Competitive Products - A Final Rule is Only Half the Story

Competitive Products: A Final Rule is Only Half the Story

Commentary excerpted from the Jan. 7, 2019 issue of Mailers Hub News


In an order issued January 3, the Postal Regulatory Commission published its final rule regarding the institutional cost requirement for Postal Service competitive products. The 197-page order concludes a rulemaking that had begun in November 2016.

The backstory

Some of what’s involved in the rulemaking relates to the fundamentals of postal ratemaking, from the 1970 Postal Reorganization Act if not earlier, while other elements relate to provisions of the 2006 Postal Accountability and Enhancement Act (“postal reform”).

The older principles parse Postal Service costs as “attributable” or “institutional.” The former group includes those that can be directly linked to a specific product or service “on the basis of reliably identified causal relationships,” as the PRC defines them. The latter group is, essentially, the remainder. For example, the cost of mail delivery is attributed to the items being delivered, while the cost for the lights in the delivery unit is institutional.

The 2006 law divided what the Postal Service provides into two categories of “products”: market-dominant (e.g., the traditional classes of hard-copy mail such as First-Class, Standard, and Periodicals) for which a comparable service isn’t offered by the private sector (electronic media isn’t recognized as a competitor) and competitive (e.g., Priority Mail and Parcel Select) for which direct competition from comparable private sector offerings exists.

Under the 2006 law, revenue from competitive products must cover not only those products’ attributable costs but an “appropriate share” of USPS institutional costs as well. After a 2007 rulemaking, the PRC initially set the appropriate share at 5.5% but, under the law, that figure was to be reviewed periodically to ensure it’s still appropriate and adjusted (or not) accordingly; it retained the 5.5% figure five years in 2012. However, after an October 2015 petition by United Parcel Service, the commission initiated a November 2016 rulemaking to consider replacing the fixed share with one that’s derived from an annually-adjusted formula.

The formula

In its decision, the commission first reviewed the competitive parcel market, noting that, since 2012, “a clearer picture of the parcel delivery market and the Postal Service’s position in that market has emerged.” Further, the PRC found that “the Postal Service and its competitors experienced steady increases in revenue over the past 5 fiscal years, indicating that growth in the market benefited all market competitors,” and that “the Postal Service has captured market share since FY 2007, particularly in the years since FY 2011.”

After a review of the legislative history of the “appropriate share” concept, a lengthy discussion of the econometrics underlying its proposed formula, a discussion of “attributable” versus “institutional” costs, and a review of the comments submitted by parties including UPS, the commission stated its ruling:

“Annually, on a fiscal year basis, the appropriate share of institutional costs to be recovered from competitive products collectively, at a minimum, will be calculated using the following formula:

p>(Math and economics majors can translate for the rest of us.)

In its order, the PRC illustrated the “appropriate share” figure that its formula would produce if applied to each fiscal year since the enactment of the PAEA:

(Ironically, according to the USPS Annual Compliance Report for FY2018, the actual contribution of competitive products toward USPS institutional costs was much more: 24.7%.)

Of course, implementation of the new formula assumes that there won’t be legal challenges to the PRC’s decision, as has happened in a related case. Read on.

The sibling case

While the recently-concluded rulemaking focused on the contribution from competitive products revenue toward USPS institutional costs, a separate but related rulemaking examines what should be considered “institutional” rather than a cost attributable to competitive products.

That rulemaking was initiated in October 2015 to consider three proposals by United Parcel Service “to consider changes to how the Postal Service accounts for the costs of competitive products in its periodic reports.” UPS contended that “its analysis reveals that the Postal Service is ‘failing to ensure that its competitive products business is recovering all costs fairly attributable to that business’ and that the Postal Service ‘is not accounting fully for the true costs’ of its competitive products.”

In a September 2016 order, the PRC rejected two of UPS’ proposed changes but agreed to initiate the just-concluded rulemaking about the “appropriate share”). UPS, never one to decline an opportunity to disadvantage a competitor, didn’t accept the PRC’s decision and took the commission to court.

In May 2018, a three-judge panel of the US Court of Appeals for the DC Circuit upheld the PRC; that court later declined UPS’s request to rehear the case en banc, i.e., before all eighteen of the its judges. This left UPS with one last challenge to the PRC: before the Supreme Court.

On December 26, 2018, UPS filed a Writ of Certiorari asking the Supreme Court to review the appellate court decision. In its writings, UPS framed the reason for its request as “an exceptionally important question regarding the scope of Chevron deference.” (“Chevron deference” refers to the landmark decision in a 1984 Supreme Court case (Chevron USA, Inc. v. Natural Resources Defense Council, Inc.) regarding the degree to which a court should defer to an agency’s decision or interpretation of a statutory provision.) In this case, UPS is contending that the appeals court granted the PRC too much deference when upholding the commission’s interpretation of how Postal Service costs are attributed.

Though its purpose remains to impair USPS competitiveness in its parcel services, UPS is using the Chevron question as the bait it hopes the Supreme Court will take and, in turn, revisit the crux of the Chevron decision – deference to an administrative agency – and rule that the appeals court was too deferential. Then, if it does agree with UPS, the Supreme Court would send the matter back to the appeals court for reconsideration. It, in turn, could remand the matter to the PRC for it to rework its 2016 decision.

The underlying motive

It’s unlikely that anyone with the slightest awareness of the parcel market would believe that UPS’ persistence is simply zeal for purity and accuracy in postal costing, or for protecting mailers of market-dominant products against cost burdens deflected from competitive products. Rather, the parcel business is growing, and UPS is using every means possible to retain and expand its dominant position.

Although market-dominant product mailers may not realize it, competitive products are offering significant relief to the institutional cost burden that they would otherwise need to bear in the prices they pay.

That’s why, even for them, all of this matters.


Excerpted from the Jan 9, 2019 edition of the Mailers Hub NewsFor the full newsletter, visit the Mailers Hub News archives. 

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