Volume VII, No. 5 November-December 2000 Newsletter
19 Percent Spike in FY 1999 Costs Drives 16 Percent Rate Increase
In litigating Docket No. R2000-1, APMU won nearly every battle it could win. Nevertheless, low weight Priority Mail rates are going up dramatically. So what happened? The good news is that the Postal Rate Commission rejected UPS' efforts to attribute additional costs to Priority Mail. The Commission agreed with APMU that Priority Mail receives inferior service to First-Class Mail, and even called on the Postal Service to "take steps to assure that customers are not misled into purchasing a more expensive product that will not provide added service." The Commission agreed with APMU that Priority Mail's economic value of service was also decreasing. The Commission agreed with APMU that excessive Priority Mail costs incurred under the PMPC contract support a reduction in Priority Mail's cost coverage. In sum, the Commission reduced Priority Mail's cost coverage to an all-time low. The Commission's recommended cost coverage of 162 percent is nearly at the systemwide average.
The 162 percent cost coverage is slightly larger than the Postal Service's estimated Test Year Before Rates cost coverage for Priority Mail -- 160 percent. Had the 162 percent cost coverage been applied to the estimated TYAR Priority Mail costs in the Postal Service's initial case-in-chief, the rate increase would have been only 3.1 percent. (It is important to note, however, that the Commission does not use the Postal Service's methodology for attributing costs. Instead, the Commission methodology attributes a greater percentage of postal costs. See page 2 of this newsletter for details.)
In the final analysis, however, neither the Commission nor APMU has control over the costs incurred by the Postal Service for Priority Mail. According to the FY 1998 and 1999 Cost and Revenue Analyses, Priority Mail's volume variable costs increased over 19 percent from FY 1998 to FY 1999, an increase of over $440 million (the corresponding volume increase was less than 1.3 percent). The Docket No. R2000-1 rates were set to cover estimated costs for FY 20001, two years later. When the Commission chose to adopt the actual FY 1999 costs to set rates, the only question remaining was whether Priority Mail rate increases would be kept under 20 percent.
Thus, it was the $440 million increase in Priority Mail costs that drove the Commission's 16 percent increase in Priority Mail rates in Docket No. R2000-1. These costs could not be denied. Consequently, it appears that the best APMU could hope to accomplish was to keep that increase as small as possible. That much, we can say, was accomplished. Going forward, the key issue is whether the Postal Service can regain control over its costs, or whether they will continue to escalate out of control.
The only good news is for those who mail heavier weight pieces. In fact the Commission's recommended rates are actually lower than current rates for 201 of the 420 Priority Mail rate cells. The Commission also commented favorably on APMU's proposal to give a break to mailers who use Priority Mail to dropship other classes of mail, because their mail does not receive street delivery, urging the Postal Service to request such a discount in a future case. The Governor's remanded the case to the Commission, asking for more money and still higher rates. Mailers can only hope that request will fall on non-responsive ears. Stay tuned.
1: Attribution of Eagle/Western Network Premium Costs to Priority Mail
| APMU Wins & USPS Wins |
UPS Loses |
PRC: "the evidence is insufficient to refute the Postal Service's position, as developed by its witnesses, that, but for the need to support a guaranteed overnight product, the overnight network would be unnecessary." Op. & Rec. Dec., para. 3313. |
2: Priority Mail's Value of Service
| APMU Wins |
UPS Loses & USPS Loses |
PRC: "Taken together, these indicia do not bear out the high value of service that Priority Mail's intrinsic features would otherwise imply. In the Commission's view, this conclusion justifies moderation in the assignment of institutional costs to Priority Mail." Op. & Rec. Dec., para. 5304, emphasis added. |
3: PMPC Contract Costs
| APMU Wins |
UPS Loses & USPS Loses |
PRC: "as a source of significant, perhaps extraordinary, cost increases for the Priority Mail subclass, the Emery contract provides an additional reason for moderating the markup of Priority Mail on the ground of consequent impact on its users under § 3622(b)(4), as in the last omnibus rate proceeding." Op. & Rec. Dec., para. 5311, emphasis added. |
4: Should the Markup Index for Priority Mail be Reduced from the USPS Proposal?
| APMU Wins |
UPS Loses & USPS Loses |
Current markup index: 1.20 Postal Service proposal: 1.08 markup index (1.00 = systemwide average) (Exhibit USPS-32B) APMU proposal: 1.00 markup index (APMU-T-1, p. 64) PRC recommended rates: 1.05 markup index (para. 5316) PRC: "a recommended level of coverage slightly above systemwide average is responsive to §§ 3622(b)(4) and (b)(5) concerns generally." Op. & Rec. Dec., para. 5317. |
5: Should the Maximum Weight of First-Class Mail be Reduced from 13 to 11 oz.?
| APMU Loses (Issue mooted) |
USPS Wins (Issue mooted) |
PRC: "witness Haldi's proposal to roll back the First- Class/Priority breakpoint to 11 ounces is a rational adjunct to his other recommendations. However, at the rate levels the Commission recommends for First-Class mail, it is unnecessary to lower the 'floor' for the ... Priority Mail rate from the current 13-ounce breakpoint." Op. |
6: Institute a Discount for Priority Mail Carrying Other Classes of Mailpieces to SCFs?
| APMU Victory Deferred |
USPS Wins for now |
PRC: "While the Commission commends witness Haldi for focusing attention on this type of Priority Mail, his discount proposal lacks sufficient support to warrant recommendation at this time. However, the Commission strongly encourages the Postal Service to investigate the bases of such a discount...." Op. & Rec. Dec., para. 5338. |
Operation of PMPC Network Reverts to Postal Service
The Postal Service and CNF, Inc.'s Emery Worldwide Airlines are terminating the contract to operate 10 PMPCs in the Northeast and Florida. Emery will turn over control of the PMPCs on January 7, but continue providing aircraft to transport Priority Mail for up to nine months.
The PMPC contract has been extremely expensive, and is responsible for jacking up unit costs significantly. A recent court decision required the Postal Service to pay Emery an additional $102 million in October, and Emery claims that it still is owed $150 million on account of underpayments. Ironically, while the Postal Service was paying far more than ever to process Priority Mail through the PMPC network, CNF claims that it has been losing money on the contract. Termination of the ill-fated PMPC contract ends the bold experiment in contracting out and puts this particular "disaster" behind the Postal Service. Looking ahead, an immediate question is whether the Postal Service can maintain service during the transition. Longer term, the issues are whether the Postal Service can (1) reduce unit costs, and (2) restore service quality where it was systematically degraded; for example, to those customers who formerly plant-loaded Priority Mail direct to the nearest airport but were forced to divert it through the PMPC network.
Postal Service to Expand MBE Pilot Program
In February of 2001 the Postal Service will almost quadruple its existing pilot program with Mail Boxes Etc. ("MBE"). Some 700 MBE locations will be added in metropolitan areas of the Southeast and the Southwest. They will offer Priority Mail plus other Postal Service products such as certified mail, Express Mail, and stamps. The USPS-MBE pilot program, begun in the fall of 1998, currently applies to 250 MBE franchises in and around Boston, Chicago, Denver, Detroit, Honolulu, Houston, Los Angeles, New York, Orlando, San Francisco and Washington, DC. An important goal of the pilot program is to improve convenience and access for customers, especially individual customers. By mutual agreement, the pilot program is intended to last three years.
GAO Faults USPS Performance Reporting
The Postal Service needs to improve its reporting under the Government Performance and Results Act, according to the General Accounting Office. Under the 1993 Act, agencies first submit performance plans that detail their goals, and then report back to Congress on how well they did. The GAO report, Enhancements Needed in Performance Planning and Reporting, dealt with the Postal Service's FY 1999 performance report and its FY 2001 performance plan. With respect to reporting of performance in FY 1999, the GAO stated that
some aspects of the Service's fiscal year 1999 performance report could be misleading. For example, the Service's highlighted results for timely delivery of First-Class Mail cold lead readers to mistakenly conclude that for fiscal year 1999, the Service exceeded its on-time delivery targets for both overnight and 2- and 3-day deliveries. For fiscal year 1999, the Service met, but did not exceed, its goal for on-time overnight deliveries of first-Class Mail and fell a little short of its goal for 2- and 3-day deliveries.... The report could also mislead readers into concluding that the Service's Total Factor Productivity ["TFP"] increased during fiscal year 1999 due to the report's portrayal of negative postal productivity as a strongly positive result. (Emphasis added.)
Talk about spin control. The plan called for TFP to decline by 0.4 percent, and the Postal Service tried to make a big deal out of the fact that it declined by only 0.3 percent. Priority Mail was not explicitly mentioned in the GAO report because the Postal Service publishes neither plans nor actual performance for Priority Mail.
Requiem for H.R. 22
The House Committee on Government Reform took no action on H.R. 22, The Postal Reform and Modernization Act, during the last Congress. Congressman McHugh (R, NY) has served three terms as chairman of the House Postal Service Subcommittee, and under current House rules he cannot succeed to a fourth term. Thus the next Congress will bring a new chairman, unless the subcommittee is eliminated.
At the risk of jumping the gun, perhaps it is time to begin the post mortems. It is easy to fixate on those provisions in H.R. 22 that are known to have stirred opposition. For example, labor views price caps as wage caps, and opposes that provision, while UPS opposes freeing the Postal Service to compete so long as it remains a government protected monopoly. At some point, however, attention should focus on what H.R. 22 didn't do. For example, it did not remove or relax such Congressionally imposed prohibitions as (i) closing uneconomic post offices or (ii) tendering for the lowest cost air transportation in Alaska, even though such provisions cost ratepayers untold hundreds of millions of dollars each year. In other words, Congress did not view the Postal Service to be in such need of reform that it was willing to put any of its own "goodies" on the table. Similarly, the deep-rooted labor-management relations problems that for years have plagued the Service, its unions and management associations were not addressed, even though the GAO calls it a high priority issue. The list could go on. The point is, a real crisis situation must probably develop before Congress will allow many of the pertinent issues to be put on the table and craft a truly comprehensive reform bill.
2001 Calendar
APMU Meetings (tentative)
January 29 -- Washington, DC; March 26 -- Orlando, FL (NPF Breakfast & Briefing);
April 30 -- Washington, DC; July 30 -- Washington, DC;
October 16 -- Denver, CO (NPF Breakfast & Briefing); November 5 -- Washington, DC