Priority Mail: Two USPS Initiatives to Watch - Exigent Rate Case and IMb

This fall there are two important USPS initiatives to watch. The first is the progress of the rate case filed by the USPS in July 2010 to raise rates effective January 2011. The second is the full implementation of Intelligent Mail, scheduled for May 2011. Both have important implications for mailers. The rate case, should it become effective, is predicted to further lower overall mail volume, which will affect the workload and sales volume of mailers, and complying with Intelligent Mail regulations may increase costs for mailers.

Exigent Rate Case

Under new rules established by Congress in 2006, the USPS can raise rates each May using a formula based on the Consumer Price Index (CPI), and under “extraordinary or exceptional circumstances” at times other than May. In July 2010 the USPS exercised the second option by filing what has come to be known as the exigent rate case (exigent means pressing or urgent). The USPS claims that the recession, coupled with a faster than anticipated decline in mail volume, renders the USPS unable to meet its operating expenses and its Congressionally mandated contribution to retiree benefits—a prepayment of $5.4 billion each year until 2016 to cover the healthcare costs of retired employees.

Its decision was supported by three separate studies conducted by three reputable consulting companies—Boston Consulting Group (forecast mail volume), Accenture (additional USPS products), and McKinsey and Company (business model). Here are the results:

• Boston Consulting Group: Projects another 15% drop in mail volume over the next decade, or 150 billion pieces by 2020 (down from a high of 213 billion pieces in 2006). Also, a shift away from first class mail (loss of 30 billion pieces). USPS revenue will be lower from both the loss in volume and the reduction in first class as a percent of overall volume.
• Accenture: Although other national postal systems provide additional services such as mobile phones, banking and logistics, this is not feasible for the USPS because of the required capital investments. However, even at a reduced volume of 150 billion pieces of mail, the USPS is still the largest postal system in the world, and should concentrate on its core business—mailing and shipping.
• McKinsey and Company: Without significant changes, the USPS faces a cumulative $238 billion loss from now until 2020, when the net income gap will be $33 billion. The current business model lacks the flexibility required to manage the USPS through this time of transition.

Using the results of all three studies and recommendations made by McKinsey, the USPS produced a plan with these primary features:

• Ask Congress to adjust the current retiree health benefit payment schedule to “pay as you go.”
• Ask Congress to eliminate Saturday delivery.
• Ask Congress to expand access to postal product by using retail, non-postal locations that are open seven days a week and up to 24 hours a day (like office supply, grocery, and pharmacy chain stores), and then close post offices where it makes economic sense.

McKinsey also recommended eliminating outdated work rules to bring labor costs in line with the USPS ability to pay, base pricing for market dominant products on demand for each product and cost structure, changing the pricing cap to the market dominant level, and use exigent pricing.

Postmaster General John Potter announced in early March that an exigent rate increase would be sought, and the actual rate case was filed in early July. At 5.6%, the increase is the largest since May 2007 (7.6%). Periodicals and package services have the highest rate of increase.

Industry response was swift, and centered almost exclusively on the idea of whether current conditions constitute the emergency that the USPS claims and, therefore, is a good reason for breaking the CPI cap. Also at issue was the wisdom of raising rates at a time when prices for most goods and services are either holding steady or declining.