A Bad Move for Small Mailers: Postal Expert Questions Move Update Surcharge

Despite price caps and promises of a rate freeze, the U.S. Postal Service is about to implement a new form of price gouging that will hit small organizations especially hard.

As guest columnist Robert W. Mitchell (pictured at right) explains below, Standard-class mailings that are not Move Update-compliant are slated to pay a surcharge of 7 cents for something that costs the USPS barely a penny.

Large mailers will presumably have the expertise to avoid the surcharge, which takes effect tomorrow, by complying with Move Update – though a PostCom podcast indicates that even sophisticated mailers may unwittingly run afoul of the new regulations.  (The USPS also has a Web site explaining Move Update.)

The main victims are likely to be small businesses, local non-profit groups, churches, and the like, who in many cases won’t learn of the surcharges until after their mailings have been printed and prepared.  Mitchell points out that the surcharge is immense relative to costs and is out of line with the principles of efficient rate setting.

Mitchell knows whereof he speaks.  First as a Postal Service employee, then as Special Assistant to the Postal Rate Commission, and now as a consultant on postal-rate issues, he has played a major role in such innovations as Standard-class workshare discounts and the move toward cost-based rates for Periodicals. He can be reached at robertwmitchell@comcast.net.

By Robert W. Mitchell

For a number of decades, mailers wishing to send at Standard rates have engaged in preparation activities. In the spirit of worksharing and cost recognition, many of these have been optional, which, without causing harm to the Postal Service, has allowed mailers to choose what is best for them. Observers, including the Postal Service, have pointed often to increases in efficiency thus brought about. Examples have included ZIP + 4 coding, presorting, prebarcoding, walk sequencing, and dropshipping. Cost differences among letters, flats, and parcels have been recognized in the rate structure as well.

When Move Update services became available, another workshare option could have been arranged. That is, based on lower costs to the Postal Service, a discount for Move Updating could have been offered. Then mailers could have weighed the costs and the benefits, as they saw them, and Move Updated whenever advantageous. That would have allowed mailers the option of purchasing UAA (Undeliverable As Addressed) services at an appropriate price. And UAA services, which the Postal Service has spent years developing, would be put on par with its other services, which include sorting, transporting, and delivering.

However, the Postal Service did not take that course. It chose instead to make Move Updating a requirement for all Standard mailings, no alternatives allowed. Its justification appears to be its analysis that its costs will be lower and that the most advantageous course for each mailer is to finance and follow through with Move Updating. It is inefficient, however, for the Postal Service to substitute its judgment, by regulation, for that of mailers, and it is a mystery why the Postal Service should be opposed to offering its UAA services, as an option, at a fair price.

For Standard mailings that are not Move Updated, if such mailings could still be called “Standard mailings,” the Postal Service took the position that the only rates available would be the rates for Single-piece First-Class, now 44 cents for the first ounce, if letters. The attendant rate increases would be quite large, and particularly so for nonprofit mailers. For example, a 1-ounce nonprofit letter, sorted to 5 digits and entered at a destination SCF, would see an increase of 394.4%. Even higher increases would exist for heavier pieces and flats. When a Federal Register process drew comments that the mailers bearing the increases could well be “small local businesses and nonprofit organizations,” the Postal Service brushed off the possibility of a burden by saying that it “feels that there are many methods mailers can use in order to qualify and make this fit any business model.” [Federal Register, Vol. 72, No. 188 (Friday September 28, 2007), p. 55056].

The Postal Regulatory Commission made it clear in November that noncompliant mailings can remain Standard mailings and that the applicable rates are the reigning Standard rates plus a surcharge. The order also approved a proposal to set the surcharge at 7 cents, which is a smaller penalty than the Postal Service had in mind. But that does not make the rates efficient or fair.

The cost justification behind the surcharge, as provided by the Postal Service, is that a Standard piece intercepted as UAA (and then discarded) costs the Postal Service, on average, 5.2 cents more than a Standard piece that receives ordinary delivery. That gives rise to several important questions:

1. Why is the 7-cent surcharge so much higher than the 5.2-cent cost? A surcharge may at times be more than 100% of the cost underlying it, but not often when it is first introduced.
2. Why should each piece in a mailing pay the surcharge, when only a few pieces would be expected to require UAA treatment? If, on average, 20 percent of the pieces in noncompliant mailings receive UAA treatment, and the markup to 7 cents were taken as appropriate, common ratesetting practice would set the each-piece surcharge at 1.4 cents (0.20 times 7 cents).
   
3. Why should letters and flats pay the same surcharge, when the UAA cost for letters is undoubtedly lower than the UAA cost for flats? When rate differences are not based on corresponding cost differences, inefficient signals are sent to mailers and inefficient behavior can be expected.
4. Is the 5.2-cent cost net of any costs avoided by not have to complete delivery on pieces that are intercepted? It is not apparent that the cost study nets these costs out. If it does not, mailers would be in the position of being double charged.

For all of these reasons, the surcharge of 7 cents would seem to be an immense overcharge. Aside from suggesting that the Postal Service does not want to make its UAA services available on reasonable terms, it will drive some mailers to leave the Postal Service, perhaps finding that email will work just fine. These mailers will not come back.