MPA on Recently Issued Periodicals Study
Late last week, the Postal Regulatory Commission and the Postal Service released their much-delayed joint study of Periodicals costs that was mandated by the 2006 postal reform act.
The report presents two main findings. First, despite questions about the accuracy of Periodicals costs raised by MPA and numerous others over the course of many years, the report asserts that that Periodicals cost measurements are “reasonably accurate for ratemaking purposes.” Second, the report concedes that Periodicals costs could be greatly reduced, e.g., by reducing the manual handling of Periodicals. The Commission and Postal Service differ greatly about how much money can be saved: the Postal Service estimates that the potential savings are only $146 million annually; the PRC estimates a much larger $349 million. Both entities agree, however, that neither estimate is large enough to close the cost coverage gap, which has been measured at approximately $600 million.
The report discusses a number of “options” for above-inflation price increases to close the remainder of the supposed cost coverage gap. These include replacing the class-level price cap with a systemwide one (which would allow the USPS to raise Periodicals rates faster than inflation); breaching the CPI price cap to allow the PRC to raise Periodicals prices enough to achieve 100 percent cost coverage; and a Postal Service long-term suggestion of eliminating the Periodicals class and simply providing publishers with postage discounts from First-Class Mail and Standard Mail rates.
MPA strongly disagrees with the study’s findings. In particular:
- The study’s estimates of potential cost savings are hopelessly outdated, ignoring the many proposals that are currently on the table for cutting USPS costs. The PRC’s estimate of cost savings is based upon a comparison of Periodicals costs to the Postal Service’s current costs for handling Standard Mail flats. This approach ignores the significant savings that will result from the Postal Service’s plans to close hundreds of plants and optimize its retail network, as well as from the many other cost cutting proposals currently being considered by Congress.
- The cost savings estimates in the joint study reflect only a small part of the extraordinary inefficiency with which the Postal Service handles Periodicals. The study shows that despite substantial increases in mailers’ worksharing and the deployment of automated flat sorting equipment, the Postal Service’s real (i.e., inflation-adjusted) cost of handling Periodicals has increased by more than fifty percent over the last 25 years. Even the Commission’s estimate of potential cost savings, which is higher than the Postal Service’s, would leave the Postal Service’s real cost of handling Periodicals higher than in 1985.
MPA also strongly disagrees with the study’s discussion of potential rate setting changes:
- A systemwide rate cap would leave captive rate payers completely at the mercy of USPS monopoly power. The Postal Service could increase prices on disfavored classes (particularly those, such as Periodicals, that represent only a small percentage of total mail volume) as much as it wished, as long the USPS offset this by increasing prices on favored classes by less than inflation (or reduced those prices outright). USPS could gouge captive mailers, all the while retaining its monopoly powers, including its legal monopoly over the mailbox.
- The current class-by-class rate cap was a carefully crafted compromise that gives the Postal Service significant pricing flexibility while protecting captive customers. The requirement that the USPS apply the CPI cap separately to each class of mail was a central part of the compromise that led to the enactment of the 2006 postal reform act. Mailing industry groups continue to support this constraint on rates, which is the main safeguard provided by the 2006 law against abuse of the Postal Service’s market dominance.
- Eliminating the Periodicals Class would upend centuries of postal policy designed to foster dissemination of educational, cultural, scientific, and informational publications. Not only do Periodicals provide ECSI value to subscribers, magazines and newspapers are the type of mail consumers look forward to receiving. The damage to both the magazine industry and the Postal Service from eliminating Periodicals rates would be immeasurable.