The Postal Regulatory Commission found that the current rate-setting system has not been effective, but not so bad as to remove the inflation price cap on any First-Class, Standard, or Periodical rate hikes.
The USPS wanted the rate cap eliminated so it could raise rates as it determined. The PRC did not give in to the request.
Instead it is proposing a CPI inflation cap plus 2%, to give the USPS additional revenues as well as an additional 1% if it meets certain standards.
Bottomline: annual rate hikes will be the rate of inflation, plus 3%. That means mailers will be paying more in 2018 than the rate hikes set for January 21, 2018. As an example, the current law only allows a 1.9% rate hike because that is the rate of inflation. With the proposed changes, that would jump to 4.9%.
But the 2% additional price hike will expire in five years. Whether the additional 1% expires after five years is unclear.
The PRC proposed changes will undergo a 90-day review period after which a final rule will be ordered. Here are the highlights of the new system as laid out by Robert Taub, PRC Chairman in his announcement on December 1:
A two-pronged approach to complement, rather than replace, the CPI-U price cap by providing discrete, clearly defined amounts of additional authority. The intent is to put the Postal Service on the path toward generating positive net income and retained earnings.
1. 2 percentage points of rate authority per class of mail per calendar year for each of the first 5 full calendar years following the effective date of these proposed rules.
2. Up to 1 percentage point of rate authority per class of mail per calendar year, contingent on the Postal Service meeting or exceeding an operational efficiency-based standard and adhering to service standard quality criteria.
3. A required rate increase for any non-compensatory product of a minimum of 2 percentage points above the percentage increase for the class. The proposed solution does not mandate immediate full cost coverage for non-compensatory classes, but rather seeks to narrow the coverage gap and move prices towards full cost coverage over time and thereby achieve reasonable and efficient rates as envisioned by the PAEA.
4 Establishment of two bands – ranges with upper and lower limits — for workshare discount passthroughs: (1) band range of plus or minus 25 percent for Periodicals; and (2) band range of plus or minus 15 percent for all other classes. Non-compliant passthroughs would be subject to a 3-year grace period.
“In our review, the Commission finds that the Postal Service, during the past 10 years, set most discounts substantially above or substantially below 100 percent. This is problematic because such discounts send inefficient price signals to mailers, and therefore reduce productive efficiency in the postal sector. Ultimately, the inefficient pricing may lead to decreased revenue for the Postal Service,” Taub said.
“To address the situation, the Commission proposes to establish bands for workshare discount pass-throughs. One for periodicals, and one for all other classes. For periodicals, pass-throughs must range between 75 percent and 125 percent. For all other classes, pass-throughs must range between 85 percent and 115 percent. All pass-throughs that fall outside of the applicable band would be considered noncompliant, but subject to a three-year grace period commencing from the effective date of these rules, or when a new workshare discount is established. After the grace period, the Commission would require the pass-throughs to become compliant,” he said.