Volume VII, No. 1 January-February 2000 Newsletter

Double Digit Increases To Priority Mail Rates Requested By Postal Service

On January 12, 2000, the Postal Service filed a new omnibus rate case, Docket No. R2000-1. Under the rate-setting process, in which rates are requested by the Postal Service, recommended by the Postal Rate Commission, and then approved by the Postal Service's Board of Governors, the new rates cannot be implemented before January 2001. With respect to Priority Mail, highlights of the Postal Service's proposals are as follows:

• The average rate increase proposed for Priority Mail is 15 percent, with some rate cells increasing over 20 percent. (In the last omnibus rate case, Priority Mail rates increased an average of 5.6 percent.)
  
  
• The proposed 2-pound and flat rate envelope rates would increase from $3.20 to $3.85 -- over 20 percent. This rate increase is nearly 3 times the size of the increase for this product in the last rate case (an increase of 6.7 percent).
  
  
• A new 1-pound rate cell is proposed (an idea previously proposed by APMU's economic counsel, Dr. John Haldi), with a starting rate of $3.45.
  
  
• The proposed rates for 3-, 4- and 5-pound packages would increase 18.6 percent, 17.6 percent, and 16.9 percent, respectively.
  
  
• Increases in rates for zoned rate cells vary from just under 10 percent to just over 20 percent. Many rate cells face increases of 10 to 12 percent.
  
  
• Signature confirmation would become available for the first time, at the rate of $1.25 for electronic version, and $1.75 for retail version.

The Postal Service admits that these rate increases will cause Priority Mail volume to drop 105 million below what the volume would have been at current rates.

It is no comfort for Priority Mail users to know that even these rate jumps are likely to be exceeded by rate proposed by the United Parcel Service. At this point, unlike past omnibus rate cases, APMU is currently the only intervenor actively working to protect the interests of Priority Mail users before the Commission.

The Association of Priority Mail Users has established a rate case litigation fund to permit a challenge to the requested Priority Mail rates in this docket. APMU is analyzing a variety of possible avenues for challenge to the Postal Service's requested rates:

• The Postal Service's requested rates reflect an extraordinary attribution of costs to Priority Mail. Many of these attributed costs arise from the Priority Mail Processing Center network, which was in the process of being implemented during the year from which the costs have been drawn. These costs need to be studied carefully to avoid over-attribution of costs to Priority Mail. The Postal Rate Commission has already questioned why more current cost data was not used by the Postal Service in formulating its rate requests.
  
  
• The Postal Service's requested rates also reflect a cost coverage factor of 180.9 percent for Priority Mail. This number is too high considering all of the factors set out in the Postal Reorganization Act. A reduced coverage factor for Priority Mail benefits all users of Priority Mail.
  
  
• Another factor which has led to higher proposed Priority Mail rates is the Postal Service's target revenue requirement for the new rates. The revenue requirement of the Postal Service incorporates a 2.5 percent contingency (which is the largest in a decade, and more than twice the 1 percent contingency in 1997) to cover unanticipated costs and mis-estimates of costs and expenses. The burden of covering this contingency falls disproportionately on products with a high cost coverage, such as Priority Mail. As the Commission will look at the Postal Service's financial condition, the state of the economy, and other factors in determining the proper contingency level, APMU sees the Postal Service's revenue requirement as vulnerable to reduction.
  

Deadlines are fast approaching (for example, the deadline for discovery (i.e., formal requests for answers given under oath in response to written questions) of the Postal Service regarding the data and analyses underlying its rate proposals is March 23.

APMU has developed several documents for current and prospective members which discuss the rates setting process and the Postal Service's proposals in greater detail:

• a Backgrounder discussing how postal rates and classifications are changed, how cases are litigated before the Postal Rate Commission, and what APMU and its members have done in previous cases to defend the interests of Priority Mail users;

• an Analysis of how the Postal Service proposal in Docket No. R2000-1 would hurt Priority Mail users, and what issues need to be litigated by APMU; and
  
  
• a specific Proposal for APMU involvement in this case and a plan to fund that involvement.

To learn more about APMU membership, and about how you can help with APMU's participation in Docket No. R2000-1, please call APMU at (703) 356-6913.

APMU Breakfast & Briefing at National Postal Forum in Nashville

On Tuesday, March 21, 2000, at 7:30 a.m., APMU will hold its next Breakfast & Briefing at the National Postal Forum in Nashville, Tennessee. The featured speaker will be Jack Potter, Senior Vice President, Operations. To RSVP, call APMU at (703) 356-6913.

Priority Mail Processing Center Contractor May Sue Postal Service

Published reports state that CNF Transportation, the parent company of Emery Worldwide (which operates Priority Mail Processing Centers under contract with the Postal Service) is threatening to sue the Postal Service over disputes on pricing and operational issues. An official for CNF states that the company is negotiating with Postal Service officials on a daily basis.

In other news, CNF's year-end financial statement reported that the company broke even on the Priority Mail Processing Center contract during the fourth quarter of 1999.

According to data filed with the Postal Service's omnibus rate proposal in Docket No. R2000-1, payments to CNF under the Priority Mail Processing Center contract were expected to increase 72 percent between Postal Fiscal Year 1998 and Postal Fiscal Year 2001, while Priority Mail volume was only expected to increase 11 percent from PFY 1998 to PFY 2001.

First Quarter Data Shows Priority Mail Is Strongest Postal Product

At the February 8, 2000, meeting of the U.S. Postal Service Board of Governors, postal management announced that net income for the first quarter of Postal Fiscal Year 2000 (which ended December 3) was $816 million, about $140 million below the postal service's plan. Revenue was $306 million less than planned. Revenue growth was soft in nearly all categories except Priority Mail, with volumes and revenue of First Class and Standard A Mail cited as areas of "particular concern."

Postal Service Announced $400 Million in Spending Cuts

John Ward, Postal Service Controller, announced $400 million in spending cuts at the MTAC meeting on Wednesday, February 2. The cuts will affect payroll, the implementation of new programs, and other expenses.

These spending cuts follow $1.1 billion in spending cuts that are already being implemented, including delays in the implementation of the Postal Service's Point-of-Sale retail terminal network (Ward stated "[w]e've said 'That's a nice program. That's a useful thing to have if we had the cash. But we don't.'") and reductions in the corporate call center program. Over 10,000 job vacancies have not been filled.

Year 2000 Calendar

APMU Meetings (tentative)	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
National Postal Forum	March 19-22 -- Nashville, TN September 10-13 -- Anaheim, CA
MTAC Meetings	February 1-3 -- Washington, D.C. April 25-27 -- Washington, D.C. July 11-13 -- Washington, D.C. October 10-12 -- Washington, D.C.
MailCom 2000	April 30-May 5 -- Atlantic City, NJ Dates to be determined -- Las Vegas, NV