1. POSTAL REGULATORY COMMISSION Association of Alternate Postal Systems Regulatory Update Alex Cooper Special Assistant to Commissioner Mark D. Acton May 5, 2015 5/5/2015VIEWS OF ALEX COOPER1

2. POSTAL REGULATORY COMMISSION Contents 5/5/2015VIEWS OF ALEX COOPER2 The Postal Regulatory Commission PRC Duties Compliance Matters Ratemaking Requests for Proposal (RFPs) International Role Legislative Update Questions & Answers

3. POSTAL REGULATORY COMMISSION The Postal Regulatory Commission 5/5/2015VIEWS OF ALEX COOPER3 Mission Statement: Ensure transparency and accountability of the United States Postal Service and foster a vital and efficient universal mail system Present Composition 5 Commissioners, appointed by the President and confirmed by the U.S. Senate—this is the full complement Office of Accountability and Compliance – Technical Analysis Office of the General Counsel - Legal Office of the Secretary and Administration Office of Public Affairs and Government Relations Office of the Inspector General

4. POSTAL REGULATORY COMMISSION PRC Duties 5/5/2015VIEWS OF ALEX COOPER4 Ensure the Postal Service complies with the law and applicable regulations Provide the public with transparency and accountability of the United States Postal Service Provide Advisory Opinions, which offer professional analytical and legal feedback to the public when USPS wishes to make a change in the “Nature of Service,” or its core functions Provide views to Secretary of State when new or amended international Market Dominant rates are established as to their consistency with U.S.C. § 3622

5. POSTAL REGULATORY COMMISSION Compliance: Annual Compliance Determination 5/5/2015VIEWS OF ALEX COOPER5 Annual Compliance Determination A report is issued by the Postal Regulatory Commission (PRC) in response to the Annual Compliance Report submitted by USPS to the PRC each fiscal year PRC determines whether any price or fee in effect during the year under review was not in compliance with applicable provisions and whether any service standards were not met

6. POSTAL REGULATORY COMMISSION Compliance: Annual Compliance Determination 5/5/2015VIEWS OF ALEX COOPER6 Principal Findings for FY 2014 include: 26 workshare discounts did not comply with section 3622(e), which requires the Commission to ensure that workshare discounts do not exceed the costs avoided by the Postal Service as a result of mailers preparing the mail. Seven noncompensatory Market Dominant products are identified: Periodicals In-County, Periodicals Outside County, Standard Flats, Standard Parcels, Media/Library Mail, Inbound Letter Post and Stamp Fulfillment Services. Revenue for two Competitive products failed to cover attributable costs and therefore do not comply with the law: International Money Transfer Service – Inbound, and International Money Transfer Service – Outbound. The Postal Service met its service performance targets for Presorted First- Class Letters/Postcards (Overnight and 2-Day), while performance results for Periodicals and Package Services fell short despite initiatives to increase performance.

7. POSTAL REGULATORY COMMISSION Compliance: Financial Analysis 5/5/2015VIEWS OF ALEX COOPER7 Separated from the ACD for the second year for greater clarity and transparency Includes a more in-depth discussion of the cost savings the Postal Service has generated, the financial impact of the various classes of mail, and a review of its assets and liabilities

8. POSTAL REGULATORY COMMISSION Compliance: Financial Analysis 5/5/2015VIEWS OF ALEX COOPER8 In FY 2014, the Postal Service had a total net loss of $5.5 billion. This is the Postal Service’s eighth consecutive financial loss, bringing its total net deficit since FY 2007 to $51.7 billion. The total net loss for the year was $10.9 billion less than the total net loss in FY 2012 and $1 billion better than expected under the Financial Plan. The Postal Service had an operational net income for the first time since FY 2008. Postal Service liquidity is insufficient to significantly improve operational efficiency. Liquid assets (current assets) are insufficient to meet the payment of current liabilities. The Postal Service has no further access to borrowing under current law.

9. POSTAL REGULATORY COMMISSION Rate Making: Latest CPI-U Based Price Cap Authority (This has not been updated since 12/2014) 5/5/2015VIEWS OF ALEX COOPER9

10. POSTAL REGULATORY COMMISSION Rate Making: R2013-11 Exigent Rate Case 5/5/2015VIEWS OF ALEX COOPER10 On September 26, 2013, the Postal Service filed a request for an average 4.3% increase above the CPI- cap for market dominant products. “Exigent” circumstances are defined as “Due to extraordinary or exceptional circumstances.” The Postal Service justified the need for an exigent rate increase as being the result of the Great Recession.

11. POSTAL REGULATORY COMMISSION Rate Making: R2013-11 Exigent Rate Case 5/5/2015VIEWS OF ALEX COOPER11 The exigent rate increase is functionally a surcharge adjustment The CPI-based rates and the exigent surcharge, are by PRC, design separate and distinct considerations. This means any CPI-based rate change in the future (the next opportunity would be 2015) would be based on the current CPI rates, not CPI rate + exigent surcharge.

12. POSTAL REGULATORY COMMISSION Rate Making: R2013-11 Exigent Rate Case 5/5/2015VIEWS OF ALEX COOPER12 The decision by the PRC to grant in part the Postal Service’s request is being appealed by both mailers and the Postal Service. Oral arguments in DC Circuit Court of Appeals occurred on September 9, 2014. This case is pending in a court of law, therefore we are unable to discuss details or opinions on the case.

13. POSTAL REGULATORY COMMISSION Rate Making: R2013-11 Exigent Rate Case 5/5/2015VIEWS OF ALEX COOPER13 There are three possible general outcomes: – The Postal Service could be found to be correct in asserting that the exigency should go on forever, and be “baked into” the base rate, or the Court could make a determination that the exigency should be allowed to collect more than the $3.2 billion the Commission determined. USPS is on track to reach that number around September 2015. – The Alliance for Nonprofit Mailers et al. could be found to be correct, in which case the Postal Service would have to return those exigent revenues. – The Court could remand our decision back to us for expansion or clarification, or alternatively they could agree with the Commission’s original order granting in part the exigent request from the Postal Service.

14. POSTAL REGULATORY COMMISSION International Role 5/5/2015VIEWS OF ALEX COOPER14 The PRC contributes to the work of the Universal Postal Union (UPU) to develop terminal dues rates for letters, as well as rates for parcels and supplementary services. Commission staff also participate in work on broader regulatory issues. For Market Dominant products, the Commissions seeks to promote compliance with § 3622. For Competitive products, the Commission seeks to promote a level playing field between the Postal Service and the private sector. The PRC is working as part of the U.S. delegation to the UPU to finalize proposals on international rates and other issues for adoption at the September 2016 UPU Congress in Istanbul.

15. POSTAL REGULATORY COMMISSION Terminal Dues Study 5/5/2015VIEWS OF ALEX COOPER15 Terminal dues are the rates that postal operators pay to each other for the delivery of letter mail. In the UPU, many national postal operators receive terminal dues that are below cost. Therefore, foreign mailers are accessing domestic delivery markets at lower rates than domestic mailers, with domestic mailers subsidizing foreign mailers. In 2014, the PRC commissioned Copenhagen Economics to study, from the perspective of economic theory, whether the UPU terminal dues system distorts competition and to determine how to measure any such distortions. Copenhagen Economics found that a system of terminal dues that are below cost for national postal operators does create market distortions, and proposed that an ideal terminal dues system should be based on the average incremental cost of last-mile delivery.

16. POSTAL REGULATORY COMMISSION Legislative Update 5/5/2015VIEWS OF ALEX COOPER16 As of yet, no major postal legislation has been introduced by the Chairman or Ranking Member of either the House or Senate postal oversight committees – Both Committees have new Chairmen—in the House, Rep. Jason Chaffetz, and in the Senate, Sen. Ron Johnson. Senate Homeland Security and Governmental Affairs Committee Ranking Member, Sen. Tom Carper, hosted a postal briefing for committee members on April 16, in which the PRC participated, which dealt with USPS finances. The PRC has been invited to participate in a second briefing later this month to discuss issues related to rural delivery The Postal Service had its first operational profit since 2008, which may impact the chances of significant legislation as the circumstances surrounding USPS may seem less dire.

17. POSTAL REGULATORY COMMISSION 5/5/2015VIEWS OF ALEX COOPER17 QUESTIONS? WWW.PRC.GOV