Green light for USPS to increase commercial parcel prices

The US Postal Service has been granted conditional approval to transfer its commercial Standard Mail Parcels service from its monopoly portfolio to its list of competitive products. The move will mean that the USPS can alter pricing for the parcels service without sticking to its annual cap on rate rises for the market-dominant products, a limit imposed by Congress and based on the Consumer Price Index.

The USPS applied for the change in status last November, and was given the conditional green light on Wednesday (March 2) by the Postal Regulatory Commission.

The proposal is to create a new Lightweight Parcel Select subcategory within the existing competitive Parcel Select Product category.

Separately, the USPS is currently seeking a similar transfer into its competitive portfolio for commercial First Class Mail parcels, filing its request earlier this week. Comments can be sent in to the Commission by mid-March.

Price increase

The transfer of Standard Mail parcels to the competitive product category means that prices for the service look set to increase.

In its filings with the Commission, the USPS said that currently the prices of the service cover only 75% of the costs in producing the service. Under US law, the USPS is not allowed to subsidise its competitive products with revenues from its monopoly services.

As a result, in its ruling on the Standard Mail parcels this week, the conditions set by the Commission included the requirement to put forward new pricing that covers all of the costs of the Standard Mail Parcels service.

As part of its request to transfer Standard Mail Parcels to the competitive list, the USPS argued that it “does not have a market dominant position in the market segment of commercial bulk lightweight parcels”, and therefore will not be able to raise prices significantly without losing business to rival shipping companies UPS and FedEx.

It said the 79.2% share of the market it had for parcels under a pound in weight was because its prices were below cost – around $2.27 for a one-pound piece compared to $3.49 – $4.34 charged by competitors. Raising these prices significantly would also mean losing market share, the USPS claimed.

But, competing with UPS and FedEx meant the USPS needed more flexibility to adjust parcel prices to maximize profitability, the Postal Service said.

Evidence from the Parcel Shippers’ Association submitted to the Commission warned that in reality, the Postal Service would be able to raise its Standard Mail Parcel prices “substantially” without losing a significant amount of volume.

The parcel shipping lobby group said the USPS had a monopoly in Standard Mail Parcels, and exclusive access to US mailboxes, and therefore should have price increases regulated in the same way other monopoly products were by the Postal Regulatory Commission.

In its ruling this week, the Commission agreed with the USPS side, stating that competitors had a large enough share of the market, and a 55% share of revenues for ground shipments, and therefore “does not have market power in the lightweight parcels market”.

The PRC argued there was “at least a risk” of the Postal Service losing a substantial amount of business if its rates were raised significantly or if it altered its service.

Transfer

The ruling of the PRC means that the transfer of commercial Standard Mail Parcels to the competitive list will not be immediate.

The USPS must now file proposed price changes for the new Lightweight Parcel Select parcels that would see the service covering its costs, so that a competitive product is not being subsidized by monopoly services.

The Commission will have to approve the price changes before the product can formally transfer to the competitive list.
Parcel shippers told Post&Parcel that the move could open the door for the Postal Service to change prices for all Parcel Select products at the same time.

They said they were “very disappointed” at the ruling by the Postal Regulatory Commission, maintaining the Parcel Shippers Association view that the USPS had a virtual monopoly on lightweight Standard Mail parcels, and would therefore be in a position to substantially increase prices.