81 FR 95071 - Statutory Review of the System for Regulating Market Dominant Rates and Classifications

POSTAL REGULATORY COMMISSION

Federal Register Volume 81, Issue 248 (December 27, 2016)

The Commission is initiating a review to determine whether the current system of regulating rates and classes for market dominant products is achieving the objectives, taking into account the factors, established by Congress under the Postal Accountability and Enhancement Act of 2006. This advance notice informs the public of the docket's initiation, invites public comment, and takes other administrative steps.

[Federal Register Volume 81, Number 248 (Tuesday, December 27, 2016)]
[Proposed Rules]
[Pages 95071-95074]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-31052]


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POSTAL REGULATORY COMMISSION

39 CFR Part 3622

[Docket No. RM2017-3; Order No. 3673]


Statutory Review of the System for Regulating Market Dominant 
Rates and Classifications

AGENCY: Postal Regulatory Commission.

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: The Commission is initiating a review to determine whether the 
current system of regulating rates and classes for market dominant 
products is achieving the objectives, taking into account the factors, 
established by Congress under the Postal Accountability and Enhancement 
Act of 2006. This advance notice informs the public of the docket's 
initiation, invites public comment, and takes other administrative 
steps.

DATES:  Comments are due: March 20, 2017.

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. Scope of the Review
III. Review Framework
IV. Objectives
V. Notice of Commission Action
VI. Ordering Paragraphs

I. Introduction

    On December 20, 2006, the Postal Accountability and Enhancement Act 
(PAEA) was signed into law.\1\ The PAEA required that the Commission 
establish a modern system of regulating rates and classes for market 
dominant products.\2\ The PAEA also mandated that the Commission review 
this system 10 years later to determine if it is achieving the 
objectives, taking into account the factors, established by 
Congress.\3\ If the Commission determines that the system is not 
achieving the objectives, taking into account the factors, the 
Commission may, by regulation, make modifications or adopt an 
alternative system as necessary to achieve the objectives. Id.
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    \1\ Pub. L. 109-435, 120 Stat. 3198 (2006).
    \2\ 39 U.S.C. 3622(a).
    \3\ 39 U.S.C. 3622(d)(3).
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    In accordance with 39 U.S.C. 3622, this Notice and Order 
establishes the beginning of the Commission's statutory review of the 
ratemaking system. Based on the Commission's analysis and relevant 
information obtained through this proceeding, the Commission will 
determine if the objectives, taking into account the factors, are being 
achieved by the current system. If the Commission finds that the 
objectives, taking into account the factors, are not being achieved, 
the Commission may propose modifications to the system or propose to 
adopt an alternative system as necessary to achieve the objectives.

II. Scope of the Review 4
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    \4\ The Postal Service previously petitioned the Commission to 
initiate a proceeding to clarify the scope of the statutory review. 
See Docket No. RM2016-9, Petition of the United States Postal 
Service for the Initiation of a Proceeding to Clarify the Scope of 
the Review of the System for Regulating Market-Dominant Rates and 
Classes, April 7, 2016. In Order No. 3237, the Commission found the 
petition premature and held the petition in abeyance pending the 
start of the review. See Docket No. RM2016-9, Order No. 3237, Order 
Holding Petition in Abeyance, April 12, 2016. The Commission defines 
the scope of the review at this time.
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    The Commission intends to examine all aspects of the ratemaking 
system

[[Page 95072]]

provided within section 3622, including the annual limitation on the 
percentage changes in rates,\5\ the schedule for rate changes,\6\ the 
45-day notice before the implementation of rate adjustments,\7\ 
expedited rate changes due to extraordinary or exceptional 
circumstances,\8\ class level application of the annual limitation,\9\ 
the rounding of rates and fees,\10\ the use of unused rate 
authority,\11\ and workshare discounts.\12\
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    \5\ 39 U.S.C. 3622(d)(1)(A); see also 39 U.S.C. 3622(d)(1)(D).
    \6\ 39 U.S.C. 3622(d)(1)(B).
    \7\ 39 U.S.C. 3622(d)(1)(C).
    \8\ 39 U.S.C. 3622(d)(1)(E).
    \9\ 39 U.S.C. 3622(d)(2)(A).
    \10\ 39 U.S.C. 3622(d)(2)(B).
    \11\ 39 U.S.C. 3622(d)(2)(C).
    \12\ 39 U.S.C. 3622(e).
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III. Review Framework

    To assist commenters, the Commission presents preliminary 
definitions for the objectives as well as potential methods that may be 
used to evaluate whether the objectives, taking into account the 
factors, are being achieved. Proposed definitions and potential 
evaluation methods for each objective are discussed in section IV. 
After the Commission receives comments and conducts its analysis, the 
Commission will determine if the current system is achieving the 
objectives while taking into account the factors listed in 39 U.S.C. 
3622(c). If the Commission finds the system is not achieving these 
objectives, taking into account the factors, it may propose rules that 
modify the system or adopt an alternative system to achieve the 
objectives.

IV. Objectives

    Based on research of legislative history, Commission precedent, 
stakeholder comments in various past dockets, and other sources, the 
Commission presents preliminary definitions for each objective. In 
addition, the Commission suggests measurable key concepts within each 
objective. These key concepts could be measured quantitatively and/or 
qualitatively to determine if each objective as a whole has been 
achieved. Because the statute does not require that factors be 
independently achieved, the Commission is not proposing definitions or 
measurement methods for the factors. However, over the course of the 
review, the factors will be taken into account for each objective, as 
required by the statute.
    A. Objective 1: To maximize incentives to reduce costs and increase 
efficiency.\13\
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    \13\ 39 U.S.C. 3622(b)(1).
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    Preliminary definition. A system achieving Objective 1 uses 
available mechanisms, such as flexibility under the price cap, pricing 
differentials, and workshare discounts, to the fullest extent possible 
to incentivize the reduction of costs and increases in operational and 
pricing efficiency.
    Potential measurement. There are three measurable key concepts 
within this objective: (1) Maximize incentives, (2) reduce costs, and 
(3) increase efficiency.
    First, ``maximize incentives'' could be measured by determining if 
the maximum benefit was provided by each incentive mechanism (e.g., 
price cap, price differentials, and workshare discounts), taking into 
account associated statutory constraints. For example, a review of 
whether workshare discounts provided the maximum incentives possible 
would take into account the constraints set forth in 39 U.S.C. 3622(e).
    Second, measuring ``reduce costs'' could include an evaluation of 
the costs, including unit operating costs and controllable costs, 
before and after the PAEA was implemented.
    Third, ``increase efficiency'' could include a review of 
operational and pricing efficiency. Measuring operational efficiency 
could involve reviewing trend analyses of total factor productivity, 
real unit operating costs, productivity data, and workhours. To measure 
pricing efficiency,\14\ a comparison of actual prices and prices that 
adhere to principles of efficient component pricing could be conducted.
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    \14\ Pricing can promote allocative efficiency by setting prices 
at marginal costs or by applying second-best pricing. Pricing can 
also promote productive efficiency by application of the Efficient 
Component Pricing Rule.
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    B. Objective 2: To create predictability and stability in 
rates.\15\
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    \15\ 39 U.S.C. 3622(b)(2).
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    Preliminary definition. A system achieving Objective 2 fosters 
rates, including prices for all market dominant products and 
promotions, that are capable of being consistently forecast with regard 
to timing and magnitude and that do not include sudden or extreme 
fluctuations.
    Potential measurement. There are two measurable key concepts within 
this objective: (1) Predictability, and (2) stability.
    Potential approaches for measuring predictability include measuring 
the time between notices of market dominant price adjustments, or the 
amount of time between a notice of market dominant price adjustment and 
the effective date of those prices. The outcomes of these measurements 
could be compared to price adjustments prior to the passage of the 
PAEA, or other relevant benchmarks to measure the predictability of the 
current system.
    One potential method for measuring stability is to measure average 
price increases over time and compare them to objective measures, such 
as the Consumer Price Index for All Urban Consumers (CPI-U). Another 
method may be to evaluate the number of price categories that deviate 
significantly from percentage changes in objective measures, such as 
the CPI-U or the average price adjustment for the class or product.
    C. Objective 3: To maintain high quality service standards 
established under section 3691.\16\
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    \16\ 39 U.S.C. 3622(b)(3).
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    Preliminary definition. A system achieving Objective 3 is designed 
for the Postal Service to consistently achieve, for each class of mail, 
stated days to delivery at a desired target rate.
    Potential measurement. The key measurable concept within this 
objective is ``high quality service standards.''
    Potential approaches for the measurement of ``high quality service 
standards'' include measuring the Postal Service's performance, both 
for discrete time periods and since the passage of the PAEA. Some of 
these measurements are already conducted in the Commission's Annual 
Compliance Determination (ACD) Reports.\17\ For example, the Commission 
typically details the number of percentage points a class or product is 
above or below its service performance target.\18\ In addition, 
measurement of this objective could include analysis of changes in 
service standards over time, analysis of service performance results 
over time, and determining how satisfied mail users are with service 
standards.
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    \17\ See, e.g., Docket No. ACR2015, Annual Compliance 
Determination, March 28, 2016, Chapter 5 (FY 2015 ACD).
    \18\ See, e.g., FY 2015 ACD at 123.
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    D. Objective 4: To allow the Postal Service pricing 
flexibility.\19\
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    \19\ 39 U.S.C. 3622(b)(4).
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    Preliminary definition. A system achieving Objective 4 allows for 
the Postal Service to exercise its discretion

[[Page 95073]]

to set prices, the price structure, and the price schedule for market 
dominant products, subject to other requirements under the law.
    Potential measurement. The key measurable concept within this 
objective is ``pricing flexibility.''
    Potential measurement methods for this term include comparisons to 
other systems, such as the pricing flexibility afforded to and/or 
exercised by foreign posts, utilities, the Postal Service pre-PAEA, and 
private carriers. Measurement of ``pricing flexibility'' could also 
include a review of price adjustment proceedings and Annual Compliance 
Report (ACR) dockets, which highlight the pricing flexibility exercised 
by the Postal Service. Analysis of the time it takes for the approval 
of a price adjustment, the number of price categories approved without 
material alteration, and reviewing discussions of pricing flexibility 
in other Commission proceedings could also be conducted to determine if 
this objective is being achieved.
    E. Objective 5: To assure adequate revenues, including retained 
earnings, to maintain financial stability.\20\
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    \20\ 39 U.S.C. 3622(b)(5).
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    Preliminary definition. In a system achieving Objective 5, the 
Postal Service is financially solvent while able to respond to changes 
in its environment (e.g., volume erosion, legal or regulatory 
framework, demographic trends) and meet its statutory obligations 
(e.g., pricing and universal service).
    Potential measurement. The key measurable concept within this 
objective is ``financial stability,'' which incorporates adequate 
revenues and retained earnings.
    ``Financial stability'' could be measured by reviewing short-term, 
medium-term, and long-term financial stability of the Postal Service. 
Short-term financial stability could be measured by the Postal 
Service's operating profit (i.e., operational revenue--operational 
expenses). Medium-term financial stability could be measured by 
economic profit (i.e., total revenue - [variable cost + fixed cost]). 
Long-term financial stability could be measured by solvency (i.e., 
total assets/total liabilities).
    The Commission has analyzed these concepts in its recent financial 
reports and could potentially use those analyses to determine if this 
objective is being achieved.\21\ For example, in Chapter 4 of its FY 
2015 Financial Report, the Commission included an analysis of the 
Sustainability, Liquidity, Activity, and Financial Solvency of the 
Postal Service's financial status.\22\
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    \21\ See, e.g., FY 2015 Financial Analysis of United States 
Postal Service Financial Results and 10-K Statement, March 29, 2016 
(FY 2015 Financial Report).
    \22\ See FY 2015 Financial Report at 75-86.
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    F. Objective 6: To reduce the administrative burden and increase 
the transparency of the ratemaking process.\23\
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    \23\ 39 U.S.C. 3622(b)(6).
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    Preliminary definition. A system achieving Objective 6 balances the 
(sometimes competing) concepts of reducing the costs imposed by rate 
proceedings or regulatory requirements generated by those proceedings, 
and the availability of comprehensive understandable material relating 
to each rate proceeding.
    Potential measurement. There are two measurable key concepts within 
this objective: (1) Reduce the administrative burden, and (2) increase 
the transparency. In order to achieve this objective, the ratemaking 
system must balance reducing administrative burden with increasing 
transparency.
    ``Reducing the administrative burden'' of the ratemaking process 
could be measured by evaluating the complexity of rate adjustment 
filings and proceedings and/or quantifying the length, number of 
information requests and/or staff hours required to review the price 
adjustment proposal, ACRs, complaints, or dockets related to price 
setting.
    ``Increasing transparency'' could be measured in several ways. An 
analysis of the necessary interaction between stakeholders and the 
Postal Service and/or Commission could be conducted. Another option 
could be to analyze the amount and type of information filed under seal 
compared to publicly available information. These features could also 
be compared to levels of transparency and administrative burden present 
prior to the passage of the PAEA.
    G. Objective 7: To enhance mail security and deter terrorism.\24\
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    \24\ 39 U.S.C. 3622(b)(7).
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    Preliminary definition. A system achieving Objective 7 encourages 
methods of safeguarding the mail system from illegal or dangerous use, 
or terrorism.
    Potential measurement. There are two measurable key concepts within 
this objective: (1) Enhance mail security, and (2) deter terrorism. 
Possible metrics to determine if Objective 7 is being achieved include 
a review of available safeguards (and associated available funds) that 
are intended to enhance security and deter terrorism, and a review of 
the availability of an exigent-like provision to ensure funds are 
available to respond to specific threats.
    H. Objective 8: To establish and maintain a just and reasonable 
schedule for rates and classifications, however the objective under 
this paragraph shall not be construed to prohibit the Postal Service 
from making changes of unequal magnitude within, between, or among 
classes of mail.\25\
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    \25\ 39 U.S.C. 3622(b)(8).
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    Preliminary definition. A system achieving Objective 8 requires 
that rates and classifications are linked to distinct cost or market 
characteristics, and the amount charged for each service is neither 
excessive to the mailer nor threatens the financial integrity of the 
Postal Service.
    Potential measurement. There are two measurable key concepts within 
this objective: (1) Just, and (2) reasonable. These two concepts are 
associated with both the schedule of rates and the schedule of 
classifications.
    To determine whether the schedule of rates and classifications is 
``just,'' a review of instances of excessive price increases could be 
conducted, including a review of classification changes. A review of 
price and cost relationships could also be conducted to ensure that 
customers are protected from misuse of the Postal Service's monopoly 
power. Additionally, a review of the cost or market characteristics 
that define a price category, product, or service could be conducted.
    To determine whether the schedule of rates and classifications is 
``reasonable,'' an examination of the relationship between price and 
cost could be conducted to ensure prices and classifications do not 
threaten the Postal Service's financial integrity. Another option to 
measure the concept ``reasonable'' could be an examination of the total 
compensation provided by products/services, classes, and all market 
dominant classes.
    I. Objective 9: To allocate the total institutional costs of the 
Postal Service appropriately between market dominant and competitive 
products.\26\
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    \26\ 39 U.S.C. 3622(b)(9).
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    Preliminary definition. A system achieving Objective 9 has a 
mechanism to appropriately divide total institutional costs between 
market dominant and competitive products in a manner reflecting the 
relevant statutory considerations.
    Potential measurement. The key measurable concept within this 
objective is ``allocate the total institutional costs appropriately.'' 
This objective is related to sections 3633(a)(3) and 3633(b). The 
measurement of

[[Page 95074]]

Objective 9 could rely on a historical review of the allocation of 
institutional costs between market dominant and competitive products. 
The measurement of this objective could also include a review of any 
action the Commission takes to analyze the competitive products' 
minimum contribution to institutional costs.

V. Notice of Commission Action

    Using this framework of potential definitions and measurement 
methods, the Commission establishes Docket No. RM2017-3 to begin its 
review of the market dominant ratemaking system. The Commission invites 
comments from interested persons regarding the process and structure of 
the review, as well as whether the current system is achieving the 
objectives, taking into account the factors. In particular, the 
Commission invites comments in response to the following questions:
    1. Is the framework proposed by the Commission appropriate for the 
review?
    a. For each objective, is the preliminary definition reasonable? If 
not, please suggest alternative definitions.
    b. For each objective, are the potential metrics for measuring the 
achievement of the objective reasonable? If not, please suggest 
alternative metrics for measuring whether the objective is being 
achieved.
    2. If the proposed framework is not appropriate for the review, 
please identify the framework that should be used for the review and 
describe how to measure the achievement of the objectives in that 
alternative framework.
    3. Based on the Commission's proposed framework or an alternative 
framework provided in response to question 2, is the current system 
achieving each objective, while taking into account the factors? Please 
note that review of the system shall be limited to section 3622 as 
discussed in section II above.
    4. If the system is not achieving the objectives, while taking into 
account the factors, what modifications to the system should be made, 
or what alternative system should be adopted, to achieve the 
objectives?
    Comments are due no later than March 20, 2017. No reply comments 
will be accepted. Commission regulations require that comments be filed 
online according to the process outlined at 39 CFR 3001.9(a). 
Additional information regarding how to submit comments online can be 
found at: http://www.prc.gov/how-to-participate. However, given the 
unique nature of this docket, the Commission will waive these 
requirements for filers who mail their comments.\27\ All information 
and comments provided, whether filed through the Commission's filing 
system or sent by mail, will be made available on the Commission's Web 
site (http://www.prc.gov).
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    \27\ Filers who choose to mail in their comments should be 
mindful of possible delays given the irradiation process for mail 
delivered to the Commission.
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    Pursuant to 39 U.S.C. 505, the Commission appoints Richard A. 
Oliver to represent the interests of the general public (Public 
Representative) in this proceeding.

VI. Ordering Paragraphs

    It is ordered:
    1. The Commission establishes Docket No. RM2017-3 to initiate the 
review of the market dominant ratemaking system as required by 39 
U.S.C. 3622.
    2. Comments regarding the process and structure of the review, as 
well as whether the current system is achieving the objectives, while 
taking into account the factors, and if not, whether and what 
modifications to the system or an alternative system should be adopted 
as necessary to achieve the objectives, are due no later than March 20, 
2017.
    3. Pursuant to 39 U.S.C. 505, Richard A. Oliver is appointed to 
serve as an officer of the Commission (Public Representative) to 
represent the interests of the general public in this proceeding.
    4. The Secretary shall arrange for publication of this order in the 
Federal Register.

    By the Commission.
Stacy L. Ruble,
Secretary.
[FR Doc. 2016-31052 Filed 12-23-16; 8:45 am]
 BILLING CODE 7710-FW-P