Inflation-based US postal price cap "showing signs of strain"

The inflation-based price cap on US postal rates is “showing signs of strain”, the USPS Office of the Inspector General said yesterday. In a report examining the cost structures of the financially-stricken US Postal Service, the independent auditing arm of the USPS said 80% of costs are labour costs, but reducing them was proving “difficult” because of the many fixed expenses, such as in union agreements.

The OIG said the legal price cap restricting rate rises for market-dominant postal products needs reform to take more account of the rising costs that are outside USPS control.

The USPS is losing about $8.3bn a year at the moment, partly thanks to Congressionally-imposed requirements to pre-fund future retiree benefits, requirements that are projected to amount to 15% of USPS annual revenues by 2016.

Losses are also stemming from Americans’ reduced use of the mail. While staff numbers at USPS have been cut by 12% during the last few years, mail volumes have declined 16% in the same period.

The OIG said the Postal Service has acted to improve productivity as well as slimming down its workforce, but despite a “massive drop” in workhours at USPS, staff costs are not reducing as fast because workers’ compensation and benefits costs are rising.

Although this rise in benefits for workers comes as part of a general trend in US business, the OIG noted that an “astounding” 448% above inflation rise in benefit costs has been going on over the past four decades.

Cost savings can be achieved through offers of early retirement, the OIG said, but warned that in the current financial situation USPS “cannot afford” to buy staff out of their contracts.

The report also warned that the current freeze in capital investment at the USPS might be saving it money in the short-term, but could paradoxically lead to higher costs in future.

Among its recommendations, the OIG states that the Postal Service should restructure its transportation contracts so that it no longer pays directly for fuel used by third-party contractors. Transportation is the biggest single non-labour cost for USPS, and currently there is “no financial incentive” for USPS contractors to purchase the cheapest fuel available.

Price cap

The OIG also suggests reform of the legal limit on increasing postal rates each year for mail products in the non-competitive area.

Including factors other than the inflation rate, as measured by the Consumer Price Index, would allow the Postal Service to cope with the fact that costs of providing its postal product are rising above inflation, the report suggested.

Although the USPS already has some legal leeway for including “exigent” factors in its postal price rises, an attempt to do exactly that last September saw a refusal by regulators at the Postal Regulatory Commission of a 5.6% price rise proposal, with a resulting visit to the law courts.

The OIG now suggests adding an “X” factor alongside the CPI price cap, for USPS efficiency gains, a “Y” factor for recurring costs like the universal service obligation and benefit pre-funding, and a “Z” factor for one-off impacts like energy crises or a natural disaster.

The report argued: “This overall approach would provide a sensible ‘quid pro quo’, allowing the Postal Service to pass along cost burdens unaccounted for in the current arrangement, while allowing for offsets to account for efficiency gains and ensure that postal customers could share in the cost savings.”

Mailers

Responding to the suggestions of the OIG, mailing industry association PostCom told Post&Parcel that the Postal Service could still continue in an inflation-based price cap if Congress acts to give the organisation the flexibility it needs to operate in the current mail market of declining volumes.

Gene Del Polito, PostCom president, said of the CPI price cap: “It’s only showing signs of strain because of the strains the Congress has put the entire Postal Service under.”

He went on: “If the Postal Service didn’t have a $5.5bn bogey hanging around its neck, Congress allowed the Postal Service to adjust days to deliver in accordance with actual marketplace need, if Congress would keep away from the Postal Service when it tries to consolidate post offices, there would be more than sufficient available revenue there to still be abel to live within an inflation-based cap.”

The Postal Regulatory Commission chairman Ruth Goldway said the problem with the inflation-based price cap was that it was developed at a time when nobody conceived that inflation pressures might become negative in the US economy.

She said the Postal Service had been demanding more flexibility for a while, but pointed to the need for regulatory restraint to keep postal prices down.

“We are providing our own report to Congress evaluating the effect of the current law,” Goldway told Post&Parcel.