Alliance Report — December 11, 2023

The holiday season delivers a ray of hope to mailers

In case you missed our Alliance Alert on the day before Thanksgiving, there is some good news for USPS mailers. The Postal Regulatory Commission agreed to review its 2020 pricing rules two years ahead of schedule. These are the rules that allow the United States Postal Service to add extra amounts above inflation to its market-dominant mail rate increases.

The PRC issues order on January rate hikes

The day before Thanksgiving, the Postal Regulatory Commission issued Order 6814.  Unsurprisingly, in that Order, the Commission approved the Postal Service’s proposed price changes that will become effective on January 21, 2024.

More surprisingly, the Commission announced its intention to initiate a proceeding in the near term that explores the concerns raised by the Alliance and other associations about the frequency and magnitude of market-dominant rate increases under the rate regulations adopted after the ten-year review proceeding (RM2017-3).

The PRC’s willingness to review its ratemaking system two years ahead of schedule owes, at least in part, to the work of the Alliance and its board members who relentlessly demonstrated that the USPS’s pricing strategy is failing and is harming both mailers and the Postal Service. That is something to be thankful for.

During the RM2017-3 review of its market-dominant ratemaking system, the Commission proposed taking a look at the effects of the final changes to its regulations five years after the date those final rules went into effect. The Commission issued the revised regulations on November 30, 2020, published them in the Federal Register on December 15, 2020, and they became effective 30 days later on January 14, 2021.  Thus, mailers could expect the 5-year review to commence on or around January 14, 2026.

Some commenters had advocated for a shorter review period, with the Public Representative championing a 3-year review period to “allow the Commission to act more quickly in the event of deleterious effects to Postal Service stakeholders.” The PRC nonetheless had preliminarily determined that a 5-year review period was “optimal,” and it doubled down on that determination in its final Order.

The Commission was concerned that a 3-year review period “would only show the effects of two rate cycles,” and held that a “thorough and insightful review must provide more than two rate cycles as data points to assess the impact of the changes to the Market Dominant ratemaking system.” Of course, the Postal Service’s decision to impose two rate increases per year, rather than only one, undermined the PRC’s concern.

The Alliance had pressed the PRC to review the pricing rules sooner

The Commission retained the discretion to review aspects of the new rate system in less than five years, and the Alliance has pushed for the PRC to do so when appropriate.

In April 2022, shortly after the enactment of the Postal Service Reform Act, the Alliance and PostCom jointly petitioned the Commission to open a rulemaking revisiting the regulations put in place by Docket No. RM2017-3. Those regulations allowing the Postal Service to impose above-inflation rate increases on captive mailers were premised on the perceived need to stabilize the Postal Service’s financial condition and close the revenue-cost gap that had largely been created by the USPS’s retirement health benefits (RHB) plan pre-funding requirements.

The PSRA eliminated the Postal Service’s RHB pre-funding requirement going forward and wiped nearly $50 billion in unpaid RHB pre-funding liabilities from the Postal Service’s balance sheet. This dramatic improvement to the Postal Service’s financial condition merited a fresh look at the new rate system and the necessity of granting the Postal Service enhanced pricing authority, in our view.

Separately, the Alliance began intervening in market-dominant rate cases to advocate that the PRC more assertively regulate the Postal Service and resist the USPS’s pricing strategy of levying maximum-authority price increases twice yearly. In our R2023-2 comments, the Alliance urged the Commission to reject the Postal Service’s proposed July 9, 2023 rate adjustments while pointing to financial results showing that the USPS’s pricing actions were causing lower volumes and revenues.

The Commission refused: it claimed that it has “no legal basis to reject the proposed increases in this proceeding as ANM suggests.” It also demurred on an early review of the rate-making system, reiterating that “it will review the Market Dominant ratemaking system 5 years following the implementation of the system put in place” in RM2017-3, and that petitions for an earlier review remain pending.

In the R2024-1 docket, the Alliance’s comments were more pointed.  We sharply criticized the Postal Service’s Delivering For America pricing strategy, we called out the disingenuousness of the Postal Service’s claims that it was using prudent business judgment, and we cited newer (and more damning) evidence that the rate increases were hurting the USPS’s financial condition. We also pressed the PRC to accelerate its scrutiny of the Postal Service’s actions:

The Commission need not wait until the five-year review, however. While it cannot in this docket adjust the final rules adopted in Nov. 2020, it can certainly evaluate right now, in this docket, whether the Postal Service’s pricing decisions are exacerbating volume declines, whether the Postal Service has been increasing rates too sharply, or whether the Postal Service is exercising business judgment.

The regulator thaws

In its November 22, 2023 Order, the PRC – for the first time in a rate case under the new rules – appeared to thaw. While explaining “that the structure of these types of proceedings do not allow the expansive and detailed review requested by many of the commenters,” the Commission “does recognize stakeholders’ concerns about a wide variety of issues related to the recent Market Dominant rate changes and the potential effects of the regulations adopted in Docket No. RM2017-3.  In recognition of these concerns, the Commission believes further consideration of them is appropriate and intends to open a future Commission proceeding as outlined below.”  (Emphasis added.)

The regulator went on to state that, “[a]t this juncture, the Commission believes further consideration of these issues is warranted. As a result, the Commission intends in the near term to initiate an appropriate proceeding pursuant to 39 U.S.C. § 3622(d)(3) to explore such issues.”

The PRC has not yet indicated precisely when it will initiate a review of the rate-making rules. But it cited the Alliance’s comments extensively in its recent Order (far more extensively than it did other associations’ comments), and it seems likely that the Alliance’s advocacy on this point helped to move the needle. We will undoubtedly participate in the review proceeding when it opens.

Alliance urges no extra rate authority for making goals

In a separate but related proceeding, the Alliance for a second time urged the PRC to not add even more rate authority as a reward for the Postal Service making its performance goals. A businesslike enterprise already has a built-in reward for performance – it is called ‘net income’ which USPS is allowed to make, retain, and reinvest.

Stakeholders in this proceeding, in which the Commission seeks input on additional regulations that may be necessary to achieve objectives such as “maximizing incentives to increase efficiency and reduce costs, maintaining high-quality service standards, and assuring financial stability,” submitted their initial comments on September 15, 2023. The Alliance joined with PostCom to advocate for restoring the CPI price cap and for limiting the availability of rate authority when the Postal Service fails to meet service standards.

The Postal Service’s initial comments claimed that “the most sensible and straightforward solution is for the Commission to refrain from exploring any further changes to the ratemaking system until a holistic evaluation can be conducted during the scheduled five-year review.”

We and PostCom submitted reply comments on October 16, 2023, reiterating that “the Commission should bear in mind the key principles outlined above and in the Mailers’ initial comments: that the price cap itself incentivizes efficient operations, that providing additional rate authority for efficiency improvements is unnecessary and counterproductive, and that there is a need for enforcement of service performance that is lacking in the current regulations.”

The Postal Service’s reply comments once again urged the Commission to refrain from examining the current ratemaking system in any form or fashion (including any potential changes through a performance incentive mechanism) until the five-year review. The Commission, though, signaled in the R2024-1 docket that it does intend to initiate a review of the ratemaking system before the five-year review. We will monitor the scope of that review and assess the relationship between it and the PIM docket.

First-Class Mail service is not living up to its name

Some nonprofit mailers are noting that First-Class Mail service is not up to standard.

SnailWorks in its latest report shows FCM letters at 85.3% on time for the week, 80.8% for November, and 89.5% year-to-date, all well below the USPS goal of 95%. FCM flats are truly in the tank: 66.8% on time for the week, 65% for the month, and 72.7% for the year.

On the other hand, Marketing Mail is doing very well: letters are 98%, 96.5%, and 96.9%. MM flats are doing pretty well too: 90.5%, 94.2%, and 92.7%. Despite better service, MM volume is falling quite a bit faster than FCM.

Why the big difference? More FCM travels through the USPS network, while most MM is drop-shipped by private sector mail service providers directly into the USPS system close to the destination.

Government Executive reported that USPS blames temporary issues for the FCM slowdown:

Albert Ruiz, a Postal Service spokesperson, pointed to two specific incidents that have exacerbated delays: the agency insourced several Surface Transfer Centers—buildings that serve as staging areas where mail gets dropped off before it gets rerouted elsewhere—previously managed by third parties and a two-week shutdown of a facility in St. Louis after an illegally shipped package caused a mercury spill at the plant.

Ongoing supply chain issues have added volume to the postal system, Ruiz said, also contributing to delays. He added DeJoy’s 10-year Delivery for America plan to restructure the Postal Service, including through modernizing facilities, building new facilities, adding new processing machines and improving the transportation network, could lead to some issues in meeting the slowed down standards. 

“Our aim is to keep any temporary disruptions to service resulting from these changes to a minimum,” Ruiz said. “When there are service impacts, we respond rapidly to resolve those issues.”

Media reports have cited several other possible reasons for FCM delays:

  • Ongoing USPS staffing shortages in certain locations.
  • Prioritization of Amazon packages over mail in rural areas that have taken on new package volume from the giant online retailer.
  • New “milk run” procedures in which outgoing mail is left overnight at post offices to save a trip by USPS trucks.
  • The new configuration of USPS sorting facilities.
  • Delays in handing over Business Reply Mail to the mailer, which might not be reflected in the service numbers.

Whatever the reasons, one thing is for sure: mailers are getting much worse service for much higher prices.

Alliance board members meet with PRC

Eight of your Alliance board members, some of the largest nonprofit mailers in the land, along with your executive director and general counsel, had a very productive discussion with the five Postal Regulatory Commissioners and their senior staff on December 6. The PRC described the meeting in the following notice on the agency’s home page.

Postal Regulatory Alliance of Nonprofit Mailers

Washington, DC – Representatives of the Postal Regulatory Commission and the Alliance of Nonprofit Mailers met on December 6, 2023, to share information of interest concerning the operations of both organizations.

This session was limited to the sharing of information for the purpose of familiarizing each entity with the operations of the other organization, such as reporting on the status of major initiatives. Pending (or anticipated) postal matters before the Commission were not discussed, nor did deliberations or decisional matters take place during this session.