The Postal Regulatory Commission (PRC) has approved the US Postal Service’s request for an “exigent” rate increase (to 49 cents for a one ounce letter) to make up for revenue lost due to the recession. Because the rate hike is related to a temporary economic fluctuation, however, the rate increase is also temporary. How temporary? The PRC doesn’t say. However, the decision requires the USPS to develop a plan for rescinding the rate increase as soon as it has recovered the “lost” income. The PRC says that will happen within two years.
Here’s the PRC summary of its decision:
This Order reviews the Postal Service’s second request for rate increases to offset losses suffered as a result of the Great Recession of 2008 – 2009. Its first request, in 2010, was denied as the Commission found that although the Great Recession was an extraordinary and exceptional event, the Postal Service had failed to quantify losses as due to that recession.
The Postal Service now requests a 4.3 percent increase designed to add $1.8 billion a year to its bottom line. In support of this request, the Postal Service presents an analysis to quantify the volumes it lost due to the Great Recession. This analysis assumes that negative volume trends that began during the Great Recession identify continuing volume losses caused by the Great Recession.
The Postal Service contends that in FY 2012 alone it lost 53.5 billion pieces, worth $6.6 billion in net revenue, as a result of the Great Recession. It further claims that it is continuing to suffer annual Great Recession-related losses. It suggests that by the end of FY 2014, the net revenue lost as a result of the Great Recession will approach $40 billion.
There is substantial mailer opposition to the Postal Service proposal. Mailer presentations conclude that the Postal Service overestimates volume losses due to the Great Recession. They demonstrate that these losses are mostly the predictable result of electronic diversion. They oppose adding the exigent rate increase to base rates.
The Commission finds the Postal Service’s econometric analysis has several flaws. First, the variables used in the model do not separate the effects of economic activity from electronic diversion. Second, the model is incomplete with respect to its choice of macroeconomic variables. Third, the analysis conflates the effects of the Great Recession with other factors. Fourth, the Postal Service relies on unsupported assumptions to attribute volume loss to the Great Recession.
The Commission corrected these flaws by considering both the positive and negative impacts of the Great Recession on mail volume and tying the impact on mail volumes by class to the period of negative economic factors. The Commission considers mail volume loss as due to the Great Recession only until: (1) a sufficient number of relevant macroeconomic indicators demonstrate a return to positive trends; (2) the rate of change for Postal Service mail volumes is positive; (3) the Postal Service regains its ability to project mail volumes; and (4) the Postal Service demonstrates an ability to adjust operations to the lower volumes.
The Commission estimates a total of 25.3 billion pieces were lost between 2008 and 2011 as a result of the Great Recession. This volume loss equates to $2.8 billion in 2014 after-rates contribution (profit).
The Commission analyzes the Postal Service request to recover lost contribution through rate adjustments in light of the statutory requirements. It finds that the Postal Service’s dangerously low liquidity levels make the rate adjustments necessary to maintain and continue needed service. The proposed rate adjustments are reasonable and within the Commission’s estimate of total loss. The proposed rate adjustments are equitable in that they are distributed proportionately to all categories of mail. For those reasons, the Postal Service may implement the proposed rates as scheduled.
However, allowing the rates to remain in effect indefinitely would result in over recovery of the financial impact of the Great Recession on the Postal Service. The rates proposed by the Postal Service will enable it to recover the lost contribution in less than two years.
The Commission finds the Postal Service proposal to collect this rate adjustment indefinitely inconsistent with the fundamental policies underlying the price cap. Under the price cap, the Postal Service is expected to respond to declining volumes by reducing costs and improving efficiencies. Although the Great Recession accelerated volume decline, it does not eliminate the Postal Service’s obligation to respond to revenue losses by reducing costs or improving efficiency. Consequently, the Commission must determine an appropriate end date for collection of the exigent rate adjustment.
The Commission directs the Postal Service to report quarterly on the revenues generated by these rates, and to develop a plan to phase out these rates once they have produced the revenues justified by this request.