PRC CHAIRMAN’S ANNOUNCEMENT ON NEW RATE SETTING SYSTEM

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Below is the transcript of the announcement from Chairman Taub on December 1, 2017:

Good afternoon everyone good afternoon everyone, I am Robert Taub Chairman of the Postal Regulatory Commission, myself and my 3 other commissioners Vice Chairman Mark Acton, Commissioner hch hch and Commissioner Nanci Langley welcome to the PRC.

Today I’m here to announce the results of our past 11 months of the work reviewing the rate making system created by the postal accountability and enhancement act of 2006.

This is a long statement and by the end of it some of you may feel as if you’re living all 11 months of our work. But I think it’s important to fully walk through the key results of this critical review. The Commissioner’s Order and Notice, press release and responses to frequently asked questions will be available at the conclusion of this press conference on the home page of the Commission’s website, PRC.gov.

The postal accountability and enhancement act of 2006 mandated that after December 2016 the Commission review the law’s decade old price cap system for regulating Market Dominant products to determine if the system is achieving its statutory objectives. And if it is not, to, quote, make such modification or adopt such alternative system, end quote, to achieve these objectives. There are 9 objectives listed in the law that must be achieved, as well as 14 factors that the Commission must take into account.

The Commission began its review more than 11 months ago on December 20th, 2016, and designed a process that allowed full and open opportunities for public participation, while balancing the aim of completing our findings and beginning any needed rulemaking in an efficient and effective manner.

While I won’t enumerate each one in this statement, the 9 objects reflect the goals of the Act to create a flexible, stable, predictable and streamlines rate making system that ensures the Postal Service’s financial health and maintains high quality service standards and performance.

The 2006 Law reformed the system of setting postal rates. Lengthy hearings were abandoned in favor of a more streamlined rate setting process centered on a CPI based price cap as the primary limit on rate setting. Changes were also made to service standard performance measurement and reporting. The 2006 Law required the Postal Service to establish service standards and report publicly on its achievement of those standards.

At the time the new system was created, Congress anticipated that the CPI price cap would enable the Postal Service to achieve sufficient revenues to cover all of its operating costs and statutory obligations while at the same time motivate the Postal Service to cut costs and become more efficient.

The price cap was intended to allow the Postal Service to fund network expansion and necessary capital improvements because it removed the break-even restriction and allowed the Postal Service to generate retained earnings.

In its review, the Commission identifies three principal areas of the 2006 Law’s system which encapsulate the 9 objectives. One, the structure of the rate making system; two, the financial health of the Postal Service; and three, service.

After extensive review and consideration of the facts and the comments provided to the Commission, it concludes that while the system achieved some of the goals, the overall system has not achieved the objectives taking into account the factors of the 2006 Law.

First, with respect to the structure of the rate making system, the Commission concludes that the system has worked as intended to create rate adjustments that are stable and predictable with regards to both timing and magnitude; reduce the administrative burden and increase the transparency of the rate making system, and provide the Postal Service pricing flexibility while maintaining just prices. However, the Commission concludes that the rate making system has not increased pricing efficiency.

Second, with respect to finances, the Commission finds that the system has not maintained the financial health of the Postal Service as intended by the 2006 Law. While the Postal Service has generally achieved short-term financial stability, both medium-term and long-term financial stability measures have not been achieved. For the medium-term measure, the total revenue was not sufficient to cover total costs.

For the long-term measure, the Postal Service has not been able to generate retained earnings since the 2006 Law. In its review of the financial health of the Postal Service, the Commission also finds that while some cost reductions and efficiency gains occurred during the past 10 years, the incentives were not maximized in a way that allowed the Postal Service to achieve financial stability.

Although the system contained a mechanism to appropriately allocate institutional costs and was able to enhance mail security and deter terrorism, there was not an adequate mechanism to maintain reasonable rates during the past 10 years because certain products and classes failed to cover their attributable costs, further threatening the financial health of the Postal Service.

Third, the Commission determines that high quality service standards have not been maintained during the past 10 years. While the system requires the Commission to review service performance routinely during the annual compliance determination, it does not effectively encourage the Postal Service to maintain service standard quality.

Taken together, the Commission’s analysis of each of the three principal areas of the current system leads it to conclude that while some aspects of the system of regulating rates and classes for Market Dominant products have worked as planned, overall, the system has not achieved the objectives of the 2006 Law.

As a result of these findings, the Commission also issues today a notice of proposed rulemaking to address the shortcomings identified by the Commission in its review. This notice is just that — a proposal. Nothing in this proposal will be final until after public comments are received and considered by the Commission and a final rule is adopted.

We now begin a 90 day period of public comment with an additional month provided for reply comments.

I will now walk through the key proposals from the rulemaking order.

First and foremost, I’d like to note that the Commission proposal would maintain a price cap system.

Maintain a price cap system.

The Commission determined that it is necessary to maintain such a mechanism to create predictability and stability.

The Commission seeks to build upon, rather than replace, the CPI price cap by providing discrete amounts of additional rate authority. This additional rate adjustment authority is designed to put the Postal Service on the path to generating positive net income and retained earnings as mandated by law.

Specifically, the Commission proposes to provide 2 percentage points of supplemental rate authority, in addition to the CPI price cap, each year for a 5-year period.

The Commission determined that 5 years is a reasonable and appropriate time period to low the Postal Service the opportunity to achieve medium-term financial stability. After five years, the supplemental rate authority will terminate and the Commission will review the Postal Service’s financial condition.

To put the Postal Service on a path to long-term financial stability, while providing meaningful incentives for the Postal Service to increase operational efficiency and maintain high quality service standards, the Commission proposes 1 percentage point of performance-based rate authority per calendar year.

Of this 1 percent, .75 percentage points is allocated based on meeting operational efficiency-based requirements, and .25 percentage points is allocated based on maintaining service quality. In other words, this additional performance based rate authority would only be available contingent upon the postal service meeting these efficiency and service measures.

The Commission also proposes a solution to address noncompensatory products. Specifically, those products for which attributable costs exceed revenue, otherwise referred to as underwater products. These products are not reasonably or efficiently priced, as required by the 2006 Law, therefore the Commission proposes modifications to the current system of ratemaking that will require price increases to improve cost coverage for noncompensatory products.

Under the Commission’s proposal, whenever the Postal Service files a request for the Commission to review a notice of rate adjustment applicable to any class of mail, it will be required to propose to increase the rate for any noncompensatory product within that class by a minimum of 2 percentage points above the percentage increase for the class.

The final aspect of the Commission’s proposed rulemaking order that I will comment on is workshare discounts. Workshare discounts are rate discounts that the Postal Service provides to mailers for presorting, prebarcoding, handling, or transporting mail. The 2006 Law tasked the Commission with ensuring that these discounts do not exceed the cost that the Postal Service avoids as a result of workshare activity, unless certain limited exceptions are met.

Objective one of the 2006 Law required that the Postal Service, quote, maximize incentives to reduce costs and increase efficiency, end quote. The ratemaking system achieves pricing efficiency when prices adhere as closely as practicable to what is known as efficient component pricing. To adhere to efficient component pricing, workshare discounts should be set equal to the costs avoided by the Postal Service when the mailer performs the workshare activity, thus producing what’s termed pass-throughs of 100 percent.

In our review, the Commission finds that the Postal Service, during the past 10 years, set most discounts substantially above or substantially below 100 percent. This is problematic because such discounts send inefficient price signals to mailers, and therefore reduce productive efficiency in the postal sector. Ultimately, the inefficient pricing may lead to decreased revenue for the Postal Service.

To address the situation, the Commission proposes to establish bands for workshare discount pass-throughs. One for periodicals, and one for all other classes. For periodicals, pass-throughs must range between 75 percent and 125 percent. For all other classes, pass-throughs must range between 85 percent and 115 percent. All pass-throughs that fall outside of the applicable band would be considered noncompliant, but subject to a three-year grace period commencing from the effective date of these rules, or when a new workshare discount is established. After the grace period, the Commission would require the pass-throughs to become compliant.

A final section within the notice of proposed rulemaking contains certain procedural changes designed to improve the rate making process relating to planned rate adjustments of general applicability.

Again, I refer you to the Commission’s website, PRC.gov, where at the conclusion of this event you’ll find both orders in their entirety.

I want to emphasize that the Commission looks forward to a robust comment period on this proposal. To encourage maximum participation by all interested parties, we will be accepting comments for 90 days, with a further month granted for reply comments.

For anyone unfamiliar with the Commission’s process for public comment in rulemaking, please visit our website where you’ll find clear guidance on how to participate. Additionally, to simplify the process to provide comments, the Commission has placed a link on its home page entitled 10 Year Rate System Review.

Before I conclude, a few thank yous. I want to thank my three esteemed colleagues on the Commission. Vice Chairman Mark Acton, Commissioner Tony ham monld, and Commissioner Nanci Langley. All are not only long time friends, but as evidenced by our commitment to this task, are dedicated to the PRC’s central mission: Transparency and accountability of the Postal Service, and ensuring a vital and efficient universal mail system.

I also want to thank the entire staff of the Commission for the many months of effort put into the development of these orders. While the Commissioners may be the face of the PRC, the staff are the agency’s heart and soul.

Our small independent federal agency is comprised of roughly 70 dedicated professionals charged with determining the legality of the Postal Service’s prices and products, adjudicating complaints and fair competition issues, and overseeing the Postal Service’s delivery performance. The Commission is the regulator, not the operator of our nation’s Postal Service. It is composed of 5 Commissioners, each appointed by the President and confirmed by the Senate.

The Commission receives an annual appropriation from the Congress out of the Postal Service Fund. Now, it’s important to keep in mind that the Postal Service itself is 100 percent part of the federal government. Today, the Postal Service is a $70 billion operation with more than 600,000 employees. It is not quasi government, quasi private, or quasi anything, it is 100 percent part of the federal government operating as an independent establishment in the executive branch.

Yet the Postal Service receives no tax dollars for operating expenses and relies completely on the sale of postage, products, and services to fund its operations.
Why a regulator for another government agency? Unlike almost any other federal agency, the Postal Service operates in a commercial marketplace, while also having a large contingent of captive customers, given the Postal Service’s market dominance for certain products and services.

The Postal Service is provided a statutory monopoly over mailboxes and the delivery of letters. The public interest role of a regulator in this case is clear: A need to protect the captive customers and ensure fair competition.

So in addition to this 10 year review, we maintain a very busy docket of many other cases related to the Postal Service’s prices, products, and service. The staff have continued to carry out all these demands in addition to this review we conclude today, and they have always delivered. They are truly exceptional public servants, and I thank them for their service, day in and day out, on behalf of our fellow Americans.

And with that, this concludes my statement and our event. Thank you for your endurance through this long statement.