[Federal Register Volume 86, Number 23 (Friday, February 5, 2021)]
[Proposed Rules]
[Pages 8330-8334]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-01500]


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POSTAL REGULATORY COMMISSION

39 CFR Part 3030

[Docket No. RM2021-2; Order No. 5816]


Market Dominant Products

AGENCY: Postal Regulatory Commission.

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: The Commission is initiating a review seeking input from the 
public about what additional regulations promulgated by the Commission 
may be necessary to achieve the objectives of the Postal Accountability 
and Enhancement Act (PAEA) particularly related to maximizing 
incentives to increase efficiency and reduce costs, maintaining high-
quality service standards, and assuring financial stability (including 
retained earnings). This advance notice informs the public of the 
docket's initiation, invites public comment, and takes other 
administrative steps.

DATES: 
    Comments are due: April 15, 2021.
    Reply comments are due: May 17, 2021.

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. Background
III. Substantive Areas for Further Refinement
IV. Administrative Actions
V. Ordering Paragraphs

I. Introduction

    Pursuant to 39 U.S.C. 3622(d)(3), the Commission issues this 
advance notice of proposed rulemaking to seek input from the public 
about what additional regulations promulgated by the Commission may be 
necessary to achieve the objectives of the Postal Accountability and 
Enhancement Act (PAEA) \1\ over the longer-term, particularly related 
to maximizing incentives to increase efficiency and reduce costs, 
maintaining high-quality service standards, and assuring financial 
stability (including retained earnings).
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    \1\ Public Law 109-435, 201, 120 Stat. 3198, 3204 (2006).
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II. Background

    In Docket No. RM2017-3, the Commission found that the existing 
Market Dominant ratemaking system did not achieve the PAEA's objectives 
during the 10 years following the PAEA's enactment.\2\ The Commission's 
findings were premised in part on the existing ratemaking system's 
inability to assure financial stability (including retained earnings), 
maximize incentives to reduce costs and increase efficiency, and 
maintain high-quality service standards. See Order No. 4257 at 3-5, 
274-275. During the PAEA era, the existing ratemaking system was 
inadequate, which resulted in an accumulated deficit,\3\ maximum use of 
the Postal Service's borrowing authority and a sharp decline in capital 
investments,\4\ operational efficiency increases and cost reductions 
that were insufficient to achieve overall financial stability and/or 
retained earnings,\5\ and reduction of the high-quality service 
standards that were set in 2007.\6\
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    \2\ See Docket No. RM2017-3, Order Adopting Final Rules for the 
System of Regulating Rates and Classes for Market Dominant Products, 
November 30, 2020, at 2 (Order No. 5763); see also Docket No. 
RM2017-3, Revised Notice of Proposed Rulemaking, December 5, 2019, 
at 7 (Order No. 5337); Docket No. RM2017-3, Notice of Proposed 
Rulemaking for the System for Regulating Rates and Classes for 
Market Dominant Products, December 1, 2017, at 26 (Order No. 4258); 
Docket No. RM2017-3, Order on the Findings and Determination of the 
39 U.S.C. 3622 Review, December 1, 2017, at 3-5, 274-275 (Order No. 
4257).
    \3\ See Order No. 4257 at 171-172 (describing how the 
consecutive net losses resulted in an accumulated deficit).
    \4\ The Postal Service lacks shareholders and instead must 
finance capital investments through revenue or through borrowing. 
Order No. 4258 at 48-49. Therefore, as consecutive years of net 
losses resulted in an accumulated deficit, the Postal Service relied 
heavily on its borrowing authority, deferred capital investments, 
and increased its cash reserves. See id. at 46-52.
    \5\ Order No. 4257 at 222, 274-275 (summarizing that while some 
cost reductions and efficiency gains were achieved post-PAEA, they 
were insufficient to achieve financial stability in the medium term 
and long term).
    \6\ Id. at 273. The two major service standard changes in the 
first 10 years after the passage of the PAEA were reviewed by the 
Commission, prior to implementation, in Docket Nos. N2012-1 and 
N2014-1. The ``Network Rationalization'' initiative implemented by 
the Postal Service included changes to the service standards for 
First-Class Mail, Periodicals, USPS Marketing Mail, and Package 
Services. The ``Load Leveling'' initiative included changes to the 
service standards for USPS Marketing Mail. Id. at 264-273.
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    In response, the Commission modified the ratemaking system's design 
to encourage and enable the Postal Service to address its complex 
challenges by making prudent pricing and operational decisions. See 
Order No. 5763 at 285. Among other changes made, the modified rules 
provide additional rate authority to address two underlying drivers of 
the Postal Service's net losses that are largely outside of its direct 
and near-term control: (1) The increase in per-unit cost resulting from 
the decline in mail density for each fiscal year under subpart D of 39 
CFR part 3030 of this chapter; and (2) the statutorily mandated 
amortization payments for particular retirement costs under subpart E 
of 39 CFR part 3030 of this chapter. See id. These principled 
adjustments to the price cap made by the Commission in Docket No. 
RM2017-

[[Page 8331]]

3 are necessary to achieve the objectives of the PAEA, in conjunction 
with each other, and are focused on vital near-term improvements.
    However, the objectives of the PAEA related to maximizing 
incentives to increase efficiency and reducing costs as well as 
assuring financial stability (including retained earnings) set forth 
ambitious goals that are difficult to achieve instantaneously or 
simultaneously. See 39 U.S.C. 3622(b)(1) and (5). These goals must also 
be achieved in conjunction with other priorities over time, such as 
maintaining high-quality service standards. See id. section 3622(b)(3). 
Consistent with the Commission's findings in Docket No. RM2017-3, 
Docket No. RM2021-2 is initiated to explore whether additional 
regulatory changes may be necessary to promote longer-term financial 
stability, increased efficiency and cost reductions, while maintaining 
high-quality service standards, and if so, how to best design these 
potential changes. See Order No. 5763 at 166. The Commission invites 
any interested party to submit comments on the following topics and 
asks the following questions to initiate a meaningful dialogue with 
stakeholders.

III. Substantive Areas for Further Refinement

A. Incentive Regulation

    Performance-based regulation is a broad concept referring to a 
regulatory system that applies incentives to promote targeted behavior 
by the regulated entity.\7\ More specifically, a performance incentive 
mechanism (PIM), also referred to as a targeted performance incentive 
(TPI), is used by regulators to set a target for acceptable performance 
by the regulated entity in a specific area and attach financial 
consequences to ensure compliance. See Zarakas, supra. This rulemaking 
is initiated to explore whether and how to introduce any potential 
modifications to the design of the ratemaking system that would further 
enhance (i.e., maximize over the longer-term) the Postal Service's 
incentives to increase efficiency and reduce costs. Achieving such 
efficiencies could benefit the Postal Service by improving its longer-
term financial viability and could benefit the ratepayers by leading to 
improved service performance. At the same time, the Commission remains 
mindful that further enhancing the Postal Service's incentives to 
increase efficiency and reduce costs may weaken the incentive to 
maintain high-quality service standards. The Commission also 
acknowledges that ratepayers may have different preferences with 
respect to the speed and/or the consistency of delivery service for 
Market Dominant products. Accordingly, to explore possible enhancements 
to the Market Dominant ratemaking system overall, through the 
introduction of direct financial consequences (such as an upward or 
downward adjustment to rate authority) using a PIM or a different 
method, the Commission raises the following discussion points:
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    \7\ See William Zarakas, A New Face for PBR: Aligning Incentives 
in the Electric Utility Ecosystem, PUB. UTILS. FORT., December 2017 
(Zarakas), available at: https://www.fortnightly.com/fortnightly/2017/12/new-face-pbr?authkey=e0a4230ee85eb602f123c1e633c0e5b5260f9bd3f297c094c055e7868e5a4589.
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    1. Whether additional regulatory changes are needed to further 
enhance the Postal Service's incentives to increase efficiency and 
reduce costs while maintaining high-quality service standards. Why or 
why not?
    2. How to identify and evaluate potential types of regulatory 
changes that would introduce direct financial consequences that would 
further enhance the Postal Service's incentives to increase efficiency 
and reduce costs while maintaining high-quality service standards? Are 
there any financial consequences that can be drawn from other postal 
systems or other regulated industries that should be considered?
    3. How to identify and evaluate potential types of regulatory 
changes other than the connection of direct financial consequences that 
would further enhance the Postal Service's incentives to increase 
efficiency and reduce costs while maintaining high-quality service 
standards? Are there any non-financial incentives that can be drawn 
from other postal systems or other regulated industries that should be 
considered?

B. Mechanism for a Financial Incentive

    The Commission is interested in exploring whether a regulatory 
mechanism connecting direct financial consequences with increasing 
efficiency and reducing costs and maintaining high-quality service 
standards would benefit the Market Dominant ratemaking system, and how 
to connect the Postal Service's behavior with the financial incentive 
introduced. The Commission acknowledges that every proposal has 
tradeoffs and that it is impossible to refine the connection to a level 
of absolute precision.\8\ This rulemaking does not aim for this level 
of precision. Generally, the Commission seeks to identify an amount of 
a financial incentive that is both meaningful to the Postal Service 
(i.e., would actually motivate it to engage in the desired behavior) 
and would neither be excessive to the ratepayers nor threaten the 
financial integrity of the Postal Service.
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    \8\ See Nat'l Ass'n of Broadcasters v. F.C.C., 740 F.2d 1190, 
1210 (D.C. Cir. 1984) (``But administrative action generally occurs 
against a shifting background in which facts, predictions, and 
policies are in flux and in which an agency would be paralyzed if 
all the necessary answers had to be in before any action at all 
could be taken.'').
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    Preliminarily, the Commission is interested in exploring whether 
and how to introduce a financial incentive by modifying the Postal 
Service's authority to adjust its rates. Adjustments to rate authority 
could be upwards (increase rate authority), downwards (reduce rate 
authority), or both. See Zarakas, supra. An upward PIM would reward 
superior performance, whereas a downward PIM would penalize 
unsatisfactory performance. The PIM may be designed to operate 
simplistically: For instance, a specific upward or downward incentive 
is either provided or not provided, based on the observed performance. 
On the other hand, a more nuanced PIM could be designed to provide a 
particular tier of financial incentive based on the observed 
performance: For instance, progressively increasing rewards or 
penalties.\9\ If any commenters have a basis for connecting particular 
requirement(s) with particular amount(s), they may include such 
proposals in their response to this Order.
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    \9\ See Synapse Energy Economics, Inc., Melissa Whited, Tim 
Woolf, & Alice Napoleon, Utility Performance Incentive Mechanisms: A 
Handbook for Regulators, Prepared for the Western Interstate Energy 
Board, March 9, 2015 (2015 PIM Handbook), at 43-44 (demonstrating 
quadratic versus step functions).
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    One potential method to develop a PIM for both upward and downward 
adjustments would be to set a ``dead-band'' around historical 
performance.\10\ This type of PIM would trigger a penalty when actual 
performance falls below the lower target (unsatisfactory performance) 
and trigger a reward when actual performance exceeds the upper target 
(superior performance).\11\ The lower and upper targets could be 
derived by measuring the standard deviation(s) from historical

[[Page 8332]]

performance.\12\ Actual performance within the dead-band (a neutral 
zone) would not result in a direct financial consequence.\13\
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    \10\ See 2015 PIM Handbook at 38; Paul L. Joskow, Incentive 
Regulation in Theory & Practice: Electricity Distribution & 
Transmission Networks, January 21, 2006 (2006 Joskow), at 8, 
available at: https://economics.mit.edu/files/1181.
    \11\ See 2015 PIM Handbook at 38; see also 2006 Joskow, supra at 
8.
    \12\ See 2015 PIM Handbook at 38; see also 2006 Joskow, supra at 
8.
    \13\ See 2015 PIM Handbook at 38.
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    Therefore, to develop a mechanism that would balance simplicity 
with optimal refinement, the Commission raises the following discussion 
points:
    1. How to identify the percentage of rate authority that would 
provide a meaningful incentive(s) to the Postal Service, while also not 
leading to excessive rate increases for mailers nor threatening the 
financial integrity of the Postal Service?
    2. How to identify data and methods available to develop a 
connection between the amount of the financial incentive(s) at stake 
with the observed performance (i.e., the change(s) in or level(s) of 
efficiency, costs, and/or service standards)?
    3. How to identify the relative advantages of applying incentives 
as upward adjustments (increasing the amount of rate authority(ies)), 
downward adjustments (reducing the amount of rate authority(ies)), a 
combination mechanism (both), or another method?
    4. How best to administer the chosen method?

C. Operational Efficiency-Based Requirement

    The Commission intends to explore whether and how to translate the 
broad policy goals of the PAEA--incentivizing the Postal Service to 
increase efficiency and reduce costs--into a specific PIM.
    For purposes of evaluating the Postal Service's operational 
efficiency, total factor productivity (TFP) is a highly comprehensive 
metric.\14\ The Commission intends to further explore whether TFP or an 
alternative metric is capable of producing sufficiently reliable, 
accurate, and transparent results that would be appropriate for use as 
a potential benchmark on which to condition rate authority. While the 
Commission's preliminary expectation is that there is not a practical 
way to refine TFP to focus on only Market Dominant products (see Order 
No. 5337 at 134), the Commission would welcome any comments proposing a 
basis for doing so. There have been some changes in the TFP methodology 
over the years, and TFP results have been revised after-the-fact on 
occasion.\15\ Accordingly, the Commission intends to review how these 
changes impact reliability and accuracy over time. While there is not 
necessarily a reason to believe that the Postal Service would attempt 
to influence TFP results by making unreasonable business decisions (see 
Order No. 5337 at 135), the Commission also intends to further explore 
how TFP could be refined methodologically to produce results that are 
adequately safeguarded against manipulation. A critical step to enable 
this study of TFP is to require the Postal Service to file the 
documentation and linked workpapers containing all formulae for its TFP 
methodology.\16\ Therefore, this Order imposes a deadline for the 
Postal Service to file this information of February 16, 2021.
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    \14\ See Docket No. RM2017-3, Northwest Postal Consulting (NWPC) 
for the Postal Regulatory Commission, Report 1, Adequacy of the 
Postal Service's TFP Model, Final Report, March 27, 2017, at 2 (NWPC 
Report 1) (opining that the Postal Service's TFP Model contains 
significant levels of detail regarding different aspects of Labor, 
Capital, Materials, Mail Volume, and Possible Deliveries).
    \15\ Compare, e.g., United States Postal Service, USPS Annual 
Tables, FY 2017 TFP (Total Factor Productivity), February 28, 2018, 
Excel file ``table annual 2017 public (2017 cra).xlsx,'' tab ``Tfp-
52'' (updating FY 2016 TFP result to 1.262) with United States 
Postal Service, USPS Annual Tables, FY 2016 TFP (Total Factor 
Productivity), March 1, 2017, Excel file ``table annual 2016 public 
(2016 cra).xlsx,'' tab ``Tfp-52'' (reporting FY 2016 TFP result as 
1.260). While the Postal Service did not provide an explanation for 
the updated FY 2016 TFP result, Commission analysis identified 
updated source data for FY 2016. Additional technical changes to the 
TFP are detailed in the NWPC Report 2 filed by the Commission in 
conjunction with Order No. 5337. See generally Docket No. RM2017-3, 
Northwest Postal Consulting (NWPC) for the Postal Regulatory 
Commission, Report 2, Comparison of Postal Service Productivity 
Measurement: Before and After PAEA Enactment, March 27, 2017, at 8-
11 (NWPC Report 2).
    \16\ By way of background, the TFP workpapers filed by the 
Postal Service contain hardcoded inputs and outputs rather than 
displaying the formulae used and links to related spreadsheets. 
Compare, e.g., United States Postal Service, USPS Annual Tables, FY 
2019 TFP (Total Factor Productivity), February 27, 2020 with 39 CFR 
3050.2(c).
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    The Commission intends to explore whether TFP can be refined to 
better focus on efficiency gains within the Postal Service's control or 
whether an alternative metric should be developed. The Postal Service 
has used the Deliveries per Total Workhours (DPTWH) as an alternative 
efficiency metric in its annual reports to Congress and to develop its 
Integrated Financial Plan.\17\ The Commission has expressed concerns 
with the underlying methodology, finding that DPTWH is less 
comprehensive than TFP for purposes of measuring productivity because 
DPTWH isolates workhours (labor) and because DPTWH does not recognize a 
major workload component: The collection, processing, transporting, and 
sequencing for delivery of mail.\18\ However, it may be possible to 
develop an alternate methodology that is easier to calculate, 
understand, and apply than TFP but still comprehensive enough to 
reflect overall efficiency gains. If the Postal Service proposes that 
the Commission use a metric other than TFP for a PIM, then it shall 
file a detailed public explanation of the methodology along with its 
comments.
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    \17\ See Docket No. ACR2019, Library Reference USPS-FY19-17, 
December 27, 2019, United States Postal Service FY 2019 Annual 
Report to Congress, at 34 (FY 2019 Annual Report). DPTWH is 
calculated by multiplying the total possible deliveries by the 
number of delivery days and dividing that product by total work 
hours. FY 2019 Annual Report at 34. ``Starting in FY 2021, the DPTWH 
metric will no longer be tracked as a corporate indicator.'' Docket 
No. ACR2020, Library Reference USPS-FY20-17, December 29, 2020, 
United States Postal Service FY 2020 Annual Report to Congress, at 
52 (FY 2020 Annual Report).
    \18\ See Docket No. ACR2010, Annual Compliance Determination, 
March 29, 2011, at 39; see also Docket No. ACR2013, Review of Postal 
Service FY 2013 Performance Report and FY 2014 Performance Plan, 
July 7, 2014, at 25.
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    Some of the sources of inefficiency (and the potentially resulting 
lost opportunities to reduce costs and improve service performance) are 
known in theory but difficult to correct in practice. The following 
examples are not intended to exhaustively detail these types of issues 
and instead are intended to promote thoughtful engagement and 
exploration of the potential challenges and opportunities to enhance 
the design of the Market Dominant ratemaking system.\19\
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    \19\ Extremely detailed discussions of issues related to 
specific processing (referred to as pinch-points) may be found in a 
number of other proceedings. See, e.g., Docket No. ACR2015, Annual 
Compliance Determination, March 28, 2016, at 165-180; Docket No. 
ACR2016, Annual Compliance Determination, March 28, 2017, at 165-
170; Docket No. ACR2017, Annual Compliance Determination, March 29, 
2018, at 175-181; Docket No. ACR2018, Annual Compliance 
Determination, April 12, 2019, at 215-222; Docket No. ACR2019, 
Annual Compliance Determination, March 25, 2020, at 161-174 (FY 2019 
ACD).
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    For instance, while the Postal Service acknowledges that it must 
better align labor with volume, it has stated that this has been 
difficult to put into practice.\20\ During a given day, there are 
periods of higher workload (peaks) and lower workload (valleys or off-
peaks). More staff are needed to handle peaks, whereas, during the 
valleys, fewer staff are needed. These peaks and valleys do not 
naturally align with the traditional Postal Service labor structure, 
which operates in three tours, or 8-hour cycles, per day.\21\ 
Therefore, Postal Service

[[Page 8333]]

management must plan carefully to minimize inefficient outcomes, such 
as insufficient staff during peaks or over-staffing during valleys.\22\ 
Additionally, inefficient staffing may lead to mail failing to clear 
operational checkpoints as expected, which may lead to other negative 
effects such as the use of overtime hours or additional contract 
transportation to ``catch-up'' and/or late delivery.\23\
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    \20\ See, e.g., Docket No. ACR2019, Library Reference USPS-FY19-
29, December 27, 2019, PDF file ``FY19-29 Service Performance 
Report.pdf,'' at 7, 30.
    \21\ Tour 1 is from 11:00 p.m. to 07:00 a.m.; Tour 2 is from 
07:00 a.m. to 3:00 p.m.; Tour 3 is from 3:00 p.m. to 11:00 p.m. 
United States Postal Service, Office of the Inspector General, 
Report No. 20-144-R20, Transportation Network Optimization and 
Service Performance, June 5, 2020, at 15, available at: https://www.uspsoig.gov/sites/default/files/document-library-files/2020/20-144-R20.pdf (OIG Rep. No. 20-144-R20).
    \22\ See Docket No. N2010-1, Advisory Opinion on Elimination of 
Saturday Delivery, March 24, 2011, at 115-126 (Docket No. N2010-1 
Advisory Opinion); see also OIG Rep. No. 20-144-R20 at 15-16 
(finding insufficient management staff working during Tours 1 and 
3); United States Postal Service, Office of the Inspector General, 
Report No. 19XG013NO000-R20, U.S. Postal Service's Processing 
Network Optimization and Service Impacts, October 15, 2018, at 17-
18, available at: https://www.uspsoig.gov/sites/default/files/document-library-files/2020/19XG013NO000-R20.pdf (OIG Rep. No. 
19XG013NO000-R20) (finding employee availability issues contributed 
to lower productivity, higher costs, and slower service 
performance).
    \23\ For example, if inefficient staffing leads to failure to 
complete origin processing by the applicable target time of day, the 
affected mail may miss its scheduled transportation. While the 
Postal Service may try to mitigate the downstream effects by 
catching-up during transit or destination processing, the Postal 
Service acknowledges that these types of delays often require 
extraordinary action to deliver the affected mail within the 
applicable service standard. FY 2019 ACD at 109 (The Postal Service 
asserts that if a mailpiece misses its scheduled transportation, 
then generally that mailpiece will not be delivered within the 
expected timeframe absent ``extraordinary measures at substantial 
cost, such as extra transportation along with clerk and carrier 
overtime at the delivery point.'') (quoting Docket No. ACR2018, 
Responses of the United States Postal Service to Questions 1-9 of 
Chairman's Information Request No. 13, February 21, 2019, question 
2).
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    As another example, while the Postal Service acknowledges that it 
must better encourage preparation of the mail by mailers and/or mail 
service providers so as to facilitate more efficient handling by the 
Postal Service, existing practices do not maximize this 
opportunity.\24\ For instance, certain ways of preparing mail for 
presentation to the Postal Service are more likely to result in bundle 
breakage.\25\ Increased bundle breakage tends to reduce the ability to 
process the affected mail using machines and increase the likelihood 
that the affected mail will undergo manual processing instead. Manual 
processing is less efficient (slower and more costly) than machine 
processing.\26\ Increased manual processing may lead to mail failing to 
clear operational checkpoints as expected, which may lead to other 
negative effects such as the use of overtime hours to ``catch-up'' and/
or late delivery.\27\
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    \24\ See, e.g., United States Postal Service, Office of the 
Inspector General, Report No. 20-088-R20, Cost Reduction Initiatives 
for Mail Products, Report Number, August 3, 2020, at 1, available 
at: https://www.uspsoig.gov/sites/default/files/document-library-files/2020/20-088-R20.pdf (OIG Rep. No. 20-008-R20) (finding that 
the Postal Service personnel did not regularly record mail 
preparation quality issues, report such issues to Postal Service 
management for updates to the guidance provided to mailers, or 
otherwise communicate with mailers concerning correction).
    \25\ See, e.g., OIG Rep. No. 20-088-R20 at 5-9 (detailing that 
mailpieces that are relatively thinner, shrink-wrapped, bundled 
using rubber bands or strings, or presented in sacks tend to break 
more often than mailpieces that are relatively thicker, not shrink-
wrapped, bundled using polypropylene (plastic) straps, or presented 
on pallets).
    \26\ See, e.g., OIG Rep. No. 20-088-R20 at 6 (estimating that 
for FYs 2018-2019, broken bundles could have increased bundle 
processing costs by $96.9 million).
    \27\ For example, if bundle breakage triggers manual processing 
of the affected mail, the affected mail may miss its applicable time 
target to clear the next processing operation. See, e.g., Docket No. 
ACR2019, Library Reference USPS-FY19-29, December 27, 2019, PDF file 
``FY19-29 Service Performance Report.pdf,'' at 19. The Postal 
Service may try to use overtime hours to speed up manual processing 
in an effort to deliver the affected mail within the applicable 
service standard. See, e.g., OIG Rep. No. 20-088-R20 at 8.
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    Generally, the Commission aims to select targets that are outcome-
oriented, consistent with the policy goals of the PAEA, objectively 
measureable and verifiable, readily interpretable, and achievable. 
Because the Commission is particularly focused on promoting the Postal 
Service's longer-term financial viability, the Commission is interested 
in selecting a metric(s) and target(s) for the PIM that would be 
consistent with ancillary benefits such as increasing the opportunities 
for reducing costs and improving service performance. Moreover, the 
Commission intends to consider potential safeguards to incorporate into 
the PIM, to ensure that results are adequately safeguarded against 
manipulation and that selection of a shorter-term target would not 
perversely incentivize behavior that would be detrimental in the 
longer-term.
    Therefore the Commission raises the following discussion points:
    1. How to identify possible refinements to TFP to increase its 
reliability, accuracy, and representativeness as a measure of 
efficiency gains within the Postal Service's control?
    2. How to identify alternative potential metric(s) other than TFP 
that could be developed or refined as an accurate, reliable, and 
representative measure of efficiency gains within the Postal Service's 
control? Should the Commission consider industry-wide, economy-wide, or 
similar comparative benchmarks for efficiency? Are there any metrics 
that the Commission can learn from in adjacent industries, other 
sectors, or other posts?
    3. How to identify potential target(s) for efficiency gains?
    4. How to identify potential metric(s) and target(s) related to 
efficiency gains to promote the longer-term financial viability of the 
Postal Service, such as by increasing the opportunities for cost 
reduction and/or improved service performance?
    5. How to identify potential safeguards designed to minimize 
manipulation by the operator and prevent the operator from engaging in 
behavior that would be detrimental over the longer-term?

D. Service Standards-Based Requirement

    Additionally, the Commission intends to explore whether and how to 
translate the policy goal of the PAEA to maintain high-quality service 
standards into a specific PIM. This goal is intended to encourage the 
maintenance of high-quality service standards established pursuant to 
39 U.S.C. 3691, and to hold the Postal Service accountable for 
consistently achieving those standards. See Order No. 4257 at 261.
    The first aspect underlying this goal is referred to as ``service 
standards,'' which are the stated days-to-delivery for different types 
of mail. See id. at 250. Service standards are comprised of a delivery 
day range and business rules.\28\ With respect to service standards, 
the Commission is interested in whether introducing direct financial 
consequences linked to maintenance of the existing service standards 
would enhance the system, and if so, how to calibrate that mechanism. 
See Order No. 5763 at 170.
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    \28\ See id. at 251-252. By way of example, there are three 
separate service standards for First-Class Mail: (1) 1-Day (referred 
to as ``overnight''); (2) 2-Day; and (3) 3-5-Day; business rules 
determine whether an individual mailpiece will be delivered 
overnight, in 2 days, or in 3-5 days. See id. at 250-251.
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    The second aspect underlying this goal implicitly requires 
consistent achievement of service standards, which is referred to as 
``service performance.'' See id. at 296; Order No. 4257 at 262-263. The 
existing regulatory system has a mechanism to hold the Postal Service 
accountable for its service performance: The annual compliance review 
proceeding.\29\ If commenters have

[[Page 8334]]

suggestions on how to improve upon that mechanism, they may propose 
changes in their response to this Order.
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    \29\ Order No. 5763 at 296; Order No. 4257 at 264; Docket No. 
RM2009-11, Order Establishing Final Rules Concerning Periodic 
Reporting of Service Performance Measurements and Customer 
Satisfaction, May 25, 2010, at 32 (Order No. 465).
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    An effective price cap system maintains reliable, efficient, and 
economical service.\30\ ``The Postal Service cannot be permitted to 
degrade service in order to comply with the revenue constraints 
associated with the price cap.'' Order No. 4257 at 255 (citing Docket 
No. N2010-1, Advisory Opinion at 8). ``A reduction in service must be 
warranted by declining demand for the service, rather than to ease the 
obligation of adhering to the price cap.'' Docket No. N2010-1, Advisory 
Opinion at 10. Introducing a direct financial incentive connected to 
operational efficiency gains and cost reductions may undermine the 
existing incentives to maintain high-quality service standards.\31\ 
Accordingly, to give due consideration to a potential need to 
counterbalance such unintended consequences, the Commission raises the 
following discussion points:
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    \30\ Order No. 4257 at 255 (citing Docket No. N2010-1 Advisory 
Opinion at 7-10).
    \31\ See Order No. 5763 at 171 (citing Order No. 5337 at 142, 
144; Order No. 4257 at 255); see also 2006 Joskow, supra at 8 
(observing that regulatory mechanisms focusing on cost reductions 
exclusively may lead to the operator reducing its service).
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    1. How to identify potential regulatory changes that may be needed 
to counterbalance any perverse incentive to degrade service standards 
and/or service performance that may be created by introducing an 
operational-efficiency based requirement?
    2. How to identify the relative advantages of designing a system 
that creates a direct financial link to changes in service standards?
    3. What data and methods could be used to design a system that 
creates a direct financial link to changes in service standards?

IV. Administrative Actions

    The Commission establishes Docket No. RM2021-2 for consideration of 
the matters discussed in the body of this advance notice of proposed 
rulemaking.
    The Commission will accept comments and reply comments concerning 
the topics identified in this advance notice of proposed rulemaking. 
Comments are due April 15, 2021. Reply comments are due May 17, 2021. 
Pursuant to 39 U.S.C. 505, Richard A. Oliver is designated as an 
officer of the Commission (Public Representative) to represent the 
interests of the general public in this proceeding.
    The Postal Service shall file the documentation and linked 
workpapers for its TFP methodology to aid in the evaluation of TFP by 
February 16, 2021. Materials filed in this docket will be available for 
review on the Commission's website (http://www.prc.gov).
    The Regulatory Flexibility Act requires federal agencies, in 
promulgating rules, to consider the impact of those rules on small 
entities. See 5 U.S.C. 601, et seq. If the proposed or final rules will 
not, if promulgated, have a significant economic impact on a 
substantial number of small entities, the head of the agency may 
certify that the initial and final regulatory flexibility analysis 
requirements of 5 U.S.C. 603 and 604 do not apply. See 5 U.S.C. 605(b). 
In the context of this rulemaking, the Commission's primary 
responsibility is in the regulatory oversight of the United States 
Postal Service. The rules that are the subject of this rulemaking have 
a regulatory impact on the Postal Service, but do not impose any 
regulatory obligation upon any other entity. Based on these findings, 
the Chairman of the Commission certifies that the rules that are the 
subject of this rulemaking will not have a significant economic impact 
on a substantial number of small entities. Therefore, pursuant to 5 
U.S.C. 605(b), this rulemaking is exempt from the initial and final 
regulatory flexibility analysis requirements of 5 U.S.C. 603 and 604.

V. Ordering Paragraphs

    It is ordered:
    1. Docket No. RM2021-2 is established for the purpose of 
considering amendments to Chapter III of title 39 of the Code of 
Federal Regulations as discussed in this advance notice of proposed 
rulemaking.
    2. The Postal Service shall file the documentation and linked 
workpapers for its total factor productivity methodology, in a manner 
that displays the formulae used and links to related spreadsheets by 
February 16, 2021.
    3. If the Postal Service proposes to use a metric other than total 
factor productivity for a performance incentive mechanism, then it 
shall file a detailed public explanation of the methodology along with 
its comments.
    4. Pursuant to 39 U.S.C. 505, Richard A. Oliver shall serve as an 
officer of the Commission (Public Representative) to represent the 
interests of the general public in this proceeding.
    5. Interested persons may submit comments no later than April 15, 
2021.
    6. Interested persons may submit reply comments no later than May 
17, 2021.
    7. The Secretary shall arrange for publication of this order in the 
Federal Register.

    By the Commission.
Erica A. Barker,
Secretary.

    Editorial Note: This document was received at the Office of the 
Federal Register on January 19, 2021.

[FR Doc. 2021-01500 Filed 2-4-21; 8:45 am]
BILLING CODE 7710-FW-P