A surge of momentum in late spring led to guarded optimism in the postal industry that the first bill to reform the U.S. Postal Service in more than 30 years would actually pass before the end of this year.


But, the realities of an election year, which include a shortened legislative calendar, sobered the industry to the fact that postal reform would have to wait another year yet again. The House and Senate reform bills, which would change the way postage rates are set, create a stronger regulatory body and lift an escrow account set to take effect in 2006, are now in limbo. Some mailing groups remained hopeful in mid-summer that the House and Senate would consider their separate bills to reform the Postal Service in September, when Congress returns from a six-week recess.


Still, postal reform has come further this year than previous efforts over the past decade, with the House Government Reform Committee unanimously passing its bill to reform the USPS, H.R. 4341, in mid-May 2004 and the Senate Governmental Affairs Committee passing its own version S. 2468 in early June. (See insert for a look at a possible scenario for the bills passage.) Because both bills fall short of reforming key aspects of the postal system, some mailers say these bills need an overhaul. However, they also recognize that if Congress does not pass a reform bill this session, postal ratepayers face a very large postage rate increase in the next rate case.


Both bills would preserve universal service at uniform rates and continue the Postal Service's monopoly over mail and the mailbox. However, the bills would reform the rate-setting process by directing a new Postal Regulatory Commission (PRC) to set up a modern system of setting rates. This stronger regulatory body would design the new rate structure so that rate increases in the "market-dominant" categories of mail (First Class, Standard, Periodicals mail) would be tied to a price cap. Price increases would not exceed inflation growth or some other index. The House and Senate bills differ on what the PRC could use as its index.


In competitive products, such as Priority Mail and Express Mail, the bills would give the Postal Service some freedom in how it sets prices for these products. For example, the House bill would allow the Postal Service to post its price increase for a class of mail that is generally available to everyone, such as Priority Mail, 30 days in advance rather than run through an entire rate proceeding. However, the few freedoms are more than offset by burdens no other carrier faces. Indeed, the language on competitive products remained a hot-button issue and one that was still being wrestled with into the summer. In the language on competitive products, both bills are laden with what insiders refer to as the "UPS amendments." These provisions, which United Parcel Service backed, would handcuff the Postal Service's ability to negotiate rates with large customers of Priority Mail and Express Mail.


There are a few reasons why postal reform moved as swiftly as it did in the spring, before bogging down in the run-up to the conventions and the political fussing of an election year. For one, the bills had bipartisan support. The key Republican and Democratic leaders of both the House and Senate oversight committees were committed to postal reform and willing to work with each other. They had bipartisan support because the bills did not address controversial matters, such as labor issues.


But more urgently, lawmakers recognized that the Postal Service and its customers will begin paying into an escrow account in 2006 and will pay the pension costs for its employees' years of military service if legislation is not passed to rectify those issues. Postal officials have said those two issues will add more than 5.4% to its next rate increase. This is on top of what it needs to fund its normal operating expenses.


In 2003, the President signed legislation that changed how the Postal Service pays into one of its pension plans, the Civil Service Retirement System (CSRS). The USPS was on track to over-fund the pension plan by more than $70 billion. The new funding formula saved the Postal Service more than $3 billion in 2003 and is expected to save it nearly $3 billion more in 2004. This "savings" is being used to pay down debt and keep postage rates stable.


However, the CSRS legislation from 2003 also directed the Postal Service to create an "escrow" account made up of the "savings" from the old payment system to the new system for paying into the pension plan. It also shifted responsibility of paying for the military service cost of employees from the Treasury Department to the Postal Service, a cost of about $30 billion.


Congress agreed to address these issues and provide the USPS relief, but only as part of omnibus legislation to reform the postal system. Both the House and Senate postal reform bills would lift the escrow account and return the burden of paying for military pension costs back to the Treasury. Mailers have applauded these provisions in the bill. This is one reason many mailers have supported the reform legislation, even though they fall short in many other areas. If the bills do not pass before the end of this year, then mailers can expect the next rate case to include the costs associated with the escrow account and military service. Although the Postal Service has promised that it won't raise rates until 2006, the next rate case could be filed late this year or in early 2005. It takes 10 months for a rate case to move through proceedings at the Postal Rate Commission.


Other than fixing the CSRS pension issues, it's not immediately obvious why many mailers are throwing their weight behind these bills. The bills promote a modern system for setting rates, but it's not clear what that system will be. It leaves much of the formation of this system to a new regulatory body, which most assume will be reasonable, but there are no guarantees. And while both bills demand rate increases for market-dominant products be tied to a price cap, it's not clear what the index will be. It could end up being such a loose index that mailers face annual rate increases above inflation. Further, many economists argue that price caps don't work without residual claimants, that is, shareholders that hold the organization accountable.


In addition, the bills do not give the USPS complete power to run the company. Many stakeholders had hoped the bill would explicitly grant the Postal Service the authority to right-size and realign its network. In exchange, the regulatory body would be given complete authority over rates and such issues as the universal service obligation.


So why support it? For many mailers, the bottom line is money. They cannot afford a humongous rate increase in 2006. Relief on the pension issues would buy the industry a few years to work on fixing the Postal Service model. "If something isn't done to rectify the escrow and military costs, mailers are facing an enormous rate increase in 2006, which will put some people out of business," says Robert McLean, executive director of the Mailers Council. Further, McLean says the current system for setting rates has become prohibitively expensive. Mailers can no longer afford to be participants in a rate case. "And that serves no one's interests," he adds.


Kate Muth is the editor of the Business Mailers Review. For more information, please call 301-528-0011 or e-mail her at muth@erols.com.