April 26, 2022

PRC cannot fully regulate USPS; seeks to build its capacity with more funding and data initiatives

To properly regulate the monopoly United States Postal Service, the Postal Regulatory Commission should firmly control three things: pricing, service quality, and costs.

Strong control over pricing

The U.S. Court of Appeals recently affirmed that the PRC has firm control of the regulation of USPS pricing. The November 12, 2021 court ruling stated that the PRC can determine the price increases authorized for USPS as long as it takes into account nine objectives set down by Congress. The court opinion began:

Opinion for the Court by Circuit Judge ROGERS.

    ROGERS, Circuit Judge: In 2006, Congress passed the

Postal Accountability and Enhancement Act, which directed

the Postal Regulatory Commission to establish a ratemaking

system to govern the prices set by the U.S. Postal Service for

its market-dominant products. Although Congress left many

details to the Commission, it forbid rates from increasing faster

than the rate of inflation. The Commission was also required

to assess after ten years whether the system had achieved nine

objectives. If not, then the Commission could modify the

ratemaking system or adopt an alternative one. This case arises

from that mandatory ten-year review. In 2017, the

Commission found that the existing ratemaking system was

deficient and had not maintained the Postal Service’s financial

stability. After extensive review, it adopted a new system in

2020, which retains the price cap generally but allows above inflation

rate increases to target specific costs. Order 5763:

Order Adopting Final Rules for the System of Regulating Rates

and Classes for Market Dominant Products, Docket No.

RM2017-3 (P.R.C. Nov. 30, 2020), 85 Fed. Reg. 81,124 (Dec.

15, 2020) (“Order 5763”).

    Groups whose members purchase postal products

(“Mailers”) and the Postal Service seek review of the

Commission’s new ratemaking system. The Mailers oppose

any new rate authority. They contend that the system is

inconsistent with the statute that gives the Commission its

regulatory authority and is arbitrary and capricious. In

contrast, the Postal Service contends that the Commission’s

new ratemaking system is irrational because it does not confer

enough rate authority. The Commission responds that its

actions are authorized by statute and reasonably explained.

    For the following reasons, the court concludes that the

Commission acted within its authority under the

Accountability Act, and that its predictive judgments and

economic conclusions satisfy the Administrative Procedure

Act’s requirement of reasoned decision-making. Accordingly,

the court denies the petitions for review.

The nine objectives that the PRC must consider when designing a USPS pricing system are:

Objectives. -Such system shall be designed to achieve the following objectives, each of which shall be applied in conjunction with the others:

(1) To maximize incentives to reduce costs and increase efficiency.

(2) To create predictability and stability in rates.

(3) To maintain high quality service standards established under section 3691.

(4) To allow the Postal Service pricing flexibility.

(5) To assure adequate revenues, including retained earnings, to maintain financial stability.

(6) To reduce the administrative burden and increase the transparency of the ratemaking process.

(7) To enhance mail security and deter terrorism.

(8) To establish and maintain a just and reasonable schedule for rates and classifications, however the objective under this paragraph shall not be construed to prohibit the Postal Service from making changes of unequal magnitude within, between, or among classes of mail.

(9) To allocate the total institutional costs of the Postal Service appropriately between market-dominant and competitive products.

The PRC has exercised significant power to regulate USPS pricing. Indeed, the court affirmed the regulator’s maximum emphasis on one of the nine objectives, number 5, to “maintain financial stability.”

Pricing judgment is questionable

We do question the PRC’s judgment in its pricing regulation. By placing so much emphasis on financial stability, it added three surcharges onto the Consumer Price Index with the sole intent to get the postal operator more money from captive customers. This blunt-force approach does almost nothing to enhance the other eight objectives. In some cases, it moves away from achieving other objectives, for example, maximizing incentives to reduce costs, creating predictability and stability in rates, and maintaining high-quality service standards.

Service and cost regulation lack capability

Likewise, we question the capability of the PRC to effectively regulate quality service and USPS costs. Its Annual Compliance Determinations are proof positive that the regulator has little influence over postal service and costs. It has limited its role to admonishing USPS to do better and to requiring more studies and reports. There are no penalties or consequences for USPS not achieving cost control and quality service. The annual determinations sound like a broken record, or Groundhog Day, or déjà vu all over again.

An excerpt for the 2021 ACD illustrates the consequence-free orders of the PRC:

“The Commission directs the Postal Service to improve service performance results to achieve the applicable on-time percent target level for these noncompliant products in FY 2022. The Commission has also specifically developed directives that are designed to elicit information and data from the Postal Service regarding service performance for noncompliant products and the steps that the Postal Service will take to restore service performance for those products in FY 2022. These directives include continued Postal Service reporting of specific information developed from its internal metrics within 90 days of the issuance of this Report and as part of its FY 2022 ACR. Additionally, the Commission directs the Postal Service to include with its FY 2022 ACR filing a specific plan for moving service performance targets from their current interim levels to 95 percent for each Market Dominant product, should that remain its intention.”

Fifteen years after being elevated from a “rate” to a “regulatory” commission, the PRC is still trying to figure out why USPS is missing its service targets and what it is doing to bring itself into compliance.

When it comes to regulating USPS costs, the PRC is left with expressing concern and urgency:

The Commission finds that for flats overall, attributable cost has continued to rise, negative contribution has continued to grow, and none of the flats products have met their service performance targets. In addition, data show that despite Postal Service operational initiatives, several pinch points have gotten worse. Bundle breakage increased, mail processing productivity decreased, transportation costs increased, and delivery costs increased.

The Commission remains deeply concerned with the continued trends of increases in costs and declines in quality of service. The Commission also remains concerned about the lack of specific plans to reduce costs and improve service for flats. The Commission provides recommendations for data collection and analysis regarding ongoing and future Postal Service initiatives designed to reduce flats costs, improve flats service performance, and/or improve flats operations. The fact that in FY 2021 flat-shaped mail products collectively had a cumulative negative contribution of almost $1.3 billion highlights the urgency and importance of improvement on this issue.

Postal Service Reform Act could help PRC build capacity and capability

The PRC is trying to regulate the USPS which has over $70 billion in revenue, employs over 600,000, and serves everyone, every business, and every organization in the world’s largest economy. It is trying to rein in the USPS behemoth with a virtually unchanged (in 15 years) budget of $17 million and 75 employees.

Part of the reason for such a small budget is the requirement to ask for an annual appropriation out of the Postal Service Fund (rate-payer money). Under the new PSRA funding language, the regulator will essentially tell USPS how much it needs each year of the rate-payer money in the Postal Service Fund. Only a unanimous vote by the USPS Governors can change what the PRC budget:

SEC. 205. FUNDING OF POSTAL REGULATORY COMMISSION.

    (a) In General. –Subsection (d) of section 504 of title 39, United

States Code, is amended to read as follows:

    “(d)(1) <> Not later than September 1 of

each fiscal year (beginning with fiscal year 2022), the Postal

Regulatory Commission shall submit to the Postal Service a budget of the

Commission’s expenses, including expenses for facilities, supplies,

compensation, and employee benefits, for the following fiscal year. Any

such budget shall be deemed approved as submitted if the Governors fail

to adjust the budget in accordance with paragraph (2).

    “(2)(A) Not later than 30 days after receiving a budget under

paragraph (1), the Governors holding office, by unanimous written

decision, may adjust the total amount of funding requested in such

budget. Nothing in this subparagraph may be construed to authorize the

Governors to adjust any activity proposed to be funded by the budget.

    “(B) If the Governors adjust the budget under subparagraph (A), the

Postal Regulatory Commission shall adjust the suballocations within such

budget to reflect the total adjustment made by the

Governors. <> The budget shall be deemed approved

on the date the Commission makes any such adjustments. The Commission

may make further adjustments to the suballocations within such budget as

necessary.

Data initiatives are top of mind at the PRC

The PRC sees much better use of more data as a key to being an effective regulator. On February 15 the agency announced the hiring of its first-ever Chief Data Officer and highlighted ongoing data initiatives that are in their early stages. An early data initiative is the beta version of a “dashboard” the regulator sought public input on. It asked several questions:

Specifically, the Commission seeks public input on:

• The overall usefulness and desirability of dashboard-style visualization concerning the Postal Service’s service performance
• The current dashboard’s presentation, usability, functionality, and any other features
• The scope of products and/or product components covered by the current dashboard
• The frequency of desired updates (e.g., quarterly, annually, etc.)
• The desirability of being able to download source data, and if so, in what format

In this inquiry, the Commission also seeks additional input from the public regarding what, if any, other dashboards and similar tools the Commission should develop in order to provide more accessible and usable data (e.g., postal finances, etc.) regarding the Postal Service.

Dashboards are the “in” postal thing these days as the USPS Office of Inspector General launched its own, and the PSRA requires USPS to start a dashboard, which the PRC will oversee the development of. Mailers, who want affordable, predictable rates and reliable service much more than more postal data, are right to be skeptical about the dashboard mania that has taken hold.

Most larger mailers, and some smaller ones, receive very good mail delivery information from their service providers already. Please let us know whether you glean any value from the new dashboard, or anticipate value from the upcoming USPS dashboard.

The PRC likely is very optimistic that the increase in funding that it anticipates along with its data initiatives will help to build its capacity and capabilities. But mailers should not expect such a transformation to happen overnight. A reasonable question is how much mail and how many mailers will remain by the time the PRC effectively regulates the full spectrum of USPS rates, service, and costs.

Do not expect more postal reform

We understand that some might be projecting the possibility of more postal reform legislation happening soon, particularly related to limiting rate increases. On the other hand, we believe that the Postal Service Reform Act of 2022, recently signed into law, will be the last new postal legislation for quite a while. We advise against holding out hope of legislative rate relief.

The PSRA passed in large part because of an unusual convergence of support. The postal unions supported it, and actively lobbied the Democratic caucus, so the Democrats voted for it. The Republican fundraising Postmaster General Louis DeJoy supported PSRA, and activity lobbied the Republican caucus, so the Republicans voted for it.

Both the postal unions and Postmaster General DeJoy will actively oppose any new legislation that limits postage increases. Therefore, such legislation will gain no support on the Hill.

Further, all of the supporters on the Hill and in the Administration have been taking victory laps for their part in “reforming” and “overhauling” the USPS. They also have said that it’s now up to USPS leadership to execute the rest of the ten-year plan Delivering for America. Indeed, the PSRA has all the changes USPS asked for from Congress in the DFA plan.

And PMG DeJoy has taken up the challenge with a round of very forceful interviews and speeches proclaiming that he will do the remaining hard work to solve the USPS puzzle as no previous PMG has been able.

There is no realistic possibility of enactment of legislation that would force the PRC to do a new, second study of the postal rate structure, taking into account the freeing of the USPS of the large retiree healthcare cost. Such legislation is a false hope. It’s not going to happen.

Alliance asking for a new review of rate system

We alerted our members on April 11 that we had filed a petition with the Postal Regulatory Commission for a new review of the rate system. Here is the gist:

With the passage of the Postal Service Reform Act, the Postal Service is now well-positioned to continue to improve its financial position without saddling mailers with rate increases exceeding historically high levels of inflation. The Act eliminates the bulk of the Postal Service’s accumulated deficit, frees it from past obligations, and significantly reduces institutional costs going forward. Moreover, it remedies the conditions on which the Commission relied when finding the CPI-limited rate system did not achieve the objectives of PAEA. The Commission has a duty to revisit its regulations authorizing above-CPI rate increases in light of these changes and should immediately open a rulemaking docket to do so.

For some reason, the Postal Service appears afraid of what a new review in the wake of its groundbreaking $107 billion Postal Reform Act of 2022 might bring. Not surprisingly, the agency filed a “motion to reject” on April 20. The agency concluded:

After extensive deliberation, the Commission established a new regulatory system that was intended to allow the Postal Service to make progress towards financial stability, in conjunction with continued efforts by the Postal Service to reduce costs and increase efficiency. Meaningful progress towards this goal is now being made, via use of the pricing authorities provided by the Commission and the Postal Service’s other efforts to reduce costs, increase efficiency, and raise revenue under the Delivering for America Plan. At the same time, the Postal Service is also now taking action pursuant to the Plan to address its many outstanding and long-deferred capital investment needs. The passage of the PSRA provides significant additional momentum to achieving the goal of a financially viable Postal Service but does not solve the Postal Service’s problems or call into question the appropriateness of the current system. Consistent with the principles laid out by the Commission in Order No. 5763, the Commission should decline the petitions.

As always, the monopoly mail agency’s point of view is entirely inward-looking with no consideration for the impact on its customers. We will again alert our members when we reply to the USPS rejection motion.