Postal Regulatory Commission denies USPS exigent rate increase request

Earlier today, the Postal Regulatory Commission (PRC) formally denied a request made in July by the United States Postal Service (USPS) for an average 5.6 percent rate increase.

PRC officials said that the request was turned down, because the USPS “failed to justify rate increases in excess of its statutory CPI price cap.”

This proposal was part of the USPS’s exigent price case to raise rates filed on July 6. This case was comprised of four-to-six percent price increases for various products, including its 18 Market Dominant products. Among the proposed USPS rates changes were:
-raising First Class Stamps to 46 cents, with a new Forever Stamp available in October;
-an 8 percent increase for Periodicals;
-a 5.6 percent increase for Standard Mail;
-6.7 percent increase for Package Services;
-a 5.2 percent increase for Special Services;
-a recommended increase for catalogs of 5.1 percent; and
-Standard Mail parcels increasing by about 23 percent. 

These changes, had they been approved by the PRC, would have taken effect on January 2, 2011. When the USPS made this proposal, it said these price changes would generate $2.3 billion for the last three quarters of Fiscal Year 2011 and an estimated $3 billion for the full 12 months of Fiscal Year 2012.

“After careful consideration, the Commission agreed with the Postal Service that the recent severe recession, and the decline in mail volume experienced during the recession, do qualify as an extraordinary or exceptional circumstance under the law,” said Ruth Y. Goldway, PRC Chairman, in a statement. “However, the Commission finds that the requested exigent rate adjustments are not due to the recent recession, or its impact on mail volume. Rather they represent and attempt to address long-term structural problems not caused by the recent recession. The Commission finds, therefore, that the Postal Service has failed to meet its burden under the law and the Commission is unanimous in denying its request for an exigent rate increase.”

Due largely to an ongoing diversion to electronic alternatives, including e-mailing business documents and online purchasing orders, as well as other electronic mailing processes, the USPS has been under difficult circumstances for more than three years. It has seen mail volume drop by more than 25.6 billion pieces—or 12.7 percent—in the last fiscal year, with total volume currently at 177 billion pieces.

And the USPS also is working to restructure retiree health benefits for as many as 800,000 retirees, even though it only has an active work force of 596,000 career employees. Left uncorrected, that bill will reach $4 billion next year.

PRC officials said that the USPS may not be able to continue to meet a statutory 10-year payment schedule at an average of about $5.5 billion per year to create a fund to pay future retiree health benefit premiums. They added that the USPS has been unable to fund this obligation from operations and has used all of its retained earnings and drawn down from its $15 billion borrowing authority. And even with the requested increase, the USPS would not be able to meet this annual obligation in 2011 or subsequent years, said the PRC.

USPS officials have stated that due to this situation it is running the risk of insolvency, coupled with a massive drop in mail volume and the fact that the bulk of its costs are fixed by laws, contracts, or regulations. And Stephen M. Kearney, USPS senior vice president, Customer Relations, said during a media conference call earlier this year that the USPS’ operating flexibility is severely limited right now.

“Our network is expanding by a million delivery points every year, and we are subject to a lot of legal requirements that limit our ability to reduce service commensurate with the decline in demand,” he said.

USPS Postmaster General John Potter said in a statement that the USPS is disappointed to learn that the Postal Regulatory Commission (PRC) has denied its price filing, but said the USPS is encouraged by the PRC’s acknowledgment and understanding of the larger financial risk the USPS faces through the mandated prefunding of Retiree Health Benefits.

“We will need to take a much closer look at the ruling from the PRC in order to make an informed decision about what options we have and what may be the best course of action for our customers, our employees, our stakeholders and the American public,” said Potter. “The Postal Service ends the current fiscal year with approximately $2 billion cash and available credit, meeting all our end-of-year financial obligations, including a $5.5 billion payment to the Retiree Health Benefit Fund as required by law. As we have stated repeatedly throughout the year, the Postal Service sought a deferral of this $5.5 billion payment to minimize the risk of defaulting on our financial obligations in Fiscal Year 2011. Unfortunately, no legislative action has been taken at this time.”

Even though the PRC denied the USPS’ request, it may not be a bad thing for the USPS as it somewhat helps its case in getting the $50-to-$75 billion overpayment issue with its retirement fund fixed, said Jerry Hempstead, principal of Orlando-based Hempstead Consulting. The reason for this, he said, is the denial by the PRC might force Congress to get the United States Office of Personnel Management to get something done.

And in terms of the rate hike not going through, Hempstead said “some of the parcel increases [proposed in July] approached 35 percent depending on how and where you inducted your standard parcels, so this is a big relief for shippers.” This is particularly relevant for shippers, he said, given the proposed “enormous” increases for parcels weighing less than one pound.