Volume VI, No. 5 September-October 1999 Newsletter
BREAKING NEWS: Board of Governors Postpones Rate Case Action
The Board of Governors of the Postal Service went into public session on November 2, 1999, but adjourned making no announcement about the filing of the next omnibus rate case. What was not well known was the Board immediately went back into executive session to be briefed by rate case counsel Dan Foucheaux on the details of the rate case request. Word is that the Board took no action, so the next critical date is the December Board meeting on December 6-7, but a telephone meeting to authorize the filing of the rate case before then is still possible.
PRC Chairman Gleiman Speaks at APMU Postal Forum Meeting
Postal Rate Commission Chairman Ed Gleiman provided several thought-provoking ideas for APMU's breakfast and briefing meeting at the Chicago Postal Forum. After noting that lighter weight Priority Mail with delivery confirmation (35 cents extra) costs less to mail than if it was sent via parcel post with delivery confirmation (60 cents extra), he suggested that the situation cries out for some reform. "Eliminating lightweight parcel post in favor of Priority mail or some other, more general realignment in the parcel area might be a solution worth considering," Gleiman said.
Going beyond Priority Mail, Chairman Gleiman commended the Postal Service for its recent efforts in submitting narrowly drawn classification proposals that benefit only a few mailers. After comparing such cases to the proposal in H. R. 22 to authorize Negotiated Service Agreements (NSAs), he said that these narrow classification cases constitute a way to work within the existing framework of the law and still meet customers' needs. "Let's look at the law on the books and push the envelope on that existing law for the benefit of the USPS and mailing public in general," he said.
Chairman Gleiman also put in a plug for a reduced rate for Priority Mail which is dropshipped to postal facilities where the sack is opened and the enclosed mail is entered usually as Standard A Mail or at the periodical rate. Since this mail receives no delivery beyond a postal facility, he argued, there may be cost savings justifying a reduced rate.
Among those present at the well-attended meeting were Commissioners George Omas and Danny Covington.
Inspector General Rips PMPC Contract
A recent audit report from the Postal Service's Inspector General (IG) concludes that the cost of the PMPC network is at least $101 million more than if the Postal Service operated the processing centers themselves. According to the Inspector General, only a minimal 1 to 4 percent improvement, not statistically significant, has been observed in two-day delivery performance. The IG's report contains a number of recommendations aimed at improving performance and controlling cost. Overnight delivery of Priority Mail is not discussed in the IG's report, but APMU members in the areas served by PMPCs have reported a decline in performance both within areas that are considered overnight for First-Class Mail, as well as for dropship Priority Mail previously plant-loaded direct to nearby airports. When these other considerations are taken into account, the PMPCs appear to be something of a mixed blessing.
Costly Arbitration Award in Carrier Contract
A major arbitration award has settled the letter carriers' contract dispute with the Postal Service. In short, the letters carriers won big. The contract runs through November 20, 2001. Postal officials say that the contract will cost $400 million in unexpected costs during the third year, and more thereafter. Under the arbitration award, all letter carriers in Grade 5 of the Postal Service pay classification will be upgraded to Grade 6 on November 20, 2000. This is the first time since 1907 that clerks and carriers have been classified at different grades. In addition, the contract also calls for
For mailers, the implications of this arbitration award are not good. In the Test Year of the next rate case (see separate item below) it will increase costs and the revenue requirement necessary to cover those costs. It will also complicate if not completely discourage future negotiations (due next year) with the other big unions, Clerks (APWU), Mailhandlers, and Rural Letter Carriers.
Priority Mail Costs: Out of Control?
The Postal Service's Cost and Revenue Analysis Report (CRA) shows that between 1996 and 1998 the marginal cost for a piece of Priority Mail increased by a staggering 19.3 percent, while the marginal cost for First-Class Mail decreased by 3.5 percent (see data below). This caused the cost coverage on Priority Mail to decrease from 202 to 179 percent, while the cost coverage on First-Class Mail increased from 202 to 209 percent. For Priority Mail, these trends in marginal cost and cost coverage are ominous, and forebode a request for a large rate increase in the next rate case.
| PRIORITY MAIL | FIRST-CLASS MAIL |
| Fiscal | Marginal | Cost | Marginal | Cost |
| Year | Cost | Coverage | Cost | Coverage |
| 1996 | $1.671 | 202% | $0.170 | 202% |
| 1997 | $1.761 | 205% | $0.167 | 205% |
| 1998 | $1.993 | 179% | $0.164 | 209% |
The source of the increase in the unit cost for Priority Mail is not readily apparent because of the way PMPC contract costs are recorded in the CRA. One thing is clear, however. Unless and until the unit cost trends are reversed, Priority Mail could be in danger of pricing itself out of the market.
Rate Case Appears Imminent
Net income for fiscal year 1999 (ended Sept. 30) is expected to be about $300 million. This is down from $550 million in FY 1998, despite the higher rates that have been in effect during the last nine months of the fiscal year, or since January 1 of this year. Inasmuch as the higher rates were designed to increase revenues by $1.6 billion a year (or about $1.2 billion over 9 months), the Postal Service's profit situation between FY 98 and FY 99 has clearly eroded at an alarming rate.
For the current fiscal year, a net income of $100 million is planned by the Postal Service. To achieve this goal, the Postal Service plans to increase total factor productivity (TFP) by 3.1 percent, a feat achieved only 4 times since postal reorganization in 1971. TFP has declined in 4 of the last 5 years, and is up only 9.1 percent over the last 27 years. Whether the Service can remain profitable without any rate increase thus appears highly doubtful.
For the next fiscal year and beyond, the Postal Service undoubtedly would be facing deficits without any rate increase. The arbitration award to the letter carriers virtually guarantees that result (see related story). Readers who want detailed information on procedural steps in rate case litigation are invited to call APMU at 703-356-6913 for a report on what is involved.
Update on the PMPC Network
The PMPC network operated by Emery for the Postal Service reportedly achieved a 94 percent performance record in FY '99. However, the cost of achieving this performance is unclear (see related articles on Priority Mail Costs and the Inspector General's audit report). Approximately 11 percent of all Priority Mail originates and destinates within the PMPC network, while 36 percent of nationwide Priority Mail volume goes through the network in one form or another (i.e., originating and destinating within the network; originating outside the network and destinating within; or originating within the PMPC network for delivery outside). The air fleet has grown from one plane in September 1997 to 22 in March 1999, including 19 designated dual-use aircraft.
GAO Urges Congress to Oversee Data Quality Improvements
The GAO's latest report on the Postal Service, "Challenges to Sustaining Performance Improvements Remain Formidable on the Brink of the 21st Century," states that the end of an era may be approaching for the Postal Service. Noting that growth of the Internet, electronic communications, and electronic commerce have the potential to reduce mail volume substantially, starting after year 2003, the GAO says that the Service must resolve four long-standing challenges to (i) maximize performance, (ii) manage employees, (iii) maintain financial viability, and (iv) adapt to competition. The GAO Report also emphasized the need to improve the quality of data from the Postal Service. It cited a recently completed study by an outside consultant that "improvements and enhancements can - and must - be made to ensure future data provided for rate making will be sufficiently compete and accurate." The consultant's study included some 47 recommendations designed to improve data which the service provides for ratemaking. While taking note that postal officials agree with most of the study's recommendations, the GAO also states "it is not clear what specific actions the Service plans to take to improve the quality of data used in ratemaking and the timeframes for completion." The report then makes a recommendation (which is rare for the GAO) that the Congressional oversight subcommittees request the Postmaster General to report on actions taken and planned to improve the quality of data used in ratemaking.
Year 2000 Calendar
| APMU Meetings (tentative) | January 31 -- Washington, DC March 21 -- Nashville, TN (NPF Breakfast and Briefing) April 24 -- Washington, DC July 10 -- Washington, DC September 12 -- Anaheim, CA (NPF Breakfast and Briefing) October 9 -- Washington, DC |
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March 19-22 -- Nashville, TN September 10-13 -- Anaheim, CA |
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February 1-3 -- Washington, D.C. April 25-27 -- Washington, D.C. July 11-13 -- Washington, D.C. October 10-12 -- Washington, D.C. |
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April 30-May 5 -- Atlantic City, NJ Dates to be determined -- Las Vegas, NV |
| USPS Board of Governors
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January 11 -- Washington, D.C. (Other meetings t.b.a.) |