Industry expert Jeff Peoples, founder, CEO, and president of Window Book, recently sat down with Steve Lopez, Chief Operating Officer for Window Book, to discuss the current state of postal reform and what the proposed legislation means for the industry. Below is an excerpt of their interview.
Lopez: In terms of legislation, there’s only been one legislation in our lifetime that we would be old enough to remember, and that would be the Postal Accountability and Enhancement Act (PAEA) back in 2006. There were also changes made in the ‘70s when the Postal Service came off being a cabinet-level position in the US government and operated as a “corporation.” When PAEA hit, the intent was for it to operate as a business and make a profit. It is a very large employer. Back then, we were looking at about 560,000 employees in the Postal Service and it was interesting to see that the Postmaster made less than the Vice President and had probably the second-largest employment staff at that time. There is a bill floating around right now, [so] I'll let you ask some questions and I'll see what I can answer.
Peoples: The [recent] postal legislation was introduced in the House and the Senate. Where are we in the process?
Lopez: On the House side, the House government oversight committee had a markup, they passed down the legislation out to the committee, and it is sitting there on the House floor waiting for consideration. At the same time, in the Senate Homeland Security and Governmental Affairs, which we call HSGAC, Chairman Peters introduced identical legislation with his committee. Where we're at with the Senate side is they have not held a markup.
For our clients that mail letters and flats (which are mostly on the market-dominant side), there's quite a bit of concern [with this bill]. I think it's justifiable to have this concern, because there are things in interpretation that can occur when a bill is written into law. Once people can manipulate the interpretation of a law that wasn't the original intent, it can be dangerous. This bill has a specific provision that has caused a lot of angst. It is mostly driven by the Package Service Coalition, who is largely funded by Amazon, and they are a large user of USPS last-mile parcels. If you [think] about it, they would love to dump non-profitable parcels on the Postal Service to be delivered for the last mile because they have their own delivery network, but there's an obvious reason why they are getting rid of (or shedding) parcels to the Postal Service. It's because they're not profitable to be delivered. They're behind some of this legislation, and we've been active in talking to Congress about our concerns of what potentially could occur.
Peoples: What is contained in the legislation?
The bill has some changes the industry has been seeking for quite a while and has a few new provisions that are written that will compose a long-term threat. A great example of something the industry has been after is reform on the retiree health care pre-funding benefits. There is some language in there that for the money that the Treasury has not collected, that debt would be forgiven and no longer be required to be pre-funded at 100%.
To put that into perspective, that's why most people tell you the Postal Service is bleeding money every year. That is a $5, $6, $7 billion obligation on paper that causes them to lose money immediately. I read a report a few years back, it's a little dated now, and it said that if you had looked at the 10-year period after the first reform bill came in, if they had not done the 100% prefunding requirement and counted that as a liability on their books, they would have been in the black in that 10-year period. They wouldn't have lost money. A lot of people don't understand that.
That’s one thing that they're interested in. However, there's another big thing; they've introduced the ability to have Medicare as a requirement for any employee (or retiree) that qualifies for Medicare, [which] then eliminates the Postal Service carrying that as a healthcare cost.
There are a few other provisions in there that can be called “nice to have.” They're trying to combine the PRC, along with the Office of Inspector General of the USPS, to get some synergies and to reduce some costs and have some departments work together. Now, that's kind of key. Because many times, the Inspector General [does] a lot of audit reports and look[s] at decisions that have been made by the PRC and then they come back and say, “In hindsight, now that we're looking at this...” The OIG are quite critical at times of changes that the PRC made that may or may not have had the intended impact on the business. That would be an interesting combination of the two. They're also looking at trying to provide a transportation provision that will allow the USPS to choose the most efficient mode of transportation for every class of mail. That's interesting because that basically means that, according to the 10-year plan, everything will be on the surface.
And does it artificially create no distinguishable difference between Standard Marketing Mail and First-Class Mail? At one time in 2020, First-Class Mail was taking anywhere from 17 to 30 days in certain places to be delivered. Why would somebody pay postage at full rate to put something in First-Class that you could basically get the same level of [service] out of Standard (Marketing) Mail, for a much deeper discount?
That’s something that they've gotten into the bill as well; they have the ability with the PRC now that every time something causes a loss, they can exceed a price cap and it keeps increasing the cost. You're basically feeding the system, you're degrading service; products leave the market, and because you don't make enough revenue, you charge higher prices, which causes more products to leave the market, and that's the deathward spiral. That’s a concern.
The last thing in the bill that I would say is a major piece of legislation is that the bill mandates, for the first time ever, six-day delivery. The Postal Service for years has said don’t handcuff us and tell us we must do six-day delivery. It goes way back to other PMGs. They looked at the profitability of routes. They knew the cost and the cost per mailbox per stop. They always wanted to have the flexibility to say, “Let me run the business the way I need to run the business.” The interesting thing is in the 10-year plan, the current Postmaster General was originally against six-day delivery. Suddenly, Amazon, a big customer in packages, was pushing this coalition, and now he says, he's for it. In fact, not only is he for six-day, but they also want to do seven-day delivery. I [ask the] question: if you claim you're losing money in five- and six-day [delivery], how can you say you’ll make money on seven-day? But that's for another conversation.
But let's get back to the one provision that I have an issue with that I've been speaking to 12 or so staff members of the various HSGAC Congressional [committee members] that we've been talking about. My concern is that there's a provision in there that says, “Integrated Network of Delivery Services.” The word integrated network has NEVER, and I'm going to repeat myself for people who are putting false things in the media, has never been introduced (or litigated for a definition) as a term in postal history.
The Postal Service already acts as an integrated network. You don't see a truck going down the street with letters and flats followed by a truck right behind it that has parcels. They've always been integrated. What concerns me is, in the PMG’s 10-year plan, where he talks almost exclusively about parcels, I think the word ‘mail’ is only referenced maybe once in the plan.
[The PMG] wants to spend $40 billion on parcel delivery and he's estimated that it's only going to generate $24 billion of revenue. I have three decades in the business. I've already seen, and we're seeing it right now, effective back on August 29, 2021, where we have a regulator that is putting their own interpretation into what's written into the law. PAEA specifically stated, CPI (only) increases based on full year or less than full-year calculations based upon the last filing. It does not say “CPI plus two percent” in the law.
The PMG was originally against six-day mandated delivery but now he's for six-day. He says he's going to lose $16 billion in essence. So, my question is simple: who do you think is going to pick up that $16 billion loss? Based upon new integrated delivery network language and how institutional costs are allocated, unfortunately it could most likely end up being our clients. The reason why is exactly the example I gave earlier: unintended consequences of an interpretation of a law and words that are newly introduced. Recent examples of unintended consequences are when the PRC says, “We can do cost plus two percent because there are like 17 provisions to monitor under PAEA, and only one of them talks about profitability and the keeping the Postal Service viable.” Therefore, they decide to look at that one area (of the 17 or so) and [the PRC] interpretation on intent is, “That must mean that we should be able to allow them to do cost plus two percent and allow more than one increase per year to make up differences in revenue.” Nowhere in the bill does it ever say you can add extra percentage increases onto a CPI-only increase as calculated by one of the two ways possible. Congress didn't intend for that to happen, but that's exactly what came out of it.
Personally, I've told all of them that the Postal Service already operates as an integrated network, and it [Integrated Network of Delivery Services] should be struck [from the bill]. On six-day, it's not my decision to tell the Postal Service whether they should operate five, six, or seven days. I've never argued over what days of the week they are, but I also don't think that the universal service obligation should be defined by a package coalition that's a competitor of the Postal Service that dumps unprofitable products on it with no conversation whatsoever (by our part of the sector).
One thing I want to add: I have been in many calls and there have been a variety of stakeholders, including some of the Postal Service's competition, that has been aligned with some concerns in some of the language. [One competitor is] the United Parcel Service (UPS), [but] I've never once heard them say that they're against the Postal Service being open for six days. In fact, they go out of their way to say it's not their business to talk about how many days the Postal Service should deliver mail because they're not only a partner of the Postal Service for certain products but they're also a competitor. They don't feel they should say anything. I've read numerous things that have come out of the package service coalition in the press that are blaming UPS, saying the reason why they're against Section 202 is they don't want six-day delivery because they think it's going to harm UPS. That's a 100% false statement. They go out of their way to say that's not their concern. They're concerned about the definition of integrated as well because no one wants cross-pollination or cross-subsidization of products.
Peoples: Does it help the Postal Service financially? If so, will they finally make money?
Lopez: Making money and being efficient, especially in certain businesses in this country, sometimes are an oxymoron. The Medicare integration will save the USPS about $1 billion over the 10-year period. That’s what the Congressional Budget Office says. The elimination of the pre-funding of the future retiree health benefits is going to clean up the USPS balance sheet by about $33 billion. That's your unpaid annual expenses, and it eliminates about $1 billion of amortization payments.
However, most of our clients don't understand is that it's our clients’ money. Everything that's been paid in there, they paid it. They're the ratepayers. It's interesting that they want to keep that money that was overpaid that we paid as an industry, because it's our money, but OK. We'll go with, that's something for the mailers and for the Postal Service to get a benefit. When you look at it and you add it all up, it's about a $50 billion in relief package. The Postal Service could still suffer from operational losses and the PRC has given them some additional pricing authority that went into effect. We must see how the industry responds and how much new revenue is generated from the USPS.
Peoples: Are there many (or any) provisions in the bill that the industry finds troubling? If so, which ones?
Lopez: As I said earlier, most of the cost[s] of these provisions have been discussed by the industry over the last couple of years. I went through them extensively and depending on where you are from an industry perspective, some people are against mandating the six-day delivery and some people are really concerned about the integrated network language.
Let's talk about six-day delivery for a moment. One of the stakeholders in this small group that has participated with me on some of these calls brought up… that when you come out with language like this, what happens to the future when the volume falls off? You're telling the Postal Service that they must deliver all classes of mail six days a week, but it's more efficient for them to stay viable by doing odd carrier type solutions where mail is only delivered to a specific side of the street or some other model that says they can hold mail for a day to make more density in the truck to make it more worthwhile and staff appropriately.
The cost-sharing I talked about is roughly $30 billion [of which] $27 billion goes to the [letter/flat] market-dominant side of the industry. I'm worried about that but there are ways to avoid that in the legislation. As I mentioned earlier, Medicare, which is out of all our hands, could end up being the most troubling thing for this legislation. It has nothing to do with industry and we're just going to have to see if the two sides… can agree to terms.
Peoples: Why was Section 202 introduced?
Lopez: The package coalition, which is led by Amazon, claimed ownership of that provision. They put out press releases on it. They've pressed Congress to pass postal reform with that new provision in it. When you come out to do that, they're saying that they won't support reform unless that is in there. Who can blame them? They probably saw the USPS’ 10-year plan right away and the first thing they said is, “Here's a great opportunity to shed $16 billion of projected losses where 90% of them can be shed on somebody else without us doing it.”
Unfortunately, we're getting to the point now [that] instead of working together, which we did for many years under previous PMGs, we're now fighting. Now they've got us fighting against each other, as opposed to fighting for what's right for the private sector. It's a utility. The only reason why businesses use the Postal Service is it's a convenient medium that generates business and profit, period. It's not a job promotion thing. It's not an economy thing. If it were - I do believe there are benefits to rural communities and things to have post offices – but if you want to get into that conversation, let's talk about Congress allocating money for the 38,000 retail post offices that are out there that provide that vital service to those communities, and start subsidizing that cost out, so the ratepayers don't pick up 100% of the bill.
Peoples: What is being done to amend Section 202?
Lopez: There's a small group of us, and we've been meeting with the senate committee to explain why it's troubling and what we don't like about 202. I have discussed an amendment from the HSGAC that they can propose to add to Section 202, which will stop the Postal Service from doing any cross-subsidization with the way they will put the language into the bill. Think of it this way. If you are a package mailer and you could lower your costs, why wouldn't you want that cost to go elsewhere?
Peoples:How can mailers help?
Lopez: I would say for many of them, if they do the math and they're concerned, they need to talk to their local state representatives, congresspeople, and senators and tell them, I'm in your district and state. These are how many jobs you employ, or this is my growth plan, or I'm trying to build another facility and I'm trying to grow my business. I can't do that if I'm going to be hit with 10% increases in a mid-year price increase (year after year). Some classes of mail got nailed 10% in this extra price increase. Add that on top of degraded service standards and ask members of Congress why should I use the USPS for my business? Pay more, get poor delivery for what?
Peoples: Do you think postal reform will pass?
Lopez: We need to continue to follow it, [but] I'm going to hold my judgment on that. I need to have a little bit more conversation given the fact that no markups occurred in certain areas. I will say that it has a lot of hurdles to pass where it is now. I have recently heard it will most likely not even get marked up until 2022 calendar year (i.e., January or later).
It will not surprise me if they resolve some of these things. There's some language to do it, so I don't want to say no, but these could be considered large hurdles and you're going to have some philosophical differences amongst parties and in both houses in Congress that I just find it's an uphill battle at this point to get passed.
This article originally appeared in the November/December, 2021 issue of Mailing Systems Technology.