[Federal Register Volume 80, Number 214 (Thursday, November 5, 2015)]
[Proposed Rules]
[Pages 68480-68481]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-28127]



[[Page 68480]]

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POSTAL REGULATORY COMMISSION

39 CFR Part 3050

[Docket No. RM2016-2; Order No. 2793]


Periodic Reporting

AGENCY: Postal Regulatory Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commission is noticing a recent filing requesting that the 
Commission initiate an informal rulemaking proceeding to consider 
changes to analytical principles relating to periodic reports (Proposal 
One Through Three). The Commission will consider Proposals One and Two 
at this time. Proposal Three will be held in abeyance. This notice 
informs the public of the filing, invites public comment, and takes 
other administrative steps.

DATES: Comments are due: January 20, 2016. Reply Comments are due: 
March 25, 2016.

ADDRESSES: Submit comments electronically via the Commission's Filing 
Online system at http://www.prc.gov. Those who cannot submit comments 
electronically should contact the person identified in the FOR FURTHER 
INFORMATION CONTACT section by telephone for advice on filing 
alternatives.

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

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
II. Summary of Proposals
III. Initial Commission Action
IV. Ordering Paragraphs

I. Introduction

    On October 8, 2015, the United Parcel Service, Inc. (UPS) filed a 
petition pursuant to 39 CFR 3050.11 requesting that the Commission 
initiate a rulemaking proceeding in order to consider changes to how 
the Postal Service accounts for the costs of competitive products in 
its periodic reports.\1\ Proposals One, Two, and Three are attached to 
the Petition along with a report created by Dr. Kevin Neels (Dr. 
Neels), an economic consultant, which supports each Proposal. UPS 
concurrently filed a non-public library reference with its Petition.\2\
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    \1\ Petition of United Parcel Service, Inc. for the Initiation 
of Proceedings to Make Changes to Postal Service Costing 
Methodologies, October 8, 2015 (Petition).
    \2\ Notice of Filing Library Reference UPS-RM2016-2/LR-NP1, 
October 8, 2015.
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    UPS explains that the Postal Accountability and Enhancement Act 
freed the Postal Service from certain rate-making conditions so that it 
could better compete with private companies in the parcel markets. 
Petition at 3. UPS notes, however, that when regulated entities such as 
the Postal Service are allowed to compete with private companies, ``the 
regulated entity has a natural incentive to leverage the monopoly 
revenues it is making from sales to its captive customers (here, those 
purchasing letter mail services) to finance the competitive ventures.'' 
Id. at 2. UPS contends that in exchange for new pricing ``freedoms,'' 
and in recognition of the Postal Service's ``inherent incentive'' to 
expand its competitive ventures at the expense of its captive 
customers, Congress mandated that ``the Postal Service could not 
subsidize its expansion into competitive parcel delivery markets with 
revenues it enjoys from the products it sells pursuant to the letter 
monopoly.'' Id. at 3, 4. UPS cites 39 U.S.C. 3633, which prohibits the 
subsidization of competitive products by market dominant products; 
requires that each competitive product cover its own attributable 
costs; and mandates that competitive products collectively cover an 
appropriate share of the Postal Service's institutional costs.\3\
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    \3\ Id. at 4-5. See also 39 U.S.C. 3633(a).
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    UPS states that it is filing this Petition after an ``exhaustive 
analysis'' of the Postal Service's cost methodologies. Id. at 5. UPS 
asserts that its analysis reveals that the Postal Service is ``failing 
to ensure that its competitive products business is recovering all 
costs fairly attributable to that business'' and that the Postal 
Service ``is not accounting fully for the true costs'' of its 
competitive products. Id. at 5-6. UPS states that its analysis shows 
the Postal Service is misclassifying a significant amount of variable 
costs; \4\ therefore, ``competitive products are not bearing the full 
scope of the variable costs attributable to them.'' Id. at 7. 
Accordingly, UPS presents three proposals to change the Postal 
Service's current costing methodologies. Id. at 1.
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    \4\ The term variable cost is a relatively new term for 
Commission proceedings. It is not the same as volume variable cost, 
which is based on marginal cost. Each piece of mail that enters the 
postal system imposes an additional cost. As mail pieces continue to 
be entered into the postal system, these additional costs increase 
in total. Thus these costs vary with volume. The cost imposed on the 
postal system by the last piece entered into the system is the 
marginal cost. The additional costs imposed by previous pieces 
entered into the postal system are called inframarginal costs. The 
sum of all of these additional costs, including the cost of the last 
piece, is called variable costs.
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    In Proposal One, UPS recommends that the Postal Service incorporate 
all the variable costs, including the inframarginal costs attributable 
to individual products.\5\ In Proposal Two, UPS recommends that certain 
costs currently identified as fixed be reclassified as fully or 
partially variable and subsequently attributed to individual products. 
Petition, Proposal Two at 1. In Proposal Three, UPS recommends that the 
Commission increase the ``appropriate share'' pursuant to 39 U.S.C. 
3633(a)(3), from 5.5 percent \6\ to 24.6 percent, which is the 
competitive products' 3-year trailing average of the share of total 
attributable costs. Petition, Proposal Three at 1.
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    \5\ Petition, Proposal One at 1. UPS refers to the marginal 
costs associated with every preceding piece of mail as 
``inframarginal costs.'' Id.
    \6\ See 39 CFR 3015.7(c). The Commission most recently retained 
this share at 5.5 percent. See generally, Docket No. RM2012-3, Order 
Reviewing Competitive Products' Appropriate Share Contribution to 
Institutional Costs, August 23, 2012 (Order No. 1449).
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II. Summary of Proposals

A. Proposal One

    In Proposal One, UPS explains that in order to attribute costs to 
products, the Postal Service first estimates the marginal cost of 
various cost segments. Petition, Proposal One at 1-2. UPS notes, 
however, that the Postal Service's cost attribution method 
``effectively assumes that the cost associated with adding the last 
unit of mail is identical to the cost associated with adding each and 
every unit of mail.'' Id. at 4 (emphasis omitted).
    UPS argues that this is only a reasonable assumption when marginal 
costs are consistent throughout all volume levels. Id. UPS claims that 
when marginal costs decline as the level of volume increases, the cost 
associated with the last mail piece is lower than the marginal cost 
associated with producing each preceding piece. Id. Thus, it argues 
that by attributing only the marginal cost of the last piece of mail, 
the Postal Service is failing to attribute the higher marginal costs 
associated with producing every preceding piece in those cost 
components that exhibit declining marginal costs. Id.
    UPS recommends that the Postal Service include the inframarginal 
costs of individual products in its calculation of the costs 
attributable to those products. Petition at 1. It argues that 
distribution keys, which are currently used to calculate ``volume 
variable'' costs, can be used to distribute inframarginal costs to 
products. Id. Proposal One at 19, 20. UPS states that

[[Page 68481]]

``[a]ttributing inframarginal costs to products using the existing 
distribution keys is just as reliable as attributing marginal costs to 
products using those distribution keys. Id. at 20.

B. Proposal Two

    In Proposal Two, UPS contends that the Postal Service has a 
``systematic tendency to misclassify costs as fixed.'' Petition at 10. 
Such fixed costs, which are a major component of institutional costs, 
are not attributed to specific products.\7\ UPS asserts that the Postal 
Service's misclassification of certain costs as fixed allows it to 
``largely ignore'' such costs when setting the prices for its 
competitive products. Petition at 10. Based on UPS's belief that fixed 
and institutional costs are ``borne disproportionately'' by market 
dominant products, it concludes that the Postal Service's systemic 
misclassification of costs as fixed results in the improper 
subsidization of competitive products by market dominant products, in 
violation of 39 U.S.C. 3633(a)(1). Id. Proposal Two at 5.
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    \7\ Id. Proposal Two at 2. 39 U.S.C. 3633(a)(3) requires that 
competitive products cover an ``appropriate share'' of institutional 
costs.
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    Relying on Dr. Neels' analysis, UPS identifies 37 cost pools that 
it believes should be reclassified as wholly or partially variable. Id. 
at 1. UPS contends that Dr. Neels' analysis reveals that over $3 
billion in costs have been misclassified as fixed, and thus, have not 
been properly attributed to products. Id. at 8. UPS requests that the 
Commission attribute these reclassified costs to specific products 
based on their respective shares of overall attributable costs in the 
prior fiscal year. Id. at 10. Using this methodology, UPS estimates 
that over $700 million of costs have not been properly attributed to 
the Postal Service's competitive products. Id. at 8.

C. Proposal Three

    Unlike Proposals One and Two, Proposal Three does not involve 
issues related to the proper attribution of variable costs to the 
Postal Service's products. Rather, in Proposal Three, UPS requests that 
the Commission reconsider the ``appropriate share'' of institutional 
costs that must be covered by competitive products. Petition, Proposal 
Three at 1. Pursuant to 39 U.S.C. 3633(b), the Commission is required 
to review the appropriate share requirement at least every 5 years to 
determine if the percentage should be ``retained in its current form, 
modified, or eliminated.'' The current appropriate share, set by the 
Commission in CY 2012, is 5.5 percent. See Order 1449 at 27.
    In light of competitive products' volume growth in recent years, 
along with the Postal Service's significant investments in its 
competitive business, UPS believes that the current appropriate share 
percentage does not reflect current market conditions. Petition, 
Proposal Three at 6-14. To ensure that the Postal Service competes 
fairly, UPS asserts that the appropriate share percentage should be set 
at a level that approximates the fixed costs that a private competitor 
must bear. Id. at 14. Accordingly, UPS recommends that the appropriate 
share percentage be set at 24.6 percent. Id. UPS states that this 
percentage is equal to the average of the ``previous three years of 
attributable cost shares'' for competitive products. Id. UPS also 
encourages the Commission to adopt a mechanism that would adjust the 
appropriate share percentage each year in order to account for the 
fluctuation of postal cost and market realities. Id. at 14-15.

III. Initial Commission Action

    The Commission establishes Docket No. RM2016-2 for consideration of 
Proposals One and Two as raised by the Petition. The Commission holds 
Proposal Three in abeyance until it has completed its review of 
Proposals One and Two. As discussed above, Proposals One and Two both 
relate to the proper attribution of all variable costs to the Postal 
Service's products. Given the interrelatedness of these two proposals, 
the Commission finds that it is appropriate to consider them together 
in this docket. However, as UPS itself discussed in its Petition, if 
Proposals One and Two are adopted, unattributed costs will decline from 
$34.2 billion in FY 2014 to approximately $17 billion. Petition at 11-
12.
    Given the potentially significant impact that Proposals One and Two 
could have on the size of the Postal Service's unattributed costs, and 
given that Proposal Three relates to the portion of these costs that 
should be covered by competitive products, the Commission finds that 
consideration of Proposal Three should be delayed until the impact of 
Proposals One and Two are known. Both the Commission and the mailing 
community will benefit from having this information before evaluating 
UPS's proposed adjustments to the appropriate share requirement. 
Further, the Commission must allocate its finite resources across 
multiple priorities. Simultaneously considering all three proposals may 
result in the Commission having insufficient resources to bring to bear 
on other critical responsibilities.
    Additional information concerning the Petition may be accessed via 
the Commission's Web site at http://www.prc.gov. Interested persons may 
submit comments on Proposals One and Two in the Petition no later than 
January 20, 2016. Reply comments are due no later than March 25, 2016. 
Pursuant to 39 U.S.C. 505, Kenneth E. Richardson is designated as an 
officer of the Commission (Public Representative) to represent the 
interests of the general public in this proceeding.

IV. Ordering Paragraphs

    It is ordered:
    1. The Commission establishes Docket No. RM2016-2 for consideration 
of Proposals One and Two from the Petition of United Parcel Service, 
Inc. for the Initiation of Proceedings to Make Changes to Postal 
Service Costing Methodologies, filed October 8, 2015.
    2. Consideration of Proposal Three from the Petition is held in 
abeyance until the Commission has completed its review of Proposals One 
and Two.
    3. Comments are due no later than January 20, 2016. Reply comments 
are due no later than March 25, 2016.
    4. Pursuant to 39 U.S.C. 505, the Commission appoints Kenneth E. 
Richardson to serve as an officer of the Commission (Public 
Representative) to represent the interests of the general public in 
this docket.
    5. The Secretary shall arrange for publication of this order in the 
Federal Register.

    By the Commission.
Stacy L. Ruble,
Secretary.
[FR Doc. 2015-28127 Filed 11-4-15; 8:45 am]
BILLING CODE 7710-FW-P