PRC’s Goldway Tells What Was Behind the Exigency Decision

On December 24, 2013, the Postal Regulatory Commission approved an exigent increase that shot postal rates up 6% and sent direct mail marketers and their accountants back to their strategic models and financial forecasts to remake plans for 2014. Mailers had hoped the PRC would soften the blow with a lower percentage increase and were disappointed by the Commission’s ultimate decision to give USPS the rate it asked for.

To learn more about what was behind the PRC’s decision, Direct Marketing News spoke with Commission Chairman Ruth Goldway. The following is an edited transcript of the conversation.

Did having only three commissioners on hand for such a momentous decision make the process easier or harder?

I think we always prefer to have a broader group of people to get more input into the decision making process. In fact, we did get the opportunity to get have some initial discussions with the two commissioners [Nanci Langley and Tony Hammond] before their terms expired. We have three commissioners and the law says that’s a quorum and we provided the public with their full complement of participation and we proceeded with going through the statutory requirements to review an exigency case within the 90 days that are required. I believe the process was as complete and thorough as it would be in any case.

What calculations did the commissioners used to estimate the volume drop-offs that would result from a 6% increase in rates?

The point to emphasize with regard to the decision that we made in this case–and that we make in just about every case–is that we rely on established statistical and economic analysis procedures. We do not take new formulas that have been untested or not supported by substantial analysis in the general field. So if the Postal Service comes to us with a new idea and we feel it has not been vetted by the economic establishment, we revert to what’s established.

In this case we used the established models for estimating price elasticity. Those models have been in place for over 30 years and they consider the impact of large price increases, as well as the small ones. And there was no evidence or testimony presented to us that would have supported a different model. That model [we used] showed fairly small price elasticity. It continued to show mail with very low price elasticity comparable to other essential items like gasoline and prescription drugs.

Did the commissioners entertain any discussion of spreading a smaller increase over a longer period of time—say 2% over 5 years—as a way to soften volume declines? If so, why was that route rejected?

What we did do was to tell the Postal Service to report to us on a regular basis as to how much additional revenue they were receiving as a result of this rate increase, because the focus of an exigency case allows them to recoup the actual money that we can demonstrate they lost during the emergency. Our calculations showed that they should be reimbursed $2.8 billion and they’re going to show us how these new rates provide them with that $2.8 billion and there will be a cutoff at some point in year two based on calculations the Postal Service presented to us. The Postal Service also has the flexibility to adjust the rate downward in year two to make sure they get the $2.8 billion but no more than that.

Is the Postal Service required to drop the exigent rate once they collect the $2.8 billion, or is it up to them when they drop it?

Since the enactment of the [Postal Accountability and Enhancement Act], the commission has been reluctant to actually set rates. We feel that’s the prerogative of the Postal Service. So what we do is give them directions as to how to set rates within what we determine is the law or the obligation of the particular issue at hand. So the Postal Service presented this proposal for a 4.3% rate increase, we determined that the across the board rate increase was fair and equitable, and then we determined that the Postal Service had the prerogative to adjust those rates in a future proposal to ensure they got reimbursed by $2.8 billion, but only by $2.8 billion.

If they have not recouped the $2.8 billion by January 28 2016, does the exigency increase still go away?

I don’t think that we contemplated that, but we did assume we would get filings from the Postal Service that we would review. We did not contemplate what issues might come up in those filings other than to be assured that the Postal Service did not recoup more than what is required in the order.

Mailers feel they got an extra bad deal when the USPS filed for an advisory decision on load leveling just a few days after the exigency decision came down. Do they have a beef, or have we reached a point where a new business reality has set in that all stakeholders in the Postal process are just going to have to adjust to?

I raised the issue about whether, in a price cap system, service cuts are equivalent to rate increases, but the law doesn’t give us the latitude to implement that type of analysis. The law is quite vague on this. We feel that the advisory opinion process is very useful at keeping the Postal Service honest and responsible and transparent to its stakeholders, but it cannot guarantee permanent relationships between price and service. This particular case is open for the mailing community to provide input. We encourage the mailing community to let us know what they think. In many cases, the Postal Service responds to this input and makes adjustments.

USPS files its annual compliance review in January, but this year it will be just as the rate change takes effect. Does the filing of the review in this case help the commission do its job, or will something be done to rectify this?

This is not a new issue. There’s been a disparity between the costing information and the timing of when the rates go into effect for three years now. I’d refer you to the Annual Compliance Determination decision of 2012, page 79, which explains this decision in great detail. We do what we can to provide an analysis to the Congress.

According to USPS’s draft report on flats, it intends to process only 30% of all eligible flats mail on the new Flats Sequencing System (FSS). Has USPS provided information to the PRC as to how it expects to process the other 70%, especially since FSS is supposed to be the most efficient processing method?

In fiscal year 2013 only 18% of flats were processed on FSS, so 30% is an increase. You may know that the Commission has concerns about the cost of handling flats and we’ve discussed this with the Postal Service at great length. We believe the Postal Service is making an effort to increase efficiencies, but unfortunately those efforts have resulted in much slower periods of service improvement.

Is postal reform legislation still on the horizon? The Senate initiative looks to eliminate the CPI cap, give pricing power to the USPS, and limit the PRC’s statutory authority over postal rates. Mailers, obviously, do not view this as sound policy. What’s your view?

We hope the Senate can move forward with legislation. Sen. Carper is working hard to move a bill into markup by the end of the month. What the ultimate nature of that legislation will be we cannot predict at this time. I testified before Sen. Carper’s committee on September 19 and my testimony, which is the view of the Commission, is that the CPI cap is one of the most positive impacts of the current law. It protects ratepayers from large, unpredictable rate increases. I’ve heard information that [Rep. Darrell] Issa wanted to wait until the Senate bill comes out before he introduces his. My understanding is that, in both the House and the Senate, there are elected officials who have different interests and that they will make efforts to change those bills. It does seem to me that Congress is working in a more constructive manner this year than they were last year, but it seems that any legislation enacted would not take effect until the end of 2014.

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