Which Way will PRC Rule in Exigent Postal Rate Case?

With less than two weeks before the Postal Regulatory Commission decides on the U.S. Postal Service’s exigent rate hike proposal, both sides are clearly on edge. The money-losing USPS says it needs the exigent rate hike desperately, while already-stretched catalogers say a postage increase will force them to cut back on mailings.

Plus, the legality of the exigent rate hike proposal filed on July 6 is still in question.The Affordable Mail Alliance (AMA) on July 26 asked the PRC to dismiss the USPS’s proposal, arguing that the rate hike violates the cost controls Congress put in place to protect consumers.

Under the Postal Accountability and Enhancement Act of 2006 (PAEA), postal rate hike are capped at inflation as measured by the Consumer Price Index (CPI). So the estimated price cap is 0.6%, yet the average exigent price increase is 5.6%. (Standard Mail flats or catalog rates would go up 5.1% if the rate case is passed and increases are implemented Jan. 2.)

The exception to the CPI cap for exigent circumstances: when the USPS cannot continue operating without overall price increases above the CPI. The AMA’s motion says that the USPS has not met the “exigent” test for several reasons.
For its part, the USPS on Aug. 2 asked the PRC to reject the AMA’s request for dismissal. So what’s going to happen?

Joe Schick, director of postal affairs for printer Quad/Graphics (a steering committee member of the AMA), says he’s optimistic on a complete dismissal of the exigent rate request after the hearings in August. “But there is no way to project what the PRC will do. The Alliance’s comments and the inability of the USPS to fully support its filing have definitely made the PRC’s decision much more difficult.”

Schick says the PRC could fully reject the exigent filing, meaning it agrees with the AMA motion to dismiss. “That obviously would be the best-case scenario,” he says.

Or in a worst-case scenario, he says the PRC could decide to increase certain classes/categories of mail even further because of cost coverage concerns. But Schick doesn’t expect the latter scenario to happen, “given what happened in the 2007 price increase when the PRC did in fact jack up the increases for catalogs, starting the volume decline months before the recession kicked in.”

Jerry Cerasale, senior vice president of government affairs for the Direct Marketing Association and member of the Affordable Mail Alliance, believes the AMA’s efforts have had an effect on the proceedings, since the PRC “did ask at its hearings many of the questions posed by the Alliance.”

USPS witnesses responded to the Alliance arguments by “changing their focus on extraordinary or exceptional circumstances from the recession and diversion of mail to electronic communications to the 10-year loss projections it announced on March 2,” Cerasale says.

That change in focus will require the PRC to shift its focus from the 2010 specific issues to a 10-year horizon. “That will require them to decide whether or not the USPS may use a 90-day exigent proceeding to deal with a 10-year future problem. The Alliance argues not.”

Since this is a case of first impression, Cerasale says the exact authority the PRC has in the decision is subject to argument. There are parties, including USPS, that argue the PRC only has thumb’s up or down authority, he says.

But others, and Cerasale believes that the PRC may be leaning this way, argue that the PRC has authority, if it approves an exigent postage increase, to adjust the rates that USPS proposed in its request, he says. “We will learn the answer to that question on Oct. 4.”

Even if the PRC approves the USPS request in total, Cerasale says it would not solve the short-term financial problems for 2011. The USPS lost $11.7 billion during the past three years and has seen its mail volume fall from a record 213 billion pieces to the 168 billion it’s expecting for this year.

“Our expenses are outpacing our revenue, and that’s why we needed this rate increase,” says USPS spokesperson Gerald McKiernan.

What’s more, McKiernan points to a number of initiatives laid out by Postmaster General John Potter in March that have yet to be acted upon by Congress. Those initiatives—aimed to “ameliorate” the USPS financial situation—include prepayment of retiree health benefits, proposed five-day postal delivery, more freedom to close postal facilities, and the alleged $50 billion overpayment to the Civil Service Retirement System from 1972-2009.

“None of these issues has been resolved,” McKiernan says. “We think we’ve made a compelling case.”

No committee report suggests the definition of exceptional or extraordinary circumstances, he notes. “But it’s hard to argue against the fact that we’ve lost 20% of our business because of the worst recession since 1933. We view that as justifiable and exigent.”

What happens if the PRC rejects the proposed exigent rate case in totality? “We really haven’t thought of that, because the belief here is that the PRC will provide some relief,” McKiernan says.

That relief would come at a huge price for the USPS, however. If the PRC approves the exigent rate case proposal, Cerasale says it would force catalogers to find alternative channels “to make every effort to leave the mail. It would be imprudent for catalogers to remain with a supplier that cannot control its costs and prices.”

Terri S. Alpert, CEO of Stony Creek Brands, which operates Uno Alla Volta and Cooking Enthusiast catalogs, is a bit more blunt about it. “When will the USPS learn, that when rates go up, our customer acquisition costs go up while the future value of those customers goes down?”

This results in a forever-shrinking mailable universe, Alpert says, “Does the USPS really want us to spiral down together?”

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