December 23, 2015
Possible Declining CPI Cap Could Drive Timing Court Decision Looms
In our previous report we noted that it might have slipped out that Postal Service staff had begun preparing a CPI-capped rate increase for April 26, 2015. Following their usual practice the USPS would announce such an increase 90 days in advance, or on January 27, 2015. Forty-five days are required by law, and the enlightened USPS leadership in 2007 decided to double the lead time to enable a smooth implementation by all involved. The next CPI release by the Bureau of labor Statistics will be on January 16, 2015, for the month of December 2014. As we reported on December 17 in the following Alliance Alert, we expect the USPS price cap to continue to rise even in the face of a declining Consumer Price Index (CPI) driven by falling gas prices. This is because the Postal Service price cap is a lagging index based on a 12 month moving average, the latest 12 months divided by the previous 12 months. Here is our Alliance Alert:
Based on the November CPI figure (-0.3% released this morning, the biggest decline since December 2008), the Postal Service’s rate adjustment authority (now reflecting 15 months of CPI) is 1.965%. That’s up from 1.857% last month.
You might ask why the postal cap increased in a month that the CPI decreased. While the November 2014 CPI figure (236.151) is less than the October 2014 CPI figure (237.433), it is still about 1.3 percent higher than the November 2013 figure (233.069) that it replaced in the calculation of the 12-month moving average CPI. The 12-month moving average is the method the PRC designed for the cap after the 2006 law imposed a CPI cap but left the details up to the regulator.
Our financial consultant, Sandy Glick, provides these calculations for us and says that it seems unlikely that the cap would start going down (at least by much) until the March 2015 CPI comes out in mid-April 2015. The March 2014 CPI was 236.293.
Recall that the Postal Service says it is holding off on its next CPI-capped increase filing until it hears from the U.S. Court of Appeals on the exigent surcharge, specifically whether and when it will be rescinded.
Having declared that they can operate without a quorum, the Postal Service Governors will be able to file a rate case when they want to. We expect that they will file for an increase before their cap starts to decline.
So if the Postal Service were to carry out its rumored April 26, 2015 price increase, it would most likely be about 2%. But the story doesn’t stop there because the three remaining Governors of the Postal Service declared last week that they will be able to make decisions on their two key roles—rates and Postmaster General (PMG) selection–even though the larger Board of Governors (BoG) does not now have a quorum. This amounts to the Governors pulling a rabbit out of a hat that no one expected. Of course, they kept the rabbit hidden until the Senate adjourned without confirming a Governor to bring the BoG to a quorum.
To understand the magic trick, we need to recall that there are spots for nine Governors appointed by the President and confirmed by the Senate. The Board of Governors includes the appointed Governors and the PMG and Deputy Postmaster General (DPMG), making a Board of eleven. The quorum we talk about is a minimum of six on the BoG to function. With no confirmations by the Senate, the BoG is down to five, and has no quorum. But the legal document published by the USPS in the Federal Register says the three remaining Governors can continue to make those all-important rates and PMG decisions. Further, the full BoG, including the PMG and DPMG, passed a resolution to delegate all remaining BoG decisions, as distinguished from Governors decisions, to a “Temporary Emergency Committee.” So the upshot for nonprofit mailers is that the lack of a quorum will not prevent any decision or action normally carried out by the Governors and the BoG, if the action withstands challenge. Three Governors will make rates and PMG decisions, by absolute majority vote, and five BoG members will make all other Board decisions. By the way, it should be quite a while before another PMG decision needs to be made as Megan Brennan is scheduled to take office in February. You can read the December 16 Federal Register here.
As for the prospects related to the next price change, these declarations mean that a majority of two Governors can and will make the decision when they see fit, of course in close consultation with the PMG and DPMG. And as we stated in the Alliance Alert, we expect the lagging CPI cap calculated by the Postal Regulatory Commission to continue going up through the April 17, 2014 release of the March CPI. If the sharp declines in gas prices continue, it is possible that the USPS CPI cap will then start declining. It is quite possible then, that the Governors will decide to file for a rate increase before April 17, to avoid leaving any of their price increase capability on the table. They might even decide to act earlier, say before the March 24 release of the February CPI. The likely range of possibilities is a filing between late January and late March for implementation between late April and mid-July, if they stay with the usual 90 days advance notice. In any case, the prospect of a declining CPI cap adds a new wrinkle to an already uncertain situation.
And we haven’t even mentioned yet the really big issue related to Postal Service pricing—the decision by the U.S. Court of Appeals on the exigent rate case. As of today, December 23, it had not been released. The decision could range from telling the PRC to reduce the $3.2 billion cap on exigent revenue expected to be reached in August or September 2015, telling them to increase it, or making the 4.3% surcharge permanent as the USPS sought. The most likely outcome expected by many would be a remand to the PRC in order to improve its methodology for determining the limit on exigent revenue, and this scenario carries the real risk of leading to an increase in the amount and time the surcharge is in effect. If and when the case is remanded, the PRC will be operating with a full team of five Commissioners, with Nanci Langley and Tony Hammond having returned after belated Senate confirmation.
The Postal Service delayed its usual late January CPI rate increase largely because it is waiting to see what the Court says. It also has expressed sympathy for, but not commitment to, the idea that it would be better to time the increase to coincide with the rollback of the exigent surcharge so we would have only one price change to implement next year. We expect that sympathy to waiver if the prospect of a CPI cap decline continues.
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