Postal Affairs Update, December 4, 2020

December 4, 2020

On Monday, the Postal Regulatory Commission filed its findings for its 10-year review of the 2006 PAEA, with recommendations to give greater pricing authority to the USPS. Additionally, we see Congress potentially working toward a new stimulus bill, which includes funding for the USPS.

Quad’s Postal Affairs team remains committed to keeping you up to date and informed. As a significant mailing industry partner, we are in a unique position to provide clear and accurate information regarding the state of the USPS and suggest best practices during this time. Please notify the Quad Postal Affairs team if you become aware of any changes, questions or something new related to how the USPS is reacting to the pandemic. We will investigate and update all. Please send inquiries to the Quad Postal Affairs Distribution list (Postal Affairs – Team) or ask your Quad representative.

Here are key developments since our last update:

News from the PRC

The Postal Regulatory Commission (PRC) completed its 10-year review of the existing USPS Market Dominant rate and classification system, releasing its findings on Monday, November 30. The Postal Accountability and Enforcement Act of 2006 (PAEA) enacted the current system — so this filing arrived nearly four years after it was officially kicked off.

The delay has clouded our industry’s ability to forecast and plan since 2016. We all knew something was coming — just not what or when.

What the PRC filed

The big question was whether the PRC would give the Postal Service greater pricing authority. The PAEA capped annual increases relative to the Bureau of Labor Statistics Consumer Price Index (CPI).

Monday’s filing (PDF) expanded that pricing authority with additional components for the equation. The Commission found that the ratemaking system is not meeting the original nine objectives and 14 factors of the 2006 PAEA.

Simply put, the USPS has been unable to control costs to align with the revenue they generate. In addition to the CPI cap, there are now several new calculations added to provide greater pricing authority.

  • CPI: average change in price that consumers pay for goods and services
  • Density: average cost-per-piece — delivering less volume to more addresses allows for additional rate authority
  • Retirement payments: additional rate authority, if used, must be earmarked for prefunding liabilities
  • Non-compensatory classes and products: optional additional authority to narrow the gap for products that are not covering their costs

What it means for USPS customers

To be clear, the Commission’s findings only expand the Postal Service’s rate authority — this is not a definitive picture of what will happen in the future.

The PRC adds that the USPS should use discretion based on business need. And any unused Density authority can carry over year-to-year — Postal Service leadership won’t increase prices just for fear they’d lose the ability the following year.

The biggest change in this scenario is to non-compensatory classes and products, which applies primarily to periodicals and marketing mail flats. Based on what we know today, we estimate that magazine publishers and marketers could potentially see an increase of 3-8% for postage sometime next year.

This of course depends on whether the USPS chooses to bank some of that percentage for another year. And it’s unclear whether there’s a cap on how much they could use later.

When additional authority takes effect

Even the USPS wasn’t aware that it has the authority to increase prices as soon as March 2021, when it calculates density for FY2020. The PRC stated on page 276 of its report (PDF) that the Postal Service’s assumptions about timing were wrong:

The Postal Service’s assertion that it would not be able to include any new authority until January of 2022 is incorrect, as it is premised upon the Postal Service waiting to propose a Market Dominant product price adjustment until October of 2021. The Postal Service retains the flexibility to propose an out-of-sequence price adjustment at any time. The rate authority provided by the final rules is available for the Postal Service to use shortly after the effective date of the rules, and following the Commission’s determination.

The earliest we could see the Postal Service implement its new pricing authority would be in July or August 2021. Changes would be above and beyond what the USPS already announced for its CPI-determined Jan 24, 2021 pricing increases.

There are several caveats, however. These are the unknowns that we’re now aware of:

  • The dramatic volume drops from the pandemic made 2020 an extraordinary year. This inflates the additional rate authority in the Density formula. Will the USPS take full advantage of its authority, knowing that 2021 will be much different?
  • If implemented, percentages for retirement will be phased in over five years to reduce immediate sticker-shock. Since the prefunding requirement is unique to just the Postal Service, this should be dealt with by Congress and not be an added burden to rate payers. Will the USPS ignore its customers and implement the initial increase estimated at around 1%?
  • Associations and customers might go to court and ask for a stay to prevent these changes from going into effect immediately. Will legal challenges allow the industry to try and reduce the damage of this decision and provide additional time to fully absorb the new information and plan budgets that were already in place for 2021?
  • The USPS authority to “bank” any unused increases beyond the current year could change immediate estimates for pricing. With the expectation that next year should be much different than the 2020 outlier, will Postal Service leadership dial back in 2021 and apply some banked percentages later?

What happens next

Quad will be working with industry associations to support fighting this decision in court, and in the halls of Congress. There is a real question as to who actually has the authority to change the rate cap as provided for in PAEA. Can the PRC change the rates on their own or are they limited to making a recommendation to Congress? This question should be answered by the courts or Congress itself. We will all have to wait to hear exactly what the USPS plans to do with its new authority. We’ll be able to give clients more accurate guidance once the Postal Service announces its intentions — planning for change depends on how the PMG and Board of Governors apply the formula.

We’ll continue to update information on a biweekly basis, with additional communications as needed. Quad’s Postal Solutions team plans to offer more webcast sessions to discuss the latest developments and answer questions in real time.

The negotiations between the Senate and the House have picked up some steam recently. Both the Senate GOP and House Democrats introduced competing bills, and it is possible that Congress could pass a recovery/stimulus package during the upcoming “lame-duck” session.

In a positive development for the health of the Postal Service, both versions include a $10 billion appropriation directly to the USPS. This would replace the $10 billion loan that was in the CARES Act. The good news is that by replacing the CARES Act loan with a straight appropriation, the money does not need to be repaid to the treasury, with interest. The loan only served to put more pressure on raising the postage rates for mailers.

There is no guarantee that the COVID stimulus package will get passed but the two sides are talking again. President-elect Biden has urged Congress to act and President Trump has indicated that if a deal would be reached he will likely sign it into law —all of which has generated some positive momentum for getting to a deal. There are still many roadblocks that could derail the deal. But at the moment, all sides appear to be supportive of providing much needed financial support directly to the USPS.

We are working closely with our friends in Congress to ensure this funding remains in whatever overall final package is negotiated.

Mail volume from last week, compared to 2019:

Total: Down 10.4%
Packages: Up 39%
Single Piece: Down 11%
Presort First Class: Down 7%
Marketing Mail: Down 15%
Periodicals: Down 23%