As any attentive mailer should already know, the Postal Service has announced revised rates for its market dominant products (mailing services) and the associated implementing rules that will take effect on May 11.

To many in the mailing industry, the most significant influencer of postal rates is the CPI-based cap on the average rate increase per class. That figure had been watched anxiously as it evolved over the latter half of 2008, climbing to 4.5% in November before dropping back to 4.2% in December and 3.8% in January. Be because the January figure is what the Postal Service uses to develop its May price changes, this year those are capped at 3.8%.

Good News and Bad News
Ratepayers may be relieved that the calculated cap moved lower - at one point it was expected to climb as high as 5% - and that their woes from the general economic slump won't be compounded by a severe postage rate hike. But the good news for them isn't necessarily such good news for the Postal Service.

Last year, the agency suffered significant financial losses as the recession took hold and mail volume fell faster than expenses could be reduced; unfortunately, that trend has continued in 2009. Moreover, the Postal Service remains burdened with the statutory obligation to contribute nearly $6 billion this year to prefund future retiree health care costs. Together, these two factors alone are expected to propel the agency to a loss for 2009 that will exceed what it experienced in 2008. Clearly the Postal Service could have used the additional revenue that would have been possible from rates increased under a CPI cap of almost 5%. Instead, though, the agency saw potential revenue evaporate as the cap fell to under 4%, so what was good news to ratepayers wasn't such good news for the Postal Service.

Although it has the statutory authority to seek increases exceeding the cap in "exigent" circumstances, the Postal Service had openly rejected that option, aware that a steeper price jump would only exacerbate the volume losses already occurring.

Adjusting and Tweaking
As would be expected, the announced rates are the product of both science and art and, in this exercise, the Postal Service faced several other challenges. Perhaps the most delicate was how to encourage use of the intelligent mail barcode "full service" option, and to set an appropriate discount that was sufficient to motivate mailer participation but not so great as to imbalance anticipated revenues.

In setting the final discounts ($0.003 per piece for First-Class, $0.001 per piece for other eligible mail), the Postal Service tried to balance incentive and revenue without making the discount so large as to be untenable in future rate cases. Simply put, the agency knew that too small a discount would not result in the desired mailer behavior, while too large a discount - revenue loss aside - would not be sustainable in the future.

Elsewhere, the agency used rates to indicate how the value for certain rate components or worksharing measures has changed. For example, it concluded that the effect of weight on cost was less than that of piece handling - and different from what its pricing had indicated in the past - so it adjusted its rates accordingly for those categories having per-piece and per-pound rate components. Also, as automated processing becomes more potent, the need for mailers to carrier route presort mail is lessening, and thus is the value of a discount for such presort.

Venturing into new territory, under a one-year test program the Postal Service is offering a discount for new saturation mail volume. The incentive, $0.037 per piece for commercial letters and $0.04 per piece for commercial flats ($0.022 and $0.024 for nonprofit letters and flats, respectively) will be available for new Saturation volume "mailed during the defined period" and qualifying under other standards.

Fixing the Money-Losers
The Postal Service's pricing work also had to do something about those categories that were simply losing money - but not be so deliberate as to cause rate shock for the producers of such mail.

For example, Periodicals as a class has been covering only 83% of its costs, so the Postal Service drew on "banked" rate authority to raise the class-average rate by more than the 3.8% cap. Elsewhere, Standard Mail parcels were "underperforming," so they and NFMs were hit with an increase of more than 16%, again to move the revenue they generate closer to meeting their costs. Other parcel categories - in Package Services - also got a higher-than-average boost as well.
For Bound Printer Matter, parcel rates went up only 2.5% and the rates for flats were cut by 2% to better align with the those for Standard Mail catalogs - whose rates went up just 2.3% (much less than the steeper boost in 2008). The Postal Service explained that it was "mitigating the price increase to maintain the viability of the catalog industry."

The Review Process
Procedurally, the Postal Regulatory Commission reviewed the case for compliance with statutory criteria and, in a March 16 report, stated that it determined that the rates "do not violate the rate cap , adhere to the extent practical to the formulae in [the law], and appear consistent with, or justified by an exception to, the workshare discount limitations in [statute]." So, for the Postal Service, the good news was that - with one exception - the rates they announced last month passed muster and can be implemented as planned on May 11.

Mailers still pondering what to do about intelligent mail barcode implementation may want to note the Postal Service's response to a PRC inquiry about the proposed $0.003 discount for IMB "full service" option First-Class Mail. The agency responded that use of the "full service" option will not enable it to avoid any additional costs and, therefore, the discount's basis isn't worksharing. Instead, the discount is a "policy-based differential to promote adoption of full service so that the promise of Intelligent Mail can be more fully and expeditiously realized." Further, the agency stated that it did not "expect the incentive to become permanent, and envisions that eventually it will no longer be relevant or meaningful and thus will be phased out." [Emphasis ours.]

In Standard Mail, a significant element of the postal rate proposal was the $0.07 per-piece surcharge related to move-update failures. In its report, the PRC was brief: "Given the limited record available in this expedited review, the surcharge has not been shown to be inconsistent with applicable law." Therefore, any mailers - or list owners - who had put off updating their lists in hope that the surcharge would be quashed might want to start the list update process soon. (There's more to this story; see below.)

The element of the rate proposal to which the PRC most objected was the increase in the Platinum level Confirm service subscription fee for mailing agents; that jumped 963.8%, from $23,500 to $250,000. "Given the magnitude and selectivity of the proposed increase," the PRC wrote, "it is not surprising that mailing agents and their customers have questioned the lawfulness of the Platinum tier price increase for mailing agents. Their allegations raise troubling issues of discrimination and compliance with the objectives and factors of [the statute]."

Consequently, the PRC found that the difference between the fees for mailers and mailing agents "is inconsistent with applicable law" and that, until the Postal Service can produce "adequate justification for separate mailing agent rates, those rates must be removed" and both mailers and agents charged the same rate.

Late Developments
On March 26, the Postal Service filed an "amended notice" that deleted the proposed $250,000 Confirm fee for mailing agents; both they and mail owners would pay the same $25,000 annual fee. The agency said it expected to lose about $3.4 million in revenue as a result.

In the same notice, the Postal Service stated that it will delay implementation of the $0.07 per-piece penalty for Standard Mail that fails to comply with "move update" standards. Rather than taking effect on May 11 as planned, the penalty will now be deferred to January 4, 2010. No change was announced in the penalty for noncompliant First-Class Mail; it's been subject to "move update" rules for over a decade. As a result, Standard Mail revenue over the rest of 2009 will be reduced by about $4.5 million.

With the review and its aftermath settled, therefore, all that's left is rate implementation, and that will be May 11.
Leo Raymond is the Vice President, Postal and Member Relations, for the Mailing & Fulfillment Service Association, the only national trade association for the mailing and fulfillment service providers. For more than 87 years MFSA has been working to improve the business environment for mailing and fulfillment companies and to provide their managers with opportunities for learning and professional development.

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