Answering An Uncomfortable Question

In comments filed February 3 with the Postal Regulatory Commission in response to the PRC’s proposed rule (System for Regulating Market Dominant Rates and Classifications, published in the December 11, 2019, Federal Register), Mailers Hub offered a view about “non-compensatory products,” (market-dominant products whose rates do not cover costs). The passage discussing such “underwater” rates was also excerpted in the February 3, 2020, issue of Mailers Hub News:

“Most non-compensatory classes and products did not become ‘underwater’ in a year or two or even ten; Periodicals, as a class, for example, hasn’t covered its costs since the PAEA was passed.

“… Aside from the resistance of ratepayers in those classes or for those products to accelerated rate increases to bring them to full cost coverage, the PAEA itself thwarted such efforts; the CPI cap is a two-edged sword that keeps rate increases to no more than CPI but also prevents larger rate increases to correct ‘underwater’ classes and products. …

That cost coverage for non-compensatory classes and products needs to be brought to 100% is not debatable, but neither is the need for caution in how that’s to be done. … Though the price sensitivity of most non-compensatory mail will be challenged by an additional 2% per year rate increase above the CPI cap, requiring that seems the least than can be done.

“However, any additional rate authority should be confined to the class or product currently ‘underwater,’ and should be separate from, not offset by, decreases in the rate authority available to other products in the class." 

The sensitivity of all mailers to price increases – Periodicals as well as of other classes – was acknowledged in the comments, as was the separate need to somehow address reconciling costs and rates.

The Question and the Answers

Later that month, a colleague wrote me an email saying “I’m wondering why you decided to support the 2% surcharge on periodicals and flats.” That seemed like a reasonable question, one that might have been in others’ minds, and so one that deserved a more public answer.

There were reasons that weren’t why: animus against magazines or catalogs; because raising rates – for any type of mail – should be the preferred go-to solution for the Postal Service's financial or operational challenges; because the USPS doesn’t have to get to the bottom of (and fix) flats costs; or because I agree with the PRC’s narrow definition of the task it’s been given (i.e., the rate-setting review) and how it can respond. Rather, my support for the 2% was an attempt to be logical, balanced, fair, and a little pragmatic.

The Postal Service’s circumstances are such that one remedy alone – or perhaps a few together – won’t be enough to right the ship. Fixing the prefunding obligation would be important, but so would rationalizing the USO in the 21st century, taking a tougher approach to collective bargaining, and improving postal costing methodology.

As for the Flats Sequencing System, it’s become sort of an albatross that the USPS can’t figure out how to get off its neck. Long ago committed to the FSS, it doesn’t really have a Plan B at hand and might be reluctant to adopt one, especially given the huge investment the FSS has become.

Those aren’t problems that can be solved simply by changing the ratemaking system, e.g., by raising rates, as seems to be the only focus the PRC believes the law allows it to have.

Moreover, the argument I made in comments was, essentially, because one could raise rates, as the perfect-world solution to needing money or covering costs, doesn’t mean necessarily it’s what one should do. The simple impact of higher prices on mail volume can’t be ignored, nor can the counterproductive nature of such a course of action. The problem isn’t the ratemaking system, I argued in comments, it’s what it was expected to produce.

Underwater

I further argued that the “underwater” categories (those whose rates don’t cover costs) are a separate matter; their situation has been worsening for years, and just raising rates for them as much as needed to cover their costs would be fatal for their volumes; the impact of outsized rate hikes is as undeniable for them as it is for other types of mail.

The difference is that the other types of mail aren’t losing money, and not on the scale of Periodicals, for example. The ugly fact is that, for whatever reason, every piece of “under-water” mail costs the USPS more to handle than the mailpiece represents in revenue. There may be clear and valid arguments that those costs are out of line with what they should be, that they need more scrutiny, and that they may derive from inefficient processing, whether the FSS or otherwise.

However, regardless of how valid those arguments may be, the fact remains that each “underwater” mailpiece is a loss for an institution that can’t afford it. More troubling, perhaps, the losses from Periodicals, Marketing Mail flats, and other “underwater” categories needs to be made up somehow, and that can only be from greater institutional cost contribution by other types of mail.

Even the PRC, always pressing the USPS to get cost coverages where they should be, admits that the shortfall for Periodicals and some other categories is so great now that, even if volume loss were not a factor, it can’t be corrected while still staying within the CPI-based price cap.
Supporting the 2% was an attempt to do something, albeit slightly, to improve the cost coverage of the “underwater” categories and ease the burden on everyone else, without going hog wild with jumps of 7% or 10% or more just to reach the magic 100% coverage. Simply saying “no” to any attempt to align rates and costs seemed unfair and irresponsible.

All other debates over why things are as they are aside, there’s the immediate sizeable gulf between current and 100% cost coverage for Periodicals and many flats that needs to be addressed. It might not be worth the risk to volume to recoup 2 or 4 points of coverage, but a 40 point abyss is something that can’t be ignored, not while the uncovered institutional costs are being picked up by other postage payers who aren’t any more anxious for higher rates, and whose commitment to the USPS is just as tenuous.

I never heard whether my answer made sense or caused more annoyance at me. I knew I hadn’t taken a position that would be popular among my colleagues, but it was honest.

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