A Long, Hot Summer for USPS, Mailers

Most of us thought it would be “all quiet on the postal front” this summer. Though a lot is going on, specifically the rate case and reform legislation, both these items were expected to be resolved, one way or another, before the summer doldrums began. However, neither is going away quietly.

First, let’s look at the rate case. On April 8, the U.S. Postal Service filed for a rate increase with the Postal Rate Commission. With a few exceptions, all rates were proposed to rise 5.4 percent. The basic First-Class stamp would increase to 39 cents. No date was specified for the increase, though it is to be expected over the Martin Luther King Jr. holiday weekend next January.

The USPS blamed the increase on Congress not having removed the escrow requirement that it imposed because of presumed Civil Service Retirement System pension requirements. I said “presumed” because various government agency studies had determined that the postal service’s pension plan, at the current funding rate, was overfunded.

The USPS said that if Congress reversed the escrow requirement, it would withdraw the proposed increase. Congress, with its hand deep in the postal service’s pocket, didn’t blink. So the rate case has continued.

Most observers expected that the rate case would be settled as filed, without extensive and expensive PRC hearings. But several issues have intervened.

First, some mailers concluded that given a choice, it’s better to pay higher rates later rather than sooner. It’s their guess that if there is no settlement, the PRC hearing process might delay new rates by several months.

A second factor affecting the rate increase is that the USPS is doing better financially and in mail volume than was expected when the case was filed.

In May 2005 compared with May 2004, First-Class volume was up 2.5 percent; Priority Mail, up 16.1 percent; Standard, 6.9 percent; and Package Services, 12 percent. As a result of these volume increases and continued control over expenses, particularly labor, the postal service’s finances are in much better shape than expected.

Indeed, through May, or two-thirds of the fiscal year, the USPS showed net income of $1.8 billion, almost $500 million better than plan. The results were so much better than expected that rumors swirled saying postal officials wanted to rescind the proposed increase. However, that was not to be (yet).

And lastly, at least one large mailer, mainly using the carrier route subclass, claims that across-the-board increases will continue to overcharge that subclass with higher-than-warranted allocations.

What will happen? The PRC could decide on a settlement, even without a unanimous agreement among the parties, or it could opt to continue the fact discovery and hearing process. In either case, concern exists among periodicals and parcel mailers that the commission could rule that the proposed across-the-board increase leaves these rate classes not covering their attributable costs. And the PRC could tinker with the filing.

The second item likely to cause the long, hot summer is the so-called postal reform legislation. That legislation is showing surprising staying power, refusing to fade away. It seems to have strong support among the Senate and House committee chairs and continued support from many in industry. Some of the legislative support deals with the provisions that resolve, in the postal service’s favor, the CSRS and military pension issues.

However, these are the issues, because of their effect on the federal budget deficit, that the Bush administration has the most trouble with. In fact, some officials seem to be recommending that since USPS finances are improving, the service should consider some borrowing to tide it over. Borrowing to cover deficits is a process the administration is quite familiar with.

The key question regarding the legislation is whether the Senate and House leadership will schedule floor time to debate and then vote on it. This is always a question, as other issues compete for floor time. Issues this year include the energy bill, Supreme Court nominee hearings, terrorism and trade.

Let me take a guess at a likely outcome to the rate increase and reform. I think that the PRC will approve, with minor modifications, a negotiated settlement of the 5.4 percent across-the-board increase. Expect rates to rise Jan. 15. As for reform, I think too many obstacles remain, with too few truly committed mailers and legislators willing to provide the political and economic capital to give the legislation the push it needs.

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