Wednesday, January 6, 2010

Re-regulating the Postal Service?

Yesterday the Postal Regulatory Commission established Docket No. ACR2009, "to consider matters raised by the Postal Service's FY 2009 Annual Compliance Report."    The specific request of the PRC, and in particular its reference to those sections of the U.S. Code relating to ratemaking requirements and objectives that remained virtually unchanged with the passage of the PAEA, suggests that its review of the Annual Compliance Report could become the equivalent of a "rate case light."

The PRC asked the Postal Service and others parties to comment on whether the Annual Compliance Report shows that postal rates and fees comply with the pricing requirements and objectives.   While the PRC cannot force the Postal Service to change its rates to be in compliance, it could use this proceeding to determine that certain rates are not.   If the PRC draws the conclusion that certain rates are not in compliance, it will base it on nearly 40 years of ratemaking precedence and the pricing framework developed in what Congress saw as a failed ratemaking process in its decision to pass the PAEA.

A PRC decision that the Postal Service's rates are not in compliance with the ratemaking requirements and objectives of 39 U.S.C. could have consequences beyond a public embarrasment of the Postal Service.  Private parties could take the PRC's ruling to court to deal with the conflict between the price cap design and the ratemaking requirements and objectives.   It may be possible that a court could force the Postal Service to raise rates in order to comply with its ratemaking requirements and objectives.

The PRC's notice highlights the rates that could cause it to issue a determination of non-compliance.

Rates for market dominant products that are below the product's measured attributable costs  
  • Periodical Mail lost $642 million in FY 2009, "earning revenues that were only 76 percent of attributable costs;"  
  • "Regular flats, Standard Regular parcels and NFM's together lost $830 million.  Flat [revenue] was roughly 82 percent of attributable costs and revenues for parcels and NFM's were roughly 75 percent of attributable costs.
  • Among package services products, only Bound Printed Matter flats and Inbound Surface Parcel Post covered their attributable costs.
  • Four Special Services failed to recover their attributable costs—Registered Mail, Stamped Cards, International Ancillary Services, and Confirm.
  • International Inbound Single-Piece First-Class Mail failed to cover its costs, earning revenues that were approximately 60 percent of attributable costs.
 Worksharing discounts granted to products that are larger than avoidable costs. 
  • The Postal Service provides a discussion of the competing policy considerations that impact workshare discounts and the reasons a substantial number of workshare discounts may have exceeded avoided costs in FY 2009.
Rates for competitive products that are priced below attributable costs 

  • These products are Inbound International Expedited Services 1 and 2; Inbound Surface Parcel Post at Non-UPU Rates; International Money Transfer Service; Competitive Registered Mail; Competitive Insurance; Competitive Return Receipt; and Competitive International Business Reply Service negotiated service agreement contracts.
Stakeholders that are concerned that the PRC could issue a statement of non-compliance should take this proceeding very seriously.    In particular, stakeholders should consider the following costing, pricing and policy issues that the Commission's request raises.
  • What is the role of the ratemaking objectives and requirements when the Postal Service has the option of using price caps to adjust rates?
  • What is the role of the ratemaking objectives and requirements when the Postal Service is trying to lower costs in order to become profitable under a price cap regime?
  • What implications for postal policy and Postal Service self sufficiency does the requirement that worksharing discounts be limited to differences in costs have? 
  • How does the collection of revenue, volume, and cost data using sampling systems affect the reliability of cost estimates and determination of cost coverage for low volume products?   Cost estimates of low volume products have a large variance around the estimate of costs refleccting the interaction of variances associated with estimates generated by all of the Postal Service's sample based costing , volume and revenue measurement systems.
  • What impact do preferential rates for products such as periodicals and non-profit mail have on the issue of compliance with ratemaking objectives and requirements?   
  • Is the potential non-compliance of the identified Standard rate categories related to the proportion of non-profit mail in those categories?
  • If preferential rates cause the non-compliance, should the Postal Service provide an estimate of the lost revenue due to preferential rates and seek payment from Congress for the legislated preferences?
  • How should the process of moving periodicals 2010 be changed to reduce costs? See Dead Tree Edition for some suggestions.
  • Are there problems in cost models for periodicals that cause an overestimation of their costs?   See "Periodicals, The Postal Service’s Math Doesn’t Add Up."
  • Is there value in handling Periodicals at cost or below cost to improve the value of advertising mail? 
  • How relevant are FY 2009 costs for 2010 rates for flats given that they are based on costs determined in production processes and a processing network that is being replaced by a network designed around automated flat sorting machines?
  • How relevant are any FY2009 costs for estimating compliance given expected changes in operating, delivery, and transportation networks as the Postal Service consolidates facilities, and continually optimizes delivery routes?
  • Do piggyback factors based on the use of labor to process mail distort the distribution of facility related costs given that the costing theory used to create these piggyback factors date back to the time that mail was sorted manually?   
  • How do the legal requirements for workshare discounts distort the prices of workshared and non-workshared products?
  • How does the continued linkage between single piece First Class and bulk first class rates affect non-First Class rates and in particular the rates of single piece parcel products?  Are Parcel Post rates, and in particular Parcel Post rates under 2 pounds constrained by the level of First Class rates which are themselves constrained by workshare discount requirements and precedent relating to ratemaking objectives?
  • Would market-based rates for mail produce rates significantly different than what Commission precedent would generate?   In particular, what rates would the Postal Service charge if its rates were "rational?"  (In this context, rational is used in the way that investment analysts describe transportation prices that allow firms in the industry to earn competitive rate of return.   Generally, firms with pricing freedom, price irrationally when they are willing to charge prices below cost just to hold onto the business.   This often occurs when a market has significant overcapacity.   Currently, analysts are describing the recent pricing decisions of FedEx and UPS as rational as capacity has been cut sufficiently to match current demand levels.   Analysts are still concerned about irrational pricing in the less-than-truckload and truckload markets where significant overcapacity still exists.)

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