Game Over: Postage Rate Hikes Would Shut Down ESPN Magazine

A plan to increase publishers' postage rates drastically over the next five years would cause ESPN The Magazine to cease publication, an ESPN official indicated Friday.

If the Postal Regulatory Commission follows through with its plan "to increase our postage rates 40% over the next 5 years then ESPN will not produce a paper Periodical mailed through the USPS," Dennis Farley, the magazine's distribution director, said in a statement filed with the PRC.

"The content will be delivered via the many other means we now use to deliver our content," Farley added, in emphasizing that ESPN would continue as a popular cable network and web site.

In theory, Farley's statement left open the possibility of using other means to deliver the magazine to its 2 million paying subscribers. But that "other means" doesn't exist for a printed magazine, and digital magazines have mostly failed to catch on with consumers.

The PRC, claiming it has the power to override the inflation-based cap on most postage rates, put forth a plan in December to bail out the U.S. Postal Service with a series of rate increases. The Periodicals class, on which the USPS supposedly loses money, would be hit especially hard.

More than 100 organizations have filed comments with the PRC opposing the plan. Among those was the nation's largest magazine publisher, Meredith Corporation, which recently projected that the rate hikes would force it to stop publishing some titles and reduce the number of magazines it mails by 32%.

Ironically, even under the Postal Service's questionable accounting, ESPN The Magazine is probably a profitable customer for the USPS. The fortnightly is dropshipped entirely on pallets to 175 postal facilities, Farley said, with 83% of the copies in carrier-route bundles.

The Postal Service does well with such efficient mailers while tending to undercharge inefficient Periodicals mailers.

Meredith Warns PRC of Massive Magazine Cutbacks

A plan to jack up postal rates over the next five years would force the nation’s largest magazine publisher to slash its print offerings, according to the company’s CEO.

Meredith Corporation would “pursue magazine closures, circulation cuts, issue frequency reductions, conversions to digital only formats and alternative delivery for some magazine subscription copies,” Tom Harty, the company’s president and Chief Executive Officer, wrote in comments filed Wednesday with the Postal Regulatory Commission.

32% fewer magazines
“We conservatively estimate that the PRC’s proposed rate structure will result in a 32% reduction in the number of periodical pieces mailed by Meredith (a loss of approximately 310 million pieces annually),” Harty wrote. “At this level of volume decline, the Postal Service will receive less revenue, not more, from Meredith than it does under the current CPI [Consumer Price Index] cap system.”

He said the company spent nearly $322 million on postage last year. (He didn’t clarify whether that number included last year’s postage bill for Time Inc., which Meredith purchased a month ago.)

The PRC acknowledges that its package of proposals could raise Periodicals postage rates by more than 40% over the next five years. And that's assuming the inflation rate remains at 2%.

Meredith's corporate headquarters

Meredith is among more than 150 organizations that have submitted comments, mostly unfavorable, about the proposal. A variety of mail-dependent businesses and non-profits are challenging the PRC’s claim that it can enact the rate hikes without Congressional approval.

And the move to bail out the Postal Service with rate hikes is also unnecessary, some have noted. The billions of dollars the agency is supposedly losing every year are a figment of inept government accounting procedures. A recent analysis noted that the USPS closed out Fiscal Year 2017 with “$10.5 billion in cash and cash equivalents, more than it has possessed in the last 15 years.”

Of each dollar Meredith spends on producing and distributing magazines, 40 cents goes to the USPS – up from 24 cents in 2006, Harty said. And that’s “despite ongoing presort and drop ship optimization by Meredith” that should have reduced the costs of delivering those magazines.

Shooting itself in the foot
Harty also pointed out that Postal Service mismanagement has hampered efforts to make Periodicals mail more efficient. The USPS, for example, keeps decreasing the incentive to place copies into carrier-route bundles even though doing so significantly reduces the agency’s mail-handling costs. With better incentives, he said, publishers would do more to reduce the Postal Service’s costs via co-mailing and other measures.

He also noted that the Flats Sequencing System, which was supposed to reduce the Postal Service’s costs of delivering flat mail, has been an abject failure – and is getting worse.

“The total cost processing and delivery cost for an FSS flat exceeded that of a Carrier Route flat by 14.7 cents/piece in FY2015, 16.8 cents/piece in FY2016, and 19.9 cents/piece in FY2017,” Harty said. “The PRC’s proposal . . . will do nothing to incent the Postal Service to fix (or abandon) the FSS debacle.”

Related articles:

• USPS Bail Out Could Hike Postal Rates 41% in Next Five Years 
• Boondoggle: The FSS Goes From Bad to Worse 
• Mail-Industry Leaders File Joint Comment in Opposition to Massive Postal Rate Increases

Postal Service Eyes January Rate Hikes

The U.S. Postal Service is planning to raise virtually all rates a bit in January, apparently including a one-cent hike of the Forever Stamp, to 50 cents. And it’s also hoping it will soon get the power to implement larger rate hikes.

The USPS will raise rates for both market-dominant mail (such as First Class and Marketing Mail) and competitive mail (such as Priority Mail) on Jan. 21, 2018, postal officials told mailing-industry representatives this week.

The average rate increases for market-dominant classes are limited by an inflation-based cap, currently close to 2%. A postal official indicated that rates would rise from 1% to 3% for most market-dominant products, according to attendees at a meeting of the Mailers Technical Advisory Committee.

Postal officials didn’t spell out what any of the new rates would be. But a statement that the increase for letter mail would be about 2% almost certainly means that the price of the popular Forever Stamp for First Class letters will rise from 49 cents to 50 cents (a 2.04% hike).

The new rates for flat Marketing Mail and Periodicals would provide greater incentives to create efficient mailings, which is good news for catalogs and magazines that are co-mailed, as well as for printers that provide co-mail services. But it means higher-than-average rates for small publishers that don’t take advantage of such mail-consolidation programs.

The USPS is most likely to file the new rates with the Postal Regulatory Commission in October. As long as the PRC determines that the USPS proposal meets certain standards, such as not violating the price caps, the new rates will take effect without modification.

Next month, the PRC is slated to announce the results of its 10th anniversary review of the law that created the price cap. If it determines that the law’s system for regulating market-dominant rates is not meeting the law’s objectives, the PRC can modify or replace the system.

Postal officials argue that, because the system fails to meet the objective “to assure adequate revenues . . . to maintain financial stability,” the PRC should loosen or eliminate the price cap. But a significant PRC overhaul of the rate-making rules would probably lead to legal challenges that could delay implementation of any changes.

Related articles:

• Why the Rate Cap Isn't Killing the Postal Service 
• Hell Will Freeze Over on April 10 
• Is the Postal Service Really Broke?

USPS's Court Victory Could Cost Mailers Billions

July 30, 2015 update: The PRC went with the Postal Service's minimum -- $1.2 billion (or $1.191 billion, to be exact). The USPS will collect that amount from mailers via an extension of the exigent surcharge. That means the surcharge is slated to expire somewhere around April 2016 instead of August 2015. But remember that, in Washington, "temporary" taxes tend to become permanent.

Despite news reports to the contrary, the only thing clear about Friday’s appeals court decision on postal rates is that the U.S. Postal Service won and mail-dependent industries lost.

Worth 49 cents -- or 47?

Sure, the Postal Service didn’t get everything it asked for – namely, making the 4.3% exigent surcharge permanent. But a ruling that is likely to bring in more than a billion dollars, at the expense of mailers, can hardly be called a loss for the USPS.

As detailed in an article I wrote today for Publishing Executive (See Get Ready for Roller-Coaster Postage Rates.), the one thing the federal judges didn’t like about the current surcharge is the “count once” rule for determining how much the recent recession cost the Postal Service.

They court sent the Postal Regulatory Commission back to the drawing board to come up with what could be called a “count multiple times” rule.

Minimum cost: $1.2 billion
If the count-once rule is transferring “only” $2.8 billion from mailers to the Postal Service via the surcharge, we can only imagine what the “count many times” rule will do given that the recession lasted several years.

The Postal Service said today the additional amount is a minimum of $1.2 billion. That's the equivalent of about 8 months of the current 4.3% surcharge. And postal officials will argue for a much larger amount.

Some writers assume that, instead of allowing the surcharge to expire this summer, the PRC will just leave it in place until it brings in enough money to satisfy the “count many times” rule. Or that, as the Postal Service requested today, the PRC will at least leave the surcharge in place until the new revenue target and surcharge are approved.

But it’s not necessarily so simple. Unlike the appeals court judges, the PRC commissioners are no doubt aware that canceling the surcharge and then reinstating it weeks later would be disruptive for both the Postal Service and for mailers. (Just think of the public’s confusion if the price of Forever Stamps drops to 47 cents and then bounces back to 49 cents only a few weeks later.)

But the commissioners have to proceed cautiously and allow for due process, especially given the propensity of both postal officials and mailers groups to appeal PRC decisions regarding exigent rate hikes. They will have to wade through reams of mind-numbing econometric analyses before arriving at a revenue target for the new surcharge.

They may not be able to finish their work before the current surcharge expires. And even a perfectly reasonable assumption – that the USPS will not be overcompensated if the current surcharge is left in place until the details of “count many times” are worked out – may be open to legal challenges.

Nothing, by the way, says that the new “count many times” surcharge has to be 4.3%: The PRC could decide to make it higher so that the Postal Service is fully compensated for its recession losses in a timely manner.

And when the new “temporary” surcharge is supposed to expire, Congress might decide to make it permanent as a way of dodging real postal reform. I’m reminded that, back in January, my fortune-telling friend Madame Marie predicted that the surcharge would not disappear this year, adding this gem of political science: “What, you think I have crystal ball or something? All I know is, don’t ever bet on government getting rid of a temporary tax or fee.”

Sticker Shock: Size of Postal Increase Stuns Publishers

March 6 update: The PRC sent the proposed Standard, Periodicals, and Package Services rates back to the Postal Service for revisions and clarifications. Here's the PRC press release.

Although the April postage hike for Periodicals will supposedly average only 1.4%, some publishers are learning that their increases will be 10 times that amount.

The biggest rate increases will probably hit relatively lightweight publications that contain little or no advertising, such as weekly magazines and association newsletters. Some other publishers, however, will probably see lower postage bills.

Projections for nine leading nonprofit publications show increases ranging from 3.4% to 16.2%, with all but three above 8%, The Alliance of Nonprofit Mailers wrote this week in an alert sent to its members. Although the U.S. Postal Service announced the new rates nearly two months ago, the alliance noted that publishers could not calculate how the rates would affect them until recently, when USPS spelled out some new mailing rules changes that will accompany the new rates.

Such large postage hikes are "likely to force many of these newsletters and magazines to discontinue mailing, or reduce the frequency of their publications, and look elsewhere to achieve their very important mission," the alliance wrote.

"We believe that the Postal Service did not intend to impose such large increases on important nonprofit publications, and that the increases are unintended collateral effects of a larger, complex pricing strategy for Periodicals," the alert said. It added that the alliance is trying to get USPS to amend its rate proposal.

For Periodicals and several other types of mail, the new rates place less emphasis on weight-based charges and more on other factors that have a more direct impact on USPS costs. That's good news for hefty fashion magazines and some types of letter mail, but not so good for mailers that aren't paying much for weight to begin with.

The Postal Service itself has been thrown off by the complexity of its own changes in rates and rules for the Periodicals class. It intended for the average Periodicals increase to be nearly 2%, but has adjusted the calculation to 1.4% after acknowledging calculation errors pointed out by the Postal Regulatory Commission.

And recent questioning from the PRC indicates it may still not be satisfied with the Postal Service's calculations.

Related articles:

• USPS Goof Gives Publishers a Break on Postal Rates
• Seven Mysteries of the New Postal Rates 
• USPS Raising Rates, Imposing New FSS Rules, and Perhaps Inviting a Legal Challenge

Postal Rates in 2015 Could Rise or Fall -- or Do Both

The outlook for changes in postal rates for the next 12 months is murkier than it's been in years.

A rate hike, a decrease, an extension of the temporary “exigent” increase, and even an increase and decrease a few months apart are all plausible 2015 scenarios for First Class, Standard, and Periodicals mailers. That uncertainty is a far cry from the past few years, when "market-dominant" postal rates inched up each January based on the rate of inflation.

The 4.3% exigent increase that was implemented in January is the source of the unusual uncertainty. That surcharge is supposed to disappear after it yields the U.S. Postal Service an additional $3.2 billion, presumably in mid-2015.

The three-judge panel considering an appeal of the exigency case seems unlikely either to eliminate the rate hike or to make it permanent, according to Stephen Kearney, executive director of the Alliance for Nonprofit Mailers. But based on the judges’ comments and questions during recent oral arguments, his reading of the tea leaves foresees a decent chance the judges will remand the case to the Postal Regulatory Commission with orders to revise it.

Big risk to mailers

“The big risk to mailers in the remand outcome would be a possible determination by the PRC that the exigent rates would need to raise more than the $3.2 billion in their original order,” Kearney wrote in a summary of the oral arguments. That could result in hiking the surcharge or in extending it.

The main issue in the case is how much revenue USPS lost as a result of the recent recession, as opposed to revenue it would have lost anyway from increased usage of email, online billing, and other digital media.

“The judges seemed to agree that the PRC was right to accept the recession as an extraordinary event under the statute as well as the need for a special rate increase to cover the recession-caused losses,” Kearney said.

However, the judges indicated that the PRC’s decision was unclear regarding how the Postal Service’s recession-related losses were calculated, Kearney wrote. And they questioned whether the PRC’s methodology fell short of counting all the losses.

Two choices
"The judges likely will decide between two choices: to defer to the expert regulating agency and let the PRC order stand, or to remand the case back to the PRC and tell them to do a better job determining and implementing methods to quantify the revenue that the USPS lost as a result of the 2007-2009 recession.”

With the judges taking one to three months to issue their order and the PRC possibly needing additional time to reconsider the case, it could be well into next year before we know the outcome. And even an order upholding the PRC decision would not completely clear up what will happen to postal rates next year.

Mailers and postal officials are still arguing over how to decide when the $3.2 billion target has been reached. One issue, for example, is whether to count the surcharge on all Forever Stamps sold during the exigency period or only on those that are actually used.

USPS officials could implement the usual inflation-based price increase – probably in the 1%-2% range -- in January. But that could mean a 4.3% decrease a few months later if the exigent surcharge expires as currently planned.

Postal officials have indicated they might postpone a January rate increase in hopes of building up enough rate-increase authority to keep rates level when the surcharge expires. However, if the PRC order is upheld and inflation continues at a tortoise’s pace, USPS's rate authority would probably fall a couple of percentage points short, leading to price decreases.

But remember that, in Washington, “temporary” measures to increase government revenue have a way of becoming permanent. For mailers, there’s a danger that Congress will let the Postal Service keep the extra surcharge in place to keep the agency solvent, to preserve Saturday delivery, to stop some postal facilities from closing, or to finance new delivery vehicles.

Or just because.

Related articles:

• USPS May Delay Next Price Increase
• Why the Exigent Postal Rate Increase Will Backfire  
• Forever Stamp-ede: Consumers May Hoard Stamps This Week But Stop Buying Next Year

Lower Pay Rates Are Boosting USPS's Finances

Partly because of a shift to lower-paid employees, the U.S. Postal Service experienced a rare improvement in its business last year, according to a Postal Regulatory Commission analysis. But the PRC warned that USPS is still on shaky ground – losing money for the seventh year in a row, short on cash, and unable to borrow money or invest in new equipment.

In other words, the good ship Postal Service is still sinking, but it’s not taking on quite as much water as it used to.

The PRC calculates that USPS’s financial loss from operations was “only” $1 billion in FY2013, down from nearly $2.5 billion the previous year. The PRC’s calculation excludes prepaid retiree health benefits (a budgeting gimmick created by Congress that USPS has stopped paying) and one-time accounting adjustments.

“The Postal Service reduced expenses in FY 2013” despite a minuscule decline in mail volume, says the PRC’s analysis of the Postal Service’s annual 10K financial report, released a few days ago. “Workhours and the average hourly compensation and benefits rate were both lower than last year. This indicates that the Postal Service’s finances may be improving.”

“Personnel expenses, including compensation and benefits expenses and systemwide benefit expenses, account for 78 percent of total expenses. The Postal Service reduced compensation and benefits almost $1 billion by increased use of non-career workforce and voluntary retirement incentives.”

Lower average pay rates
With the help of early-retirement incentives, the number of career employees declined by 37,000, all from attrition. In many cases, they were replaced by lower-paid non-career employees, especially because of a union contract allowing more hiring of non-career postal clerks. As a result, in most segments of the Postal Service the “productive hourly rate” of pay actually declined during FY2013.

On the negative side, fuel costs were higher, and USPS had to spend an additional $137 million on supplies when Express Mail was re-branded as Priority Mail Express.

Growth in packages and Standard Mail almost made up for the ongoing decline in First Class Mail. Boosted by price increases, revenue rose by $700 million (1.2%) during the year.

USPS’s strength in residential delivery could enable it to continue prospering from the growth of e-commerce, but the agency is not prepared for such growth, the PRC warned.

“For the burgeoning e-commerce market to become a viable option, the Postal Service needs to replace and improve its existing aging vehicles to accommodate the shift in mail mix toward a higher fraction of packages and to invest in new and efficient mail processing technologies and equipment. The Postal Service’s ability to make these investments is affected by the lack of available working capital.”

Related articles:

• Postal Workforce Is Both Shrinking and Growing 
• Flexible Workforce Lowers USPS Wages -- and Hurts Productivity  
• The United States Postal Service & Power Company?

Postal Service Dragging Its Feet on Fixing Periodicals

Postal officials, who frequently complain about losing money on Periodicals mail, bear much of the blame for that loss, according to the Postal Regulatory Commission.

“The Commission is increasingly concerned that the Postal Service’s Periodicals pricing strategy is leading to inefficient mailer preparation,” the commission wrote recently in its review of 2013 postal rates, echoing a complaint that magazines have been making for the past decade.

“The inefficient pricing signals being sent by the Postal Service’s prices prevent the Postal Service from maximizing contribution from Periodicals. Further, the inefficient price signals are increasingly creating winners and losers within the Periodicals class.”

The Postal Service’s flawed accounting shows that it receives only 76 cents in Periodicals-class revenue for every dollar it spends delivering magazines and newspapers. That was an improvement of 4 cents over the previous year – the first improvement since 2008 – but it hasn’t eliminated the political and legal pressure to jack up Periodicals rates.

A year ago, in considering whether Periodicals rates are legal, the PRC directed USPS to “leverage its pricing flexibility to improve Periodicals bundle and container pricing to incent more efficient mailer preparation and increase contribution from Periodicals.”

The efficient subsidize the inefficient

Instead, the commission chided, USPS has followed its same old approach to Periodicals pricing – just raising rates by the same percentage across the board. As a result, efficient Periodicals mailers are subsidizing inefficient ones, and USPS is losing out on a change to get publications to mail in ways that reduce its costs.

For example, the PRC wrote, the Postal Service’s own study shows that copies in carrier-route bundles are among the most profitable type of Periodicals mail, yet USPS steadfastly refuses to improve the incentives for carrier-route bundles. [In fact, it’s actually watered down the incentive over the years.]

The PRC noted that the Postal Service has undertaken various initiatives to reduce the cost of Periodicals and other flat mail, but “the Commission is concerned that the Postal Service is not measuring the success of the operational initiatives it has implemented to reduce the costs of Flats.”

It cited a statement from two trade associations urging the PRC “to ‘confront directly the elephant in the living room of Periodicals mail pricing: the Postal Service’s failure to rein in the out-of-control costs of Periodicals Mail despite large investments in automation equipment by the Postal Service, and large increases in worksharing by periodical publishers and their mail service providers.’”

No explanation

Postal officials never have offered a plausible explanation for the USPS's allegedly escalating costs for handling Periodicals.

If the saying that “what gets measured gets done” is true, the Postal Service is shooting itself in the foot by not tracking which of its cost-cutting efforts are working. How can it decide which ones need to be tweaked or scrapped and which ones are worthy of expanding and emulating?

Are postal officials more interested in avoiding the embarrassment that comes with owning up to failures than they are in improving their operations?
  
Related articles:

• Don’t Blame ‘Overpaid Postal Workers' for Rising Periodicals Costs
• Thrown Overboard: Publishers Feel Abandoned by the U.S. Postal Service
• Do Postal Execs Want To Lose Money on Periodicals?  
• Increased Efficiency Led to Higher Periodicals and Catalog Costs, Goldway Says 
• FSS Is Increasing USPS's Costs, Expert Says

17 More Ways USPS Is Not Like a Real Business

Please see the U.S. Postal Service's response to this article, Layers of Redundant Management Have Been Eliminated, USPS Says.

The recent article Nine Ways the Postal Service Is Not Like a Real Business apparently struck a chord, or maybe a nerve, generating numerous insightful comments on this blog, various LinkedIn groups, and private emails.

Though the U.S. Postal Service must live off of the revenue it generates rather than on government appropriations, it differs fundamentally from private enterprises in numerous ways. Those distinctions are more than just an interesting point of discussion. They are a key to understanding the Postal Service and how it might be reformed.

So, with thanks to many Dead Tree Edition readers, here are xxx more ways the USPS is not like a real business:

1. The concept of “investment” is nearly absent from the Postal Service, which must live from one annual budget to the next. It is not able to access private capital markets, such as the bond market, to finance major capital investments. That prevents it from making investments that would probably pay off in the long run, such as replacement of its aging, inefficient delivery fleet and more of the kind of automation that has enabled it to increase labor productivity.
2. Similarly, the Postal Service is hamstrung when it comes to launching new products that are not immediately profitable. 
3. The Postal Service does enjoy low interest rates on its debt because it can borrow from the federal government. But it has reached the legal limit of its ability to borrow. And much of its debt was racked up to cover subsidies to the federal budget that were dressed up as prepaid retiree health benefits and pension-fund payments. 
4. “Real businesses are not required to invest ALL their pension assets in low interest government bonds but instead can choose to invest then in a balanced portfolio,” noted one anonymous commenter. “The difference in average returns on pension assets of the USPS and the average returns of a typical businesses pension assets amount to over $10 billion per year.” 
5. “They are forced to deliver to unprofitable addresses,” notes Mike Seethaler, president of Raintree Graphics in Jacksonville, FL. “If a customer is too far out and too small for us to make a profit, we don’t do business with them.” In contrast, one commenter noted, USPS “is mandated to serve all areas of the country, every address, every day.” 
6. Speaking of unprofitable customers, USPS can’t charge higher prices for customers who are expensive to serve. People who get front-door delivery pay no more than those who receive their mail curbside or in cluster boxes. When USPS has to rely on airplanes, boats, or donkeys to get mail to remote places, it can’t charge a premium for those services. And it costs you 46 cents to send a letter from Maine to Alaska, or to send it across town. 
7. “Real businesses report long term liabilities, like retiree health benefit liability, on their balance sheet, and only report them as an expense when money is set aside to fund the liability,” wrote Liam Skye. “USPS is the only organization that is required by law to report fixed amounts of the liability as expense, whether they put the money aside to fund the liability or not!” 
8. Unlike most postal agencies around the world, the U.S. Postal Service is legally restricted from straying outside of its core business of offering postal services. And even its delivery-related ventures can run into problems if they compete with private businesses. “Consider the fact that USPS came up with the concept of overnight mail first,” says R.E. Perry. “It made so much money for the service that USPS bought a bankrupt airline rather than continue to pay other carriers to provide that service. Complaints that private companies could be making this money led to Congress ordering the service to sell the airline, and return to paying others to move their mail.” 
9. The Postal Service is subject to a regulatory agency, the Postal Regulatory Commission, that has no authority over USPS’s private-sector competitors. 
10. “Another way USPS is not like a business: It is mandated by the Constitution of the United States,” wrote Kofi M. G. W. Opantiri. (Technically speaking, the Constitution authorizes but does not require Congress “to establish Post Offices.”) 
11. It is exempt from income, sales, and real estate taxes. On the other hand, USPS is not eligible for the kind of tax breaks that incent private businesses to expand and to become more energy efficient. 
12. “Real businesses don't have two private police agencies who have to enforce thousands of federal rules and regulation WITHOUT reimbursement,” noted one commenter. 
13. By law, postal workers cannot strike. But impasses in labor-management negotiations at the Postal Service lead to an unusual step – binding arbitration. 
14. Private businesses are not subject to the Freedom of Information Act. But nor do they have the power of eminent domain, exemption from many state and local laws, and some protections from being sued. “USPS considers itself above the law,” wrote “a lady veteran.” “Some of their trucks should never be on the road.” 
15. “Not even Wal-Mart risks electrocuting its employees,” tweeted Dave Berdych, alias Dry Mail Man, referring to OSHA’s four-year investigation of electrical safety hazards in numerous postal plants. 
16. ‏ “No real business would have this many layers of redundant management. (bureaucracy),” responded one reader, echoing a complaint often heard from postal workers. 
17.  “Real business management incompetence is usually dealt with a demotion or termination,” wrote another. “Postal incompetence is rewarded with a promotion.” 

USPS Backs Off From Price-Hike Gambit

The U.S. Postal Service is apparently backing away from an attempt to use one-time payments to mailers as justification for permanent price increases.

As Dead Tree Edition reported last month, USPS proposed to offer large mailers a one-time “Technology Credit” and then to have those credits considered a price decrease for purposes of calculating its inflation-based rate cap. That would result in permanent price increases that would eventually cost mailers far more than the maximum $5,000 credit per mailer.

USPS clarified – or changed – its position this week in response to questions from PRC Chairman Ruth Goldway:

“Revenue forgone from the Technology Credit Promotion for each class of mail will be subtracted from revenue in calculating price cap authority in the upcoming annual price change, and then the same amount will be added back to revenue in calculating price cap authority in the subsequent annual price change,” USPS wrote. In other words, any price increases resulting from the Technology Credits would be temporary.

I’m told that postal officials have claimed during a meeting with mailers that the Dead Tree Edition article misinterpreted the price-cap issue. But several private-sector postal experts have told me they agreed with my interpretation of the Postal Service’s original request, which said nothing about reversing the price increase. And Goldway apparently agreed as well.

“The Postal Service appears to propose the creation of permanent price cap authority,” Goldway wrote to USPS last week. “However, the Technology Credit Promotion is proposed as a temporary, one-time offer. How does the Postal Service intend to reflect the expiration of the Technology Credit Promotion in subsequent . . . rate adjustments?”

The PRC’s Public Representative staff had a similar interpretation, warning the commission about “the danger of creating permanent price cap authority from temporary price reductions” because that could lead to “price cap avoidance tactics.”

USPS estimates it will pay out $61.6 million (down from the original $66 million estimate) in Technology Credits to major mailers that use the Full-Service barcodes during the 12 months that begin June 1. Both Goldway and the Public Representative noted that USPS’s original filing did not show how the payouts were calculated.

In fact, the Public Representative indicated that USPS tried to game the system by presenting “bare bones initial filings without the data necessary to evaluate its request,” making it difficult for anyone to challenge the proposal before the PRC must decide the case.

The Postal Service has already admitted to significant math errors in that initial filing. It now estimates the potential price increase for Standard mail will be 0.231% instead of 0.158% and for Periodicals will be 0.165% instead of 0.244%. It also tweaked the estimated increases for First-Class Mail (0.084%) and Package Services (0.015%).

Because the PRC is requesting so much additional information from USPS on the proposal, it has extended the deadline for commenting until May 17.

Five-Day Delivery and Reduced USPS Service Standards Could Face Legal Barrier

The U.S. Postal Service’s plans to eliminate Saturday delivery and to lower its delivery standards could face a significant legal obstacle, according to the Postal Regulatory Commission.

In its advisory opinion last week on USPS’s plan to close nearly half of its mail-processing centers, the commission seemed to side with witnesses who said reducing service standards could run afoul of the Congressionally-imposed price cap on postal rates.

“Two expert witnesses . . . presented persuasive testimony that a relationship exists between price and quality, and that lowering quality is equivalent to raising the price,” wrote Chairman Ruth Goldway in an addendum to the PRC’s document.

Under USPS’s Network Rationalization plan, “Eighty percent of all First-Class Mail . . . will be delayed by at least one day,” Goldway wrote. “Much of 2-day mail will become 3-day mail. Rural and remote communities that already receive slower delivery may be impacted even further when weekend and holiday delays are factored in.”

Has USPS Targeted the Wrong Plants for Closure?

The U.S. Postal Service's plan to reduce its mail-processing network by half has a major flaw, according to a Postal Regulatory Commission opinion released Friday: The plan would tend "to move processing assignments from more productive plants to less productive plants."

USPS goofed in assuming that consolidating mail sorting into larger plants would improve productivity, according to the PRC's advisory opinion on the Postal Service's ambitious Network Rationalization plan. In fact, larger plants historically have tended to process fewer mail pieces per workhour than smaller ones, the PRC's analysis finds. (Five-Day Delivery and Reduced USPS Service Standards Could Face Legal Barrier explores another issue addressed in the lengthy advisory opinion.)

"Shifting volume from less productive to more productive plants, without changing operating windows or service standards, would increase productivity by 18 percent, and save $1.3 billion in direct mail processing costs," the ruling says.

That's more than the $968 million USPS projects that its plan will save in mail-processing costs, and the PRC believes that projection is overly optimistic because of questionable assumptions.

Hurry It Up, Key Senator Tells Postal Regulatory Commission

Chastizing the Postal Regulatory Commission for taking 12 months to issue an opinion on ending Saturday delivery, Sen. Thomas Carper (D-DE) is asking the panel to work faster on other proposals to streamline the U.S. Postal Service.

"At a time when the Postal Service is reporting losses of$25 million a day and is doing all it can to head off financial collapse, there is a clear need for postal management to take a number of steps to streamline operations and adjust the Postal Service's network and product offerings to reflect the changing demand for hard-copy mail," Carper wrote in a letter dated yesterday.

Carper, co-sponsor of the Senate's main postal-reform legislation, said the PRC's advisory opinions "have been of great value to the Postal Service, Congress, and postal customers." But he expressed concern about the "lengthy, courtroom-style process" the commission has used in developing such reports.

The PRC's split decision on five-day delivery "suffered from a lack of focus on the key issues that I believe needed examination during the debate about moving to five-day service," Carper wrote. He recommended that the panel set time limits on its consideration of USPS's proposed changes to service levels.

A drawn-out process for considering such changes would "run the risk that the Postal Service could be forced to act on its proposal before the Commission has had a chance to share its thoughts and findings," Carper wrote. That could result in USPS making "serious mistakes in implementing a service change that might have been avoided had postal managers had the benefit of the Commission's counsel."

Related articles:

• Divided PRC Presents Its Opinion on Saturday Delivery  
• 5-Day Delivery: Maybe the PRC's Decision Is In the Mail  
• Postal Watchdogs Trying to Unleash USPS Innovation

USPS Seeks Special January Rate Increases

The U.S. Postal Service is seeking permission to implement “exigent” rate increases in January averaging more than 4% on most classes of mail.

In a filing with the Postal Regulatory Commission this week, USPS asked for the ability to implement the special rate increases, along with the usual inflation-based price increases, to make up for the volume it lost during the recent recession. The PRC rejected a similar 2010 attempt to impose exigent increases of about 5.6%, but is reconsidering that ruling at the direction of a federal court

“The Postal Service suffered financial harm directly associated with extraordinary and exceptional volume losses that the [inflation-based] price cap mechanism is incapable of addressing,” the USPS brief in the case says. “The Postal Service respectfully requests that the Commission recognize $2.34 billion as a plausible lower-bound estimate of the Postal Service’s financial harm ‘due to’ recession-related volume losses in FY2008 and FY2009, and approve exigent increases (for January 2012 implementation) on that basis.”

To yield $2.3 billion annually, the rate increases on the market-dominant classes of mail -- such as First Class, Standard, and Periodicals -- would have to average at least 4.2%. USPS did not specify exactly how rates would change, only that it wants increases that would bring in an additional $2.3 billion in revenue.

But mailers groups don’t think the court order means the Postal Service should get another crack at rate increases that exceed the rate of inflation.

“The court left in place the Commission’s findings that the Postal Service had submitted no evidence indicating that its request was causally related to the recession, and that the Postal Service’s financial problems were caused in large part by longstanding structural issues, not the recession,” says a joint filing by four industry groups.

The Postal Service brief notes that USPS is in even worse shape now that when it filed the original request for exigent increases last year:

“The contribution lost as a result of the massive volume declines, including volumes lost because of the recession, has not returned, and, based on volume projections, is unlikely to return. The injection of additional revenue from this increase is also critically important to ensuring the continuation of mail service. The Postal Service lost $15.1 billion over the FY2008-FY2010 period, will lose approximately $9 billion this year, and will soon exhaust its statutory borrowing authority. The Postal Service currently expects to run out of money to pay its employees and suppliers sometime next year, thereby risking a shutdown in mail service. The additional revenue from this increase would help to delay that date, and is therefore clearly ‘necessary’ to ‘enable the Postal Service…to maintain and continue the development of postal services of the kind and quality adapted to the needs of the United States.’”

Related articles:

• Court Decision May Lead to Hike in Postal Rates: Why a federal appeals court sent the original case back to the PRC. 
• Could the Deficit-Reduction Deal Limit Postal Pay Raises and Rate Increases?: Congress has toyed with changing how the inflation rate is calculated, which could lower the price cap on most postage rates.

Court Decision May Lead to Hike in Postal Rates

Mailers may be facing an unexpected, emergency increase in most postal rates later this year because of an appeals court decision that was issued today. (May 25 update: A knowledgeable person states that the ruling will not result in a rate increase, just some new guidelines from the PRC. Stay tuned.)

The U.S. District Court of Appeals for the District of Columbia sided mostly with the U.S. Postal Service in its appeal of a Postal Regulatory Commission decision last year denying "exigent" rate increases of more than 5%. The court sent the case back to the PRC for reconsideration.

The PRC erred, the court said, in requiring that "the proposed rate adjustments be tailored to offset the specific effects of the claimed exigency," which in this case was the economic recession that helped cause the Postal Service's financial crisis. Rates for most classes of mail -- including First Class, Standard, and Periodicals -- can increase no faster than the rate of inflation except in the case of "exceptional or extraordinary circumstances."

"A financial crisis can often result from multiple contributing factors, of which only one may be 'extraordinary or exceptional,' but that would still justify an exigent rate increase,” the court said.

The decision seems to present at least three challenges for the PRC:

1) The court said the PRC should "exercise its discretion" in interpreting an ambiguous law and determine "how closely the amount of the [rate] adjustments must match the amount of the revenue lost as a result of the exigent circumstances." But the ruling offers no guide as to how much discretion the PRC must exercise, other than saying the PRC was too strict with the Postal Service in its Sept. 30 ruling. In other words: "Exercise discretion, but not too much discretion."

2) The PRC must decide how much of a rate increase is justified by the recession even though the Postal Service presented sketchy data on the amount of money it lost because of the economy -- and how much was from such other causes as the increasing use of e-mail.

3) In the 10 months since the Postal Service asked for exigent rate increases, an inflation-based set of rate hikes was proposed and implemented.  The PRC must apparently decide whether to recalculate -- or to have USPS recalculate -- the requested exigency-based rates in light of those non-exigent increases.

USPS's Action Delays Announcement of New Postal Rates

Because the Postal Service is seeking a ruling on how to calculate its rate cap, mailers will probably have to wait a few weeks before learning what rate increases are in store for next year.

USPS asked the Postal Regulatory Commission yesterday to determine “the amount of unused rate adjustment authority when rate adjustments are more than 12 months apart.” The issue is especially murky because the PRC’s rules for determining the inflation-based price cap on most postal rates (including First Class, Standard, and Periodicals) did not anticipate periods of deflation, as occurred in late 2008.

“If amendment to the Commission’s rules is necessary to give effect to the Commission’s determination, then the Postal Service asks that the Commission take such action,” the USPS petition said.

Assuming the Postal Service will await the PRC’s decision before issuing new rates for the “market-dominant” classes, the petition probably puts off any rate announcement for a couple of weeks – or longer if the PRC decides to hold a hearing or to entertain legal briefs. A rule change would probably require even more time.

The PRC has indicated it is sympathetic to the Postal Service’s financial plight, so it might expedite the decision. But it is also trying to complete an advisory ruling this month on the complex and contentious five-day delivery issue.

Informal guidance last month from the PRC’s chief lawyer said the rate cap could be calculated by comparing the recent monthly Consumer Price Indices to those from 2008 because most postal rates have not changed since then. But the Affordable Mail Alliance objected on both procedural grounds and also because that would unfairly ignore the fact that the average CPI in 2009 was lower than in 2008.

Rate increases that are within the CPI-based rate cap can be implemented in as little as 45 days (See the Nov. 12 update explaining the change from this article's original language), but USPS has usually given at least 90 days so that providers of presort software can rejigger their programs.

Postal Service Files Rate-Case Appeal

A previous version of this article had errors regarding the dates. I apologize for the confusion and errors.

The U.S. Postal Service's appeal of the Postal Regulatory Commission's decision on proposed exigent" (emergency) rate increases reveals little about USPS's arguments.

The filing in "United States Postal Service v. Postal Regulatory Commission" does not reveal any of the Postal Service's arguments in the case. It merely states, "The United States Postal Service hereby petitions this Court for review of Order Number 547 of the Postal Regulatory Commission (PRC), issued on September 30, 2010, which denied the Postal Service's request for exigent rate adjustments."

Yesterday, the U.S. District Court of Appeals for the District of Columbia set deadlines of Nov. 29 for procedural motions and Dec. 13 for dispositive motions (that is, motions for the court to issue a summary judgment or to dismiss the case).

Rate-Case Appeal Is a No-Lose Venture for USPS

The U.S. Postal Service’s decision, announced today, to appeal the Postal Regulatory Commission's exigency-rate ruling could backfire, and yet in a way the Postal Service can’t lose.

The appeal could backfire if the appeals court decides that hardship to USPS caused by an economic recession is not grounds for breaching the inflation-based price cap on most postal rates. The PRC said the recent recession did in fact justify emergency rate increases but that postal officials failed to tie their request to the recession.

Regardless of what happens in the Court of Appeals for the District of Columbia, the appeal is likely to be a winner in the court that really matters for the Postal Service – Congress. Win, lose, or draw, there’s not enough money at stake in the exigency case (“only” $2.3 billion) to fix the Postal Service’s finances.

The only potential solutions big enough to stanch the bleeding seem to be reforming retirement-benefits payments that shift money from USPS to the federal government, reducing days of delivery, or some kind of radical downsizing. Congress is the key, or rather the roadblock, to all of those.

To get Congress to remove any of those roadblocks, postal executives need to show Congress that they have done everything possible within current law to balance the books. They can’t afford to be second-guessed regarding why they didn’t appeal the PRC’s Sept. 30 ruling, even if the court’s ruling closes a door (a revised exigency rate request) that the PRC left open.

The Postal Service's announcement did not provide much detail regarding the basis for its appeal, other than that it "disagrees with the PRC’s interpretation of the statutory language and believes that the PRC applied an incorrect standard in evaluating the request for anexigent price increase."

It added, "The Postal Service believes we need clarity regarding the exigent price increase rules under current law should the Postal Service find itself in a similar situation in the future."

The appeal will have no impact on USPS’s ability to seek an inflation-based increase, which could happen any day.

Related articles:

• PRC Decision Only a Partial Win for Mailers 
• Informal Ruling Makes Postage Increase of 1.7% Likely in January  
• Mailers Alliance Fights 'Nonsensical' Price-Cap Ruling

Mailers Alliance Fights 'Nonsensical' Price-Cap Ruling

In an attempt to hold down next year’s increase in postage rates, an alliance of mailers today challenged as “nonsensical” an informal ruling issued by a Postal Regulatory Commission lawyer.

Periods of deflation should not be ignored when calculating the price cap for postal rates, the Affordable Mail Alliance argued in its filing with the PRC.

The alliance's interpretation of the PRC’s regulations would set the U.S. Postal Service’s rate authority today at 0.873%, versus 1.447% in the method endorsed yesterday by the PRC’s general counsel, Stephen L. Sharfman. (See Informal Ruling Makes Postage Increase of 1.7% Likely in January.)

If the Postal Service filed for rate increases after September’s Consumer Price Index is released this Friday, the allowed rate increase would be about 1.1% with the alliance's method versus about 1.7% (Oct. 15 update: 1.685%) with the Sharfman method.

“Maintaining the integrity of this [inflation-index price] structure requires that the price cap reflect periods of deflation as well as inflation,” wrote the broad-based industry alliance, which was formed this year in response to USPS’s unsuccessful request for exigent (emergency) rate increases.

Ignoring years when the Consumer Price Index is lower than in the previous year, as happened in 2009, “would allow the Postal Service to ratchet up its prices over time faster than inflation by refraining from rate adjustments following intervals of deflation,” the filing said. “No reviewing court is likely to find this nonsensical outcome consistent with the plain language” of the law or PRC regulations.

“The difference between the two competing interpretations of the Commission’s rules amounts to approximately $360 million in postage and fees per year,” the mailers alliance wrote. “Moreover, postal price levels inflated by the use of an excessive rate adjustment factor would become the base rates for future price cap adjustments; hence, the original overcharge would recur in perpetuity.”

“Recurring periods of deflation are not unlikely in the current economies of the United States and the world. If the economy alternates between periods of inflation and deflation that leave the CPI roughly flat, selective timing of CPI-based price adjustments could result in postal price increases substantially outpacing inflation over time,” the alliance response said.

The alliance also objected to Sharfman’s “informal advice” because it came only six days after the Postal Service requested guidance on how to interpret the rate-cap regulations. The PRC’s rules require interested parties to have seven days to respond in such cases, and Sharfman’s letter was issued even though PRC staff knew the alliance was preparing a response to USPS's request, the alliance claimed.

Informal Ruling Makes Postage Increase of 1.7% Likely in January

Please see the follow-up article, Mailers Alliance Fights 'Nonsensical' Price-Cap Ruling, about a challenge to the Sharfman ruling that was filed on Oct. 13.

Postage rates are likely to increase about 1.7% in January as a result of a letter that the Postal Regulatory Commission's chief lawyer issued today.

When the PRC established its rate-making rules, "little attention was given to the possibility that during periods of deflation, the Postal Service might accrue negative rate authority," PRC General Counsel Stephen L. Sharfman acknowledged in a letter to his counterpart at the U.S. Postal Service. That's why the Postal Service sought Sharfman's advice in how to interpret the law and regulations that limit increases in most postal rates to changes in the Consumer Price Index. (See USPS Seeks Guidance On Its Rate Cap.)

Sharfman's "informal advice," which presumably reflects the commissioners' thinking, basically said that the period of declining prices in late 2008 could be ignored in determining the price cap. The cap is to be based on the difference in the average CPI for the most recent 12 months versus the previous 12 months, he wrote.

The CPI has only increased 0.86% since calendar year 2008, which was the basis for the last round of rate increases. But with Sharfman's method, the rate cap would be 1.477% if USPS requested increases before the September CPI is released on Friday. Then, it seems likely to inch up to about 1.7% and to stay at about that level for at least a couple of months. (Oct. 15 update: With the September CPI, the number is 1.685%.)

Postmaster General Jack Potter promised not to increase postage rates during 2010, but postal officials seem eager to bump up rates once the calendar changes over to 2011. The Postal Service only has to give 45 days' notice before announcing price increases that comply with the rate cap. So it seems likely that USPS will announce increases by mid-November, and perhaps as early as Friday, that take effect in early January.

The price cap applies to the "market-dominant" classes, such as First-Class, Standard, and Periodicals. Individual rates can rise far more than the cap as long as the average for the class doesn't violate the cap.

Increasing rates based on the CPI would not prevent the Postal Service from also filing for another "exigent" (emergency) increase to ease the impact of the recession on its finances. But it would take much longer to get PRC approval for such an increase and then to fight off a likely legal challenge from mailers.

Related articles:

• PRC Decision Only a Partial Win for Mailers: The PRC ruled against USPS's request for exigent price increases but left the door open for a revised proposal.
• Postal Rate Cap Finishes Year in the Red: Back in January, Dead Tree Edition pointed out that the PRC's regulations did not anticipate a decline in the CPI.