[Federal Register Volume 84, Number 21 (Thursday, January 31, 2019)]
[Rules and Regulations]
[Pages 537-539]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-00399]


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POSTAL REGULATORY COMMISSION

39 CFR Part 3015

[Docket No. RM2017-1; Order No. 4963]


Competitive Postal Products

AGENCY: Postal Regulatory Commission.

ACTION: Final rule.

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SUMMARY: The Commission is adopting a final rule concerning the minimum 
amount that the Postal Service's competitive products as a whole are 
required to contribute to institutional costs annually. The rule as 
adopted uses a formula-based approach to annually calculate competitive 
products' appropriate share of institutional costs. For additional 
information, Order No. 4963 can be accessed electronically through the 
Commission's website at https://www.prc.gov.

DATES: Effective: March 4, 2019.

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

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Relevant Statutory Requirements
II. Background
III. Basis and Purpose of Rule Change
IV. Final Rule

I. Relevant Statutory Requirements

    Section 3633(a)(3) of title 39 of the United States Code requires 
the Commission to ``ensure that all competitive products collectively 
cover what the Commission determines to be an appropriate share of the 
institutional costs of the Postal Service.'' 39 U.S.C. 3633(a)(3). 
Section 3633(b) requires that the Commission revisit the appropriate 
share regulation at least every 5 years in order to determine if the 
minimum contribution requirement should be ``retained in its current 
form, modified, or eliminated.'' 39 U.S.C. 3633(b). In making such a 
determination, the Commission is required to consider ``all relevant 
circumstances, including the prevailing competitive conditions in the 
market, and the degree to which any costs are uniquely or 
disproportionately associated with any competitive products.'' Id.

II. Background

    Pursuant to section 3633(b), the Commission initiated Docket No. 
RM2017-1 for the purpose of conducting its second review of the 
appropriate share requirement since the enactment of the Postal 
Accountability and Enhancement Act (PAEA), Public Law 109-435, 120 
Stat. 3198 (2006). In the decade following the PAEA's

[[Page 538]]

enactment, competitive products' appropriate share has been set at 5.5 
percent of the Postal Service's total institutional costs. When the 
Commission promulgated its initial competitive product rules in Docket 
No. RM2007-1, it found that basing the appropriate share on a 
percentage of total institutional costs was an easily understood 
approach that mirrored the directive of section 3633(a)(3).\1\ The 
Commission considered the amount that competitive products had 
historically contributed to the Postal Service's institutional costs 
and set the appropriate share at 5.5 percent.\2\ In Docket No. RM2012-
3, the Commission completed its first review of the appropriate share 
and, after performing a qualitative evaluation of the criteria of 
section 3633(b), determined that the appropriate share should be 
maintained at 5.5 percent.\3\
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    \1\ See Docket No. RM2007-1. Order Proposing Regulations to 
Establish a System of Ratemaking, August 15, 2007, at 70 (Order No. 
26).
    \2\ See Order No. 26 at 70-74; Docket No. RM2007-1, Order 
Establishing Ratemaking Regulations for Market Dominant and 
Competitive Products, October 29, 2007, at 91, 138 (Order No. 43).
    \3\ 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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    In its second review of the appropriate share, the Commission found 
that market conditions have changed since the PAEA's enactment and 
since the Commission's last review of the appropriate share.\4\ Most 
significantly, the parcel delivery market has experienced a significant 
increase in demand, particularly over the last 5 years, due to the 
growing prevalence of e-commerce. Order No. 4963 at 5-12. This has led 
to steady increases in revenue and profit for all competitors in the 
market, as well as growth in competitive volumes and market share for 
the Postal Service. Id.
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    \4\ See Docket No. RM2017-1, Order Adopting Final Rules Relating 
to the Institutional Cost Contribution Requirement for Competitive 
Products, January 3, 2019, at 4-12, 114-170 (Order No. 4963); Docket 
No. RM2017-1, Revised Notice of Proposed Rulemaking, August 7, 2018, 
at 41-42 (Order No. 4742); Docket No. RM2017-1, Notice of Proposed 
Rulemaking to Evaluate the Institutional Cost Contribution 
Requirement for Competitive Products, February 8, 2018, at 12, 32, 
34-53 (Order No. 4402).
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III. Basis and Purpose of Rule Change

    In light of the changes described above, Order No. 4963 implements 
a formula-based approach to determining the appropriate share and 
adopts related rule changes. Id. at 19-29. The purpose of the 
Commission's formula-based approach is to provide an objective basis on 
which to quantify the statutory considerations of section 3633(b) in 
order to determine the year-to-year change in competitive products' 
joint minimal capacity to generate profit that can be contributed to 
the coverage of institutional costs. Id.
    The objective basis that the formula relies on is the Postal 
Service's market power, which implicitly captures the vast majority of 
the qualitative considerations that the Commission has previously 
looked to in assessing the prevailing competitive conditions in the 
market and other relevant circumstances. Id. at 20. Market power is a 
firm's ability to price a product or service higher than the marginal 
cost of producing it and, as a concept, embodies both absolute and 
relative aspects. Id. at 20-21. A firm's absolute market power is its 
ability to raise prices with regard to its own consumers. Id. at 21, 
22. A firm's relative market power, which can also be described as its 
market position, is its capacity to exercise market power relative to 
its competitors. Id. at 21, 25. A firm's absolute market power in a 
competitive market will necessarily be limited by its market position 
and, as such, the Postal Service's absolute market power and its market 
position must be assessed in conjunction. Id. at 21.
    In order to assess the Postal Service's absolute market power and 
its market position, the formula utilizes two distinct components. The 
first component is the Competitive Contribution Margin, which measures 
the Postal Service's absolute market power. Id. at 22-24. Specifically, 
the Competitive Contribution Margin is calculated by subtracting the 
total attributable costs of producing the Postal Service's competitive 
products collectively from the total amount of revenue the Postal 
Service is able to realize from those competitive products collectively 
in a given fiscal year, and then dividing this result by the total 
competitive product revenue. Id. at 23-24. The formula assesses the 
year-over-year percent change in the Competitive Contribution Margin to 
determine how much, if any, the Postal Service's absolute market power 
has changed. Id. at 22.
    The second component of the formula is the Competitive Growth 
Differential, which measures the Postal Service's market position. Id. 
at 25-26. Specifically, the Competitive Growth Differential is 
calculated by subtracting the year-over-year percent change in the 
combined revenue for the Postal Service's competitors from the year-
over-year percent change in the Postal Service's competitive product 
revenue. Id. at 25. This relative growth is then weighted by the Postal 
Service's market share. Id.
    Using the above-described components, the Commission's formula is 
represented by the following equation:

ASt + 1 = ASt * (1+%[Delta]CCMt-1 + CGDt-1)
If t=0=FY 2007, AS = 5.5%

Where,

AS = Appropriate Share
CCM = Competitive Contribution Margin
CGD = Competitive Growth Differential
t = Fiscal Year

Id. at 26.

    In order to calculate an upcoming fiscal year's appropriate share 
percentage (ASt + 1), the formula multiplies the sum of the prior 
fiscal year's Competitive Growth Differential and percentage change in 
the Competitive Contribution Margin (1 + %[Delta]CCMt-1 + CGDt-1) by 
the current fiscal year's appropriate share (ASt). Id. at 27. Both 
components of the formula are given equal weight. Id. The formula is 
recursive in order to incorporate all changes in the parcel delivery 
market since the PAEA was enacted and the appropriate share was 
initially set. Id. The formula's calculation thus begins in FY 2007 
with a beginning appropriate share of 5.5 percent. Id. The upcoming 
fiscal year's appropriate share will be updated by the Commission each 
year as part of the Commission's Annual Compliance Determination, which 
is performed pursuant to 39 U.S.C. 3653. Id.

IV. Final Rule

    In order to implement the Commission's formula, existing Sec.  
3015.7(c) is revised. Final Sec.  3015.7(c)(1) establishes the formula 
which is to be used in calculating the appropriate share and defines 
each of the formula's terms. Existing Sec.  3015.7(c) states that the 
appropriate share of institutional costs to be covered by competitive 
products set forth in that rule is a minimum contribution level, and 
final Sec.  3015.7(c)(1) retains this concept.
    Final Sec.  3015.7(c)(2) establishes the process by which the 
Commission shall update the appropriate share for each fiscal year. The 
Commission will annually use the formula to calculate the minimum 
appropriate share for the upcoming fiscal year and report the new 
appropriate share level for the upcoming fiscal year as part of its 
Annual Compliance Determination.

List of Subjects for 39 CFR Part 3015

    Administrative practice and procedure.

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    For the reasons stated in the preamble, the Commission amends 
chapter III of title 39 of the Code of Federal Regulations as follows:

PART 3015--REGULATION OF RATES FOR COMPETITIVE PRODUCTS

0
1. The authority citation for part 3015 continues to read as follows:

    Authority:  39 U.S.C. 503; 3633.


0
2. Amend Sec.  3015.7 by revising paragraph (c) to read as follows:


Sec.  3015.7   Standard for Compliance.

* * * * *
    (c)(1) Annually, on a fiscal year basis, the appropriate share of 
institutional costs to be recovered from competitive products 
collectively, at a minimum, will be calculated using the following 
formula:

ASt + 1 = ASt * (1+%[Delta]CCMt-1 + CGDt-1)

Where,

AS = Appropriate Share, expressed as a percentage and rounded to one 
decimal place
CCM = Competitive Contribution Margin
CGD = Competitive Growth Differential
t = Fiscal Year
If t = 0 = FY 2007, AS = 5.5 percent

    (2) The Commission shall, as part of each Annual Compliance 
Determination, calculate and report competitive products' appropriate 
share for the upcoming fiscal year using the formula set forth in 
paragraph (c)(1) of this section.

    By the Commission.

Stacy L. Ruble,
Secretary.
[FR Doc. 2019-00399 Filed 1-30-19; 8:45 am]
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