Alliance responds to unusual USPS reply comments in 60% case

October 3, 2017

This is “Periodic Reporting Proposal 8.” The Postal Service has had a much easier time getting its way in the previous proposals.  For example, predecessors have generated only a few documents: Proposal 4: 20 documents; Proposal 5: 15 documents; Proposal 6: 33 documents; and Proposal 7: 12 documents. Proposal 8 has attracted a whopping 128 documents filed, which is even more that the 10-year rate review which has attracted 119 documents (although many more pages).

In reaction to the perhaps unexpected overwhelming opposition to a periodic reporting proposal, USPS on September 26 filed 16 pages of “Reply Comments…Regarding Proposal Eight” even though the PRC did not plan to have a round of rebuttals. The Postal Service has obviously devoted substantial resources to developing the proposal, and persists in advocating it despite widespread opposition to it from the Postal Service’s nonprofit customers, and only isolated support from the Postal Service’s commercial customers.

So, the Alliance was forced to respond to the USPS reply comments. The 16 USPS pages merely underscore the lack of any good reason to abandon the interpretation of the law that the Postal Service persuaded the Commission to adopt in R2008-1, and which the Postal Service and the PRC have consistently applied since then. 

Our comments document that every year since the USPS originally made the case to use the full Standard Mail (now Marketing Mail) class to calculate compliance with the law, both the USPS and the PRC reaffirmed their support.

Perhaps the most interesting example occurred in the 2009 Annual Compliance Determination. Val-Pak intervened to make the case (that USPS is making now) to change compliance back to the subclass level. This would have lowered some of the rates ValPak pays, at the expense of nonprofit mailers. But the Postal Service came to the vehement defense of the current system. Here we quote the USPS at length:

Valpak’s comments also raise the issue of how the nonprofit / commercial unit revenue ratio of section 3626(a)(6) is calculated. Valpak Comments at 55-58.  While Valpak is careful to point out that it is not taking a position on this issue, it does “recalculate” nonprofit / commercial ratios at the product level, as opposed to the class level.  Valpak’s reason for doing so is to make the narrow point that a product-level application of section 3626(a)(6) would increase the calculated cost coverage for the High/Density and Saturation products.

The proper calculation of this ratio was first addressed in Docket No. R2008-1.  In that case, the Postal Service expressed its view that the appropriate successor to the “subclasses” mentioned in the statute should be the Standard Mail class as a whole.  The Commission accepted this interpretation as being consistent with the law, both in its review of the Postal Services’ new prices, and later in the FY 2007 ACD.  See Order No. 66 at 32; FY 2007 Annual Compliance Determination at 87-88.

Valpak’s discussion of this issue, simply to make its narrow point concerning the cost coverage for the products it is interested in, should not entice the Commission to reconsider its acceptance of the class-level approach.  A review of section 3626(a)(6) shows that it was not updated when the PAEA was passed: it not only uses the term “subclasses,” which has been replaced in the new regulatory structure with the “products,” but also refers to the “factors” of section 3622(b), whereas that section lays out “objectives” (the “factors” are set forth in section 3622(c)).  Thus, the question becomes how to apply this language to the new pricing structure, in a way that best effectuates the purposes of that provision, in light of the new regulatory principles.  While calculating the ratio at the product level may help Valpak to make its point, it could constitute bad business policy in the long run.

For instance, whereas the creation of new subclasses was a rare event during the PRA regime, encompassing as they did relatively large groupings of mail, the creation of new products may be less rare.  For example, new Standard Mail products may be added, in order to recognize important market segments, such as through niche classifications.  Applying the ratio to smaller and smaller groupings of mail would rob the Postal Service of needed pricing flexibility and potentially lead to highly undesirable outcomes.  Consider a niche product that consists of a group of mail with a low cost coverage (though not necessarily a low unit contribution). In such a circumstance, section 3626(a)(6), if applied at the product level, could require the Postal Service to set nonprofit prices at economically unwise levels.  This situation could also occur within the context of the current product makeup of Standard Mail.  For instance, the FY 2008 ACR shows that the Parcels / NFMs product currently does not cover its costs. Were subsequent price increases to raise this cost coverage to, say, 125 percent, interpreting section 3626(a)(6) as requiring that nonprofit Parcels / NFMs have an average revenue that could not exceed 60 percent of commercial Parcels / NFMs would almost certainly guarantee that most, if not all, nonprofit Parcels / NFMs would fail to cover their costs, which is not consistent with the Postal Service’s business interest in having its costs covered.  Clearly, it is superior to interpret section 3626(a)(6) in a way that precludes such an outcome, by applying it at the class level, when such an interpretation fully achieves the purposes of that provision.

USPS reply comments in ACR2008 (Feb. 13, 2009) at 30-32 (emphasis added).

The Postal Service’s reply comments in ACR2009 thus identified three separate grounds for applying the 60 percent ratio at the class average level rather than at a more disaggregated level:  (1) elimination of subclasses for ratemaking by PAEA in 2006 made the prior subclass-level approach anachronistic; (2) applying the 60 percent ratio at the class average level “fully achieves the purposes of” Section 3626(a)(6); and (3) applying the 60 percent ratio at a more disaggregated level could lead to “highly undesirable outcomes.”  The Postal Service has failed to offer any reasoned basis in the current docket for finding that these policies no longer hold.

In its reply comments the Postal Service attorney and the analysts he consulted demonstrated a lack of understanding of nonprofit direct mail fundraising. Here’s what they said:

The Postal Service, of course, is not seeking to unduly minimize the budget consequences for very worthy nonprofit organizations that might, for example, be required to trim the least remunerative names and addresses from their mailing lists, or to reduce the number of mailings sent each year. But such consequences would militate against any increase in nonprofit rates, regardless of the basis, and the intent of the current rate preference scheme was certainly not to lock in nonprofit rates at current levels forever.

It’s the postage increases that are unexpected and above the rate of inflation that have major, damaging impacts on nonprofits that rely on predictable, annual budgets to raise a large portion of their revenue to fund their causes. Yes, Postal Service, there are real consequences. And why spend significant resources to push nonprofit mail volume out of the system?

As we said in our comments, the straw man in this debate is the Postal Service’s attempt to pass off the known effects of the original change in methodology as a later change in circumstances. Indeed, the very existence of Proposal Eight itself underscores the Postal Service’s willingness to take actions that harm nonprofit mailers without “any practical incentive” for doing so.