The Postal Rate Case: Give Us Another Opinion

As we all know, the U.S. Postal Service’s Board of Governors has voted to implement the new postal rates on Jan. 7. However, the governors have approved these new rates under protest and have sent back the decision to the Postal Rate Commission for reconsideration.

The governors sent the recommended decision back to the PRC because it “incorporated several reductions in revenue that the governors cannot accept.”

The reality was that there was only one reduction that caused the decision to be sent back: the reduction in the contingency provision. The USPS asked for a contingency provision of 2.5 percent of expected revenues, about $1.7 billion. The PRC reduced the contingency by $700 million to 1.5 percent of expected revenues.

When the PRC reduced the contingency, it provided itself the opportunity to reduce several of the increases in rates that the USPS was seeking. Among the rate increases reduced by the commission were periodical rates and several categories within First-Class, including three-digit automation, postcard and additional ounce rates.

There were two reasons the board sent the decision back. First, the governors truly think the postal service needs the additional money. All reports indicate that postal finances continue to deteriorate. Second, the governors think the determination of the contingency is theirs, and they want to keep the PRC from meddling in what they consider solely their responsibility.

The board has requested that the PRC reconsider its decision “as expeditiously as possible.” However, it’s unlikely that the PRC, after this second look, will provide significant additional revenues. The board may have made a tactical mistake by sending the decision back to the PRC.

Though the PRC undoubtedly will try to be as expeditious as possible, there is no legal timetable for the review. Therefore, significant delay, however unlikely, could affect the timing of the next rate case. However, if the commission follows the governors’ direction and increases the contingency allotment, the result will be even higher rates for commercial mailers – the same universe that the USPS will need to rely upon for postal reform to proceed.

But the real problem underlying these financial and political issues is the changing workload of the postal service.

The USPS just reported on its workload for the first two months of the fiscal year. It showed a dramatic shift between First-Class mail and Standard-A mail.

Through the first two months, First-Class mail volume increased just 0.2 percent to 15.88 billion pieces. In the same period, Standard-A mail increased 7.8 percent to 16.88 billion. What we have is more Standard-A mail in the system than First-Class mail.

It is possible that these figures are just the seasonal increase in advertising mail, perhaps in anticipation of higher January postage rates. However, it might be the effect of e-commerce and a real slowdown in First-Class as the economy slows.

We are all familiar with the adage, “One swallow doesn’t make a summer,” particularly in the middle of winter. However, this shift has been forecast for a long time, and these trends are consistent with the forecast.

The effect of this shift on the postal service’s bottom line has been significant. For the first two months of the last fiscal year, the postal service’s average revenue per piece processed was 2.934 cents. In the current fiscal year, this was reduced to 2.881 cents per piece. The effect of this “modest” decrease was dramatic. When the unit revenue change is multiplied by the total postal volume for the first two months of FY 2001 (34.93 billion pieces), it results in a total revenue decrease of $185 million.

Therefore, the real question, with undoubtedly second and perhaps multiple opinions, is: What should the postal service do about this changing landscape?

Specifically, what changes does the postal service have to undertake to its cost structure if its revenue per piece continues to decline? How should this trend influence its labor negotiation/arbitration stance? The rumors suggesting the departure of Postmaster General William J. Henderson may make the answers even more difficult to come by.

This requires even more strategic and political thinking. Through the first two accounting periods of FY 2001, First-Class mail accounted for 45.3 percent of all the mail in the postal system, while Standard-A mail accounted for 48.3 percent. If this trend continues, and all indications are that it will, the USPS will become primarily a carrier of commercial advertising mail.

Is this the proper role for a governmental agency? How will that influence postal reform?

There are many critical issues facing the Board of Governors, let alone the rather obvious one remaining from the R-2000-1 rate case.

• Cary H. Baer is a direct marketing consultant and chairman of the Association for Postal Commerce (Postcom), New York.

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