Chapter 1 Our Mission

Governance

POSTAL ACCOUNTABILITY AND ENHANCEMENT ACT COMPLIANCE

Overview

On December 20, 2006, the President signed the Postal Act of 2006. In many respects, the law represents the most sweeping legislative change to the postal system since the Postal Reorganization Act of 1970. This new law modernizes price regulation and service standards, increases the authority of the Postal Regulatory Commission (PRC), requires a variety of reports and evaluations, and an accelerated schedule for the funding of Postal Service retiree health benefits. It also ends the previously mandated break-even business model and allows for profit-or-loss, encouraging retained earnings to be reinvested into the business.

The law separates postal products and services into market dominant and competitive categories, with increased pricing flexibility for both. The market dominant category — referred to as mailing services in this document — includes First-Class Mail, Periodicals, Standard Mail, and Package Services other than Bulk Parcel Post. For mailing services, the law caps price increases at the class level to the annual Consumer Price Index. The competitive category — referred to as shipping services — includes Priority Mail, Express Mail, and Bulk Parcel Post. For shipping services, the Postal Service is free to price these products as long as they cover their costs, are not subsidized by mailing services, and make an appropriate contribution to institutional costs.

As for service standards, the law contains three main requirements. First, the Postal Service must reevaluate existing service standards within the context of current network capabilities. Second, objective measurement systems must be established and implemented. Third, the Postal Service must submit a plan to Congress that includes the Postal Service vision for rationalizing the network to improve efficiency and meet the new service standard goals.

Separate accounting will be required for mailing services and shipping services. A new Competitive Products Fund, apart from the existing Postal Service Fund, will be established at the U.S. Department of Treasury. An assumed income tax will apply to profits from the Competitive Products Fund, with tax proceeds transferred to the Postal Service Fund to help defray costs for meeting the universal service obligation. By December 2007, the Department of Treasury will issue recommendations to the PRC on the accounting process. Additionally, the Federal Trade Commission will report on the application of federal and state laws to shipping services and how they may differ between the Postal Service and private companies.

Under the law, the PRC role changed significantly from its previous one as the Postal Rate Commission. The regulatory authority of the PRC has been enhanced. The law directs the PRC to establish a modern ratemaking process and each year the PRC will conduct a review of Postal Service prices and service. The law also requires the PRC to report to Congress and the President on the universal service obligation and monopoly status of the Postal Service.

Another key aspect of the law entails funding for Postal Service retirement and health benefits. The escrow requirement under Public Law No. 108-18 was abolished. However, the law replaced the escrow requirement with a new requirement that the Postal Service begin to fund the Postal Service portion of future retiree health benefits. The funds from the escrow account and over-funding of the Civil Service Retirement System liability are transferred to the new Postal Service Retiree Health Benefits Fund. Over the next decade, the Postal Service must pay each year between $5.4 billion and $5.8 billion into this fund. Finally, funding for the years that retirees spent in the military becomes once again the responsibility of the Department of Treasury, not postal customers. This change returns the Postal Service to the same status as other federal agencies.

Implications

The implications for the Postal Service are diverse. Although the Postal Service mission remains the same, the way the Postal Service manages its business will change considerably.

Among the most significant changes is a departure from the break-even business model. Since the Postal Reorganization Act of 1970, the Postal Service had been required to break-even financially over time. Under the Postal Act of 2006, however, the Postal Service has a profit-or-loss model. The new law encourages the Postal Service to make profits, retain earnings, and reinvest those earnings into the Postal Service. For example, retained earnings can be used to invest in system improvements that will enhance customer service or operating efficiency.

The law also grants the Postal Service increased pricing flexibility, in both the procedures to be used and the substantive standards to be applied. The process for changing prices is now more streamlined and efficient. In the past, the litigation period of an omnibus rate case could take 10 months. Now the Postal Service can give minimum of 45 days notice before changing prices for mailing services products.

For shipping services, the process for changing prices is further streamlined. The Postal Service will give at least 15 days notice before changing individual customer prices or 30 days notice before changing market-wide prices. Moreover, pricing for shipping services is not constrained by a CPI cap. Rather, the PRC has established a cost floor to ensure that these products cover their costs and make a reasonable contribution to institutional costs. The law also supports pricing flexibility for experimental products.

Requirements for separate accounting for the mailing services and shipping services categories will impose new and enhanced cost accounting and cost measurement systems. At the same time, the Postal Service will be required to comply with Securities and Exchange Commission rules that implement the financial internal controls under Section 404 of the Sarbanes-Oxley Act of 2002. Full compliance must occur with the 2010 Annual Report.

Finally, the law brings significant financial implications. The required transfer of $3.0 billion from the escrow fund to the new Health Benefits Fund in Quarter 1 was booked as an expense under generally accepted accounting principles. The law also required the Postal Service to pay an additional $5.4 billion into the Fund in 2007. These two amounts were only partially offset by the reduction in Civil Service Retirement System payments for 2007.

2007 Progress

The Postal Service completed 2007 well under way in complying with many provisions of the Postal Act of 2006. At the same time, the Postal Service emphasized public outreach and communications as a critical part of its transition under the law.

Concerning the modern pricing regulation provisions, the Postal Service held a joint ratemaking summit with the PRC on March 13, 2007. This summit, Meeting Customer Needs in a Changing Regulatory Environment, initiated the Postal Service’s outreach to the public to discuss the challenges and opportunities of the Postal Act of 2006.

Additional outreach to customers included the National Postal Forum, held from March 25 to 28; periodic meetings with the Mailers’ Technical Advisory Committee; a May 17 Flats Summit; the Postal Supplier Council Conference, held on September 11; and the National Postal Customer Council Day, held on September 19. During 2007, the Postal Service also filed comments and documents with the PRC as part of the RM2007-1 Rulemaking proceeding that established the modern ratemaking system; these included an initial mail classification schedule proposal.