IDEAlliance Print Distribution Conference Current Regulatory Concerns Mark Acton Vice-Chairman Postal Regulatory Commission April 4, 2011

Thanks  IDEAlliance / Print Distribution folks David Steinhardt, President and CEO of IDEAlliance My first visit to Print Distribution Conference of the IDEAlliance - familiar faces and new friends  Anita Pursley, VP Postal Affairs, RR Donnelley 2

Summary of Content  USPS Plan: Envisioning America’s Future Postal Service Brief review of Key Components of USPS Action Plan  Exigent Rate Case  Postal Service Retiree Health Benefit Fund Liability  Postal Service Pension Costs 3

Summary of Content  Change in Frequency of Delivery: 6 to 5 days  Annual Compliance Determination FY2010  Discover Financial Services NSA  Workshare Discount Methodology 4

Upcoming Attractions …  Joint PRC/USPS Periodicals Study  USO/Value of Societal Benefits  PRC’s 5 Year Review of the Postal Accountability and Enhancement Act (PAEA) 5

USPS: “Envisioning America’s Future Postal Service”  March 2, Postal Service unveils plan: Concerted Government Affairs/Public Relations Initiative. Mail volume will fall: 177 B pieces (2009) to 150 B (2020)  No action -- cumulative shortfall of $238 billion by (--USPS) 6

USPS: “Envisioning America’s Future Postal Service”  As much as $123 billion in savings during that same time period through aggressive cost cutting and increased productivity  Even so, “Estimated $115 billion shortfall will remain.” (--USPS) 7

USPS: “Envisioning America’s Future Postal Service”  What is the USPS Action Plan? Regulatory and legislative relief:  Exigent rate case  Restructure RHB payments and address overpayments to CSRS fund  Adjust delivery days to “better reflect current mail volumes and customer habits” Elimination of Saturday delivery 8

Exigent Rate Adjustment: Why the Rate Cap is Key  CPI-U price-cap trend: 2.9% December 2007 (R2008-1cap) 3.8%December 2008 (R cap) 0.356%December %Through February 2011 please see  Prepared by Postal Regulatory Commission Last Update: 3/17/2011 9

Exigent Rate Case  USPS proposal must: (39 USC 3622(d)(1)(E)) Describe the exigent circumstances and show why they necessitate the increase, Show that the proposed rates are reasonable and equitable, and Describe circumstances under which the increases could be rescinded or reduced 10

Exigent Rate Case  On July 6, 2010 the Postal Service filed with the PRC a request for an exigent rate adjustment  PRC has established a docket to provide for public comment and has conducted hearings on the record Interested parties were encouraged to participate in building the record and suggesting relevant questions to the PRC for the USPS to answer during the course of public hearings  Commission required to issue Decision within 90 days of USPS filing Published Order Denying Request for Exigent Rate Adjustment on September 30, one week early 11

Exigent Rate Case Order  Order No Denying Request for Exigent Rate Adjustments Commission found the requested exigent rate adjustments “not designed to respond to the recent recession, or its impact on mail volume. Rather, they represented an attempt to address long-term structural problems not caused by the recent recession.” The Postal Service achieved over $6 billion in cost reductions in 2009  These results indicate that the Price Cap is working and providing the right signals for USPS to reduce costs & improve efficiency 12

Exigent Rate Case “Take Away”  What’s the key “Take Away” from the Exigent Case decision? A unanimous and bipartisan message that, in a price cap regulatory regime, the integrity of the cap is paramount  Guarding the rate cap is the Commission’s first concern Price cap not to be pierced absent compelling, direct causation due to exigent circumstances  USPS Appeal of Commission Decision is pending in DC Circuit Court of Appeals, Case No Oral Arguments heard March 15 Anticipate a Decision in about two months 13

PRC Review of USPS Retiree Health Benefit Fund Liability  Request by then-Chairman Stephen F. Lynch, Subcommittee on Federal Workforce, Postal Service and the District of Columbia, Committee on Oversight and Government Reform, U.S. House of Representatives: Requested on June 15, 2009 Consultant was Mercer Health and Benefits LLC PRC presented its report to the Subcommittee July 30,

PRC Review of USPS Retiree Health Benefit Fund Liability Annual payments needed to achieve 73% funded Status:  OPM:$5.5 billion  OIG:$1.7 billion  PRC:$3.4 billion Under any of these estimates, funding of the Retirement Health Benefits Fund exceeds that of any private and public sector fund of this nature 15

PRC Review of USPS Retiree Health Benefit Fund Liability Commission’s recommendations are designed to promote a more fair, equitable, and responsibly sustainable recognition of this obligation  Adherence to modern, generally accepted accounting principles as adopted by Financial Accounting Standards Board (FASB) 16

USPS CSRS Pension Funding Special Study (SS2010-1)  39 USC 802(c): The Commission, upon request of USPS, promptly procures service of an actuary qualified to evaluate pension obligations to conduct a review in accordance with generally accepted actuarial practices and principles and provide a report to the Commission containing the results of the review 17

USPS CSRS Pension Funding Special Study (SS2010-1)  Per USPS request of February 23, 2010, PRC established Docket SS to conduct a review of the Civil Service Retirement System (CSRS) pension liability of USPS PRC selected The Segal Company, an actuarial firm, to conduct a study Actuarial report: $50 – 55 Billion overpayments for CSRS, due to a formula set in 1970s PRC reviewed Segal’s report, and (June 30, 2010) submitted findings (Overpayment to CSRS Funds $50-55 B) to USPS, Congress and OPM Office of Personnel Management (OPM) responsible for calculating the Postal Service’s CSRS pension liability. They assert they have used the lawful calculation; will not act without Congressional direction 18

USPS CSRS Pension Funding Legislative Action Last fall, Members of Congress in both Chambers drafted legislation regarding OPM management of USPS’ CSRS fund payments February 15, 2011 Sen. Susan Collins introduced an updated version of her bill, “U.S. Postal Service Improvements Act of 2011” for consideration by the 112th Congress. (S. 353) 19

Change in Delivery Frequency: 6 to 5 Days  March 30, 2010: USPS filed request with the Commission for an Advisory Opinion [39 U.S.C. 3661(c)] for the elimination of Saturday delivery  “A change in frequency, not a change in service” Discontinue Saturday residential and business delivery/collections Post Offices usually open on Saturday remain open No mail collection from blue boxes 20

Advisory Opinion 6 to 5 Days  PRC is “watchdog agency” protecting USPS’s Universal Service Obligation to Nation One of the most significant changes the Postal Service has ever presented to the Commission Nearly one year in development  Commission proceedings included 7 Field Hearings: Dallas, Sacramento, Chicago, Memphis, Las Vegas, Rapid City and Buffalo  Field hearing transcripts posted at Solicited public comments via our website  Response was exceptional – over 13,000 letters and s 21

Advisory Opinion 6 to 5 Days – Findings  Commission’s Advisory Opinion was issued March 24, 2011  Cost Savings: The Commission’s annual net savings estimate is $1.7 B  The Postal Service annual net savings estimate is $3.1 B  A difference of $1.4 B annually 22

Advisory Opinion 6 to 5 Days – Findings  Cost Savings cont: The Commission estimates that in either case full cost savings would likely not be achieved until year 3 following implementation  The Postal Service estimates that it will realize full-up savings within a year of implementation  Lost Revenue: The Commission estimate of net revenue losses due to volume declines caused by the service change is $0.6 B  The Postal Service estimate of net revenue loss is $0.2 B  A difference of $0.4 B 23

Advisory Opinion 6 to 5 Days – Findings  Service Impact: The planned changes would cause an average of 25 percent of all First-Class and Priority mail to be delayed by 2 days Customers in rural, remote, and non-contiguous areas can be particularly affected by the Postal Service’s plans  The Commission received significant input from rural America and traveled to South Dakota and Wyoming to meet directly with rural customers and community leaders  The Postal Service did not evaluate the impact of the proposal on customers who reside or conduct business in rural, remote, or non- contiguous areas 24

Advisory Opinion 6 to 5 Days – Findings  Service Impact cont: Service standards currently in place were conceived and implemented in a 6-day delivery environment  Consideration is warranted as to whether these service standards should be re-evaluated in the event five-day delivery is implemented 25

Advisory Opinion 6 to 5 Days - Recommendations  Recommendations for specific mailers Rural newspapers  Newspapers using USPS for Saturday delivery might warrant expansion of current limited exception for dailies utilizing curbside boxes Sunday and holidays Vote by Mail  Commission encourages USPS to continue its commitment to jurisdictions that have chosen to use vote by mail programs & work with election officials to ensure that election materials are delivered in a timely fashion 26

Annual Compliance Determination  Commission findings for FY 2010 Annual Compliance Determination issued March 29 Total Factor Productivity increased 2.2 %, as USPS reduced workhours by 75.1 M, saving an estimated $3.6 B USPS was able to meet all of its obligations in FY 2010, ending the year with $1.2 B in cash  It anticipates, however, a $2.7 B negative cash balance at the end of FY

Annual Compliance Determination Findings  Volume and Revenue Declines: Total volume declined by 3.5%, or more than 6 billion pieces First-Class Mail volume and revenue continue to decline, falling by 5.5 B pieces and more than $1.8 B, respectively Total revenues declined by 1.5% Total expenses increased by 5.1% 28

Annual Compliance Determination Findings  Pricing: Competitive products, as a whole, made a positive contribution to institutional cost amounting to 7.1% -- exceeding the required 5.5% share The Commission identifies 10 market dominant products and services with revenue that did not cover attributable costs in FY2010, including flats, periodicals, and non-profit mail, totaling $1.7 B in losses including:  $611 million from Periodicals,  $577 million from Standard Mail Flats, and  $172 million from Standard Mail Parcels/Not-Flat Machinables For the first time ever, Commission finds rates not in compliance with the statute, and directs the Postal Service to take action to address the intra- class cross subsidy for Standard Mail Flats as soon as practicable 29

Annual Compliance Determination Findings  Service Measurement: The Commission reviewed the Postal Service’s service measurement systems based on the Intelligent Mail barcode (IMb) and found persistent data errors, insufficient customer IMb usage, and a lack of product specific documentation The Commission is concerned with USPS ability to report service performance measurements for market dominant products as required by PAEA  Structural Obstacles:  The Postal Service’s liquidity crisis is related to an overly ambitious requirement for the Postal Service to prefund its future retiree health benefit premiums  Over the past four years, the Postal Service has paid $21.9 B to prefund these benefits, while the Postal Service’s cumulative losses were just $20 B. The Postal Service is mandated to make another $5.5 B payment this year  Full text of FY2010 ACD at: www prc.gov 30

Discover Financial Services NSA  On March 15, in Commission Order 694, the PRC approved a Negotiated Service Agreement for Discover Financial Services the first Market Dominant negotiated service agreement sought by USPS in four years since passage of PAEA postal reform 3-year Agreement designed to maintain the total contribution the Postal Service receives from DFS First-Class Mail and Standard Mail DFS NSA provides an incentive for net contribution beyond that total amount 31

Discover Financial Services NSA  5 key components of DFS NSA: 1. a revenue threshold 2. a revenue threshold adjustment 3. a postage commitment 4. rebates on First-Class Mail 5. rebates on Standard Mail 32

Discover Financial Services NSA  Commission approved DFS NSA to permit USPS management to learn more about potential tools to slow overall decline of First-Class Mail volume Creates a quantitative model for measuring estimated volumes through the NSA. PRC recognizes that non-problematic data are not always available As a result Commission is hopeful that USPS will be better off in the long run due to this NSA 33

Worksharing Discounts RM2009-3: Order 536  On September 14, 2010 the Commission found: the Benchmark currently used to measure avoided costs for presort First-Class Mail is obsolete the Commission also established guidelines to help determine the scope of worksharing activities  The Commission initiated Docket RM * to consider proposals to identify appropriate benchmarks for measuring the costs avoided by worksharing and establish discounts in the future (*pending)  USPS appealed Order 536 to the United States Court of Appeals for the DC Circuit (case ) USPS and PRC Briefs filed in February A date for oral argument has not been set 34

(Upcoming) Periodicals Study  Joint PRC/USPS Periodical Study PAEA Section 708 directs the USPS and PRC to jointly study the quality data used to determine attributable costs of Periodicals mail and opportunities for improving the efficiency of this mail class 35

(Upcoming) Periodicals Study  The joint study group so far has: Visited USPS facilities to view Periodicals processing Conducted meetings with mailers Hosted webinar on cost issues related to Periodicals mail Analyzed data related specifically to publications; as well as overall costing data Developed a report draft outline  The Commission anticipates publication of the final report to Congress soon 36

(Upcoming) Value of Societal Benefits of Mail  USO / Value of Societal Benefits of Mail  Commission considering supplementing its 2008 Report on Universal Postal Service and the Postal Monopoly. PRC engaged a consultant to assess the range of societal benefits of Postal Service The consultant targeted eight broad categories and offered metrics to quantify societal benefits in those categories This provides a possible outline for a more in-depth investigation estimating the “societal” value aspect of the universal service obligation to our Nation 37

(Upcoming) PAEA Five-Year Review 39 USC 701  Assessments of ratemaking, classification, and other provisions of 2006 postal reform Act  “The Postal Regulatory Commission shall, at least every 5 years, submit a report to the President and Congress concerning: (1) the operation of the amendments made by this Act; and (2) recommendations for any legislation or other measures necessary to improve the effectiveness or efficiency of the postal laws of the United States.” 38

(Upcoming) PAEA Five- Year Review 39 USC 701  December 2, 2010 Commission invited public comment  Public forum January 11, 2011, at the Commission offices; discussion with participants  February 1, 2011 comment period closed  Study proceeding; December 20 deadline 39

Summary We look forward to working with the Postal Service and Congress to address the challenges and opportunities... and through the daily oversight activities of the Commission to promote a healthy viable universal mail system for the Nation. -- Chairman’s letter, FY 2010 Annual Compliance Determination 40

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