APMU News March 22, 1994

Postal Service Seeks Rate Increase

On March 8, 1994, at a Press Conference held in the Postal Service's Ben Franklin room, the drama ended. Postmaster-General Marvin Runyon proved that he did have the four votes on the Board that he was rumored to have for his "10.3 percent, across-the-board" rate increase.

As with many other labels in Washington, the name given to this proposal was somewhat misleading. It was a "10.3 percent, across-the-board" rate increase for every class, except for those for whom it wasn't. At least nine subclasses and special services were hit with larger increases: second-class in-county (34.1 percent); third-class single piece mail (39.1 percent); fourth-class parcel post (13.2 percent); fourth-class special rate (13.6 percent); fourth-class library rate (73.7 percent); business reply mail (35.8 percent); basic money order fee (13.3 percent); collect-on-delivery (39.0 percent); and address correction (29.6 percent).

Rate Case Begins

On the afternoon of March 8, the Postal Service filed its rate request with the Postal Rate Commission - including the written testimony of eleven witnesses, and weighing 14.5 pounds. On March 15, 1994, the Postal Rate Commission issued its Notice of the Filing, and set a schedule for consideration by the Commission. The deadline for intervention is April 6, and the Prehearing Conference is April 7. Discovery on the Postal Service's direct case is to be completed by May 10, and hearings with the Postal Service witnesses begin on June 1. Each intervenor files its case-in-chief by June 23, and discovery directed to the intervenors concludes on July 18. Hearings with the intervenors' witnesses begin on August 8. The Postal Service rebuttal case is due on September 7, and hearings on the rebuttal testimony begin September 19. Initial briefs are due October 4, and reply briefs are due October 13. The litigation of the docket concludes with oral argument on October 19, 1994. Since the Commission must render its Opinion and Recommended Decision within ten months, that would be due by January 7, 1995. Rates presumably would be implemented in late January, or early February 1995.

Priority Mail Pays Hefty Markups

Priority Mail currently pays the highest percentage markup of any class of mail. The target markup set in the last rate case (Docket No. R90-1) by the Postal Rate Commission was 89.3 percent. Actual results for FY 92 and FY 93 consistently exceeded the target (see table). In the new rate case, the Postal Service seeks to lock Priority Mail into an even higher markup of 109 percent. It wasn't personal. That's what happens when "across-the-board" justice is applied.

Fiscal Year Revenues ($, mill) Attributable Cost ($, mill) Markup (%)
1992 2,071 1,046 98
1993 2,300 1,161 98
1994e 2,520 1,269 99
1995BRe 2,626 1,362 94
1995ARe 2,799 1,341 109

BR = Before Rate Change; AR = After Rate Change; e = estimated

A Modest Increase; An Astonishing Proposal

Following the lead of Postmaster General Marvin Runyon, the Postal Service has adopted an approach to rate setting that is without precedent in a number of respects.

Postage rates were last increased in February of 1991. New, higher rates are not expected to become effective before January or February of next year (although they could come earlier). This means that the Postal Service would go without a rate hike for an unprecedented four years.

Second, the Postal Service's proposed rate increase amounts to only 10.3 percent for most classes, including Priority Mail. As a result, rates for most mailers will go up by less than the cost of living; this, too, is without precedent. In more than 25 years, this is the smallest proposed percentage increase, and it comes despite substantial losses during FY 92 and FY 93, plus a bleak outlook for FY 94 (see next item), and no sign of any major productivity breakthrough.

Finally, the Postal Service is attempting to negotiate with mailers an agreement and acceptance to the proposed rate increases. Within the context of a general rate case, this initiative by the Postal Service is also without precedent. Before filing the rate case, extensive negotiations have apparently taken place between the Postal Service and various mailer groups. In a request to schedule a settlement conference, the Postal Service expressed a strong belief that many mailers may be willing to stipulate acceptance of the proposed higher rates. At no time, however, has the APMU been consulted, nor is it party to any agreement or understanding, explicit or implicit, with the Postal Service. To the best of our knowledge, no Priority Mail user has agreed to endorse or accept a markup of 109 percent for Priority Mail.

A number of mailer groups publicly campaigned for the 10.3 percent increase, and they appear to be almost euphoric over the outcome. Sam Winters, Chairman of the Board of Governors, and Postmaster General Marvin Runyon described the proposed rate increase as "modest," and part of a businesslike and customer-driven approach.

The Postal Service's Bleak Outlook for Fiscal 1994

How does this rate proposal fit into the overall financial picture of the Postal Service? The Postal Service projects a net loss of $1.3 billion during the current fiscal year, FY 94. However, after five accounting periods (the Postal Service divides the year into thirteen four-week accounting periods), including the Christmas season, the Postal Service's cumulative loss is significantly worse than planned. The Postal Service reportedly showed no improvement in accounting period six. Unless the Postal Service can effect a substantial turnaround within the few remaining months of this fiscal year, it will likely report a loss in excess of $2.0 billion. Such a loss would portend an ominous outlook for future rates (see next item).

What If The Postal Service Can't Pay Its Bills?

Unfortunately, mailers' euphoria may be short-lived. Looking beyond the rhetoric, the hard questions that mailers should be asking include:

Is the Postal Service really sharing a "productivity dividend" with mailers? Or are the Governors and the PMG borrowing against the future just so mailers can feel good for another year or two?
Can the proposed rates last for 24 to 36 months, and then be followed by another modest increase below the cost of living, or will the Service be forced to seek further increases immediately after this rate case concludes?

A hard look at numbers supplied by the Postal Service indicates that mailers could be in for a rude surprise, and perhaps much sooner than they think. The Postal Service says rates would increase in January or February 1995. Therefore, during FY 95, which starts October 1, 1994 and is the Test Year in this rate case, the "Before Rates" scenario will be in effect for approximately four months, and the "After Rates" scenario will be in effect for approximately eight months. Using the Postal Service's own projections, it expects to show only a small surplus of around $416 million in FY 95. Here's a closer look at this unpublicized bit of reality.

Projected Revenues in FY 95 (millions of dollars):
Before rates 50,455 x 1/3 = 16,818
After rates 54,569 x 2/3 = 36,380
Total Revenues 53,198

Accrued Costs in FY 95 (millions of dollars):
Before rates 53,180 x 1/3 = 17,727
After rates 52,582 x 2/3 = 35,055
Total Costs 52,782
Net Profit 416

More often than not, the Postal Service's projections have turned out to be optimistic. Should that again turn out to be the case, FY 95 could actually end at break-even, or with a modest loss (on top of a loss in FY 94), and FY 96 will have a projected deficit of several billion dollars. To avoid this painful outcome, the Postal Service must soon achieve substantial productivity gains from its automation program - or, to accomplish the improbable, it must negotiate some "givebacks" from the powerful postal unions. Otherwise, to stem the red ink, the Postal Service could need another significant rate increase as early as January or February of 1996 - only one year after the pending increase takes effect. This would require a filing for another rate increase in January or February of 1995, the same time that the currently proposed rates would go into effect. As these cases cost millions to litigate, mailers may get an unwelcome surprise from this modest rate increase. That, too, would have no precedent.

Analysis: The Not So Hidden Agenda

Historically, the Board of Governors has favored longer periods of rate stability, with three years being the general target. Have the Governors changed their long-standing policy? Why do the Governors seem willing to risk the Postal Service's financial integrity?

The answer to the preceding question is reclassification, which is being widely touted as a panacea for the Postal Service's problems. Although the Postal Service filing makes no mention whatsoever of reclassification, it is no secret that part of the Service is hard at work on major reclassification proposals. Priority Mail is not expected to be part of the reclassification case, but major changes are being contemplated for second, third and fourth class mail. Major mailers expect to see their postage fees and costs reduced, while all others can expect to incur offsetting rate increases. For each affected class as a whole, the proposals would be "revenue neutral." The Postal Service would like to file the "mother of all reclassification cases" by this September. Getting the new rate case out of the way with a settlement would help conserve resources and facilitate the reclassification effort. This is a major reason why the Postal Service has taken such an unprecedented approach in its rate filing. One result of a settlement, however, could be increased rates going into effect by September 1994 - four to five months ahead of schedule. The Postal Service's filing seems to assume a rate increase date of September 1994, not January/February 1995, despite public statements by Postal Service officials.

Priority Mail users see themselves as getting the short end of the stick from the rate case. In addition to being stuck with an unprecedented high markup, a number of other important issues are also being swept under the table. These include: poor delivery performance, the high cost of the Eagle network, lack of any kind of delivery guarantee or track and trace capability, plus problems of cost attribution and rate design. If this were not enough, there will be another rate case to fight just as soon as this one is over.