New postal legislation may level the parcel playing field

Pricing changes give the USPS more flexibility to compete with private-sector carriers

By Jeff Berman, Senior Editor -- Logistics Management, 1/1/2007

WASHINGTON—Postal-reform legislation signed by President George W. Bush last month may put the United States Postal Service (USPS) in a better position to compete with private-sector giants UPS, FedEx, and DHL. The Postal Accountability and Enhancement Act (H.R. 6407), the first major overhaul of postal pricing in more than 30 years, authorizes the USPS to revamp how it determines pricing, change prices when needed, and roll out new or customized products in response to customer demand.

A major provision of the bill directs the newly created Postal Regulatory Commission to establish a system for separately regulating rates and classes for “market-dominant” (monopoly) products, including periodicals, first-class mail and parcels, standard mail, and bound printed matter; and “competitive” products, including priority and expedited mail, bulk parcel post, and international mail.

The Postal Service will now have to ensure that revenue from each competitive product covers its own costs; the commission will also have to issue regulations that prohibit the USPS from using revenue from market-dominant products to subsidize competitive products. Private-sector carriers have long contended that monopoly services like first-class mail are subsidizing the cost of parcel express and other competitive products.

Other provisions of interest to shippers include: more flexibility in setting rates for competitive products, including the ability to negotiate discounts for individual shippers; an annual cap that limits rate increases for market-dominant products over the next 10 years to the percentage change in the Consumer Price Index; more predictable rate adjustments; faster approval and implementation of rate changes; 30 days’ advance notice of rate changes for competitive products; and a requirement that the USPS rationalize its network of some 400 logistics facilities.

One likely result of these provisions is that the Postal Service will issue more-frequent but smaller rate increases—probably annually for some products—much as FedEx, UPS, and other carriers do, says consultant Doug Caldwell, executive vice president of ParcelPool in Oram, Utah. That will allow shippers to better forecast their costs, he says. Shippers can also expect the USPS to offer negotiated service agreements, which in effect are discounting and work-sharing agreements, he adds.

Under the new law, the Postal Service has the potential to compete on a more level playing field with express-delivery bellwethers UPS and FedEx, says Kate Muth, vice president of the Association for Postal Commerce, an Alexandria, Va.-based group that focuses on mail usage for business communications and commerce.

“From a shipper’s perspective, what they will find with the USPS is that it will have more flexibility in how it sets its rates for competitive products,” said Muth. But the Postal Service won’t have complete freedom: It will still have to submit its rate proposals, including negotiated rates for individual shippers, to a regulatory body, she notes.

Despite that handicap, the Postal Service’s increased pricing flexibility for competitive products may present some risk to private-sector carriers, suggested Thomas R. Wadewitz of investment banking firm JPMorgan in a recent research report. “We believe the flexibility could enable the USPS to become a tougher competitor over time,” he wrote.

In exchange for more pricing flexibility, the law puts more responsibility on the USPS to keep costs in line and a close eye on the bottom line, says Caldwell. “The USPS will have to operate more entrepreneurially,” he says. “This law lets them do that.”