[Federal Register Volume 88, Number 12 (Thursday, January 19, 2023)]
[Rules and Regulations]
[Pages 3313-3315]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-00944]


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POSTAL REGULATORY COMMISSION

39 CFR Part 3035

[Docket Nos. RM2017-1 and RM2022-2; Order No. 6399]


Competitive Postal Products

AGENCY: Postal Regulatory Commission.

ACTION: Final rulemaking.

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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. 6399 can be accessed electronically through the 
Commission's website at https://www.prc.gov.

DATES: Effective February 21, 2023.

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 Final Rule
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 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\ As a result, in Order No. 4963, the Commission adopted a 
final rule implementing a dynamic formula-based approach to setting the 
appropriate share.\2\
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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).
    \2\ Order Adopting Final Rules Relating to the Institutional 
Cost Contribution Requirement for Competitive Products, January 3, 
2019 (Order No. 4963). The Final Rulemaking was published in the 
Federal Register on January 31, 2019. See 84 FR 537 (Jan. 31, 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.\3\ The court identified two major aspects of Order No. 4963 
for the Commission to clarify on remand. The Commission issued Order 
No. 6043, which was a supplemental notice of proposed rulemaking that 
addressed the issues identified by the court and provided an 
opportunity for interested persons to file initial comments and reply 
comments concerning the Commission's third 5-year review of the 
appropriate share as required by 39 U.S.C. 3633(b).\4\ In addition, the 
Commission issued Order No. 6269, which invited public comment relating 
to the Commission's analysis pursuant to uncodified section 703(d) of 
the Postal Accountability and Enhancement Act (PAEA).\5\
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    \3\ UPS II, 955 F.3d 1038, No. 19-1026, ECF Document No. 
1846181, at 1, (issuing formal mandate), June 8, 2020.
    \4\ Supplemental Notice of Proposed Rulemaking and Order 
Initiating the Third Review of the Institutional Cost Contribution 
Requirement for Competitive Products, November 18, 2021 (Order No. 
6043). The Supplemental Notice of Proposed Rulemaking was published 
in the Federal Register on August 13, 2018. See 86 FR 67882 (Nov. 
30, 2021).
    \5\ Notice and Order Providing an Opportunity to Comment on the 
Commission's Section 703(d) Analysis, September 7, 2022 (Order No. 
6269); Postal Accountability and Enhancement Act (PAEA), Public Law 
109-435, Title VII, Sec.  703, 120 Stat. 3198, 3244 (2006).
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    The Commission received and considered comments with respect to 
nearly every aspect of the Commission's findings in Order Nos. 6043 and 
6269.
    In Section IV., the Commission addresses comments relating to the 
Commission's statutory interpretation of the appropriate share 
provisions at 39 U.S.C. 3633(a)(3) and (b). After considering these 
comments, the Commission has determined not to alter its interpretation 
as articulated in Order No. 6043, which the Commission continues to 
conclude is consistent with the PAEA's text and structure, as well as 
its context and legislative history. See Section IV.
    In Section V.A., the Commission addresses comments relating to the 
application of the ``uniquely or disproportionately associated'' phrase 
from 39 U.S.C. 3633(b) to the Postal Service's accrued costs. The 
Commission continues to find that all attributable costs are already 
included in the 39 U.S.C. 3633(a)(3) price floor and are furthermore 
implicitly considered as part of the formula. See Section V.A.2.b. The 
price floors set under 39 U.S.C. 3633(a)(1) and (a)(3) fully ameliorate 
any competitive deficit alleged to be unaddressed by the price floor 
under 39 U.S.C. 3633(a)(2), and that the use of incremental costs for 
purposes of the price floors under 39 U.S.C. 3633(a)(1) and (a)(2) is 
sufficient to prevent subsidization of Competitive products. See 
Section V.A.3.b. Any further attempt to account for attributable costs 
as part of the appropriate share would constitute double-counting of 
those costs that would be economically unsound and potentially harmful 
to the Postal Service. See Section V.A.4.b. There is no meaningful 
relationship between unattributed inframarginal costs and Competitive 
products; there are no costs uniquely or disproportionately associated 
with Competitive products within currently-existing institutional 
costs; and using economically sound measurement is reasonable. See 
Sections V.A.5.b., V.A.6.b., V.A.7.b. The arbitrary allocation of 
institutional costs to Competitive products would contravene the intent 
of the PAEA, would be economically unsound, would degrade the existing 
costing methodology, and could harm the Postal Service and consumers. 
See Section V.A.8.b.
    In Section V.B., the Commission addresses comments relating to the 
prevailing competitive conditions in the market and other relevant 
circumstances. The Commission confirms that revenue is the appropriate 
measure of market size, and that the profitability of competitors is 
relevant to assessing the prevailing competitive

[[Page 3314]]

conditions in the market. See Section V.B.2.b. The Commission presents 
an updated market analysis and continues to find that the state of 
competition in the market for competitive postal services is healthy. 
See id.
    With respect to comments suggesting that the Commission should 
consider the Postal Service's financial losses, the ``non-existence of 
a level playing field'' and ``subsidization,'' the Commission explains 
why these three potential circumstances are not relevant to this 
review. See Section V.B.3.b. The Commission finds that comparative harm 
and the balance of risk and actual Competitive product contribution to 
institutional costs are relevant circumstances which all weigh in favor 
of readopting the dynamic formula-based approach. See id. Finally, the 
Commission reiterates its dismissal of comments alleging that the 
formula is arbitrary and capricious. See Section V.B.4.b.
    In Section VI. the Commission addresses comments regarding the 
Commission's analysis pursuant to uncodified section 703(d) of the 
PAEA. See PAEA 703(d). In accordance with that provision, the 
Commission invited additional public comment regarding Commission 
updates to a quantification by the Federal Trade Commission (FTC) of 
the net economic effect of federal and state laws that apply 
differently to the Postal Service than to private competitors in the 
market for competitive postal services, based on subsequent events that 
the Commission found affected the ongoing validity of the FTC's 
findings. See Order No. 6269. The Commission concludes that the 
additional events (beyond those identified by the Commission in Order 
No. 6269) raised by commenters are outside the scope of the 
Commission's 703(d) analysis. See Section VI.C.
    In Section VII., the Commission addresses arguments relating to 
each specific type of costs alleged by any commenters to be uniquely or 
disproportionately associated with Competitive products. Upon 
consideration of each category of costs raised, the Commission 
concludes that none of these costs raised by commenters are uniquely or 
disproportionately associated with Competitive products and that it 
would be inappropriate to alter the formula-based approach to take 
these cost categories into account. See Section VII.
    In Section VIII. the Commission addresses comments proposing 
alternatives to the formula-based approach to setting the appropriate 
share. The Commission concludes that UPS's four alternative proposals 
would each involve the arbitrary allocation of institutional costs to 
Competitive products, and furthermore all suffer from numerous 
methodological flaws and inconsistencies with the PAEA. See Sections 
VIII.A.3., VIII.B.3., VIII.C.3., VIII.D.3. With respect to comments 
that the appropriate share should be eliminated, the Commission 
reiterates that it has, pursuant to the discretion accorded to it by 39 
U.S.C. 3633(b), elected to retain the appropriate share requirement as 
a margin of safety against any possibility of the Postal Service having 
an unfair competitive advantage. See Section VIII.E.3.
    Based on the analysis provided above and its review of comments, 
the Commission readopts its dynamic formula-based approach to 
calculating the appropriate share.

III. Basis and Purpose of the Final Rule

    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. 
Order No. 6399 at 114.
    The formula seeks to determine the Postal Service's overall market 
power by measuring its absolute and relative market power. Id. at 115-
117. In order to assess the Postal Service's absolute market power and 
its market position, the formula utilizes two distinct components. Id. 
The first component is the Competitive Contribution Margin, which 
measures the Postal Service's absolute market power. Id. at 115. 
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. 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.
    The second component of the formula is the Competitive Growth 
Differential, which measures the Postal Service's market position. Id. 
at 116-117. 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 116. 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 117.

    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 118. 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.

IV. Final Rule

    In order to implement the Commission's formula, existing Sec.  
3035.107(c) is revised. Final Sec.  3035.1077(c)(1) establishes the 
formula which is to be used in calculating the appropriate share and 
defines each of the formula's terms. Final Sec.  3035.107(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. Final 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.

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List of Subjects for 39 CFR Part 3035

    Administrative practice and procedure.

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

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. 2023-00944 Filed 1-18-23; 8:45 am]
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