Postal Regulatory Commission Proposes Major Rate IncreasesDecember 13, 2019
On December 5, the Postal Regulatory Commission (PRC) issued a proposal that would enable the U.S. Postal Service to significantly increase mail prices. While the Postal Service wanted to have no constraints on what it charges for mail – a monopoly service – the proposal will add needless costs and complexity and lessen predictability. As such, the proposal needs significant revisions.
The proposal comes from a requirement in the Postal Accountability and Enhancement Act (PAEA) which was signed into law by President Bush in December 2006. The key components of PAEA are: a Consumer Price Index (CPI)-based rate cap; postal services split into competitive and market dominant categories; aggressive prefunding of retiree benefit obligations and expanded scope and authority for the PRC.
PAEA also requires a reexamination of postal pricing regulations ten years after enactment. So, in December 2016, the PRC initiated what has come to be known as the ‘10 Year Review’ by asking for comments on how they should consider whether the factors and objectives of PAEA were being met.
After voluminous comment and some deliberation, the PRC offered new postal rate regulations in December 2017. The Commission proposed drastic changes to current regulations applying to market dominant products including the following:
- Replacing the CPI-based price cap with a more liberal pricing scheme allowing 2% pricing authority per year above the rate of inflation.
- Providing an additional 1% in price increases for modest productivity gains and maintaining current service standards.
- Requiring additional price increases where the Postal Service’s cost of providing service exceeds current revenues.
- Requiring the Postal Service to pass through a larger proportion of avoided costs when mailers engage in worksharing activities.
The 2017 proposal also included supplemental comments from two Commissioners serving at the time, and a dissenting opinion from another, hinting at divisions among the Commissioners. Given the number of interested parties, the varying Commissioners’ opinions, and the issues at hand, it is not surprising that the proposal received dozens of comments, some arguing that the Commission had gone too far, others claiming they had not done enough.
After two years sifting through mountains of comments and integrating three new appointees, the reformulated Commission has just produced a revised proposal likely to have effects similar to the original, but there are some important differences:
- The blanket CPI+2 is replaced by a more complicated formula that links additional pricing authority explicitly to volume losses and retirement prefunding.
- Performance-based pricing authority requires the Postal Service to achieve productivity gains AND maintain service levels.
- The Postal Service has discretion over how to use additional pricing authority when product costs exceed revenues.
The new proposal appears to give USPS pricing freedoms that are similar in magnitude to the 2017 proposal, but with added complexity and reduced predictability. The new formulas in the current proposal add volatility to the CPI cap and require additional reporting by the Postal Service, so customers will not be able to plan for postage increases as reliably as they have for the last twelve years.
And though the new proposal requires additional reporting on USPS cost-savings initiatives, there are no assurances that reporting will lead to efficiency improvements, one of the main concerns of industry.
Interested parties have until February 3, 2020 to comment on the proposed regulations, with 30 days for reply comments after that. It is unclear when the final order will be issued. Given that the most recent proposal is similar to the first, it seems very likely that a final Order from the PRC will break the price cap and give a government monopoly unprecedented pricing authority. The likelihood of appeals is also high.
It is important for the PRC to proceed cautiously and deliberately on this important matter.
Michael Plunkett is the President and Chief Executive Officer of the Association for Postal Commerce (PostCom).