You came to the Postal Regulatory Commission (PRC) the same time that the Postal Accountability and Enhancement Act (PAEA) became law. So much has transpired over this intervening time - what are some of the highlights?
It's been exciting. Assuming leadership in December 2006, at the same time we were transitioning into the Regulatory Commission from the former Rate Commission, was challenging. We were on a dual track: finishing a rate case under the old law and moving into our new role as the strengthened regulator. I took the bold step in March 2007 when I said the Commission could have new ratemaking systems for competitive and market-dominant products in place prior to the June 2008 statutory deadline. We beat that deadline by eight months and issued final regulations on this essential and critical requirement of the PAEA at the end of October. I'm proud that our hard work and the tremendous input from the postal community resulted in the Postal Service foregoing one last omnibus rate case under the 1970 law and adopting the new ratemaking process.
Before issuing our proposed rules, however, we wanted to hear from the public. That's why we issued two advance notices asking interested parties to tell us their expectations for a new ratemaking system. The Commission also held field hearings in Los Angeles, Kansas City and Wilmington to make sure we heard from mailers outside of Washington, DC. I also testified five times before Congress over a seven-month period, so we also had the benefit of hearing from the authors of the new law.
What are the advantages of the new ratemaking system?
The benefits are tremendous. The elimination of costly and time-consuming rate cases in favor of annual rate adjustments with a cap based on the CPI and a 45-day notice period gives mailers the predictability they need to better project mail volumes and costs. It also provides the Postal Service with the tools to balance its near-term needs with future goals. The bottom line is the predictability and transparency of the data behind cost adjustments will bring more value to the mail. (Editor's note: The PRC updates the price cap based on monthly CPI changes, www.prc.gov.)
The law also calls for new service standards and performance goals. Is the PRC involved in this effort?
Absolutely. The PAEA requires the Postal Service to have new standards for each class of mail by December 2007 and performance goals for these standards by June 2008. The law also requires consultation with the Commission on this effort. I've been pleased with the series of meetings we've had with senior postal officials which are ongoing. We continue to solicit the input of mailers on service standards because we know that realistic delivery standards and attainable goals are critical to the viability of the Postal Service.
How important do you believe pricing and product innovations will be to the future of the Postal Service?
After cost containment and maintaining as well as improving service quality, this is very important. Innovations can help stem or offset lost profit from volume declines and may help draw in new business. In the past, pricing innovation through work sharing discounts had a phenomenal impact. The innovative set of discounts dramatically boosted volume in all classes, created private companies to market mail and reduced the costs of mailing.
Can you provide us with examples of innovations that have been introduced into the pricing of parcels?
A key innovation that dates back to the 1990s was the introduction of discounts on parcel rates for those mailers who drop ship parcels to the local delivery unit or regional sorting facility with barcodes and presorting. This work sharing activity significantly eliminated costs in the Postal Service, reduced the postage paid to the Postal Service and allowed mailers to use other, less costly and more customer-friendly means to get parcels closer to the point of delivery. UPS, FedEx and DHL now use these discounts to hand over to the Postal Service large volumes of parcels for the "last mile" of delivery, which, for example, reduces logistics costs to rural areas. This resulted in a dramatic and immediate turnaround in a decades-old decline in the number of parcels delivered by the Postal Service.
A major development in the last rate case was the Postal Service's emphasis on shape-based pricing, which had many positive effects, including rationalizing the difference in pricing between letters and flats based on differences in costs. For parcels, the Commission agreed with mailers that the full effect of cost differences between flats and parcels should not be reflected immediately in price differences. So, only 40% of the cost difference is reflected in rate differences.
What role do customers have in driving pricing innovations?
Postal customers have a very important role to play. They know better than anyone how they use the mail for their business, and they know how they would like it to work better. Helping the Postal Service understand their business models could result in the Postal Service being more responsive to their needs.
What do you see for the future of Negotiated Service Agreements (NSAs)?
The PAEA clearly provides new opportunities for NSAs. That is why our new ratemaking regulations sought to ensure that NSAs could move forward expeditiously. Our criteria when reviewing Postal Service requests for NSAs is to see if the proposed agreement would have either a positive effect on net income or provide operational improvements, as long as no competitor is harmed. Our regulations and the law provide the Postal Service with significant flexibility to develop quickly a broad range of NSAs.
The Commission, as part of its decision approving an NSA for BankOne, presented a technique for quickly confirming the economic worth of any NSA with discounts contingent on increased volume. This model could provide the means for expeditious review of NSAs by the Commission. However, it is yet to be used to produce a steady stream of deals. I hope that will change.
There are a number of requirements under the PAEA affecting the Commission. What's next for the PRC?
This year will be even busier than last year. Our attention right now is on finishing by March 27 our first annual Compliance Report that is required by the PAEA 90 days after the Postal Service files data on its 2007 costs, volume, revenue and service performance. The information we're looking at now is based on the last rates under the old 1970 law, but future reports will check compliance with rates set under the new system.
Although we have a formal complaint process, we'll issue proposed rules soon to update the current procedure to incorporate certain requirements of the PAEA. We are now operating as a true regulator. We have subpoena power and the ability to levy fines in instances of noncompliance with the law. Making sure that there is an open and transparent complaint process is critical as the new law is implemented, especially for rate modifications.
We also anticipate the Postal Service seeking a rate adjustment for competitive and market dominant products using the new regulations we issued in October.