How’s the exigent rate increase doing?

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Earlier this week, the Postal Service released its preliminary financial report for fiscal year 2014.  Now may be a good time to evaluate the impacts of the exigent rate increase that went into effect on January 26, 2014.

Back in September 2013, when the Postal Service presented testimony to the Postal Regulatory Commission about the proposed increase, one of the main questions was how the increase would impact mail volumes and revenues.  The Postal Service knew that raising rates would drive away some business, but it figured that the higher rates would yield more revenue in the end.

The mailers and others argued that volumes would drop so much that even with higher rates, total revenues would decline.  For example, Rafe Morrissey, the vice president of postal affairs at the Greeting Card Association, called the PRC's decision to grant a temporary increase “disappointing."  Morrissey then said this:

“Raising rates above inflation is not a solution, but rather a pathway that will exacerbate the Postal Service’s current financial crisis by driving away much needed mail volume to other competitors."

Along the same lines, Senator Susan Collins, one of the lawmakers behind the 2006 postal legislation governing the price cap rules, had this to say upon hearing the PRC's decision:

“My concern is that a rate increase of this magnitude will worsen the Postal Service’s crisis by further driving down mail volume, eroding the Postal Service’s steadily declining customer base, and leading to a further decline in revenues.”

At this point in time, the Postal Service seems to have been right about its view of price elasticities.  In fact, the falloff in volumes turns out to be less than the Postal Service anticipated.

The following table compares two data sets.  The “Projected” columns (A-E) contain data provided by Stephen J. Nickerson, USPS Finance Manager, one of the Postal Service’s witnesses for the exigent increase before the PRC.  They're Attachments 15 and 16 at the end of his testimony.  The percentages were calculated using Nickerson's numbers.  

The “Actual” columns (F-H) come from the Postal Service’s financial report for FY 2014, which you can find on the PRC website.  (If the table isn't appearing, try refreshing your browser.  You can see the table on Google Docs here.)

Nickerson’s projections were calculated a month or two before Fiscal Year 2013 had ended, so his numbers for the baseline in column A were projected.  Column B shows his projections for what would happen if the Postal Service did not raise rates.  Column C shows his projections for what would happen if both an exigent increase and CPI increase — a total increase of 6 percent — went into effect on January 26.  (These numbers reflect the fact that the impacts would only be felt for only the final eight months of the fiscal year.  His testimony also included annualized estimates, as if the increase were in effect for a full fiscal year.)

As you can see by comparing columns C and E, the Postal Service expected that First Class mail volumes would decline 5.6% with no increase and 6.4% with an increase, but revenues would decline less — falling 4.9% with no increase but down only 2.1% with an increase.  This illustrates how even with losing volume the Postal Service could end up with more revenue. 

The same goes for Standard mail and most of the other categories impacted by the rate increase.  The bottom line shows that volumes would decline 1.6% with no increase and 2.6% with an increase, but revenues would improve — rather than declining 1.7%, they would increase 0.5%.

Now compare  columns E and H — the projections for FY 2014 with the actual FY 2014.  (Both reflect the impacts of the rate increase for eight months, February through September 2014.)

For First Class mail, the drop in volumes was much less than projected.  Volumes actually fell 3.3%, compared to the projected drop of 6.4%.  Consequently, rather than seeing a drop in revenues of 2.1%, revenues actually increased 0.8%.

Standard mail was a somewhat different story.  The Postal Service had projected a slight increase in volume even with the rate increase (0.1%) but ended up with a slight decrease (0.6%).  Revenues were therefore up less than anticipated — 3.0% rather than 5.3%.  That was about the same as projected without a rate increase, but the Postal Service still did better than it would have because the decrease in volumes meant lower costs for processing and delivering the mail.

Overall, the bottom line shows that the rate increase apparently had less impact on volumes than projected.  The Postal Service was anticipating a drop of 2.6% but ended up with a drop of 1.8%.  Revenues thus increased more than projected — 2.8% rather than 0.5%.

There are probably many ways to explain the differences between the projected numbers and the actual numbers.  Perhaps the gradual improvement in the economy was better than factored in to the Postal Service's analysis.  Perhaps the impacts of the Internet on First Class mail are levelling off.  

Another possibility is the rate increase had only a minimal impact on mailers — they did not cut down on their volumes as much as anticipated — because the PRC granted the increase only for about 18 months, or until the Postal Service recoups about $2.8 billion.  Knowing that their rates would go back down sometime in mid-2015 may have inclined mailers not to change their plans and habits very much.

It's also possible that the Postal Service was just a bit conservative in its estimates of price elasticities.  Maybe customers, big and small, tend to continue in their mailing habits even with significant price increases.  

Whatever the explanation, it looks as though Senator Collins and the mailers were wrong about their prediction that the rate increase would lead to a further decline in revenues.  That doesn't seem to have happened.  

At least not yet.  Perhaps if the Postal Service wins its lawsuit against the PRC and the exigent increase becomes permanent — of if legislation accomplishes the same thing — perhaps then mail will exit the system in the way critics of the increase have predicted.  

In the meantime, it appears that the OIG's report "Analysis of Postal Price Elasticities" (May 2013) was on the mark.  Based on work done by Christensen Associates, the OIG had this to say:

"The demand for the postal products studied is price inelastic.  Price increases will increase revenues….  Neither the recession nor any other event since 2008 caused postal price elasticities to increase in any significant way. Postal price elasticities are not in flux. The demand for postal products remains price inelastic….  Based on the econometric evidence, raising the price level for First-Class Mail, Standard Mail, and Periodicals above the rate of inflation will increase the gross revenues of the Postal Service."

At the close of fiscal year 2014, the OIG was right.  Revenues were up, just as predicted.  Actually, even more than predicted.

(Previous posts on the exigent rate increase can be found here.)

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