Will Postage Rates Jump in 2021?

In the wake of the Postal Regulatory Commission’s issuance of a final rule amending the rate-setting process, rumors began to circulate that the Postal Service would seek higher rates by mid-2021 and that the increases would be over 7%.

These stories may have some relationship to facts but are not entirely factual or accurate. Just the same, given that rumors travel faster than facts, it’s important that commercial mail producers have the necessary information to convey to their clients – who may already have heard the rumors.

The basis for change

The 2006 Postal Accountability and Enhancement Act (commonly called the postal reform law) that revised the rate-setting process also required the PRC to review that process ten years later to determine if it was achieving a set of objectives specified in the law.  If the PRC’s review – begun in 2016 and concluded last month – found that the objectives weren’t being met, the statute states “the Commission may, by regulation, make such modification or adopt such alternative system for regulating rates and classes for market-dominant products as necessary to achieve the objectives.”

Given the Postal Service’s tenuous financial condition and multi-billion-dollar debt, it wasn’t hard for the PRC to conclude that the law’s objective of financial stability for the USPS wasn’t being met and that, in turn, it had to revise the rate-setting process to remedy that circumstance.

It’s important to note that the same 2006 law also imposed the requirement that the USPS pre-fund 75 years’ of future retiree health costs through ten years’ of payments totaling about $55.8 billion.  Arguably, that provision doomed the new rate-setting process’s chances of meeting the “financial stability” objective from the start.

Unfortunately, the PRC’s assignment didn’t let them look beyond the rate-setting process should they find it wasn’t meeting the law’s objectives.  As a result, though external factors were obviously impairing USPS financial stability, the commission was limited in its remedial options only to amending the rate-setting process.  If the USPS needed more revenue, regardless of why, the rate-setting process was the only source that the PRC was allowed to consider.

In the final rule issued November 30, the commission retained the CPI cap as it’s been calculated since 2006 but provided the USPS with three additional bases for increased rate authority: density, retirement obligation, and non-compensatory classes or products.  It’s how the new sources of rate authority will be implemented that’s fueling the rumors.

Density

As the PRC explained it its final rule,

“The Commission has identified the portion of the increase in per-unit costs caused by the decline of mail density as a specific driver of the Postal Service’s net losses, and has determined that this increase is largely beyond the Postal Service’s control. ... Put simply, when the Postal Service delivers fewer mailpieces to more delivery points, those costs which are driven by factors other than marginal changes in volume are spread over fewer pieces, necessarily increasing the per-unit cost.  The loss of its economies of density means that the Postal Service’s per-unit costs will be unavoidably higher than they were before the decline in density. ...

“The density-based rate authority modifies the existing price cap to include additional Market Dominant rate authority calculated to approximate the amount that per-unit costs would be expected to increase as mail density declines, using the prior year’s decline in density to determine the amount of density-based rate authority.”

The final rule requires the Postal Service to “file a notice with the Commission by December 31 of each year that calculates the amount of density rate authority that is eligible to be authorized” under the density provision.  Once calculated, however, the Postal Service is not obligated to use the additional authority – and what it doesn’t use can be “banked” for use in a subsequent filing.  As the commission explained,

“The Postal Service has discretion to decide how much of the density-based rate authority to use on a year-to-year basis, and can choose not to use all of its available rate authority if it decides that doing so would be counterproductive.  Additionally, in the event that price elasticity for Market Dominant products changes such that volume effects are outside the expected range, the Commission retains the authority to revisit the density-based rate authority sooner than the planned 5-year timeframe.”

Because the density provision is tied to volume declines, it would have added 1.72% and 1.21% on top of the cap in 2018 and 2019, respectively, but would add about 4.6% to the Postal Service’s rate authority next year, given the severe volume loss associated with the pandemic.

Retirement obligation

This new provision also was explained by the PRC:

“The Commission has identified the Postal Service’s retirement costs as a specific driver of the Postal Service’s net losses, and determined that the amortization payments for those retirement costs are beyond the Postal Service’s control. ... The retirement-based rate authority modifies the existing price cap to include additional Market Dominant rate authority calculated from the proportional increase in revenue per piece for all products (both Market Dominant and Competitive) needed to permit the Postal Service to make the targeted amortization payments.  To protect Market Dominant mailers from a large initial rate shock, this additional rate authority will be phased in over 5 years, with annual recalculations to ensure ongoing accuracy during the phase-in period.

“The Postal Service must remit all revenue raised under the additional rate authority towards the targeted amortization payments to be eligible to continue to receive the retirement-based rate authority.”

Because any revenue generated under this new authority is specifically designated for the annual prefunding payments, the USPS cannot “bank” it for future use.  The commission did not detail the consequences if the Postal Service either fails to seek a price increase under this provision or fails to make the payment for which the revenue was intended.

Non-compensatory classes and products

This provision adds rate authority to allow 2% over-CPI price increases for classes and products whose rates are not covering their costs.  These include both in-county and outside-county Periodicals; Marketing Mail flats, parcels, and Carrier Route mail; and Media Mail/Library Mail.  Cost coverage shortfalls for Periodicals, for example, are so great – revenues are over 30% below costs – that CPI-capped price increases can’t even keep up with cost growth, let alone close the coverage gap.  As the commission explained,

“The Commission determined that the above-average price increase requirement is appropriate because it balances the need for mailers to pay reasonable rates (rates that do not threaten the financial integrity of the Postal Service) with the need for the Postal Service to reduce costs. ...

“Moreover, the minimum product-level price increases are not so large to give the Postal Service the ability to address its financial challenges solely by raising rates. ...”

Though the PRC continues, in this provision and elsewhere, to press the Postal Service to take steps to reduce flats processing costs (something especially relevant for Periodicals), it recognized that “cost-reduction and efficiency improvements have not staunched the growing negative contribution caused by non-compensatory products.”  Therefore, the PRC concluded, “the trend of negative class contribution would continue if the Postal Service does not have access to additional pricing authority.”

Ironically, despite the severity of the cost coverage problem, the PRC did not make use of the additional 2% rate authority a requirement.

“By making the use of the additional authority optional, the Commission recognized that there are a significant number of cumulative changes to the ratemaking system and there may be unknown effects on volume and revenue if prices were to increase in these classes....

“To provide added flexibility, the Commission modifies [the final rule] such that the Postal Service may use the additional authority to generate unused rate adjustment authority.  This change also takes into consideration the assumption that the ability to use the additional authority is equivalent to a requirement.  Making the additional authority bankable discourages the Postal Service from simply using it to avoid losing it.  Rather, this change provides more incentive for the Postal Service to consider demand, ECSI value, and other market conditions before determining whether to use the additional authority.”

Adding it all up

The PRC was not oblivious to the potential impact of the added rate authority on mailers and mail volume.

“... [T] the Commission has considered the impact of above CPI price increases on mailers as well as the Postal Service and has balanced these considerations with all of the objectives.  The Commission has determined that additional pricing authority is necessary.  It has determined that under the parameters set forth in the final rules, the Postal Service will be able to obtain necessary revenue while minimizing the burden on mailers. ... Additionally, the final rules provide safeguards to protect mailers from deleterious effects of the increased rates – not only will the Commission perform a holistic review of the revised Market Dominant ratemaking system in 5 years, it also possesses the ability to adjust components of that system sooner than 5 years if serious ill effects are alleged and proven.  Finally, the Commission also notes that while the system of ratemaking limits the maximum pricing authority the Postal Service may utilize, it does not generally mandate a specific price level.  The Postal Service’s Board of Governors is vested with managing the Postal Service, and is in the best position to determine how to best utilize the pricing authority and make decisions about specific price increases for Market Dominant products.  The Commission expects the Postal Service to use its business judgment in utilizing the tools provided in the system of ratemaking to craft pricing schemes and specific prices.

Other limits were also imposed:

“The Postal Service will be limited to use no more than 2 percentage points of banked rate authority per class per year and banked rate authority will expire after 5 years.  The retirement rate authority, however, will not be bankable due to the computation of this authority as a self-adjusting amount to be remitted to cover the Postal Service retirement obligations.”

As for when the new rules, and new rate authority, would be effective, the commission explained:

“The final rules would require the Postal Service to file proposed calculations of the amount of the density-based and retirement-based rate authorities by the end of December.... The Commission would then validate these proposed calculations and determine the amount of the density-based and retirement-based rate authorities, as well as the amount of the non-compensatory-based rate authority.  Presuming the Commission makes its determinations no later than the issuance of the ACD in March of 2021, any additional rate authority would be available to the Postal Service in March of 2021.

“The Postal Service’s assertion that it would not be able to include any new authority until January of 2022 is incorrect, as it is premised upon the Postal Service waiting to propose a Market Dominant product price adjustment until October of 2021.  The Postal Service retains the flexibility to propose an out-of-sequence price adjustment at any time.  The rate authority provided by the final rules is available for the Postal Service to use shortly after the effective date of the rules, and following the Commission’s determination. ...”

With all of that in mind:

  • If the USPS were to file for a price increase before the annual interval next October, a different formula would apply to calculating the CPI cap than is used for the annual cycle.  As of this writing, that would be 0.31%.
  • The only required additional rate authority to include in a price filing is for the retirement obligation.  That percentage is yet to be calculated.
  • The need for additional revenue has been moderated by the surge in package volume.  If the positive financial results from October continue in November and December, that may decrease the urgency perceived by the USPS for raising prices.
  • The uncertainty about how much volume (letter and flats) will return in 2021 might be a disincentive for raising rates.

But wait!

None of the PRC’s changes may be effective anytime soon.  On December 18, the Alliance of Nonprofit Mailers, the Association for Postal Commerce, MPA – The Association of Magazine Media, and the American Catalog Mailers Association, filed suit in the US Court of Appeals for the DC Circuit asking the court to review the PRC’s final rule.  In their filing, the petitioners stated that

“In Order No. 5763, the Commission promulgated new ratemaking regulations that, among other things, revised the existing regulations by allowing annual price increases above the annual change in the Consumer Price Index applied on a class-average basis.  In so doing, the Commission exceeded its statutory authority.  Petitioners seek review of the Orders because they are contrary to law, arbitrary and capricious, and an abuse of discretion within the meaning of the Administrative Procedures Act, 5 USC § 701 et seq. ... Petitioners are aggrieved by the Orders because the Orders will likely result in a devastating increase in the postal rates Petitioners’ members pay as part of the core nature of their business.  Petitioners respectfully request that this Court hold unlawful, vacate, enjoin, and set aside the Orders, and provide such additional relief as may be appropriate.”

As a result, mailers’ concerns over the possibility of large rate increases in 2021 have reason to ease – at least for now.  The court may well take months to hear the petitioners’ case, responses from the PRC, and render a decision.

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