[Federal Register Volume 74, Number 184 (Thursday, September 24, 2009)]
[Notices]
[Pages 48788-48795]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-23024]


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POSTAL REGULATORY COMMISSION

[Docket No. R2009-5; Order No. 299]


Postal Service Incentive Pricing Program

AGENCY: Postal Regulatory Commission.

ACTION: Notice.

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SUMMARY: The Postal Service has prepared, and the Commission has 
approved, a special program offering reduced rates on certain presorted 
First-Class Mail. This document addresses related issues and provides 
pertinent details.

DATES: Effective September 24, 2009.

FOR FURTHER INFORMATION CONTACT: Stephen L. Sharfman, General Counsel, 
202-789-6820 and [email protected].

SUPPLEMENTARY INFORMATION: Regulatory History, 74 FR 41947 (August 19, 
2009).

I. Introduction
II. Description of the Incentive Program
III. Comments
IV. Commission Analysis
V. Ordering Paragraphs

I. Introduction

A. Overview

    The Postal Service proposes to offer eligible companies a 20 
percent postage rebate on qualifying presorted First-Class letter, 
flat, and card volumes mailed between October 1, 2009 and December 31, 
2009.\1\ Under the proposal, which the Postal Service calls the First-
Class Mail Incentive Program (Incentive Program), qualifying volume is 
defined as a single company's First-Class Mail volume over and above a 
predetermined threshold. Notice at 3. For reasons discussed below, the 
Commission approves the Incentive Program.
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    \1\ United States Postal Service Notice of Market-Dominant Price 
Adjustment, August 11, 2009 (Notice) and Notice of United States 
Postal Service of Filing Supplemental Information, August 14, 2009 
(Supplemental Notice). The latter provides a spreadsheet with 
additional data on the Incentive Program's financial impact. The 
Postal Service published implementing regulations in the Federal 
Register on September 2, 2009. See 74 FR 45325 (September 2, 2009).
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    The Incentive Program is designed as ``a short-term incentive to 
use the mail and stabilize or grow'' presorted First-Class Mail volume 
in response to the current economic downturn and declining mail 
volumes. Id. The Postal Service estimates that the Incentive Program 
will generate additional revenue of $43 million with a net contribution 
of about $24 million. Id. at 7.
    The Commission recognizes the serious circumstances giving rise to 
this proposal and finds it to be a worthwhile effort to generate new 
volumes of First-Class Mail, the Postal Service's flagship product. The 
Postal Service cites the Incentive Program as ``an example of the 
increased flexibility provided to the Postal Service under the 
[PAEA].'' Id. at 10. The Commission agrees.
    The Commission must comment however, that the Postal Service's 
filing, including its responses to Chairman Information Requests, 
unnecessarily delayed this decision.\2\ For example, the Postal Service 
initially failed to provide basic information needed to verify its 
volume and revenue projections, and it provided an imprecise and 
thereby confusing description of program eligibility, questionable 
volume assumptions, and a less-than-complete risk analysis. These 
problems hampered prompt Commission review.
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    \2\ The Notice was filed pursuant to 39 U.S.C. 3622, as amended 
by the Postal Accountability and Enhancement Act (PAEA) of 2006, and 
39 CFR part 3010, the Commission's regulations governing market 
dominant price adjustments.
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    The revamped ratemaking process mandated by the PAEA assigns 
complementary roles to the Postal Service and the Commission. The 
Postal Service's pricing flexibility with its attendant shortened 
review period requires that pricing adjustment filings be fully 
documented at submission and supported throughout the course of review 
to permit the Commission to analyze such filings adequately during the 
accelerated review periods. The failure to provide full documentation 
at the outset compromises the Commission's ability to thoroughly and 
expeditiously evaluate proposals.
    The Commission's rules implementing 39 U.S.C. 3622 require filings 
to be fully supported. Moreover, the Commission has too frequently had 
to reiterate the need for Postal Service pricing proposals to be 
adequately supported and to adhere to accepted analytical principles. 
While not disqualifying in this instance, the Commission finds it 
necessary to underscore that future pricing adjustment filings must be 
fully supported and documented to enable the Commission to adequately 
assess their merits in timely fashion. Otherwise, the Commission will 
be obliged to defer action on such proposals pending the development of 
a more complete record.\3\
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    \3\ As discussed below, the Postal Service's responses to 
Chairman's Information Requests, including its last, late response 
filed September 10, 2009, were deficient in several respects and 
hindered the Commission's ability to evaluate the Incentive Program 
fully. Although still within the statutory deadline, this order was 
delayed, and issued two days later than planned.

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[[Page 48789]]

B. Procedural History

    The Postal Service filed a Notice announcing the Incentive Program 
with the Commission on August 11, 2009. As supplemented, it describes 
basic aspects of the Incentive Program, discusses compliance with the 
price cap, assesses consistency with the objectives and factors of 
Sec.  3622, and provides the Postal Service's perspective of the impact 
on workshare discounts and preferred rates. Proposed Mail 
Classification Schedule language and a schedule of new prices appear in 
Appendix A.
    In Order No. 276, the Commission provided public notice of the 
filing, established Docket No. R2009-5 to consider matters raised 
therein, appointed a public representative pursuant to rule 
3010.13(a)(4), and set August 31, 2009 as the deadline for submission 
of comments.\4\
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    \4\ PRC Order No. 276, Notice and Order Concerning Incentive 
Pricing Program for Certain Presorted First-Class Mail, August 13, 
2009. 74 FR 41947 (August 19, 2009) (Order No. 276).
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    The Chairman issued three Information Requests.\5\ The Information 
Requests, to which the Postal Service responded, pursued theoretical 
and technical aspects of the Postal Service's risk analysis.\6\
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    \5\ Chairman's Information Request No. 1, August 14, 2009 (CHIR 
No. 1); Chairman's Information Request No. 2, August 27, 2009 (CHIR 
No. 2); and Chairman's Information Request No. 3, September 4, 2009 
(CHIR No. 3).
    \6\ Responses of the United States Postal Service to Chairman's 
Information Request No. 1, August 21, 2009 (Response to CHIR No. 1); 
Responses of the United States Postal Service to Chairman's 
Information Request No. 2, September 2, 2009 (Responses to CHIR No. 
2); Response of the United States Postal Service to Chairman's 
Information Request No. 3, Question 2 (September 9, 2009) (Response 
to CHIR No. 3, Question 2); Response of the United States Postal 
Service to Chairman's Information Request No. 3, Question 1, 
September 10, 2009 (Response to CHIR No. 3, Question 1); and Motion 
of the United States Postal Service for Late Acceptance of Response 
to Chairman's Information Request No. 3, Question 1, September 10, 
2009.
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    Parcel Shippers Association, Pitney Bowes Inc., and the Public 
Representatives filed formal comments.\7\ Several persons filed 
informal comments through the Commission's Office of Public Affairs.
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    \7\ Comments of the Parcel Shippers Association (PSA Comments); 
Comments of Pitney Bowes Inc. (Pitney Bowes Comments); and Comments 
of the Public Representatives (Public Representatives' Comments), 
all filed August 31, 2009.
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II. Description of the Incentive Program

    The Incentive Program gives eligible participants a 20 percent 
postage rebate on qualifying presort First-Class letters, flats, and 
cards mailed between October 1, 2009 and December 31, 2009. Notice at 
1. Qualifying volume is defined as a single company's First-Class Mail 
volume over a predetermined threshold. Id. at 3. To be eligible to 
participate in the Incentive Program, a company must have mailed 
500,000 or more non-parcel presorted First-Class Mail pieces between 
October 1 and December 31 in both 2007 and 2008 through company-owned 
permit accounts or through permits set up on the company's behalf by a 
Mail Service Provider (MSP). Id. Participants must then exceed a 
company-specific threshold during October 1, 2009 through December 31, 
2009 to qualify for the incentive rebate.\8\ The incremental volume 
mailed by an eligible, participating company above the calculated 
threshold will earn a 20 percent rebate.
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    \8\ This threshold is determined by computing the ratio of the 
October 1-December 31, 2008 non-parcel First-Class Mail presorted 
volume to the October 1-December 31, 2007 non-parcel First-Class 
Mail presorted volume. The result is then multiplied by the 
company's October 1-December 31, 2008 non-parcel First-Class Mail 
presorted volume. Id.
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    Rebate calculation; credit. The rebate will be calculated as 20 
percent of the average revenue per piece for all eligible mail volume 
during the program period multiplied by the incremental volume above 
the threshold during the program period. It will be credited to the 
company's permit trust account. Id.
    Incentive Program intent. The stated intent of the Incentive 
Program is to provide an incentive for customers to increase non-parcel 
First-Class Mail presorted volume above the volume they otherwise would 
have sent. To protect this core element of the Incentive Program, the 
Postal Service includes provisions to address the possibility of 
strategic shifting or withholding of volume. Id. at 4.
    Incentive Program administration. The Notice addresses several 
aspects of program administration, including methods for contacting 
eligible mailers; procedures for establishing company thresholds and 
crediting rebates to permit trust accounts; data collection and 
reporting (including filing some data under seal); financial impact; 
and risk. See generally id. at 4-8. Importantly, further clarification 
was provided when implementing regulations were published in the 
Federal Register. 74 FR 45325 (September 2, 2009). The implementing 
regulations further describe the process the Postal Service will follow 
to notify potential participants, how mailers who are not contacted can 
apply, and provide details on development of both of the volume 
threshold requirements. They also clarify that metered mail will be 
eligible and that some customers of MSPs can participate. See Pitney 
Bowes Comments at 4.
    Under the Postal Service's proposed data collection plan, the 
Postal Service would submit Incentive Program-related data to the 
Commission 90 days after the payment of incentive rebates. The Notice 
describes specific components of the plan, notes that some participant 
data will be filed under seal, and states that actual administrative 
costs will be identified. Id. at 6.
    With respect to the financial aspects of the Incentive Program, the 
Postal Service expects, based on the 20 percent rebate and the 
expressed interest of customers, a contribution increase of around $24 
million and a revenue increase, net of the 20 percent rebate, of $43 
million. It anticipates new volume of about 103 million pieces, which 
it says will generate about $31 million in additional revenue and $16 
million in contribution. It also expects about 103 million pieces to 
``buy up'' from Standard Mail, providing an additional $12 million in 
revenue and $8 million in contribution. Id. at 7. Administrative costs 
are expected to total $809,000, and to be easily covered by the 
contribution generated from additional volume. Id.
    The Postal Service's primary measure of success will be incremental 
revenue and volume growth over the threshold for participating 
customers, but qualitative aspects, such as the Postal Service's 
ability to efficiently and effectively administer the program and 
customer feedback, also will be monitored. Id. at 5-6.

III. Comments

    In separate filings, PSA, Pitney Bowes and the Public 
Representatives advocate Commission approval of the Incentive Program; 
commend the Postal Service for exercising its Sec.  3622 authority in 
developing the Incentive Program; and note that the Incentive Program 
may provide experience to build on in the future. See generally PSA 
Comments at 1; Pitney Bowes Comments at 1-2; and Public 
Representatives' Comments at 4.
    PSA does not condition its approval on further clarifications or 
additional information, but reiterates a concern it raised in the 
Summer Sale over the lack of lead time, given the planning time needed 
to produce mailings.\9\ PSA Comments at 1. However, Pitney Bowes' and 
the Public Representatives' support is qualified, conditioned on either 
clarifications or submission of additional explanation, data and 
information. Pitney Bowes Comments at

[[Page 48790]]

1 and 4; Public Representatives' Comments at 12.
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    \9\ See Docket No. R2009-3, Notice of Price Adjustment (Summer 
Sale).
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    Pitney Bowes seeks two clarifications, which it considers important 
in terms of allaying confusion and ensuring that all eligible mailers 
take advantage of the program. One would make it clear that metered 
mail counts toward satisfying the initial volume eligibility threshold 
and as qualifying volume during the sale period. The other would make 
it clear that metered mailings are also eligible for the rebate. Pitney 
Bowes Comments at 4. Apart from this, Pitney Bowes says it plans to 
encourage customers to participate, and plans to provide assistance in 
validating the volume data required for program participation. Id. at 
3. It also expresses interest in working with the Postal Service on 
developing additional incentive programs, including ones in which MSPs 
can directly participate, to increase the use and value of mail and 
improve the future profitability of the Postal Service. Id.
    The Public Representatives affirmatively support many aspects of 
the Incentive Program, but seek some additional clarification, 
explanation and data (before issuance of the Commission's order) and a 
more robust data collection plan. The material requested before 
approval consists of:
    (1) Clarification of an alleged inconsistency (in the Postal 
Service's discussion of protection against migration) between 
statements in this case and in the Summer Sale with respect to cross-
elasticities;
    (2) An explanation for the choice of different periods to determine 
volume thresholds for this Incentive Program and the Summer Sale; and
    (3) Information and data required in the rules for negotiated 
service agreement (NSA) filings, based on Postal Service references to 
``NSA treatment'' for certain matters in this case.
    Public Representatives' Comments at 4-6 and 9.
    The Public Representatives also urge the Commission to require the 
Postal Service's final report to include, in addition to what the 
Postal Service offers to provide:
    (1) An analysis that permits the analysis described in PRC Op. 
MC2004-3 \10\ (Bank One Reconsideration) and later cases;
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    \10\ The Public Representatives cite the analysis that appears 
at PRC Op. MC2004-3, paras. 5001-38.
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    (2) A narrative explanation of problems experienced with 
implementation of the Incentive Program;
    (3) Identification of any necessary or desirable improvements to 
Postal Service data systems identified as a result of implementing the 
Incentive Program;
    (4) A summary of customer expressions of satisfaction or 
dissatisfaction with the Incentive Program;
    (5) A discussion of any generic weaknesses with, or strengths 
associated with, the Incentive Program concept; and
    (6) Identification or discussion of any other information gained 
from the Incentive Program the Postal Service deems relevant or 
pertinent. Id. at 9-11.

IV. Commission Analysis

    Preliminary consideration: type of classification. It has been 
asserted that the Postal Service should be required to meet filing and 
reporting requirements for NSAs because, among other things, it has 
invoked the treatment accorded NSAs for purposes of assessing price cap 
compliance in this case. Id. at 8-9. While elements of the Incentive 
Program may have characteristics in common with an NSA, which is a type 
of ``special classification'' referred to in 39 U.S.C. 3622(c)(10), the 
facts on this record support viewing it as a generic special 
classification under this section, as it is available ``on public and 
reasonable terms to similarly situated mailers.'' In this sense, it is 
more closely analogous to a ``niche classification'' under the Postal 
Reorganization Act of 1970 than to an NSA.
    Impact on the price cap. The Postal Service proposes that for 
purposes of assessing price cap compliance in this case, the Incentive 
Program be treated as mathematically analogous to negotiated service 
agreements in rule 3010.24, as occurred in Docket No. R2009-3, the 
Summer Sale. Notice at 8. Accordingly, it does not intend to include 
calculation of the effect of the price decrease resulting from the 
Incentive Program on the price cap for both future and current prices, 
and therefore, it did not calculate the cap or price changes described 
in rule 3010.14(b)(1) through (4). Id. No opposition has been raised on 
this record to using the Postal Service's proposed approach.
    As the Postal Service correctly notes, the question of whether a 
rate decrease should affect the cap calculation and unused rate 
adjustment authority arose in the recent Summer Sale docket. The 
Commission again finds it appropriate to accept the Postal Service's 
approach to price cap compliance, given the Incentive Program's short 
duration and uncertainty over the amount of new volume that will be 
generated.
    Assessment of consistency with statutory objectives and factors. 
The Notice provides, in compliance with Commission rules, the Postal 
Service's assessment of how the Incentive Program helps achieve the 
objectives of 39 U.S.C. 3622(b) and properly takes into account the 
factors of 39 U.S.C. 3622(c).\11\ Id. at 8-13. With respect to section 
3622(b) objectives, the Postal Service asserts that the Incentive 
Program either does not substantially alter the degree to which First-
Class Mail prices already address these objectives, or the objectives 
are addressed by the design of the system itself (Objectives 1, 2, 3, 
6, 7, 8 and 9). Id. at 10. It says the Incentive Program is an example 
of the increased flexibility provided to the Postal Service by the PAEA 
(Objective 4). It also says that the objective of ensuring adequate 
revenues to maintain financial stability (Objective 5) would be 
furthered by the Incentive Program's increase in mail volumes and its 
support for a key customer segment. Id.
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    \11\ See Commission rules 3010.14(b)(5) through 3010.14(b)(8).
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    With respect to Sec.  3622(c), the Postal Service says the 
Incentive Program does not substantially alter the degree to which 
First-Class Mail prices address most of the factors (Factors 1, 4, 5, 
6, 8, 9, 10, 11, 12, 13, and 14). Id. at 10. Pursuant to Sec.  
3622(c)(10), a special classification's consistency with the statute is 
to be evaluated in terms of whether it improves the net financial 
position of the Postal Service through increasing overall contribution 
to the institutional costs, and does not cause unreasonable harm to the 
marketplace. 39 U.S.C. 3622(c)(10)(A)(i) and (B). The Commission finds 
that there is a reasonable likelihood that the Incentive Program will 
meet both prongs of this test. It also concludes that the Postal 
Service's references to NSA-style treatment for some aspects of 
reviewing this Incentive Program do not trigger application of NSA 
reporting and filing requirements.
    As to other factors, the Postal Service asserts that the Incentive 
Program addresses Factor 3 (effect on business mail users) by providing 
assistance to a key customer segment during the severe economic 
downturn; and that the Incentive Program will not affect the ability of 
First-Class Mail to cover attributable costs. Id. at 12-13. It adds 
that the Incentive Program is ``a prime example of how the Postal 
Service can utilize the pricing flexibility provided under the PAEA in 
order to encourage increased mail volume.'' Id. at 12. It maintains 
that the Incentive Program will help to counteract the effect of the 
current recession on business mailers,

[[Page 48791]]

and provide a boost to a key customer segment. It also says that 
although the rebates are material, the Incentive Program will not 
affect the ability of First-Class Mail to cover its attributable costs 
(Factor 2), and that as a result of the Incentive Program, First-Class 
Mail as a whole will make an increased contribution toward overhead 
costs (Factor 10). Id. at 12-13.
    The Commission accepts the Postal Service's reasoning with respect 
to the statutory objectives and factors, and finds the Incentive 
Program consistent with those that are applicable.
    Workshare discounts. The Postal Service states that to the extent 
the Incentive Program affects discounts between presort categories, it 
will shrink them, but asserts that the Incentive Program itself is not 
worksharing, nor should its effects be considered a modification of, or 
change to, First-Class Mail worksharing discounts. Id. at 13. It 
asserts that the Incentive Program is a temporary incentive intended to 
drive additional First-Class Mail presort volume and, as such, is not 
tied to any specific mail preparation or induction practice. Id. It 
suggests that the discounts, in this sense, are similar to the 
incremental discounts the Commission has approved in a number of 
negotiated service agreements or the Intelligent Mail barcode discount 
that will take effect in the fall. Id.
    The worksharing issue is the subject of a pending docket, RM2009-3. 
For purposes of this case, the Commission finds that the rebates, given 
the brief duration of the program, could have only a de minimis impact. 
Thus, it finds that the Incentive Program is not inconsistent with 
Sec.  3622(e) requirements.
    Preferred rates. The Commission agrees with the Postal Service's 
assertion that the Incentive Program will have no impact on any 
preferred rates.
    Financial impact. The Postal Service estimates that the Incentive 
Program will increase revenues by approximately $43 million, and 
increase contribution by about $24 million. It also expects to incur 
$809,000 in administrative expenses related to the Incentive Program. 
Id. at 7.
    In response to CHIR No. 1, the Postal Service explains that its 
estimates are based on an assumed 2 percent increase in eligible mail 
volume in response to the discount, split evenly between new First-
Class Mail (own-price response) and volume shifted from Standard Mail 
to First-Class Mail (cross-price response). These assumptions are based 
on conversations with mailers and inferences from Summer Sale data. The 
response also indicates that the projected own-price volume response is 
distributed among letters, flats, and cards based on the FY 2008 First-
Class Mail presort volumes for those shapes, and that the cross-price 
response is similarly distributed, except that cards are excluded from 
the distribution key. Response to CHIR No. 1, Question 1.a.
    The Postal Service provides the aggregate volumes used to establish 
eligible mailers' volume trends and discount thresholds in response to 
CHIR No. 3, Question 1.\12\ The spreadsheet attached to the response 
shows the share of total First-Class Mail presort sent by eligible 
mailers (91 percent), the trend in eligible mailers' volumes from fall 
2007 to fall 2008 (a 7.1 percent decline), and the key used to 
distribute the own-price volume response to letters, flats, and cards. 
Response to CHIR No. 3, Question 1.
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    \12\ The Postal Service's forecast assumes that the thresholds 
are equal to the volume that would have been sent absent the 
Incentive Program (before-rates volumes).
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    The Commission finds the Postal Service's estimates deficient in 
several ways. The initial filing and responses did not present the 
calculations and assumptions needed to verify the results asserted by 
the Postal Service. It was only in response to the third information 
request that the basic data needed for this task was provided, and upon 
review of that data, questions remain.
    One concern relates to the source of the volumes sent by eligible 
mailers, identified as the Corporate Business Customer Information 
System (CBCIS). Previously, the Postal Service indicated that 40 
percent of presorted First-Class Mail volume captured in the CBCIS is 
comprised of volume from MSPs and, therefore, could not be identified 
with a particular mail owner. Response to CHIR No. 2, Question 1.a. It 
is not clear how the Postal Service is able to determine how much of 
that mail was sent by eligible mailers if it has not determined by whom 
it was sent.
    The key used to distribute the forecast volume response between 
letters, flats, and cards also raises questions. The Postal Service 
indicates that the key is the distribution of FY 2008 presorted First-
Class Mail volumes. Using volume figures from the FY 2008 Revenue, 
Pieces, and Weight (RPW) report, the Commission calculates a 
distribution that is substantially different. For example, RPW data 
indicate that presort flats are about 1.5 percent of total presort 
letters, flats, and cards, and not 7.6 percent as in the key used by 
the Postal Service. This discrepancy manifests in the Postal Service's 
FY 2010 first quarter (before-rates) eligible flats volume forecast of 
779 million pieces. This represents a 477 percent increase over the 
same period in FY 2009 (135 million pieces).
    The distortion caused by this distribution key is compounded by the 
treatment of the volume projected to shift from Standard Mail (cross-
price response). Instead of distributing this volume on a key that 
excludes cards, the Postal Service divides the volume that its key 
would distribute to cards evenly between letters and flats.
    Another problem in the Postal Service's forecast lies in its use of 
an assumed total volume response to the Incentive Program of 2 percent, 
evenly divided between own-price and cross-price response. This 
assumption is based solely on conversations with mailers rather than 
available empirical information about the price sensitivity of 
presorted First-Class Mail. The Postal Service asserts that the 
available estimated price elasticities cannot be applied to the 
Incentive Program discounts because they apply only to marginal volume. 
It believes that the volume response implied by the elasticities should 
only be applied to the marginal volume, which is unknown beforehand. 
Response to CHIR No. 1, Question 1.b.
    This theoretical question was thoroughly explored in the first case 
before the Commission involving marginal discounts as an incentive for 
increased volume. In support of the joint Postal Service/Capital One 
proposal, Capital One witness Elliott estimated the volume response by 
applying available elasticities to the marginal discounts in the same 
manner as if the price change was for the entire volume. When 
questioned about the use of total volume, he defended his approach by 
explaining that ``it is essential to understand that the resulting 
price elasticities are estimates about marginal changes in behavior. 
The importance of examining the behavior of economic decision makers at 
the margin is one of the basic insights of modern microeconomics.'' 
\13\ He further explained that a marginal discount ``allows the Postal 
Service to provide the same marginal incentive for volume growth as 
with a single-price discount on all mail, while requiring that the 
discount be paid on only part of that mail.'' See Docket No. MC2002-2, 
Tr. 2/223-24. (Emphasis in original.)

[[Page 48792]]

In the same case, the method of applying elasticities to total volume 
for marginal price changes was adopted in the testimony of Postal 
Service witness Eakin.\14\ The Commission accepted this Postal Service 
analysis.
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    \13\ See Docket No. MC2002-2, Experimental Changes to Implement 
Capital One NSA, Direct Testimony of Stuart Elliott on Behalf of 
Capital One Services, Inc., September 19, 2002.
    \14\ See id., Rebuttal Testimony of B. Kelly Eakin on Behalf of 
United States Postal Service, February 25, 2003.
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    The Commission has continued to use the elasticity-based approach 
to estimating the response to marginal pricing incentives. See Opinions 
and Recommended Decisions, Docket Nos. MC2002-2, MC2004-3, MC2004-4, 
MC2005-2, MC2005-3, MC2007-4, MC2007-5 and R2009-3; see also NSA 
sections of ACD2007 and ACD2008.\15\ This basic method is an accepted 
analytical principle described in Order No. 104 as ``the analytical 
principle that the financial impact of price incentives to increase 
mail volume or shift mail volume between products should be based on 
the Postal Service's best estimate of the price elasticity of the 
discounted product.''\16\
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    \15\ See Docket No. ACR2007, FY 2007 Postal Regulatory 
Commission Annual Compliance Determination, United States Postal 
Service Performance FY2007, March 27, 2008 (ACD2007); and Docket No. 
ACR2008, FY 2008 Annual Compliance Determination, March 30, 2009 
(ACD2008).
    \16\ See Docket No. RM2008-4, Notice of Proposed Rulemaking 
Prescribing Form and Content of Periodic Reports, August 22, 2008, 
at 9 (Order No. 104). The order further explains that ``with the 
appropriate justification and explanation, reasonable proxies may be 
used for [elasticities] and other mailer-specific traits.'' Id.
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    The First-Class Mail presort letter price elasticities\17\ most 
relevant to evaluating the likely effects of the Incentive Program are 
the current own-price elasticity (which measures the change in volume 
in response to a change in the price, without the lag effects of 
quarters subsequent to the price change) and the Standard Mail discount 
elasticity (which measures the change in volume in response to a change 
in the difference between the price of First-Class Mail presort letters 
and Standard Regular letters). The values of these are -0.025 and -
0.079, respectively. See United States Postal Service FY 2008 Demand 
Analysis Materials Market Dominant, January 16, 2009. These 
elasticities are not estimated specifically for the eligible mailers or 
other unique aspects of the price change embodied in the Incentive 
Program. However, the Postal Service estimates that more than 90 
percent of presorted First-Class Mail (non-parcels) is sent by eligible 
mailers, making it a very large subset of the mail reflected in the 
elasticity. Using an empirically derived price elasticity to estimate 
the response to a price change is superior to anecdotal information 
gleaned from conversations with individuals.
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    \17\ The Postal Service's price elasticity estimates are 
developed for four categories of First-Class Mail: Single-piece 
Letters and Sealed Parcels, Presort Letters and Sealed Parcels, 
Single-piece Cards, and Presort Cards.
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    The low current own-price elasticity suggests that the Incentive 
Program is unlikely to generate a substantial volume of new mail. This 
is especially true in light of the low (-0.365) t-statistic of the 
coefficient.\18\ Id. The discount elasticity and the relatively large 
percentage change in the difference between First-Class Mail presort 
rates and Standard Regular Mail rates for eligible mailers suggest that 
there is likely to be a meaningful shift of Standard Regular Mail 
letters to First-Class Mail presort letters. The Postal Service will 
benefit significantly from this response where eligible mailers' 
thresholds are set low enough to be achievable and high enough to avoid 
excessive discounts on mail that would have been sent even in the 
absence of the agreement.
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    \18\ The t-statistic indicates that the own-price volume 
response may not be significantly different from zero. This 
contrasts with the t-statistic of the Standard Regular Mail discount 
elasticity (-1.885), which indicates that the coefficient is, 
statistically speaking, significantly different from zero.
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    Risk assessment. The Postal Service identifies two sources of 
potential risk: The possibility for a smaller than expected volume 
response to the Incentive Program discounts and that administrative 
costs could be higher than anticipated. Notice at 7-8.
    When asked about the risk of revenue leakage on discounts paid on 
mail that would have been sent regardless of the Incentive Program 
discounts, the Postal Service replied that it had not formally analyzed 
the risk. It stated that the risk was mitigated by the use of a mailer-
specific volume trend to set each mailer's threshold and by targeting 
mail owners, rather than MSPs. Response to CHIR No. 1, Question 2.
    The risk of revenue leakage due to a threshold that is below the 
volume that would have been sent absent the Incentive Program is of 
concern. Post hoc analysis of data from NSAs suggests that the 
difficulty of accurately forecasting before-rates volumes has prevented 
the volume incentive provisions of NSAs from achieving their full 
potential. In some cases, significant revenue leakage has occurred, 
while in others, mailers' volumes have fallen far short of their 
discount thresholds. See ACD2008 at 83-84.
    The use of each mailer's individual volume trend in setting the 
thresholds is likely to reduce the risks, as compared with other 
methods such as applying an average trend to all mailers or assuming no 
change from the previous year. The adjustment for shortfalls in 
mailers' September and January volumes also should provide some 
protection against volume shifting by participants. Nevertheless, no 
forecasting method is flawless, and given the relatively low 
sensitivity of presorted First-Class Mail volume to price changes, and 
its relatively higher sensitivity to non-price variables (e.g., 
employment), the potential for the Incentive Program to fall short of 
expectations due to threshold-related risks is real. The success of the 
program cannot be measured simply by assuming that all volume above the 
thresholds is increased volume attributable to the discount, as the 
Postal Service proposes. Notice at 5.
    An additional source of risk is the potential for discounts to be 
paid on mail that has merely been shifted from one permit to another. 
The most likely way for this to occur is if the mail owner is not 
properly identified for each time period used to determine thresholds 
and discounts. Therefore, it is important to properly identify all mail 
volumes for each participating mailer, including volumes sent through 
MSPs. The recent spate of mergers and/or acquisitions in the financial 
industry are an example of the challenges in identifying all mail owned 
by participating mailers. The Postal Service plans to identify all of 
the use of MSPs and mergers by participants. See id., and Response to 
CHIR No. 2, Question 2.
    The Commission's prescribed data collection plan is intended to 
monitor these risks and generate information that will inform the risk 
analysis and risk mitigation mechanisms of future proposals of a 
similar nature.
    Conclusion. The Commission is unable to confirm the Postal 
Service's estimated financial impact, in part, due to the lack of 
information until very late in the proceeding and the remaining issues 
with the Postal Service's estimate, which are described above. However, 
available data suggest that Postal Service contribution will be 
increased by the migration of Standard Regular Mail to presorted First-
Class Mail. The amount of offsetting revenue leakage in the form of 
discounts paid for presorted First-Class Mail that would have been sent 
regardless of the Incentive Program is an empirical matter that cannot 
be forecast with the available information. The data collection plan, 
described below, will provide information which will enable a more 
complete post hoc analysis of the financial effects of the Incentive 
Program. The results of the analysis will

[[Page 48793]]

inform the design and risk analysis of future volume incentives, 
thereby increasing their benefits and reducing their risks. In future 
proposals of this nature, the Commission expects the Postal Service to 
apply accepted analytical principles and fully present all 
calculations, document all inputs, and explain all assumptions in the 
initial filing.
    Data collection. The data collection plan for the Incentive Program 
established by the Commission balances the need to avoid imposing 
excessive regulatory burden on the Postal Service with the need for the 
Commission and the public to have sufficient information to perform the 
effective regulatory oversight contemplated by the PAEA. The data 
provision requirements established herein should not impose any burden 
on mailers taking advantage of the Incentive Program.
    The Postal Service proposes to file the following data 90 days 
after the payment of rebates to qualifying mailers. Notice at 6.
    1. For each eligible mailer, monthly volume and revenue figures for 
First-Class Mail letters by product, flats by product, and cards by 
product for the months of September 2007 to January 2008, September 
2008 to January 2009, and September 2009 to January 2010; \19\
---------------------------------------------------------------------------

    \19\ The Postal Service defines eligible mailer as ``a company 
[that has] mailed 500,000 or more non-parcel First-Class Mail pieces 
between October 1 and December 31 in both 2007 and 2008, through 
permit accounts owned by the company, or through permits set up on 
behalf of the company by a Mail Service Provider (MSP).'' Id. at 3.
---------------------------------------------------------------------------

    2. Information on rebates paid, with supporting calculations;
    3. For each eligible mailer, monthly permit volumes for Standard 
Mail letters and flats; \20\
---------------------------------------------------------------------------

    \20\ The Postal Service proposes that the information reported 
in paragraphs 1, 2, and 3 be filed under seal with mailers' 
identities masked. Id. at 6.
---------------------------------------------------------------------------

    4. The monthly information identified in paragraph 1 above, on an 
aggregated basis; and
    5. The actual administrative costs of the Incentive Program.
    The Commission concludes that to fully evaluate the Incentive 
Program, the Postal Service's proposed plan should be enhanced in 
certain respects to parallel data collection requirements adopted in 
Docket No. R2009-3 concerning the volume incentive pricing program for 
Standard Mail. See Docket No. R2009-3, PRC Order No. 219, Order 
Approving Standard Mail Volume Incentive Pricing Program, June 4, 2009, 
at 14.
    Information necessary for evaluating the Incentive Program shall be 
provided within 15 days after crediting of rebates to qualifying 
mailers.\21\ The Postal Service offers no explanation for delaying 
reports beyond the due dates established in the Summer Sale. If the 
Postal Service can justify additional delay, it may request an 
adjustment of this requirement. Mailer-specific data may be filed under 
seal. The Postal Service shall report the following data:
---------------------------------------------------------------------------

    \21\ See Appendix A for a tabular representation of the content 
and form of the data to be provided.
---------------------------------------------------------------------------

    1. For each eligible mailer, the Postal Service shall provide 
monthly volumes and revenues for all presorted First-Class Mail 
letters, flats, and cards, including residual mailpieces entered as 
part of presort mailings, for the period October 2006 through January 
2010;
    2. Information on rebates paid to each qualifying mailer, with 
supporting calculations;
    3. To account for acquisitions and mergers, data are to be reported 
separately for each company involved on (i) a pre-acquisition or pre-
merger basis, and (ii) for the combined company, on a post-acquisition 
or post-merger basis, with appropriate links between the sheets for 
each company involved in the acquisition or merger; \22\
---------------------------------------------------------------------------

    \22\ Mailers' identities may be masked using a generic 
identification number. Whenever that convention is used, however, 
the Postal Service shall file a companion document under seal that 
provides a crosswalk between the generic identification number and 
the identity of each mailer.
---------------------------------------------------------------------------

    4. For each eligible First-Class Mail user, the Postal Service 
shall provide monthly permit volumes for Standard Mail Letters and 
Flats for the periods identified in paragraph 1, above;
    5. The monthly information identified in paragraphs 1 and 4 above, 
on an aggregated basis; and
    6. The actual administrative costs of the Incentive Program.
    The data collected is designed to provide stakeholders and the 
public with the ability to evaluate the program's impact on Postal 
Service volumes, revenues, and costs. Like the Summer Sale, the 
Incentive Program is largely experimental. Thus, data reporting is 
perhaps the most critical output of the proposal and, as such, it must 
be robust enough to enable the Commission (and others) to reasonably 
measure the merits of the instant program. What is learned may guide 
the design and analytical review of any future Postal Service programs 
of a similar nature.

V. Ordering Paragraphs

    It is ordered:
    1. The Commission approves the First-Class Mail Incentive Program.
    2. Within 15 days after crediting rebates to qualifying mailers, 
the Postal Service shall file with the Commission data to be reported 
on the First-Class Mail Incentive Program as set forth in this order.
    3. The Motion of the United States Postal Service for Late 
Acceptance of Response to Chairman's Information Request No. 3, 
Question 1, filed September 10, 2009, is granted.
    4. The Secretary of the Commission shall arrange for publication of 
this Order in the Federal Register.

    By the Commission.
Shoshana M. Grove,
Secretary.

Appendix A--First-Class Mail Incentive Data Collection Plan and Rebate 
Calculation Information

    This Appendix contains an outline of the First-Class Mail Incentive 
Data Report contents as specified in this order. The template is 
presented to help clarify the disaggregation by product, shape, and 
time period as described in the order.
    The specific format of the report may be tailored to fit the 
presentation format of the data generation programs of the Postal 
Service, but should be in a broadly available electronic format such as 
Microsoft Excel.
    Workbook (1), Mailer Information, contains the disaggregated Volume 
and Revenue information to be reported for each mailer eligible for the 
Incentive Program. This tab and the Incentive Rebate calculations 
contained therein should be replicated for each eligible mailer. For 
mailers party to a merger or acquisition, separate tabs for each pre-
merger (or pre-acquisition) entity are to be provided, with links to 
the tab for the post-merger (or post-acquisition) entity.
    Workbook (2), Aggregate Information, contains the Volume and 
Revenue categories as they appear in tab (1). The Incentive Aggregate 
Incremental Volume and Aggregate Rebate should be a summation 
calculation linked to each Mailer Information tab so that each volume 
and revenue figure represents the total for all eligible mailers for 
the relevant month.

[[Page 48794]]



                                        Workbook (1): Mailer Information
----------------------------------------------------------------------------------------------------------------
                                                              Month (for each month)
           Mailer name           -------------------------------------------------------------------------------
                                      October-06          November-06         December-09         January-10
----------------------------------------------------------------------------------------------------------------
Volume
First Class Presort
    Letters.....................
    Flats.......................
    Cards.......................
First Class Presort Residual*
    Letters.....................
    Flats.......................
    Cards.......................
Standard
    Letters.....................
    Flats.......................
    Carrier Route Letters.......
    Carrier Route Flats.........
    High Density and Saturation
     Letters.
    High Density and Saturation
     Flats.
Revenue
First Class Presort
    Letter......................
    Flats.......................
    Cards.......................
First Class Presort Residual*
    Letters.....................
    Flats.......................
    Cards.......................
Standard
    Letters.....................
    Flats.......................
    Carrier Route Letters.......
    Carrier Route Flats.........
    High Density and Saturation
     Letters.
    High Density and Saturation
     Flats.
----------------------------------------------------------------------------------------------------------------
Rebate Calculation for each                       Formula
 Mailer.
                                                Calculation
                                 -------------------------------------------------------------------------------
Threshold
Incremental Volume
Volume Shift Adjustment
Volume Eligible for Discount
Average Revenue Per Piece
Rebate
----------------------------------------------------------------------------------------------------------------
\1\ Formulas used in the determination of Volume Threshold, Incremental Volume, October 2009 Adjustment, Average
  Revenue Per Piece, and Summer Sale Rebate should be shown on each mailer page. Only mailer input data should
  be hardcoded.
* Presort Residual refers to mail entered with bulk presort mailings that does not qualify for presort rates.


                                       Workbook (2): Aggregate Information
----------------------------------------------------------------------------------------------------------------
                                                              Month (for each month)
   Eligible mailer information   -------------------------------------------------------------------------------
                                      October-06          November-06         December-09         January-10
----------------------------------------------------------------------------------------------------------------
Volume
First Class Presort
    Letters.....................
    Flats.......................
    Cards.......................
First Class Presort Residual*
    Letters.....................
    Flats.......................
    Cards.......................
Standard
    Letters.....................
    Flats.......................
    Carrier Route Letters.......
    Carrier Route Flats.........
    High Density and Saturation
     Letters.
    High Density and Saturation
     Flats.
Revenue
First Class Presort
    Letter......................

[[Page 48795]]

 
    Flats.......................
    Cards.......................
First Class Presort Residual*
    Letters.....................
    Flats.......................
    Cards.......................
Standard
    Letters.....................
    Flats.......................
    Carrier Route Letters.......
    Carrier Route Flats.........
    High Density and Saturation
     Letters.
    High Density and Saturation
     Flats.
----------------------------------------------------------------------------------------------------------------
Rebate Calculation for each                       Formula
 Mailer.
                                                Calculation
                                 -------------------------------------------------------------------------------
Threshold
Incremental Volume
Volume Shift Adjustment
Volume Eligible for Discount
Average Revenue Per Piece
Rebate
----------------------------------------------------------------------------------------------------------------
\1\ Formulas used in the determination of Volume Threshold, Incremental Volume, October 2009 Adjustment, Average
  Revenue Per Piece, and Summer Sale Rebate should be shown on each mailer page. Only mailer input data should
  be hardcoded.
* Presort Residual refers to mail entered with bulk presort mailings that does not qualify for presort rates.

[FR Doc. E9-23024 Filed 9-23-09; 8:45 am]
BILLING CODE 7710-FW-P