Get it while you can: The PRC to rule on exigent rate case – How long will the surcharge go on?

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UPDATE: A few hours after this post was published, the Postal Regulatory Commission released its order on the exigent increase.   As predicted in the post, the Commission determined that the Postal Service was entitled to another $1.191 billion in additional contribution as an exigent rate adjustment, which translates to $1.396 billion in revenue.   That means the surcharge will be extended by about eight months — from early-to-mid August, when it was scheduled to end, to sometime in April 2016.  (Read more about today’s order at the end of the post.)

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Any day now, the Postal Regulatory Commission is expected to issue an order regarding the exigent rate increase.  Judging by the comments that have been filed by the Postal Service and the mailers, the Commission is likely to rule that the 4.3 percent exigent surcharge will be extended by several months, perhaps longer.

The Commission will be responding to a June 5th ruling by the DC District Court of Appeals remanding the Commission’s 2013 order on the increase.  According to the court, there was one element in the order that was “arbitrary and capricious” — the way the Commission had counted up the losses due to the recession.

The court ruled that Commission should not have counted each year’s losses only once.  Instead, the losses should carry over to the following year, and again to the next year, until the “new normal” of lower volumes is reached.  At that point, the Postal Service should have been able to adjust to conditions, and the exigent circumstances could no longer be said to exist.

For the past few weeks, the Commission, along with the Postal Service and the mailers and other stakeholders, has been looking at the same question that has been on the table since the beginning, back in 2010, when the Postal Service first requested an exigent increase: How much volume and revenue did the Postal Service actually lose due to the recession?  Only this revenue could be made up through the exigent surcharge.

The Commission’s original order said that the Postal Service had lost about $3.2 billion in revenue, or about $2.8 billion in contribution (profit), due to the recession.  It therefore granted a 4.3 percent surcharge until this amount was achieved.  The surcharge went into effect in January 2014, and it is set to expire soon, in early to mid August.

The Commission could not officially act on the court’s ruling until it had issued its mandate, which happened on Monday of this week (July 27).  With the expiration of the surcharge just days away, the Commission will undoubtedly act quickly.

 

Consumer relations

In response to the court’s ruling, the Postal Service and the big mailers submitted initial comments and reply comments debating how much additional contribution the Postal Service should be allowed to take in and how much longer the surcharge should remain in effect.   The estimates were widely divergent.

Initially, the Postal Service described three scenarios, ranging from $1.2 billion to $8.7 billion in additional contribution.  The mailers put forward two estimates, one for $600 million and another for just $60 million.  In response to comments from the mailers, the Postal Service put forth at least three more scenarios.  Other commenters offered additional opinions on how to count the losses, but without presenting calculations for a total.

Given how far apart the mailers and the Postal Service are in their estimates, it’s not surprising that the rhetoric in the comments sometimes gets a little testy.  For example, the Postal Service refers to some of the mailers’ arguments and assertions as “baseless,” a “shell game,” “perverse,” and so on.

In response, the Greeting Card Association and National Postal Policy Council made this remark in a footnote to their comments:

“Finally, while it is not part of the issue before the Commission in this remand proceeding, it should be observed that the tone and some of the wording of the Postal Service’s motion does not promote healthy customer relations or further the kind of productive cooperation which helps both it and the mailing public.”

 

The estimates

Here’s a quick summary of the methodologies that have been put forward for implementing the court’s ruling.  The comments filed on the remand case can be found in PRC docket R2013-11 R, here.

 

1. USPS #1: $1.2 billion more

The Postal Service describes this scenario as “the floor.”  The calculation is based on the premise that losses in one year carry over into the next until the “new normal” is reached, which the Commission has already said occurred at the beginning of FY 2010 for Standard mail and FY 2011 for First Class.  A total of 35 billion pieces were lost, which translates into $1.2 billion in additional contribution.  The Postal Service takes in about $150 million a month in contribution, so this scenario would extend the surcharge for about eight more months.

2. USPS #2: 8.66 billion more

The Postal Service argues that the court’s ruling opens up an opportunity to revisit when the “new normal” occurred.  Rather than FY 2010 or FY 2011, argues the Postal Service, the new normal actually occurred in FY 2013.  Using these dates, the losses due to the recession were 105.7 billion pieces of mail and $11.4 billion in total contribution — $8.66 billion more than the Commission originally determined.  This would extend the surcharge for about 4 years and nine months.

3. USPS #3: $3 billion more

In between scenario 1 and 2 is a third methodology in which the Postal Service argues that the “new normal” date for Standard mail should be the same as for First Class, i.e., the beginning of FY 2011.  That adds another year of losses to Standard mail, bringing the total lost contribution to $3 billion more than the Commission had determined.  The surcharge would go on for 20 more months.

 

4. GCA-NPPC: $600 million more

In their comments, the Greeting Card Association and the National Postal Policy Council argue that the court’s decision to vacate the “count once” rule doesn’t mean that every piece lost should be counted again every subsequent year.  In the years after year one, other factors (like Internet diversion) also affected volumes.

Using this premise, they calculate that the total losses due to the recession were 31.3 billion pieces — about 4 billion pieces less than in the Postal Service’s Scenario 1.  That leads to a net loss in contribution of $3.37 billion — about $600 million more than the Commission had originally determined.  That would extend the surcharge by about 4 months.

In response to this scenario, the Postal Service and NALC argue that the Commission’s “new normal” analysis already eliminates losses due to other causes, so 100 percent of the losses due to the recession should carry over into the next year.

The Postal Service was apparently rather annoyed by the fact that GCA-NPPC waited until their reply comments to provide the calculations justifying its estimate of $600 million, rather than presenting them in their initial comments.  In fact, the Postal Service submitted a motion to strike this computational approach because USPS had been deprived of an opportunity to explain why it was filled with “simple, obvious, and egregious errors.”  The Commission hasn’t ruled on the motion, but may address it in its upcoming order.

 

5. PostCom et al: $60 million more

In their initial comments, a group of mailers that includes the Association For Postal Commerce (PostCom), the Association of Magazine Media, the Alliance of Nonprofit Mailers, the Direct Marketing Association, and several other mailers’ associations, offer their own calculation.  They accept the Postal Service’s methodology in scenario #1 for determining the total number of lost pieces — 35 billion.

But PostCom argues that the Commission was wrong to use the unit contribution (profit per piece) for FY 2014 when it issued its order granting $2.8 billion in contribution.  PostCom says that the unit contribution should be the value for the year in which the losses occurred.  Since the unit contributions for 2008-2010 are much smaller than in 2014, PostCom et al figure that the additional contribution comes to only $60 million.  That would extend the surcharge by  about 12 days.

 

6 – 8. USPS alternate scenarios

The Postal Service suggests that if the Commission is interested in abandoning its use of the 2014 unit contributions, as PostCom argues, the year-specific numbers should not be those used by PostCom in its initial brief.  The Postal Service argues that the year-specific numbers should be much higher, about 40 percent higher, in fact.

Using its own unit contribution figures, the Postal Service then returns to the three scenarios it had previously presented and comes up with several more scenarios.

6. Using the new normal dates in Scenario 1 and the Postal Service’s own year-specific unit contribution figures leads to a total lost contribution of $5.7 billion — about $2.9 billion more than the Commission’s order.  This would extend the surcharge by 19 months.

7. Using the new normal dates in Scenario 2 and USPS unit contribution figures leads to a total lost contribution of $11.1 billion — about $8.4 billion more than the Commission’s order.  This would extend the surcharge by about four and a half years.

8. Using the new normal dates in Scenario 3 and USPS unit contributions leads to a total lost contribution of $7.05 billion — about $4.4 billion more than the Commission’s order.  This would extend the surcharge by about two and a half years.

In addition to all of these scenarios, the Postal Service suggests several more possibilities using even other unit contribution figures, which produces results ranging from $1.3 billion to $7.9 billion in additional contribution.

As these various scenarios suggest, the Commission will need to address several issues as it determines its own methodology for calculating what additional contribution the surcharge should bring in.  The main two seem to be the dating of the new normal and the issue of unit contribution.

 

The new normal

The court’s ruling affirmed the Commission’s determination that the exigent circumstances could not go on forever and that eventually the Postal Service needed to recognize and adapt to the “new normal” of lower volumes.  In its order, the Commission decided that the new normal arrived in FY 2010 for Standard mail, FY 2011 for First Class, and FY 2012 for periodicals.

The court, however, also said that the Commission was “free to consider” this matter if it chose to.

The Postal Service interprets this to mean that the Commission should do exactly that.  In its reply brief, the Postal Service argues that by taking the “the unusual step of expressly singling out a particular issue to clarify,” the court was implicitly suggesting that the new normal dating might need to be revisited by the Commission on remand.

The mailers strongly disagree.   They say that if the Commission is going to revisit this issue, it should also reconsider a range of other issues, some of which would work to their advantage.  The Postal Service says that no other issues need to be reconsidered because they have already been settled by the court’s ruling.

If the Commission decides with Postal Service on this issue, scenarios 2 and 3 (as well as 7 and 8) could be in play.  If the Commission agrees with the mailers and sticks with its previous determination about the new normal dates, USPS Scenarios 2 and 3 (and 7 and 8) would presumably not be up for consideration.

 

Unit contribution

PostCom wants to use year-specific contribution rates rather than the FY 2014 numbers.  The Postal Service, along with the National Association of Letter Carriers, points out that the mailers had said nothing about the unit-contribution issue when they argued the case on appeal to the court, and it’s too late to bring this point up now.

The Postal Service also argues that in offerings its first three scenarios it “has done nothing more and nothing less than to simply apply the exact same methodology” that the Commission used in its order.   It says that PostCom thus seeks to reopen this aspect of the case, even though it rejects the Postal Service’s effort to reopen the dating for the “new normal” moment.

The Postal Service also points out that PostCom had used unit contribution for FY 2012 and FY 2014 in some of the calculations it presented previously to the Commission.  “PostCom,” says the Postal Service, “apparently views the choice of unit contributions to apply in the conversion process as a shell game in which it can always choose whatever option generates the lowest estimate of lost contribution.”

 

A little guesswork

At this point, it’s anyone’s guess what the Commission will determine.  But given that the Postal Service has offered Scenario 1, with its estimate of $1.2 billion in additional contribution, as a legitimate interpretation of the court’s ruling, it seems that this is as good a guess as any for how the Commission will rule.

The other USPS estimates are much larger and likely to cause considerable consternation for the mailers, and the Commission would have to justify the departure from its previous view of when the new normal occurred.

GCA-NPPC, with its estimate of $600 million more, may have some impact on the Commission’s thinking because it takes into consideration the impacts of other factors on mail volumes besides the recession, such as internet diversion.  But the Postal Service has a good argument when it says that these other factors have already been included in the equations.

PostCom’s estimate of only $60 million is not likely to fly at all.  The mailers would have a hard time explaining why they didn’t bring up the unit contribution issue earlier and why the court can be presumed to have left the issue open on remand when it wasn’t ever mentioned before.  But the fact that the Postal Service devoted so many pages to redoing PostCom’s calculations using its own unit contributions suggests that there may be more to this issue.

One thing seems fairly certain.  The exigent surcharge is not going to expire in early to mid August.  The Commission is going to grant the Postal Service some sort of additional contribution.  If it’s too little, the Postal Service will probably return to court.  If it’s too much, the mailers may go back to court.  And it’s entirely possible that both sides will be back in court, just as they were before.


More on today’s ruling

As anticipated in this post, the Commission determined that the Postal Service was entitled to $1.191 billion in additional contribution, or $1.396 billion in revenue (USPS scenario #1).   That means the surcharge will be extended by about eight months beyond early-to-mid August, when it was scheduled to end.

The Commission declined to reopen the “new normal” framework, thereby eliminating scenarios #2 and #3 (as well as #7 and #8) from consideration.

The Commission also determined that the GCA/NPPC proposal relied on an inaccurate interpretation of the underlying econometric model.  It concluded that the Postal Service had successfully rebutted the claims by GCA/NPPC that the Postal Service’s proposed method for estimating volume losses was based on unproven and flawed assumptions.  That eliminated the GCA/NPPC scenario (#4).

The Commission declined to revisit the use of FY 2014 unit contribution figures to calculate losses the Postal Service is permitted to recover through the exigent surcharge.  That eliminated the methodology proposed by PostCom and the other mailing associations (scenario #5).

The Commission thus determined that of all the methodologies on the table, scenario #1 — the Postal Service’s “floor” scenario — was the most reasonable and equitable.

One final note: Commissioner Tony Hammond issued a dissenting opinion on the case.  Hammond had voted against the exigent request back in 2010, but he was not a member of the Commission when it issued its 2013 order granting a temporary 4.3 percent increase.

Now that he is back on the PRC, he still disagrees.  “While the Order complies with the Court’s mandate,” writes Commissioner Hammond, “I cannot agree with the conclusion that the new amount the Postal Service is authorized to collect as a result of the new calculation of volume lost due to the Great Recession is ‘reasonable and equitable and necessary.’”

If the mailers go back to court, they will surely quote this dissenting opinion.


For more on the exigent increase and the court’s ruling, see this previous postthis one, and this one too.

(Image credit: Janis Joplin stamp)

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