Wednesday, August 18, 2010

Why the Exigent Rate Case Should Not be Approved

I have tried to avoid commenting on the exigent rate case up till now.   I have long held that the Postal Service can no longer hold accounting break-even as the standard for financial self-sufficiency.  Over a year ago I wrote that financial self sufficiency requires an operating margin of 10 to 15 percent and until the Postal Service manages its business with that goal in mind it will be in a continuing state of crisis.

In addition, I have written that the decline in First Class mail, and in particular single-piece First Class mail will impose significant costs on the Postal Service for shrinking its workforce and network that should be borne by current users of this product today as otherwise the Postal Service will not have sufficient cash to cover those costs when they incur in the future.   Then these costs will be mostly born by advertising and parcel mailers in the future as there will not be enough single piece First Class mailers left to handle the brunt of these costs. However, the current costing approach does not recognize this need so the Postal Service is less likely to take steps that cost money to quickly reduce its workforce and network as demand declines.

So if I believe that the Postal Service needs to have a significant operating margin and higher prices on products to cover transition costs, why do I believe that the exigent rate increase should not be approved?

  1. Approving the exigent rate case reduces the pressure on Congress to fix the retiree benefit over-payments for pensions and miscalculations of these obligations.   No solution to the Postal Service's problems exists without this fix.   This is true regardless of whether one believes that the Postal Service should be privatized or should continue operating using a business model similar to the one it now has.   The exigent rate case reduces the level of adjustments that Congress must make to prevent an annual liquidity crisis, let alone solve this problem.

  2.  The timing of the exigent rate case weakens the Postal Service's political position as it attempts to streamline its network.   The Postal Service has always faced pressure from Congress that often derailed efforts to streamline its network and modernize its retail operations.    Without the exigent rate case the Congress is more clearly faced with the choice between allowing the Postal Service to streamline its operations and subsidizing postal operations.   Given budget politics, subsidizing postal operations is clearly off the table.

  3. The exigent rate case weakens the Postal Service's argument before Congress that it needs greater commercial freedom and ability to offer "non-postal" products.   The long term health of the mailing industry requires the Postal Service to have significantly greater commercial freedom to expand the value of its products to customers and to identify additional means of earning a profit off of its physical, intellectual, and human capital assets.  A change in law to expand this ability puts the Postal Service in direct competition with a number of powerful interests that benefit from these restrictions.    These restrictions weaken the U.S. economy as they limit competition in both the delivery of parcels and more importantly in the production and the delivery of advertising used to identify new customers and expand private sector businesses.

  4. The exigent rate case makes little sense for an enterprise whose customers require that what they pay for postage generates a positive return.  Increasingly postal revenue is driven by advertising and parcel delivery.    These are highly competitive markets where spending on services provided by the Postal Service require that its service provide a higher return than those offered by competitive delivery modes, as well as a higher return than not advertising at all.   Higher prices reduce the number of customers that find that mail generates the positive return on their advertising spending necessary to use the mail.

  5. The exigent rate case comes at the wrong time relative to the Postal Service's labor negotiations.   The Postal Service is likely to demand some significant, necessary and unpopular changes in its labor contracts within the next two years.    These changes reflect the fact that the total demand for labor, the mix of full-time and part-time employees, and a number of other contract provisions no longer make sense when few postal customers use retail outlets and most mail does not require originating sortation.    It makes little sense for Postal management to raise rates prior to beginning the negotiations and more importantly arbitration where its ability to raise rates could be a significant factor in the arbitrator's decision.   Postal labor unions recognize this fact and have been among the strongest supporters of the exigent rate case.

  6. The exigent rate case does not introduce realistic financial goals for the enterprise.   It makes little sense to raise rates without changing the primary financial goal of the organization from whether there is enough money at the end of the year to pay the bills.    Before the Postal Regulatory Commission even considers raising rates, it should develop a position as to what financial goals are needed to ensure self sufficiency.  This is also critical for Congress to understand why fixing the retiree expense issues cannot be avoided but also why it is the first step and not the last step necessary if the Postal Service is to have a long-term future.

  7. The exigent rate case maintains the cost plus approach dating back to regulation under the Postal Reorganization Act.   Postal rates eventually have to reflect a better understanding of demand for its products and the costs of an efficient operator.   Costing approaches, rate relationships, and worksharing discounts all take the focus away from the value of the service to the customer in determining prices.   Worksharing increased volumes of mail, not just because the private sector could sort mail cheaper because many of the automation related discounts could be received by mailers that did not have to incur any costs to sort the mail they tendered to the Postal Service at all.   Instead, the discounts put the price of the delivery service below the value of the delivery for more customers allowing advertising agencies and printers to sell their services to customers that would not have considered the use of mail previously.  Worrying about the level of cost pass-through prevents the Postal Service from asking two even more important questions.  1) What is the value of mail to the sender and how do postal prices compare with the value that senders perceive that mail has?  2) How can the Postal Service provide its services at costs below the customer's understanding of the value of the service?
  8. The exigent rate case illustrates that a piece-meal approach to fixing the Postal Service's business model and regulatory framework does not work.  The exigent rate case, just like all other proposals made by the Postal Service is being handled independently of all other changes that may be needed to restore financial self sufficiency to the Postal Service.   As such, it is never clear if rate increases do little more than reduce the pressure on taking other steps neccesary to make the Postal Service self sufficient.
In closing, rates for Postal Services eventually need to reflect market realities and the costs of an efficient operator both capable of and working toward managing operations to cost levels that market realities can support.  This requires a better understanding of the value of mail to customers, the elimination of unwarranted retiree expenses, the streamlining of management and contract resources, the speedy restructuring of the network to minimize delivery, processing and transportation costs while still meeting universal service requirements, and elimination of restrictions that prevent the most effective use of human capital, physical and intellectual property assets.  The exigent rate case conducted in a vacuum brings us no closer to producing rates based on market realities and may hinder fixing a number of the serious flaws in the business model and regulatory framework that must be changed.


Anonymous said...

your goal is to pay someone proverty wages with no benefits or a gaurantee of any work hours. could you support a family with that?

Anonymous said...

Alan's last paragraph is key. Comprehensive, not piece-meal change, is required. There is a solution, and is is not solely "fire useless management", nor "break the union", nor "eliminate PAEA pre-funding", nor any other single proposal. The solution is compromise, not more lobbying. Unfortunately, we live in a politically-charged world. I don't see the parties coming together. It's going to get worse before it gets better, imho.

Anonymous said...

Why does no one address the fat at the top. Continually the cuts come down to the actual workers. Supervisors, managers, Post Masters and most especially the fatest fat at the top, the PostMaster General and his cronies.
They are actually only superficial postions and should be the first cut.

ray said...

The exigent rate case does not rectify the disparity between the discount given to bulk mailers for presorting and the need for this presorting. It is more cost effective for the postal service to sort and run the mail themselves! Will be a huge boost in revenue and should be done immediately.