On December 5, 2019, the Postal Regulatory Commission (PRC) published Order 5337 – Proposed Rulemaking for USPS Rates. This was a follow-up to the proposed rules released in December, 2017. After hundreds of comments, changes to the PRC board membership, and a continued deterioration of the US Postal Service (USPS) financial situation, the PRC has made several key changes to their proposal.
Most of the articles and blog posts published immediately after the announcement focused solely on the authority to raise rates for market dominant products above the existing price cap. Under the Postal Accountability and Enhancement Act (PAEA), the annual increases in postage rates for market dominant prices is currently tied to the Consumer Price Index for Urban Customers (CPI-U). The price cap was intended as a check on rates and an incentive for the USPS to increase efficiencies.
However, there is significantly more than rate authority covered in the order. In addition to the enacting sections (XI – XVI), the chapters are:
- Review of Comments Concerning Statutory Authority
- Supplemental Rate Authority
- Performance-Based Rate Authority
- Non-Compensatory Products and Classes
- Workshare Discounts
- Cost Reduction Reporting Requirements
- Procedural Improvements
- 5-Year Review
In the overview, the PRC acknowledges that the legislation didn’t consider unforeseen factors that negatively impacted the USPS. These include the economic downturn, technological trends and the borrowing requirements to achieve the prepayment of future retiree healthcare costs. So, while some aspects of regulating rates for market dominant products have worked, “overall, the system has not achieved the objectives of the PAEA.”
The chapter on statutory authority is worth reading, as it’s probable that the final rules will be contested in the courts. Considering that two of the current commissioners (Chairman Taub and Commissioner Fisher) were part of the team that drafted the PAEA, the arguments presented in the order seem logical. However, as the adverse ruling in Carlson v. Postal Regulatory Commission demonstrates, nothing should be taken for granted.
The PRC recommends supplemental rate authority for increases above the CPI cap based on two factors – increase in costs due to decline in mail density and statutorily mandated payments for retirement costs. Both of these factors are beyond the control of USPS management. While mail volumes are dropping, there are more addresses to deliver to every year, and Congress and the Administration decide the retiree amortization schedule.
Like most government planning, this is a backwards-looking approach. The USPS will calculate density changes for the previous year as well as additional payments required for retirees. While the formula for calculating density changes looks complicated when expressed in algebraic terms, it’s based on simple concepts. As the number of delivery points increase and the volume of pieces decrease – the costs to deliver each piece goes up. This is true even as the USPS works to increase efficiencies. (Table IV-2 on page 74 of the Order provides an excellent illustration of the calculations).
The USPS is also required to make payments into 3 different retirement systems. The schedule for those payments is decided either by legislation (e.g., PAEA) or by the Office of Personnel Management (OPM). The likelihood of a congressional fix in the near future is highly unlikely. The calculations of payments – and potential overpayments – into the other systems have been disputed for years. These financial issues have to be addressed now.
The PRC is also recommending that the USPS be allowed additional rate increases based on performance. The USPS has improved efficiencies, but also reduced service levels since the implementation of the PAEA. Under this section, the USPS will only be rewarded for improvements of total productivity. That is, lower institutional costs while maintaining or improving service levels. This approach provides a “carrot and stick” for the USPS.
What’s overlooked in several of the commentaries published against this authority is that the USPS must submit any additional rate requests on December 31 of each calendar year, which the PRC will then use to calculate any additional rate authority. Only after the PRC ruling will the USPS have 12 months to implement a rate change that incorporates any authorized authority.
Unless the USPS changes the annual rate increase schedule from January, the earliest the new authority will impact mailers will be 2022. Consider the following schedule:
- October 2020 USPS Proposes 2021 Rates at CPI cap
- December 2020 PRC approves 2021 rates at CPI cap
- December 31, 2020 USPS files request for additional authority
- January 2021 New market dominant rates go into effect
- March 2021 PRC approves new rate authority
- October 2021 USPS Proposes 2022 Rates at CPI cap PLUS additional authority
- December 2021 PRC approves 2022 rates at CPI cap PLUS
- January 2022 New rates go into effect
This new calendar means that the new rates will remain as “predictable” as they are today. Mailers will know the additional rate authority 7 to 8 months before the USPS submits the new rate increases to the PRC. The CPI is calculated monthly, with easy to follow trends. This allows ample time for planning.
The potential impact isn’t as onerous as some commentators will have one believe. For First-Class Mail, one of the most common presort levels is mail sorted to the automated area distribution center, or AADC rates. Here are the actual AADC rate increases for the last 4 years.
If the USPS was granted an additional 2.5% over CPI during those years, this is the result.
|AADC Rates with potential 2.5% over cap increase
|% over actual
This gradual increase in rates would have allowed the USPS to be financially solvent, pay down debt and increase capital investment. This would benefit all ratepayers – and all citizens.
The chapters on non-compensatory products and workshare discounts address the issues of all products paying for their costs and mailers achieving the maximum discounts possible. A generally accepted definition of “compromise” is one in which no parties are completely satisfied, and that seems the approach the PRC takes here. Some products will continue to lose money for the USPS for a while, and 100% of all savings will not be passed to mailers who sort and prepare their mail. However, in each case, the PRC is taking the approach of “do no harm”.
Along with additional rate authority is additional reporting. As the regulator, the PRC needs to know if the attempts of the USPS to improve efficiencies are actually working. This approach continues to allow the USPS and the Board of Governors to decide what to attempt but holds them accountable for the results. Most of this information is sprinkled throughout other reports, and the consolidation will improve access for the PRC and mailers.
The proposed procedural improvements are designed to codify the existing practice of raising postage rates annually. While the USPS may request additional increases, it must provide an explanation for doing so. Having annual rate increases take effect each January has provided stability to the industry. Most companies follow a fiscal year that coincides with the calendar year and having a 90-day notice will allow for proper planning and budget adjustments.
The final recommendation is to establish a 5-year benchmark for reviewing the rate structures and rate-making process. The original language in the PAEA required a 10-year review, with new proposed rules. It’s been 13 years since the PAEA was enacted, and new rules still aren’t in place. Meanwhile the country experienced a recession, 2 new presidents and radical shifts in technology. Shortening the review period is a sensible move.
The initial comment period expires Monday, February 3, 2020. There will then be responses from the PRC and reply comments. It’s important to the mailing industry that the commissioners take decisive action and enact the proposed rules in the immediate future.
Meanwhile, the rank and file of the USPS will continue delivering the mail.