[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.
[[Page 539]]
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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