Continuing to prioritize businesslike profitability over public service is leading USPS and PRC down the wrong path

January 7, 2020

Continuing to prioritize businesslike profitability over public service is leading USPS and PRC down the wrong path

Two federal agencies, the Postal Regulatory Commission and the United States Postal Service, are in violent agreement that it’s OK, even advisable, to raise rates well above general inflation for mailers who must use USPS “market dominant,” or monopoly, mail services to deliver hard copy to America’s homes.  The employees of these agencies justify their actions by giving priority to profitability and financial stability, and citing outdated price elasticity data.

The PRC and USPS are following the lead of the 1970 Postal Reorganization Act (PRA) that attempted to change the 200-year-old agency to a businesslike entity supported exclusively by user fees paid by mailers.  We have written often that this model has proven to not work.

The PRC and USPS believe that, even though their actions will lead to an unknown but significant reduction in the use of USPS mail services, that’s OK because the USPS in the short-run will net higher revenue.  And in their minds, the agency’s revenue from mailers is more important than the impact on the mailers themselves.

Profitability is the main goal of capitalism, but it is incompatible with the original public service purpose of our postal system.  By focusing on profitability first, and public service second, the PRA attempts to fit a square peg in a round hole.

The regulator quickly dismissed the impact of its proposed rate increases on mailers in this brief excerpt from the 484-page November 30 PRC Order 5763, mentioning only four of dozens of nonprofits that wrote, and referencing only one of many uses of mail, fundraising:

Many Postal Service customers state that above-inflation rates would be detrimental to their ability to carry out their respective missions. See, e.g., Feed the Children Comments at 1; CBF at 1; ChimpHaven Comments at 1; HRC Comments at 1. In remarks representative of many of the comments received, the American Kidney Fund states that it “relies on the U.S. mail to raise funds and communicate with [its] supporters and constituents” and goes on to state that its “fundraising budget will not be able to keep pace with the increase in postage costs” resulting from the proposed rules, leading to “a reduction in our use of the mail, a reduction in our revenue, and in turn, a reduction in our ability to serve patients, and will not reform the Postal Service.” AKF Comments at 1. Similarly, the March of Dimes asserts that it “is not able to increase [its] budget to continue to keep pace with postage increases over the next five years” and “[a]ny expense, such as postage, that exceeds our means will result in necessary reductions in our use of mail… [that will] lead to less revenue, limiting our reach and reducing the amount our organization can spend on maternal and infant health programs, advocacy, and research funding.” March of Dimes Comments at 1.

Additionally, the Public Representative urges the Commission to consider the cumulative volume and price impacts of the proposed modifications before adopting them into a final rule. PR Reply Comments at 29.

As a threshold matter, the Commission notes that an analysis of the impact of its proposal as a whole is discussed below in its evaluation of how the modification to the ratemaking system appropriately balances all of the PAEA’s objectives in conjunction with each other. See Chapter XIII., infra. As discussed therein, the Commission has considered how the modifications to the ratemaking system are necessary to achieve the objectives in conjunction with each other, and as they apply to the system as a whole. See id. It has determined that “although some aspects of the final rules may be in tension with particular components of certain objectives…the weight of the balance favors implementation of the final rules.” Section XIII.A., infra.

Accordingly, the Commission has considered the impact of above CPI price increases on mailers as well as the Postal Service and has balanced these considerations with all of the objectives.332 The Commission has determined that additional pricing authority is necessary. It has determined that under the parameters set forth in the final rules, the Postal Service will be able to obtain necessary revenue while minimizing the burden on mailers.

The PRC summarizes the joint goal they have with USPS as netting additional revenue while suppressing volume somewhat but not enough to reduce Postal Service cash flow:

In the Commission’s experience, demand for Market Dominant products has been relatively price inelastic in both the pre-PAEA period and the PAEA period. Accordingly, the decrease in volume induced by the density-based rate authority is expected to be less in proportional terms than the amount of density-based rate authority.

A problem with the belief in postal price inelasticity is that the PRC has no experience with sustained rate increases well above inflation pre- or post-PAEA.  The models have never measured permanent, sustained rate increases above inflation, so how could they predict the impact?  The PRC and USPS also have a weak understanding of postal customer segments and individual organizations that will consider tipping point actions to largely abandon mail. Rear-view mirror elasticity data do not reflect such strategic decisions.

Focusing on “necessary revenue” and outdated elasticity data to force mail out of the system in exchange for extra revenue for the postal agency flies in the face of the policy mandate of the USPS law, Title 39:

The United States Postal Service shall be operated as a basic and fundamental service provided to the people by the Government of the United States, authorized by the Constitution, created by Act of Congress, and supported by the people. The Postal Service shall have as its basic function the obligation to provide postal services to bind the Nation together through the personal, educational, literary, and business correspondence of the people. It shall provide prompt, reliable, and efficient services to patrons in all areas and shall render postal services to all communities. The costs of establishing and maintaining the Postal Service shall not be apportioned to impair the overall value of such service to the people.

In contrast to the misguided PRA choice to have the USPS operate like a profitable business (with a legal monopoly over much of its service), other public service agencies focus on the people they serve as the primary metric of success.  For example, Smithsonian museums, which are 62 percent federally-funded, pursue increasing visitors as a primary goal, much more important than maximizing revenue at the expense of their constituents.  Public transportation agencies focus on ridership, safety, and reliable service over profits.  Our National Parks prioritize access and experience for the general public over profit maximization.

The U.S. Postal Service has three major levers to reach financial stability:

  • better cost control,
  • government funding, and
  • raising rates for mailers.

The USPS cannot control costs as a business would, and the regulator cannot force efficiency and reliable service.  This fact has been documented over and over by the Government Accountability Office, the Office of the Inspector General, and the repeated efforts by a succession of Governors and Postmasters General. The PRA took away government funding.

So, the PRC and USPS have turned to the remaining lever—making captive customers pay much more than they would in a competitive, businesslike situation.  While the folks at the two agencies cite their elasticity numbers as justification, private sector postal customer know that this will end badly if price is the main or only lever pulled.