This article originally appeared in the May/June issue of Mailing Systems Technology.

Late 2016 marked the tenth year since the current set of laws governing the U.S. Postal Service were enacted. The Postal Accountability and Enhancement Act (PAEA) was passed into law in December 2006, and it included the requirement that 10 years later, the Postal Regulatory Commission (PRC) would perform a review to determine if the new rate-making system that was put in place in 2006 is meeting the objectives of the law.

And so the process began, with the PRC opening a “docket” (RM2017-3) on December 20, 2016, to begin the required review. The PRC initially laid out how it wanted those commenting on the review to frame their comments, as well as a rough timetable for the proceeding. It then began a period for public comment, which ended on March 20, 2017. Over 65 separate sets of comments were filed at the PRC in the proceeding, including comments from the U.S. Postal Service, USPS employee labor organizations, UPS, associations representing mailers and service providers, dozens of individual businesses and non-profit organizations, and others.

Why so much interest in this particular regulatory proceeding? There is a lot at stake…

What’s at Stake?

Obviously one of the biggest things at stake in this proceeding is whether USPS rate increases for market dominant (monopoly) products will continue to be capped at the annual CPI. But there are many other elements in the law that the PRC is likely to review and which could be impacted by the outcome of the proceeding(s).

The current law has nine objectives that the rate system should achieve, including maximizing incentives to reduce costs and increase efficiency; creating predictability and stability in rates; maintaining high-quality service standards; allowing the USPS pricing flexibility; ensuring the USPS has adequate revenues (including retained earnings) to maintain financial stability; reducing the administrative burden and increasing the transparency of the ratemaking process; enhancing mail security and deterring terrorism; establishing and maintaining a just and reasonable schedule for rates and classifications; and allocating the USPS’ total institutional costs appropriately between market dominant (monopoly) products and competitive products.

In addition, the law lays out 14 items that the PRC should take into account in establishing/revising the rate making system. These include factors such as value of the mail service to sender/recipient; that each mail class/type of service bear its attributable costs and a portion of institutional costs; the effect of rate increases on the general public and mail users; the alternative means of sending/receiving mail at reasonable costs; the degree of mail preparation performed by mailers and cost reductions for the USPS; the simplicity of the rate schedule and relationships between rates; pricing flexibility to encourage increased volume and operating efficiency; and other factors. [All the objectives and factors are laid out in the PAEA, which is available on the PRC’s website at https://www.prc.gov/sites/default/files/references/pl109-435paea.pdf.]

In announcing the start of the 10-year review, the PRC said its review “will engage in a comprehensive evaluation of all aspects of the ratemaking system,” including: “The annual limitation on the percentage changes in rates; The schedule for rate changes; The 45-day notice before the implementation of rate adjustments; Expedited rate changes due to extraordinary or exceptional circumstances; Class level application of the annual limitation; The rounding of rates and fees; The use of unused rate authority; and worksharing discounts.”

Those using the mail for communications, transaction, advertising, and marketing don’t have to search back far prior to PAEA to be reminded of the devastating effects of USPS rate changes prior to PAEA. These rate changes were unpredictable, inconsistent, often included huge percentage increases depending on the mail class/product, and generally involved contentious and long legal proceedings costing both the USPS and industry extraordinary legal fees. The mailing industry largely has credited the CPI rate cap with bringing stability, predictability, and affordability to USPS rate changes.

A Complex Conundrum

In addition to the complexities that already abound in the USPS’s rate setting system, there have been significant changes that occurred during the 10 years since PAEA was enacted that make a review of whether the rate system is achieving the objectives in the law even more complex.

First, Congress included requirements in the law that the USPS pre-fund retiree health benefits, which essentially resulted in USPS annual payment requirements of over $5 billion. This requirement was put in place at a time when mail volumes were seeing significant increases year over year and the Great Recession was not envisioned. When volumes tanked during the recession and beyond, the USPS ultimately was unable to make the annual payments required under the law, which largely has led to its current financial “dilemma.”

How should the financial pressures from the pre-funding requirements be treated in the context of whether the USPS’s rate system has worked over the past 10 years? How should the dramatic decline in mail volumes as a result of the recession be considered? These are just a few of the complexities of the 10-year review, and neither was envisioned when the PAEA was crafted.

No Surprises in Round One

In terms of the main positions that could be taken in this process – keep the CPI rate cap, or eliminate the CPI rate cap – those who submitted comments to the PRC basically stuck to “party lines.” The USPS and the organizations representing its workforce weighed in on the side of eliminating the rate cap to give the USPS more “pricing flexibility.” Those representing businesses using the mail (industry associations as well as individual businesses) took the opposite position that the existing CPI rate cap should be retained because it has kept postal prices affordable and predictable.

A few who commented in the current PRC docket recommended that a different price cap index be considered instead of CPI-U, and many commenters weighed in on other aspects of the review such as workshare discounts, mail categories not currently covering their costs, appropriation of institutional costs between monopoly and competitive product categories, whether demand for using postal products/services is price-elastic or not, and other aspects of the rate system.

Potential Outcomes

Before we think about the potential outcomes of the PRC issuing a ruling in the 10-year rate system review, it is important to understand that there are some in the postal industry who disagree that the PRC has the authority to make changes to the existing CPI rate-cap system of rate-making enacted in the 2006 law. Some believe that the PAEA did not give the PRC the authority to make changes to the rate-cap system during the 10-year review -- that such changes can only be made as part of a legislative process.

The way the PRC has laid out what it intends to do in the 10-year review is that in this first proceeding, it will determine whether the rate-making system established with the PAEA is meeting the nine objectives. If the PRC determines it is, then that could be the end of the review. If the PRC determines the current rate-making system is not meeting any one (or more) of the nine objectives in the PAEA, then it likely will begin a second proceeding to determine what changes are needed.

When it laid out its timetable for the first proceeding, the PRC said it planned to rule in “early autumn” of 2017, and if it determined that a second proceeding was needed to determine changes to the rate system, that proceeding would begin shortly after the first proceeding concludes.

Based on the comments received in the current PRC proceeding as well as patterns of behavior with such proceedings since the passage of PAEA, here are some potential scenarios following the outcome of the current PRC proceeding.

PRC rules that the existing rate system is meeting the objectives of the PAEA. This likely would end the PRC proceedings, but the USPS and/or its labor organizations could take up the issue in the appeals court. In this scenario, absent any other legislative change, it is likely that the USPS would move ahead with a January 2018 CPI-cap price change while the argument is taken up in appeals court.

PRC rules that the existing rate system is NOT meeting the objectives of the PAEA. The PRC then would begin a rulemaking proceeding to review potential changes to the system. Those who do not agree that the PRC has the authority to change the rate cap, however, could take up the issue in the appeals court either before, during, or following the second PRC proceeding. In this scenario, it is harder to predict what the USPS might do in terms of its annual CPI-cap price change. It could delay doing so until the outcome of the 2^nd proceeding, or it could go ahead with it and then perhaps consider a subsequent price change if allowed under whatever changes are enacted – though legal battles likely would be going on in the background in the appeals courts.

And Then There’s Postal Reform…

Neither of the above scenarios takes into account any new postal reform legislation passing into law – that likely would cause a significant change in the PRC proceeding depending on what is included in any new legislation.

The House Oversight and Government Reform Committee in mid-March passed a bipartisan postal reform bill (HR 756). The legislation still has a long way to go in the House, much less the Senate. But if it were to pass, it would dramatically change the USPS’ financial picture and could negate some of the issues being raised in the PRC 10-year review proceeding, though the USPS has made clear that it has a three-pronged approach to its future, which includes not only “positive” postal reform, but also a “favorable outcome” in the 10-year review process as well as “aggressive management action” by USPS management.

Personally, I think the PRC is unlikely to issue any ruling or decision on the 10-year review until after the end of this Congressional session. That way, if postal reform legislation were to be passed before summer, the PRC could take into account whatever was included in the legislation in terms of its review.

For Now… A Waiting Game

Now that the comment phase of the PRC proceeding has ended, it is a waiting game to see how the agency will rule on whether the existing rate system is meeting the objectives of the PAEA, which it said it would do by “early autumn.” In the interim, it’s back to the crystal ball prognosticating around potential postal reform, as well as wondering if Congress will ever fulfill its obligations to nominate and confirm candidates for any of the vacant seats on the USPS Board of Governors (currently there are no non-USPS governors) or the one vacancy on the Postal Regulatory Commission.

Kathleen J. Siviter is president of Postal Consulting Services Inc. (PCSi) and has over 30 years’ experience in the postal industry, having worked for the U.S. Postal Service, Association for Postal Commerce (PostCom), and a diverse set of clients with interest in the postal industry. She also serves as the Director, Community & Brand Development, for PostalVision 2020 (http://www.postalvision2020.com), an initiative designed to engage stakeholders in discussions about the future of the American postal system.