E8-1778. Change in Rates of General Applicability for a Competitive Product

AGENCY:

Postal Service.

ACTION:

Notice of a change in rates of general applicability for a competitive product.

SUMMARY:

This notice sets forth changes in rates of general applicability for a competitive product, specifically the establishment of prices for a Priority Mail large-sized flat-rate box.

DATES:

Effective Date: March 3, 2008.

FOR FURTHER INFORMATION CONTACT:

Daniel J. Foucheaux, Jr., 202-268-2989.

SUPPLEMENTARY INFORMATION:

On January 17, 2008, pursuant to their authority under 39 U.S.C. 3632, the Governors of the Postal Service established prices for a new large-size Priority Mail flat-rate box. The Governors' Decision and the record of proceedings in connection with such decision are reprinted below in accordance with section 3632(b)(2). Implementing regulations are published elsewhere in this issue.

Neva R. Watson,

Attorney, Legislative.

Decision of the Governors of the United States Postal Service on the Priority Mail Large Flat-Rate Box (Governors' Decision No. 08-1)

January 17, 2008.

Statement of Explanation and Justification

Pursuant to our authority under section 3632 of title 39, as amended by the Postal Accountability and Enhancement Act of 2006, we establish the following prices for a new, larger (approximately 1/2 cubic foot) Priority Mail flat-rate box: $12.95 for domestic mail destined to most ZIP Codes, $10.95 for domestic mailed destined to APO/FPO ZIP Codes, $29.95 for international mail destined to Mexico and Canada, and $49.95 for international mail destined to all other countries. We have reviewed the attached analysis provided by management and have evaluated this change in accordance with 39 U.S.C. §§ 3632-3633 and 39 C.F.R. § 3015.2, which address changes in rates of general applicability for competitive services.

As background, we first approved the domestic flat-rate box as an experiment more than three years ago.^[1] Subsequently, we concluded that the experiment was a success, and we approved a permanent classification for the flat-rate box as part of the recent omnibus rate case.^[2] The existing box has a volume of 0.34 cubic feet, with a price of $8.95.^[3] The Postal Service extended the flat-rate box to international mail in May 2007, at prices of $23.00 for mail destined to Canada and Mexico, and $37.00 for mail destined to all other countries.

The Priority Mail flat-rate box has proven to provide value to customers in the form of convenience and ease of use and has made a positive contribution to postal finances. This success suggests a place for an additional Priority Mail flat-rate box. Such an offering would enhance customer choice, convenience and ease of use. The larger box will have a cubic capacity of approximately 1/2 cubic foot, or about 50 percent more than the current flat-rate box.

As indicated in the attached analysis, the addition of this new option will benefit the Priority Mail flat-rate box rate category. Moreover, the lower rate for APO/FPO-destined ZIP Codes is justified by the analysis, and provides an opportunity for the Postal Service to assist American troops stationed abroad and their families.

Establishment of the larger flat-rate box is a minor change that does not raise an issue of subsidization of competitive products by market dominant products. (39 U.S.C. § 3633(a)(1)). The change will have no negative effects on the ability of Priority Mail or Priority Mail International to cover attributable costs (39 U.S.C. § 3633(a)(2)), or for competitive products as a whole to comply with 39 U.S.C. § 3633(a)(3), which, as implemented by 39 C.F.R. § 3015.7(c), requires competitive products to contribute a minimum of 5.5 percent to the Postal Service's total institutional costs.

Order

The prices specified above for the new flat-rate Priority Mail box shall be effective March 3, 2008. We direct the Secretary to have this decision published in the Federal Register in accordance with 39 U.S.C. § 3632(b)(2). We also direct management to file with the Postal Regulatory Commission appropriate notice of this change.

By The Governors:

James C. Miller III,

Chairman.

Analysis of the Priority Mail Large Flat-Rate Box

DOMESTIC

The Priority Mail large flat-rate box is 0.52 cubic feet (exterior), with dimensions of 121/4” x 121/4” x 6” exterior and 12” x 12” x 51/2” interior.

Pricing

• $10.95 for Priority Mail shipments to APO/FPO addresses.
• $12.95 for Priority Mail shipments to all other addresses.

Estimated Profitability

[FY 2007 Basis]

	Non-APO/FPO addresses	APO/FPO addresses
Price	$12.95	$10.95
Est. Unit Cost	$8.03	$8.46
Est. Unit Contribution	$4.92	$2.49
Implicit Cost Coverage	161%	129%
Note: Calculations include the incremental cost of packaging (over and above the approximately 10 cents per piece “baked in” to every Priority Mail rate cell).

Support for the Domestic Prices

Given the most recent price change, estimated domestic Priority Mail cost coverage is currently in the range of 135 to 140 percent. The $12.95 price reflects a premium comparable to that established for the original flat-rate box in 2004, which proved sufficient to protect against the risk of contribution leakage. A preferential $10.95 price is offered for shipments to APO/FPO addresses. These shipments account for only seven percent of total current flat-rate box volume. The price is sufficient to provide adequate contribution because of the unique demand characteristics of care-package shipments.

Compliance With Relevant Law

By sheer weight of volume, the primary use of the larger flat-rate box will be for general domestic Priority Mail shipments. Based on experience with the existing flat-rate box, the premium built into the $12.95 price is likely to produce an increase in contribution. Some contribution leakage is likely to result from lower-volume APO/FPO applications, but the amount should be minimal. As shown above, the Priority Mail large flat-rate box will easily cover its costs. Therefore, the domestic Priority Mail large flat-rate box is not expected to raise an issue of subsidization of competitive products by market dominant products (39 U.S.C. § 3633(a)(1)); or undermine the ability of Priority Mail to cover its attributable costs (39 U.S.C. § 3633(a)(2)); or undermine the ability of competitive products as a whole to comply with 39 U.S.C. § 3633(a)(3), which, as implemented by 39 CFR § 3015.7(c), requires competitive products to contribute a minimum of 5.5 percent to the Postal Service's total institutional costs.

INTERNATIONAL

The same flat-rate box will be used for Priority Mail International (PMI).

Pricing

• $29.95 for Priority Mail International shipments to Canada and Mexico.
• $49.95 for Priority Mail International shipments to the rest of the world.

Estimated Profitability

[FY 2007 Basis]

	Canada and Mexico	All other countries
Price	$29.95	$49.95
Est. Unit Cost	$21.46	$39.83
Est. Unit Contribution	$8.49	$10.12
Implicit Cost Coverage	140%	125%

Support for the International Prices

The estimated overall Priority Mail International cost coverage is 128 percent. The Canada and Mexico price of $29.95 and the Rest-of-the-World price of $49.95 yield a weighted-average implicit cost coverage the same as PMI as a whole, 128 percent. The risk of contribution leakage is contained by the imposition of a 20-pound weight limit.

Compliance With Relevant Law

The Priority Mail large flat-rate box will represent a small percentage of total Priority Mail International (PMI) volume. It, therefore, can have only a limited effect on total contribution, but it is designed to increase contribution by having a price set approximately at the average for similar-weight PMI pieces. It may also increase contribution by increasing total PMI usage. Any potential for contribution loss is partially offset by the imposition of a 20-pound limit. As shown above, the large flat-rate box will easily cover its costs. Therefore, the Priority Mail International large flat-rate box will not raise an issue of subsidization of competitive products by market dominant products (39 U.S.C. § 3633(a)(1)); or undermine the ability of Priority Mail International to cover its attributable costs (39 U.S.C. § 3633(a)(2)); or undermine the ability of competitive products as a whole to comply with 39 U.S.C. § 3633(a)(3), which, as implemented by 39 CFR § 3015.7(c), requires competitive products to contribute a minimum of 5.5 percent to the Postal Service's total institutional costs.

Certification of Governors' Vote in the Governors' Decision No. 08-1

I hereby certify that the following Governors voted by paper ballot on adopting Governors' Decision No. 08-1:

Mickey D. Barnett

James H. Bilbray

Carolyn Lewis Gallagher

Louis J. Giuliano

Alan C. Kessler

Thurgood Marshall, Jr.

James C. Miller III

Katherine C. Tobin

Ellen C. Williams

The vote was 9-0 in favor.

Wendy A. Hocking,

Secretary of the Board of Governors.

Footnotes

1.  Governors' Decision on Docket No. MC2004-2 (October 29, 2004).

2.  Governors' Decision on Docket No. R2006-1, at 13-14 (March 19, 2007).

3.  Governors' Decision on Reconsideration, Docket No. R2006-1, at 1-2 (May 2, 2007).