Proposed Rule2021-25841
Competitive Postal Products
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
November 30, 2021
Issuing agencies
Postal Regulatory Commission
Abstract
On January 3, 2019, the Commission adopted final rules to implement a dynamic formula-based approach for calculating the institutional cost contribution requirement for Competitive products, which is also referred to as ``the appropriate share,'' in accordance with the applicable statutory requirements. Subsequently, the United States Court of Appeals for the District of Columbia Circuit (D.C. Circuit), in a decision issued in April 2020, remanded two issues to the Commission for clarification. This supplemental notice of proposed rulemaking addresses the issues identified by the D.C. Circuit, initiates the Commission's third 5-year review of the appropriate share, reissues the dynamic formula-based approach to calculating the appropriate share as a proposed rule, and invites public comment.
Full Text
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<title>Federal Register, Volume 86 Issue 227 (Tuesday, November 30, 2021)</title>
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[Federal Register Volume 86, Number 227 (Tuesday, November 30, 2021)]
[Proposed Rules]
[Pages 67882-67885]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-25841]
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POSTAL REGULATORY COMMISSION
39 CFR Part 3035
[Docket Nos. RM2017-1 and RM2022-2; Order No. 6043]
RIN 3211-AA29
Competitive Postal Products
AGENCY: Postal Regulatory Commission.
ACTION: Supplemental notice of proposed rulemaking.
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SUMMARY: On January 3, 2019, the Commission adopted final rules to
implement a dynamic formula-based approach for calculating the
institutional cost contribution requirement for Competitive products,
which is also referred to as ``the appropriate share,'' in accordance
with the applicable statutory requirements. Subsequently, the United
States Court of Appeals for the District of Columbia Circuit (D.C.
Circuit), in a decision issued in April 2020, remanded two issues to
the Commission for clarification. This supplemental notice of proposed
rulemaking addresses the issues identified by the D.C. Circuit,
initiates the Commission's third 5-year review of the appropriate
share, reissues the dynamic formula-based approach to calculating the
appropriate share as a proposed rule, and invites public comment.
DATES: Comments are due: February 25, 2022; Reply Comments are due:
March 25, 2022.
ADDRESSES: For additional information, Order No. 6043 can be accessed
electronically through the Commission's website at <a href="https://www.prc.gov">https://www.prc.gov</a>.
Submit comments electronically via the Commission's Filing Online
system at <a href="http://www.prc.gov">http://www.prc.gov</a>. Those who cannot submit comments
electronically should contact the person identified in the FOR FURTHER
INFORMATION CONTACT section by telephone for advice on filing
alternatives.
FOR FURTHER INFORMATION CONTACT: David A. Trissell, General Counsel, at
202-789-6820.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Relevant Statutory Requirements
II. Background
III. Basis and Purpose of Proposed Rule
IV. Proposed Rule
I. Relevant Statutory Requirements
Section 3633(a)(3) of title 39 of the United States Code requires
the Commission to ``ensure that all competitive products collectively
cover what the Commission determines to be an appropriate share of the
institutional costs of the Postal Service.'' 39 U.S.C. 3633(a)(3).
Section 3633(b) requires that the Commission revisit the appropriate
share regulation at least every 5 years in order to determine if the
minimum contribution requirement should be ``retained in its current
form, modified, or eliminated.'' 39 U.S.C. 3633(b). In making such a
determination, the Commission is required to consider ``all relevant
circumstances, including the prevailing competitive conditions in the
market, and the degree to which any costs are uniquely or
disproportionately associated with any competitive products.'' Id.
II. Background
Pursuant to section 3633(b), the Commission initiated Docket No.
RM2017-1 for the purpose of conducting its second review of the
appropriate share requirement since the enactment of the Postal
Accountability and Enhancement Act (PAEA), Public Law 109-435, 120
Stat. 3198 (2006). In its second review of the appropriate share, the
Commission found that market conditions have changed since the PAEA's
enactment and since the Commission's last review of the appropriate
share.\1\ Most significantly,
[[Page 67883]]
the parcel delivery market has experienced a significant increase in
demand, particularly over the last 5 years, due to the growing
prevalence of e-commerce. Order No. 4963 at 5-12. This has led to
steady increases in revenue and profit for all competitors in the
market, as well as growth in competitive volumes and market share for
the Postal Service. Id. In light of the changes described above, Order
No. 4963 adopted a dynamic formula-based approach to determining the
appropriate share and adopts related rule changes. Id. at 19-29.
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\1\ See Docket No. RM2017-1, Order Adopting Final Rules Relating
to the Institutional Cost Contribution Requirement for Competitive
Products, January 3, 2019, at 4-12, 114-170 (Order No. 4963); see 84
FR 537 (January 1, 2019).
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However, Order No. 4963 was appealed by the United Parcel Service,
Inc. and later remanded to the Commission for further consideration by
the United States Court of Appeals for the District of Columbia
Circuit. United Parcel Serv., Inc. v. Postal Reg. Comm'n, 955 F.3d 1038
(D.C. Cir. 2020). The court identified two major aspects of Order No.
4963 for the Commission to clarify on remand.
First, the court found that ``the Commission ha[d] not adequately
explained how the statutory phrases `direct and indirect postal costs
attributable to [a particular competitive] product through reliably
identified causal relationships' and `costs . . . uniquely or
disproportionately associated with any competitive products' can
coincide.'' Id. at 1041, 1049. Second, the court found that ``in
focusing narrowly on costs attributed to competitive products under [39
U.S.C.] 3633(a)(2), the Commission failed to discharge its
responsibility under [39 U.S.C.] 3633(b) to `consider . . . the degree
to which any costs are uniquely or disproportionately associated with
any competitive products.' '' Id. at 1042, 1049 (emphasis in original).
As part of Order No. 6043 and to provide necessary background
concerning the issues identified by the court, Chapter IV of the Order
details the evolution of postal costing. The current cost attribution
methodology is designed to facilitate the attribution of costs to
products to the greatest extent feasible. See Section IV.A.1. The
Commission discusses the nature of institutional costs and why they
cannot be allocated any further. See Section IV.B.4. With respect to
Competitive product regulation, the Commission explains how section
3633, as implemented by the Commission, functionally results in a
series of interrelated price floors. See Section IV.B. The price floor
required by 39 U.S.C. 3633(a)(2), which requires each Competitive
product to recover its product-level attributable costs, is included in
the calculation of the price floor under 39 U.S.C. 3633(a)(1), which
requires the recovery of both product- and group-level attributable
costs for Competitive products collectively. See Section IV.B.2-3. This
is because incremental costs \2\ currently form the basis for both cost
attribution and testing for cross-subsidization of Competitive products
by Market Dominant products. See id. Therefore, the price floor under
paragraph (a)(1) is currently equivalent to the total attributable cost
of Competitive products collectively, which includes both individual
product-level incremental costs as well as group-level costs that are
incremental for Competitive products collectively. See id.
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\2\ Incremental costs are the variable and fixed costs that
would be eliminated if a product or group of products were
discontinued, or, equivalently, the total cost caused by the product
or group of products. See Section IV.B.2.
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Chapter V discusses the regulatory scheme for Competitive products
and amplifies the Commission's interpretation of 39 U.S.C. 3633(a)(3)
and (b). Based on the PAEA's text, context, and structure, and as
confirmed by its history, the purpose of the appropriate share
provision is to ensure fair competition in the market for competitive
postal services by protecting against any possibility that prices for
the Postal Service's Competitive products (despite covering their
attributable costs), might nevertheless be anticompetitively priced as
a result of the Postal Service's institutional costs being jointly
incurred by Market Dominant and Competitive products. See Section V.B.
The Commission concludes that the primary focus of the appropriate
share provision is to protect competition rather than to ensure a
particular level of institutional cost coverage. See id.
The Commission clarifies that the ``uniquely or disproportionately
associated'' standard appearing in 39 U.S.C. 3633(b) is broader than
the ``reliably identified causal relationship'' standard for cost
attribution under 39 U.S.C. 3631(b), such that the latter standard can
be viewed as a subset of the former. See id. The Commission also, as
directed on remand, considers the ``uniquely or disproportionately
associated'' standard as applied to all accrued costs, which includes
both attributable and institutional costs. See id. To rise to the level
of being ``uniquely or disproportionately associated with any
competitive products'' as contemplated by 39 U.S.C. 3633(b), the cost's
relationship with the product or products must be distinct (uniquely
associated) or out of proportion compared to the cost's relationship
with other products or groups of products (disproportionately
associated). See id.
Chapter VI applies the Commission's interpretation to ``all
relevant circumstances,'' resulting in the Commission electing to
maintain the dynamic formula-based approach to determining the
appropriate share. Under 39 U.S.C. 3633(a)(3), the prices set for
Competitive products must be marked up high enough to generate revenue
above and beyond the costs attributable to Competitive products at the
individual product and group level in order to also cover an
appropriate share of the Postal Service's institutional costs. See
Section VI.A.1. The price floor set by 39 U.S.C. 3633(a)(3) is made up
of the appropriate share of institutional costs, as determined by the
Commission, plus the attributable cost of Competitive products
collectively. See id. Thus, this price floor set by 39 U.S.C.
3633(a)(3) is higher than both of the price floors set by 39 U.S.C.
3633(a)(1) and (a)(2). See id. Because all attributable costs are
already included in the Competitive product price floor under 39 U.S.C.
3633(a)(3), the Commission declines to further account for them as part
of the appropriate share. See id. Double-counting such costs would be
economically unsound and would undermine the Postal Service's ability
to effectively compete. See id.
The Commission applies the ``uniquely or disproportionately
associated'' standard to all of the Postal Service's accrued costs. See
Section VI.A. The Commission has analyzed the degree to which any costs
are ``uniquely or disproportionately associated with any competitive
products,'' (39 U.S.C. 3633(b)), and found there are no costs (other
than those that also meet the definition of attributable costs) that
can be identified to be ``uniquely or disproportionately associated
with any competitive products.'' 39 U.S.C. 3633(b); see Section VI.A.1.
The nature of the residual costs which remain in the institutional
cost category is such that the relationships between such costs and
specific products or groups of products are not discernible or
quantifiable. See id. There is no method to identify a portion of
institutional costs as associated with Competitive products that would
not be arbitrary and capricious. See Section VI.A.2. Moreover,
employing arbitrary cost allocation methods would seriously
[[Page 67884]]
undermine the Postal Service's ability to compete. See id.
The inability to further allocate institutional costs under the
current methodology, however, does not mean that the Postal Service has
an unfair competitive advantage with respect to Competitive products.
See id. The available evidence suggests that the market is healthy and
competitive. See id.; Section VI.B.2. There is no evidence that the
Postal Service has engaged in anticompetitive pricing of Competitive
products; to the contrary, the evidence suggests that the Postal
Service is incentivized to maximize Competitive product profits, and
its market conduct has been in line with what would be expected of a
profit-maximizing firm. See Section VI.A.2. Competitive product
contribution to institutional costs has always exceeded the required
amount, often by a significant margin.\3\ The Commission has elected to
retain the appropriate share to serve as a margin of safety against any
possibility of the Postal Service having an unfair competitive
advantage. See Section VI.A.2. Under the proposed dynamic formula-based
approach, the appropriate share requirement would increase due to
growth in the profitability or market share of the Postal Service's
Competitive products. See id.
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\3\ See id. (citing FY 2020 ACD at 91-95; FY 2019 ACD at 86-89;
FY 2018 ACD at 112-17; Order No. 4402 at 52-53 (83 FR 6758, Feb. 14,
2018).
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With the foregoing clarifications having been made, the Commission
explains how the formula operates and how it accounts for the
prevailing competitive conditions in the market and other relevant
circumstances that the Commission has historically considered
qualitatively when evaluating the appropriate share requirement. See
Section VI.B. Because the dynamic formula-based approach reasonably
reflects the qualitative statutory criteria from 39 U.S.C. 3633(b), it
easily falls within the Commission's broad discretion to determine what
the appropriate share should be. See Section VI.B.1. The Commission
concludes that the appropriate share requirement, as derived from the
formula, is sufficient to prevent the possibility of the Postal Service
engaging in anticompetitive pricing of Competitive products. See
Section VI.B.1.c.
III. Basis and Purpose of Proposed Rule
The purpose of the Commission's dynamic formula-based approach is
to provide an objective basis on which to quantify the statutory
considerations of section 3633(b) in order to determine the year-to-
year change in Competitive products' joint minimal capacity to generate
profit that can be contributed to the coverage of institutional costs.
Order No. 6043 at 99.
The formula seeks to determine the Postal Service's overall market
power by measuring its absolute and relative market power.\4\ In order
to assess the Postal Service's absolute market power and its market
position, the formula utilizes two distinct components. The first
component is the Competitive Contribution Margin, which measures the
Postal Service's absolute market power. Id. at 99-101. Specifically,
the Competitive Contribution Margin is calculated by subtracting the
total attributable costs of producing the Postal Service's competitive
products collectively from the total amount of revenue the Postal
Service is able to realize from those competitive products collectively
in a given fiscal year, and then dividing this result by the total
competitive product revenue. Id. at 99-100. The formula assesses the
year-over-year percent change in the Competitive Contribution Margin to
determine how much, if any, the Postal Service's absolute market power
has changed. Id. at 100.
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\4\ Market power is a firm's ability to price a product or
service higher than the marginal cost of producing it and, as a
concept, embodies both absolute and relative aspects. Id. A firm's
absolute market power is its ability to raise prices with regard to
its own consumers. Id. A firm's relative market power, which can
also be described as its market position, is its capacity to
exercise market power relative to its competitors. Id.
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The second component of the formula is the Competitive Growth
Differential, which measures the Postal Service's market position. Id.
at 100-101. Specifically, the Competitive Growth Differential is
calculated by subtracting the year-over-year percent change in the
combined revenue for the Postal Service's competitors from the year-
over-year percent change in the Postal Service's competitive product
revenue. Id. This relative growth is then weighted by the Postal
Service's market share. Id. at 100.
Using the above-described components, the Commission's formula is
represented by the following equation:
ASt<INF>+1</INF> = ASt * (1 + %[Delta]CCMt<INF>-1</INF> +
CGDt<INF>-1</INF>)
If t = 0 = FY 2007, AS = 5.5%
Where,
AS = Appropriate Share
CCM = Competitive Contribution Margin
CGD = Competitive Growth Differential
t = Fiscal Year
Id. at 102.
In order to calculate an upcoming fiscal year's appropriate share
percentage (ASt<INF>+1</INF>), the formula multiplies the sum of the
prior fiscal year's Competitive Growth Differential and percentage
change in the Competitive Contribution Margin (1 +
%[Delta]CCMt<INF>-1</INF> = CGDt<INF>-1</INF>) by the current fiscal
year's appropriate share (ASt). Id. Both components of the formula are
given equal weight. Id. The formula is recursive in order to
incorporate all changes in the parcel delivery market since the PAEA
was enacted and the appropriate share was initially set. Id. at 103.
The formula's calculation thus begins in FY 2007 with a beginning
appropriate share of 5.5 percent. Id. The upcoming fiscal year's
appropriate share will be updated by the Commission each year as part
of the Commission's Annual Compliance Determination, which is performed
pursuant to 39 U.S.C. 3653. Id.
Because another 5 years has passed since the Commission's review
began in Docket No. RM2017-1, Order No. 6043 also initiates the
Commission's third 5-year review via Docket No. RM2022-2. Because the
issues and facts under review are related, the two dockets are
consolidated to enable more efficient administration of proceedings
before the Commission. See 39 U.S.C. 503; 39 CFR 3010.104.
IV. Proposed Rule
In order to implement the Commission's formula, existing Sec.
3035.107(c) is reissued. Proposed Sec. 3035.107(c)(1) establishes the
formula that is to be used in calculating the appropriate share and
defines each of the formula's terms. Proposed Sec. 3035.107(c)(1)
states that the appropriate share of institutional costs to be covered
by competitive products set forth in that rule is a minimum
contribution level. Proposed Sec. 3035.107(c)(2) establishes the
process by which the Commission shall update the appropriate share for
each fiscal year. The Commission will annually use the formula to
calculate the minimum appropriate share for the upcoming fiscal year
and report the new appropriate share level for the upcoming fiscal year
as part of its Annual Compliance Determination.
List of Subjects for 39 CFR Part 3035
Administrative practice and procedure.
For the reasons stated in the preamble, the Commission proposes to
amend chapter III of title 39 of the Code of Federal Regulations as
follows:
[[Page 67885]]
PART 3035--REGULATION OF RATES FOR COMPETITIVE PRODUCTS
0
1. The authority citation for part 3035 continues to read as follows:
Authority: 39 U.S.C. 503; 3633.
0
2. Amend Sec. 3035.107 by revising paragraph (c) to read as follows:
Sec. 3035.107 Standards for compliance.
* * * * *
(c)(1) Annually, on a fiscal year basis, the appropriate share of
institutional costs to be recovered from competitive products
collectively, at a minimum, will be calculated using the following
formula:
ASt<INF>+1</INF> = ASt * (1 + %[Delta]CCMt<INF>-1</INF> +
CGDt<INF>-1</INF>)
Where:
AS = Appropriate Share, expressed as a percentage and rounded to one
decimal place.
CCM = Competitive Contribution Margin.
CGD = Competitive Growth Differential.
t = Fiscal Year.
If t = 0 = FY 2007, AS = 5.5 percent.
(2) The Commission shall, as part of each Annual Compliance
Determination, calculate and report competitive products' appropriate
share for the upcoming fiscal year using the formula set forth in
paragraph (c)(1) of this section.
By the Commission.
Erica A. Barker,
Secretary.
[FR Doc. 2021-25841 Filed 11-29-21; 8:45 am]
BILLING CODE 7710-FW-P
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