[Federal Register Volume 86, Number 227 (Tuesday, November 30, 2021)]
[Proposed Rules]
[Pages 67882-67885]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-25841]


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POSTAL REGULATORY COMMISSION

39 CFR Part 3035

[Docket Nos. RM2017-1 and RM2022-2; Order No. 6043]
RIN 3211-AA29


Competitive Postal Products

AGENCY: Postal Regulatory Commission.

ACTION: Supplemental notice of proposed rulemaking.

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SUMMARY: On January 3, 2019, the Commission adopted final rules to 
implement a dynamic formula-based approach for calculating the 
institutional cost contribution requirement for Competitive products, 
which is also referred to as ``the appropriate share,'' in accordance 
with the applicable statutory requirements. Subsequently, the United 
States Court of Appeals for the District of Columbia Circuit (D.C. 
Circuit), in a decision issued in April 2020, remanded two issues to 
the Commission for clarification. This supplemental notice of proposed 
rulemaking addresses the issues identified by the D.C. Circuit, 
initiates the Commission's third 5-year review of the appropriate 
share, reissues the dynamic formula-based approach to calculating the 
appropriate share as a proposed rule, and invites public comment.

DATES: Comments are due: February 25, 2022; Reply Comments are due: 
March 25, 2022.

ADDRESSES: For additional information, Order No. 6043 can be accessed 
electronically through the Commission's website at https://www.prc.gov. 
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. Relevant Statutory Requirements
II. Background
III. Basis and Purpose of Proposed Rule
IV. Proposed 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 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.\1\ Most significantly,

[[Page 67883]]

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. In light of the changes described above, Order 
No. 4963 adopted a dynamic formula-based approach to determining the 
appropriate share and adopts related rule changes. Id. at 19-29.
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    \1\ 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); see 84 
FR 537 (January 1, 2019).
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    However, Order No. 4963 was appealed by the United Parcel Service, 
Inc. and later remanded to the Commission for further consideration by 
the United States Court of Appeals for the District of Columbia 
Circuit. United Parcel Serv., Inc. v. Postal Reg. Comm'n, 955 F.3d 1038 
(D.C. Cir. 2020). The court identified two major aspects of Order No. 
4963 for the Commission to clarify on remand.
    First, the court found that ``the Commission ha[d] not adequately 
explained how the statutory phrases `direct and indirect postal costs 
attributable to [a particular competitive] product through reliably 
identified causal relationships' and `costs . . . uniquely or 
disproportionately associated with any competitive products' can 
coincide.'' Id. at 1041, 1049. Second, the court found that ``in 
focusing narrowly on costs attributed to competitive products under [39 
U.S.C.] 3633(a)(2), the Commission failed to discharge its 
responsibility under [39 U.S.C.] 3633(b) to `consider . . . the degree 
to which any costs are uniquely or disproportionately associated with 
any competitive products.' '' Id. at 1042, 1049 (emphasis in original).
    As part of Order No. 6043 and to provide necessary background 
concerning the issues identified by the court, Chapter IV of the Order 
details the evolution of postal costing. The current cost attribution 
methodology is designed to facilitate the attribution of costs to 
products to the greatest extent feasible. See Section IV.A.1. The 
Commission discusses the nature of institutional costs and why they 
cannot be allocated any further. See Section IV.B.4. With respect to 
Competitive product regulation, the Commission explains how section 
3633, as implemented by the Commission, functionally results in a 
series of interrelated price floors. See Section IV.B. The price floor 
required by 39 U.S.C. 3633(a)(2), which requires each Competitive 
product to recover its product-level attributable costs, is included in 
the calculation of the price floor under 39 U.S.C. 3633(a)(1), which 
requires the recovery of both product- and group-level attributable 
costs for Competitive products collectively. See Section IV.B.2-3. This 
is because incremental costs \2\ currently form the basis for both cost 
attribution and testing for cross-subsidization of Competitive products 
by Market Dominant products. See id. Therefore, the price floor under 
paragraph (a)(1) is currently equivalent to the total attributable cost 
of Competitive products collectively, which includes both individual 
product-level incremental costs as well as group-level costs that are 
incremental for Competitive products collectively. See id.
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    \2\ Incremental costs are the variable and fixed costs that 
would be eliminated if a product or group of products were 
discontinued, or, equivalently, the total cost caused by the product 
or group of products. See Section IV.B.2.
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    Chapter V discusses the regulatory scheme for Competitive products 
and amplifies the Commission's interpretation of 39 U.S.C. 3633(a)(3) 
and (b). Based on the PAEA's text, context, and structure, and as 
confirmed by its history, the purpose of the appropriate share 
provision is to ensure fair competition in the market for competitive 
postal services by protecting against any possibility that prices for 
the Postal Service's Competitive products (despite covering their 
attributable costs), might nevertheless be anticompetitively priced as 
a result of the Postal Service's institutional costs being jointly 
incurred by Market Dominant and Competitive products. See Section V.B. 
The Commission concludes that the primary focus of the appropriate 
share provision is to protect competition rather than to ensure a 
particular level of institutional cost coverage. See id.
    The Commission clarifies that the ``uniquely or disproportionately 
associated'' standard appearing in 39 U.S.C. 3633(b) is broader than 
the ``reliably identified causal relationship'' standard for cost 
attribution under 39 U.S.C. 3631(b), such that the latter standard can 
be viewed as a subset of the former. See id. The Commission also, as 
directed on remand, considers the ``uniquely or disproportionately 
associated'' standard as applied to all accrued costs, which includes 
both attributable and institutional costs. See id. To rise to the level 
of being ``uniquely or disproportionately associated with any 
competitive products'' as contemplated by 39 U.S.C. 3633(b), the cost's 
relationship with the product or products must be distinct (uniquely 
associated) or out of proportion compared to the cost's relationship 
with other products or groups of products (disproportionately 
associated). See id.
    Chapter VI applies the Commission's interpretation to ``all 
relevant circumstances,'' resulting in the Commission electing to 
maintain the dynamic formula-based approach to determining the 
appropriate share. Under 39 U.S.C. 3633(a)(3), the prices set for 
Competitive products must be marked up high enough to generate revenue 
above and beyond the costs attributable to Competitive products at the 
individual product and group level in order to also cover an 
appropriate share of the Postal Service's institutional costs. See 
Section VI.A.1. The price floor set by 39 U.S.C. 3633(a)(3) is made up 
of the appropriate share of institutional costs, as determined by the 
Commission, plus the attributable cost of Competitive products 
collectively. See id. Thus, this price floor set by 39 U.S.C. 
3633(a)(3) is higher than both of the price floors set by 39 U.S.C. 
3633(a)(1) and (a)(2). See id. Because all attributable costs are 
already included in the Competitive product price floor under 39 U.S.C. 
3633(a)(3), the Commission declines to further account for them as part 
of the appropriate share. See id. Double-counting such costs would be 
economically unsound and would undermine the Postal Service's ability 
to effectively compete. See id.
    The Commission applies the ``uniquely or disproportionately 
associated'' standard to all of the Postal Service's accrued costs. See 
Section VI.A. The Commission has analyzed the degree to which any costs 
are ``uniquely or disproportionately associated with any competitive 
products,'' (39 U.S.C. 3633(b)), and found there are no costs (other 
than those that also meet the definition of attributable costs) that 
can be identified to be ``uniquely or disproportionately associated 
with any competitive products.'' 39 U.S.C. 3633(b); see Section VI.A.1.
    The nature of the residual costs which remain in the institutional 
cost category is such that the relationships between such costs and 
specific products or groups of products are not discernible or 
quantifiable. See id. There is no method to identify a portion of 
institutional costs as associated with Competitive products that would 
not be arbitrary and capricious. See Section VI.A.2. Moreover, 
employing arbitrary cost allocation methods would seriously

[[Page 67884]]

undermine the Postal Service's ability to compete. See id.
    The inability to further allocate institutional costs under the 
current methodology, however, does not mean that the Postal Service has 
an unfair competitive advantage with respect to Competitive products. 
See id. The available evidence suggests that the market is healthy and 
competitive. See id.; Section VI.B.2. There is no evidence that the 
Postal Service has engaged in anticompetitive pricing of Competitive 
products; to the contrary, the evidence suggests that the Postal 
Service is incentivized to maximize Competitive product profits, and 
its market conduct has been in line with what would be expected of a 
profit-maximizing firm. See Section VI.A.2. Competitive product 
contribution to institutional costs has always exceeded the required 
amount, often by a significant margin.\3\ The Commission has elected to 
retain the appropriate share to serve as a margin of safety against any 
possibility of the Postal Service having an unfair competitive 
advantage. See Section VI.A.2. Under the proposed dynamic formula-based 
approach, the appropriate share requirement would increase due to 
growth in the profitability or market share of the Postal Service's 
Competitive products. See id.
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    \3\ See id. (citing FY 2020 ACD at 91-95; FY 2019 ACD at 86-89; 
FY 2018 ACD at 112-17; Order No. 4402 at 52-53 (83 FR 6758, Feb. 14, 
2018).
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    With the foregoing clarifications having been made, the Commission 
explains how the formula operates and how it accounts for the 
prevailing competitive conditions in the market and other relevant 
circumstances that the Commission has historically considered 
qualitatively when evaluating the appropriate share requirement. See 
Section VI.B. Because the dynamic formula-based approach reasonably 
reflects the qualitative statutory criteria from 39 U.S.C. 3633(b), it 
easily falls within the Commission's broad discretion to determine what 
the appropriate share should be. See Section VI.B.1. The Commission 
concludes that the appropriate share requirement, as derived from the 
formula, is sufficient to prevent the possibility of the Postal Service 
engaging in anticompetitive pricing of Competitive products. See 
Section VI.B.1.c.

III. Basis and Purpose of Proposed Rule

    The purpose of the Commission's dynamic 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. 
Order No. 6043 at 99.
    The formula seeks to determine the Postal Service's overall market 
power by measuring its absolute and relative market power.\4\ 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 99-101. 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 99-100. 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 100.
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    \4\ 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. A firm's 
absolute market power is its ability to raise prices with regard to 
its own consumers. Id. 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.
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    The second component of the formula is the Competitive Growth 
Differential, which measures the Postal Service's market position. Id. 
at 100-101. 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. This relative growth is then weighted by the Postal 
Service's market share. Id. at 100.
    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 102.
    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. 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. at 103. 
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.
    Because another 5 years has passed since the Commission's review 
began in Docket No. RM2017-1, Order No. 6043 also initiates the 
Commission's third 5-year review via Docket No. RM2022-2. Because the 
issues and facts under review are related, the two dockets are 
consolidated to enable more efficient administration of proceedings 
before the Commission. See 39 U.S.C. 503; 39 CFR 3010.104.

IV. Proposed Rule

    In order to implement the Commission's formula, existing Sec.  
3035.107(c) is reissued. Proposed Sec.  3035.107(c)(1) establishes the 
formula that is to be used in calculating the appropriate share and 
defines each of the formula's terms. Proposed Sec.  3035.107(c)(1) 
states that the appropriate share of institutional costs to be covered 
by competitive products set forth in that rule is a minimum 
contribution level. Proposed Sec.  3035.107(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 3035

    Administrative practice and procedure.

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

[[Page 67885]]

PART 3035--REGULATION OF RATES FOR COMPETITIVE PRODUCTS

0
1. The authority citation for part 3035 continues to read as follows:

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

0
2. Amend Sec.  3035.107 by revising paragraph (c) to read as follows:


Sec.  3035.107  Standards 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.
Erica A. Barker,
Secretary.
[FR Doc. 2021-25841 Filed 11-29-21; 8:45 am]
BILLING CODE 7710-FW-P