The dramatic decline in mail volume has prompted many of us to start rethinking the Postal Service's business model - again. Two years ago, the Postal Accountability and Enhancement Act (PAEA) replaced the security of assured rate increases to cover costs with greater flexibility and a price cap based on CPI. Today, due to both long term trends (such as the diversion of communications to the internet) and the current recession, shrinking mail volumes are creating alarm in Washington. The Postal Service finds itself stuck with fixed costs that must be spread over fewer mail pieces, while its price increases are capped by a dropping CPI. That, plus a whopping $2 billion annual payment for future health care liabilities - not due for decades - has pushed the Postal Service into the red to the tune of billions of dollars. Postal cognoscenti here in Washington are using terms like "survival" and "bail out" and even whispering the "E" word. But even an "Exigency" rate case (where the Postal Regulatory Commission may lift the CPI price cap if it finds "extraordinary circumstances") would not solve the basic structural problems of the Postal Service.

            So what structural changes will give the Postal Service the best chance for survival? Given the PRC's December order rejecting the Postal Service's broad interpretation of the PAEA's "non-postal services" authorization, how can the Postal Service "stick to its knitting" and yet make money from its shrinking "core business"? And what is the PRC's role in helping the Postal Service survive?

            Those of you who work in postal industry and who deal daily with the nuts and bolts of the Postal Service have a unique understanding of what needs to be fixed and how to fix it which folks in Washington don't appreciate. You also know how business really works, not just the economic theories behind it. I hope you will be able to provide your views on some of these basic questions in this forum, and I look forward to sharing many of your ideas in this column. My role will be to ask questions, to play devil's advocate, and hopefully to encourage discussion. Maybe we can come up with tangible, practical ideas based on real experience that can actually help the Postal Service survive and even thrive.

            So the first question is, "How can we fix the Postal Service's business model?" Of course, the PAEA recognized that the 1970 business model was obsolete, and it began the task of restructuring.  It divided services into "market dominant" (e.g., First-class and Standard Mail letters and flats) and "competitive" (parcels and express mail). But the economic crisis has thrown even that new approach into disarray. So let's review the options:

1.  Traditionally, the Postal Service divided its key classes of mail based on content, that is, personalized communications were sent by First-class Mail and advertisings or solicitations were sent by Standard Mail. In the past, bulk First-class Mail (think bank statements and bills) carried the most institutional costs, but Standard Mail had the greatest growth in volume. Since the dividing line was "personalization," there was always debate about how much personalization could go into solicitations before they would lose their eligibility for the lower Standard Mail rates. In its last rate case in R2006-1, the Postal Service attempted to move towards pricing based on the of the mail piece to better align prices with costs.
2. The PAEA divided all products into either "market dominant" or "competitive". This structure was developed for regulatory, not business purposes. Where the Postal Service was the dominant provider in the market, greater regulatory review would be necessary. Where competitors were already strong enough to constrain the Postal Service, lighter regulation would suffice, mainly to prevent the Postal Service from using its monopoly profits to cross-subsidize its competitive products. Unfortunately, one of the unintended consequences of this regulatory-based structure is that the Postal Service may be unable to meet the needs of its customers in the most efficient way. For example, a large cataloger might want to use the Postal Service for its (market dominant) Standard Mail flats as well as its (competitive) parcels and returns. But in an overabundance of caution in interpreting the cross-subsidy prohibition, the Postal Service seems to have decided it cannot bundle those services for one customer; instead, it must conduct separate discussions for the two services and act as though the right hand doesn't know what the left hand is doing. (Careful internal accounting controls to prevent cross-subsidies would assure compliance with the PAEA and be a lot more customer-friendly.)
3. In an operational sense, the local delivery portion (often referred to as the first or last mile) can be considered distinct from the upstream sortation and transportation portion. This is like the old landline telephone network, which was divided into a long distance portion (where calls could be transmitted by microwave towers) and an origination end and a destination end provided by the local exchange telephone company. Like the Postal Service, AT&T once carried all phone calls over a seamless network, but in the 1980's, the long distance portion was opened to competition while the local exchanges remained under a monopoly. (Cell phones have since become a "disruptive technology" now in the process of rendering local exchanges obsolete.)  In the postal industry, the growth of Parcel Select seems to demonstrate the validity of this operational division;

As a practical matter, the Postal Service may be best suited for the first and last mile, at least with respect to parcels. A major benefit to this approach in our carbon-conscious world would be that a single postal truck, on its daily route to all addresses, could replace numerous delivery trucks each making special deliveries. More about green issues later.

4. Finally, if we were members of Congress, we might divide the Postal Service's offerings into "social services" and "economically viable services". This is not the same as the market dominant/competitive division although over time the two might align.  Generally, the Postal Service is seen as the carrier of last resort, serving remote or high cost addresses in order to meet its Universal Service Obligation to "bind the Nation together." If Congress determines that the entire Nation benefits from certain social services provided by the Postal Service, then it may be more appropriate for taxpayers or mail recipients to pay for those social services rather than mailers. If there is any possibility of a "bail out" in the next few years, then Congress will need to know what social benefit it is receiving for its money. The report on the Universal Service Obligation, issued by the PRC in December takes the first step in identifying and quantifying these "social benefits."

So what do you think? Can you suggest other organizational structures? Next month, we will explore the differing impact each of these structures could have on how you use the Postal Service and how much you pay.

Joy M. Leong

Ms. Leong has both depth and breadth in the postal industry, having represented individual mailers in the financial services and catalog industries, trade associations, vendors, suppliers, and posts (including the USPS). Ms. Leong specializes in negotiating contracts with the Postal Service and obtaining regulatory approvals for these agreements and in representing mailers in rate cases. She has participated in the entire range of regulatory proceedings at the Postal Regulatory Commission, including rulemaking, ratemaking, regulatory approval, and complaint proceedings. She was involved in the passage and implementation of the Postal Accountability and Enhancement Act of 2006. She helped start the American Catalog Mailers Association, negotiated the first competitive contract under the PAEA, and filed the first major complaint case under the PAEA on behalf of her clients. Together with PRC Commissioner Ruth Goldway, Ms. Leong founded Women in Logistics and Delivery Services (WILDS), which has grown into a national network of over 100 professional women in the postal and delivery industry.

After serving as a partner at Morrison & Foerster and Sidley Austin (two of the top ten law firms in the world), Ms. Leong founded her own law firm, The Leong Law Firm PLLC, and consulting company, Joy Leong Consulting, LLC. She is a graduate of Harvard College and Yale Law School.

Contact: Joy M. Leong, The Leong Law Firm, 2020 Pennsylvania Avenue, N.W., Suite 229, Washington, D.C. 20006 - Phone: (202) 640-2590, joy@joyleong.com.