Parcel Shippers Association Current Postal Regulatory Concerns

1. Parcel Shippers AssociationCurrent Postal Regulatory Concerns Mark Acton Postal Regulatory Commissioner August 10, 2010

2. Word of Thanks • Pierce Myers, Executive VP & Counsel • Tim May, General Counsel • Engaged and active participant in the postal regulatory process

3. Summary of Discussion • USPS Plan • Envisioning America’s Future Postal Service • Pending PRC Concerns (limited discussion): • Change in Frequency of Delivery: 6 to 5 days • Exigent Rate Case

4. Summary of Discussion • PRC Reports on USPS Workforce Legacy Costs • 2009 PRC Review of Postal Service Retiree Health Benefit Fund Liability • PRC Pension Cost Special Study • Upcoming PRC Initiatives • Joint PRC/USPS Periodical Study • USO/Value of Societal Benefits Assessment • Q & A

5. USPS Plan: Envisioning America’s Future Postal Service • March 2, 2010 -- Postal Service unveils plan: • Concerted Government Affairs/Public Relations Initiative • Mail volume will continue to shrink: 177 B pieces (2009) to 150 B (2020) • No action -- cumulative shortfall of $238 billion by 2020

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? • Further cost cutting and ramped up productivity, and • Regulatory and legislative relief: • Adjust delivery days to “better reflect current mail volumes and customer habits” • Exigent rate case • Restructure RHB payments and address overpayments to CSRS fund.

8. Change in Delivery Frequency:6 to 5 days • March 30, 2010: USPS filed request with the Commission for an Advisory Opinion 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 pick-up from blue collection boxes

9. Change in Delivery Frequency: 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

10. Change in Delivery Frequency: 6 to 5 days • Public, on-the-record PRC hearings and proceedings analyzing and cross-examining USPS proposal and supporting evidence • During the process, mail users and interested members of the public offer supporting or opposing views, both informally and as part of more formal, technical presentations

11. Change in Delivery Frequency: 6 to 5 days • The Commission conducted 7 field hearings: • Dallas, Sacramento, Chicago, Memphis, Las Vegas, Rapid City and Buffalo • Field hearings transcripts: Posted at www.prc.gov • Solicited public comments via our website • Response to date has been exceptional – over 12,000 letters and e-mails to date • Advisory Opinion could take 6 months or more (September/October, 2010) • No statutory deadline • First priority now is the Exigent Case

12. Exigent Rate Case • On July 6 the Postal Service filed with the PRC a request for an exigent rate adjustment • Pierce the rate cap • 5.6% average increase • New rates implemented in January, 2011

13. 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

14. Exigent Rate Case • “Exigency” has yet to be defined by the Commission • Extraordinary and exceptional instance

15. Exigent Rate Case • Setting the rate cap: • The Commission determines the price cap for any 12-month period by calculating the ratio of two 12-month CPI averages that are one year apart, subtracting one, and expressing the value as a percentage

16. Exigent Rate Case • CPI-U price-cap trend: • 2.9% December 2007 (R2008-1cap) • 3.8% December 2008 (R2009-1 cap) • 0.356% December 2009 • 0.968% through June 2010 … • Last Update: 7/16/2010 • For a more detailed explanation of the calculation of the price cap please see the PRC rules at http://www.prc.gov

17. Exigent Rate Case • PRC has established a docket to provide for public comment and has conducted hearings on the record • Interested parties have been encouraged to participate in building the record and suggesting relevant questions to the PRC for the USPS to answer during the course of these hearings • Commission will issue its decision within 90 days of the USPS filing: • PRC Deadline is October 4, 2010

18. USPS WORKFORCE LEGACY COSTSPRC REPORTS • PRC Review of USPS Retiree Health Benefit Fund Liability • PRC Special Study (SS2010-1) USPS Civil Service Retirement System (CSRS) Pension Funding

19. PRC Review of USPS Retiree Health Benefit Fund Liability • The need to restructure retiree health benefit prefunding requirement is by far the most important aspect of USPS Action Plan – Joe Corbett, USPS CFO • Request on June 15, 2009 by 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: • Consultant was Mercer Health and Benefits LLC • PRC presented its report to the Subcommittee July 30, 2009 • Annual Payments to Achieve 73% Funded Status: • OPM: $5.5 billion (present annual expense) • OIG: $1.7 billion • PRC: $3.4 billion

20. PRC Special Study (SS2010-1) USPS CSRS Pension Funding • Background: • USPS Office of Inspector General (OIG) Report released January 2010 estimates USPS overpaid CSRS by $75 B • IG estimates that if the overcharge was used to prepay the Postal Service’s health benefits fund, it would fully meet all of the Postal Service’s accrued retiree health care liabilities and eliminate the need for the required annual payments of more than $5 B • “Also, the health benefits fund could immediately start meeting its intended purpose -- paying the annual payment for current retirees, which was $2 billion in 2009”

21. PRC Special Study (SS2010-1) USPS CSRS Pension Funding • 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 • Per USPS request of February 23, 2010, PRC established Docket SS2010-1 to conduct a review of the Civil Service Retirement System (CSRS) pension liability of USPS

22. PRC Special Study (SS2010-1) USPS CSRS Pension Funding • PRC selected The Segal Company, a certified actuarial firm, to conduct the study • PRC reviewed Segal’s report and on June 30, 2010 submitted our findings to USPS, Congress and OPM • Overpayment to CSRS Funds $50-55 billion • PRC endorsed adoption of a more modern, fair and equitable accounting methodology as promoted by Financial Accounting Standards Board

23. PRC Special Study (SS2010-1) USPS CSRS Pension Funding • What’s next? • Office of Personnel Management (OPM) responsible for calculating the Postal Service’s CSRS pension liability • OPM emphasizes that their methodology is lawful and the need for Congress to direct another approach • Chairman Stephen Lynch legislation: H.R. 5746 • Requires OPM to recalculate CSRS fund payments, but provides no relief from annual REHB payments mandated by PAEA

24. Upcoming: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 • No deadline in the law

25. Upcoming:Joint PRC/USPS Periodical Study • The joint PRC/USPS study group so far has: • Visited USPS facilities to assess 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 in the months ahead

26. Upcoming:USO/Value of Societal Benefits • The Commission is considering supplementing our 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 an outline for a more in-depth investigation estimating the “societal” value aspect of the universal service obligation to our Nation • RPO recently issued

27. Chairman’s Letter,2009 Annual Compliance Determination • On March 2, 2010, the Postal Service unveiled a thoughtful and comprehensive ten-year plan to address what would otherwise be ever-growing deficits. The Commission looks forward to participating actively with the public and Congress in the exploration of the Postal Service’s retiree healthcare benefit funding, pension funding, strategies to reduce costs and improve customer service, and opportunities to expand products and services. We will also continue to provide regulatory oversight of the Postal Service on a monthly, quarterly and annual basis.

28. www.prc.gov