POSTAL REGULATORY COMMISSION Annual Compliance ...

1 POSTAL REGULATORY COMMISSION Annual Compliance Determination Report Fiscal Year 2017 March 29, 2018 POSTAL REGULATORY CommissionSubmitted 3/29/2018 11:52:01 AMFiling ID: 104398 Accepted 3/29/2018 TABLE OF CONTENTS Page EXECUTIVE SUMMARY .. 1 Principal Findings: Market Dominant Rate and Fee Compliance .. 1 A. Principal Findings: Market Dominant Noncompensatory Products .. 2 B. Principal Findings: Competitive Products Rate and Fee Compliance .. 2 C. Principal Findings: Service Performance and Customer Access .. 3 D. Principal Findings: Flats Cost and Service Issues .. 3 1: 5 Statutory Context .. 5 A. Timeline and Review of 6 B. Focus of the ACR .. 6 C. Other Reports .. 6 D. COMMISSION Responsibilities .. 6 E. Procedural History .. 7 F. Methodology Changes .. 7 Calculation of Incremental Costs at the Class Level for Market Dominant Products.

2 8 2. Calculation of Attributable Costs for Domestic Negotiated Service Agreements (NSAs) .. 10 Attributable Costs in FY 2017 ACD .. 12 H. Product Analysis .. 12 I. Service Performance .. 12 J. Confidentiality .. 12 K. Requests for Additional Information .. 13 2: MARKET DOMINANT PRODUCTS: PRICING REQUIREMENTS .. 14 Introduction .. 14 A. The Class-Level Price 14 B. Workshare Discounts .. 14 First-Class mail .. 15 2. 19 3. USPS Marketing mail .. 24 4. Package Services .. 38 Preferred Rate Requirements .. 42 3: MARKET DOMINANT PRODUCTS: OTHER RATE AND FEE Compliance ISSUES .. 44 Introduction .. 44 ii - Noncompensatory Products .. 44 44 2. USPS Marketing mail Flats .. 51 3. USPS Marketing mail Parcels .. 60 4. Stamp Fulfillment Services .. 63 5. Money Orders .. 64 6. Market Dominant International mail .. 65 7. Market Dominant International Products Consisting of NSAs.

3 73 8. Media mail /Library mail .. 75 9. Domestic Market Dominant NSAs .. 76 Other Issues .. 78 First-Class mail Product Cost Coverage Disparity .. 78 2. First-Class mail Volume Decline .. 79 3. First-Class mail Cost Avoidance Models .. 80 CHAPTER 4: COMPETITIVE PRODUCTS .. 81 Introduction .. 81 A. Cross-Subsidy Provision: 39 3633(a)(1) .. 81 B. Product Cost Coverage Provision: 39 3633(a)(2) .. 82 Competitive Domestic Products with Rates of General Applicability . 83 2. Competitive Domestic Products Consisting of NSAs .. 83 3. Competitive International Products with Rates of General Applicability .. 85 4. Competitive International Products Consisting of NSAs .. 88 5. Competitive Nonpostal 92 Appropriate Contribution Provision: 39 3633(a)(3) .. 92 D. Other Issues .. 93 Other Issues Raised By Commenters .. 93 2.

4 Palletized Priority mail Open and Distribute .. 95 CHAPTER 5: SERVICE PERFORMANCE .. 96 Service Performance Results .. 96 Introduction .. 96 2. Measurement Systems .. 97 3. The POSTAL Service s Responses to the Directives Related to First-Class mail Single-Piece Letters/Postcards .. 107 4. FY 2017 Service Performance Results by Class .. 143 5. Other Issues .. 160 Customer Access .. 162 Introduction .. 162 - iii - 2. Retail Facilities .. 162 3. Post Office Suspensions .. 163 4. Delivery Points .. 166 5. Collection Boxes .. 167 6. Wait Time in Line .. 168 7. Alternative Access .. 169 Customer Satisfaction with Market Dominant Products .. 170 Background .. 170 2. Comments .. 172 3. COMMISSION Analysis .. 173 CHAPTER 6: FLATS COST AND SERVICE ISSUES .. 174 Introduction .. 174 A. FY 2017 Results .. 174 Bundle 175 2. Low Productivity on Automation Equipment.

5 176 3. Manual Sorting .. 178 4. Productivity and Service Issues in Allied Operations .. 178 5. Increased Transportation Time and Cost .. 179 6. Last mile/delivery .. 180 Comments .. 181 C. Status of Docket No. RM2018-1 .. 182 D. Appendix A Special Study of Delivery Performance in Remote Locations Appendix B Key COMMISSION Findings and Directives Requiring POSTAL Service Action for Annual Compliance Reports Appendix C Commenters 2017 Annual Compliance Determination Appendix D Acronyms and Abbreviations EXECUTIVE SUMMARY This report reviews the POSTAL Service s performance in Fiscal Year (FY) 2017, fulfilling the COMMISSION s responsibility to produce an Annual assessment of POSTAL Service rates and service mandated by Title 39, section 3653, of the United States Code. It is based on information the POSTAL Service is required to provide within 90 days after the close of the fiscal year and on comments subsequently received from the public.

6 Specific COMMISSION findings and directives are identified in italics in each chapter. Consistent with the approach adopted in past years, the Annual Compliance Determination (ACD) focuses on Compliance issues as defined in 39 3653(b)(1) and (b)(2). These statutory subsections require the COMMISSION to make determinations on whether any rates and fees in effect during FY 2017 were not in Compliance with chapter 36 of Title 39 of the United States Code and whether any service standards in effect during FY 2017 were not met. The COMMISSION s review in this year s ACD is based on the rates approved in Docket No. R2017-1 and all the rates in effect during FY 2017 for Competitive Products. The financial analysis that had been incorporated in ACDs prior to 2013 is expanded in the Financial Analysis of United States POSTAL Service Financial Results and 10-K Statement 2017.

7 The COMMISSION will also issue a separate report on the POSTAL Service s FY 2017 Annual Performance Report and FY 2018 Performance Plan to fulfill its statutory responsibilities under 39 3653(c). Principal Findings: Market Dominant Rate Fee Compliance In Chapter 2, the COMMISSION identifies Compliance issues related to 42 workshare discounts, finding that 20 of the discounts did not comply with section 3622(e). Workshare discounts that exceed avoided costs adversely affect POSTAL Service finances because they incentivize mailers to perform worksharing that the POSTAL Service could have done on a less costly basis. For 7 of the 20 workshare discounts that were not in Compliance with section 3622(e), the prices approved in Docket No. R2018-1 align the discounts with avoided costs or eliminate the discount; therefore, no further action is required.

8 For the 13 workshare discounts remaining out of Compliance with section 3622(e), the POSTAL Service must either align workshare discounts with avoided costs in the next Market Dominant price adjustment or specify an applicable statutory exception. Additionally, for the Periodicals class, the COMMISSION finds that the POSTAL Service meaningfully addressed the FY 2016 ACD directives to report on the cost and contribution impact of worksharing and progress in improving pricing efficiency. The COMMISSION Docket No. ACR2017 - 2 - directs the POSTAL Service to continue reporting on Periodicals pricing issues in its FY 2018 Annual Compliance Report (ACR). Principal Findings: Market Dominant Products In Chapter 3, the COMMISSION identifies 10 noncompensatory Market Dominant products: Periodicals In-County, Periodicals Outside County, Standard Flats, Standard Parcels, Media mail /Library mail , Inbound Letter Post, Stamp Fulfillment Services, Money Orders, International Ancillary Services, Inbound Market Dominant PRIME Tracked Service Agreement, and the Market Dominant negotiated service agreement (NSA) with PHI Acquisitions, Inc.

9 (PHI). With respect to Periodicals In-County, Periodicals Outside County, and Standard mail Flats, the COMMISSION finds that additional transparency is necessary to hold the POSTAL Service accountable. The COMMISSION will continue to explore cost and service issues related to flats in Docket No. RM2018-1. For the Special Services products Money Orders and Stamp Fulfillment Services, the COMMISSION finds that revenue was not sufficient to cover attributable cost in FY 2017. The POSTAL Service must investigate the accuracy of the costing methods for Money Orders. For Inbound Letter Post, the COMMISSION recommends that the POSTAL Service continue to pursue compensatory Universal POSTAL Union (UPU) terminal dues and pursue bilateral agreements with foreign POSTAL operators that result in an improved financial position for the POSTAL Service.

10 The POSTAL Service is also directed to provide an update on its collection of accurate shape-based costing data. For the PHI NSA, the COMMISSION finds that the PHI NSA did not meet the criteria of 39 3622(c)(10)(A) in contract year 2. The POSTAL Service suspended the agreement during contract year 3. If the POSTAL Service provides the COMMISSION with an amended contract, such filing shall include an estimate of the total contract net financial contribution. If an amended contract is not in effect by June 30, 2018, the PHI NSA will remain suspended. For the remaining noncompensatory products, the COMMISSION finds that the POSTAL Service is taking appropriate steps to improve cost coverage. Principal Findings: Competitive Products and Fee Compliance In Chapter 4, the COMMISSION finds that revenues for 7 Competitive products did not cover attributable costs and, therefore, did not comply with 39 3633(a)(2).