Understanding the Postal Regulatory Commission's Power.

In a number of previous posts, I indicated that the Annual Compliance Review had the potential to become a mini-rate case.  In her remarks before the Financial Services and General Government Subcommittee of the Senate Appropriations Committee, Postal Regulatory Commission Chairman Ruth Goldway laid out a view of the Postal Regulatory Commission that more than reinforces that view.

Chairman Goldway, in response to a question from Senator Durbin, noted that the PRC's opinion on the Postal Service's 5-day delivery proposal was advisory.  The PRC could not stop the Postal Service from implementing a service change that it advised against.   However she indicated that the Commission had the power to compel the Postal Service to reinstate service if it finds as part of the annual compliance review that the change results in the Postal Service no longer providing the universal service required by the law.

Her exact quote was:

Every year we have to make a report on whether the Postal Service has complied with the law and that means whether it [the Postal Service] has met its obligation to provide an efficient and fair level of universal service.  So if they don't take our advice on this [the 5-day delivery proposal] and at the end of the year they entered into an activity that we deem is less than universal service, we can find them out of compliance and require them to start up some new activity again.   But we could not tell them at the time of our advisory opinion what to do.

The PRC will issue its review of the Postal Service's 2009 Annual Compliance Report in the next few weeks.   This quote suggests that the Commission will assert that it has the power to compel the Postal Service to change any aspect of its rates or service in order to comply with the law. 

The Public Representative and others presented testimony in the annual compliance proceeding stating that Postal Service rates put it out of compliance with the law.   Given Chairman Goldway's understanding of the Commission's powers, the possibility exists that the Commission could concur with these assessments and require the Postal Service to adjust its rates upward to comply with the law.  

Mailers and the Postal Service appear likely to find an outcome in the PRC's review of the Annual Compliance Report to their liking only if the Commission does not find that the testimony arguing non-compliance was convincing or identifies a way to defer its power to compel Postal Service action.

Earlier Posts on this topic:

• Rethinking the Value of Postal Regulatory Policy
• Regulating the USPS into Financial Stability
• Re-regulating the Postal Service

Closing the USPS' Income Gap

The Public Representative performed a service for postal stakeholders in their estimates of the required rate increases to return the Postal Service to break even by 2011 under various estimates of the Postal Service’s retiree obligations. These estimates represent the worst case scenarios for mailers as they assume that the return to break even could only come from increases in rates.

Unfortunately for mailers, the Public Representatives estimates of rate increases are not enough to return the Postal Service to self sufficiency. Simply put, the break even goal for 2011, a goal that guided rate cases under the Postal Reorganization Act, is not sufficient to ensure a financially viable Postal Service. A more realistic goal would include these two parameters:

• A target for cash flow that is sufficient to fund capital expenditures, working capital, transition costs of a shrinking network and workforce and potential dividends and taxes or payments in lieu of taxes.
• An EBITDA (earnings before interest, taxes, depreciation and amortization) and an interest expense ratio such that a government guarantee would not be required to raise capital in the debt markets, even if private capital is not employed.The Postal Service may need an EBITDA of between 10% and 15% in order to generate the targeted levels of cash flow.

These targets are independent of the business model employed. They reflect goals that are necessary for both governmental and corporate business models. As such stakeholders that believe that one type of business model or another will prevent job cuts, require fewer closures and relocations of postal plants, preserve the current model of providing retail service, or prevent near-term rate increases above the current rate cap constraints will likely be disappointed if their business model choice is selected by Congress.

So what would really happen to postage rates if the Public Representative used more realistic financial targets? Using the Office of Inspector General recommendations for financial relief, postage rates might need to rise at least 25% without more aggressive actions on restructuring the operating network or modernizing the retail model. Without relief, postage rates might need to rise by 40% or more. (Both of these estimates do not account for the impact of price increases on mail volume.) Not a pretty picture and one that no postal stakeholder believes would ensure a viable postal enterprise as vibrant as it is today.