The Year in Review: The Postal Service submits its Annual Compliance Report for FY 2015

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Earlier this week the Postal Service submitted its FY 2015 Annual Compliance Report (ACR) to the Postal Regulatory Commission.  Over the next few weeks, the Commission will review the report, request more information, give stakeholders an opportunity to comment, and then, sometime in March, issue its own Annual Compliance Determination (ACD) report.  The USPS ACR is on the PRC website here; last year’s PRC ACD report is here.

The main goal of this process, as described in 39 U.S.C. § 3652, is to “analyze costs, revenues, rates, and quality of service” in order to ensure that all postal products have complied with the law.  In particular, the compliance review in intended to determine if each product is covering its attributable costs so that one product doesn’t subsidize another.

The 2015 ACR runs to 73 pages, plus 42 library references available to the public and 29 others that are nonpublic.  It’s a huge amount of material — and the Commission will ask for still more — but almost all of it is about costs, rates, and revenues.

In order to satisfy the statute’s requirement about “quality of service,” however, the ACR contains a brief section (pp. 56-62) about service performance (delivery speed), customer satisfaction, and customer access to postal services (e.g., the number of post offices closed and suspended, wait time in line, etc.).

It looks as though not a lot has changed over the past year with respect to customer access, and there’s actually some happy news to report.  As in FY 2014, there were no post office discontinuances in FY 2015, and compared to last year, fewer emergency suspensions took place and fewer blue collection boxes were removed from the street due to low volumes.

On the other hand, the ACR shows that the average wait time in line at the post office has increased for the first time in a few years, and on-time service performance for delivery has declined from last year.  Perhaps as a result, customer satisfaction has dropped for a second year.  

More on these matters in a moment, but first a word about the main subject of the ACR, cost coverage.

 

Covering costs and cross subsidies

As in previous ACRs, the 2015 ACR shows that nearly all market-dominant products cover their costs (some by a significant percentage), but a few do not — Standard Flats, Standard Parcels, Periodicals, Media Mail, and Inbound Single-Piece First-Class Mail International mail. (The Library Reference on costs, revenues, and cost coverage is on the PRC website here and Google Drive here.  There more on the issues with International mail in this recent OIG report.)

Similarly, every competitive product covered its costs in FY 2015, with just a few exceptions, including two Negotiated Service Agreements (NSAs).  In addition, again as in years past, the workshare discounts on several products exceeded the estimated cost avoidance.  All of these issues will be addressed during the compliance review.

Another important matter will be the question of whether or not competitive products are being cross-subsidized by market dominant products.

For several years, the United Parcel Service has been arguing that the products with which UPS competes — i.e., most USPS shipping services — are not generating enough revenues to cover their costs.  If true, it would mean that market dominant products are unfairly and illegally subsidizing competitive products.

UPS has therefore been pushing the Postal Service and the PRC to change the methodologies for allocating costs.  UPS made comments along these lines during the previous ACD review, and it will no doubt do so again.  A few weeks ago UPS also initiated a PRC docket (No. RM2016-2) that addresses the issues with cost allocation and proposes new methodologies.  To further its case, UPS has also sponsored a couple of reports by economist Robert Shapiro, which you can find here and here.  (There’s an excellent discussion of the subject in a previous post by Mark Jamison.)

While the issues about allocation get very technical, the bottom line is clear enough.  UPS wants to increase the amount of money that competitive products must contribute to the cost of operations, which would force the Postal Service to increase its prices on these products in order to cover these higher costs.  That would obviously be beneficial to UPS.

In the ACR filed this week, the Postal Service challenges the UPS argument.  According to the Postal Service (as shown in this table), competitive products cost about $12.2 billion to process and deliver, while they brought in about $16.4 billion in revenues.  “Therefore,” observes the Postal Service, “based on these estimates, it is clear that competitive products in FY 2015 were not cross-subsidized by market dominant products, and thus were in compliance with subsection 3633(a)(1).”  That won’t be the last word on the subject, however.

 

Service performance

“Service performance” refers to the transit time from when a mail piece is sent to when it arrives at its destination.  The actual transit time is measured against the corresponding service standard, i.e., overnight, two days, or three-to-five days, and expressed as an on-time percentage, which can be compared to the Postal Service’s on-time target, as well as the performance in previous years.

As the Postal Service observes in the ACR, “No First-Class Mail products met the service targets for FY 2015.”  In addition, as this table shows, no FCM product performed as well as last year.  Here’s a table included with the ACR, with an extra column showing last year’s results.  As you can see, the performance for FY 2015 are below both the target and last year.

First-Class Mai
Origin / Destination
FY 2015 FY 2014
% On-Time Target % On-Time
Single-Piece Letters/Postcards
Overnight 95.8 96.8 96.7
Two-Day 94 96.5 95.7
Three-To-Five-Day 77.3 95.25 88.6
Presort Letters/Postcards
Overnight 96 96.8 97.2
Two-Day 93.8 96.5 96.6
Three-To-Five-Day 88 95.25 92.5
Flats
Overnight 83.2 96.8 84.9
Two-Day 79.8 96.5 82.5
Three-To-Five-Day 65.3 95.25 72.6
Parcels
Overnight 84.8 96.8 88.4
Two-Day 84.2 96.5 86.8
Three-To-Five-Day 73.7 95.25 83.8

Things were not much better with Standard Mail and Periodicals.  Standard Mail Flats, for example, had an on-time performance of 73.8 percent, compared to a target of 91 percent and last year performance of 76.2 percent.  Periodicals had an on-time performance of 77.7 percent, compared to a target of 91 percent and last year performance of 80.9 percent.

As it has said when the quarterly performance results were released during the fiscal year, the Postal Service explains the drop in performance by pointing to two events — winter storms and “the disruption caused by realigning staffing and educating employees in new jobs” that took place when service standards were changed and processing plants changed their operations in January 2015.  The Postal Service notes that “in Postal Quarters 3 and 4, service trends rebounded and continued to improve into FY 2016.”

The ACR doesn’t go into the matter, but one of the key questions about these service standards is what happens when the Postal Service doesn’t meet them.  The APWU filed a complaint with the PRC about the Postal Service’s failure to meet the standards, and in September the union took the PRC to court because it was not satisfied with the Commission’s response.  At issue is whether the standards are simply goals or “legally enforceable” standards.  That issue may come up again in the context of the compliance review.

To see all of the FY2015 data, the library reference containing the service performance results for FY 2015 (USPS FY15-29) is here; you can find them on Google Drive here.  The PRC website has a page with links to previous quarterly performance reports, here.  There’s more about the service performance results in this previous post.

 

Customer Satisfaction

As required by the statute on the compliance review, the Postal Service provides the PRC with some data on customer satisfaction with market dominant products based on customer surveys.  You can see the data and survey instruments in Library Reference USPS-FY15-38, which we’ve uploaded to Google Drive here.

As noted in last year’s ACR, in 2014 the Postal Service changed how it measured customer satisfaction by replacing the Customer Experience Measurement (CEM) with a new Customer Insights (CI) program.  In the CI program, Residential and Small/Medium business customers are randomly selected, contacted by mail, and offered the opportunity to complete an online or phone survey.  Here’s a table showing the results from this year and the two previous years.

USPS ACR FY 2015: Customer Satisfaction
Respondent Residential Small/Medium Business
Response % Rated Very/Mostly Satisfied change 2014 to 2015 % Rated Very/Mostly Satisfied change 2014 to 2015
Year 2013 2014 2015 2013 2014 2015
First-Class Mail 94.67 91.15 89.22 -1.93 93.21 87.25 84.77 -2.48
Single-Piece International 87.38 85.58 85.80 0.22 84.27 83.04 82.31 -0.73
Standard Mail 85.11 86.76 85.11 -1.65 87.95 83.82 80.82 -3.00
Periodicals 88.09 85.90 85.50 -0.40 85.92 83.26 82.42 -0.84
Single-Piece Standard Post 89.87 88.92 86.66 -2.26 88.81 84.06 82.65 -1.41
Media Mail 89.32 88.66 87.17 -1.49 88.15 86.55 85.18 -1.37
Bound Printed Matter 86.84 –* –* n/a 85.85 81.72 81.70 -0.02
Library Mail 87.77 –* 85.10 n/a 86.33 81.79 85.43 3.64
*– Number of responses received did not meet minimum threshold for 90% level of confidence.

As the table shows, customer satisfaction, while still relatively good, has been steadily declining. It’s not clear why, but it may have to do with the mail slowing down as a result of the plant consolidations and change in service standards, or perhaps there are other explanations.

The decline may be cause for concern, but the results of the survey should be seen in a larger context.  As discussed in this previous post, the public’s general view of the Postal Service appears to be very good.

A recent Gallup poll showed that Americans rank the customer service they receive at post offices among the best in the nation — third behind banks and pharmacies.  Another new survey by Pew Charitable Trust found that 84% of Americans have a favorable view of the Postal Service – the highest rating among 17 agencies and departments tested.  And earlier this year, the U.S. Customer Experience Index similarly found that the Postal Service was at the top of the list for federal agencies.

 

Customer Access to Postal Services

The ACR has just one paragraph about “Consumer Access to Postal Services” (called “customer access” in previous ACRs). This discussion includes some basic numbers regarding the number of post offices in operation, closures and suspensions, collection boxes, wait time in line, and delivery points. There’s more data in a library reference entitled “Consumer Access to Postal Services” (USPS-FY15-33), which you can find on Google Drive here.

The following table provides a quick summary of the numbers for FY 2015 along with comparisons to FY 2013 and FY 2014.  (The numbers for previous years come from the FY 2014 ACR and FY 2013 ACR.  Note that in subsequent filings, the Postal Service modified some of the numbers, so they are all not exactly as they appear in the PRC’s own ACD reports.)

USPS ACR FY 2015: Customer Access
Year At end of FY 2012 At end of FY 2013 At end of FY 2014 At end of FY 2015 Changes
Post Office Closures Closed during 2013 Closed during 2014 Closed during 2015
Post Offices 26,708 26,648 26,655 26,196 60 0 0
Stations and Branches* 4,962 4,949 4,948 2,789 13 0 0
Carrier annexes 689 689 698 527 0 0 0
Total 32,359 32,286 32,301 29,512 73 0 0
Emergency Suspensions Suspended during 2013 Suspended during 2014 Suspended during 2015
Post Offices 254 354 398 469 126 73 63
Stations and Branches 56 87 97 107 35 12 13
Carrier annexes 1 1 0
Total 310 441 495 161 85 76
Village Post Offices Added during 2013 Added during 2014 Added during 2015
VPOs** 20 358 767 874 338 409 107
Delivery Points (Res + Bus) Change 2012 to 2013 Change 2013 to 2014 Change 2014 to 2015
Curbline 52,933,256 53,472,871 51,672,918 52,409,986 539,615 -1,799,953 737,068
NDCBU 17,270,574 17,690,277 16,973,241 17,967,666 419,703 -717,036 994,425
Centralized 20,888,776 21,090,295 20,569,493 21,208,002 415,920 -520,802 638,509
SDWK n/a n/a 513,635 994,138 480,503
Other 35,017,042 34,936,855 33,308,970 32,971,534 -80,187 -1,627,885 -337,436
Total 126,109,648 127,190,298 123,038,257 125,551,326 1,080,650 -4,152,041 2,513,069
Collection Boxes Change 2012 to 2013 Change 2013 to 2014 Change 2014 to 2015
Total 164,099 159,872 156,345 153,999 -4,227 -3,527 -2,346
Wait Time in Line Change 2012 to 2013 Change 2013 to 2014 Change 2014 to 2015
Average (min:sec) 2:34 2:29 2:24 2:36 -0:05 -0:05 0:12
*The number for stations and branches in FY 2015 is probably an error in the ACR.
**The numbers for VPOs at the end of 2012, 2013, and 2014 are estimates and not included in the ACR.

 

Post offices in operation

The ACR says that the Postal Service closed no post offices or stations and branches in FY 2015.  In last year’s ACR, the Postal Service similarly reported there were no closures of post offices, stations, or branches in FY 2014.  That’s two years running without a single post office being discontinued.

That’s obviously quite unusual.  Over the past 40 years, the Postal Service has closed an average of one hundred post offices annually, and in FY 2012 and 2013, it closed several hundred.  One wonders how long this unofficial moratorium on closures will last.

As for post offices in operation, last year’s ACR reported that at the end of FY 2014, there were 26,655 independent post offices, 4,948 stations and branches, and 698 carrier annexes.  According to the 2015 ACR, at the end of the fiscal year there were 26,196 regular post offices, 2,789 stations and branches, and 527 carrier annexes.

These numbers for FY 2015 seem suspect.  There’s no way that over two thousand stations and branches just disappeared during FY 2015.  And it’s not just the national total that looks wrong, by the way.  The spreadsheet in the library reference on post offices also shows inexplicably low numbers for stations and branches in each area of the country.  The Postal Service will probably file a notice of errata soon.

It’s also not clear how the number of post offices could have declined by 459 and the number of carrier annexes by 171.  As the ACR notes, there were no discontinuances during the year, so where did all of these facilities go?  Perhaps there are errors in these numbers too.

In any case, while no post offices were permanently discontinued during the year, many were closed by emergency suspensions.

 

Emergency suspensions

During FY 2015, the ACR reports that 76 suspensions took place, as compared to 85 in FY 2014 and 161 in FY 2013.  While weekly news reports make it seem as if post offices are constantly being suspended, it appears that the suspensions may actually be on the decline.  But there are still a lot of them on the books.

At the end of FY 2015, there were 469 suspensions of post offices and 107 suspensions of stations and branches in effect.  That compares with 398 suspensions of post offices and 96 suspensions of stations and branches in effect at the end of FY 2014.

petworth-post-officeAs these numbers indicate, many post offices have been in a state of suspensions for several years.  The Commission has encouraged the Postal Service to complete the suspension process — as required by postal policies — which means either reopening the post office or proceeding to a discontinuance procedure.

When a suspension goes on for years without anything happening, it’s really a de facto discontinuance.  That’s “out of compliance” because the Postal Service has closed the post office without following the legal requirements for a regular discontinuance.

Over the coming weeks, the Commission will probably ask the Postal Service for more information about the causes of the suspensions.  As in years past, it will turn out that most of them involved lease issues, problems staffing the office, and unsafe conditions with the building.  The fact that the lease problems are sometimes of the Postal Service’s own making will probably go unexplored in the Commission’s review, and it’s not likely that the Commission will make much of a fuss over the suspensions.

 

Village Post Offices

The ACR states that in FY 2015, the Postal Service opened 107 more Village Post Offices (VPOs).  In last year’s ACR, the Postal Service had indicated that it hoped to open a total of 350 Village Post Offices in FY 2015, so it appears that the Postal Service did not reach its goal.

In FY 2014, the Postal Service opened 409 new VPOs, almost four times as many as were opened in FY 2015.  It’s not clear why the pace of opening VPOs has slowed like this.  Perhaps the Postal Service is losing interest in VPOs.  They probably don’t generate significant profits, and they are not being seen as a viable alternative to real post offices, primarily because they basically just sell stamps and provide Priority shipping materials.

The ACR says that at the end of FY 2015, there were a total of 874 VPOs in operation.  The Postal Service publishes a list of VPOs on its website (here).

That list hasn’t been updated since April 2015, but you can find a more recent list, which also contains some additional data like the fees the Postal Service pays the operators here.  This list was created thanks to regular FOIA requests filed by postal watchdog Steve Bahnsen.

The ACR states how many VPOs were opened in FY 2015 and how many are currently in operation, but it doesn’t say anything about how many have closed.  To address that question, Mr. Bahnsen compared some of his older FOIA lists with newer ones, and we also checked the USPS Find Locations website, which includes VPOs.  We came up with a list of about 70 VPOs that appear to have closed sometime over the past couple of years.  You can see this list here.

Given that these VPOs were created just a year or two ago, one wonders why they didn’t last longer.  Real post offices are decades old; most of them go back to the 19th century.  Why have one in twelve VPOs closed so quickly?

In some cases, the business hosting the VPO may have decided the fee it was paid by the Postal Service was too low and not worth the trouble.  These fees range from $1 to $9,200, but they average about $1,600 a year.   In exchange, the business must give up floor space for a rack containing priority envelopes and flat rate boxes, learn some basics for selling postal products, do all the paperwork associated with dealing with the USPS, and so on.

In other cases, the Postal Service may have decided that the fee was too high for what it was getting in return and so it cancelled the contract.  Maybe the host business wasn’t generating enough revenue, or perhaps it wasn’t doing the paperwork correctly or transmitting revenues to the Postal Service in a timely way.  (Similar problems have occurred with contract postal units, as discussed in this OIG report.)

In a few cases, the host may have simply gone out of business.  They tend to be small stores in small towns and hardscrabble rural areas, and maybe they just couldn’t survive, even with the added revenues a VPO is supposed to bring in.

 

Wait time in line at the PO

The ACR indicates that the average wait time in line at the post office increased at the national level from 2 minutes 24 seconds in FY 2014 to 2 minutes 36 seconds in FY 2015.  In the Pacific and Western Areas, the average wait was over 3 minutes.

The ACR doesn’t say anything about why the wait times have increased like this.  It should be cause for concern, especially given that in the two previous years, the wait time had improved.

As stated in the Postal Operations Manual, the Postal Service aims for a “Five Minutes or Less” standard, so an average of two and half minutes sounds pretty good.  But that’s the average.   The range is something else.

As part of last year’s ACD review, the Postal Service reported that over 16 percent of customers reported waiting longer than five minutes in line, and over 4 percent waited more than 16 minutes.  With about a billion retail visits every year, this means about 200 million visits exceeded the five-minute standard.

 

Collection boxes

The ACR says that there were 153,999 collection boxes available at the end of FY 2015, compared to 156,345 at the end of FY 2014.  Approximately 2,300 boxes have been culled for failing to meet the minimum volume requirement.

The number of collection boxes has been declining for many years.  At the end of FY 2012, just three years ago, there were 164,099 — about 10,000 more than there are now.  But that rate of decline is not nearly as dramatic as it has been in years past.

According to this USPS report, in 2000 there were 365,000 collection boxes on the street — more than twice as many as there are now.

There’s more on the disappearing collection boxes in this previous post.

 

Delivery points

The ACR doesn’t say anything about the subject, but the library reference on customer access contains a spreadsheet showing the number of delivery points for each mode of delivery.  There were more than two million new delivery points added during the fiscal year.

The terminology is not explained in the ACR or on the spreadsheet, but as best as we can make out, the types of delivery can be defined as follows: Curbline (mailboxes at the curb, where delivery is usually by vehicle); NDCBU (Neighborhood Delivery and Collection Box Units, usually outdoors); Centralized (centralized mail receptacles, usually inside apartment houses and businesses); SDWK (i.e., sidewalk, which apparently refers to “potential” delivery points at door slots and receptacles near the door); and Other (mostly door delivery, as well as other types).

One of the main issues with delivery points is that centralized modes of delivery are less costly for the Postal Service, as discussed in this OIG report.  While the type of delivery for existing addresses cannot be changed without the customer’s permission, for new addresses it’s up to the Postal Service, so people often get a cluster box when in the past they would have gotten a curbside box.  The Postal Service also tries to encourage customers to accept conversion to a CBU, but that’s difficult when it’s voluntary.

While news reports often tell stories about customers being unhappy that they’re getting a cluster box, the data provided with the ACR indicate that there have not been a lot of changes over the past year.  In last year’s Annual Report, the Postal Service stated that it had “voluntarily converted a total of 225,009 deliveries to a more efficient delivery mode — 165,358 residential and 59,641 business deliveries.”  That represents less than 0.2 percent of all delivery points.

So long as conversion is voluntary, it’s not likely that things will change very much anytime soon, and this year’s compliance review will probably find that relatively few conversions have taken place.  The experience of Canada Post shows that customer resistance to cluster boxes is very strong.  (There’s more on “modes of delivery” in this previous post.)

 

Time for comments

After receiving the ACR this week, the PRC published Order No. 2968 initiating the proceedings for the compliance review.  The Commission is now soliciting comments from the public “on the cost coverage matters the Postal Service addresses in its filing; service performance results; levels of customer satisfaction achieved; and such other matters that may be relevant to the Commission’s review.”  Comments are due by February 2, 2016.

(Most of the ACR documents referenced in this article can be found on Google Drive, here.)

(Image credits: UPS graphicPetworth, DC post office, suspended in July 2015; VPO opening in Candy Outfitters in Copperas Cove, TX, in May 2015; customers in line at Lady Lake, FL post office; collection box in Palo Alto, CA, one of 81 being removed next month; postal worker delivering to CBU.)

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