Thursday, January 15, 2015

USPS Raising Rates, Imposing New FSS Rules, and Perhaps Inviting a Legal Challenge

Just in the nick of time, the U.S. Postal Service filed price increases averaging nearly 2% late Thursday on most mail except Forever Stamps.

The Postal Regulatory Commission marked receipt of the filing as 4:07 p.m., less than an hour before closing. If USPS had waited until Friday morning, the December 2014 Consumer Price Index would have been factored into the calculation of the inflation-based cap on postage increases -- perhaps lowering the cap because of plummeting gasoline prices that are leading to deflation.
No change for the Caped Crusader

The rate increases on the "market-dominant" mail classes, slated to take effect April 26, range from 1.886% for Standard to 1.965% for the Postal Service's favorite whipping boy, Periodicals. Take those numbers with a grain of salt.

Those are average increases, but I've never met an average mailer. Different types of mail in the same class may experience rate hikes that deviate significantly from the average -- especially for First-Class Mail.

To achieve the average First-Class rate hike of 1.949% without changing the 49-cent charge for a Forever Stamp, other types of First-Class mail will get larger increases, such as 2.417% for presorted letters and postcards and 10.18% for parcels. Within the Standard Class, carrier-route and letter mail will get relatively low increases, but Every Door Direct Mail will rise nearly 5% and parcels nearly 10%.

Mailers of catalogs, magazines and other flat mail in the Standard and Periodicals classes will also face new rules and incentives for preparing Flats Sequencing System (FSS) mail. The impact is likely to vary significantly from customer to customer.

Flats mailers will face "required FSS preparation for all flat-shaped mail pieces destinating in FSS zones" but also "pricing incentives to reward mailers that prepare and enter flats that are most advantageous to the Postal Service."

Generally speaking, CPI-based rate increases take effect as long as the PRC determines that the Postal Service stayed within the rate cap and followed certain other rules. But there could be a different twist this time around.

A Flats Sequencing System machine
Only the Postal Service's Board of Governors can file for a rate change, but Congress has failed to fill so many positions on the board that it no longer has a quorum. Until more governors are approved, a Temporary Emergency Committee of the remaining governors is acting in place of the board.

A legal challenge to the emergency committee's authority to raise rates might delay implementation, if not block them altogether.

It would be a sweet irony if the inaction of Congress -- where a majority of members seem OK with jacking up the postage paid by business mailers -- blocked USPS from rate increases that would fall disproportionately on business and institutional mailers.

Market-dominant rates are slated to decline by 4.3% this summer when the exigent surcharge expires, but that could be altered by an appeals court or an act of Congress. Postal officials seem especially concerned with the consumer confusion that would result if the price of Forever Stamps were increased and then decreased during the same year, which is probably why they left the price alone.

When (or, rather, if) the surcharge expires, it's not clear whether other First-Class rates could again be rejiggered in a way that again enabled the price of Forever Stamps to remain at 49 cents.

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1 comment:

Robert Webb said...

This is a good start to a messy, still to unfold situation. Not yet mentioned is the impact that the new FSS rate will have on flats mail particularly that now entered as High Density. I may not yet have a complete understanding of the new rates and their impact, so my comments beg for correction or completion. Also note that the net impact for a particular mailer will be determined by the amount of their mail going into FSS zones.

My reading of the FSS rate is that both CR and HD "go away" in the areas (zip codes?) defined to be FSS serviced areas. This will mean grossly different "postage costs" outcomes for different flats mailers and will impact the way the industry suppliers develop mail management software and programs. It could lead to legal issues around the legality of the FSS rates and may have unintended or unpublicized impacts on the USPS contribution.

For Standard flats mailers like many catalogs, it is a win because the FSS rate is roughly 20% less than the new Standard Flats rate. Presumably the USPS can responsibly do that because the FSS prepared mailings are more efficient than Standard entry. As long as the coverage on FSS is better than on Standard Flats, which would not be hard, this is a win for both the mailer and the Post Office. We will ignore whether or not the cost-coverage numbers are is what they have to work with.

CR flats entered in a FSS area is a different story. The new FSS rate is essentially the same (about a tenth of a point less than CR) at the flats piece rate. This will be mean no FSS impact for the CR mail, as long as the printer can provide the FSS prep at no additional cost. It also meets the political test of "not raising CR rates due to FSS" that the last two Postmasters have publicly proclaimed. So the CR mail is unharmed and we assume the USPS is making as much contribution on the FSS mail that otherwise would have been CR. (The CR cost coverage is up again to about 140%; has the USPS released their projection FSS cost coverage? If they anticipate less than 140% coverage, this is a bad business decision for them.) The current mix for catalogs mailing with a major printer co-mail program might be about 65% CR and the balance Standard, so the total outcome for many mailers is positive. They will see a net decrease in postage in the FSS areas even after the 2015 rate increase.

HD is another matter. Since HD "goes away" in the FSS areas, the applicable FSS rate is about 20% higher than the HD rate it replaces. This is a massive increase to the largest mailers that have worked hard to achieve HD penetration. My company mailed tens of millions of HD flats last year, and planned on mailing more than 50 million this year. If everything moved to FSS, it would reduce our volume by tens of millions of pieces and add millions of dollars in cost. Since we will be living in an FSS/non-FSS world, we have to figure out how to change merge software, circulation decisions, add-a-name software and plans to accommodate these huge cost increases and volume changes in parts of our market.

Additionally, the USPS has about 200% cost-coverage on HD flats. If the FSS coverage is less than that, then the USPS will be losing contribution AND volume from some of their most profitable mailers.

If I am basically correct on the way the HD rates will work with FSS, then I want to know: Is this legal? Is it fair? Does it represent a financial responsible decision for the USPS based on their cost-coverage numbers? Could or should the USPS keep the HD rates in the FSS Zones to the benefit of the mailers and the USPS?