The Postal Regulatory Commission (PRC) on December 5, 2019, issued its long-awaited next step on its statutorily mandated “10-year” review of the Postal Service’s rate system.
A Look at the Required 10-year Review
The Postal Accountability and Enhancement Act (PAEA) legislation enacted in late 2006 included the requirement that the PRC evaluate the rate system the Commission put in place after 10 years to see if it was meeting the 10 objectives and fourteen factors contained in the law. Accordingly, the PRC began its review process in late 2016 and ultimately decided that the current rate system was not meeting some of the objectives and factors contained in the law. Specifically, the Commission concluded that while the USPS was financially stable in the short term, it could not meet its “medium” and “long term” financial objectives as defined by the Commission. The PRC further concluded that some of the failures of the current system were actually due to the USPS not utilizing the “system” effectively.
In 2017, the PRC proposed revisions to the rate system and received extensive comments from all concerned stakeholders, including those in the mailing industry, USPS employee organizations, the USPS, the PRC’s Public Representative (tasked with representing the public’s interests), and more.
Further complicating the PRC’s work was the fact that in 2019, three of the five PRC Commissioners were replaced as their term limits were reached. The PRC ultimately issued a 354-page set of revised proposed rules on December 5, 2019, with comments due by February 3, 2020 and reply comments due by March 4, 2020. While I encourage all stakeholders to review the full set of revised proposed rules, here are some key highlights.
USPS Would be Allowed/Required to Raise Prices…Significantly
The main thrust of the PRC’s revised proposed changes are to give the USPS “additional rate authority” above the CPI-cap (i.e., allow the USPS to raise postage prices beyond the annual CPI percentage).
First, the PRC proposes a required category of additional rate authority, which it says is designed to address the ongoing USPS liabilities from the pre-funding of its retiree health benefits, a contentious part of the PAEA enacted in 2006 which is the main reason for the USPS’ current financial difficulties. The PRC proposes requiring the USPS to make payments each year for the next five years, and designates the additional rate authority required for the USPS to make the annual payment (i.e., the USPS would raise postage prices by whatever additional percent is needed to make the annual payment).
Though the PRC cautioned that it can’t accurately predict USPS revenue changes year over year, it showed a chart where it applied its proposed formula for this additional rate authority to example revenues for the next five years, and the annual percentage of additional rate authority ranged from 0.827% to 1.11%. This category of additional rate authority would be required, not optional, unless legislation were to be passed to change it (or unless the USPS decided not to pay on its retirement liabilities). So, if the CPI were two percent for the year, and this category required the USPS to raise an additional 1.11% to cover the retirement payment, that would mean a total of 3.11% postage price increase… but there is more.
The PRC also included a formula-based mechanism to provide for additional rate authority based on year-to-year changes in mail volumes and USPS delivery points. The PRC’s premise in creating this “density” category of additional rate authority is that the USPS has little to no control over mail volume declines, yet its delivery points continue to increase, meaning that the cost per piece for the USPS continues to rise as volumes decline. The density rate authority is designed to make up for that additional cost.
In its revised proposed rules, the PRC included a chart that showed what the result of implementing its proposed density formula would have been for USPS Fiscal Years 2013-2019, and the percentage of additional postage increase each year (in addition to the CPI postage increase) ranged from 0.36% to 1.72%. [I would note that if the PRC had gone back a few more years to FY2009, a year when mail volumes declined dramatically due to the Great Recession, the proposed density formula would have resulted in a 5.4% additional rate authority (remember this is on top of the CPI price increase…)]. So now, using our example above, if CPI allows the USPS to raise prices two percent, and the retirement category requires it to do another 1.11%, and this density category comes out to another 1.72%,the USPS then would be able to raise postage rates 4.83%. But wait, there is more.
The PRC also proposes two additional components of “performance based” rate authority. One is a service-efficiency category, where the USPS would receive one percent of additional rate authority if it meets the proposed service and efficiency goals. To meet the proposed service requirement, the USPS would have to NOT lessen its service standards (its targets for delivery of each mail class within a specified number of days), like it did in years past where it eliminated retail First-Class Mail overnight service or the load leveling changes it implemented for Marketing Mail. The USPS would not be required to actually meet the standards in terms of its service performance; however, as long as it doesn’t change the standards, there is no requirement around whether it meets the standard. For efficiency, the USPS would have to show year-over-year improvement in its Total Factor Productivity (TFP) scores. If the USPS achieves both in a given year, compared to the prior year, it would receive the additional one percent rate authority.
Lastly, for those products the PRC determines are “underwater” each year – meaning the price does not cover its costs – the USPS would be required to increase prices an additional two percent unless all the products in a mail class were determined to be underwater, in which case the additional rate authority would be optional for the USPS to use. The PRC had identified eight non-compensatory (aka underwater) products for FY2018: (1) In-County Periodicals; (2) Outside County Periodicals; (3) USPS Marketing Mail Flats; (4) USPS Marketing Mail Parcels; (5) Stamp Fulfillment Services; (6) Inbound Letter Post; (7) Media Mail/Library Mail, and (8) the Market Dominant negotiated service agreement (NSA) with PHI Acquisitions, Inc. (PHI).
What Does All This Additional Rate Authority Mean?
It means that, in a given year, the USPS could conceivably increase prices for all its Market Dominant (monopoly) products by the CPI (which was about two percent for 2019), plus two additional categories of rate authority (which could amount to anywhere from an additional 1.5% to two percent, or much higher), plus another one percent if it achieved the service-efficiency improvements, plus another two percent for underwater products… which means some products would be looking at a seven percent or higher annual postage increase.
Changes to the Workshare Rules Are a Definite Bright Spot… But May Need some Clarification or Fine-Tuning
There is a definite bright spot in the PRC’s proposed changes, though it may need clarification or fine-tuning, which are the proposed changes in support of workshare. For years, the PRC has recognized the value of Efficient Component Pricing (ECP) and has encouraged the USPS to set its workshare discounts as close as possible to 100% “passthrough” of the costs avoided. In other words, if a workshare (e.g., presort) saves the USPS five cents, the discount should be set at five cents, not at three cents (which would be below 100% passthrough, meaning the USPS does not pass all the savings on to the mailer or Mail Service Provider (MSP)) or seven cents (above passthrough, meaning the USPS is giving the mailer/MSP more than what the workshare saved the USPS).
In the PRC’s revised proposed rules, it sets three principles around workshare to start with the first pricing change the USPS files after the PRC’s rules are implemented: The USPS must leave workshare discounts set equal to 100% of the passthrough alone; the USPS can’t further reduce workshare discounts where the passthrough is already below 100%; and the USPS can’t further increase workshare discounts where the passthrough is already above 100%.
All that is just as it should be to help drive the USPS to set workshare discounts as close to 100% as possible… except that the PRC also includes “safe harbor” and a process for the USPS to request a waiver to any of the above rules. This is where things get a bit confusing in the PRC’s proposed rules. There are scenarios where the USPS can file a request for waiver at the PRC to enable it (if approved by the PRC) to reduce a workshare discount where the passthrough is below 100% (as long as it stays above 85%), or to increase a workshare discount where the passthrough is above 100%. These exceptions threaten to undermine the PRC’s stated goal of maximizing incentives to improve efficiency.
The PRC should stick to its “do no harm” principle that discounts can only move closer to a 100% passthrough, except in the very limited circumstances where USPS can show cause that such a discount would impede its operational efficiency (an intentional high bar). Such an approach would help the USPS reduce its costs while increasing the incentive for mailers and MSPs to prepare and enter mail the most efficient way possible. While the proposed rules need some clarification and perhaps fine-tuning around the “waiver” portion, the core principles here are sound business practice.
Increased Focus on USPS Costs and Cost Reduction Initiatives
Lastly, another core component of the PRC’s revised proposed rules are new USPS reporting requirements on costs and cost-reduction initiatives, including annual reporting on unit product costs and additional data when costs increase more than the average product cost increase from one year to the next, as well as specific reporting on USPS cost reduction initiatives and their impact on performance metrics and unit costs. The PRC also proposes requiring “summary information” on ongoing and future projects that have approved USPS DARs (Decision Analysis Reports).
The Mailing Industry’s Reaction
Reaction from the mailing industry to the PRC’s revised proposals has been swift and vehement – raising postage prices above CPI will simply accelerate mail volume declines, not to mention that much of what is being proposed on increasing prices is premature.
For starters, the industry vehemently disagrees with the PRC’s premise in creating the “density” additional rate authority category — that the USPS has little to no control over mail volume. If that were true, why is there a USPS sales and marketing force? Or promotions/incentives, or Informed Delivery and its marketing campaigns, or USPS efforts to grow use of Marketing Mail, or any of the other initiatives the USPS is putting forward targeted at retaining and growing mail volume? If those are all pointless exercises, perhaps eliminating them would result in the savings the PRC is looking for? Of course these initiatives are not pointless; they are representative of things the USPS can do to retain and grow mail volume by adding value to its products/services. Not to mention the impact on mail volume that comes from rising prices and declining service — are both of those out of the USPS’ control as well? Not to mention the fact that mail is protected by two USPS monopolies — access to the mailbox and preventing much of the mail volume from being delivered by alternative carriers. What other government monopoly is protected from competition but allowed to continue raising prices rather than focusing on reducing its costs and growing its business through new innovative products… or just improving service on its existing products?
Industry has come out hard in saying that the USPS has a lot of control and impact on whether mail volumes increase or decrease. And in the case of another recession (something the PRC’s proposed density category seems designed to combat), were that to happen and negatively impact mail volumes, there is the “exigency” price increase process the PRC already established, which the USPS utilized after the Great Recession volume declines (of course those additional price increases just accelerated pressure on businesses to seek other more affordable communication methods).
Second, looking at the “retirement” rate authority category, there currently is legislation gaining traction that would repeal the USPS’ pre-funding requirement entirely. In its proposal, the PRC clarifies that if Congressional action were to impact the USPS’ retirement liability or fundamentally alter the structure of its retiree obligations, the PRC would reevaluate the rules and rate system. But there is little detail, or confidence among industry stakeholders, as to exactly what that would mean… and it could only impact one category of the proposed additional rate authority the PRC envisions. When you look at the USPS’ financial condition – which is what the PRC did in the first phase of its review and what drove it to proposing additional rate authority for the USPS – it is clear that if the pre-funding requirement were repealed, that should change the entire picture of the USPS’ finances and eliminate the requirement for these additional rate authorities beyond CPI altogether.
Industry stakeholders also feel that mechanisms designed to drive the USPS to become more efficient and improve service are insufficient since service performance could continue to deteriorate under the proposed rules and the USPS could still meet the requirements necessary to grant it another one percent rate authority.
The workshare piece of the proposal has a great deal of benefit to the industry, and there is nothing stopping the PRC from moving ahead with that piece of its proposal while putting the brakes on the rest to see if other significant changes can have the desired impacts without significantly raising prices and driving business out of the mail. The workshare piece on its own can result in significant cost savings for the USPS as it better aligns the incentives to drive efficient mail preparation and entry. But there are also other significant changes in the USPS’ oversight that should be allowed the chance to succeed.
Give Change a Chance!
Coming in 2020, we will have new leadership at the USPS with the appointment of a new Postmaster General, which undoubtedly will bring fresh approaches, new ideas, and a different perspective on the USPS’ place in the larger mail supply chain. In 2019, we saw the appointment of three new Governors on the USPS’ Board – bringing it to a quorum for the first time in many years and allowing it to regain the ability to steer the USPS’ direction. 2020 will also be a year with some events that will give mail volume a boost – the 2020 census mailing and a Presidential election, and while that is not an ongoing boost, it helps buy some time for the new USPS leadership to implement changes. And implementing well-designed workshare incentives would also help drive much-needed change.
So why move to raise postage prices above CPI before seeing if these significant changes in leadership, oversight, and more can have the desired impact on the USPS’ finances? Why not implement some well-designed changes to workshare alone, which, combined with all the other changes, could give the USPS just the boost it needs, then revisit the situation after giving these changes the time to make an impact?
The bottom line is, it’s imperative we give change a chance to be successful.
Kathleen J. Siviter is Asst. Executive Director of the National Association of Presort Mailers (NAPM) as well President of Postal Consulting Services Inc. (PCSi), and she has over 30 years’ experience in the postal industry. She has worked for the U.S. Postal Service, Association for Postal Commerce (PostCom), and others, as well as providing consulting services to a diverse set of clients with interest in the postal industry. She has also worked with PostalVision 2020, an initiative designed to engage stakeholders in discussions about the future of the American postal system.
This article originally appeared in the January/February, 2020 issue of Mailing Systems Technology.