Today, the Alliance of Nonprofit Mailers filed comments with the Postal Regulatory Commission urging the regulator to reject the rate increases proposed by the Postal Service for Market Dominant Mail in July:
The Commission cannot continue to allow the Postal Service to ignore a promised pricing strategy of prudence and judiciousness. The USPS has been permitted to implement a series of large, frequent, and compounding rate hikes since 2021, and the results of that approach are plain for all to see: plummeting volumes, reduced revenues, and the USPS lagging behind the goals of its ten-year plan. If the Postal Service will not demonstrate business acumen by exercising pricing restraint, then the Commission – as regulator – must force the Postal Service’s hand. The Alliance strongly encourages the Commission to reject the proposed July 9, 2023 rate adjustments.
While the PRC has no record of overturning or significantly changing USPS rate hikes since the 2006 Postal Accountability and Enhancement Act, the Alliance believes it must speak up and ask the regulator to step in during these unprecedented developments at USPS. Read our 8-page comments here.
Never before have rate hikes caused such large drops in volume that resulting revenue declined. USPS pricing has a long history of very low own-price elasticity, meaning that mail volume has not reacted much to rate increases. Normally, price increases result in small volume declines and large net increments in USPS revenue.
The unprecedented size and frequency of USPS rate hikes in 2021-2023 have completely changed the game for USPS. The agency is getting no bump in revenue at all—it is actually declining. If USPS management and Postal Service Governors are not able to reverse the downward price-volume spiral, it is incumbent on the regulator to do so.
Unlike most past postal rate increases, USPS has no near-term need for more cash. The agency continues to hold about $20 billion in operating cash which is well more than it will spend down in a year or more. Indeed, USPS just announced another delay in one of its largest capital spending initiatives, new vehicles.
It seems like an obvious decision to staunch the massive decline in mail volume by banking rate authority for future use when inflation has subsided and CPI-based new rate authority is much lower. Today’s CPI release for April showed the tenth monthly decline in a row to a 4.9% annual rate.
Perhaps the incentive that the PRC built into USPS pricing called the “mail density” add-on is at work. When mail volume declines in one year, and mail delivery points continue to increase, USPS is allowed to raise rates more the following year. The complicated formula concocted by the regulator yields a roughly 45% incentive for USPS. For example, if volume declines by 10% in year one, the Postal Service can add 4.5% to the following year’s rate hikes.
If it is any consolation, the USPS rate increases planned for January 2024 will be based on six months of CPI alone. The CPI cap should be no more than 2-3%.
The speakers at the USPS Board of Governors meeting yesterday were mostly very subdued, reading their staff-prepared scripts without enthusiasm. Postmaster General Louis DeJoy alluded to the USPS not reaching its goals in his remarks:
The second quarter USPS financial results were very troubling:
Second quarter of FY 2023 (Jan-March 2023):
Loss ($2.5 billion)
Lost revenue -2.4%
Total operating expenses +7.6%
Lost First-Class Mail volume -8.1%
Lost Marketing Mail volume -11.0%
Lost Periodicals volume -8.3%
Lost Packages volume -5.0%
Chief Financial Officer Joseph Corbett put the USPS failure to perform this way:
“We continue to be challenged by declining mail volumes and rising operating costs due to inflation,” said Chief Financial Officer Joseph Corbett. “We are managing the costs within our control, such as reducing work hours by 7 million hours compared to the same quarter last year. However, price increases are necessary to try to offset declining mail volumes and inflation. Despite these increases, our prices remain among the most affordable in the world.”
USPS remains in the mode of “price increases are necessary to try to offset declining mail volumes” instead of understanding the somewhat obvious point that price increases are causing declining mail volumes.
Operating revenue was down 0.7% in the first six months of the fiscal year, so the second quarter represents an acceleration in lost revenue at -2.4%.
Reducing workhours by 7 million in three months and 15 million in six is probably not the holistic solution to out-of-control operating costs. The other part of the equation is the cost per workhour which has been escalating with the passthrough of inflation by cost-of-living allowances in the labor contracts negotiated and signed by USPS management.
USPS described the workhour reductions as reflective of lower volumes:
For the three months ended March 31, 2023, total work hours were 284 million, a decrease of 7 million hours, or 2.4%, compared to the same period last year, consisting of a decrease of 9 million overtime hours, partially offset by an increase of 2 million straight-time hours. This net decrease is reflective of the overall lower volumes experienced for the three months ended March 31, 2023, compared to the same period last year.
For the six months ended March 31, 2023, total work hours were 589 million, a decrease of 15 million hours, or 2.5%, compared to the same period last year, consisting of a decrease of 12 million overtime hours and 3 million straight-time hours. These decreases are reflective of the overall lower volumes experienced for the six months ended March 31, 2023, compared to the same period last year.
Two years ago, USPS projected breakeven this year. Four months ago, the agency revised that to a loss of $4.5 billion. At the current trajectory, we could be looking at a loss approaching $6 billion.
Many mailers and others have been wondering when the USPS regulator would perform any kind of oversight regarding the Postal Service Delivering for America plan that is well underway. This is especially true given the fact that the main justification for punitive rate increases has been that Postmaster General Louis DeJoy needs the cash to pay for his grand scheme to remake USPS sorting and delivery operations.
Further, Mr. DeJoy has threatened mailers who do not fully support every aspect of his plan. This is despite the lack of transparency about what actually is in the plan. Stakeholders have been forced to rely on the producer of a website called savethepostoffice.com to try to stay up to date on the Postal Service’s actions which it is revealing only when its labor contracts require information.
On April 20, two years into the plan, the PRC finally issued an order setting up a “public inquiry” to garner information about what the USPS is doing and plans to do. A mailer association, PostCom, quickly responded to the PRC request for suggestions about what information it should require. The list of questions is a great start:
b. Facility type.
c. Planned date of activation.
d. Planned date of completion.
e. Impacted existing facilities.
f. 3-Digit zip codes served.
a. Please identify the specific cost saving initiatives included in this $34 billion projection.
b. For each identified initiative, please provide any analysis or study prepared identifying the cost savings associated with that initiative.
c. If no such studies or analyses exist, please identify the basis for the projection of $34 billion in aggregate cost improvements.
a. Please identify the metrics associated with each initiative identified in response to Question 2.a.
b. Please provide any information, including from the enterprise dashboard referenced on Page 5 of the referenced OIG Report, indicating the progress of initiatives that have been implemented, in whole or in part, against the identified metrics.
a. Please provide the volume and revenue forecasts, by product, used to develop the projections contained in Appendix A.
b. Please identify the assumptions regarding timing and magnitude of price increases underlying these projections.
i. At page 46 of the DFA (Appendix A), USPS states that its revenue “estimates incorporate volume losses, due to increased prices based on estimated price elasticities.” Do these revenue estimates incorporate revenue associated with density rate authority resulting from these volume losses?
1. If so, please provide any estimates of density rate authority the Postal Service used when developing its revenue estimates.
a. Please provide any volume and revenue forecasts, by product, the Postal Service relied on in identifying, analyzing, or evaluating the purchases identified in response to Question 6.
b. Please provide any updates to the forecasts provide in response to Question 6.a. that have been performed since the forecasts were used to identify, analyze, or evaluate the purchases identified in response to question 6.
PostCom requests that the Commission or Presiding Officer require that: (1) the requested information be produced publicly, to the extent consistent with law and Commission policy; (2) information generated by spreadsheets be produced in Microsoft Excel or other spreadsheet files; and (3) any formulas embedded in the spreadsheets should be preserved.
As the Postal Service is using our money to fund its plan, and it says anything less than unqualified support for the plan will delay and increase the cost of its implementation, then it should be fully transparent with its stakeholders.
Unfortunately, the Postal Service reacted angrily and is clearing laying the groundwork for a legal challenge in the D.C. Circuit Court. In an unusual move, the General Counsel and Executive Vice President Thomas Marshall signed the motion to quash the inquiry along with six of his staff attorneys. The 33-page Motion for Reconsideration threw multiple legal arguments at the PRC attempt to engender transparency and accountability:
A. The Commission Lacks Statutory Authority to Open this Docket
B. The Commission Does Not Have Authority to Conduct Review into Pre- Decisional Initiatives Contained Within the Plan
C. Inquiry into Specific Initiatives Within the Plan Are Properly Resolved Through Other Available Procedures
If the PRC grants the USPS motion to shut down the public inquiry, there will be no public view inside the plan being funded with the private sector’s money. If the PRC denies the motion, USPS likely will take the issue to court causing a long delay that will have the same effect of quashing transparency. The Postal Service is happy to use its unlimited access to mailers’ money to achieve its legal goals.