Court rules on exigent rate increase: Not forever, but for how long?

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This week the DC Court of Appeals issued its decision on the exigent rate case.  The court affirmed the most significant element of the ruling by the Postal Regulatory Commission back in late 2013, namely, that the increase could not go on forever.

But the court remanded another aspect of the Commission’s order, and it is now almost certain that the exigent increase will be extended beyond August, when it was expected to end.  Depending on how the Commission does the next round of calculations, the increase could continue into the spring, or perhaps even longer.  (The court’s ruling is here.)

In its original order, issued on December 24, 2013, the Commission determined that the Postal Service had lost about $2.8 billion in contribution (profit) due to the recession.  The Commission therefore approved the 4.3 percent increase the Postal Service had requested, but only until the agency had recouped this amount.

The increase went into effect in January 2014, and as of March 31, 2015, the Postal Service had collected almost 80 percent of the $2.8 billion.  At the current rate of generating contribution — about $150 million a month — the exigent increase would have reached the authorized limit by the end of August.  The court’s ruling, however, means that the Commission will need to do some more calculations for how much additional contribution the Postal Service can take in.

According to the Postal Service’s brief to the court (filed on April 15, 2014), even with the court ruling as it has, the agency still deserves somewhere between $1.2 billion and $3.8 billion more.  That would extend the exigent increase anywhere from spring 2016 to fall 2017.

The mailers will undoubtedly dispute these numbers and argue that the Commission should authorize a much smaller amount.  The parties have waited over fifteen months for the court to issue its decision, but this case is far from over.

[UPDATE: On June 8, the day after this article was published, the Postal Service submitted a motion to the PRC explaining how the court’s ruling means that it is due at least $1.2 billion in additional contribution, and it asks the Commission to keep the exigent increase in place while the issue is reviewed so that rates don’t go down and then back up.  There’s also a helpful analysis of the court’s ruling on Dead Tree Edition.]

 

The issues

At issue in the exigent case were three basic questions: (1) What portion of the lost volume and revenue was “due to” the recession as opposed to other factors, like the Internet, which cannot be considered “extraordinary” circumstances meriting an exigent increase?  (2) How long could the losses be blamed on the recession?  (3) And how should the losses be counted up?

According to the Postal Service’s answers to these three questions, the total losses due to the recession were staggering — on the order of 190 billion pieces for 2008 – 2013, with a total contribution loss of $22 billion.  That would have justified a 4.3 percent increase for about twelve years, perhaps longer.  The Postal Service argued that the losses would continue adding up beyond 2013, which would justify making the increase permanent.

In order to calculate losses “due to” the recession, the Postal Service provided a thorough econometric analysis, but the Commission disputed it because it did not provide a satisfactory explanation for losses due to the Internet and other factors.  So the Commission came up with its own method for doing the calculations.

The court did not want to arbitrate which analysis was better.  It simply said that the Commission had the authority to use its own method so long as it was reasonable.  The Postal Service will not be able to re-argue that its method was more reasonable.

Concerning the second issue, the Postal Service had claimed that even though the recession officially ended in June 2009, its effects on the mail continued long after, so revenue was lost in 2010, 2011, 2012, and beyond.

The Commission, however, took the position that the Postal Service needed to adjust to the “new normal” of lower volumes and could not claim that the exigent circumstances went on and on.  It said there had to be a “stopping point” when the losses could no longer be blamed on the recession.

On this issue, the court also ruled in favor of the Commission and endorsed the “new normal” rule.  That’s why the exigent increase will not go on forever.

On the third issue, the Commission’s mode of calculation involved counting each year’s loss only once.  For example, if the Postal Service lost 6 billion pieces in 2008, and another 18 billion in 2009, the total loss was 24 billion.

The Postal Service argued that the calculations should carry over losses from one year to the next.  So the total loss for this example would be 30 billion — 6 billion in 2008, 18 billion in 2009, plus the 6 billion from 2008 that was lost again in 2009.

On this point, the court agreed with the Postal Service, and it remanded the “count once” aspect of the PRC’s original ruling back to the Commission for further consideration.  The Commission will now re-examine its analysis and presumably figure out how to count each year’s losses in subsequent years until the moment when the “new normal” is reached.

 

Counting more than once

In its brief to the court, the Postal Service anticipated that it might lose the “new normal” argument, so it offered an estimate for how much the Commission underestimated its losses as a result of using the “count once” rule even if the “new normal” rule applied.

On page 35 of the USPS brief submitted on April 15, 2014, the Postal Service states the following:

 “In all events, this error [counting once] alone caused the Commission to underestimate the Great Recession’s impact by approximately 9.82 billion additional pieces of lost mail and $1.19 billion in lost contribution.”

The Postal Service didn’t provide an explanation of how it came up with this number, but here’s a possible scenario.  [Update: In its June 8 motion to the PRC, the Postal Service provdes an analysis that is almost identical to the one that follows.]

When the Commission issued its ruling on the exigent case, it provided a worksheet showing how it came up with the estimate of $2.8 billion for total losses due to the recession.  The full table is can be found in the PRC’s exigent docket as PRC-LR-R2013-11/2 here, and we’ve put it on Google docs here. Here’s an abridged version of the key table:

COUNT ONCE: CONTRIBUTION LOSSES BY FISCAL YEAR (PRC)
(in millions of $)
2008
2009
2010
2011
Total
First-Class
-151
-500
-278
-929
Standard
-477
-1,412
-1,890
Other
7
23
22
1
52
Total
-621
-1,890
-256
1
-2,766

The table shows that according to the PRC’s methology, the losses due to the recession were  2766 million, or about $2.8 billion, the limit it authorized on the exigent increase.  The table also shows that for First Class mail the “new normal” arrived in FY 2010 (which is why there’s no loss entered for FY 2011), while for Standard it arrived in FY 2009 (which is why there’s no loss entered for FY 2010).

Now here’s another table showing how the numbers look if, rather than just counting each year’s losses only once, you include the year’s losses in the following year’s cumulative losses.

COUNT AGAIN: CONTRIBUTION LOSSES BY FISCAL YEAR
(in millions of $)
2008 2008 – 2009 2008 – 2010 2008 – 2011 Total
First-Class -151 -651 -929 -1,730
Standard -477 -1,890 -2,367
Other 7 30 51 52 140
Total -621 -2,511 -878 52 -3,958
Original exigent amount -2,766
Additional contribution -1,192

Using this counting method, the Postal Service should be allowed to recoup another $1.19 billion in additional contribution through the exigent increase.

If the Commission were to determine that the Postal Service is in fact due another $1.2 billion, the exigent increase would continue another eight months or so.  Rather than ending this August, it would continue until April 2016.  But it could go much longer, as another aspect of the issue suggests.

 

Figuring in the new normal

The court’s rejection of the “count once” rule means that the losses in one year will carry over into the cumulative losses of the following year until the “stopping point” when the recession no longer is having an “exigent impact.”  That’s the moment when the “new normal” arrives.

According to the Commission’s order, the “new normal” occurs when “all or most” of four things have happened: (1) macroeconomic indicators demonstrate a “return to near historic positive trends”; (2) the rate of change on mail volumes is “positive”; (3) USPS “regains its ability to predict or project mail volumes; and (4) USPS “demonstrates an ability to adjust operations to the lower volumes.”

This new normal arrives at different times for different classes and sub-classes of mail, ranging from the start of fiscal year 2010 to the start of fiscal year 2012.  Considering that the losses continue to add up until the moment arrives, these variations can have a significant effect.

When it ran its calculations on lost volume and revenue, the Commission not only used the “count once” rule.  It also lumped the various sub-classes of mail (e.g., letters, cards, single-piece, pre-sort) together into single classes (First Class, Standard, etc.).  But each sub-class reached its “new normal” moment at a different time.  For example, pre-sort First Class mail reached this moment in FY 2011, but single-piece First Class mail did not reach it until FY 2012.

The Postal Service argues that assessing a “new normal” date by class instead of sub-class significantly underestimates the total losses.  Here’s what the Postal Service states on page 48 of its brief to the court:

Setting the “new normal” endpoints by class rather than sub-class — compounded by the “count once” error discussed above — led the Commission to underestimate the Great Recession’s impact by 30.9 billion pieces of lost mail volume and $3.81 billion of lost contribution between 2008 and 2012. Even accepting the notion that losses can no longer be “due to” the recession once a “new normal” is reached — and accepting all of the Commission’s findings concerning the econometric modeling of the recession’s impact — correcting these counting errors alone would have more than doubled the volume and contribution losses the Commission ultimately recognized.

The Postal Service’s brief doesn’t provide data showing how it came up with this additional $3.8 in lost contribution, and it’s hard to see how a more nuanced or “granular” analysis of sub-classes instead of classes would yield such a significantly larger number.  But if the Postal Service is right about this, and if the Commission were to rule that the Postal Service is entitled to $3.8 billion more in contribution, the exigent rate increase could continue for another two years.

 

The case goes on

That probably won’t happen, though.  In its ruling, the court said that “contrary to the Postal Service’s argument, the Commission acted well within its discretion in starting the date of the new normal separately for each class of mail, rather than smaller sub-classes.”  It doesn’t seem likely that the Commission will now change how it determines when the “new normal” arrived.

On the other hand, it’s worth remembering that the Commission’s Acting Chairman, Robert Taub, issued a dissenting opinion on the exigent ruling, in which he argued that the Commission had failed “to account for the entire, ongoing impact of the exigent event on the Postal Service’s ability to recover lost contribution.”  He would probably have granted the Postal Service’s full request.  Under Taub’s leadership, the Commission may be inclined to revisit how it determined when the “new normal” arrived.

In any case, it seems clear at this point that the Commission will be granting some additional amount to the total that the Postal Service is permitted to recoup with the exigent increase. Over the coming weeks, the Postal Service and stakeholders will probably submit comments about how they believe the calculations should be done, and the Commission will probably try to issue a decision several weeks before the current exigent increase runs out.

The Postal Service initially requested an exigent rate increase in 2010.  The PRC denied the request, and the Postal Service appealed the decision to the DC court, which remanded the case back to the Commission.  In 2013, the Postal Service resubmitted a request for an exigent increase, and when the Commission approved it with the $2.8 billion limit, the Postal Service again petitioned the court.  Now the case has again been remanded to the Commission.

Given the complexity of the issues still on the table and the amount of money at stake, it’s possible that the Postal Service — or the mailers — will not be satisfied with the Commission’s next ruling.  The case may end up back in court a third time.  In the meantime, the exigent rate increase remains in place.  Not forever, but longer.

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