Postal Regulatory
Commission
Postal Pricing Regulation in the U.S.
October 4, 2011
Charles J. Robinson
Assistant Director
Office of Accountability
and Compliance
Introduction
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Postal eras
Commission organization
Pricing regulation
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U.S. Postal Eras
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Post Office Department (1775)
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Postal Service (1970)
Postal Reorganization Act
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Postal Service (2006)
Postal Accountability and Enhancement Act
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Postal Reorganization Act of 1970
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Created U.S. Postal Service – Independent agency of
executive branch of government
Breakeven mandate – Postal Service funded by
postage not taxes
Created Postal Rate Commission – Oversight of rate
setting
Social compact – To bind the nation together through
the personal, educational, literary, and business
correspondence of the people
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Postal Accountability and Enhancement Act
(PAEA) of 2006
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Flexibility to compete, innovate, and respond to the
market
Postal Service allowed to earn and retain profits
Postal products separated into market dominant and
competitive products
Greater Postal Service accountability and
transparency
Created Postal Regulatory Commission with
strengthened regulation and oversight
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Postal Regulatory Commission
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Independent Federal Agency
Regulator of U.S. Postal Service only
Five commissioners appointed by the President and
confirmed by the U.S. Senate
Mission: Ensure transparency and accountability of
the U.S. Postal Service and foster a vital and efficient
universal mail system
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Postal Regulatory Commission
Organization
Tony Hammond,
Commissioner
Office of
Accountability
& Compliance
Director
Assistant
Director
Mark Acton,
Vice-Chairman
Ruth Goldway,
Chairman
Office of Public
Affairs &
Government
Relations
Office of the
General
Counsel
General
Counsel
Assistant
General
Counsel
Director
§505 Officer of the
Commission
representing the
general public
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Nanci Langley,
Commissioner
Office of the
Secretary &
Administration
Secretary and
Chief
Administrative
Officer
Assistant
Secretary &
Administrative
Officer
Vacant,
Commissioner
Office of the
Inspector
General
Inspector
General
Postal Regulatory Commission
Pricing Regulation Generally
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Congress divided postal products into two groups
Market Dominant (monopoly products)
Competitive
Market Dominant products are subject to a price cap
that should protect mailers of market dominant
products
Competition should protect mailers of competitive
products
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Market Dominant Products (1)
Five Classes of Mail
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First-Class (letters, bills, statements, personal)
Periodicals (magazines and newspapers)
Standard Mail (advertising and light weight parcels)
Package Services (Single-piece parcel post and bound
printed matter)
Special Services (e.g., certified mail, return receipt,
money orders, insurance)
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Market Dominant Products (2)
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Each class contains products
First-Class products
Single-piece letters and cards
Presort Letters and cards
Flats
Parcels
International First-Class Mail – Outbound
International First-Class Mail – Inbound
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Market Dominant Products (3)
The Postal Service Can Charge Any
Price It Wants Subject to Three Caps
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Cap on class prices
Cap on workshare discounts
Cap on rates for preferred mail category (Mostly
nonprofit mailers)
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Market Dominant Products
Price Cap Regulation (1)
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Annual price changes for each class cannot exceed
inflation as measured by the Consumer Price Index
(CPI)
Percentage change in rates by product and within
product may exceed CPI
For example, the percentage increase for the singlepiece letter first-ounce rate could be above the CPI,
while the percentage increase for the extra-ounce
rate could be less than the CPI
The Commission uses a 12-month simple moving
average
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Market Dominant Products
Price Cap Regulation (2)
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Market Dominant Products
Price Cap Regulation (3)
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Classification hierarchy
Class
o
Product
•
Price Category (Bulk Mail)

Price
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Market Dominant Products
Price Cap Regulation (4)
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Congress could have chosen to apply the price cap to
all classes as whole (most flexibility)
o
The average increase for some classes could
exceed the CPI
each class (actual law)
each product
each price category
each price (most restrictive)
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Market Dominant Products
Price Cap Regulation (5)
Unused Rate Authority
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The Postal Service does not have to use all of the
available CPI
It may bank any unused portion and use it later
If it uses any banked amounts in a future case, the
amount above the applicable 12-month CPI cannot
exceed 2% (CPI + 2%)
If there are multiple years with banked amounts, the
Postal Service must use them in the order they were
banked
Unused rate authority can be banked for only 5 years
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Market Dominant Products
Price Cap Regulation (6)
Unused Rate Authority-Example
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Assume Price Cap = 5%
Assume requested price increase = 4.3%
Unused Rate Adjustment Authority (Banked
Authority) =
5% - 4.3% - 0.7%
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Market Dominant Products
Price Cap Regulation (7)
Variations on Rate Increase Requests
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If the Postal Service requests a price increase less than 12 months since
the last CPI increase
It is only entitled to the CPI increase since the last request plus any
banked amount it chooses to use
If the Postal Service requests a price increase more than 12 months
since the last CPI increase
It is entitled to the most recent 12-month CPI plus any banked
amounts
The interim period becomes unused banked amount, but it cannot
be used until previous year banked amounts are used
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Market Dominant Products
First CPI Price Change Under the New Law
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Filed February 11, 2008
Scheduled to take effect May 2, 2008
CPI = 2.9%
Approved all rates, except for one barcode discount that
exceeded avoided cost by substantial amount
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Market Dominant Products
Second CPI Price Change Under the New Law
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Filed February 10, 2009
12 months after last price change was filed
Scheduled to take effect May 11, 2009
CPI = 3.8%
Approved, except for two rates for mail tracking service
found to be discriminatory
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Market Dominant Products
Third CPI Price Change Under the New Law
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Filed January 13, 2011
23 months after last price change was filed
11-month interim period
Scheduled to take effect April 17, 2011
12-month CPI = 1.741
Approved
Created negative banked amount (-.577%)
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Competitive Products (1)
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Express Mail (domestic and international)
Priority Mail (domestic and international)
Parcel Select and Parcel Return Service
Negotiated Service Agreements (domestic and
International)
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Competitive Products (2)
Three Tests in the Law
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Market dominant products, as a whole, must not
cross-subsidize competitive products, as a whole
The Commission uses incremental cost
The revenues for each competitive product must
cover the corresponding attributable cost
Competitive products must pay a fair share of the
institutional cost of the Postal Service
Institutional costs are primarily fixed costs
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Competitive Products (3)
Types of Cost Supporting the Three Tests
Attributable Cost
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Attributable cost equals volume variable cost plus
product specific cost
Volume variable cost = marginal cost x volume
Product specific cost
Does not vary with volume
“But for” the existence of the product, the
expense would not be incurred
For example, the advertising expense for
Express Mail
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Competitive Products (3)
Types of Cost Supporting the Three Tests
Incremental Cost
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Incremental cost equals the difference between the
total cost of the Postal Service now and the total
cost without, for example, First-Class mail
This is equivalent to the total variable cost of a
product plus any product specific costs
Note the use of the term variable cost rather than
“volume variable cost”
Variable cost includes the cost imposed on the
system by each piece of mail not just the last piece
To comply with the law, incremental costs for
competitive products as a whole are estimated
Attributable cost plus
Group-specific cost
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Competitive Products (3)
Appropriate Share of Institutional Costs
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The Commission determined that the appropriate
share is 5.5 percent
Based on history
By law, to be re-evaluated at the end of this
calendar year
Retain
Change
Eliminate
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Contact Information
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www.prc.gov
Charles.Robinson@prc.gov
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