idealliance print distribution conference current regulatory concerns mark acton vice-chairman...

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

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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

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Summary of Content

Change in Frequency of Delivery: 6 to 5 days

Annual Compliance Determination FY2010

Discover Financial Services NSA

Workshare Discount Methodology

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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)

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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)

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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)

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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

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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

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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

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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

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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

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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


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

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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)

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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

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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

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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)

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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

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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

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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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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

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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

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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

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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

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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

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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%

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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

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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

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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

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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

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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

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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

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(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

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(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

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(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

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(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.”

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(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

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www.prc.gov

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idealliance print distribution conference current regulatory concerns mark acton vice-chairman...

Documents

rate cap

days of usps

exigent rate adjustment

exigent rate case order

postal accountability

exigent circumstances

summary of content usps

vp postal affairs