January 27, 2021
Service is quite poor. People are losing confidence in mail. Everyone is talking about Christmas cards that took a month to be delivered and bill payments that were late. We’ve heard the rationale—employee absences and resignations due to the pandemic, difficulties hiring more employees, huge increases in packages, and inadequate air lift on commercial and cargo airlines.
Postal management doesn’t seem to have a good handle on service. They rely a lot on mailers and mail service providers telling them about problems. Mailers suspect that USPS has been prioritizing packages over mail.
With all the service problems, we have a 6 to 8.5 percent mid-year rate increase hanging over us.
The Postal Service has tons of cash and cash equivalents available to it, and the legality of the Postal Regulatory Commission busting through the rate cap is under review by the U.S. Court of Appeals, and the new Congress and Administration have expressed commitment to helping the USPS with real reforms and assistance, and the pandemic is far from over, and postal rates just went up about 1.5 percent on January 24.
It’s time to call off any more postage increases in 2021.
As reasonable as our plea is, there is a high probability that it will not be heeded. So, we need to plan for the worst: postage rate increases in the neighborhood of 6 to 8.5 percent around the middle of 2021.
A number of mailers and service providers have been asking questions about this complicated, tenuous situation. So, we are going to try to answer in a Q & A format.
Q1: Will rates really go up mid-year? For years, USPS has touted predictability with annual CPI-based increases in January. The latest happened on January 24.
A1: Yes, the Postal Regulatory Commission and the USPS have put the wheels in motion for mid-year rate increases in 2021. They did this as the result of the 10-year review of pricing regulation mandated by the 2006 postal law. The two agencies have been working on the review for four years. At the Mailers’ Technical Advisory Committee meeting on January 26, Postmaster General DeJoy said the rate increases are “imminent.”
Q2: How big will the rate increases be?
A2: USPS has indicated how big they might be. We most likely won’t find out how big they actually are until sometime after the end of March. On December 31, USPS indicated the increases could be as much as 5.562 percent above inflation for “compensatory” types of mail, and 7.562 percent above inflation for “non-compensatory” mail. The Postal Service also could include a partial year of CPI inflation in the mix, adding around another 0.6 to 0.8 percent, bringing the range to 6 to 8.5 percent. As these are numbers we have now, they are what we will work with.
Q3: Why do we have to wait three months to find out whether USPS will do what it is threatening?
Q3: Even though the formulas that arrived at the new rate increases are very straightforward, the PRC most likely will confirm the USPS math in the Annual Compliance determination it issues annually at the end of March, and USPS wants to keep its options open and its cards close to its vest.
Q4: Could the increases be less than the initial USPS numbers?
A4: Yes, the PRC helpfully gave the USPS the option to “bank” a portion of the rate authority for use in future years. In other words, if they don’t use a half percent in 2021, they could add it to their increases in 2022, or later years.
Q5: Is the Postal Service likely to use less than the full rate authority in 2021?
A5: Not at all. Since the Postal Accountability and Enhancement Act was enacted in 2006, the USPS has used essentially all the rate increase authority is has been granted. This is very much in line with economic studies of monopoly pricing.
Q6: How much will USPS implementation of the higher rates cost mailers?
A6: The PRC decision authorizes USPS to increase rates this summer by about $200 million per month above inflation at current volume levels.
Q7: What’s the difference between “compensatory” and “non-compensatory” mail?
A7: “Compensatory” mail covers the costs USPS attributes to it, and makes an additional contribution to overhead or “institutional” costs. “Non-compensatory” mail does not fully cover USPS-measured attributable costs.
Q8: Couldn’t “non-compensatory” mail become “compensatory” through better cost control and productivity by USPS?
A8: Yes, definitely. The Alliance, other mailers, the Inspector General, and the Government Accountability Office have pointed this out and given specific examples and suggestions. The new PRC rules do not address productivity and instead try to help USPS with higher rates only.
Q9: Which types of mail are considered “compensatory?”
A9: –First-Class Mail
– Marketing Mail Non-Carrier Route Letters and High-Density/Saturation Mail.
Q10: Which types of mail are considered “non-compensatory?”
A10: –Non-Compensatory Classes:
–Non-Compensatory Products in a Compensatory Class:
Q11: So, all mail gets hit with 5.562 percent above inflation. How will the additional 2 percent be applied to the different types of “non-compensatory” mail?
A11: The two “non-compensatory” classes of mail will have their rate increase cap raised by the additional 2 percent, totaling 7.562 percent above inflation. The three “non-compensatory” products are within the “compensatory” Marketing Mail class. Marketing Mail’s rate cap will not increase by the additional 2 percent, but rates for these three products will be required to increase 2 percentage points more than the average increase for the class. Other products within Marketing Mail will by definition have to increase less than the average.
Q12: How much will First Class Mail postage go up this summer?
A12: We will not know the exact amount until much closer to when it happens. The cap that the PRC formulas allow is 5.562 percent above inflation. There will be a partial year of CPI also, bringing the total cap to about 6.0 To 6.5 percent.
It is likely, but not yet certain, that USPS will choose to use the full amount. Then, the Postal Service will need to decide how to distribute the cap across all the different types of First-Class Mail.
The two main types of FCM are single piece and presorted. The additional ounces and post cards also have their own rates. The weighted average increase for these and the other categories of FCM must stay within the cap of about 6.0 to 6.5 percent.
USPS made all of the guesswork even more confusing with its kooky decision three years ago the raise single piece First-Class only in 5-cent increments. (This might have made sense back when people bought individual stamps, paid in cash, and had no Forever Stamps.) The stamp went from 50 to 55 cents, a 10 percent increase in one category which caused the other categories to go up much less than inflation to keep the class average within the cap. In the two rate increases since then, USPS has held the stamp price at 55 cents, causing other categories to go up more than inflation.
Will the agency keep stamps at 55 cents in its mid-year 2021 rate increase? We’ll find out. With an overall cap on First-Class of about 6.0 to 6.5 percent, they might go to 60 cents on the stamp rate.
Single piece First-Class is very important to nonprofits. We use it for donation response envelopes with Business Reply Mail or stamps, and for subscription and membership responses. A number of nonprofits use stamps on outbound mail, for which St. Jude Children’s Research Hospital was recently recognized by USPS with an award. Unfortunately, USPS doesn’t track the actual use of single piece to better understand its uses and the impact of large rate increases.
Q13: How much will Marketing Mail postage go up this summer?
A13: Like First-Class, the cap will be about 6.0 to 6.5 percent. The three “non-compensatory” products within MM, listed in A10, will be required to go up 2 percentage points higher than the average increase. That means the other products within MM will not go up as much as the average in order to keep the class within the cap.
Q14: How much will Periodicals postage go up this summer?
A14: The cap on Periodicals class will likely be about 8.0 to 8.5 percent. This 2 percentage points above the other two main classes, and it is because USPS judges Periodicals to be “non-compensatory.” How it is distributed among different types of Periodicals may be similar to previous rate cases.
Q15: Can we stop this?
A15: The Alliance in partnership with other mailer associations filed an appeal in the U.S. Court of Appeals for the D.C. Circuit. It likely will take the court quite a while to reach a decision on the appeal. We also filed for a stay at the PRC, which was denied, as we expected. We will file for a stay at the court, based on four criteria:
If the court does not grant a stay, then the Postal Service will move quickly to implement the largest rate increase allowed by the PRC. Mailers will suffer the damage from at least the first rate increase above inflation, both in higher postage and the forced reduction of mailings.
Q16: If we later win in court, can we get the extra money we paid back?
A16: No. Once the new rates go into effect, mailers would be unable to recover overcharges even if the rate increases were later found to have been unlawful because “[n]o mailer may be reimbursed for any amount paid under any rate or fee which, after such payment, is determined to have been unlawful.” 39 U.S.C. §3681.
Q17: Is this a one-time hit?
A17: No. The PRC indicated it will allow USPS to raise rates above inflation according to its formulas for at least five years. Then the regulator will take another look, and decide what to do next.
Q18: Won’t these large rate increases exacerbate already steep declines in mail volume?
A18: Yes. The question is by how much. The twin postal agencies are gambling that the increases in revenue will outweigh losses of volume. They base this on price “elasticity” models that indicate mail has low elasticity. In other words, mail doesn’t react much to price increases. Elasticity is the percentage volume declines in reaction to a percentage increase in mail. The problem with this gamble is that the elasticity models are based on years of postage increases in line with inflation. There is no recent precedent for these types of above-inflation increases over several years.