Mailers Anticipate Next Rate Case After Potter's NPF Speech

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KISSIMMEE, FL -- Despite Postmaster General John E. Potter's request to hold off on speculating about the next rate case, many mailers here at the 2006 National Postal Forum spent a good deal of time doing just that.


The speculation likely will continue at some sessions and on the trade show floor during this week's National Conference on Operations and Fulfillment in Orlando, FL.


In his keynote speech at the forum last week, Potter said the U.S. Postal Service cannot continue to absorb high fuel costs and that the agency plans to file its next rate case as soon as this month.


It will be the first comprehensive rate case the agency has sought in nearly five years. The 5.4 percent increase that took effect in January resulted solely from a pension escrow fund requirement.


Since the USPS raised rates in 2002, "fuel has risen more than $1 a gallon, costing the postal service over $1 billion a year for the gasoline we purchase directly," Potter said.


Fuel and energy-related costs are major drivers of the Consumer Price Index, he said, but unlike most businesses, "the postal service still has CPI-based [cost of living adjustments] in our collective bargaining agreements, which in turn have driven our cost per work hour up 9 percent since 2002. That means this year's salaries and benefits are $4.5 billion more than they were four years ago."


However, the USPS never added a fuel surcharge, he said, absorbing all of the costs.


Healthcare is another cost driver for the USPS.


"Despite the reduction in employees, our annual health benefits costs have grown some $2 billion -- or 36 percent -- since 2002," Potter said.


And given the effects of inflation, he said, "there is a need for another rate adjustment. When? Sometime in 2007." He added that "management and the Board of Governors have been reviewing our finances and discussing the alternatives for some time now."


Insiders here expect the USPS filing with the Postal Rate Commission to occur April 17, with implementation next spring.


"The filing will reflect a break-even scenario in 2008," Potter said. "Remember, rate adjustments are made to conform with the law that assures all Americans have access to universal service and that the postal service break even over time.


"We have worked hard to present to the governors a case that is fair, that gives mailers options to lower the impact of the rate change through greater use of work-share discounts and that reshapes prices to reflect the actual cost by type of mail being delivered, be it letters, oversized letters, magazines, catalogs or packages."


Potter said the agency could have delayed January's increase until 2007. However, it wasn't prudent to do so.


"But everything we heard has been that the industry would prefer smaller, more predictable and manageable rate adjustments than one extremely large one that provides 'sticker shock' to you and to your clients," he said.


The agency plans to move toward smaller, annual increases beginning in 2009, Potter said.


As for the upcoming case, most NPF attendees were fearing the unknown.


"I have no idea what the rate increase will be, but I hope it benefits more efficient mailers," said Howard Schwartz, executive director of distribution sourcing and postal affairs at Advance Magazine Group Inc., New York. "If that is the case, it shouldn't be bad for [our company]."


You just don't know what to expect with rate increases, said Susan Koshiol, mailing division manager at Sunray Printing Solutions Inc., St. Cloud, MN.


"You hear the announcement but you don't get any more details," she said. "We'll just have to wait and see."


Others think the rate case will be huge for several reasons. For one, the agency cannot continue to absorb the high fuel and healthcare costs. Also, it might be the last increase before Congress imposes a rate cap as part of a postal overhaul bill awaiting action in conference committee.


The Senate version of the postal reform bill contains a provision limiting the amount by which the USPS can raise rates -- a first for the agency. The postal service could take advantage of operating without a price ceiling for perhaps the last time.


Another cause for concern: The USPS plans to use 2008 as a test year for the case as opposed to 2007. A later test year for a case typically leads to a higher rate increase because there are more unknowns for which the USPS will seek more money.


Also, some think that rate increases will be higher for certain classes, such as Media Mail and Periodicals, whose revenue-versus-cost ratio hasn't been as high as other classes the past several years.


Some fear that another rate case will follow right after this one, to be filed in 2007.


And other attendees expressed concern that software vendors will not have enough time to implement all of the classification changes expected to be part of the case. The Mailers Council has formed an ad hoc committee to work with the USPS to ensure it gives software vendors 90 days to implement any changes. In the past, the agency has given 40 to 60 days on average, said Bob McLean, executive director of the Mailers Council in Arlington, VA.


The council also hopes to work with the agency to ensure changes do not need to be made "during the first of the year or during the busy holiday mailing season," he said.


But others do not expect such a dire situation. They think the increase sought will be in the mid-single digits, which is what USPS board chairman James C. Miller predicted last summer.


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