What’s fair is fair: The PRC issues a final order on the “appropriate share” issue
What’s fair is fair: The PRC issues a final order on the “appropriate share” issue, Save the Post Office, Steve Hutkins
Another one of the posts by Steve Hutkins about the USPS. The effort by commercial interests to get the USPS to increase pricing has been going on for years. At the bottom, I have attached a post by Mark Jamison (“When Titans Collide: UPS petitions the PRC to change USPS costing methodologies”) detailing the efforts of UPS to get USPS to increase pricing. It is the same old story. USPS will be forced to abandon certain business which is what UPS wants so as to have complete control. Forth qtr. profits in 2022 for UPS lifted full-year earnings to $11.3 billion. This is up from what had already been a record, of $10.7 billion, a year ago. Read on , , ,
After six years of debate and deliberation, hundreds of pages of stakeholder comments, several previous PRC orders evaluating these comments, an appeal by UPS to federal court, and God knows how many hours of attorney fees (some paid by corporations like UPS and Amazon, some by taxpayers), the Postal Regulatory Commission has issued what it surely hopes will be its final order relating to the institutional cost contribution requirement for Competitive products.
Order No. 6399, issued on Monday of this week, runs to over 280 pages. The main question it addresses is what is the “appropriate share” that Competitive products should contribute to the Postal Service’s institutional costs. The order reviews the entire history of the “appropriate share” issue, going back to the legislative background of the 2006 Postal Accountability and Enhancement Act. It then responds in detail to an order from the D.C. Circuit Court remanding an earlier PRC order, and it concludes by “finalizing” the rule on the appropriate share it had previously approved.
On one side of the debate is the United Parcel Service, which has been trying for many years to get the PRC to change how it allocates costs so that the Postal Service would need to raise rates on the products with which UPS competes. Supporting UPS in this effort are two conservative, free-market think tanks, the Lexington Institute and the American Consumer Institute. On other side of the debate are the Postal Service, Amazon, Pitney Bowes, and a group of mailers associations, including the Parcel Shippers Association, all of which, for one reason or another, benefit by maintaining lower shipping rates.
The issues in the case go back to 2006, when PAEA divided postal products into Market Dominant (letters, flats and periodicals) and Competitive (priority and most parcels). In order to prevent the Postal Service from using revenues from Market Dominant products to defray costs from Competitive products, which would be unfair to competitors like UPS and FedEx, PAEA required each product to cover its attributable costs (those that are caused by or otherwise associated with a particular product) and also to contribute an “appropriate share” to institutional costs (the fixed costs that can’t be associated with a particular product).
In 2007, based on Competitive products’ historical contribution to institutional costs during the previous two years, the Commission set the minimum contribution at 5.5 percent. PAEA also directed the PRC to revisit the appropriate share regulation at least every 5 years to determine if the minimum contribution requirement should be “retained in its current form, modified, or eliminated.” The first review maintained the 5.5 percent floor, but the second review, initiated in 2016, led to a significant change.
The formula-based approach
In 2018 the Commission proposed a new formula-based approach to determining the minimum contribution. Based on this formula, the minimum contribution was increased to 8.8 percent in FY 2020 and 9.1 percent in FY 2021. Based on the recently submitted Annual Compliance Review, it will increase to 10 percent for FY 2022.
Those numbers, it should be emphasized, represent just the floor. In actuality, Competitive products have been contributing much more than the minimum: 30.8 percent of total institutional costs in FY 2020, 39.2 percent in FY 2021, and 38.1 percent in FY 2022.
Because Competitive products have been contributing an amount several times greater than the floor set by the new formula, several commenters, including Amazon and the Parcel Shippers Association, have argued that the minimum contribution is no longer necessary and should simply be eliminated.
UPS, however, has not been satisfied with even these relatively large contribution numbers, and it has persisted in trying to get the PRC to require the Postal Service to allocate more costs to competitive products. UPS challenged the PRC’s 2018 order approving the formula-based approach in the D. C. Circuit Court and won a decision remanding the order back to the PRC for further consideration and clarification. At issue was the technical language used in the statute describing the standard for which costs should be viewed as attributable and which should be viewed as institutional. In this week’s order, the Commission responds to the issues identified by the court but stands by the formula-based approach it had developed previously.
A “fully distributed” costing methodology
Some of the UPS proposals would essentially eliminate institutional costs altogether and produce a “fully distributed” costing system, i.e., all costs would be attributed to one product or another and there would be no fixed, institutional costs.
Moving toward a “fully distributed” cost methodology was one of the recommendations of the report by President Trump’s Task Force on the Postal Service. (One can safely assume that this recommendation was the result of lobbying by UPS.) According to the Task Force, “the USPS’s current cost allocation methodology is outdated, leading to distortions in investment and product pricing decisions.” In order to reduce this “distortion,” the Task Force recommended that “the USPS and the PRC develop a new cost allocation model with fully distributed costs to all products, services, and activities.”
The recently passed Postal Reform Act (Section 203) also calls for a PRC review of the costing methodology “to determine whether revisions are appropriate to ensure that all direct and indirect costs attributable to competitive and market-dominant products are properly attributed to those products.”
(Again, the provision was probably the result of lobbying by UPS.)
One of the more straight-forward proposals offered by UPS would attribute the institutional costs to various products based on their percentage of attributable costs. Here’s how that could affect postal rates. (The following analysis is not part of the Commission’s order.)
According to the USPS Annual Compliance Report released a couple of week ago, in FY 2022, Competitive products contributed $12.46 billion to total institutional costs of $32.71 billion — a contribution of 38.1 percent of the total. Attributable costs for competitive products were $20.7 billion out of a total of $47 billion — 44 percent of the total attributable costs.
If institutional costs were distributed based on the attributable cost percentages, competitive products would need to contribute 44 percent rather than 38 percent of institutional costs. In order to maintain the current profit margin on competitive products, the Postal Service would need to increase revenues by about $2 billion a year and raise rates by 6 percent. That, presumably, would be on top of the regular annual increases necessary to keep up with rising expenses and inflation.
With billions of dollars at stake, then, it’s easy to see why UPS has been working so hard for costing methodologies that will drive up USPS rates. Spending millions on legal fees, lobbying, and campaign contributions is well worth the cost if it means winning a larger market share and increasing profits. That’s why UPS may once again challenge the Commission’s “final” order on the appropriate share issue. It may not be the final word at all.
The aim of UPS and its free-market allies is to increase the costs — and consequently the rates — for Competitive products. Higher cost allocations would not in themselves require the Postal Service to raise prices — it could just accept a lower profit margin — but price increases would be the most likely outcome.
Higher rates could make some USPS products simply unsustainable. At the least, they would drive away business to the Postal Service’s competitors and lead to higher prices for consumers. That’s the concern expressed by the Commission in this week’s order:
Most significantly of all, the arbitrary allocation of institutional costs to Competitive products could undermine the Postal Service’s ability to effectively compete in the market for competitive postal services because it could force the Postal Service to either stop offering products that were actually helping to cover institutional costs, or to raise product prices to unsustainable levels relative to other competitors in the market. Either outcome would lead to less rigorous competition in the market. Customers would have fewer options and there would be fewer constraints on the prices charged by competitors. (Page 109)
Constraining the prices charged by competitors has always been one of the main reasons the Postal Service delivers packages. The Post Office only got into the parcel post business in the early 1900s because the private express delivery companies were working together to keep prices high. Competition from the public Post Office was thus a way to keep the private companies in check.
And that’s as true now as it was a hundred years ago.
When Titans collide: UPS petitions the PRC to change USPS costing methodologies, Angry Bear, Mark Jamison, Save the Post Office 2015.
Mark: If the PRC were to approve the UPS proposals, the Postal Service would need to raise the prices of its competitive products significantly — much more than the 9.5 percent increase announced a few days ago. UPS would find itself in a much more competitive position. It could raise its own prices and/or grab a larger share of the parcels market.
Same old story . . .
A couple questions here. If USPS loses and cost share increase drives price increases, would those price increases and volume decrease then loop back to push the cost share down again? Would price increases in competitive products relieve pricing pressure on dominant products somehow?
That’s very unlikely. The USPS has to serve just about every address and deliver things like first class letters for well under a dollar for the first ounce. Since they have to run trucks through their entire system just about daily, adding package delivery has a marginal cost but provides a good profit. UPS, in contrast, only goes where it has a package to deliver, so it has a lot of base costs to cover. As usual, the private sector cannot compete with the public sector, so the idea is to force the USPS out of the package market so the private sector can raise rates. This would mean that the USPS would stop getting that additional package revenue but still have to run its daily first class service. That’s obviously going to raise costs and put pressure on service.
Yeah, I was wondering what the People’s Republic of China had to do with USPS control ??? :<) Got to luv acronyms. Regardless, I would pay more for USPS because it is closer to my home and provides full service rather than just drop-offs.
You kind of have the picture. The USPS is not supposed to be competitive. It is constitutionally tasked to deliver mail to ll parts of the country. That first-class stamp costing 63 cent entitles the sender to have the USPS deliver that letter anywhere in the US. It is a public service and not a private entity.
The USPS is not supposed to be profitable. It is up to commercial interests to be profitable. The USPS is constitutionally tasked with delivering the mail to all parts of the US where UPS, FedX, Amazon, and others will not go unless it charges more and has a route there. That the latter can not be as profitable is their issue and not for the USPS to resolve by raising prices.
The current governing law though drives USPS to be working hard to increase revenue and cut costs. Call it what you will, USPS is being directed to higher levels of financial self-sufficiency. Might be counterproductive for the best interests of the country over time, but USPS management is going to work as if something like profit is a major goal and maybe the major goal. This is why I wonder if replacing DeJoy is really a big priority or not. Apart from claiming his long sought scalp, maybe the future does change a lot if the laws don’t change.
This is so typical of the private sector. They can’t compete. Back in the early 1980s, the USPS offered email to everyone with completion by physical letter for people without computers. It was a bit expensive, $1 a letter, but it was a great technology that is now considered standard. Naturally, private companies unable to compete force the USPS to drop the service. Sometimes I wonder why we put up with the private sector.
That is something I did not know, If you get a chance, read Mark Jamison’s commentary at the end of the post. Former US Postmaster in North Carolina who testified in federal Court in fvor the USPS.
A different PRC order…
The Chinese government denounced the U.S. decision to down the balloon, calling it an “excessive reaction that seriously violates international convention.” The Foreign Ministry said China “retains the right to respond further,” and the National Defense Ministry said it would “use the necessary means to deal with similar circumstances.” …
The PRC says
There are other theories about how this could have happened. China’s sprawling bureaucracy might simply be too big to track the whereabouts of all its high-altitude balloons across the globe, and anticipate when their locations might set off alarm. (After a spate of reports in recent days, China acknowledged on Monday that another Chinese balloon is floating around Latin America, also, according to Beijing, errantly.) …
It seems like orbiting satellites are not to be considered as ‘air space violators’ but wandering balloons ARE such.
NYT: The top military commander overseeing North American airspace said Monday that some previous incursions by Chinese spy balloons during the Trump administration were not detected in real time, and the Pentagon learned of them only later.
“I will tell you that we did not detect those threats, and that’s a domain awareness gap,” said Gen. Glen D. VanHerck, the commander of the Pentagon’s Northern Command.
explanation, multiple U.S. officials said, is that some previous incursions were initially classified as “unidentified aerial phenomena,” Pentagon speak for U.F.O.s. As the Pentagon and intelligence agencies stepped up efforts over the past two years to find explanations for many of those incidents, officials reclassified some events as Chinese spy balloons.
It is not clear when the Pentagon determined the incidents involved Chinese spying. …