Questions Mailers May Ask

Commercial mail producers and others whose businesses have regular contact with postal services may be aware of a price increase but not really understand why it happens or what it means.  As we did last year, in an attempt to offer answers, below are some of the questions that commercial mail producers and their clients may have.

Price changes generally

Why does the Postal Service have to raise rates?

Simply put, the USPS needs to raise rates to increase revenue.  Just like households and other businesses, its expenses increase over time, and just like them it needs more income to pay its bills.  The Postal Service is also legally obligated to charge enough money to cover its costs, so not raising rates would, in that regard at least, be illegal.

Wouldn’t it be better to lower rates to increase or preserve mail volume?

Ideally, the USPS (like any other business) could lower or moderate its prices to increase or retain business.  But the USPS has public service obligations, service requirements, and financial mandates that make it infeasible to not raise prices to pay for the growing costs they represent.

How is the amount of an increase determined?

The size of a price increase for USPS “market-dominant” products, like First-Class Mail, Marketing Mail, and Periodicals, is capped by law at an amount linked to changes in the Consumer Price Index.  A 12-month rolling average of the monthly CPI yields the percentage increase that can be applied to each class of mail.  Raising prices beyond that cap can be done under specific conditions, but the USPS has to balance the additional revenue such an increase would yield against the volume that would be lost as a result.

Why doesn’t the Postal Service just do more to reduce costs, instead of raising rates?

That’s a frequent complaint of commercial ratepayers, but the short answer is that a lot of USPS costs are beyond its control.  Employee compensation and benefits represent about 80% of USPS expenses, and that includes externally-established costs for health insurance under federal health insurance plans, mandated full prefunding of retirement and retiree health care costs, and the liability for workers’ compensation claims.  Though the USPS could do a better job of trimming salary and benefit terms that it negotiates with its labor unions, history has shown that arbiters generally support the unions’ positions if contract negotiations fail.

Mail delivery is the Postal Service’s most costly operation, but its costs cannot be trimmed because of Congressional meddling.  Every year, delivery personnel have less mail, representing less postage revenue, to deliver to more addresses, yet Congress blocks the USPS from cutting Saturday delivery of letters and flats, and is opposed to changing delivery “mode” to increase the proportion of centralized or curbside compared to door delivery.

Retail and mail processing operations also are significant costs, but Congress won’t let the USPS shutter money-losing post offices, and impedes efforts to trim the processing infrastructure to better match mail volume.

If the Postal Service needs money so badly, why not raise its rates more often?

The USPS could raise prices more often, but – given the CPI-based cap – the additional revenue may not be significant.  Under the law, the Postal Service is expected to have regular, predictable rate increases, so an annual process of new rates taking effect in January fulfills that directive.

Why doesn’t Congress fix the problem?

In a way, Congress is the problem.  Aside from how it meddles in delivery, retail, and processing operations, it lacks the political courage to rationally define the service obligations of the Postal Service and how those are to be funded.  Much of the current USPS red ink can be traced to Congressional actions – like mandating the USPS to prefund $55.8 billion of future health care expenses solely through postage income.

The 2020 price increase proposal

The Postal Service is struggling financially; will this rate increase help?

Additional revenue will help some, but the financial obligations imposed by Congress far exceed the revenue that this or any other annual rate increase could produce.

Will your business be prepared for the 2021 rate increase and the changes it brings? Will you be able to answer your customers' questions about it? Join us Tuesday, Oct 20 for our "2021 Rate & Regulation Proposed Changes" webinar, with Leo Raymond. Due to high demand, two sessions have been made available, 1:00 pm and 2:30 pm.
REGISTER HERE.

 

Why are some prices changing more or less than others?

The CPI-based cap is applied at the class level, so different rate cells can be adjusted differently to encourage (or discourage) mailer practices, like presorting, barcoding, or destination entry, or to ensure logical rate relationships.  Ultimately, compliance with the total revenue increase allowed by the cap is determined by calculating the volume in the different mail categories and rate cells and multiplying each by the amount of increase being applied.

Some changes are made because they’re required.  For example, if a work-sharing discount is greater than the value of the work avoided for the USPS, that discount either has to be justified under specific criteria or reduced to no more than 100%.  Similarly, if the price isn’t enough to cover the costs for the corresponding type of mail, more aggressive increases are applied to try to correct the problem – but such “over-CPI” increases need to be offset by little or no change in other rate cells so that that class-level cap is obeyed.

In the current case, flat-size mail is getting higher than average increases to improve cost coverage.

Can’t the Postal Service get more money from its parcel business?

Unlike for its “market-dominant” products, the prices for its “competitive” products – like Priority Mail and Parcel Select – can be set by the Governors of the Postal Service, but that latitude is constrained by the marketplace.  Postal competitors, like UPS and FedEx, private businesses that don’t have expensive public service or pre-funding obligations, can modify their prices to undercut USPS rates.  In addition, high-volume shippers, like Amazon and Walmart, can demand favorable pricing and can shift volume among carriers to get the best deal.  And, once a shipper’s volume is high enough, it can set-up its own, lower cost, transportation, and delivery infrastructure and pull volume away from the USPS.

Are there “signals” to mail producers in this filing?

Every price filing includes “signals” to mail producers about how changes in mail preparation and entry would be desirable, either to reduce USPS processing costs or improve processing efficiency.  Unfortunately, the clarity of these “signals” is masked by the need to balance them with other ratemaking considerations, such as controlling workshare discounts, maintaining logical rate relationships, and staying within the overall cap on prices.

In any rate change filing, including this year’s, typical “signals” are reflected in changes in the discounts and rates for automation (machinability and barcoding), presort, and destination entry, and in the “rate differential,” the spread between one level of presort or destination entry and another, for example.

Of course, whether a “signal” produces the desired results depends on whether the necessary behavior is economically desirable or feasible for the mail producer and ratepayer.

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