Valpak Reply Comments at 25. The Postal Service suggests that incremental costs should be to determine if a product’s revenue exceeds its total cost.” Postal “used Service Reply Comments at 34. Using incremental costs for attribution need not alter the Postal Service’s pricing strategy, nor should it. While each product’s attributable cost will be equal to its incremental cost, marginal costs should remain the Postal Service’s basis for setting prices, with the application of appropriate markups to ensure that each product covers its incremental costs and provides an appropriate share of institutional costs. Effectively, the average price of a product should meet or exceed the product’s average incremental cost (the incremental cost divided by the number of pieces). This would result in products having a cost coverage of 100 percent or greater. In addition, the calculation of avoided costs associated with worksharing discounts is not altered by the attribution of incremental costs. Unit avoidable costs should be based on marginal costs that are worksharing-related, and therefore exclude inframarginal or fixed costs. The instant docket has presented an opportunity to evaluate the Postal Service’s costing methodologies and revise them. The Commission appreciates UPS’s efforts to seek new and improved ways to attribute postal costs. Based on the evidence provided and information available, the Commission is unable to adopt Proposal One because it lacks the requisite showing under section 3622(c)(2) that inframarginal costs can be attributed through reliably identified causal relationships. Because Proposal One does not demonstrate such relationships, it cannot be an improvement over the existing methodology pursuant to section 3652(e)(2). Based on the Commission’s findings that incremental costs can be linked to products through reliably identified causal relationships and that the use of an incremental costs methodology represents a significant improvement from the current attribution methodology, the Commission must require the Postal Service to attribute
Valpak Reply Comments at 25. The Postal Service suggests that incremental costs should be “used to determine if a product’s revenue exceeds its total cost.” Postal Service Reply Comments at 34. Using incremental costs for attribution need not alter the Postal Service’s pricing strategy, nor should it. While each product’s attributable cost will be equal to its incremental cost, marginal costs should remain the Postal Service’s basis for setting prices, with the application of appropriate markups to ensure that each product covers its incremental costs and provides an appropriate share of institutional costs. Effectively, the average price of a product should meet or exceed the product’s average incremental cost (the incremental cost divided by the number of pieces). This would result in products having a cost coverage of 100 percent or greater. In addition, the calculation of avoided costs associated with worksharing discounts is not altered by the attribution of incremental costs. Unit avoidable costs should be based on marginal costs that are worksharing-related, and therefore exclude inframarginal or fixed costs. The instant docket has presented an opportunity to evaluate the Postal Service’s costing methodologies and revise them. The Commission appreciates UPS’s efforts to seek new and improved ways to attribute postal costs. Based on the evidence provided and information available, the Commission is unable to adopt Proposal One because it lacks the requisite showing under section 3622(c)(2) that inframarginal costs can be attributed through reliably identified causal relationships. Because Proposal One does not demonstrate such relationships, it cannot be an improvement over the existing methodology pursuant to section 3652(e)(2). Based on the Commission’s findings that incremental costs can be linked to products through reliably identified causal relationships and that the use of an incremental costs methodology represents a significant improvement from the current attribution methodology, the Commission must require the Postal Service to attribute
Order3506.docx