To the Woodshed?

IN A RECENT EDITORIAL, the Federal Times declared that the Board of Governors is very much a part of the U.S. Postal Service’s current problems.

According to that newspaper,

Chutzpah

People are thunderstruck by the U.S. Postal Service Board of Governors’ announcement that the USPS will file for yet another round of rate increases this June. What particularly shocks them is the way the postal service so unabashedly declared that it’ll be seeking the kind of hikes that threaten to bring many mail-related businesses to the brink of bankruptcy. Others could be pushed over it.

In a recent address, a member of the USPS’ senior staff told a group of mailers that the postal service was going to stick them with higher rates because it needed money and mailers simply had no place else to go. I’d like to assume those words were said for dramatic effect. But they seem to exemplify the USPS’ predominant attitude.

Why otherwise knowledgeable businesspeople find such behavior perplexing, however, is a mystery to me. Although it’s been said that the USPS is not a business, there are still those in our industry who expect the postal service to behave as competitive firms normally do in such times of crisis.

To put it simply, the USPS is now and always has been an agency of the federal government. It’s run by a work force that’s been sheltered from the hard knocks of the business world by a monopoly and a legislative/regulatory framework that ensures the only thing that matters is its ability to break even.

Today,

Lost at Sea

FROM TIME TO TIME I have used nautical metaphors to try to describe the goings-on at the U.S. Postal Service. I really hate to do this again, but here we go: If the USPS were a ship, there would be no doubt that it’s rapidly sailing into the perfect storm.

The postal service’s fiscal situation is a disaster. Mail revenue and volume are far below what postal officials have been projecting; costs, mostly involving personnel, are rising at a rate greater than inflation; and the USPS is awash in a sea of red ink. To make matters worse, the rate increase implemented earlier this year will do little to cure its fiscal ills.

To use the words of one senior postal executive, first class mail growth has fallen into an abyss, and no one knows where the bottom is. Since the USPS relies largely on first class mail for the lion’s share of its revenue, the lack of substantial volume and revenue growth does not bode well for an institution that’s never demonstrated an ability to quickly shed costs.

News that the postal service will be filing for another rate increase later this year isn’t just some story

Take This Job and Shove It

WELL, THE WORD’S OUT. Postmaster General William Henderson will be leaving as CEO of the U.S. Postal Service on May 31. Whoever the postal governors pick as his successor, there are a few things about the job the new person should keep in mind.

The postmaster general operates the largest mail system in the world. It’s also the biggest civilian employer in the United States. It’s the federal government’s largest single agency, and it generates some $64 billion in revenue. For this, the new PMG will receive

Postal rate cases usually center on four basic tasks: defining the amount of new revenue needed to ensure break-even operation; tracing back and attributing costs caused by each mail subclass or service; recovering from each subclass or service a reasonable share of the postal service’s overhead costs; and rate design.

Without question, the first and most important issue that the U.S. Postal Service Board of Governors and the Postal Rate Commission (PRC) must address is the issue of new revenue. Defining the revenue requirement determines the size of the “pie” that ultimately establishes who must pay how much in new rates.

Experience has shown that dividing this pie can be a painful experience. It, more than any other factor, creates much of the strife and rancor that has marked American postal ratemaking.

The first (and largest) cut is made for first class mail, which provides the lion’s share of the postal service’s revenue and also is responsible for a comparable portion of its costs. For many years, the postal service and PRC have contested the “fairness” of that first cut, because whatever first class doesn’t pay must be paid by the other classes and services.

There really is only one other mail class the postal service can consider to make up the balance of its revenue, and that’s Standard A. The trouble with looking to Standard A, however, is compounded by the nature of this mail. Standard A is used mostly for advertising and marketing, and the market for the communication of these messages is hotly contested and extremely price sensitive. Price Standard A too high, and a good portion of this business can find its way into other media. Indeed, this is more true today than in any other time in our postal history.

A closer look at the challenge of dividing this pie reveals that much of the pain of ratemaking stems from the long-standing tradition of setting the first class mail rate by whole-cent amounts. Each penny of a first class stamp represents some $800 million to $900 million in postal revenue. When you increase or decrease the price of a new first class stamp by a penny, you force the postal service and the PRC to decide how to shift an $800 million increase or decrease in new revenue from all other mail classes and services. Raise the first class stamp too much, and the other classes and services get off practically scot-free. If it’s not raised enough, though, the rate increases for all other classes and services (particularly Standard A) turn out to be bone-crushing.

Postal mavens long have asked why, in the face of such regulatory tribulation, the postal service persists in proposing the basic first class rate in whole cents. After all, if first class could be set to something less than a whole-cent amount, the worry over who has to shoulder an $800 million burden would go away. The answer postal officials have long loved to give is that Americans would be “confused” over how to deal with a first class rate that was something other than a whole cent.

This, of course, is nonsense. Americans aren’t stupid. They’ve shown they are quite adept at understanding unit prices that are in something other than whole cents. In fact, our citizens do quite well when purchasing tomatoes at three for $1, cat food that’s priced three cans for $1.49 and gasoline that runs $1.11 and nine-tenths of a cent per gallon. So what’s the big deal about figuring out how to handle stamps that cost three for $1?

When was the last time you went into a post office to buy one first class stamp? If you did, do you really believe you’d feel cheated if a 33.3-cent unit-priced first class stamp might require you to pay 34 cents for just one? Why then does the postal service subsidize this silliness at the cost of terrible regulatory and marketplace hardship?

This most recent rate case provides an excellent example. Despite the postal service’s record good fortune, the PRC was compelled to recommend a 1-cent increase to the first class stamp and to struggle with jury-rigging all other rates without appreciably changing the size of the overall revenue requirement and without subjecting itself to the criticism that it burdened “Aunt Minnie” for the sake of sparing business mailers.

A great deal of the rancor, uncertainty and business-busting rate increases could disappear simply by taking the more expedient tack of permitting first class rate adjustments to be set at something more or less than a whole cent.

Continuing to demand that this rate must be in whole cents is the postal equivalent of a self-inflicted wound. It’s that simple. Now let’s see if the postal service feels there’s any sense in doing it.