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IDEAlliance Print Distribution Conference
Current Regulatory Concerns
Mark Acton Vice-Chairman Postal Regulatory
CommissionApril 4, 2011
Thanks IDEAlliance / Print Distribution folks
David Steinhardt, President and CEO of IDEAlliance
My first visit to Print Distribution Conference of the IDEAlliance - familiar faces and new friends
Anita Pursley, VP Postal Affairs, RR Donnelley
2
Summary of Content
USPS Plan: Envisioning America’s Future Postal Service Brief review of Key Components of
USPS Action Plan Exigent Rate Case Postal Service Retiree Health Benefit Fund
Liability Postal Service Pension Costs
3
Summary of Content
Change in Frequency of Delivery: 6 to 5 days
Annual Compliance Determination FY2010
Discover Financial Services NSA
Workshare Discount Methodology
4
Upcoming Attractions …
Joint PRC/USPS Periodicals Study
USO/Value of Societal Benefits
PRC’s 5 Year Review of the Postal Accountability and Enhancement Act (PAEA)
5
USPS: “Envisioning America’s Future Postal Service”
March 2, 2010 -- Postal Service unveils plan: Concerted Government Affairs/Public
Relations Initiative. Mail volume will fall: 177 B pieces (2009)
to 150 B (2020)
No action -- cumulative shortfall of $238 billion by 2020. (--USPS)
6
USPS: “Envisioning America’s Future Postal Service”
As much as $123 billion in savings during that same time period through aggressive cost cutting and increased productivity
Even so, “Estimated $115 billion shortfall will remain.” (--USPS)
7
USPS: “Envisioning America’s Future Postal Service”
What is the USPS Action Plan?
Regulatory and legislative relief: Exigent rate case Restructure RHB payments and address
overpayments to CSRS fund Adjust delivery days to “better reflect
current mail volumes and customer habits” Elimination of Saturday delivery
8
Exigent Rate Adjustment: Why the Rate Cap is Key
CPI-U price-cap trend: 2.9% December 2007 (R2008-
1cap) 3.8% December 2008 (R2009-1 cap) 0.356% December 2009 1.557% Through February 2011
please see http://www.prc.gov/PRC-DOCS/home/CPI.pdf
Prepared by Postal Regulatory Commission Last Update: 3/17/2011
9
Exigent Rate Case USPS proposal must: (39 USC 3622(d)
(1)(E)) Describe the exigent circumstances and
show why they necessitate the increase, Show that the proposed rates are
reasonable and equitable, and Describe circumstances under which the
increases could be rescinded or reduced
10
Exigent Rate Case On July 6, 2010 the Postal Service filed with the PRC a
request for an exigent rate adjustment
PRC has established a docket to provide for public comment and has conducted hearings on the record Interested parties were encouraged to participate in
building the record and suggesting relevant questions to the PRC for the USPS to answer during the course of public hearings
Commission required to issue Decision within 90 days of USPS filing Published Order Denying Request for Exigent Rate
Adjustment on September 30, one week early
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Exigent Rate Case Order Order No. 547 -- Denying Request
for Exigent Rate Adjustments
Commission found the requested exigent rate adjustments “not designed to respond to the recent recession, or its impact on mail volume. Rather, they represented an attempt to address long-term structural problems not caused by the recent recession.”
The Postal Service achieved over $6 billion in cost reductions in 2009 These results indicate that the Price Cap is working and providing
the right signals for USPS to reduce costs & improve efficiency
12
Exigent Rate Case “Take Away”
What’s the key “Take Away” from the Exigent Case decision? A unanimous and bipartisan message that, in a price cap
regulatory regime, the integrity of the cap is paramount Guarding the rate cap is the Commission’s first concern
Price cap not to be pierced absent compelling, direct causation due to exigent circumstances
USPS Appeal of Commission Decision is pending in DC Circuit Court of Appeals, Case No.10-1343 Oral Arguments heard March 15 Anticipate a Decision in about two months
13
PRC Review of USPS Retiree Health Benefit Fund Liability
Request by then-Chairman Stephen F. Lynch, Subcommittee on Federal Workforce, Postal Service and the District of Columbia, Committee on Oversight and Government Reform, U.S. House of Representatives: Requested on June 15, 2009 Consultant was Mercer Health and Benefits
LLC PRC presented its report to the Subcommittee
July 30, 2009 14
PRC Review of USPS Retiree Health Benefit Fund Liability
Annual payments needed to achieve 73% funded Status: OPM: $5.5 billion OIG: $1.7 billion PRC: $3.4 billion
Under any of these estimates, funding of the Retirement Health Benefits Fund exceeds that of any private and public sector fund of this nature
15
PRC Review of USPS Retiree Health Benefit Fund Liability
Commission’s recommendations are designed to promote a more fair, equitable, and responsibly sustainable recognition of this obligation Adherence to modern, generally accepted
accounting principles as adopted by Financial Accounting Standards Board (FASB)
16
USPS CSRS Pension FundingSpecial Study (SS2010-1)
39 USC 802(c): The Commission, upon request of USPS, promptly procures service of an actuary qualified to evaluate pension obligations to conduct a review in accordance with generally accepted actuarial practices and principles and provide a report to the Commission containing the results of the review
17
USPS CSRS Pension FundingSpecial Study (SS2010-1)
Per USPS request of February 23, 2010, PRC established Docket SS2010-1 to conduct a review of the Civil Service Retirement System (CSRS) pension liability of USPS PRC selected The Segal Company, an actuarial firm, to
conduct a study Actuarial report: $50 – 55 Billion overpayments for
CSRS, due to a formula set in 1970s PRC reviewed Segal’s report, and (June 30, 2010)
submitted findings (Overpayment to CSRS Funds $50-55 B) to USPS, Congress and OPM
Office of Personnel Management (OPM) responsible for calculating the Postal Service’s CSRS pension liability. They assert they have used the lawful calculation; will not act without Congressional direction
18
USPS CSRS Pension Funding Legislative Action
Last fall, Members of Congress in both Chambers drafted legislation regarding OPM management of USPS’ CSRS fund payments
February 15, 2011 Sen. Susan Collins introduced an updated version of her bill, “U.S. Postal Service Improvements Act of 2011” for consideration by the 112th Congress. (S. 353)
19
Change in Delivery Frequency:6 to 5 Days
March 30, 2010: USPS filed request with the Commission for an Advisory Opinion [39 U.S.C. 3661(c)] for the elimination of Saturday delivery
“A change in frequency, not a change in service” Discontinue Saturday residential and business
delivery/collections Post Offices usually open on Saturday remain
open No mail collection from blue boxes
20
Advisory Opinion 6 to 5 Days
PRC is “watchdog agency” protecting USPS’s Universal Service Obligation to Nation One of the most significant changes the Postal Service has ever
presented to the Commission Nearly one year in development
Commission proceedings included 7 Field Hearings: Dallas, Sacramento, Chicago,
Memphis, Las Vegas, Rapid City and Buffalo Field hearing transcripts posted at www.prc.gov
Solicited public comments via our website Response was exceptional – over 13,000 letters and e-mails
21
Advisory Opinion 6 to 5 Days – Findings
Commission’s Advisory Opinion was issued March 24, 2011
Cost Savings: The Commission’s annual net savings
estimate is $1.7 B The Postal Service annual net savings
estimate is $3.1 B A difference of $1.4 B annually
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Advisory Opinion 6 to 5 Days – Findings
Cost Savings cont: The Commission estimates that in either case full cost
savings would likely not be achieved until year 3 following implementation The Postal Service estimates that it will realize full-up savings
within a year of implementation
Lost Revenue: The Commission estimate of net revenue losses due to
volume declines caused by the service change is $0.6 B The Postal Service estimate of net revenue loss is $0.2 B A difference of $0.4 B
23
Advisory Opinion 6 to 5 Days – Findings
Service Impact: The planned changes would cause an average of 25
percent of all First-Class and Priority mail to be delayed by 2 days
Customers in rural, remote, and non-contiguous areas can be particularly affected by the Postal Service’s plans The Commission received significant input from rural America
and traveled to South Dakota and Wyoming to meet directly with rural customers and community leaders
The Postal Service did not evaluate the impact of the proposal on customers who reside or conduct business in rural, remote, or non-contiguous areas
24
Advisory Opinion 6 to 5 Days – Findings
Service Impact cont: Service standards currently in place were conceived
and implemented in a 6-day delivery environment Consideration is warranted as to whether these service
standards should be re-evaluated in the event five-day delivery is implemented
25
Advisory Opinion 6 to 5 Days - Recommendations
Recommendations for specific mailers Rural newspapers
Newspapers using USPS for Saturday delivery might warrant expansion of current limited exception for dailies utilizing curbside boxes Sunday and holidays
Vote by Mail Commission encourages USPS to continue its
commitment to jurisdictions that have chosen to use vote by mail programs & work with election officials to ensure that election materials are delivered in a timely fashion
26
Annual Compliance Determination
Commission findings for FY 2010 Annual Compliance Determination issued March 29 Total Factor Productivity increased 2.2 %, as
USPS reduced workhours by 75.1 M, saving an estimated $3.6 B
USPS was able to meet all of its obligations in FY 2010, ending the year with $1.2 B in cash It anticipates, however, a $2.7 B negative
cash balance at the end of FY 2011
27
Annual Compliance Determination Findings
Volume and Revenue Declines: Total volume declined by 3.5%, or more
than 6 billion pieces First-Class Mail volume and revenue
continue to decline, falling by 5.5 B pieces and more than $1.8 B, respectively
Total revenues declined by 1.5% Total expenses increased by 5.1%
28
Annual Compliance Determination Findings
Pricing: Competitive products, as a whole, made a positive contribution to
institutional cost amounting to 7.1% -- exceeding the required 5.5% share
The Commission identifies 10 market dominant products and services with revenue that did not cover attributable costs in FY2010, including flats, periodicals, and non-profit mail, totaling $1.7 B in losses including: $611 million from Periodicals, $577 million from Standard Mail Flats, and $172 million from Standard Mail Parcels/Not-Flat Machinables
For the first time ever, Commission finds rates not in compliance with the statute, and directs the Postal Service to take action to address the intra-class cross subsidy for Standard Mail Flats as soon as practicable
29
Annual Compliance Determination Findings
Service Measurement: The Commission reviewed the Postal Service’s service measurement systems
based on the Intelligent Mail barcode (IMb) and found persistent data errors, insufficient customer IMb usage, and a lack of product specific documentation
The Commission is concerned with USPS ability to report service performance measurements for market dominant products as required by PAEA
Structural Obstacles: The Postal Service’s liquidity crisis is related to an overly ambitious requirement
for the Postal Service to prefund its future retiree health benefit premiums Over the past four years, the Postal Service has paid $21.9 B to prefund these
benefits, while the Postal Service’s cumulative losses were just $20 B. The Postal Service is mandated to make another $5.5 B payment this year
Full text of FY2010 ACD at: www prc.gov
30
Discover Financial Services NSA
On March 15, in Commission Order 694, the PRC approved a Negotiated Service Agreement for Discover Financial Services the first Market Dominant negotiated service
agreement sought by USPS in four years since passage of PAEA postal reform
3-year Agreement designed to maintain the total contribution the Postal Service receives from DFS First-Class Mail and Standard Mail
DFS NSA provides an incentive for net contribution beyond that total amount
31
Discover Financial Services NSA
5 key components of DFS NSA:1. a revenue threshold2. a revenue threshold adjustment3. a postage commitment4. rebates on First-Class Mail5. rebates on Standard Mail
32
Discover Financial Services NSA
Commission approved DFS NSA to permit USPS management to learn more about potential tools to slow overall decline of First-Class Mail volume Creates a quantitative model for measuring
estimated volumes through the NSA. PRC recognizes that non-problematic data are not always available
As a result Commission is hopeful that USPS will be better off in the long run due to this NSA
33
Worksharing Discounts RM2009-3: Order 536
On September 14, 2010 the Commission found: the Benchmark currently used to measure avoided costs for presort First-
Class Mail is obsolete the Commission also established guidelines to help determine the scope of
worksharing activities
The Commission initiated Docket RM2010-13* to consider proposals to identify appropriate benchmarks for measuring the costs avoided by worksharing and establish discounts in the future (*pending)
USPS appealed Order 536 to the United States Court of Appeals for the DC Circuit (case 10-1324) USPS and PRC Briefs filed in February A date for oral argument has not been set
34
(Upcoming) Periodicals Study
Joint PRC/USPS Periodical Study PAEA Section 708 directs the USPS and
PRC to jointly study the quality data used to determine attributable costs of Periodicals mail and opportunities for improving the efficiency of this mail class
35
(Upcoming) Periodicals Study
The joint study group so far has: Visited USPS facilities to view Periodicals
processing Conducted meetings with mailers Hosted webinar on cost issues related to
Periodicals mail Analyzed data related specifically to
publications; as well as overall costing data Developed a report draft outline
The Commission anticipates publication of the final report to Congress soon
36
(Upcoming) Value of Societal Benefits of Mail
USO / Value of Societal Benefits of Mail Commission considering supplementing its
2008 Report on Universal Postal Service and the Postal Monopoly. PRC engaged a consultant to assess the range
of societal benefits of Postal Service The consultant targeted eight broad
categories and offered metrics to quantify societal benefits in those categories
This provides a possible outline for a more in-depth investigation estimating the “societal” value aspect of the universal service obligation to our Nation
37
(Upcoming) PAEA Five-Year Review 39 USC 701
Assessments of ratemaking, classification, and other provisions of 2006 postal reform Act
“The Postal Regulatory Commission shall, at least every 5 years, submit a report to the President and Congress concerning: (1) the operation of the amendments made by this Act; and (2) recommendations for any legislation or other measures
necessary to improve the effectiveness or efficiency of the postal laws of the United States.”
38
(Upcoming) PAEA Five-Year Review 39 USC 701
December 2, 2010 Commission invited public comment
Public forum January 11, 2011, at the Commission offices; discussion with participants
February 1, 2011 comment period closed
Study proceeding; December 20 deadline 39
Summary
We look forward to working with the Postal Service and Congress to address the challenges and opportunities . . . and through the daily oversight activities of the Commission to promote a healthy viable universal mail system for the Nation.
-- Chairman’s letter, FY 2010 Annual Compliance Determination
40