The Postal Rate Commission favors leaving a “stop-loss cap” in the Bank One negotiated service agreement, a decision that disappoints the U.S. Postal Service.
However, the PRC recommendation of no changes to rates or classifications in the NSA was not surprising, Michael Plunkett, USPS manager of pricing strategy, said last week.
NSAs are special service and rate arrangements between the USPS and a mailer or group of mailers. Proponents say NSAs encourage greater volume by rewarding postal customers with discounts and premium services.
The USPS Board of Governors approved such a deal with financial services company Bank One Corp. on Feb. 16, 2005, despite returning it to the PRC for reconsideration. The NSA took effect in March 2005.
The board had asked the PRC to reassess its decision to include the stop-loss cap limiting the total discounts available to Bank One during the three-year deal. With the cap in place, the USPS said, Bank One likely would stop receiving incentives in the second year of the contract, depending on how volume changed.
But the PRC said in a filing April 21 that its recommendation for a cap is “supported by the record and is consistent with statutory requirements.”
The PRC said that Bank One’s volume estimates are unreliable and so “there is an unreasonable risk that without a stop-loss cap the postal service could sustain actual economic loss through a reduction in contribution … The burden of recovering this contribution would fall largely on captive monopoly mailers not party to the agreement. Therefore, the commission does not recommend any changes to existing rates or classifications.”
Bank One and the USPS have suggested that the PRC test the need for the cap by balancing the risk of lost contribution “against the potential for additional contribution,” the filing said. But the PRC said it cannot apply this test without reliable volume estimates, and “neither Bank One nor the postal service provided such forecasts.”
Mr. Plunkett called the ruling disappointing because “Bank One’s existing level of marketing volume generates a pool of cost savings, but they believed and we believed they could have used incentives larger than that to produce substantial increases in First Class volume if they were given incentives to do so. Since the cap won’t be lifted, these incentives will go away.”
The PRC described a method for developing an NSA that would provide safeguards without a stop-loss cap. The approach relies on the demand characteristics of the mail eligible for the discount, not on a mailer’s before- and after-rates volume estimates.
The PRC said that “demand characteristics established in the most recent omnibus rate case for a particular subclass of mail can be used to develop a declining block rate discount structure that is beneficial to the mailer and the postal service over a wide range of after-rates volumes.”
This alternative “allows for tradeoffs in establishing discount amounts, discount block sizes and threshold volumes,” the PRC said. “The mailer identifies a range of possible after-rate volumes and receives discounts so long as volume falls within this range.
“As the ability of mailers to forecast after-rates volume improves, the potential for obtaining greater price incentives increases,” the filing said. “The mailer, and not the postal service, decides on the level of risk in forecasting volumes that it will tolerate to qualify for discounts.”
The USPS is analyzing this issue, Mr. Plunkett said, and will attend a briefing May 5 at the PRC to learn more.
The NSA makes Bank One eligible for volume discounts of 2.5 cents to 5 cents per piece for the next three years if its annual First Class bulk volume exceeds 535 million pieces. Discounts rise as volume increases and are higher than those given for automated First Class letters that are presorted by ZIP code and carrier route.
At certain volume levels, Bank One gets electronic address corrections from the USPS for properly endorsed First Class mail solicitations without a fee. Bank One agrees to forgo the physical return of undeliverable mail and will update any databases it maintains for solicitation mail. This aims to reduce USPS costs related to handling undeliverable-as-addressed mail as well as reduce postage costs.
The USPS estimates benefiting by $11.6 million over the life of the NSA: $7.6 million in Address Correction Service cost savings plus $6.9 million in increased contribution due to higher First Class mail volume, minus $2.9 million in discounts.
Bank One Corp. merged in July 2005 with J.P. Morgan Chase & Co., New York.