Vol. VIII, No. 2 March-April 2001


R2000-1 Rate Case Back in Governors’ Lap


On March 5, 2001, the Governors rejected and sent back to the Postal Rate Commission its (second) Opinion and Recommended Decision upon Reconsideration in the recent rate case (Docket No. R2000-1). The Governors are seeking an additional $900 million in revenue. Subsequently, on April 10, the Commission sent the Governors its (third) Opinion and Recommendation upon Further Reconsideration. The Commission, finding that the record fully justified its original recommendation, did not propose any further increase in rates.

At their May meeting, the Governors are expected to decide what further action, if any, to take with respect to the rates established as a result of Docket No. R2000-1. Because the Governors rejected the Commission’s previous Opinion and Recommendation, under the law they can impose higher rates unilaterally if they unanimously agree that such rates are needed.

Some predict that the Governors will be inclined to use the "anarchy clause" (39 U.S.C. §3625(d)) to unilaterally increase rates. This power has only been used once before — 20 years ago. Others think the recent hearings before the House Committee on Government Reform may have awakened the Governors to the fact that they are being watched very closely by Congress, as well as the entire mailing community.


No Notice Required for Rate Increases?


The possibility of the Governors using the anarchy clause raises questions about what kind of notice, if any, the Postal Service would have to give to mailers before the rates would take effect. Amazingly, it appears that the Postal Reorganization Act is completely silent in terms of a minimum notice requirement to the mailing public for increasing rates.

There are provisions in the Postal Reorganization Act which require specific notice to mailers in the case of temporary rates (39 U.S.C. §3641) and nonprofit rates (39 U.S.C. §3642), but no statutory notice requirement seems to exist with respect to other increased postage rates. No matter what would be possible legally, however, observers feel that, in view of the needs of the mailing community, it is unlikely that there would be less than 30 days’ notice prior to implementing any such unilateral rate increase.


Priority Mail Volume Declines Following Massive Rate Hike


Following the 16 percent rate hike that took effect on January 7th of this year, in Postal Quarter 2 Priority Mail volume declined 4.6 percent versus the same quarter of last year, according to the official USPS Revenue, Pieces Weight ("RPW") Report. PQ 2 covered the 12- week period from December 2nd through Feb 23rd, hence the higher rates were in effect for only 8 weeks of the quarter.


Postal Service Finances in Deficit; Rate Case Looms


At the end of Accounting Period 7 (ended March 23rd), the Postal Service had an accumulated deficit of about $290 million, versus a planned net income of $291 million. In other words, its actual loss to date exhibits a shortfall of some $580 million versus plan, despite the higher rates that took effect last January. The CFO, Richard Strasser, is projecting that during this fiscal year the Postal Service could incur a loss as high as $3 billion, because the Postal Service traditionally runs large deficits during the last four accounting periods of the fiscal year.

Total mail volume is actually up 2 percent from last year, and is running ahead of the volume on which the budget is based. Nevertheless, while the volume of low margin mail is up, the volume of mail with high profit margins, such as Priority Mail, is down (see preceding article). The Postal Service appears to be nearing the point where further rate increases become counterproductive. This may be why the Governors are exploring other options, such as elimination of Saturday delivery.

The continuing red ink, coupled with the Postal Service’s inability to increase productivity and reduce costs, means that (i) the outlook for FY 2002 and FY 2003 is grim indeed, and (ii) the next rate case is likely to be filed sooner rather than later. The Postal Service is expected to seek $6 to $8 billion in additional revenue, and plans to have its filing for the next rate case ready by July. After that, it will be up to the Board of Governors to determine when the case will actually be filed. Some mailer groups are trying to have the filing put off until January 2002, but that presents a number of problems. First, without higher rates or a change in the law, the Service may exhaust its borrowing authority some time next year. Second, a filing in January could entail using FY 2000 as the "initial" Base Year, and then updating it to FY 2001 as the case proceeds (as occurred in Docket No. R2000-1).


Postal Reform Moving Back to Center Stage


On March 2, 2001, the Governors of the Postal Service wrote similar letters to President Bush and Rep. John McHugh (R-NY) requesting their help to enact some kind of postal reform legislation. Significantly, the Governors broadened the scope of debate about reform by putting new issues on the table, including the vital issue of cost control. For the first time, the Governors called attention to the compulsory arbitration requirement in the current law, stating that it militates against a negotiated settlement and puts some 80 percent of the Postal Service’s costs in the hands of a third-party arbitrator. Separately, the Governors also announced that they were instructing the Postal Service to study the cost reduction that could be achieved by eliminating Saturday delivery.

On April 4, the House Committee on Government Reform, chaired by Rep. Dan Burton (R-IN), conducted its first oversight hearing regarding the Postal Service. The lead witness, Comptroller General David Walker, called attention to the Postal Service’s failure to increase productivity and capture more of the potential savings from its automation program. "We believe," he said, "that the Service’s deteriorating financial situation calls for prompt, aggressive action, particularly in the areas of cutting costs and improving productivity." (emphasis added) He further stated that, because of such problems, the GAO was adding the Postal Service to its high-risk list, which flags troubled government agencies and programs.

It is finally becoming clear to more and more interested parties that what all mailers need is for the Postal Service to increase productivity and reduce its costs. This, and only this, will address the fundamental problem – the "disease," figuratively speaking – that underlies the "symptom" of financial losses. Neither the Postal Service nor mailers can afford rate increases that come ever faster and higher. Nor do mailers need some kind of bogus reform giving the Postal Service greater product as well as pricing "flexibility" that diverts attention from the fundamental problem of low productivity in its core business.

The issue of how to reduce costs, whether it be by eliminating Saturday delivery, closing thousands of small money-losing post offices, or improving productivity and eliminating tens of thousands of jobs, will be contentious, but some such measure may be the only way to achieve the kind of meaningful reform that mailers so desperately need. If the issues prove too contentious for Congress to tackle head-on, then a Presidential or Congressional Commission likely will be needed to study the issue and make recommendations. That, of course, will take years. Meanwhile, the Postal Service’s financial situation is in something of a "mini-crisis" (see preceding article).


Presort Discounts Proposed for Priority Mail


The Postal Service has filed with the Postal Rate Commission a request to establish experimental presort rate categories for Priority Mail. The request was filed on March 7, and the Postal Service has requested an expedited hearing on the matter.

The previous Priority Mail presort discount of 10 cents per piece was discontinued after Docket No. R97-1, largely because the discount was used by so few mailers. Three categories of discounts are proposed, distinguished by depth of sort: ADC (Area Distribution Center), 3-digit and 5-digit. The discounts proposed for the service are 12, 16 and 25 cents per piece for sortation to ADC, 3-digit and 5-digit, respectively.

Under the Postal Service’s new proposal, about 10 mailers will be allowed to participate in the experimental presort program. The Postal Service expects to work closely with participants to observe first-hand any problems and learn how to fashion an effective presort program for Priority Mail.

United Parcel Service ("UPS") has already weighed in with objections, claiming that the proposal is not even entitled to consideration under the special rules governing experimental classification changes. According to UPS, the proposed worksharing discounts are not new or innovative, and the requested duration of the experiment (three years) is longer than necessary for a presort discount proposal. R.R. Donnelley & Sons Company, the only mailer thus far joining the fray, has agreed with the Postal Service that experimental treatment is appropriate and that UPS’ position should be rejected.

APMU has intervened in the case, and currently is monitoring its progress. APMU members having an interest in this experimental case should get in touch with the APMU office at 703-356-6913.


PMPC Delivery Confirmation Scanning Problem


The Postal Service reportedly has discontinued scans of originating Priority Mail at all PMPC sites since January 7, 2001. The causes are said to be operational issues, including processing delays as a result of the scanning. The Postal Service plans to implement a nationwide system for scanning all Delivery Confirmation packages at origin sites by September of this year. No explanation has been offered as to why six months will be required to fix the problem, which arguably should have been anticipated before the delivery confirmation program was launched.

Lack of a scan at origin sites, of course, makes it impossible for customers, or even the Postal Service itself, to check on actual time from inception to final delivery.


USPS/FedEx Contracts In the Spotlight


CNF’s Emery Worldwide Airlines, in a letter to the Board of Governors, claims that the Board was "materially misinformed" by "grossly inadequate data" before approving the FedEx shipping contract in January. According to Emery, costs will be higher and service levels worse than they were under now-canceled contracts between Emery and the Postal Service. As a result, the Office of Inspector General, which reports directly to the Board of Governors, is investigating the $6.3 billion, seven-year, no-bid arrangement with FedEx.

When questioned about the contract at the recent oversight hearing of the House Government Reform Committee, PMG Henderson responded, "Trust me, it’s a terrific deal." He refused, however, to provide any substantive information to back up his position. The claimed cost savings are based on contract details that are being withheld as confidential, proprietary information.

Meanwhile, under a separate, non-exclusive contract, FedEx has begun installing its own drop boxes in 10,000 post offices around the country. Whether these drop boxes will reduce Priority Mail volume remains to be seen.


Calendar of Events


See the APMU Calendar of events at http://www.apmu.org/calendar.html.


The Association of Priority Mail Users, Inc. is a nonprofit organization of Priority Mail users and suppliers to Priority Mail users which seeks to ensure that proper business and financial decisions are made by the United States Postal Service to promote and protect the cost efficiency and quality of service of Priority Mail. For information on APMU programs and membership information, please call 703-356-6913.


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