September 28, 2021
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The United States Postal Service is instituting slower mail standards on October 1. Effective this Friday, the agency will increase the service standards by up to two additional days for 38.5 percent of First-Class Mail and 7 percent of Periodicals mail. The managers of the mail agency say they are doing this to save money and to more reliably achieve their service standards.
The slowdown will be accomplished mostly by moving longer-distance First-Class and Periodicals off commercial aircraft onto tractor-trailers plying our interstates.
Everyone opposes this slowdown.
The postal regulator was powerless to stop the diminution of service. It made a very weak effort to even advise against it. The chairman and vice chairwoman were forced to writing “separate views” that were included at the end of the advisory opinion of the regulatory agency.
Chairman Michael Kubayanda accurately stated:
“The Commission’s Advisory Opinion recognizes problems such as the failure to test and measure temporary operational changes at a small scale before proposing long-term national changes; the failure to properly analyze the impact of changes on vulnerable population and customer segments; and the meager net savings of $169.5 million that the Postal Service proposes to achieve, relative to a cost base of $82.4 billion in FY 2020.1 Overall, the paltry savings, when measured against the damage to universal service, cast a shadow over the entire proposal.”
Yes, you read that right. The projected savings are 2 tenths of one percent of total USPS costs. But the chairman of the regulator can do nothing to stop a dumb decision.
Vice Chairwoman Ashley Poling pointed out that this service degradation is a continuation of a trend that her regulatory agency has witnessed:
“It is important to remember that this particular service cutback is but one in a continuing trend of service reductions in recent postal history, and they are all interconnected in terms of their compounding effect on the level of service the American people have grown to expect over the years. This is the third time in the last decade that the Postal Service has reduced service standards for its Market Dominant products and the second time for First-Class Mail, the Postal Service’s flagship mail product. In 2012 when the Postal Service proposed consolidating processing facilities in its network and eliminating the overnight standard for Single-Piece First-Class Mail (and also slowed a portion of 2-day mail), it promised both cost savings and service improvements. What the American people actually received, however, was permanently reduced service and negligible cost savings. Now, the Postal Service comes before the American people again claiming that it needs to reduce service standards, in part due to an insufficient network to meet its existing service standards—standards it voluntarily established when it last chose to reduce the size of its processing network.”
There appears to be little the chairwoman of the regulator can do to stop the slippery slope of postal service decline.
At the August 6 USPS Board of Governors meeting, Governor Ron Stroman, the one Governor with prior experience at the agency, also condemned the decision to slow the mail, saying in part:
“At this critical moment in America’s history, with our country only beginning to emerge from a global pandemic, struggling with the Delta variant, and with our delivery service below pre-pandemic levels, intentionally slowing First-Class Mail and package delivery changing service standards is strategically ill-conceived, creates dangerous risks that are not justified by the relatively low financial return, and doesn’t meet our responsibility as an essential part of America’s critical infrastructure.”
Two days before that meeting, The Alliance of Nonprofit Mailers joined other mailer associations in a letter to the Chairman of the Board of Governors, Ron Bloom, and his colleagues, saying in part:
“On behalf of the undersigned associations, who collectively account for billions of dollars in postal revenues annually, I am writing to strongly urge that the Board of Governors indefinitely postpone implementation of any changes in the service standards for First-Class Mail.
The Advisory Opinion issued by the Postal Regulatory Commission is clear; the proposed changes will have a minimal effect on the Postal Service’s finances, while exposing millions of postal customers to reduced levels of service that the regulator makes clear are not well understood by the Postal Service. The Commission’s findings echo concerns raised previously by the Inspector General’s office and more than twenty-one attorneys general, who have pointed out that “the proposed changes would have a detrimental impact on residents who rely on the Postal Service to pay bills, receive paychecks and public benefits, and vote….increased delivery times would result in lapsed insurance coverage, difficulty receiving checks, late fees or service cuts, and delayed government payments, among other harms.”.”
The American Postal Workers Union strongly opposed the service slowdown:
“The PRC’s opinion echoes what the APWU has argued since management first introduced their plans to slow down the mail,” said President Mark Dimondstein. “We strongly opposed these proposals and we are heartened that the Commission shared many of our concerns.”
In a September 20 letter to USPS, members of the House Oversight Committee expressed alarm and opposition to the service changes:
“We write today to express our strong concerns with your decision to move forward with service standard changes associated with First-Class Mail and Periodicals. These changes will slow down mail service for millions of Americans and risk further undermining the competitive position of the Postal Service,” the Members wrote in the letter. “On July 20, 2021, the Postal Regulatory Commission (PRC) issued an opinion raising grave doubts about whether these changes will allow the Postal Service to uphold its commitment to providing reliable mail service.”
The Members added, “The Postal Service is not an ordinary business, but an indispensable public service recognized by the Constitution as vital to the American people and to our democracy. As Postmaster General, it is your responsibility to fully consider the impact of your decision to modify service standards before it is implemented.”
The Governors chose to ignore all of the opposition.
It is quite unusual and disturbing that the two top Postal Regulatory Commissioners, a USPS Governor, the associations representing postal customers, the USPS Inspector General, members of the House Oversight Committee, and the postal unions would publicly denounce a major service reduction by the agency, and the Board of Governors would move forward as if no one objected.
Mailers will react by sending less First-Class Mail.
Already many nonprofit mailers are reducing their use of the USPS flagship service. They had been choosing this service over Marketing Mail because it was delivered reliably faster. With the pandemic, much First-Class Mail has slowed down to more closely resemble much-cheaper USPS Marketing Mail.
Now, nonprofit mailers are giving much more consideration to opting out of First-Class when possible because it’s simply not worth the extra postage. That’s because USPS has chosen to institutionalize slower FCM. In addition to switching to Marketing Mail for outbound programs, mailers will step up incentives to use electronic payment options rather than return First-Class Mail for response mail.
At a minimum, nonprofit mailers that rely on direct mail response programs for their fundraising, membership, and subscriptions must now analyze how much to adjust their programs to build in longer response times because of slower response First-Class Mail.
The PRC created an incentive for USPS to accelerate the loss of mail.
The “mail density” incentive created by the Postal Regulatory Commission rewards the monopoly USPS for less mail volume per address by allowing larger rate increases the following year. Indeed, the majority of the 6-9 percent rate increases recently imposed was caused by the 4.5 percent mail density reward by the PRC.
Monopolists prefer higher prices and lower volume. That is why they need to be regulated carefully. As the International Monetary Fund says, “The key outcome of a monopoly is prices and profits that are higher than under perfect competition and supply that is often lower.”
A major economics textbook describes monopoly pricing:
USPS persists as a monopoly only because of government-created barriers to entry, namely statutory monopolies on the carriage of the mail and use of mailboxes.
In the case of the Postal Regulatory Commission, we have the regulator encouraging one of the main problems with monopoly power, higher prices, and less output, rather than regulating to protect customers from abuse of the monopoly.
USPS says it is “judicious.”
Judicious: using or showing judgment as to action or practical expediency; discreet, prudent, or politic; having, exercising, or characterized by good or discriminating judgment; wise, sensible, or well-advised.
The Postal Service is again using the j-word to complement its wisdom in rate-increase decisions. The only guiding principle is getting the most money out of captive mailer customers as quickly and frequently as possible.
No doubt CFO Joe Corbett presented CEO Louis DeJoy scenarios involving annual and semi-annual rate increases. Not surprisingly, DeJoy chose the one that would extract the most money.
Then the agency repeated its self-description as “judicious” in its use of the pricing power granted by the PRC last year. Sorry to tell postal folks but judicious is in the eye of the beholder.
But the September 15 characterization was mainly intended to assuage the hapless postal regulators, even though it quickly qualified “judicious” as likely continuing to use the full pricing allowed:
Schedule for Regular and Predictable Rate Adjustments – Effective through Calendar Year 2024
The Postal Service next expects to implement price changes for all Market Dominant classes on July 10, 2022, with the filing occurring in April 2022. The Postal Service intends to be judicious in the use of available pricing authority, but anticipates the prospect that, given our current financial condition, the price change for each Market Dominant class may be required to apply most or all pricing authority available on the date of filing.
The Postal Service expects that, in each subsequent year, it will implement price changes for all Market Dominant classes in January and July of such year, with the filings occurring the preceding October and April, respectively. The Postal Service intends to be judicious in the use of available pricing authority depending on our financial condition, but anticipates the possibility that the price adjustment for each Market Dominant class may be required to apply most or all pricing authority available at the time of filing.
USPS provided further clarification that the extra PRC add-ons will occur each July plus CPI, while January hikes will be CPI-only, with both possibly including any previously banked authority:
Beginning January 2023, Market Dominant price adjustments will occur twice a year, (e.g. January 2023, July 2023, January 2024, July 2024, etc.). Market Dominant products include First-Class Mail (FCM), USPS Marketing Mail, Periodicals, Package Services* and Special Services.
July 2022 rate authority will include ten months of CPI plus retirement, density, and non-compensatory class authorities as determined by the Postal Regulatory Commission (PRC). The January rate authority will include six months of CPI, plus any unused rate authority. Subsequent July rate authority will include six months of CPI plus the retirement, density, and non-compensatory class authorities and any remaining unused rate authority.
The magic of compound rate increases.
Compound interest (or compounding interest) is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods. Thought to have originated in 17th-century Italy, compound interest can be thought of as “interest on interest,” and will make a sum grow at a faster rate than simple interest, which is calculated only on the principal amount.
Because the current rate system for USPS is based on percentage increases, moving to semi-annual increases yields more money taken from customers by the agency. In essence, each increase includes interest on interest or rates on rates. By moving from once-a-year compounding to twice a year, USPS is essentially doubling the impact of its compounding.
The impact of compounding will be especially great for “non-compensatory” postal products like Marketing Mail Flats, which will be subject to a mandatory 2 percent extra increase every six months. USPS Chief Customer and Marketing Officer and Executive Vice President Steven W. Monteith recently clarified the 2 percent rules for mailers:
For underwater products within a class, each time the Postal service adjusts the prices, the non-compensatory product prices need to be increased 2% above class average.
In more legalese: when the Postal Service’s adjustment filing includes a non-compensatory product in a profitable class (i.e., where overall class revenue exceeded attributable cost for the class), the Postal Service is required to increase the rate for such non-compensatory product by a minimum of 2 percentage points above the percentage increase for its class. As an example, if the combined authority for Marketing Mail is determined to be 4.0% and the product Flats is determined to be non-compensatory, the price of Flats need (sic) to be increased by at least 6.0%. However, the price of some products within Marketing Mail will need to be increased less than 4.0% so that the overall price increase of Marketing Mail is 4.0%.
For underwater classes, the additional non-compensatory rate authority for a mail class can be only used after the PRC makes the determination in the ACD limiting the use of additional authority to once a year. This authority can be banked for future use. Currently this applies to Periodicals and Package Services.
In more legalese. Non-compensatory authority applies to classes for which the Postal Service’s attributable cost for the class or product exceeds its revenue. Each class is made up of several products, and non-compensatory authority is applicable whenever attributable costs for a class of mail (i.e., the sum of all products within a class) exceeds revenue for such product or class. For each non-compensatory mail class, the PRC provides an additional 2% rate authority above the class average. As an example, if the mail class Periodicals is determined to be non-compensatory and combined CPI, Density, Retirement, and the banked amount is 4.0%, the non-compensatory authority of 2% would increase the total authority for the class to 6%.
The frequency of compounding is well known to payday lenders and illegal loan sharks who often compound bi-weekly. Frequent compounding is a major source of their excessive earnings.
No consultation with customers or the mailing industry.
39 U.S. Code § 3622 – Modern rate regulation
(1) In general. —The system for regulating rates and classes for market-dominant products shall—
(A) include an annual limitation on the percentage changes in rates to be set by the Postal Regulatory Commission that will be equal to the change in the Consumer Price Index for All Urban Consumers unadjusted for seasonal variation over the most recent available 12-month period preceding the date the Postal Service files notice of its intention to increase rates;
In the Postal Accountability and Enhancement Act of 2006, Congress envisioned annual rate adjustments:
Otherwise, why would Congress have referred to “the most recent 12-month period”?
After the passage of the Act, USPS leadership embarked on an extensive dialog with mailers about when and how to implement the new annual CPI-capped rate increases. They used meetings, surveys, and sessions of the Mailers Technical Advisory Committees to arrive at the annual late-January schedule and the voluntary doubling of the 45-day required notice period. In short, USPS leaders in 2007 cared about the potential impact of rate hikes on their customers and the mailing industry.
This time, there was no advance consultation with customers or the mailing industry before the surprise announcement by USPS. Just as there was no advance consultation about the ten-year plan.
The oral arguments that the U.S. Court of Appeals held on September 13 were the final step in our appeal of the new PRC rate rules before the court issues its opinion. Our team thought that the arguments, especially the questioning by the three judges, indicated that the court is taking our briefs very seriously. We remain confident that we put the best arguments and evidence forward and stand a decent chance of prevailing. This court takes an average 0f 4-6 months to issue a decision on a case of this complexity.
The Alliance of Nonprofit Mailers is honored to be the sole representative of the nonprofit sector on the team of petitioners and intervenors actively involved in appealing the new Postal Regulatory Commission rate rules. We are the only nonprofit mailer association intervenor, the only one that participated in developing the strategy and briefs, the only one that provided sworn declarations by our board members, and the only one that paid legal fees to support the effort.
Together, our team makes up the full spectrum of mailers that provide most of the funding for our United States Postal Service, and sent most of the hard copy content to America’s mailboxes: