July 23, 2024

Dear Alliance Members:

The Postal Regulatory Commission has extended the due date for reply comments in its Rate Review from August 13 to September 12. This was done at the request of the PRC’s “Public Representative.”

The Alliance will be filing reply comments to follow on our initial comments. In the meantime, we provide below excerpts from the United States Postal Service’s initial comments in which the monopoly provider attempts to convince the regulator to abolish the price cap system mandated by Congress or, failing that, to postpone the start of the Rate Review for two more years. The USPS places much blame on “stakeholders” and the regulator, but finds that “the Postal Service is more than doing our part.”

Highlights from the United States Postal Service Comments in the Postal Regulatory Commission Rate Review now underway:

• To be sure, the system that the Commission established cannot be said to have ensured the Postal Service’s financial stability, and thus it could be said to have failed to achieve the statutory objectives in that respect.

• The potential remedies for that failure are the same as those that we proposed during the Ten-Year Review: either (1) eliminate the price cap, which unduly hinders some statutory objectives and is not essential to achieve others, or, (2) if the current price-cap-based system is retained, follow well-established price-cap practices by allowing prices to be reset to a compensatory level…

• In addition, the next systemwide review should reconsider the application of certain workshare rules—specifically, those affecting discounts that pass through less than the relevant estimated “avoided cost”—to dropship discounts.

• Our plan is designed eventually to obviate the need for price increases that require the use of additional pricing authority. Accordingly, the Commission should close this docket and allow implementation of the Plan to proceed.

• Price caps ostensibly exist to encourage the regulated entity to reduce costs and increase efficiency. However, the PAEA did not provide the Postal Service with any new cost-cutting authority…

• High consumer inflation does translate to additional pricing authority for market-dominant products…

• It is worth pointing out, however, that our market-dominant prices are hardly excessive…

• Stakeholders have not wasted any opportunity to voice their issues with the modified system from its inception—whether it was the appropriate forum or not—and to raise the specter of grave consequences if their warnings are not heeded. But these concerns are no more persuasive now than when they were previously brought before the Commission.

• Some price-induced volume loss is inevitable and a necessary consequence of generating offsetting revenue. But price-induced volume loss represents a small part of the larger volume decline trend.

• There is simply no evidentiary support for concluding that the recent market-dominant volume declines were driven by price (either entirely or in large part).

• The Postal Service’s pricing approach under the current ratemaking system is rational given the organization’s financial condition, within the scope of our discretion, and consistent with both the Commission’s expectations and the Postal Service’s stated intentions.

• Once costs and revenues attain a more sustainable relationship, the Governors might reasonably decide to use less of their available pricing authority. Ultimately, the Postal Service’s ability to do so will depend on successful implementation of the initiatives that we are pursuing consistent with the DFA Plan. But so long as we continue to operate at a loss, it is reasonable, as a matter of both business judgment and common sense, for the Governors to use all available pricing authority to attempt to generate additional revenue and stabilize the organization’s finances.

• Additionally, there is a significant financial risk in refraining from raising prices in the misguided hope of preserving volume. If holding rates steady fails to reverse volume losses, constant rates and declining volume would sharply accelerate revenue decline. This is a particularly risky proposition when there is no evidence that such an approach would bring volume back into the system. The fact is that market-dominant volume has declined and will continue to decline regardless of the Postal Service’s pricing decisions. This conclusion is borne out by history. From 1971 through 2006, the prices for postal services were not capped, and volumes grew steadily. Starting in 2007, prices for all market-dominant classes were capped at the rate of CPI-U growth, but volume shrunk and has continued to decline. There is no evidence that holding rates constant in real terms would induce sufficient volume increases to produce more revenue than a price increase. Faced with secular volume declines and ongoing losses, any reasonable business would look for opportunities to cut costs and to raise revenue through price increases. The Postal Service has done and is doing exactly that.

• Especially for an organization as vast as the Postal Service, the substantial cost-structure changes that would be needed to offset such high and sustained inflation will take time to bear fruit. In the meantime, the Governors have used their pricing flexibility to seek rate adjustments every six months to more quickly and effectively buffer the Postal Service against the financial impact of historically high cost inflation.

• Especially amid broad successes in service performance, shortfalls from self-imposed (and continually rising) targets do not provide a legitimate justification to reopen the ratemaking system.

• The Commission’s message was clear: to have any chance at breaking even under the new system, the Postal Service would need to improve efficiency and cut costs. However balanced that approach might seem on the surface, the Commission recognized that our “unique cost structure” constrains our ability to further reduce costs. But rather than attempting to design the modified system based on an assessment of reasonably available cost-cutting potential, the Commission filled the still-yawning net-income gap with an unsupported expectation that the Postal Service could somehow find presently unidentified ways to do so on our own.

• Nevertheless, the Postal Service is more than doing our part. But it should not be surprising that net losses persist in the short run, that the initiatives we are pursuing also require significant up-front investment, or that they might produce short-term and localized service-performance challenges. Still less should such eminently foreseeable short-term effects support revisiting the system prematurely. It takes time to plan and implement organizational initiatives, and it will take even longer for the full financial benefits to be realized, especially if we are forced to move more slowly than planned. The Postal Service is fully committed to becoming a high-performing and financially sustainable organization, but it would be unreasonable to expect the Postal Service’s operational and financial challenges to be solved in three years. If anything, attempting to reexamine even aspects of the system now reflects a failure on the part of the Commission to understand the significant financial and operational challenges facing the Postal Service, as well as the aggressive and comprehensive action that is needed to address it.

• Therefore, recognizing that no serious ill effects can yet (if ever) be traced to the system modifications that went into effect in 2021, there is no reason to reexamine aspects of the system now; the Commission should allow the system to operate.

• We continue to maintain, as we discussed at length in our comments during the Ten-Year Review, that the best approach to satisfy the statutory objectives is to replace the price cap with a system built around regulatory monitoring. Rather than own the risk of setting the price cap at an inappropriate level, the best way to fulfill the regulatory criteria at this moment is to give the Governors a period of full flexibility to achieve financial stability and invest in efficiency and service. The regulator would hardly disappear, any more than it did following the shift from cost-of-service to the price cap. In addition to its other duties, the Commission would monitor the results and, after a sufficient observation period, determine when conditions have changed such that a different system would then better fulfill the statutory objectives.

• While the Postal Service can be said to maintain market power under a myopic market analysis that focuses solely on means of delivering hard-copy matter, the reality is that the Postal Service faces significant competition from gross substitutes, namely digital alternatives.

• The only rational and legally tenable action is to close this docket and follow the original plan to begin the next system review in 2026.