Joe Schick
Director of Postal Affairs

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Postal Update: Summer Sale, Exigent Price Increase and More

Monday 4/12/2010

The good news ... Summer Sale II has been approved by the Postal Regulatory Commission (PRC). It is the same as last year's sale in the timing (July 1 - September 30) and rebate (30%) for new mail volume. It is different in that the minimum volume needed to qualify is 350,000 pieces (mailed in July - September '09) compared with 1 million in the 2009 sale, and the rebate will only be applied to volumes that are +5% of the volume mailed in the same timeframe last year.

The bad news ... The USPS is definitely intent on filing for an exigent price increase in calendar year 2011. We can only speculate on the percent of increase. Unfortunately, we may actually know the numbers by this summer. If the Postal Service intends to continue to follow their previous timelines for pricing increases, allowing for a 90-day preparation period for mailers from the time prices are approved by the PRC and the USPS Board of Governors, they will have to file the pricing increase by July. That also includes the 90-day process at the PRC.

Remember that the PRC has the authority to modify (increase and/or decrease) the prices in an exigent case. That could prove to be hazardous to those classes or categories of mail that are currently not at 100% cost coverage -- Standard Mail flats and Periodicals in particular. When the filing is made, expect a legal challenge by the mailing industry on the grounds that a bad economy does not constitute an "emergency" situation as intended by the language of the law.

What about the annual allowance for the USPS to increase prices in May at no more than the rate of CPI? In 2010 the number was negative which prevented the Postal Service from increasing prices. Negative CPI continued until last month when it finally inched into positive territory. It is expected to be a positive 1-2% by the end of the year, meaning that the USPS would be able to increase prices twice in 2011: an exigent increase (probably in January) and the CPI increase in May.

Would the USPS be so bold, or should I say out of touch, to double dip and hit customers with two increases in the first half of 2011? I would expect not. Rather, the USPS might decide to "bank" the CPI until May 2012 and add it to the allowable CPI at that time. Whatever decisions are made to increase prices in 2011, it will come at a time when we're just starting to see some slight indications that business may be moving in the right direction. Increasing prices while at the same time wanting to reduce service is not the formula for volume and revenue growth.

Neutral news (for now) ... the USPS filed its 5-day delivery proposal with the PRC on March 30. This starts a proceeding that is expected to last 6-9 months and will result in an advisory opinion by the PRC. During that time, the PRC will be holding field hearings in a number of locations around the country as well as a full schedule of hearings at the Commission's office in Washington, DC. Those hearings will include testimony, comments, questions and many legal bills for everyone participating. After that process, Congress will have the final say in the matter. If they decide to give the USPS the latitude they are asking for (and there are no guarantees based on comments from a number of Senate and House reps), language in the annual appropriations bill will have to be changed. Don't expect that to happen until after the November elections at the earliest. It could, in fact, be pushed back until calendar year 2011. If and when that were to happen, it would be 6 months later before Saturday delivery would be eliminated.

Many questions still need to be answered about the impact on service and costs. Anyone can submit comments to the PRC (www.prc.gov) on this issue, and as of last week they had received more than 1,000 comments from the general public. Major mailers and industry associations will be involved as the proceeding moves on and the procedural schedule is determined later this month.

At this time, only one mailing association has publicly supported the plan. All other groups have remained neutral as there are mailers on both sides of the fence. Postal unions are very much in opposition, and the American public seems to be supportive or doesn't care.

Legislative news ... two major issues are being discussed in Washington related to USPS finances in the future: prefunding of retiree health care (annual +$5 billion payment) and the announcement by the Office of the USPS Inspector General (OIG) of an overpayment ($75 billion) of the retiree pension fund over the last few decades. Mailers, the Postal Service and postal labor unions are all in agreement that the prefunding payment schedule needs to be modified in a way that will lessen the burden on the USPS. There is also agreement that the pension fund overpayment needs to be closely examined to determine if the estimate by the OIG is accurate. Others have come up with different numbers, and at this time the PRC is in the process of contracting with an independent actuarial firm to develop its set of numbers ... hopefully resulting in something that is in line with the OIG. Congress is monitoring the situation and will be holding hearings in the next couple of weeks to gather more information. If the Postal Service were to receive relief from either or both of these impactful issues, there could be an entirely different discussion on the previously mentioned initiatives. However, I wouldn't expect any miracles happening in 2010, but at least there is an ongoing dialogue between all the interested parties.

Needless to say, there is a lot going on that will have a major impact on our business lives in the next 12-24 months and beyond. We'll be involved with all of it, representing your interests and ours, and will keep you updated as news happens.