of 27 Periodicals passthroughs set in that 
proceeding fell below the proposed band, and 2 of 27 were above the 
proposed band. By contrast, in Docket No. R2017-1, most passthroughs 
for Periodicals did not conform to the proposed band. In Docket No. 
R2017-1, 7 of 28 of the passthroughs for Periodicals conformed to the 
proposed band. Fourteen of 28 of the Periodicals passthroughs set in 
Docket No. R2017-1 fell below the proposed band and 7 of 28 were above 
the proposed band.
    With respect to passthroughs for all other classes with workshare 
discounts--First-Class Mail, USPS Marketing Mail, and Package 
Services--in Docket No. R2008-1, 46 of 69 passthroughs conformed to the 
proposed band, ranging from 85 to 115 percent. The passthroughs outside 
of the proposed band were nearly evenly distributed. Eleven of 69 of 
the passthroughs fell below the proposed band, and 12 of 69 were above 
the proposed band. By contrast, in Docket No. R2017-1, most 
passthroughs for First-Class Mail, USPS Marketing Mail, and Package 
Services did not conform to the proposed band. In Docket No. R2017-1, 
20 of 75 these passthroughs conformed to the proposed band. Thirty-
seven of 75 of the passthroughs fell below the proposed band, and 18 of 
75 were above the proposed band.
    Comparing the passthroughs set in these two proceedings also 
demonstrates that more passthroughs have moved below 100 percent. The 
median passthrough for Periodicals declined from 89 percent in Docket 
No. R2008-1 to 75 percent in Docket No. R2017-1. The median passthrough 
for all other classes declined from 97 percent in Docket No. R2008-1 to 
85 percent in Docket No. R2017-1.
    Because most workshare discount passthroughs fell within the 
proposed bands during the first rate proceeding under the PAEA, phasing 
out passthroughs that fall outside the range for each proposed band 
over a limited period of time appears to be a reasonable and achievable 
method to promote ECP. Moreover, based on an analysis of the percentage 
change in cost avoidances between ACDs, the Commission found that a 
majority of these changes fell within the proposed bands. This confirms 
that the ranges for the proposed bands are sufficient to encompass most 
fluctuations in cost avoidance. Therefore, the Commission proposes the 
bands with ranges of plus or minus 25 percent for Periodicals and plus 
or minus 15 percent for all other classes, subject to a 3-year grace 
period.
    The 3-year grace period is consistent with the PAEA's direction to 
phase out excessive workshare discounts over a limited period of time. 
See 39 U.S.C. 3622(e)(2). Based on an analysis of current workshare 
discounts and projections of potential outcomes, the Commission 
determines that 3 years is an appropriate amount of time for the Postal 
Service to phase out workshare discounts set substantially above or 
substantially below avoided costs without creating rate shock.
    For all existing passthroughs, the Postal Service will have 3 years 
after the proposed rules go into effect to adjust the passthroughs to 
comply with the applicable band. If the Postal Service establishes a 
new workshare discount after the proposed rules become effective that 
does not comply with the applicable band, the Postal Service will have 
3 years after establishing the new workshare discount to adjust the 
passthrough to comply with the applicable band.\94\ A grace period for 
workshare discounts established after the proposed rules go into effect 
is necessary because new workshare discounts would be based on 
estimated avoided cost data that will become more reliable in later 
years.
---------------------------------------------------------------------------

    \94\ The Postal Service must also continue to submit a detailed 
report to the Commission as required by 39 U.S.C. 3622(e)(4).
---------------------------------------------------------------------------

    For both current and new workshare discounts, the proposed rules 
require the Postal Service to submit a plan to bring passthroughs into 
compliance with the applicable band in each rate adjustment filed 
during the grace period. After the grace period expires, any workshare 
discounts outside the applicable band would be noncompliant.
4. Commission Analysis of Alternatives
    Based on a determination that the existing ratemaking system did 
not achieve pricing efficiency, the Commission declines to retain the 
existing rules relating to workshare discounts.
    The Commission also declines to require that all passthroughs be 
set at exactly 100 percent. Although such a rule would be consistent 
with ECP, the proposed rules incorporate the concerns of commenters 
regarding fluctuations in cost avoidance and continue to allow the 
Postal Service some pricing flexibility with regard to workshare 
discounts by establishing bands of compliant passthroughs. Establishing 
bands (plus or minus 25 percent for Periodicals and plus or minus 15 
percent for all other classes) incorporates the suggestions of 
commenters to incentivize the Postal Service to set workshare discounts 
closer to 100 percent of avoided costs. The lower limits applicable to 
the proposed bands (75 percent for Periodicals and 85 percent for all 
other classes) incorporate the suggestions that passthroughs adhere to 
a ``soft floor.''
    The suggested changes to accepted analytical principles related to 
workshare discounts fall outside of the scope of this proceeding. This 
proceeding focuses on proposing rules as necessary for the ratemaking 
system to achieve the objectives in 39 U.S.C. 3622(b). The standard for 
changing accepted analytical principles differs. Accepted analytical 
principles may be changed to improve the quality, accuracy, or 
completeness of the Postal Service data or analysis underlying the ACR. 
39 CFR 3050.11(a). Any interested person may petition the Commission to 
initiate a proceeding to consider changing accepted analytical 
principles. Id. The proponent of the change must identify the accepted 
analytical principal for review, explain any perceived deficiencies, 
and suggest remedies. 39 CFR 3050.11(b).
    The Commission declines to adopt GCA's suggestion to use a 3-year 
moving average of cost avoidances to smooth out cost fluctuations. This 
approach would place too much emphasis on avoiding rate shock while 
failing to produce workshare discounts that are calculated based on 
current prices and costs. Instead, the Commission's approach proposed 
in this proceeding--bands for passthrough compliance after a 3-year 
grace period--will encompass most cost avoidance fluctuations and

[[Page 58310]]

encourage the improvement of costing data.
5. Proposed Regulatory Changes
    The Commission has considered the comments and the foregoing 
analysis in developing proposed subpart I to 39 CFR part 3010. Proposed 
Sec.  3010.260 explains the applicability of proposed subpart I. 
Proposed Sec.  3010.261 sets forth the upper and lower limits for 
passthroughs applicable to each class. Proposed Sec.  3010.262 provides 
for a 3-year grace period to bring noncompliant passthroughs (existing 
and new) into compliance with the applicable band. Proposed Sec.  
3010.262 also requires the Postal Service to submit a plan to bring the 
noncompliant passthroughs into compliance with the applicable band. To 
conform with this proposed change, the Commission proposes to delete 
existing Sec.  3010.12(b)(6). To reflect the deletion of Sec.  
3010.12(b)(6), the Commission also proposes a conforming deletion in 
Sec.  3050.20(c).
    Proposed Sec.  3010.123(f) retains existing Sec.  3010.12(b)(5)'s 
requirements for the schedule of workshare discounts. Proposed Sec.  
3010.123(g) retains existing Sec.  3010.12(c)'s requirements pertaining 
to the contents of a Postal Service's request to review a notice of 
rate adjustment that establishes a new workshare discount.
6. Conclusion
    The proposal to require that workshare discount passthroughs 
conform to the applicable bands, subject to a 3-year grace period, is 
necessary to achieve Objective 1. Workshare discounts set substantially 
above or below avoided costs send inefficient pricing signals and are 
inconsistent with ECP. Such discounts contribute to the system having 
not achieved efficient prices, which may have contributed to the Postal 
Service's poor financial health by disrupting incentives for the Postal 
Service to right size its network and for mailers to enter volume that 
best conforms to the network. Proposed subpart I requires the Postal 
Service to gradually phase out these problematic practices and set more 
efficient prices. This proposed approach will also allow for continued 
pricing flexibility for the Postal Service.

G. Procedural Improvements

1. Introduction
    The Commission proposes two procedural changes to improve the 
ratemaking process relating to planned rate adjustments of general 
applicability. These proposed changes are within the scope of the 
Commission's general authority to revise its regulations. 39 U.S.C. 
3622(a); 39 U.S.C. 503. These proposed procedural changes are 
consistent with the Commission's review in Order No. 4257 and take into 
account the comments received in this proceeding. Therefore, the 
Commission sees no detriment to proposing these procedural changes in 
this docket. First, the Commission proposes to improve the requirements 
relating to the schedule for regular and predictable rate adjustments. 
Second, the Commission proposes to lengthen the notice period for rate 
adjustments and make conforming adjustments to the timing of comments 
and the Commission's decision.
2. Schedule for Regular and Predictable Rate Adjustments
a. Introduction
    In Order No. 4257, the Commission determined that the ratemaking 
system must have a mechanism that limits the magnitude of price 
adjustments and is sufficiently transparent to allow for mailers to 
understand how the limitation mechanism works. Order No. 4257 at 103. 
Existing Sec.  3010.9(e) requires the schedule for regular and 
predictable rate adjustments to be updated ``[w]henever the Postal 
Service deems it appropriate.'' 39 CFR 3010.9(e). Over the past 10 
years, the Postal Service has, for the most part, filed its notices of 
rate adjustments on predictable and consistent schedules. Order No. 
4257 at 61, 143. Where it has deviated from those schedules, such 
deviations have been based on external factors from which a mailer or 
postal customer could reasonably forecast the potential effect on the 
timing of price adjustments. Id. In this section, the Commission 
considers potential procedural improvements.
b. Comments
    In conjunction with its recommendation to eliminate the price cap, 
the Postal Service suggests that the Commission require the Postal 
Service to give mailers guidance regarding the timing and magnitude of 
rate increases at the class and product level, before filing a specific 
rate docket. Postal Service Comments at 14, 202. Under its proposed 
forward guidance regime, the Postal Service proposes to provide 
information in accordance with the following schedule:

         Table III-5--Proposed Postal Service Schedule of Information Relating to Planned Rate Increases
----------------------------------------------------------------------------------------------------------------
                                                Months before
                    Stage                      implementation   Information to be provided by the Postal Service
                                              of rate increase
----------------------------------------------------------------------------------------------------------------
1...........................................                12  Planned target date of planned rate change.
2...........................................                 9  Planned percentage change in rates by class.
3...........................................                 6  Planned percentage change in rates by product
                                                                 and structural changes.
4...........................................                 3  Notice of specific rates and structural changes.
----------------------------------------------------------------------------------------------------------------

Id. at 204-05. At stages 2 through 4, the Postal Service also proposes 
to address the prior information provided by either affirming or 
revising (and explaining the reason for any deviations). Id.
    Other commenters did not put forth specific proposals concerning 
the schedule of rate adjustments. Generally, commenters discuss the 
business need to accurately budget for postage rate increases. For 
instance, Publishers Clearing House notes that it attempts to forecast 
postage increases to establish 3-year budget outlooks.\95\ SMC observes 
that annual rate adjustments have created consistency in budget 
planning

[[Page 58311]]

for advertising mailers. SMC Comments at 7.
---------------------------------------------------------------------------

    \95\ Joint Declarations, Declaration of Wendy Smith on Behalf of 
Publishers Clearing House, at 2.
---------------------------------------------------------------------------

c. Proposed Commission Solution
    The Commission proposes to enhance the schedule of regular and 
predictable rate adjustments. The Commission proposes to require the 
Postal Service to update the schedule at least once a year (at a 
minimum, at the time of filing the ACR). The Commission proposes to 
require that the schedule contain plans to adjust rates that may occur 
over the next 3 years, at a minimum. Specifically, the Postal Service 
must include the estimated filing and implementation dates (month and 
year) and an explanation that will allow mailers to predict with 
reasonable accuracy, by class, the amounts of planned rate adjustments. 
The Postal Service will retain the flexibility to provide a new 
schedule at any time. It may also deviate from the anticipated rate 
changes if it explains the reason for the deviation in its request to 
the Commission to review its notice of rate adjustment.
    Requiring regular annual updates of the planned timing and 
magnitude of rate adjustments over a 3-year period would improve the 
mailing community's ability to plan budgets. The proposed changes to 
the schedule are also consistent with the Postal Service's current 
business practices to keep key stakeholders informed of planned rate 
changes outside of the ratemaking process. For instance, the Postal 
Service issued a press release in November 2009 announcing that it 
would not adjust market dominant rates in Calendar Year 2010.\96\ Also, 
in July 2016, the Postal Service shared its plans to implement price 
adjustments in January 2017 with members of the industry.\97\ 
Consistent with those continuing efforts, the proposed rule aims to 
improve accessibility of information for all mailers and minimize the 
need for mailers to refer to other materials. Therefore, the proposed 
changes also improve transparency by ensuring that the Commission and 
the public are aware of the Postal Service's current intent concerning 
future rate adjustments. The changes are also consistent with the 
Commission's review of the ratemaking process in Order No. 4257. See 
Order No. 4257 at 52-85, 142-46.
---------------------------------------------------------------------------

    \96\ U.S. Postal Service Announces 2010 Shipping Prices: Price 
of First-Class Postage Will Not Change, November 4, 2009, at 1.
    \97\ USPS 2017 Postal Pricing Considerations, QuadGraphics, July 
25, 2016, available at https://www.qg.com/blog/usps-2017-postal-pricing-considerations.
---------------------------------------------------------------------------

d. Commission Analysis of Alternatives
    The Commission proposes to improve the transparency of planned rate 
adjustments while retaining a mechanism that limits the magnitude of 
price adjustments. The Commission considers the Postal Service's 
representations about its capability to predict rate adjustments and 
the needs of mailers to have helpful information to plan their budgets 
in proposing this rule.
e. Proposed Regulatory Changes
    The Commission proposes to replace existing Sec.  3010.9 with 
proposed Sec.  3010.102.
f. Conclusion
    Pursuant to its general authority to revise its regulations under 
39 U.S.C. 3622(a) and 503, the Commission proposes changes to the 
schedule to improve transparency.
3. Revised Procedural Schedule for Rate Adjustment Proceedings
a. Introduction
    In Order No. 4257, the Commission determined that rate adjustment 
proceedings were able to be consistently adjudicated within 90 days. 
Order No. 4257 at 72. In each of the eight proceedings requesting to 
adjust rates for all classes during the PAEA era, the Postal Service 
filed its initial request to the Commission to review its notice of 
rate adjustment at least 90 days before the planned implementation date 
of each rate adjustment. Id. at 63. On average, the duration of 
Commission review of the eight large-scale rate proceedings in the PAEA 
era has been 62 days. Id. at 72. In six of these eight large-scale rate 
proceedings, there were significant issues with the Postal Service's 
rate adjustment filings resulting in durations of between 58 and 112 
days. Id.
    On average, the Commission sought additional information at least 
once in small-scale rate proceedings, resulting in an average duration 
of 37 days for Commission review of small-scale rate proceedings in the 
PAEA era. Id. at 75, 98. Longer review periods were due to the 
deficiencies in the Postal Service's filings that required correction 
to resolve the proceedings. Id. at 98. In the remainder of this 
section, the Commission considers potential procedural improvements.
b. Comments
    In conjunction with its recommendation to eliminate the price cap, 
the Postal Service committed to continuing to provide at least 90 days' 
advance notice of planned rate adjustments. Postal Service Comments at 
202, 206 n.398. Specifically, the Postal Service proposes establishing 
a requirement to provide notice of specific rate and structural changes 
3 months prior to the planned implementation date. Id. at 205.
    Other commenters did not put forth specific proposals concerning 
the notice requirement. While urging the Commission to retain a price 
cap system, MMA et al. favor the Postal Service's practice of providing 
more than 45 days advance notice of planned rate increases. MMA et al. 
Comments at 27. Similarly, SMC observes that the 90-day notice period 
corresponds with mailers' budget planning. SMC Comments at 7. Also, 
SIIA notes that its members plan their budgets early in the year. SIIA 
Comments at 7.
c. Proposed Commission Solution
    To facilitate the administration of rate adjustment proceedings, 
the Commission proposes to extend the notice period from 45 days to 90 
days prior to the planned implementation of rates. This proposed change 
codifies the existing practice. Requiring 90-days' advance notice of 
the specific rate and structural changes should facilitate mailers' 
ability to generate budgets. It also allows adequate time for the 
proceeding to be adjudicated, including potential changes, while still 
giving mailers time to implement the planned rates on the planned date.
    Commensurate with extending the notice period, the Commission also 
proposes to extend the deadline to comment on an initial request from 
20 days to 30 days. Allowing commenters 10 additional days to formulate 
comments will facilitate meaningful and intelligent participation by 
interested persons. The Commission also extends the deadline to comment 
on an amended request from 7 days to 10 days. These proposed durations 
are consistent with extensions to the comment period made in prior 
proceedings.
    Commensurate with extending the notice period and the comment 
period, the Commission also proposes to lengthen the time for the 
Commission to render its decision from 14 days to 21 days after the 
conclusion of the comment period (for both an initial and an amended 
request). These proposed changes will better allow the Commission to 
evaluate each rate proceeding.
    The Commission also proposes to enumerate potential actions that it 
may take if the Commission determines that the Postal Service's request 
fails to

[[Page 58312]]

contain the information required by the rules appearing in proposed 
Sec. Sec.  3010.122 and 3010.123, which prescribe the contents of a 
request and the required supporting technical documentation. The 
Commission may: inform the Postal Service of the deficiencies and 
provide an opportunity for the Postal Service to take corrective 
action, toll or otherwise modify the procedural schedule until the 
Postal Service takes corrective action, dismiss the request without 
prejudice, or take other appropriate action. This proposed change 
codifies existing Commission practice, which will facilitate the 
Commission's ability to ensure that the initial Postal Service request 
complies with the relevant statutory and regulatory requirements. This 
proposed change will also better ensure that commenters and the 
Commission have accurate and complete information at the beginning of a 
rate proceeding.
    Cumulatively, these changes remain consistent with the streamlined 
duration of rate review in the PAEA era. The changes are also 
consistent with the Commission's review of the ratemaking process in 
Order No. 4257. See Order No. 4257 at 52-85, 142-46.
    Rate adjustments that only propose to establish or change rates for 
market dominant NSAs (denoted as Type 2 Rate Adjustments under existing 
Sec.  3010.7) or only to adjust rates due to extraordinary or 
exceptional circumstances (denoted as Type 3 Rate Adjustments under 
existing Sec.  3010.8) remain unaffected by these proposed procedural 
changes.
d. Commission Analysis of Alternatives
    The Commission proposes to improve the transparency of planned rate 
adjustments while retaining a mechanism that limits the magnitude of 
price adjustments. The Commission has considered the Postal Service's 
commitments to providing at least 90 days' advance notice of planned 
rate adjustments and the needs of mailers to have helpful information 
to plan their budgets in proposing this rule.
e. Proposed Regulatory Changes
    The Commission proposes to replace existing Sec. Sec.  3010.10 and 
3010.11, which contain the existing timing requirements for notice, 
comments, and Commission decision, with the following proposed rules.
    Proposed Sec.  3010.121 extends the periods for the Postal Service 
to provide public notice and submit a request to the Commission to 
review its notice of rate adjustment from 45 days to 90 days. Proposed 
Sec.  3010.122(b) contains a conforming change concerning the 
representation of compliance with the public notice requirement.
    Proposed Sec.  3010.124(f) contains the revised timeframe allowing 
30 days for public comment on the initial request. Proposed Sec.  
3010.126(b) contains the revised timeframe stating that the Commission 
decision will be issued within 21 days after the conclusion of the 
comment period.
    Proposed Sec.  3010.126(a) states that if the Commission determines 
that the Postal Service's request fails to contain the required 
information, the Commission may: Provide an opportunity for the Postal 
Service to take corrective action, toll or otherwise modify the 
procedural schedule until the Postal Service takes corrective action, 
dismiss the request without prejudice, or take other action as deemed 
appropriate by the Commission.
    Proposed Sec.  3010.126(f) contains the revised timeframe allowing 
10 days for public comment on an amended request. Proposed Sec.  
3010.126(g) contains the revised timeframe stating that the Commission 
decision will be issued within 21 days after the conclusion of the 
comment period. Proposed Sec.  3010.126(h) provides that no amended 
rate may take effect until 45 days after the Postal Service's amended 
request.
f. Conclusion
    Pursuant to its general authority to revise its regulations under 
39 U.S.C. 3622(a) and 503, the Commission proposes changes to the 
notice requirement (and the conforming changes to other procedural 
requirements) to facilitate the administration of rate proceedings.

IV. Description of Proposed Changes to Rules Appearing in the Code of 
Federal Regulations

A. Introduction

1. Affected Sections
    The rules in 39 CFR part 3010, subparts A, B, C, and E. (existing 
Sec. Sec.  3010.1 et seq., 3010.10 et seq., 3010.20 et seq., and 
3010.60 et seq.) are replaced in their entirety by new rules that 
appear in new subparts A, B, C, D, E, F, G, H, and I (proposed 
Sec. Sec.  3010.100 et seq., 3010.120 et seq., 3010.140 et seq., 
3010.160 et seq., 3010.180 et seq., 3010.200 et seq., 3010.220 et seq., 
3010.240 et seq., and 3010.260 et seq.). Rules specific to NSAs 
appearing in 39 CFR part 3010, subpart D (existing Sec.  3010.40 et 
seq.) are moved to new 39 CFR part 3020, subpart G (proposed Sec.  
3020.120 et seq.). Minor changes are proposed in existing Sec. Sec.  
3050.20(c) and 3055.2(c). The proposed rules appear after the signature 
of this Order in Attachment A.
2. General Restructuring
    The new rules, as proposed, perform two functions: they implement 
the findings of this docket, and they utilize a simpler format that 
should be more readable, and thus, more user-friendly than the current 
rules. The discussions of the structure of the proposed rules and the 
line-by-line descriptions of the proposed rules explain how the 
findings of this docket have been implemented. See section IV, infra. 
The steps taken to simplify the format of the rules are addressed 
first.
    The most significant simplification is a change in terminology. The 
current rules classify rate adjustments as either Type 1-A, 1-B, 1-C, 
2, or 3. These rate adjustment types are associated with rate 
adjustments based on: the annual limitation only, the annual limitation 
and unused rate authority, a rate decrease only, an NSA, or an exigent 
circumstance. The use of the ``Type'' terminology, which is pervasive 
throughout the rules, both lengthens the rules (because each of these 
types must be defined) and makes the rules more difficult to understand 
(because the reader has to continuously refer back to the definitions 
to understand the rules). Furthermore, it is also apparent that the 
differences between Type 1-A, 1-B, and 1-C are in some instances 
nuanced and difficult to understand, and in some instances immaterial 
to the application of the rules.
    Thus, the proposed rules replace the ``Type'' terminology with 
straightforward descriptions that identify the intent of the 
proceeding. The rules replace the Type 1-A, 1-B, and 1-C terminology 
with a single type of proceeding simply referred to as ``rate 
adjustments'' (which include a limitation on rate increases). The Type 
3 terminology is replaced by rules governing ``rate adjustments due to 
extraordinary and exceptional circumstances.'' The Type 2 terminology 
is replaced by rules governing ``requests for market dominant [NSAs].'' 
The use of descriptive terms, instead of the ``Type'' terminology, is 
intended to improve the readability of the rules and make them more 
easily comprehendible.
    The other significant simplification is to remove most rules 
concerning market dominant NSAs from 39 CFR part 3010. This proposal is 
based on the substance of the current NSA rules. Except for rules 
regulating the treatment of volumes used in general rate adjustment 
calculations, the majority of the rules concern the Commission's 
initial review

[[Page 58313]]

of an NSA and do not directly address potential adjustments to existing 
NSA rates.
    Under the current rules, whenever the Postal Service proposes a new 
product (including a new NSA), it must first request that the product 
be added to the appropriate product list pursuant to the rules 
appearing in 39 CFR part 3020. Then, the NSA rules appearing in 39 CFR 
part 3010 are applied in addition to those already imposed by 39 CFR 
part 3020. Thus, it appears logical to combine both sets of rules 
within that same part, i.e., 39 CFR part 3020. This further allows for 
deletion of duplicative material that currently appears in both 39 CFR 
parts 3010 and 3020.
    In the event of rate adjustments for existing NSAs, under the 
proposed rules, the Postal Service should file pursuant to 39 CFR part 
3020, and not 39 CFR part 3010. These rate adjustments typically do not 
implicate the requirements of 39 CFR part 3010. The focus of the review 
will generally be on the statutory requirements of 39 U.S.C. 
3622(c)(10), which are implemented through the rules appearing in 39 
CFR part 3020.
    Several other minor simplifications are proposed. Some existing 
rules espouse aspirational goals, but fall short of imposing a 
requirement. For example, existing Sec.  3010.10(b) encourages the 
Postal Service to provide more than 45 days for public notice of rate 
adjustments. Other rules merely repeat statutory requirements without 
imposing any new regulatory requirements. For example, existing Sec.  
3010.40 merely restates the special classifications requirements 
appearing in 39 U.S.C. 3622(c)(10). The proposed rules attempt to 
eliminate this type of aspirational and duplicative language throughout 
the regulations.
    In certain areas, terminology is changed. For example, the current 
rules refer to each Postal Service request to review its notice as a 
``notice.'' The proposed rules only refer to a ``notice'' when 
referring to a document that is directed towards the public. This 
includes, for example, a ``notice'' published in the Federal Register 
alerting the public to a Commission proceeding, or the Postal Service's 
``notice'' to the public that it is adjusting rates. The term 
``request'' is used in the proposed rules to refer to the material 
submitted by the Postal Service to the Commission pursuant to rate 
adjustments. This material in fact acts as a Postal Service ``request'' 
for the Commission to review the Postal Service's ``notice'' of rate 
adjustment.
    The proposed modifications attempt to make other terminology 
consistent. An example is in the usage of the terminology ``unused rate 
authority,'' ``banked rate authority,'' and ``interim rate authority.'' 
Unused rate authority is the remaining amount of the maximum rate 
adjustment authority not used in any one rate adjustment proceeding. 
Banked rate adjustment authority is rate authority available for future 
rate adjustments. Interim rate authority is excess rate authority 
created when rate adjustments fall more than 12 months apart. Upon 
calculation of interim rate adjustment authority, it is immediately 
added to the bank for future use. Thus, it immediately becomes banked 
rate adjustment authority upon calculation.
3. Structure of the Proposed Rules
    Proposed 39 CFR part 3010, the rules governing the Regulation of 
Rates for Market Dominant Products, is organized into the following 
nine subparts:
     Subpart A--General Provisions;
     Subpart B--Rate Adjustments;
     Subpart C--Consumer Price Index Rate Authority;
     Subpart D--Supplemental Rate Authority;
     Subpart E--Performance-Based Rate Authority;
     Subpart F--Non-Compensatory Classes or Products;
     Subpart G--Accumulation of Unused and Disbursement of 
Banked Rate Adjustment Authority;
     Subpart H--Rate Adjustments Due to Extraordinary and 
Exceptional Circumstances; and
     Subpart I--Workshare Discounts.
    Proposed subpart A of 39 CFR part 3010 directs the reader to the 
appropriate starting point depending on the specific request of the 
Postal Service. For example, the reader is directed to proposed subpart 
B of 39 CFR part 3010 as the starting point to adjust market dominant 
rates of general applicability subject to the periodic limitations in 
rate increases. These are the typical, generally annual, rate 
adjustment proceedings. Proposed subpart B of 39 CFR part 3010 directs 
the reader to proposed subparts C through G of 39 CFR part 3010 to 
calculate the availability of rate adjustment authority in any one of 
these proceedings. There are five possible sources of rate adjustment 
authority: CPI (proposed subpart C of 39 CFR part 3010), supplemental 
(proposed subpart D of 39 CFR part 3010), performance-based (proposed 
subpart E of 39 CFR part 3010), non-compensatory (proposed subpart F of 
39 CFR part 3010), and banked rate (proposed subpart G of 39 CFR part 
3010).
    For rate adjustments due to extraordinary and exceptional 
circumstances, the reader is directed to proposed subpart H of 39 CFR 
part 3010 as the starting point. Subject to the special procedures and 
requirements appearing in proposed subpart H of 39 CFR part 3010, 
however, the concepts espoused in proposed subparts B through G of 39 
CFR part 3010 should be followed. For example, when calculating the 
percentage change in rates for an extraordinary or exceptional rate 
request, the Postal Service should apply the methodology of proposed 
Sec.  3010.128, Calculation of percentage change in rates.
    Proposed subpart I of 39 CFR part 3010 provides new rules 
concerning workshare discounts. These rules apply any time a rate that 
is associated with a workshare discount is adjusted, i.e., for both 
market dominant rates of general applicability subject to the periodic 
limitations in rate increases, and rate adjustments due to 
extraordinary and exceptional circumstances.
    The following new subpart is added to existing 39 CFR part 3020, 
Product Lists:
    Subpart G--Requests for Market Dominant Negotiated Service 
Agreements.
    The rules in this subpart are to be applied any time the Postal 
Service proposes the addition of a new market dominant NSA to the 
market dominant product list. Any time the Postal Service proposes to 
modify an existing market dominant NSA (either a rate or another term 
of the contract), the Commission will review the modifications based on 
an update to the material originally provided as required by proposed 
subpart G of 39 CFR part 3010.

B. Line-by-Line Discussion of Changes

1. Section 3010, Subpart A--General Provisions
    Section 3010.100 Applicability. Paragraph (a) of proposed Sec.  
3010.100 identifies 39 CFR part 3010 as being applicable to rate 
adjustments for market dominant rates of general applicability. It also 
identifies the Mail Classification Schedule (MCS) posted on the 
Commission's Web site as a source for current rates.
    Paragraph (b) of proposed Sec.  3010.100 acts as an index to direct 
the reader to the rules for periodic rate adjustments subject to 
regulatory limitations, the calculations of the regulatory limitations, 
rate adjustment due to extraordinary or exceptional circumstances, and 
special rules for workshare discounts.

[[Page 58314]]

    Section 3010.101 Definitions. Proposed Sec.  3010.101 replaces the 
definitions currently appearing in existing Sec.  3010.1. For the most 
part, the purported definitions in existing Sec.  3010.1 act more as a 
table of contents than as a source for definitions. This may have been 
necessary to give meaning to the Type 1-A, 1-B, and 1-C terminology 
appearing in the current rules. However, it is no longer necessary due 
to the elimination of this terminology. Proposed Sec.  3010.101 
provides definitions for: annual limitation, banked rate authority, 
class, maximum rate adjustment authority, performance-based rate 
authority, rate authority applicable to non-compensatory classes, rate 
cell (existing Sec.  3010.23(a)(2)), rate incentive (existing Sec.  
3010. 23(a)(3)), rate of general applicability (existing Sec.  
3010.1(g)), and seasonal or temporary rate.
    Section 3010.102 Schedule for regular and predictable rate 
adjustments. The rules currently appearing in existing Sec.  3010.9, 
concerning the Schedule for Regular and Predictable Rate Adjustments, 
are moved to proposed Sec.  3010.102. Several changes are made to the 
current rule. To improve transparency, and ensure both the mailers and 
the Commission are aware of the Postal Service's current intent 
concerning future rate adjustments, the new rules require the Postal 
Service to specifically address plans to adjust rates that may occur 
over the next 3 years, at a minimum. The schedule that the Postal 
Service provides will be posted to the Commission's Web site, as is 
currently the case. The rules also require the Postal Service to update 
and file a schedule annually at the time it files its ACR pursuant to 
39 U.S.C. 3652. For convenience, the Commission would prefer that the 
schedule be filed as part of the Annual Compliance Review docket, i.e., 
under the applicable Annual Compliance Review docket number. As before, 
the Postal Service must update the schedule when necessary.
2. Section 3010, Subpart B--Rate Adjustments
    Section 3010.120 General. This section identifies the rules in 
proposed subpart B of 39 CFR part 3010 as applicable to periodic rate 
adjustments subject to regulatory limitations.
    Section 3010.121 Postal Service request. This section specifies the 
public notice requirement (paragraph c of proposed Sec.  3010.121) and 
the requirement to submit a request to the Commission to review the 
Postal Service notice of rate adjustment (paragraph d of proposed Sec.  
3010.121). These rules currently appear in existing Sec. Sec.  
3010.10(a)(1) and (2). The current rules are changed to extend the 
notice and filing periods from 45 to 90 days. With this extension, the 
aspirational goal of providing a longer notice, currently appearing in 
existing Sec.  3010.10(b), is deleted because it is no longer 
necessary.
    The current requirement to take into consideration how planned rate 
adjustments are designed to help achieve the objectives listed in 39 
U.S.C. 3622(b) and take into account the factors listed in 39 U.S.C. 
3622(c), appearing in existing Sec.  3010.12(b)(7), is moved to 
proposed Sec.  3010.121(b). There is no reporting requirement for this 
paragraph. However, planned rates that are inconsistent with this 
provision may be returned to the Postal Service for reconsideration.
    Section 3010.122 Contents of a request. This section specifies the 
general contents of the Postal Service's request to adjust rates. 
Existing Sec.  3010.12, which includes these requirements, is being 
divided into two separate sections. Proposed Sec.  3010.122 will 
provide requirements for the general contents of a Postal Service 
request. The rules currently appearing in existing Sec.  3010.12(a), 
(b)(8), (b)(10), (b)(11), and (b)(12), concerning the general content 
of a Postal Service request, are moved to proposed Sec.  3010.122, 
Contents of a request. Proposed Sec.  3010.123 will provide 
requirements for the technical data (calculations) necessary to support 
the request. Proposed Sec.  3010.122(f) ties the general requirements 
of proposed Sec.  3010.122 to the technical requirements of proposed 
Sec.  3010.123. Proposed Sec.  3010.123 encompasses the remaining items 
currently appearing in existing Sec.  3010.12.
    There are two notable changes from the current rules. First, the 
public notice period is extended from at least 45 days to at least 90 
days (proposed Sec.  3010.122(b)). Second, the Postal Service will be 
required to certify that it has used the most recently approved 
analytical principles in its request (proposed Sec.  3010.122(h)). 
Currently, the Postal Service must do so, but there is no certification 
requirement (existing Sec.  3010.12(f)). This change will act as 
reinforcement to the current requirement, and provide the Postal 
Service with an opportunity to identify any challenges or limitations 
on complying with this requirement.
    Section 3010.123 Supporting technical documentation. This section 
specifies the supporting technical documentation that the Postal 
Service is to provide with its request. The section begins with a 
description of the form for any workpapers that must be submitted with 
the request, e.g., show all calculations, identify sources, submit in 
machine-readable, electronic format, link to spreadsheet cells 
(paragraph (a) of proposed Sec.  3010.123). Similar requirements are 
currently spread throughout the rules.
    Then, the remaining paragraphs describe the technical documentation 
that is to be provided with each request. The rules currently appearing 
in existing Sec.  3010.12(b)(1), (b)(2), (b)(3), (b)(4), (b)(5), 
(b)(9), (c), (d), and (e), which specify technical supporting data to 
be filed with the Postal Service's request, are moved to proposed Sec.  
3010.123(b) through (i). These sections address the provision of data 
concerning: The calculation of the maximum rate adjustment authority; 
the schedule of banked rate authority; the calculation of the 
percentage change in rates; the calculation of unused rate adjustment 
authority; a schedule of workshare discounts; material concerning new 
workshare discounts; material concerning new discounts or surcharges 
not considered a workshare discount; and material concerning rate 
incentives.
    A proposed Sec.  3010.123(j) is added to require the provision of 
information associated with products or classes where the attributable 
cost for that class or product exceeded the revenue from that class or 
product as determined by the most recent ACD made pursuant to 39 U.S.C. 
3653.
    The requirements of existing Sec.  3010.12(b)(6) concerning 
justifications for workshare discounts that exceed attributable costs 
are replaced by the material appearing in proposed subpart I of 39 CFR 
part 3010, Rates Applicable to Workshare Discounts and do not appear in 
proposed Sec.  3010.123.
    Section 3010.124 Docket and notice. The rules currently appearing 
in existing Sec.  3010.11(a), concerning the establishment of a docket 
and the Commission's notice of proceedings, are moved to proposed Sec.  
3010.124. The content is unchanged except for the extension of the 
public comment period from 20 to 30 days.
    Section 3010.125 Opportunity for comments. Similar rules concerning 
the opportunity for comment appear in existing Sec.  3010.11(b) and 
(c). The wording is revised to simply allow comments on whether the 
planned rate adjustments comport with applicable statutory and 
regulatory requirements. As always, the Commission reserves the right 
to limit comments to those

[[Page 58315]]

relevant to the rate adjustment proceeding before the Commission.
    Section 3010.126 Proceedings. This section specifies the general 
flow of a proceeding applicable to a request to review a notice of rate 
adjustment.
    A new rule appearing in proposed Sec.  3010.126(a) prescribes 
potential Commission action when the Postal Service's request does not 
substantially comply with the filing requirements concerning the 
contents of a request and the required supporting technical 
documentation. The Commission may inform the Postal Service of the 
deficiencies and provide an opportunity for the Postal Service to take 
corrective action, the Commission may toll or otherwise modify the 
procedural schedule until such time as the Postal Service takes 
corrective action, it may dismiss the request without prejudice, or 
take other action as deemed appropriate by the Commission.
    The rules currently appearing in existing Sec.  3010.11(d) through 
(k), concerning the general procedures for reviewing rate adjustments, 
are moved to proposed Sec.  3010.126(b) through (j). Within this 
material, several time periods are modified. The time period from the 
conclusion of the comment period to the Commission issuing a 
determination is increased from 14 to 21 days. The comment period 
concerning any amended notice is increased from 7 to 10 days. The time 
period from the receipt of an amended notice to the Commission issuing 
a determination is increased from 14 to 21 days.
    Section 3010.127 Maximum rate adjustment authority. This section 
specifies the calculation of the maximum rate adjustment authority, and 
imposes limitations on certain rate decreases. Proposed Sec.  3010.127 
replaces the rules currently appearing in existing Sec.  3010.20. The 
fundamental differences between the current rules and the new rules are 
the expanded sources for potential rate adjustment authority available 
under the new rules. The current rules determine a maximum allowable 
rate adjustment based upon an annual limitation (CPI rate authority), 
or if the annual limitation is entirely used, the annual limitation 
plus available banked rate authority (up to 2 percent). The new rules 
add three sources of potential rate adjustment authority to the CPI 
rate authority (proposed subpart C of 39 CFR part 3010) and the banked 
rate authority (proposed subpart G of 39 CFR part 3010) when 
determining the maximum allowable rate adjustment: Supplemental rate 
authority (proposed subpart D of 39 CFR part 3010), performance-based 
rate authority (proposed subpart E of 39 CFR part 3010), and non-
compensatory rate authority (proposed subpart F of 39 CFR part 3010). 
The availability of each of these sources is subject to limitations 
appearing in each of the new subparts. The maximum rate adjustment 
authority available to the Postal Service for each class of market 
dominant mail is limited to the sum of the percentage points developed 
in each of these subparts.
    Existing Sec.  3010.20(e) imposed no limitation on the amount of a 
rate decrease. This provision is replaced by a requirement that the 
rates for non-compensatory products may not be reduced. There is no 
limitation on the amount of a rate decrease for any other product.
    Section 3010.128 Calculation of percentage change in rates. This 
section specifies the calculation of percentage change in rates. The 
rules currently appearing in existing Sec.  3010.23, concerning the 
calculation of percentage change in rates, and existing Sec.  3010.24, 
concerning the treatment of volumes associated with NSAs and rate 
incentives not of general applicability, are moved to proposed Sec.  
3010.128. There is no intent to change the meaning or operation of the 
rules currently in place.
    Paragraph (a) of proposed Sec.  3010.128 provides the meaning of 
``current rate'' for the purpose of this section and provides two 
exceptions to the definition. This material previously appeared in 
existing Sec.  3010.23(a)(1).\98\ The definitions for ``rate cell'' and 
``rate incentive'' currently appearing in existing Sec.  3010.23(a)(2) 
and (3) are added to other definitions appearing in proposed Sec.  
3010.101.
---------------------------------------------------------------------------

    \98\ The example included in existing Sec.  3010.23(a)(1)(iii) 
is being omitted because it more appropriately belonged in a 
description of the rule, and not in the rule itself. The example 
remains factually accurate.
---------------------------------------------------------------------------

    Paragraph (b) of proposed Sec.  3010.128 describes the 
determination of volumes associated with each rate cell. This material 
currently appears in existing Sec.  3010.23(d).
    Paragraph (c) of proposed Sec.  3010.128 describes the process for 
calculating the percentage change in rates when rates are being 
increased. This material currently appears in existing Sec.  
3010.23(b)(1).
    Paragraph (d) of proposed Sec.  3010.128 describes the process for 
calculating the percentage change in rates when rates are being 
decreased. This explanation currently appears in existing Sec.  
3010.23(b)(2).
    Paragraph (e) of proposed Sec.  3010.128 provides the formula for 
calculating the percentage change in rates. The formula currently 
appears in existing Sec.  3010.23(c).
    Paragraph (f) of proposed Sec.  3010.128 describes the treatment of 
volume associated with rate incentives where the rates are not of 
general applicability. This material currently appears in existing 
Sec.  3010.23(e).
    Paragraph (g) of proposed Sec.  3010.128 describes the treatment of 
volume associated with NSAs and rate incentives not of general 
applicability. This material currently appears in existing Sec.  
3010.24.
    Section 3010.129 Exceptions for de minimis rate increases. This 
section provides exceptions to the requirements to immediately 
calculate the maximum rate adjustment authority and bank unused rate 
adjustment authority in the case of de minimis rate increases. The 
rules currently appearing in existing Sec.  3010.30 concerning de 
minimis rate increases are moved to proposed Sec.  3010.129. There is 
no intent to change the meaning or operation of the rules currently in 
place. Additionally, paragraph (g) of proposed Sec.  3010.129 is added 
as a reminder that rates may not be reduced for non-compensatory 
products.
3. Section 3010, Subpart C--Consumer Price Index Rate Authority
    Section 3010.140 Applicability. This section informs the reader 
that rate adjustment authority is available based upon changes in the 
CPI. Rate adjustment authority is calculated differently depending on 
whether the rate adjustment is being filed 12 or more months from the 
previous rate adjustment (proposed Sec.  3010.142), or less than 12 
months from the previous rate adjustment (proposed Sec.  3010.143).
    Section 3010.141 CPI-U data source. The duplicate rules currently 
appearing in existing Sec. Sec.  3010.21(a) and 3010.22(b), concerning 
the source of data for CPI-U values, are combined and moved to proposed 
Sec.  3010.141.
    Section 3010.142 CPI-U rate authority when requests are 12 or more 
months apart. The rules currently appearing in existing Sec.  
3010.21(b), concerning calculation of CPI-U rate authority when notices 
of rate adjustments are 12 or more months apart, are moved to proposed 
Sec.  3010.142.
    Section 3010.143 CPI-U rate authority when requests are less than 
12 months apart. The rules currently appearing in existing Sec.  
3010.2(b) through (d), concerning calculation of CPI-U rate authority 
when notices of rate adjustments are less than 12 months apart, are 
moved to proposed Sec.  3010.143.

[[Page 58316]]

4. Section 3010, Subpart D--Supplemental Rate Authority
    Section 3010.160 Applicability. This section informs the reader of 
the availability of 2 percentage points of rate authority per class of 
mail per calendar year for each of the first 5 full calendar years 
following the effective date of these rules. The rate authority must be 
applied, if at all, to the first generally applicable rate increase 
filed within a calendar year. For each of the 5 calendar years, the 
rate authority becomes effective on January 1 and lapses on December 31 
if unused. The unused portion may not be banked for future use. The 
Commission intends to also apply the no banking rule (proposed Sec.  
3010.160(b)(5)) to any attempt to circumvent the intent of this 
provision, such as filing a rate increase immediately followed by the 
filing of a rate decrease in order to create banked rate authority.
5. Section 3010, Subpart E--Performance-Based Rate Authority
    Section 3010.180 Applicability. This section informs the reader of 
the availability of up to 1 percentage point of rate authority per 
class of mail per calendar year based upon the Postal Service meeting 
or exceeding an operational efficiency-based standard and adhering to 
service quality-related criteria. The Commission shall review both 
operational efficiency and service quality in the ACD. If the 
Commission determines that the requirements are met, 0.75 percentage 
points shall be allocated for operational efficiency, and 0.25 
percentage points shall be allocated for service quality. Each 
determination (and allocation) is independent of the other.
    The rate authority must be applied, if at all, to the first 
generally applicable rate increase filed within a calendar year. The 
rate authority becomes effective on January 1 and lapses on December 31 
if unused. If unused, or if not fully used, the unused portion may not 
be banked for future use. The Commission intends to also apply the no 
banking rule (proposed Sec.  3010.180(b)(5)) to any attempt to 
circumvent the intent of this provision, such as filing a rate increase 
immediately followed by the filing of a rate decrease in order to 
create banked rate authority.
    Section 3010.181 Operational efficiency-based rate authority. This 
section provides the criteria for allocating 0.75 percentage points of 
rate authority based on operational efficiency. This rate authority 
shall be allocated if the average annual TFP growth over the most 
recent 5 years met or exceeded 0.606 percent.
    Section 3010.182 Service quality-based rate authority. This section 
provides the criteria for allocating 0.25 percentage points of rate 
authority based on service quality. This rate authority shall be 
allocated for each class of mail if the Commission finds in the 
appropriate ACD that all of the Postal Service's service standards 
(including applicable business rules) for that class during the 
applicable year met or exceeded the service standards in place during 
the prior fiscal year on a nationwide or substantially nationwide 
basis. This test examines the service standards and the business rules. 
It does not examine actual service performance such as time-to-
delivery.
    The Commission's finding in the ACD may be challenged. Any 
interested person may challenge the finding within 30 days of the ACD 
being issued. Once challenged, the Commission shall rule on the 
challenge within 60 days of the challenge being filed. The subject 
matter of the challenge is limited to changes in service standards or 
business rules that occur on a national or substantially nationwide 
basis. Whether or not the Postal Service is meeting its service 
standards shall not be the subject of this form of challenge.
6. Section 3010, Subpart F--Non-Compensatory Classes or Products
    Section 3010.200 Applicability. This section informs the reader 
that proposed subpart F of 39 CFR part 3010 prescribes rate setting 
criteria for products where the attributable cost for that product 
exceeded the revenue from that product, i.e., the product is non-
compensatory. It also prescribes rate setting criteria for any class of 
mail where the attributable cost for that class exceeded the revenue 
from that class, i.e., the class is non-compensatory. The Commission 
shall review whether or not a class or a product is compensatory in the 
ACD. If the Commission determines that a class or a product is non-
compensatory, this subpart applies.
    Section 3010.201 Individual product requirement. For non-
compensatory products, the Postal Service shall increase the rate of 
the product by a minimum of 2 percentage points above the percentage 
increase of the class that includes the non-compensatory product. Rates 
for the compensatory products in the class shall be adjusted 
accordingly. This section does not create additional rate adjustment 
authority for the class.
    Section 3010.202 Class requirement and additional class rate 
authority. Paragraph (a) of proposed Sec.  3010.202 provides 2 
percentage points of additional rate authority for non-compensatory 
classes. Paragraph (b) of proposed Sec.  3010.202 prescribes rate 
setting criteria, which requires the Postal Service to use all 
available rate setting authority when adjusting rates for non-
compensatory classes. This includes all CPI, supplemental, performance-
based, and banked (up to the 2-percent maximum) rate authority plus the 
additional 2 percentage points specified in proposed Sec.  3010.202(a). 
This section applies only it the Postal Service chooses to adjust rates 
for the non-compensatory class.
    Paragraph (c) of proposed Sec.  3010.202 prescribes that the rate 
authority must be applied, if at all, to the first generally applicable 
rate increase filed within a calendar year. The rate authority becomes 
effective on January 1 and lapses on December 31 if unused. If unused, 
or if not fully used, the unused portion may not be banked for future 
use. The Commission intends to also apply the no banking rule (proposed 
Sec.  3010.202(c)(4)) to any attempt to circumvent the intent of this 
provision, such as filing a rate increase immediately followed by the 
filing of a rate decrease in order to create banked rate authority.
7. Section 3010, Subpart G--Accumulation of Unused and Disbursement of 
Banked Rate Adjustment Authority
    Section 3010.220 General. This section requires the Postal Service 
to calculate unused rate adjustment authority, and, if applicable, 
revise the schedule of banked rate adjustment authority, whenever it 
plans to adjust rates. Limited exceptions to this rule apply, such as 
when the Postal Service requests review of a de minimis rate 
adjustment.
    Section 3010.221 Schedule of banked rate adjustment authority. The 
rule currently appearing in existing Sec.  3010.26(f), concerning the 
schedule of banked rate adjustment authority, is moved to proposed 
Sec.  3010.221. The rule has been expanded to include a list of items 
that should be tracked within the schedule. The schedule should include 
the availability of banked rate adjustment authority (before and after 
filing rate adjustments), along with the sources, amounts, and dates 
associated with any changes to the schedule.
    Section 3010.222 Calculation of unused rate adjustment authority 
for rate adjustments that involve a rate increase which are filed 12 
months apart or less. The rules currently appearing in existing Sec.  
3010.26(b), concerning the calculation of unused rate adjustment 
authority, are moved to

[[Page 58317]]

proposed Sec.  3010.222(a). The calculation is changed to reflect that 
the maximum rate adjustment authority may include CPI, supplemental, 
performance-based, and non-compensatory rate authority, whereas CPI 
rate authority is currently the only source of new rate adjustment 
authority. Otherwise, there is no intent to change the meaning or 
operation of the rules currently in place.
    Paragraph (b) of proposed Sec.  3010.222 imposes a requirement 
where a class of mail is non-compensatory. In that instance, unused 
rate adjustment authority cannot be generated or banked. Potential 
unused rate adjustment authority that may be banked is assumed to be 
zero. This also forecloses the possibility of banking negative rate 
authority in times of deflation.
    Paragraph (c) of proposed Sec.  3010.222 limits the maximum amount 
of unused rate adjustment authority that can be banked to the unused 
portion of the CPI rate authority.
    Section 3010.223 Calculation of unused rate adjustment authority 
for rate adjustments that involve a rate increase which are filed more 
than 12 months apart. The rules currently appearing in existing Sec.  
3010.26(c), concerning the calculation of unused rate adjustment 
authority for rate adjustments that involve a rate increase which are 
filed more than 12 months apart, are moved to proposed Sec.  
3010.223(a) through (c). The rules are restructured to make it clear 
that interim rate adjustment authority must be calculated first and 
that amount immediately added to the bank. Then, unused rate adjustment 
authority may be calculated.
    The material currently appearing in existing Sec.  3010.26(c)(2), 
which provides the formula for calculating the interim rate adjustment 
authority, is moved to proposed Sec.  3010.223(b). There is no intent 
to change the meaning or operation of this rule.
    The rules currently appearing in existing Sec.  3010.26(b), 
concerning the calculation of unused rate adjustment authority, are 
moved to proposed Sec.  3010.223(c) (Note that this is essentially the 
same calculation as appears in proposed Sec.  3010.222(a) above). The 
calculation is changed to reflect that the maximum rate adjustment 
authority may include CPI, supplemental, performance-based, and non-
compensatory rate authority, whereas CPI rate authority is currently 
the only source of new rate adjustment authority. Otherwise, there is 
no intent to change the meaning or operation of the rules currently in 
place.
    Paragraph (d) of proposed Sec.  3010.222 imposes a requirement 
where a class of mail is non-compensatory. In that instance, unused 
rate adjustment authority cannot be generated or banked. Potential 
unused rate adjustment that may be banked is assumed to be zero. This 
also forecloses the possibility of banking negative rate authority in 
times of deflation.
    Paragraph (e) of proposed Sec.  3010.222 limits the maximum amount 
of unused rate adjustment authority that can be banked to the unused 
portion of the CPI rate authority.
    Section 3010.224 Calculation of unused rate adjustment authority 
for rate adjustments that only include rate decreases. The rules 
currently appearing in existing Sec.  3010.27, concerning the 
calculation of unused rate adjustment authority for rate adjustments 
that only include rate decreases, are moved to proposed Sec.  3010.224. 
The calculation is changed to reflect that the maximum rate adjustment 
authority may include CPI, supplemental, performance-based, and non-
compensatory rate authority, whereas CPI rate authority is currently 
the only source of new rate adjustment authority. Otherwise, there is 
no intent to change the meaning or operation of the rules currently in 
place.
    Paragraph (c) in proposed Sec.  3010.224 limits the maximum amount 
of unused rate adjustment authority that can be banked to the unused 
portion of the CPI rate authority, referenced back to the most recent 
rate adjustment filing that involved a rate increase.
    Paragraph (f) of proposed Sec.  3010.224 concerning possible 
interactions with exigent rate requests, currently appearing in 
existing Sec.  3010.6(b)(2), is added to this rule.
    Section 3010.225 Application of banked rate authority. This section 
explains how previously banked rate authority may be applied to a rate 
adjustment request. The current rule appearing in existing Sec.  
3010.25, which states that all CPI rate authority must be used before 
banked rate authority can be used, is moved to proposed Sec.  
3010.225(b). The rule is changed to reflect that the proposed rate 
adjustment authority may include CPI, supplemental, performance-based, 
and non-compensatory rate authority, whereas CPI rate authority is 
currently the only source of new rate adjustment authority. Otherwise, 
there is no intent to change the meaning or operation of the rule 
currently in place.
    The rule currently appearing in existing Sec.  3010.29, which 
limits use of banked rate adjustment authority to 2 percent in any 12-
month period, is moved to proposed Sec.  3010.225(c). Direction is 
added to modify the schedule of banked rate adjustment authority, 
whenever this authority is used, as of the date of the final order 
accepting the rates.
    The rule currently appearing in existing Sec.  3010.26(d), which 
explains how interim rate authority may be used, is moved to proposed 
Sec.  3010.225(d).
    The rule currently appearing in existing Sec.  3010.28, which 
explains that banked rate adjustment authority must be used utilizing 
the first-in-first-out method beginning 5 years before the filing date 
of the instant notice, is moved to proposed Sec.  3010.225(e). The 
wording is changed for consistency with other paragraphs of this 
section.
    The rule currently appearing in existing Sec.  3010.26(e), which 
explains that banked rate adjustment authority lapses 5 years from the 
filing date of the request leading to its calculation, is moved to 
proposed Sec.  3010.225(f).
8. Section 3010, Subpart H--Rate Adjustments Due to Extraordinary and 
Exceptional Circumstances
    The rules currently appearing in 39 CFR part 3010, subpart E 
(existing Sec.  3010.60 et seq.), concerning exigent rate increases, 
are moved to 39 CFR part 3010, subpart H (proposed Sec.  3010.240 et 
seq.). There is no intent to change the meaning or operation of the 
rules currently in place. However, the order in which the material 
appears has changed, along with some material being reorganized amongst 
paragraphs.
9. Section 3010, Subpart I--Workshare Discounts
    Section 3010.260 Applicability. This subpart establishes rate 
design criteria for workshare discounts. The percentages of avoided 
costs that may be passed through to a customer in the form of a 
workshare discount are limited, and must fall within defined bands. The 
percentage passed through is defined as the workshare discount offered 
by the Postal Service divided by the cost avoided by the Postal Service 
for not providing the applicable service.
    Section 3010.261 Passthrough requirement. Two passthrough bands are 
established, one for Periodicals (75 to 125 percent), and one for all 
other classes (85 to 115 percent). Workshare passthroughs that fall 
within the applicable bands are accepted without further justification. 
Workshare passthroughs that fall outside the applicable bands, and that 
do not fall within one of the exceptions discussed below, are subject 
to return to the Postal Service for adjustment. See proposed Sec.  
3010.126(d).

[[Page 58318]]

    Section 3010.262 Exceptions for noncompliant discounts. This 
section establishes a grace period of 3 years to bring existing 
workshare passthroughs, and newly created future, workshare 
passthroughs into compliance with this subpart. If the Postal Service 
asserts that either grace period applies, it also must submit a plan 
(with each request to review a notice of rate adjustment) explaining 
how the applicable passthrough will be brought into compliance with 
this subpart before the expiration of the grace period. Failure to 
submit a plan where it can be reasonably concluded that rates will be 
brought into compliance before the end of the grace period, will result 
in the remand of the discount. See proposed Sec.  3010.126(d).
10. Section 3020, Subpart G--Requests for Market Dominant Negotiated 
Service Agreements
    Whenever a new NSA is proposed, a primary consideration is whether 
the agreement is properly classified as either market dominant or 
competitive. The starting point for considering the proper 
classification is the rules appearing in 39 CFR part 3020. Those rules 
govern the MCS and the addition, deletion, or transfer of a product to 
either the market dominant product list or the competitive product 
list. The rules currently appearing in 39 CFR part 3010, subpart D 
generally assist in the analysis required by 39 CFR part 3020. The 
remainder of the rules governing the regulation of rates appearing in 
39 CFR part 3010 are generally not implicated. Thus, the rules 
currently appearing in existing 39 CFR part 3010, subpart D, concerning 
NSAs, are moved to proposed 39 CFR part 3020, subpart G.
    In several instances, the rules currently appearing in 39 CFR part 
3010, subpart D are duplicative of the rules appearing in 39 CFR part 
3020. Moving these provisions allows for streamlining of the rules. 
There is no intent to change the meaning or operation of the rules 
currently in place. The move should clarify that a proposal to add a 
new NSA is to be filed pursuant to 39 CFR part 3020. Furthermore, in 
most instances adjustments to rates for existing NSAs require a review 
of the material previously provided pursuant to 39 CFR part 3020. 
Again, the rules governing the regulation of rates appearing in 39 CFR 
part 3010 are generally not implicated. Thus, requests concerning the 
adjustment of rates for NSAs should be filed as a contract update 
pursuant to 39 CFR part 3020.
    Existing Sec.  3010.40 Negotiated service agreements. This rule 
merely repeats the statutory requirements of 39 U.S.C. 3622(c)(10) and 
is being deleted. This statutory requirement is effectively analyzed 
using the supporting material that will be provided under proposed 
Sec.  3020.121.
    Existing Sec.  3010.41 Notice. This rule is duplicative of the 
notice requirements currently appearing in 39 CFR part 3020 applicable 
to new NSAs and is being deleted.
    Existing Sec.  3010.44 Proceedings for type 2 rate adjustments. 
Paragraph (a) of existing Sec.  3010.44 is duplicative of the docketing 
and notice requirements currently appearing in 39 CFR part 3020 
applicable to new NSAs and is being deleted. The requirements appearing 
in existing Sec.  3010.44(b) and (c) are being incorporated into the 
general requirements of proposed Sec.  3020.120.
    Section 3020.120 General. This rule explains that the requirements 
of 39 CFR part 3020, subpart G, which are specific to market dominant 
NSAs, impose requirements in addition to those appearing elsewhere in 
39 CFR part 3020, which are applicable to adding products to a product 
list. It also incorporates the existing requirements currently 
appearing in existing Sec.  3010.44(b) and (c) as discussed above.\99\
---------------------------------------------------------------------------

    \99\ Note that there is a requirement for the Postal Service to 
provide at least a 45-day notice whenever it adds, removes, or 
adjusts a rate applicable to an NSA. There is no similar statutory 
requirement governing the Commission's time for consideration of the 
addition, removal, or transfer of an NSA to a product list.
---------------------------------------------------------------------------

    Section 3020.121 Additional supporting justification for negotiated 
service agreements. The rules currently appearing in existing Sec.  
3010.42, concerning additional supporting information, are moved to 
proposed Sec.  3020.121 with the following changes. The requirement for 
the availability of similar NSAs to similarly situated mailers, 
currently appearing in existing Sec.  3010.40(c), is included in the 
new rule. The requirement to produce evidence that the Postal Service 
has provided notice at least 45 days before a new rate can go into 
effect, currently appearing in existing Sec.  3010.42(c), has been 
deleted.
    Section 3020.122 Data collection plan and report for negotiated 
service agreements. The rules currently appearing in existing Sec.  
3010.43, concerning a data collection plan, are moved to proposed Sec.  
3020.122 without change.
11. Section 3050, Periodic Reporting
    Section 3050.20 Compliance and other analyses in the Postal 
Service's section 3652 report. The workshare discount provision in 
Sec.  3050.20(c) has been superseded by the provisions of proposed 39 
CFR part 3010, subpart I--Workshare Discounts. Paragraph (c) of 
existing Sec.  3050.20 is modified by removing the phrase ``discounts 
greater than avoided costs,'' from the sentence ``It shall address such 
matters as non-compensatory rates, discounts greater than avoided 
costs, and failures to achieve stated goals for on-time delivery 
standards.''
12. Section 3055, Subpart A--Annual Reporting of Service Performance
    Section 3055.2 Contents of the annual report of service performance 
achievements. Paragraph (c) of existing Sec.  3055.2 currently requires 
the reporting of the applicable service standard(s) for each product. 
This paragraph is expanded to require the Postal Service to also 
provide a description of and reason for any changes to service 
standards, or to certify that no changes to service standards have been 
made, since the last report.

V. Administrative Actions

A. Assignment of Public Representative

    Pursuant to 39 U.S.C. 505, Richard A. Oliver shall continue to 
serve as an officer of the Commission (Public Representative) to 
represent the interests of the general public in this proceeding. See 
Order No. 3673 at 11.

B. Request for Comments and Reply Comments

    The Commission will accept comments and reply comments concerning 
whether the proposed changes outlined by this rulemaking achieves the 
objectives in 39 U.S.C. 3622(b). Comments are due no later than March 
1, 2018. Reply comments are due no later than March 30, 2018.
    Commission rules require that comments (including reply comments) 
be filed online according to the process outlined at 39 CFR 3001.9(a), 
unless a waiver is obtained. Additional information regarding how to 
submit comments online can be found at: https://www.prc.gov/how-to-participate. All comments accepted will be made available on the 
Commission's Web site (https://www.prc.gov).

VI. Ordering Paragraphs

    It is ordered:
    1. Pursuant to 39 U.S.C. 505, Richard A. Oliver shall continue to 
serve as an officer of the Commission (Public Representative) to 
represent the interests of the general public in this proceeding.

[[Page 58319]]

    2. Comments regarding the proposed rulemaking are due no later than 
March 1, 2018.
    3. Reply comments regarding the proposed rulemaking are due no 
later than March 30, 2018.
    4. The Secretary shall arrange for publication of this order in the 
Federal Register.

    By the Commission.
Stacy L. Ruble,
Secretary.
Supplemental Views of Vice Chairman Mark Acton, Supplemental Views of 
Commissioner Nanci E. Langley, Commissioner Tony Hammond Dissenting.
Supplemental Views of Vice Chairman Mark Acton
    The United States Postal Service faces tests in nearly every 
conceivable scenario as it, a venerable institution instrumental in the 
founding of our Nation, moves further into the 21st century. Many of 
the Postal Service's greatest challenges are not a primary result of 
the rates that it charges its customers and partners. Comprehensive 
legislative reform is best suited for brokering compromise and 
tailoring outcomes in this landscape where such divergent interests 
must coexist. The last few years have seen significant bipartisan 
efforts in Congress to craft such reform, and it has yet to come to 
fruition. The Commission does not have the ability to allow the Postal 
Service to re-amortize unfunded liabilities, administer employee 
benefits differently, change the frequency of delivery, or deliver 
profitable items restricted by statute. In short, there is no action 
the Commission can take to substitute for meaningful legislative 
reform, and I urge Congress to continue to work toward that goal.
    The Commission, however, cannot shirk its lawful responsibility to 
review and, if necessary, propose and implement regulations to address 
flaws in the market dominant ratemaking system. If the Commission 
determines that the PAEA's range of objectives are not being met, the 
law empowers the Commission to attempt improvements via the use of one 
tool alone--reform to the system for regulating rates and classes for 
market dominant products. In other words, this singular device--the 
ratemaking system--may be wielded by the regulator in an effort to 
achieve these objectives.
    The Commission, including its expert legal and technical staff, has 
undertaken a time and resource intensive effort to review the previous 
10 years' experience under the PAEA and chart a path forward that is 
responsive to its statutory duty. I have the highest regard for the 
Postal Service and its customers. As a Postal Rate and Postal 
Regulatory Commissioner, my record is replete with examples of my 
concern for postal customers' interests and sensitivity to rate 
adjustments. I look forward to hearing from the mailing community with 
comments that demonstrate, based on solid quantitative technical and 
well-supported legal analysis, how the Commission's proposal may be 
improved.

Mark Acton.
Supplemental Views of Commissioner Nanci E. Langley
    As the Commission has recognized in its annual reports to the 
President and Congress, there is a tension between the restrictions of 
an inflation-based price cap on market dominant price increases and the 
objectives established in section 3622(b), in particular, the objective 
that the Postal Service has adequate revenues and retained earnings in 
order to maintain financial stability.\100\ This instant rulemaking 
proposes one approach to regulating market dominant rates, which may 
satisfy the objectives of the PAEA. However, it is only one of many 
possible approaches. Interested parties, especially users of the mail, 
now have an opportunity to critique this approach and/or propose 
alternative solutions through the comment and reply comment periods.
---------------------------------------------------------------------------

    \100\ Postal Regulatory Commission, Annual Report to the 
President and Congress, Fiscal Year 2016, January 12, 2017, at 24; 
Postal Regulatory Commission, Annual Report to the President and 
Congress, Fiscal Year 2015, January 6, 2016, at 22; and Postal 
Regulatory Commission, Annual Report to the President and Congress, 
Fiscal Year 2014, January 5, 2015, at 20.
---------------------------------------------------------------------------

    For this reason, I approve moving forward with this rulemaking and 
will continue to work actively in establishing a ratemaking system that 
provides the necessary balance to ensure the financial viability of the 
Postal Service with affordable and predictable rates for ratepayers.

Nanci E. Langley.
Dissenting Views of Commissioner Tony Hammond
    I respectfully disagree with the Commission's decision to propose 
the changes contained in this Order because, rather than balancing all 
the objectives of 39 U.S.C. 3622, the proposed changes elevate the 
financial stability objective above the others.
    As I explained in my concurring statement to Order No. 4257, the 
existing ratemaking system has not provided the Postal Service with 
revenues adequate to maintain financial stability. However, I have also 
concluded that a significant portion of the Postal Service's financial 
instability results from an overly aggressive retiree health benefits 
prefunding schedule--which warrants a legislative solution--and from 
the Postal Service's decision in 2007 not to pursue the final cost-of-
service rate increase authorized by the PAEA. Therefore, I would 
propose a one-time price increase that raises the Postal Service's 
finances to the level needed to ensure stability absent those two 
factors, while leaving the price cap intact for future rate 
adjustments.
    In contrast, the changes proposed in this Order essentially 
constitute a return to the PRA's cost-of-service rates, but without any 
of the protections of the PRA framework.
    The PRA afforded the Postal Service the ability to recover all its 
costs through price increases, but accordingly made it forgo pricing 
flexibility and subjected it to significant regulatory scrutiny. The 
PAEA freed up the Postal Service's flexibility to set prices as it sees 
fit. But, it also simultaneously imposed the constraint of an overall 
price cap to protect customers.
    The changes proposed in this Order would grant the Postal Service 
the benefits of both systems and require of it the sacrifices of 
neither.
    I am especially troubled by what effect these changes may have if 
the Postal Service's finances deteriorate in unforeseen ways. This 
Order is committed to price increases that deliver revenues equaling 
the sum of all the Postal Service's costs, whatever they may be, with 
additional revenues to cover long-term capital expenditures. This is a 
laudable goal. But, if the Postal Service's costs (particularly its 
structural costs) increase unexpectedly, the logic of this Order would 
require ever-increasing prices, even if that would drive away mail 
volume at a rate that could put the Postal Service out of business.
    A second concern I have is the questionable regulatory complexity 
that this Order seeks to overlay on what has been, until now, a 
straightforward and pragmatic ratemaking system. For example, tying 
0.75 percent of pricing authority to Commission-approved efficiency and 
0.25 percent of pricing authority to Commission-approved service 
performance creates unnecessary regulatory hurdles.
    Of course, we must go through a formal process seeking public input 
in order to replace the current system and this proposal is no more 
than a starting point. All the Commissioners agree that some change is 
needed to the

[[Page 58320]]

ratemaking system. But, we disagree on the exact changes that would be 
most prudent. I look forward to comments on how to craft a balanced 
change, one that provides the Postal Service with a fair level of 
additional revenue while continuing to ensure that all of the 
objectives of 39 U.S.C. 3622 are met. In this regard, I note that the 
exigent surcharges that were in effect from 2014 to 2016 appeared not 
to result in any significant volume loss. Therefore, they may serve as 
a useful starting point for analyses.
    I am hopeful that, with the input of all stakeholders, the 
Commission can arrive at a balanced resolution to this review process.

Tony Hammond.

List of Subjects

39 CFR Part 3010

    Administrative practice and procedure, Postal Service.

39 CFR Part 3020

    Administrative practice and procedure.

39 CFR Part 3050

    Administrative practice and procedure, Reporting and recordkeeping 
requirements.

39 CFR Part 3055

    Administrative practice and procedure, Reporting and recordkeeping 
requirements.

    For the reasons discussed in the preamble, the Commission proposes 
to amend Chapter III of title 39 of the Code of Federal Regulations as 
follows:

0
1. Revise part 3010 to read as follows:

PART 3010--REGULATION OF RATES FOR MARKET DOMINANT PRODUCTS

Subpart A--General Provisions
Sec.
3010.100 Applicability.
3010.101 Definitions.
3010.102 Schedule for regular and predictable rate adjustments.
Subpart B--Rate Adjustments
3010.120 General.
3010.121 Postal Service request.
3010.122 Contents of a request.
3010.123 Supporting technical documentation.
3010.124 Docket and notice.
3010.125 Opportunity for comments.
3010.126 Proceedings.
3010.127 Maximum rate adjustment authority.
3010.128 Calculation of percentage change in rates.
3010.129 Exceptions for de minimis rate increases.
Subpart C--Consumer Price Index Rate Authority
3010.140 Applicability.
3010.141 CPI-U data source.
3010.142 CPI-U rate authority when requests are 12 or more months 
apart.
3010.143 CPI-U rate authority when requests are less than 12 months 
apart.
Subpart D--Supplemental Rate Authority
3010.160 Applicability.
Subpart E--Performance-Based Rate Authority
3010.180 Applicability.
3010.181 Operational efficiency-based rate authority.
3010.182 Service quality-based rate authority.
Subpart F--Non-compensatory Classes or Products
3010.200 Applicability.
3010.201 Individual product requirement.
3010.202 Class requirement and additional class rate authority.
Subpart G--Accumulation of Unused and Disbursement of Banked Rate 
Adjustment Authority
3010.220 General.
3010.221 Schedule of banked rate adjustment authority.
3010.222 Calculation of unused rate adjustment authority for rate 
adjustments that involve a rate increase which are filed 12 months 
apart or less.
3010.223 Calculation of unused rate adjustment authority for rate 
adjustments that involve a rate increase which are filed more than 
12 months apart.
3010.224 Calculation of unused rate adjustment authority for rate 
adjustments that only include rate decreases.
3010.225 Application of banked rate authority.
Subpart H--Rate Adjustments Due to Extraordinary and Exceptional 
Circumstances
3010.240 General.
3010.241 Contents of a request.
3010.242 Supplemental information.
3010.243 Docket and notice.
3010.244 Public hearing.
3010.245 Opportunity for comments.
3010.246 Deadline for Commission decision.
3010.247 Treatment of banked rate adjustment authority.
Subpart I--Workshare Discounts
3010.260 Applicability.
3010.261 Passthrough band requirement.
3010.262 Exceptions for noncompliant discounts.

    Authority: 39 U.S.C. 503; 3622.

Subpart A--General Provisions.


Sec.  3010.100  Applicability.

    (a) The rules in this part implement provisions in 39 U.S.C. 
chapter 36, subchapter I, establishing the system of ratemaking for 
market dominant products. These rules are applicable whenever the 
Postal Service proposes to adjust a rate of general applicability for 
any market dominant product, which includes the addition of a new rate, 
the removal of an existing rate, or a change to an existing rate. 
Current rates may be found in the Mail Classification Schedule 
appearing on the Commission's Web site at www.prc.gov.
    (b) Rates may be adjusted either subject to the rules appearing in 
subpart B of this part, which includes a limitation on rate increases, 
or subject to the rules appearing in subpart H of this part, which does 
not include a limitation on rate increases, but requires either 
extraordinary or exceptional circumstances. The rules applicable to the 
calculation of the limitations on rate increases appear in subparts C 
through G of this part. The rules for workshare discounts, which are 
applicable whenever market dominant rates are adjusted, appear in 
subpart I of this part.


Sec.  3010.101  Definitions.

    (a) The definitions in paragraphs (b) through (k) of this section 
apply in this part.
    (b) ``Annual limitation'' means the annual limitation on the 
percentage change in rates 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 a request to review rate adjustments as determined by the 
Commission.
    (c) ``Banked rate authority'' means unused rate adjustment 
authority accumulated for future use pursuant to these rules.
    (d) A ``class'' of mail means the First-Class Mail, USPS Marketing 
Mail, Periodicals, Package Services, or Special Services groupings of 
market dominant Postal Service products or services. Generally, the 
regulations in this part are applicable to individual classes of mail.
    (e) ``Maximum rate adjustment authority'' means the maximum 
percentage change in rates available to a class for any planned 
increase in rates. It is based upon the consumer price index rate 
authority, and any available supplemental rate authority, banked rate 
authority, performance-based rate authority, and rate authority 
applicable to non-compensatory classes.
    (f) ``Performance-based rate authority'' means rate authority which 
is available to all classes where the Postal Service meets or exceeds 
operational efficiency-based standards or adheres to service quality-
related criteria as determined in the most recent Annual Compliance 
Determination.

[[Page 58321]]

    (g) ``Rate authority applicable to non-compensatory classes'' means 
rate authority available to classes where revenue was insufficient to 
cover attributable costs as determined in the most recent Annual 
Compliance Determination.
    (h) ``Rate cell'' means each and every separate rate identified in 
any planned rate adjustment for rates of general applicability.
    (i) ``Rate incentive'' means a discount that is not a workshare 
discount and that is designed to increase or retain volume, improve the 
value of mail for mailers, or improve the operations of the Postal 
Service.
    (j) ``Rate of general applicability'' means a rate applicable to 
all mail meeting standards established by the Mail Classification 
Schedule, the Domestic Mail Manual, and the International Mail Manual. 
A rate is not a rate of general applicability if eligibility for the 
rate is dependent on factors other than the characteristics of the mail 
to which the rate applies. A rate is not a rate of general 
applicability if it benefits a single mailer. A rate that is only 
available upon the written agreement of both the Postal Service and a 
mailer, a group of mailers, or a foreign postal operator is not a rate 
of general applicability.
    (k) A ``seasonal or temporary rate'' is a rate that is in effect 
for a limited and defined period of time.


Sec.  3010.102   Schedule for regular and predictable rate adjustments.

    (a) The Postal Service shall develop a Schedule for Regular and 
Predictable Rate Adjustments applicable to rate adjustments subject to 
this part. The Schedule for Regular and Predictable Rate Adjustments 
shall:
    (1) Schedule rate adjustments at specific regular intervals,
    (2) provide estimated filing and implementation dates (month and 
year) for future rate adjustments for each class of mail expected over 
a minimum of the next 3 years, and
    (3) provide an explanation that will allow mailers to predict with 
reasonable accuracy, by class, the amounts of future scheduled rate 
adjustments.
    (b) The Postal Service shall file a current Schedule for Regular 
and Predictable Rate Adjustments annually with the Commission at the 
time it files its Annual Compliance Determination Report pursuant to 39 
U.S.C. 3652. The Commission shall post the current schedule on the 
Commission's Web site at www.prc.gov.
    (c) Whenever the Postal Service deems it appropriate to change the 
Schedule for Regular and Predictable Rate Adjustments, it shall file a 
revised schedule.
    (d) The Postal Service may vary the magnitude of rate adjustments 
from those estimated by the Schedule for Regular and Predictable Rate 
Adjustments. In such case, the Postal Service shall provide an 
explanation for such variation with its rate adjustment filing.

Subpart B--Rate Adjustments


Sec.  3010.120  General.

    This subpart describes the process for the periodic adjustment of 
rates subject to the percentage limitations specified in Sec.  3010.127 
which are applicable to each class of mail.


Sec.  3010.121  Postal Service request.

    (a) In every instance in which the Postal Service determines to 
exercise its statutory authority to adjust rates for a class of mail, 
the Postal Service shall comply with the requirements specified in 
paragraphs (b) through (d) of this section.
    (b) The Postal Service shall take into consideration how the 
planned rate adjustments are designed to help achieve the objectives 
listed in 39 U.S.C. 3622(b) and take into account the factors listed in 
39 U.S.C. 3622(c).
    (c) The Postal Service shall provide public notice of its request 
and planned rates in a manner reasonably designed to inform the mailing 
community and the general public that it intends to adjust rates no 
later than 90 days prior to the intended implementation date of the 
rate adjustment.
    (d) The Postal Service shall transmit a request to review its 
notice of rate adjustment to the Commission no later than 90 days prior 
to the intended implementation date of the rate adjustment.


Sec.  3010.122  Contents of a request.

    (a) The request shall include the items specified in paragraphs (b) 
through (j) of this section.
    (b) A representation or evidence that public notice of the planned 
changes has been issued or will be issued at least 90 days before the 
effective date(s) for the planned rates.
    (c) The intended effective date(s) of the planned rates.
    (d) A schedule of the planned rates, including a schedule 
identifying every change to the Mail Classification Schedule that will 
be necessary to implement the planned rate adjustments.
    (e) The identity of a responsible Postal Service official who will 
be available to provide prompt responses to requests for clarification 
from the Commission.
    (f) The supporting technical documentation as described in Sec.  
3010.123.
    (g) A demonstration that the planned rate adjustments are 
consistent with 39 U.S.C. 3626, 3627, and 3629.
    (h) A certification that all cost, avoided cost, volume, and 
revenue figures submitted with the request are developed from the most 
recent applicable Commission approved analytical principles.
    (i) For a rate adjustment that only includes a decrease in rates, a 
statement of whether the Postal Service elects to generate unused rate 
adjustment authority.
    (j) Such other information as the Postal Service believes will 
assist the Commission to issue a timely determination of whether the 
planned rate adjustments are consistent with applicable statutory 
policies.


Sec.  3010.123  Supporting technical documentation.

    (a) Supporting technical documentation shall include the items 
specified in paragraphs (b) through (j) of this section, as applicable 
to the specific request. This information must be supported by 
workpapers in which all calculations are shown and all relevant values 
(e.g., rates, CPI-U values, billing determinants) are identified with 
citations to original sources. The information must be submitted in 
machine readable, electronic format. Spreadsheet cells must be linked 
to underlying data sources or calculations (not hard coded), as 
appropriate.
    (b) The maximum rate adjustment authority, by class, as summarized 
by Sec.  3010.127 and calculated separately for each of subparts C 
through G of this part, as appropriate.
    (c) A schedule showing the banked rate adjustment authority 
available, by class, and the available amount for each of the preceding 
5 years calculated as required by subpart G of this part.
    (d) The calculation of the percentage change in rates, by class, 
calculated as required by Sec.  3010.128.
    (e) The amount of new unused rate adjustment authority, by class, 
if any, that will be generated by the rate adjustment calculated as 
required by subpart G of this part, as applicable.
    (f) A schedule of the workshare discounts included with the planned 
rates, and a companion schedule listing the avoided costs that underlie 
each such discount.
    (g) Whenever the Postal Service establishes a new workshare 
discount rate, it must include with its filing:
    (1) A statement explaining its reasons for establishing the 
discount;

[[Page 58322]]

    (2) All data, economic analyses, and other information relied on to 
justify the discount; and
    (3) A certification based on comprehensive, competent analyses that 
the discount will not adversely affect either the rates or the service 
levels of users of postal services who do not take advantage of the 
discount.
    (h) Whenever the Postal Service establishes a new discount or 
surcharge rate it does not view as creating a workshare discount, it 
must include with its filing:
    (1) An explanation of the basis for its view that the discount or 
surcharge rate is not a workshare discount; and
    (2) A certification that the Postal Service applied approved 
analytical principles to the discount or surcharge rate.
    (i) Whenever the Postal Service includes a rate incentive with its 
planned rate adjustment, it must include with its filing:
    (1) If the rate incentive is a rate of general applicability, 
sufficient information to demonstrate that the rate incentive is a rate 
of general applicability; and
    (2) A statement of whether the Postal Service has excluded the rate 
incentive from the calculation of the percentage change in rates under 
Sec.  3010.128.
    (j) For each class or product where the attributable cost for that 
class or product exceeded the revenue from that class or product as 
determined by the most recent Annual Compliance Determination issued 
pursuant to 39 U.S.C. 3653, a demonstration that the planned rates 
comply with the requirements in subpart F of this part.


Sec.  3010.124  Docket and notice.

    (a) The Commission will establish a docket for each rate adjustment 
filed by the Postal Service, promptly publish notice of the filing in 
the Federal Register, and post the filing on its Web site. The notice 
shall include the items specified in paragraphs (b) through (g) of this 
section.
    (b) The general nature of the proceeding.
    (c) A reference to legal authority under which the proceeding is to 
be conducted.
    (d) A concise description of the planned changes in rates, fees, 
and the Mail Classification Schedule.
    (e) The identification of an officer of the Commission to represent 
the interests of the general public in the docket.
    (f) A period of 30 days from the date of the filing for public 
comment.
    (g) Such other information as the Commission deems appropriate.


Sec.  3010.125  Opportunity for comments.

    Public comments should focus on whether planned rate adjustments 
comport with applicable statutory and regulatory requirements.


Sec.  3010.126  Proceedings.

    (a) If the Commission determines that the request does not 
substantially comply with the requirements of Sec. Sec.  3010.122 and 
3010.123, the Commission may:
    (1) Inform the Postal Service of the deficiencies and provide an 
opportunity for the Postal Service to take corrective action;
    (2) Toll or otherwise modify the procedural schedule until such 
time the Postal Service takes corrective action;
    (3) Dismiss the request without prejudice; or
    (4) Take other action as deemed appropriate by the Commission.
    (b) Within 21 days of the conclusion of the public comment period 
the Commission will determine, at a minimum, whether the planned rate 
adjustments are consistent with applicable law, e.g., the maximum rate 
adjustment authority as summarized by Sec.  3010.127, and calculated 
pursuant to subparts C through G of this part, as applicable, the non-
compensatory classes and products requirements pursuant to subpart F of 
this part, the workshare discount limitations pursuant to subpart I of 
this part, and 39 U.S.C. 3626, 3627, and 3629, and issue an order 
announcing its findings.
    (c) If the planned rate adjustments are found consistent with 
applicable law, they may take effect.
    (d) If planned rate adjustments are found inconsistent with 
applicable law, the Commission will notify and require the Postal 
Service to respond to any issues of noncompliance.
    (e) Following the Commission's notice of noncompliance, the Postal 
Service may submit an amended request that describes the modifications 
to its planned rate adjustments that will bring its rate adjustments 
into compliance. An amended request shall be accompanied by sufficient 
explanatory information to show that all deficiencies identified by the 
Commission have been corrected.
    (f) The Commission will allow a period of 10 days from the date of 
the filing of an amended request for public comment.
    (g) The Commission will review the amended request together with 
any comments filed for compliance and within 21 days issue an order 
announcing its findings.
    (h) If the planned rate adjustments as amended are found to be 
consistent with applicable law, they may take effect. However, no 
amended rate shall take effect until 45 days after the Postal Service 
files its request specifying that rate.
    (i) If the planned rate adjustments in an amended request are found 
to be inconsistent with applicable law, the Commission shall explain 
the basis of its determination and suggest an appropriate remedy. 
Noncompliant rates may not go into effect.
    (j) A Commission finding that a planned rate adjustment is in 
compliance with the maximum rate adjustment authority as summarized by 
Sec.  3010.127 and calculated pursuant to subparts C through G of this 
part, as applicable, the workshare discount limitations pursuant to 
subpart I of this part, and 39 U.S.C. 3626, 3627, and 3629 is decided 
on the merits. A Commission finding that a planned rate adjustment does 
not contravene other policies of 39 U.S.C. chapter 36, subchapter I is 
provisional and subject to subsequent review.


Sec.  3010.127  Maximum rate adjustment authority.

    (a) The maximum rate adjustment authority available to the Postal 
Service for each class of market dominant mail is limited to the sum of 
the percentage points developed in:
    (1) Subpart C-- Consumer Price Index Rate Authority;
    (2) Subpart D--Supplemental Rate Authority;
    (3) Subpart E--Performance-Based Rate Authority;
    (4) Subpart F--Non-compensatory Classes or Products; and
    (5) Subpart G--Accumulation of Unused and Disbursement of Banked 
Rate Adjustment Authority.
    (b) For any product where the attributable cost for that product 
exceeded the revenue from that product as determined in the most recent 
Annual Compliance Determination, rates may not be reduced.


Sec.  3010.128  Calculation of percentage change in rates.

    (a) For the purpose of calculating the percentage change in rates, 
the current rate is the rate in effect when the Postal Service files 
the request with the following exceptions.
    (1) A seasonal or temporary rate shall be identified and treated as 
a rate cell separate and distinct from the corresponding non-seasonal 
or permanent rate. When used with respect to a seasonal or temporary 
rate, the current rate is the most recent rate in effect for the rate 
cell, regardless of whether the seasonal or temporary rate is available 
at the time the Postal Service files the request.

[[Page 58323]]

    (2) When used with respect to a rate cell that corresponds to a 
rate incentive that was previously excluded from the calculation of the 
percentage change in rates, the current rate is the full undiscounted 
rate in effect for the rate cell at the time of the filing of the 
request, not the discounted rate in effect for the rate cell at such 
time.
    (b) For the purpose of calculating the percentage change in rates, 
the volumes for each rate cell shall be obtained from the most recent 
available 12 months of Postal Service billing determinants with the 
following permissible adjustments.
    (1) The Postal Service shall make reasonable adjustments to the 
billing determinants to account for the effects of classification 
changes such as the introduction, deletion, or redefinition of rate 
cells. The Postal Service shall identify and explain all adjustments. 
All information and calculations relied upon to develop the adjustments 
shall be provided together with an explanation of why the adjustments 
are appropriate.
    (2) Whenever possible, adjustments shall be based on known mail 
characteristics or historical volume data, as opposed to forecasts of 
mailer behavior.
    (3) For an adjustment accounting for the effects of the deletion of 
a rate cell when an alternate rate cell is not available, the Postal 
Service should adjust the billing determinants associated with the rate 
cell to zero. If the Postal Service does not adjust the billing 
determinants for the rate cell to zero, the Postal Service shall 
include a rationale for its treatment of the rate cell with the 
information required under paragraph (b)(1) of this section.
    (c) For a rate adjustment that involves a rate increase, for each 
class of mail and product within the class, the percentage change in 
rates is calculated in three steps. First, the volume of each rate cell 
in the class is multiplied by the planned rate for the respective cell 
and the resulting products are summed. Second, the same set of rate 
cell volumes are multiplied by the corresponding current rate for each 
cell and the resulting products are summed. Third, the percentage 
change in rates is calculated by dividing the results of the first step 
by the results of the second step and subtracting 1 from the quotient. 
The result is expressed as a percentage.
    (d) For rate adjustments that only involve a rate decrease, for 
each class of mail and product within the class, the percentage change 
in rates is calculated by amending the workpapers attached to the 
Commission's order relating to the most recent request to adjust rates 
that involved a rate increase to replace the planned rates under the 
most recent request that involves a rate increase with the 
corresponding planned rates applicable to the class from the request 
involving only a rate decrease.
    (e) The formula for calculating the percentage change in rates for 
a class described in paragraph (c) of this section is as follows:
    Percentage change in rates =
    [GRAPHIC] [TIFF OMITTED] TP11DE17.011
    
Where:

N = number of rate cells in the class
i = denotes a rate cell (i = 1, 2,. . ., N)
Ri,n = planned rate of rate cell i
    Ri,c = current rate of rate cell i (for rate adjustment 
involving a rate increase) or rate from most recent rate adjustment 
involving a rate increase for rate cell i (for a rate adjustment 
only involving a rate decrease)
Vi = volume of rate cell i

    (f) Treatment of rate incentives.
    (1) Rate incentives may be excluded from a percentage change in 
rates calculation. If the Postal Service elects to exclude a rate 
incentive from a percentage change in rates calculation, the rate 
incentive shall be treated in the same manner as a rate under a 
negotiated service agreement (as described in Sec.  3010.128(g)).
    (2) A rate incentive may be included in a percentage change in 
rates calculation if it meets the following criteria:
    (i) The rate incentive is in the form of a discount or can be 
easily translated into a discount;
    (ii) Sufficient billing determinants are available for the rate 
incentive to be included in the percentage change in rate calculation 
for the class, which may be adjusted based on known mail 
characteristics or historical volume data (as opposed to forecasts of 
mailer behavior); and
    (iii) The rate incentive is a rate of general applicability.
    (g) Treatment of volume associated with negotiated service 
agreements and rate incentives that are not rates of general 
applicability.
    (1) Mail volumes sent at rates under a negotiated service agreement 
or a rate incentive that is not a rate of general applicability are to 
be included in the calculation of percentage change in rates under this 
section as though they paid the appropriate rates of general 
applicability. Where it is impractical to identify the rates of general 
applicability (e.g., because unique rate categories are created for a 
mailer), the volumes associated with the mail sent under the terms of 
the negotiated service agreement or the rate incentive that is not a 
rate of general applicability shall be excluded from the calculation of 
percentage change in rates.
    (2) The Postal Service shall identify and explain all assumptions 
it makes with respect to the treatment of negotiated service agreements 
and rate incentives that are not rates of general applicability in the 
calculation of the percentage change in rates and provide the rationale 
for its assumptions.


Sec.  3010.129  Exceptions for de minimis rate increases.

    (a) The Postal Service may request review of a de minimis rate 
increase without immediately calculating the maximum rate adjustment 
authority or banking unused rate adjustment authority. For this 
exception to apply, requests to review de minimis rate adjustments must 
be filed separately from any other request to adjust rates.
    (b) Rate adjustments resulting in rate increases are de minimis if:
    (1) For each affected class, the rate increases do not result in 
the percentage change in rates for the class equaling or exceeding 
0.001 percent; and
    (2) For each affected class, the sum of all rate increases included 
in de minimis rate increases since the most recent rate adjustment 
resulting in a rate increase, or the most recent rate adjustment due to 
extraordinary and exceptional circumstances, that was not a de minimis 
rate increase does not result in the percentage change in rates for the 
class equaling or exceeding 0.001 percent.
    (c) If the rate adjustments are de minimis, no unused rate 
adjustment authority will be added to the schedule of banked rate 
adjustment authority maintained under subpart G of this part as a 
result of the de minimis rate increase.
    (d) If the rate adjustments are de minimis, no rate decreases may 
be taken into account when determining whether rate increases comply 
with paragraphs (b)(1) and (2) of this section.
    (e) In the next request proposing to increase rates for a class 
that is not a de minimis rate increase:
    (1) The maximum rate adjustment authority shall be calculated as if 
the de minimis rate increase had not been filed; and
    (2) For purposes of calculating the percentage change in rates, the 
current rate shall be the current rate from the de minimis rate 
increase.
    (f) The Postal Service shall file supporting workpapers with each 
request to review a de minimis rate increase that demonstrate that the 
sum of all rate increases included in de

[[Page 58324]]

minimis rate increases since the most recent rate adjustment resulting 
in a rate increase that was not de minimis, or the most recent rate 
adjustment due to extraordinary and exceptional circumstances, does not 
result in a percentage change in rates for the class equaling or 
exceeding 0.001 percent.
    (g) For any product where the attributable cost for that product 
exceeded the revenue from that product as determined in the most recent 
Annual Compliance Determination, rates may not be reduced.

Subpart C--Consumer Price Index Rate Authority


Sec.  3010.140  Applicability.

    The Postal Service may adjust rates based upon changes in the 
consumer price index identified in Sec.  3010.141. If requests 
involving rate increases are filed 12 or more months apart, rate 
adjustments are subject to a full year limitation calculated pursuant 
to Sec.  3010.142. If requests involving rate increases are filed less 
than 12 months apart, rate adjustments are subject to a partial year 
limitation calculated pursuant to Sec.  3010.143.


Sec.  3010.141  CPI-U data source.

    The monthly CPI-U values needed for the calculation of rate 
adjustment limitations under this section shall be obtained from the 
Bureau of Labor Statistics (BLS) Consumer Price Index--All Urban 
Consumers, U.S. All Items, Not Seasonally Adjusted, Base Period 1982-84 
= 100. The current Series ID for the index is ``CUUR0000SA0.''


Sec.  3010.142  CPI-U rate authority when requests are 12 or more 
months apart.

    (a) If a request involving a rate increase is filed 12 or more 
months after the most recent request involving a rate increase, then 
the calculation of an annual limitation for the class (full year 
limitation) involves three steps. First, a simple average CPI-U index 
is calculated by summing the most recently available 12 monthly CPI-U 
values from the date the Postal Service files its request and dividing 
the sum by 12 (Recent Average). Second, a second simple average CPI-U 
index is similarly calculated by summing the 12 monthly CPI-U values 
immediately preceding the Recent Average and dividing the sum by 12 
(Base Average). Third, the full year limitation is calculated by 
dividing the Recent Average by the Base Average and subtracting 1 from 
the quotient. The result is expressed as a percentage, rounded to three 
decimal places.
    (b) The formula for calculating a full year limitation for a 
request filed 12 or more months after the last request is as follows: 
Full Year Limitation = (Recent Average/Base Average)-1.


Sec.  3010.143  CPI-U rate authority when requests are less than 12 
months apart.

    (a) If a request involving a rate increase is filed less than 12 
months after the most recent request involving a rate increase, then 
the annual limitation for the class (partial year limitation) will 
recognize the rate increases that have occurred during the preceding 12 
months. When the effects of those increases are removed, the remaining 
partial year limitation is the applicable restriction on rate 
increases.
    (b) The applicable partial year limitation is calculated in two 
steps. First, a simple average CPI-U index is calculated by summing the 
12 most recently available monthly CPI-U values from the date the 
Postal Service files its request and dividing the sum by 12 (Recent 
Average). Second, the partial year limitation is then calculated by 
dividing the Recent Average by the Recent Average from the most recent 
previous request (Previous Recent Average) applicable to each affected 
class of mail and subtracting 1 from the quotient. The result is 
expressed as a percentage, rounded to three decimal places.
    (c) The formula for calculating the partial year limitation for a 
request filed less than 12 months after the last request is as follows: 
Partial Year Limitation = (Recent Average/Previous Recent Average) - 1.

Subpart D--Supplemental Rate Authority


Sec.  3010.160  Applicability.

    (a) This subpart allocates supplemental rate authority of 2 
percentage points per class per annum. The rate authority provided in 
this subpart is available in each of the first 5 full calendar years 
following the effective date of these rules.
    (b) Any rate authority allocated under this subpart:
    (1) Shall be made available to the Postal Service as of January 1 
of each calendar year;
    (2) Must be included in the calculation of the maximum rate 
adjustment authority in the first generally applicable rate adjustment 
filed in any calendar year;
    (3) Shall lapse if not used in the first generally applicable rate 
adjustment filed in any calendar year;
    (4) Shall lapse if unused, on December 31 of the applicable 
calendar year; and
    (5) May not be used to generate unused rate authority, nor shall it 
affect existing banked rate authority.

Subpart E--Performance-Based Rate Authority


Sec.  3010.180  Applicability.

    (a) This subpart allocates performance-based rate authority of up 
to 1 percentage point for each class of mail, which is available upon 
meeting or exceeding an operational efficiency-based standard and 
adhering to service quality-related criteria as determined by the most 
recent Annual Compliance Determination issued pursuant to 39 U.S.C. 
3653. Of this rate authority, 0.75 percentage points is allocated based 
on meeting the operational efficiency-based rate authority requirements 
appearing in Sec.  3010.181. Of this rate authority, 0.25 percentage 
points is allocated based on meeting the service quality-based rate 
authority requirements appearing in Sec.  3010.182.
    (b) Any rate authority allocated under this subpart:
    (1) Shall be made available to the Postal Service as of January 1 
of each calendar year as determined by the most recent Annual 
Compliance Determination;
    (2) Must be included in the calculation of the maximum rate 
adjustment authority in the first generally applicable rate adjustment 
filed in any calendar year;
    (3) Shall lapse if not used in the first generally applicable rate 
adjustment filed in any calendar year;
    (4) Shall lapse if unused, on December 31 of the applicable 
calendar year; and
    (5) May not be used to generate unused rate authority, nor shall it 
affect existing banked rate authority.


Sec.  3010.181  Operational efficiency-based rate authority.

    Operational efficiency-based rate authority shall be allocated for 
each class of mail if the Postal Service's average annual total factor 
productivity growth over the most recent 5 years meets or exceeds 0.6 
percent as determined by the most recent Annual Compliance 
Determination issued pursuant to 39 U.S.C. 3653.


Sec.  3010.182  Service quality-based rate authority.

    (a) Service quality-based rate authority shall be allocated for a 
class of mail if all of the Postal Service's service standards 
(including applicable business rules) for that class during the 
applicable fiscal year meet or exceed the service standards in place 
for the prior fiscal year on a nationwide or

[[Page 58325]]

substantially nationwide basis as determined by the most recent Annual 
Compliance Determination issued pursuant to 39 U.S.C. 3653.
    (b) Any interested person may file a challenge to the Commission's 
determination to allocate service quality-based rate authority within 
30 days of the Commission issuing the Annual Compliance Determination. 
The scope of such a challenge shall be limited to whether or not the 
Postal Service's service standards (including applicable business 
rules) during the applicable fiscal year met or exceeded the service 
standards in place for the prior fiscal year on a nationwide or 
substantially nationwide basis. The Commission shall issue an order 
which rules on any challenge within 60 days of the filing of the 
challenge. The order shall specify how much, if any, service quality-
based rate authority is authorized for the upcoming calendar year.

Subpart F--Non-Compensatory Classes or Products


Sec.  3010.200  Applicability.

    This subpart is applicable to a class or product where the 
attributable cost for that class or product exceeded the revenue from 
that class or product as determined by the most recent Annual 
Compliance Determination issued pursuant to 39 U.S.C. 3653. Section 
3010.201 is applicable where the attributable cost for a product within 
a class, exceeded the revenue from that particular product. Section 
3010.202 is applicable where the attributable cost for an entire class 
exceeded the revenue from that class.


Sec.  3010.201  Individual product requirement.

    Whenever the Postal Service files a request affecting a class of 
mail which includes a product where the attributable cost for that 
product exceeded the revenue from that product, as determined by the 
most recent Annual Compliance Determination issued pursuant to 39 
U.S.C. 3653, the Postal Service shall increase the rates for that 
product by a minimum of 2 percentage points above the percentage 
increase for that class. This section does not create additional rate 
authority applicable to any class of mail.


Sec.  3010.202  Class requirement and additional class rate authority.

    (a) This section provides 2 percentage points of additional rate 
authority for any class of mail where the attributable cost for that 
class exceeded the revenue from that class as determined by the most 
recent Annual Compliance Determination issued pursuant to 39 U.S.C. 
3653.
    (b) When the Postal Service files the first generally applicable 
rate adjustment in any calendar year affecting a class of mail where 
the attributable cost for that class exceeded the revenue from that 
class, the Postal Service must use all available rate authority, 
including consumer price index rate authority, supplemental rate 
authority, performance-based rate authority and banked rate authority, 
plus an additional 2 percentage points.
    (c) Any rate authority allocated under this subpart:
    (1) Shall be made available to the Postal Service as of January 1 
of each calendar year as determined by the most recent Annual 
Compliance Determination;
    (2) Must be included in the calculation of the maximum rate 
adjustment authority change in rates in the first generally applicable 
rate adjustment filed in any calendar year;
    (3) Shall lapse if unused, on December 31 of the applicable 
calendar year; and
    (4) May not be used to generate unused rate authority, nor shall it 
affect existing banked rate authority.

Subpart G--Accumulation of Unused and Disbursement of Banked Rate 
Adjustment Authority


Sec.  3010.220  General.

    Unless a specific exception applies, unused rate adjustment 
authority, on a class-by-class basis, shall be calculated for each 
request filed by the Postal Service. Unused rate adjustment authority 
shall be added to the schedule of banked rate authority in each 
instance, and be available for application to rate adjustments pursuant 
to the requirements of this subpart.


Sec.  3010.221  Schedule of banked rate adjustment authority.

    Upon the establishment of unused rate adjustment authority, the 
Postal Service shall devise and maintain a schedule that tracks the 
establishment and subsequent use of banked rate authority on a class-
by-class basis. At a minimum, the schedule must track the amount of 
banked rate authority available immediately prior to the filing of a 
request and the amount of banked rate authority available upon 
acceptance of the rates included in the request. It shall also track 
all changes to the schedule, including the docket numbers of Commission 
decisions affecting the schedule, the dates and amounts that any rate 
authority was generated or subsequently expended, and the expiration 
dates of all rate adjustment authority. The schedule shall be included 
with any request purporting to modify the amount of banked rate 
adjustment authority.


Sec.  3010.222  Calculation of unused rate adjustment authority for 
rate adjustments that involve a rate increase which are filed 12 months 
apart or less.

    (a) When requests that involve a rate increase are filed 12 months 
apart or less, unused rate adjustment authority for a class is equal to 
the difference between the maximum rate adjustment authority as 
summarized by Sec.  3010.127 and calculated pursuant to subparts C 
through G of this part, as appropriate, and the percentage change in 
rates for the class calculated pursuant to Sec.  3010.128, subject to 
the limitations described in paragraphs (b) and (c) of this section.
    (b) Unused rate adjustment authority cannot be generated and is 
assumed to be 0 percent for classes subject to Sec.  3010.202, Class 
requirement and additional class rate authority.
    (c) For requests that involve a rate increase, unused rate 
adjustment authority cannot exceed the unused portion of rate authority 
determined pursuant to subpart C of this part, Consumer Price Index 
Rate Authority.


Sec.  3010.223  Calculation of unused rate adjustment authority for 
rate adjustments that involve a rate increase which are filed more than 
12 months apart.

    (a) When requests that involve a rate increase are filed more than 
12 months apart, any interim rate adjustment authority must first be 
added to the schedule of banked rate authority before the unused rate 
adjustment authority is calculated.
    (b) Interim rate adjustment authority for a class is equal to the 
Base Average applicable to the second request (as developed pursuant to 
Sec.  3010.142) divided by the Recent Average utilized in the first 
request (as developed pursuant to Sec.  3010.142) and subtracting 1 
from the quotient. The result is expressed as a percentage and 
immediately added to the schedule of banked rate authority as of the 
date the request is filed.
    (c) Unused rate adjustment authority for a class is equal to the 
difference between the maximum rate adjustment authority as summarized 
by Sec.  3010.127 and calculated pursuant to subparts C through G of 
this part, as appropriate, and the percentage change in rates for the 
class calculated pursuant to Sec.  3010.128, subject to the limitations 
described in paragraphs (d) and (e) of this section.

[[Page 58326]]

    (d) Unused rate adjustment authority cannot be generated and is 
assumed to be 0 percent for classes subject to Sec.  3010.202, Class 
requirement and additional class rate authority.
    (e) For requests that involve a rate increase, unused rate 
adjustment authority cannot exceed the unused portion of rate authority 
determined pursuant to subpart C of this part, Consumer Price Index 
Rate Authority.


Sec.  3010.224  Calculation of unused rate adjustment authority for 
rate adjustments that only include rate decreases.

    (a) For requests that only include rate decreases, unused rate 
adjustment authority for a class is calculated in two steps. First, the 
difference between the maximum rate adjustment authority as summarized 
by Sec.  3010.127 and calculated pursuant to subparts C through G of 
this part, as appropriate for the most recent rate adjustment that 
involves a rate increase and the percentage change in rates for the 
class calculated pursuant to Sec.  3010.128(d) is calculated. Second, 
the unused rate adjustment authority generated in the most recent rate 
adjustment that involves a rate increase is subtracted from that 
result.
    (b) Unused rate adjustment authority generated under paragraph (a) 
of this section for a class shall be added to the unused rate 
adjustment authority generated in the most recent rate adjustment that 
involves a rate increase on the schedule maintained under Sec.  
3010.221. For purposes of Sec.  3010.224, the unused rate adjustment 
authority generated under paragraph (a) of this section for a class 
shall be deemed to have been added to the schedule maintained under 
Sec.  3010.221 on the same date as the most recent request that 
involves a rate increase.
    (c) For requests that only include rate decreases, the sum of 
unused rate adjustment authority generated under paragraph (a) of this 
section and the unused rate adjustment authority generated in the most 
recent rate adjustment that involves a rate increase cannot exceed the 
unused portion of rate adjustment authority determined pursuant to 
subpart C of this part, Rate Authority Based Upon Consumer Price Index 
in the most recent rate adjustment that involves a rate increase.
    (d) Unused rate adjustment authority generated under paragraph (a) 
of this section shall be subject to the limitation under Sec.  
3010.225, regardless of whether it is used alone or in combination with 
other existing unused rate adjustment authority.
    (e) For requests that only include rate decreases, unused rate 
adjustment authority generated under this section lapses 5 years from 
the date of filing of the most recent request that involves a rate 
increase.
    (f) A request that only includes rate decreases that is filed 
immediately after a rate adjustment due to extraordinary or exceptional 
circumstances (i.e., without an intervening rate adjustment involving a 
rate increase) may not generate unused rate adjustment authority.


Sec.  3010.225  Application of banked rate authority.

    (a) Banked rate authority may be applied to any planned rate 
adjustment subject to the limitations appearing in (b) through (f) of 
this section.
    (b) Banked rate authority may only be applied to a proposal to 
adjust rates after applying rate authority based upon the consumer 
price index pursuant to subpart C of this part, supplemental rate 
authority subject to subpart D of this part, the performance-based rate 
authority pursuant to subpart E of this part, and the rate authority 
applicable to non-compensatory classes pursuant to subpart F of this 
part.
    (c) A maximum of 2 percentage points of banked rate authority may 
be applied to a rate adjustment for any class in any 12-month period. 
If banked rate authority is used, it shall be subtracted from the 
schedule of banked rate adjustment authority as of the date of the 
final order accepting the rates.
    (d) Subject to (b) and (c) of this section, interim rate adjustment 
authority may be used to make a rate adjustment pursuant to the request 
that led to its calculation. If interim rate adjustment authority is 
used to make such a rate adjustment, the interim rate adjustment 
authority generated pursuant to the request shall first be added to the 
schedule of banked rate adjustment authority pursuant to Sec.  3010.221 
as the most recent entry. Then, any interim rate adjustment authority 
used in accordance with this paragraph shall be subtracted from the 
existing banked rate adjustment authority using a first-in, first-out 
(FIFO) method, beginning 5 years before the instant request.
    (e) Banked rate authority for a class must be applied, using a 
first-in, first-out (FIFO) method, beginning 5 years before the instant 
request.
    (f) Banked rate adjustment authority calculated under this section 
shall lapse 5 years from the date of filing of the request leading to 
its calculation.

Subpart H--Rate Adjustments Due to Extraordinary and Exceptional 
Circumstances


Sec.  3010.240  General.

    The Postal Service may request to adjust rates for market dominant 
products due to extraordinary or exceptional circumstances pursuant to 
39 U.S.C. 3622(d)(1)(E). The rate adjustments are not subject to rate 
adjustment limitations or the restrictions on the use of unused rate 
adjustment authority. The rate adjustment request may not include 
material classification changes. The request is subject to public 
participation and Commission review within 90 days.


Sec.  3010.241  Contents of a request.

    (a) Each exigent request shall include the items specified in 
paragraphs (b) through (i) of this section.
    (b) A schedule of the planned rates.
    (c) Calculations quantifying the increase for each affected product 
and class.
    (d) A full discussion of the extraordinary or exceptional 
circumstances giving rise to the request, and a complete explanation of 
how both the requested overall increase and the specific rate 
adjustments requested relate to those circumstances.
    (e) A full discussion of why the requested rate adjustments are 
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.
    (f) A full discussion of why the requested rate adjustments are 
reasonable and equitable as among types of users of market dominant 
products.
    (g) An explanation of when, or under what circumstances, the Postal 
Service expects to be able to rescind the exigent rate adjustments in 
whole or in part.
    (h) An analysis of the circumstances giving rise to the exigent 
request, which should, if applicable, include a discussion of whether 
the circumstances were foreseeable or could have been avoided by 
reasonable prior action.
    (i) Such other information as the Postal Service believes will 
assist the Commission to issue a timely determination of whether the 
requested rate adjustments are consistent with applicable statutory 
policies.


Sec.  3010.242  Supplemental information.

    The Commission may require the Postal Service to provide 
clarification of its request or to provide additional information in 
order to gain a better understanding of the circumstances

[[Page 58327]]

leading to the request or the justification for the specific rate 
adjustments requested. The Postal Service shall include within its 
request the identification of one or more knowledgeable Postal Service 
official(s) who will be available to provide prompt responses to 
Commission requests for clarification or additional information.


Sec.  3010.243  Docket and notice.

    (a) The Commission will establish a docket for each request to 
adjust rates due to extraordinary or exceptional circumstances, publish 
notice of the request in the Federal Register, and post the filing on 
its Web site. The notice shall include the items specified in 
paragraphs (b) through (g) of this section.
    (b) The general nature of the proceeding.
    (c) A reference to legal authority under which the proceeding is to 
be conducted.
    (d) A concise description of the proposals for changes in rates, 
fees, and the Mail Classification Schedule.
    (e) The identification of an officer of the Commission to represent 
the interests of the general public in the docket.
    (f) A specified period for public comment.
    (g) Such other information as the Commission deems appropriate.


Sec.  3010.244   Public hearing.

    (a) The Commission will hold a public hearing on the Postal Service 
request. During the public hearing, responsible Postal Service 
officials will appear and respond under oath to questions from the 
Commissioners or their designees addressing previously identified 
aspects of the Postal Service's request and supporting information.
    (b) Interested persons will be given an opportunity to submit to 
the Commission suggested relevant questions that might be posed during 
the public hearing. Such questions, and any explanatory materials 
submitted to clarify the purpose of the questions, should be filed in 
accordance with Sec.  3001.9 of this chapter, and will become part of 
the administrative record of the proceeding.
    (c) The timing and length of the public hearing will depend on the 
nature of the circumstances giving rise to the request and the clarity 
and completeness of the supporting materials provided with the request.
    (d) If the Postal Service is unable to provide adequate 
explanations during the public hearing, supplementary written or oral 
responses may be required.


Sec.  3010.245  Opportunity for comments.

    (a) Following the conclusion of the public hearings and submission 
of any supplementary materials, interested persons will be given the 
opportunity to submit written comments on:
    (1) The sufficiency of the justification for an exigent rate 
adjustment;
    (2) The adequacy of the justification for adjustments in the 
amounts requested by the Postal Service; and
    (3) Whether the specific rate adjustments requested are reasonable 
and equitable.
    (b) An opportunity to submit written reply comments will be given 
to the Postal Service and other interested persons.


Sec.  3010.246  Deadline for Commission decision.

    Requests under this subpart seek rate relief required by 
extraordinary or exceptional circumstances and will be treated with 
expedition at every stage. It is Commission policy to provide 
appropriate relief as quickly as possible consistent with statutory 
requirements and procedural fairness. The Commission will act 
expeditiously on the Postal Service request, taking into account all 
written comments. In every instance a Commission decision will be 
issued within 90 days of the filing of an exigent request.


Sec.  3010.247  Treatment of banked rate adjustment authority.

    (a) Each request will identify the banked rate adjustment authority 
available as of the date of the request for each class of mail and the 
available amount for each of the preceding 5 years.
    (b) Rate adjustments may use existing banked rate adjustment 
authority in amounts greater than the limitations described in Sec.  
3010.225.
    (c) Increases will exhaust all banked rate adjustment authority for 
each class of mail before imposing additional rate adjustments in 
excess of the maximum rate adjustment for any class of mail.

Subpart I--Workshare Discounts


Sec.  3010.260  Applicability.

    This subpart establishes bands for the percentages of avoided costs 
that may be passed through to a customer in the form of a workshare 
discount. For the purpose of this subpart, the percentage passthrough 
for any workshare discount shall be calculated by dividing the 
workshare discount by the cost avoided by the Postal Service for not 
providing the applicable service and expressing the result as a 
percentage.


Sec.  3010.261  Passthrough requirement.

    (a) Except as provided in Sec.  3010.262, all percentage 
passthroughs for workshare discounts must be set within the bands as 
specified in paragraphs (b) through (c) of this section.
    (b) 75 percent to 125 percent for Periodicals.
    (c) 85 percent to 115 percent for all other classes.


Sec.  3010.262  Exceptions for noncompliant discounts.

    (a) For workshare discounts in existence on the effective date of 
this subpart that do not comply with the requirements of Sec.  
3010.261, there shall be a 3 year grace period from the effective date 
of this subpart to bring the applicable percentage passthroughs into 
compliance with the requirements of Sec.  3010.261.
    (b) For new workshare discounts established after the effective 
date of this subpart that do not comply with the requirements of Sec.  
3010.261, there shall be a 3 year grace period from the establishment 
of the new workshare discount to bring the applicable percentage 
passthroughs into compliance with the requirements of Sec.  3010.261.
    (c) In each request proposing to adjust a rate associated with a 
workshare discount subject to the exceptions in paragraphs (a) or (b) 
of this section, the Postal Service shall submit a plan to bring the 
percentage passthroughs into compliance with the requirements of Sec.  
3010.261 prior to the expiration of the exception.

PART 3020--PRODUCT LISTS

0
2. The authority citation for part 3020 continues to read as follows:

    Authority:  39 U.S.C. 503; 3622; 3631; 3642; 3682.

0
3. Add subpart G to read as follows:

Subpart G--Requests for Market Dominant Negotiated Service 
Agreements

Sec.
3020.120 General.
3020.121 Additional supporting justification for negotiated service 
agreements.
3020.122 Data collection plan and report for negotiated service 
agreements.


Sec.  3020.120  General.

    This subpart imposes additional requirements whenever there is a 
request to add a negotiated service agreement to the market dominant 
product list. The additional supporting justification appearing in 
Sec.  3020.121 also should be provided whenever the

[[Page 58328]]

Postal Service proposes to modify the terms of an existing market 
dominant negotiated service agreement. Commission findings that the 
addition of a special classification is not inconsistent with 39 U.S.C. 
3622 are provisional and subject to subsequent review. No rate(s) shall 
take effect until 45 days after the Postal Service files a request for 
review of a notice of a new rate or rate(s) adjustment specifying the 
rate(s) and the effective date.


Sec.  3020.121  Additional supporting justification for negotiated 
service agreements.

    (a) Each request shall also include the items specified in 
paragraphs (b) through (j) of this section.
    (b) A copy of the negotiated service agreement.
    (c) The planned effective date(s) of the planned rates.
    (d) The identity of a responsible Postal Service official who will 
be available to provide prompt responses to requests for clarification 
from the Commission.
    (e) A statement identifying all parties to the agreement and a 
description clearly explaining the operative components of the 
agreement.
    (f) Details regarding the expected improvements in the net 
financial position or operations of the Postal Service (39 U.S.C. 
3622(c)(10)(A)(i) and (ii)). The projection of change in net financial 
position as a result of the agreement shall be based on accepted 
analytical principles. The projection of change in net financial 
position as a result of the agreement shall include for each year of 
the agreement:
    (1) The estimated mailer-specific costs, volumes, and revenues of 
the Postal Service absent the implementation of the negotiated service 
agreement;
    (2) The estimated mailer-specific costs, volumes, and revenues of 
the Postal Service which result from implementation of the negotiated 
service agreement;
    (3) An analysis of the effects of the negotiated service agreement 
on the contribution to institutional costs from mailers not party to 
the agreement;
    (4) If mailer-specific costs are not available, the source and 
derivation of the costs that are used shall be provided, together with 
a discussion of the currency and reliability of those costs and their 
suitability as a proxy for the mailer-specific costs; and
    (5) If the Postal Service believes the Commission's accepted 
analytical principles are not the most accurate and reliable 
methodology available:
    (i) An explanation of the basis for that belief; and
    (ii) A projection of the change in net financial position resulting 
from the agreement made using the Postal Service's alternative 
methodology.
    (g) An identification of each component of the agreement expected 
to enhance the performance of mail preparation, processing, 
transportation, or other functions in each year of the agreement, and a 
discussion of the nature and expected impact of each such enhancement.
    (h) Details regarding any and all actions (performed or to be 
performed) to assure that the agreement will not result in unreasonable 
harm to the marketplace (39 U.S.C. 3622(c)(10)(B)).
    (i) A discussion in regard to how functionally similar negotiated 
service agreements will be made available on public and reasonable 
terms to similarly situated mailers.
    (j) Such other information as the Postal Service believes will 
assist the Commission to issue a timely determination of whether the 
requested changes are consistent with applicable statutory policies.


Sec.  3020.122  Data collection plan and report for negotiated service 
agreements.

    (a) The Postal Service shall include with any request concerning a 
negotiated service agreement a detailed plan for providing data or 
information on actual experience under the agreement sufficient to 
allow evaluation of whether the negotiated service agreement operates 
in compliance with 39 U.S.C. 3622(c)(10).
    (b) A data report under the plan is due 60 days after each 
anniversary date of implementation and shall include, at a minimum, the 
following information for each 12-month period the agreement has been 
in effect:
    (1) The change in net financial position of the Postal Service as a 
result of the agreement. This calculation shall include for each year 
of the agreement:
    (i) The actual mailer-specific costs, volumes, and revenues of the 
Postal Service;
    (ii) An analysis of the effects of the negotiated service agreement 
on the net overall contribution to the institutional costs of the 
Postal Service; and
    (iii) If mailer-specific costs are not available, the source and 
derivation of the costs that are used shall be provided, including a 
discussion of the currency and reliability of those costs, and their 
suitability as a proxy for the mailer-specific costs.
    (2) A discussion of the changes in operations of the Postal Service 
that have resulted from the agreement. This shall include, for each 
year of the agreement, identification of each component of the 
agreement known to enhance the performance of mail preparation, 
processing, transportation, or other functions in each year of the 
agreement.
    (3) An analysis of the impact of the negotiated service agreement 
on the marketplace, including a discussion of any and all actions taken 
to protect the marketplace from unreasonable harm.

PART 3050--PERIODIC REPORTING

0
4. The authority citation for part 3050 continues to read as follows:

    Authority:  39 U.S.C. 503; 3651; 3652; 3653.
0
5. Amend Sec.  3050.20 by revising paragraph (c) to read as follows:


Sec.  3050.20  Compliance and other analyses in the Postal Service's 
section 3652 report.

* * * * *
    (c) It shall address such matters as non-compensatory rates and 
failures to achieve stated goals for on-time delivery standards. A more 
detailed analysis is required when the Commission observed and 
commented upon the same matter in its Annual Compliance Determination 
for the previous fiscal year.

PART 3055--SERVICE PERFORMANCE AND CUSTOMER SATISFACTION REPORTING

0
6. The authority citation for part 3055 continues to read as follows:

    Authority:  39 U.S.C. 503; 3622(a); 3652(d) and (e); 3657(c).
0
7. Amend Sec.  3055.2 by revising paragraph (c) to read as follows:


Sec.  3055.2  Contents of the annual report of service performance 
achievements.

* * * * *
    (c) The applicable service standard(s) for each product. If there 
has been a change to a service standard(s) since the previous report, a 
description of and reason for the change shall be provided. If there 
have been no changes to service standard(s) since the previous report, 
a certification stating this fact shall be provided.
* * * * *
[FR Doc. 2017-26307 Filed 12-8-17; 8:45 am]
 BILLING CODE 7710-FW-P