The U.S. Postal Service is near the end of a postal rate increase proceeding before the Postal Rate Commission. This will come with a PRC-recommended decision on or about May 10.
To get us all up to speed, some background is in order. The 1970 Postal Reorganization Act mandates that, over a period of time, the USPS must break even (revenue = cost). When (if) the USPS begins to lose money, it presents its case for higher rates to the PRC.
The law requires the PRC to render its recommended decision within 10 months. It then is the responsibility of the postal service's presidentially appointed Board of Governors to accept or reject the PRC's decision. Assuming it accepts, the board alone decides on the timing of the rate increase.
Let's look a little closer at a rate case.
It begins with the postal service testifying that it will lose money in a future year, known as the test year. The testimony, both financial and economic, states how much additional revenue (revenue requirement) will be needed to break even. The additional revenue includes amounts to cover contingencies and recover any prior-year financial loses.
The second element of a rate case is cost determination. As all classes of mail are required to pay for costs that they directly cause, the postal service provides voluminous data from its costing systems to demonstrate how much each class of mail costs.
A third element is pricing, in which the postal service spreads institutional costs to each class of mail. Institutional costs are those that cannot be directly attributed to a specific class of mail. This part of the rate case is very contentious, as it pits classes of mail against one another.
The final element is known as rate design. In this segment, the postal service puts a price on each kind of mail, for example, First-Class stamps, Priority Mail letters or Standard A barcoded letters sorted to a five-digit bar code.
As soon as the postal service makes its rate filing, those who oppose or support the filing present themselves before the PRC as “intervenors.” Intervenors usually consist of trade associations, corporations, public interest groups and others with an interest in postal rates. There usually are 50 to 75 intervenors.
With the case filed, the “fun” begins. Intervenors send written interrogatories to the USPS. These questions ask the postal service to explain specific elements of its filing. There usually are several rounds of interrogatories.
At this point, each intervenor may file its own rate increase (or decrease) proposal. For example, it may be a proposal to redesign all the rates in the Periodical (Second) Class or just change the rate for the second ounce in First Class.
Now the rate case gets really interesting as each intervenor and the USPS get to ask questions of everyone else's proposal.
Finally, with everyone just about exhausted, initial and reply briefs are filed. These provide intervenors with last opportunities to explain why their rate proposal should be the one approved by the PRC.
With all testimony and cross-examination complete, the PRC reviews the record and writes its rate case opinion. Its recommendation will be made public and given to the Board of Governors. The governors have the responsibility to accept (or reject) the PRC's recommendation and then set a date for implementation of new rates.
Now let's look at some specifics of this particular rate case.
The postal service's testimony in this rate case asserts that the USPS would lose $2.4 billion in the fiscal year ending Sept. 30, 1998. This figure consists of $1.4 billion in actual losses, a contingency reserve of $600 million and an allowance to recover prior-year losses of $400 million. Overall, the $2.4 billion would amount to an increase in rates of about 4.5 percent. This could be considered relatively modest since it is less than the rate of inflation since the last postal increase.
But, let's take a look at reality. Through the first seven accounting periods of fiscal 1998, the postal service has made a profit of $1.36 billion. This is $345 million higher than budget and $227 million higher than last year. For the postal service to lose its projected $1.4 billion this year, it would have to lose $460 million in each of the six remaining accounting periods in fiscal 1998. In the opinion of almost all nonpostal service observers, losses of this magnitude will not occur.
Two factors are most responsible for the high level of profit. One, the economy is keeping mail volume — particularly direct marketing mail volume — high. Two, the postal service is doing a very good job of keeping its costs under control.
The direct marketing industry has said it is willing to accept the postal service's rate-increase proposal, even though it now think it's not justified, because it hopes that the Board of Governors will delay implementation of new rates. Most industry observers acknowledge the need for higher rates after Jan. 1, 1999.
The industry soon will learn if its reliance on the board is justified. Many are skeptical.
Cary H. Baer is a direct marketing consultant and chairman of the Advertising Mail Marketing Association.