PRC Regulatory Report February 18, 2016

Topics Exigency Full-Service IMb Remand FY 2015 ACR City Carrier Street Costs UPS Costing Minimum Contribution Review 2

Exigency Surcharge Revenue –Thru 2/14/16: $4.347 billion –Revenue Cap: $4.634 billion Rollback (Absent Hill/Court Action) –Timing: April –Notice: 45 days (soon) –Rates: pe.usps.com 3

Full-Service IMb Remand DC Circuit Court –PRC is authorized to treat rule changes affecting rates actually paid as rate increases for price cap purposes. –Not all mail preparation changes should be treated as rate changes. –PRC must articulate standard of when a rule change should be treated as rate increase. 4

PRC Response (Definition) Rule has rate effect if it: –Effectively deletes a rate cell; and/or –Redefines a rate cell by causing a significant change to a basic characteristic of a mailing. Significance based upon: –Required operational adjustments –Compliance costs Full-Service IMb mandate has rate effect 5

PRC Response (Procedures) Proposed Procedure –USPS burden to identify rules with rate effect –Mailers can challenge within 30 days of notice Comment Deadlines –Initial: March 2, 2016 –Reply: March 17,

Will USPS Appeal Standard? 7

FY 2015 ACR 8

Competitive Product Share 9

City Carrier Street Study Postal Service proposal approved –Increased competitive costs by >$100M (relative to $1+B effect of UPS proposal) –Reflected in FY 2015 CRA USPS “Homework” –Time and cost to collect additional data –USPS response filed earlier this week –Further proceeding possible 10

UPS Costing Proposal 1: Attribute all inframarginal costs, variable costs that do not vary at the margin, to products Proposal 2: Re-classify a portion of fixed costs as variable and attributable Proposal 3: Increase appropriate share requirement to 25 percent 11

FY 2014 Impact CategoryProp OneProp TwoCombined Mrkt-Dmnt+38%+9%+47% Competitive+25%+7%+31% 12 UPS Proposals don’t shift costs between competitive and market-dominant, but rather increase attributable costs for all products.

Initial Comments Supporting UPS Proposals –Public Representative Opposing UPS Proposals –Postal Service –Parcel Shippers Association –Amazon Fulfillment Services, Inc. –Market Dominant Mailer Coalition (including PSA) 13

PAEA Costing Standard “‘[C]osts attributable’, as used with respect to a product, means the direct and indirect postal costs attributable to such product through reliably identified causal relationships.” Definition consistent with sound economic principles. 14

PSA/Coalition Comments UPS Proposals do not meet PAEA standard. –Rely on allocation and correlation –Not causality No evidence of subsidization today Inflating competitive product prices harms: –Postal Service (reduced contribution) –Consumers (higher prices) –Parcel shippers (higher shipping costs) –Mailers (if they have to make up lost contribution) 15

UPS Proposal 3/Contribution Review Five years after the date of enactment of this section, and every 5 years thereafter, the PRC shall conduct a review to deter- mine whether the institutional costs contribution requirement under subsection (a)(3) should be retained in its current form, modified, or eliminated. 16