Feb. 24 2007 08:32 PM

Just when the nails were being hammered into the coffin for Postal Reform, the lame duck Congress passes the reform with very few changes on the last day. President Bush signed the legislation into law on December 20 (with a herd of mail industry dignitaries in attendance). The Bush Administration was part and party to the compromise that enabled passage. Now that we will actually have Postal Reform what does that mean to all of us in the mailing industry?


Postal Regulatory Commission

First, the Postal Rate Commission is renamed the Postal Regulatory Commission (PRC). The new PRC then has 18 months from the date of enactment to establish a "modern" system for regulating rates and classes for market dominant products. Basically, these are all the products that are not "expedited." That means we should have a slightly different USPS around June 2008, coinciding with the first installation of the Flat Sequencing Sorter.


Also tied to this date are "modern" service standards. Within 12 months from enactment, the USPS, working with the PRC, is to establish a set of service standards for all market dominant products. Key objectives of the standards to be developed are:

  •            Enhance and preserve the value of postal
                services to senders and recipients.

  •            Provide a system of objective external
                performance measurements for each mar-
                ket dominant product to reasonably assure
                customers delivery reliability, speed and fre-
                quency, consistent with reasonable rates
                and best business practices.

    Then, within six months, the USPS is required to submit to Congress a plan for meeting those standards. The plan is to be very encompassing, including the Postal Service's long-term "vision" for rationalizing infrastructure and workforce.


    Postage Rates

    What about postage rates? This can get a little scary in that the PRC could start from scratch in determining rates and rate relationships. The PRC is supposed to consider the value of mail service provided by each class and that each class bears the direct and indirect postal costs attributable plus overhead costs of the USPS. First and foremost is that the rates "be fair and reasonable." Given that this PRC will just be completing a current rate case filing, there may not be any surprises to be concerned about.

    Caps to rate increases are included in the language of the bill that basically relate to the Consumer Price Index. This seems reasonable, but there are two exceptions that need mention. First is the exigency area where the USPS may exceed the CPI due to extraordinary or exceptional circumstances. There are operating rules controlling this situation, and it is meant to protect the USPS if, for example, fuel rates sky-rocket well beyond inflation.


    The other comes from the White House, and it muddies the waters where predictable rate increases are concerned. This is the Banking Provision. The general idea behind banking is that if the USPS seeks a rate increase below the CPI, it may bank the difference for use in a future rate case by class of mail! Let's say that in 2008 the USPS asks for a two percent rate increase for Standard Mail and the CPI is five percent. The USPS can then hold the unused three percent for a future rate case, say where the CPI is two percent and the USPS wants five percent. This may be good in the eyes of postal management, but it will make it difficult to predict when this banked unused CPI will be employed.



    Worksharing is preserved in the bills with the proviso that they not exceed the cost that is avoided by the USPS. What immediately comes to mind are the 3-Digit and 5-Digit Letter Automation discounts for Standard Mail, which currently are at 200% and 150% of costs today. It is felt that the PRC will not correct this in the current rate case, as this would make ECR-Basic more attractive than automated, and that is not a good thing.


    Worksharing discounts can exceed postal costs if the discounts are associated with a new postal service or is a new incentive. In addition, the discount may exceed the costs if it is deemed necessary to influence mailer behavior to drive use of more efficient automated postal processing services as well as the current idea of avoiding rate shock. However, the "overage" of the discount will have to be phased out over a limited time.


    Negotiated Service Agreements

    Negotiated Service Agreements (NSA) are not specifically addressed in the bills. However, they include factors that the PRC is to take into account that appear to promote the idea of NSAs. These are the desirability of special classifications for both postal users and the Postal Service in accordance with the policies of this new legislation, including agreements between the Postal Service and postal users, when available on public and reasonable terms to similarly situated mailers that either:

  •            Improve the net financial position of the
                Postal Service through reducing Postal
                Service costs or increasing the overall con-
                tribution to the institutional cost of the
                Postal Service.

  •            Enhance the performance of mail prepara-
                tion, processing, transportation or other
                functions   and do not cause unreasonable
                harm to the marketplace.


    It's safe to assume current NSAs will remain in force, and there will be opportunities for new ones, perhaps mail service provider agreements.


    So, what does "this" Postal Reform do for rate cases? First, I believe the USPS will go to annual rate cases, and this means that, on average, they will reasonably reflect CPI. Postal Reform will not impact the current rate case. There are at least 18 months until Postal Reform will be in effect, and I seriously doubt that the USPS will hold off to file its next rate case until then. There is a strong need within the USPS to further differentiate the rates by shape. The impact of Standard Mail flats on carrier street time is huge, and I expect we'll see another rate increase soon requested by the USPS, similar to the one in the current rate case of roughly 12.5%, before the Postal Reform is implemented.


    I believe further increases to parcels will ensue as well. I think there would be an urgency to get these differences in place before reform is implemented so that there would not be any concern about being "locked-in" to current rate relationships. I suspect the USPS will file shortly after the implementation of R'06, which is currently set to happen May 6, 2007. The projected implementation of a subsequent rate case filed late May 2007 would be around June 2008; coincident to reform implementation and the start of the installations of FSS.


    The issue of resolving the escrows and military retirement costs basically assures rates are based on operational costs of the USPS and not extraneous federal burdens. This was the "show me the money" aspect of Postal Reform. I do not think the USPS could break even if restricted to CPI and still had to bare these unwarranted costs. The next 18 months should be interesting to say the least.


    Charley Howard is Vice President, Postal Affairs, for Harte-Hanks, a worldwide, direct and targeted marketing company. Contact Charley Howard by phone at 410-412-1749, email charley_howard@harte-hanks.com or visit the company's website at www.harte-hanks.com.


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