Postal Pieces: PRC 10-Year Rate Review

What Does it Mean for Mailers? 

On December 1, 2017 Robert Taub, Chairman of the Postal Regulatory Commission (PRC) held a press conference to announce the long awaited decision of the PRC in its ten-year rate review of the rate-making system that has been in place under the Postal Accountability and Enhancement Act (PAEA) since 2006. Although the Commission declined to eliminate the CPI price cap and to give the Postal Service the unfettered pricing discretion it had been seeking in the review, it found that there were problems with the current system.
In finding that changes needed to be made to restore the Postal Service to financial health and to deal with other problems or anomalies in the prior rate making process, the PRC announced the beginning of another regulatory proceeding, a rulemaking proceeding, that would give mailers and stake holders a chance to propose their own "fixes" or solutions to the problems and to comment on the proposal advanced by the PRC.

The decision and rulemaking is in two parts. In a lengthy determination, the PRC examined the rate cap system as it has operated for the past ten years, compared it to prior cost-of-service rate making before PAEA, and proceed to analyze whether or not the current system was working under the objectives and factors set forth in the law.

In general, the PRC made the following findings:

• The CPI rate cap system has worked to achieve the objectives of stable and predictable rates with regard to timing and magnitude. But the rate-making system had not increased pricing efficiency.

• That the Postal Service was in "poor health." Although it had generally achieved short-term financial stability, it was in poor financial health from the standpoint of medium- and long-term financial stability. The PRC acknowledges that much of this is due to the Great Recession, the emergence of new technologies that hurt Postal Service volumes and revenues, and a unique period of deflation where the ability to raise rates under the CPI cap did not help the Postal Service.

• The current system jeopardizes the Postal Service's financial health because it is not able to raise the rates of "under water" products that are not covering their attributable costs. For example, the periodical class has historically had attributable costs below the prices that the Postal Service has been able to charge under a rate cap system. Because the cap is applied to all periodicals as a class (and there are no profitable periodicals), the USPS has not been able to r aise rates above the CPI for that class to cover costs.

• The Postal Service has not maintained high quality service standards.

Other findings of the PRC of significance included its determination that the plain language of PAEA gave the PRC "broad authority to engage in rulemaking in order to modify or replace the current rate making system. The scope of that authority is limited only by what is necessary to achieve the PAEA's objectives." The PRC rejected arguments that it did not have the authority to change the rate cap.

On the more positive side, the PRC largely found that the rate cap system was working to achieve needed mailer concerns of predictability and stability; and that the current system, with a regular, known, cycle or rate adjustments, was more efficient and had eliminated many of the administrative burdens and costs and had improved transparency, than the rate system that existed before PAEA under the costs-of-service rate setting model.

The PRC's findings and determination runs 270 pages, with a detailed examination of the history and a discussion of each of the factors and objectives under the Act. In spite of finding that the rate cap system is widely supported by mailers and stakeholders and has helped the Postal Service and the industry have a system that all stakeholders seem to believe is considerably better than the prior cost-of-service method, the PRC also finds that the Postal Service's balance sheet and losses have grown under the system and "need to be fixed."

Although the PRC repeatedly acknowledges that most of these financial problems are largely due to the optimistic views of Congress in 2006 that volumes would continue to grow, the economy would be stable, and that the Postal Service would have the funds to pay a very aggressive schedule for prefunding Postal Service retiree health costs, the PRC is not willing to ignore those "big numbers" and "big losses." Notably, the accumulated deficit of the USPS is approximately 59.1 billion and the RHBF requirement accounts for 54.8 billion of that number. Although all the Commissioners seem to lament that Congress has not acted to change the RHBP requirement or to potentially forgive or reamortize these "losses," the Commission insists it can't ignore these numbers and must craft a proposal to improve the Postal Service's medium- and long-term financial health.

In announcing a proposed rulemaking, the PRC makes it clear that its proposed rule is "a suggestion only." The rulemaking proceeding launches a 90-day window of time for mailers and stakeholders to comment on the PRC rule or to make their own proposals. At the end of 90 days everyone will have a chance to reply to the submissions of other parties. At the end of the 120 days period, the PRC will then consider its own proposal and industry and Postal Service comments before issuing a final rule that would change and make modifications in the present system.

Here is what the PRC is suggesting in its proposed rule:

• Postal Service prices will still be tied to a price cap based on CPI, but the USPS will have the right to charge CPI plus 2% for each of the next five years for all classes of mail.

• In addition to the 2% "extra," the Postal Service could charge an additional 1% with .75% tied to certain operational efficiencies, and .25% tied to improvements in service quality.

• The Postal Service will be required to raise prices for underwater products (like periodicals and some standard flats.) For these products, the Postal Service will be "required" to raise prices an additional 2% over the allowable price change until prices achieve full cost coverage.

• The USPS will have new restrictions on worksharing passthrough. The USPS should strive to have, as near as possible, 100 percent pass through of actual savings through worksharing. The following limits will be in place, however, subject to a three-year grace period for noncompliant passthroughs:

Periodicals: 75% - 125% of avoided costs;

All other classes: 85% - 115% of avoided costs.

The Commission Decision and Proposed Rule clearly finds that the PRC and industry must be "stuck" with the Postal Service's bad balance sheet. The PRC declined to follow suggestions made by many commentators that it should not accept as a "given" the big debt on the Postal Service's balance sheet caused by the unrealistic healthcare funding, or that it should also consider the Postal Service's undervalued assets like real estate, in determining its financial health. The PRC refused to accept any of those arguments and seems to say "we have to accept the numbers at face value." After doing this, the PRC decides it "must" give the USPS more flexibility to raise prices high enough to generate sufficient revenue to assure medium- and long-term financial stability.

At least some of the Commissioners in Supplemental Comments - and in the case of Tony Hammond, a dissent - expressed concern that the "fix" proposed by the PRC might be problematic but needed to be done because Congress had failed to act on reform. Both Commissioners Langley and Acton noted that the PRC's proposed rulemaking was "one approach to regulating market dominant rates," but invite other interested parties to propose alternate solutions.

Tony Hammond formally dissented with the majority, stating "the proposed changes elevate the objective of financial stability above the others." Hammond writes, "I have concluded that a significant portion of the Postal Service's financial instability results from an overly aggressive retiree health benefits pre-funding schedule - which warrants a legislative solution - and from the Postal Service's decision in 2007 not to pursue the final cost of service rate increase authorized by the PAEA."

Hammond states he would propose a onetime price increase that raises the Postal Service's finances to the level needed to ensure stability absent those two factors, while leaving the price cap intact for future rate adjustments. Hammond warns that the changes proposed by the PRC could have a substantial negative impact on volumes.

Given the lengthy time the Commission took to issue this decision, and the conflicting views and uncertainty expressed in some of the individual opinions by three of the four Commissioners, it seems likely that the final order and decision of the Commission on the new rules and system may vary somewhat from what the Commission has proposed.

The initial industry reaction was grim, lamenting that this proposal, although preserving the "rate cap" in principle, would do little to improve USPS efficiency and was certain to drive the USPS to raise prices to the full extent permitted over the five-year period. Several mailers and association leaders expressed grave fears that the PRC proposal would do lasting, potentially irreversible damage to the USPS and the mailing industry.

In the Postal Service's response to the Decision, Postmaster General Megan Brennan, stated, "The Postal Service agrees with the conclusion of the Postal Regulatory Commission that the current CPI price cap does not work and needs to be changed." She goes on to state, "We are analyzing the Commission's alternative price cap proposal to determine the extent to which it advances this goal. We continue to believe that any price cap is unnecessary in the rapidly evolving market place."

As of the writing of this article, it is uncertain whether or not any industry parties or the Postal Service will appeal the PRC decision or what actions or strategies may be pursued in the Postal Service rule making. The only thing that is certain, is that there will be some widely diverging views and comments in the rule making in the year to come.

Although it is not clear when any new, final, rate making rule may take effect, it seems unlikely that any change in rates will occur before early 2019.

Will the "cure" kill the patient?

The PRC found the Postal Service's position is poor. Although most of the Commissioners and staff of the PRC seem to acknowledge that the "blame" for this problem lies largely with the unworkable retiree healthcare prefunding requirement, the PRC appears to think it is stuck with the cards it and the Postal Service has been dealt But playing these cards for future rates changes is a dangerous game for mailers and the Postal Service.

You can't fix a business that is suffering from lack of revenue by charging everyone more than the market will bear. In a good faith effort to "fix" the Postal Service's poor finances, the PRC is recommending too much too long to help the Postal Service get back to mid-term and long-term financial stability.

Make no mistake about it, this is like a year over year exigency increase that will drive many businesses from continued use of the Postal Service and will exponentially drive the interest of current mailers to seek competitive alternatives for the profitable products the Postal Service wants to keep.

Even Congress, in trying to "make sausage" of competing interests in its discussions of postal reform, was not considering more than a CPI plus 1% mark up for a limited period of time, or a onetime adjustment in rates.

The bottom line of this decision is that it puts an effort to restore the Postal Service's financial health before all other objectives considered by the PRC. Although the PRC finds that the rate cap should be preserved, it effectively dismantles the cap for the next five years allowing year over year increases that may significantly outpace or even double the rate of inflation and will, sadly, result in the Postal Service still being saddled with high overhead, Congressional mandated pre-funding requirements that everyone agrees would not have been passed by a Congress with a better crystal ball in 2006, and fewer customers.


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