Negotiated Service Agreements Presented at the Interagency Mail Policy Council Meeting May 6, 2014 Margaret Cigno Director of the Office of Accountability and Compliance Postal Regulatory Commission

1.Background on PRC 2.Description of NSA 3.History of NSA 4.Value of NSA to mailers 5.Role of USPS in NSAs 6.Role of PRC in NSAs 7.Conclusions 2 Outline

3 What is the PRC? Peoples Republic of China? Parent Resource Center? Postal Regulatory Commission

Independent agency that has exercised regulatory oversight over the Postal Service since its creation by the Postal Reorganization Act of Composed of five Commissioners – appointed by the President with the consent of the Senate – for a term of six years 4 Postal Regulatory Commission

Organized into four operating offices – Accountability and Compliance – General Counsel – Public Affairs and Government Relations – Secretary The Commission maintains an independent office for its Inspector General. 5 PRC

Ensure transparency and accountability of the United States Postal Service and foster a vital and efficient universal mail system 6 PRC Mission

7 What is an NSA? National Society of Accountants? National Security Agency? Negotiated Service Agreement?

Contract between the Postal Service and a mailer Available for both Market Dominant (e.g. First- Class Mail) and Competitive (e.g. Priority Mail) Creates benefit for mailers and the Postal Service – Lower rates for mailers – Higher volume or better efficiency for Postal Service 8 An NSA

First NSA –Capital One MC – Offered discounts on First Class mail above an agreed volume threshold – Postal Service operational savings due to Address Cleansing and Undeliverable As Addressed (UAA) savings – Subsequent NSAs were similar Most recent NSA- PHI - R – 3 Market Dominant NSAs filed since approval of PAEA 9 History of NSA

NSAs “that improve the net financial position of the Postal Service” NSAs that improve the operational efficiency of the Postal Service “Functionally Equivalent” agreements for “Similarly Situated” mailers – To prevent against discrimination, the PAEA instructs the PRC and USPS to ensure that mailers who want similar agreements can obtain them. Cannot cause unreasonable harm to the marketplace 10 Two Types of Market Dom NSA

Competitive NSAs must cover their attributable cost Competitive products as a whole must contribute 5.5 percent of Institutional costs 11 Different Standard for Comp NSA

Most common structure is declining block 12 Structure of NSA

Mailers have saved millions of dollars on postage  Example: Priority Mail Contracts Savings of approximately $0.50 to $3.00 per piece Average savings around $1.00 per piece Pieces mailed range from a few thousand to many millions Average number of pieces mailed approximately 800, Value of NSA to Mailers

Negotiates with mailer on contract terms Finalizes NSA contract Submits NSA to PRC for approval Monitors NSA Provides data to PRC 14 USPS Role in NSA

PRC must approve each NSA before it can be implemented – To date, PRC has approved all NSAs PRC evaluates each NSA in the Annual Compliance Determination 15 PRC Role in NSA

PRC rules state that the PRC review of market dominant NSAs will be completed within 45 days – Adding to product list has no statutory deadline When the Postal Service provides the PRC with notice of an NSA, the PRC will, within 45 days: – Docket the case – Appoint a Public Representative – Review Postal Service workpapers and filing – Request and review public comments – Determine if the NSA complies with the statute 16 PRC Review of Market Dominant NSA

PRC rules state that the PRC review of Competitive NSAs will be completed within 15 days When the Postal Service provides the PRC with notice of an NSA, the PRC will, within 15 days: – Docket the case – Appoint a Public Representative – Review Postal Service workpapers and filing – Request and review public comments – Determine if the NSA complies with the statute 17 PRC Review of Competitive NSA

Since PAEA, the Commission has approved 470 NSA requests – 24 market dominant Approved on average in 43 days Domestic generally take longer to approve – 446 competitive Approved on average in 17 days 18 PRC Review of NSA

No obligation for NSA partner to appear or provide comment in an NSA case, under PRC regulations However, if parties choose to provide comments, the PRC will accept those comments and take them into consideration 19 PRC Review of NSA

Analytical framework for estimating the value of discount response to the Postal Service Compare profit with and without the discount – Volume mailed at the discounted price is known – Volume that would have been mailed without the discount is unknown 20 PRC Evaluation of NSA Pieces Mailed x Profit per Piece = Total Profit Profit at Discounted Rates – Profit at Undiscounted Rates = Value of NSA

There are 5 key pieces of data: 1.The After Rates volume (use actual data) 2.The Threshold volume (use actual data) 3.The discount in price (use actual data) 4.The marginal cost specific to the mailer (use system proxy) 5.The slope of the demand curve specific to the mailer (use subclass proxy) 21 PRC Evaluation of NSA

22 Elasticity-based Test Demand Curve Undiscounted Price Before Rates Vol. A B

1.Mailers can save money using NSAs 2.All NSAs submitted to the PRC have been approved 3.If interested contact USPS 23 Conclusions

24 If you would like to be contacted by the U.S. Postal Service to discuss whether a Negotiated Service Agreement is an option for your business, contact them at one of the following addresses: Mail: PRICING STRATEGY US POSTAL SERVICE 475 L'ENFANT PLAZA SW ROOM 3658 WASHINGTON DC

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