Why Potter Is Freezing Postal Rates, And What It Means For 2010

Postmaster General Jack Potter tried to restore mailers' confidence in the U.S. Postal Service today by announcing a price freeze for most postal rates in 2010.

"The Postal Service will not increase prices for market dominant products in calendar year 2010," Potter said in a statement sent to various customer groups late this afternoon. He was responding to "pessimistic speculation" that rates might increase as much as 10%.

"There will be no exigent price increase for these products," which include First Class, Standard, and Periodicals, he said.

"While increasing prices might have generated revenue for the Postal Service in the short term, the long-term effect could drive additional mail out of the system. We want mailers to continue to invest in mail to grow their business, communicate with valued customers, and maintain a strong presence in the marketplace."

Earlier in the day, the release of the Consumer Price Index virtually confirmed what had become increasingly clear in recent months -- that USPS will not be able to impose the usual inflation-based rate increases next year. Consumer prices have declined so much since 2008 that they will end the year in negative territory unless the Fourth Quarter annualized inflation rate exceeds 9%.

Mailers feared USPS would try to close its budget gap -- probably $3 billion for the fiscal year just ended, or $7 billion if you count Congress' "forgiveness" of a bogus retirement-health payment -- by seeking exigent (emergency) rate increases.

Potter's statement did not clarify whether he was referring to all market-dominant rates or to the average rates for each class. Postal officials have subsequently put out the word that "no increase means no increase," meaning that no rates in the market-dominant classes will change.

But Potter's statement made clear that he understands the two dangers of an exigent rate increase:

1) In the short run, higher rates would suppress mail volume, but, as explained last week in Potter Doesn't Want to Hike Postage Rates in 2010, savings from such volume reduction would be minimal. The combination of lost business and slim cost savings could wipe out any gains from the higher prices per mail piece.

2) An exigent rate increase would signal to mailers that the Postal Service is unreliable and that they can no longer count on rate increases being capped by inflation. One exigent rate increase would lead to expectations of more in the future. That would accelerate mailers' efforts to replace mail with cheaper electronic substitutes -- for example, customer incentives for on-line bill payment.

So how does Potter intend to close the budget gap? He's been making numerous speeches and giving interviews touting elimination of Saturday delivery, which would save up to $3 billion annually, as one option. That would result in elimination of about 40,000 career employees positions, which could be done "through attrition because we have a lot of folks right now who are eligible to retire and who we could incent to retire,” Potter said last week in a radio interview.

Continued downsizing is clearly in the cards. Just last week, USPS announced possible consolidation of nine more processing and distribution centers. Nearly 40 such Area Mail Processing studies are in the works, along with the possible closing of hundreds of post offices.

Postal officials are looking into new revenue streams, and Potter's statement today mentioned that they want "to grow the mail through innovative incentives like the Summer Sale and contract pricing."

And, inevitably, the issue of the retiree-benefits shell game will be on the table. Officially, it's called a pre-payment of retiree health benefits, but in actuality Congress is forcing USPS to overfund a benefits account by more than $5 billion annually in a way that makes the federal deficit look smaller. Without those payments from the supposedly independent and off-budget Postal Service, USPS would have been profitable until fiscal year 2009.

Congress may end up facing a choice between ending that accounting game and allowing the Postal Service to eliminate Saturday delivery. Or the Postal Service could do an end run around Congress and end Saturday delivery on its own, as explained in How USPS Could Bypass Congress on Saturday Delivery.