September 13, 2024

Dear Alliance Members & Sponsors:

Our excellent General Counsel Eric Berman debunked the spurious claims made by USPS attorneys about the PRC regulatory review.

In a filing on behalf of the Alliance and all nonprofits yesterday, Berman explained the falsehood of USPS assertions:

• USPS professes that the PRC had no right to perform a rate review until two years from now.
• The Postal Service says the regulator should abolish any rate cap and let the monopoly mail agency set its rates without external protection for mailers.
• USPS wants the ability to reset mail rates to cover the costs of individual products even though Market Dominant mail as a whole covers its costs.
• The mail agency proposes to abolish drop-ship workshare pricing that enables mailers to use more efficient and reliable private-sector transportation.

Highlights of our regulatory reply comments:

Introduction

• Even Postal Service Governors, typically staunch defenders of the agency’s Delivering For America (“DFA”) Plan, could not deny reality. Governor Tangherlini observed that the Postal Service’s financial health “continues to degrade,” and that “[o]perating costs are not falling below our improving revenue, and most importantly, service has not improved at the same rate as price increases.”

• At a minimum, the Commission must: (1) rescind the Postal Service’s above-CPI pricing authority; (2) limit the frequency of market-dominant rate cases to one per year; and (3) act quickly, before the Postal Service’s operational and pricing decisions move the current system farther away from Congress’ objectives.

• The Postal Service’s initial comments serve as little more than an 80-plus page brochure for the DFA Plan, a plan whose projections the OIG has determined are unreliable now. They are a textbook example of accountability avoidance and self-contradiction, and the Commission should not credit them.

• The Postal Service’s whiplash-inducing initial comments validate the concerns that the Alliance expressed in our initial comments: that it is an agency striving to act very much like a private sector monopoly business. Such a monopolist would prefer to have little or no outside regulation of its pricing.

• Market-dominant mailing customers have no alternative provider of hard-copy delivery to America’s mailboxes. Congress long ago granted statutory monopoly power to the Postal Service, which is why the Commission must exercise strong pricing regulation over the agency.

• The last three years featuring six rate increases prove that a lightly regulated Postal Service with pricing authority well above inflation and no limit on rate cycle frequency can and will yield disastrous results.

Do not delay the review

• The Commission is completely justified in reviewing the ratemaking system right now. The Postal Service wrongly describes this review as “premature” and misleadingly attempts to frame it as an inexplicable departure from a fictional legal standard of the Postal Service’s own making. Notwithstanding the Postal Service’s continued attempts to evade regulatory oversight, the Commission’s review stands on solid legal and policy ground.

• First, Congress – not the Commission (and certainly not the Postal Service) – established the standard by which the Commission reviews the ratemaking system. The Commission was required to review the system ten years after PAEA’s enactment, “and as appropriate thereafter.”  “Appropriateness” is the statutory standard governing the Commission’s review authority. So long as the Commission determines that it is appropriate to do so, it can – indeed, shall – review the system.

• Second, the Commission must neither acknowledge nor justify what the Postal Service mischaracterizes as a “change in position” (or, more histrionically, as a “sudden and significant departure from its precedent.”). The Commission expressly reserved for itself the flexibility to review part of or all of the ratemaking system earlier than five years.

• Third, the Postal Service’s own conduct is at least partially responsible for why the Commission’s review is appropriate now. The Postal Service claims that “there is not yet enough data to seriously evaluate the success of the modified system.” …[B]ecause the Postal Service decided to raise market-dominant rates twice yearly under the current system, the Commission can evaluate the effects of six rate cycles – more than the four or five cycles it expected to evaluate.

• Finally, even if the Commission’s review authority did require the Commission to show that the current system has caused “serious ill effects” (it does not), this review would still be appropriate. In our initial comments, the Alliance explained in detail the deleterious effects of the current system.

• We urge the Commission to summarily reject the Postal Service’s request to delay these proceedings. We also urge the Commission to reject the Postal Service’s alternative proposals, which resemble its requests for deregulation of a statutory monopolist that the Commission rejected during the ten-year review.

Reject USPS’s proposal to abrogate the price cap

• As it did in the ten-year review, the Postal Service proposes in its comments for this proceeding that it be subject to no rate cap at all. The agency would prefer that it have complete freedom to raise rates with the regulator waiting on the sidelines, relegated to performing only a light after-the-fact monitoring role.

• The idea of almost unlimited pricing freedom for a government-sanctioned monopoly provider of essential public services is absurd on its face. The absurdity of the proposal leads us to conclude that asking for the most extreme “solution” is more of a bargaining tactic than a serious suggestion.

• Nothing that has occurred over the past three and one-half years should change the Commission’s ten-year review analysis, when it rejected this proposal the first time. Indeed, the past few years demonstrate that the Postal Service needs the stronger incentives of a CPI price cap to act like an efficient business. The data over this time period include the largest market-dominant mail volume decline in FY 2023 (excepting the Great Recession and COVID-19 outlier years), as well as the largest drop in Total Factor Productivity since measurement began in 1965.

• As we describe in our initial comments, nonprofits’ revenue from charitable contributions grew at far less than the CPI in 2023. Many nonprofits must operate with their own pricing and budget increases below the CPI. Many commercial suppliers to nonprofits keep their price increases below the rate of inflation to retain business in a very competitive environment. The Postal Service must be incentivized to do the same.

• Our proposal is reasonable, is in keeping with Congress’ wishes, and would provide the strong incentives to operate the Postal Service as an efficient, customer-focused business that the statute requires. The Postal Service will never take those incentives seriously if the Commission keeps throwing more pricing power at it.

• The Postal Service simply cannot be trusted with unfettered rate authority. It disregards the Commission’s concerns with the repeated use of its maximum rate authority under the current system, claiming that the Commission “expressly contemplated the Governors using [such authority] to the fullest.” Not so. In Order No. 5763, the Commission explained that the modified system sets the Postal Service’s maximum pricing authority, but does not generally mandate a specific price level. What the Commission “expressly” contemplated was the Postal Service using “its business judgment in utilizing the tools provided in the system of ratemaking to craft pricing schemes and specific prices.” In other words, the Commission contemplated that just because the Postal Service could use its maximum pricing authority does not mean that it should.

• In addition to exercising reasonable pricing judgment, the Commission also expected the Postal Service to reduce workhours at a rate that would grow productivity and to reach its promised service goals. Of course, the operator has succeeded in none of these essential responsibilities. The Commission cannot trust the Postal Service to operate like an efficient, effective business without the stronger incentives of a CPI rate cap.

Reject USPS proposal to reset rates

• [T]he Postal Service asserts as its backup proposal that “the next logical step would be to permit rates to be reset to a compensatory level.”

• As an initial matter, and as the Association for Postal Commerce explained in its initial comments, “market-dominant mail as a whole is compensatory — it covers its attributable costs and makes a significant contribution to institutional costs….The Postal Service’s problem is that its combined revenue from market dominant and competitive products does not cover its total costs.”

• But cost coverage has two components: revenues and costs. The Postal Service’s default assumption is that it has a revenue problem (caused by insufficient pricing authority), but in fact it has a cost control problem.

• The promise of regular rate resets every few years that the Postal Service suggests would destroy the incentives for the Postal Service to control costs.

• Throughout its comments, the Postal Service assumes that it possesses sufficient internal financial discipline and “business judgment” to set prices at the appropriate level. But the only business judgment that mailers and the Commission can observe to date under the modified system is the operator’s use of its full pricing authority in each and every rate cycle. The Postal Service has no other pricing strategy, and it has never demonstrated “judicial” or “prudent” use of its rate authority by increasing prices less than allowed under the current system.

• Without intervention by the Commission, it also is difficult to discern what would motivate the Postal Service to use less rate authority than it could. It never before has.

Reject USPS proposal to end drop-ship workshare

• See the filing by economist John C. Panzar that the Alliance signed.

Conclusion

• Despite our policy differences, the Alliance and the Postal Service appear to agree on one thing: that the Commission alone cannot save the Postal Service. We diverge with respect to the Commission’s role. The Alliance steadfastly believes that the Commission can and must play a major role in reinforcing incentives for the Postal Service to operate efficiently and cost-effectively in service to America’s mailers. The Commission has the legal authority to do just that.

• It is predictable, even rational, for a monopolist to behave as the Postal Service has under the current system – raising prices as much as possible while resisting government scrutiny and ignoring customer dissatisfaction. But the Postal Service is a public good with a Congressional mandate to bind the nation together. Which means it should be making operational and pricing decisions designed to retain as much volume as possible, increase its productivity, grow its business, become financially stable, and deliver on its service promises. The current system is failing to compel or incentivize the Postal Service to do these things, and the operator is dismissive of the impact this failure is having on its customers.

• The Commission cannot sit back and wait for an indeterminate period of time for things to get better. It must act quickly to stem the damage being done to our essential public service that the Postal Service provides.