MTAC Session Examines Future Price Changes

One segment of the November 3 Mailers Technical Advisory Committee meeting’s focus group session on Customer Experience, Product Solutions, and Innovative Business Technology featured Sharon Owens, USPS VP for Pricing and Costing.

In her presentation, Owens sought to explain trends in the Consumer Price Index, on which the price cap on market-dominant rates is based, and the factors that determine the additional pricing authorities derived from the Postal Regulatory Commission’s November 2020 decision.

Details

The governors of the Postal Service had announced last September that the agency would be seeking semi-annual price increases for market-dominant products starting in 2022, but Owens elaborated on that timeline. First, there would be no price increase in January as there had been in past years. Second, though always subject to the governors’ decisions, the next price change would be “expected” in July, with others “expected” in January and July of 2023 and after.

No information was available about price changes for competitive products, though participants speculated whether the governors might announce something following their meeting on November 9-10.

Regardless, Owen offered what she could about future increases; her slide contained the statement:

“The Postal Service intends to be judicious in the use of available pricing authority, but anticipates the prospect that, given our current financial condition, the price change for each Market Dominant class may be required to apply most or all pricing authority. July 2022 rate authority will include ten months of CPI plus retirement, density, and non-compensatory class authorities as determined by the Postal Regulatory Commission. The January rate authority will include six months of CPI, plus any unused rate authority. Subsequent July prices will include six months of CPI plus the retirement, density, and non-compensatory class authorities.”

In effect, the semi-annual use of CPI-based authority will not increase what the CPI will allow, though it will allow the USPS a higher base (from the increase six months before) on which to calculate the increase. (“Unused authority” is the difference between what was available in a previous price filing and what was actually used; that amount is usually none or very little.)

Regarding the trend in the CPI, Owens’ illustration showed a steep slope suggesting larger USPS price increases, with the cap that could apply next year projected to be 4.26%.

The cap has been rising steadily ever since the USPS filed for its most recent increase, implemented at the end of August, based on the April CPI. (At that time, because it had been only eight months since the previous rate change, the formula for a less-than-annual interval was used.) The annualized CPI-based cap in April was 1.501%, but that’s shot up since then, reaching 3.334% as of the September CPI. (The actual amount of USPS authority would be calculated based on the applicable formula and the latest CPI available, likely February’s when the price filing is made.)

Other authority

As for the other forms of pricing authority, which can be applied only once per year, Owens explained that the 2% “non-compensatory” authority would be applied to Periodicals class prices and others, such as some Package Service prices, as long as those are “underwater,” i.e., inadequate to cover the related costs. (That 2% provision is separate from the additional increase for “underwater” products mandated by the PRC in past Annual Compliance Determinations.)

She provided an illustration of the formulae that would be used to calculate the pricing authorities derived from the “density” and “retirement” provisions of the PRC’s order.

Though both require some advanced math, suffice to say that, based on current projections, the “density” authority would be about 0.58% and the “retirement” authority would be about 1.07% (compared to the 4.5% and 1.062%, respectively, that was applied in the May 2021 filing).

Owens emphasized that she was providing only estimates, based on current projections. For example, “density” is based on the number of delivery points, the volume of mail, and the percent of institutional costs borne by market-dominant mail, data points that remain to be finalized later this year. As she added, final data will be known “around the middle of December,” and that will be filed with the Postal Regulatory Commission “by December 29 [so] it’s not official until the PRC ... issues [its] Annual Compliance Determination at the end of March.”

Adding it all up, based on the Postal Service’s projections, the rate increase that it plans to seek next spring, to be effective in July 2022, could be 5.902% (4.26%+0.58%+1.07%), or 7.902% for “underwater” classes and products. As noted, that amount could vary as the factors used to calculate each element change over the next few months but, barring a sharp slowdown in the growth of consumer prices, the CPI will be the largest contributor to the increase by far.

Looking further, the January 2023 price change will be based on only the CPI-based cap (plus any unused authority, if any), but the rate of growth of the CPI could yield a much larger increase than has resulted from past CPI-only price changes.

Structural changes

Owens noted that either fling also could include proposals for changes to the rate structure or other major classification elements. Acknowledging that “things are moving fast,” she added that “we are thinking about a new network and how to align mail preparation pricing signals [and] additional worksharing options potentially.”

She noted that “we don’t know exactly when we’ll be ready to get to the Commission with ... the cost study or whatnot so, I would say right now, we just need to remain nimble.”

She sympathized with callers who observed the burden on software companies caused by two market dominant price changes per year (as well as competitive product price changes), adding that the same pressure fell on their counterparts at the USPS who had to revise postal systems.

Despite Owens’ openness and willingness to share what she could, none of it was good news for commercial mail producers and their clients.

Any ratepayers still committed to the mail despite this year’s price increase and cuts in service standards may see the greater frequency and magnitude of future price changes as the incentive they need to move out of the mail. Though some in the USPS have blithely dismissed this possibility, the agency’s “judicious” pricing strategy may prove otherwise.

 

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