To NSA or not to NSA? The Valassis Question

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BY MARK JAMISON

I would earnestly warn you against trying to find out the reason for and explanation of everything….  To try and find out the reason for everything is very dangerous and leads to nothing but disappointment and dissatisfaction, unsettling your mind and in the end making you miserable. — Queen Victoria to her granddaughter

Why would the Postal Service give a huge discount to the direct marketing firm Valassis — a discount so large that it’s very possible the Postal Service will lose money on the deal, as well as doing severe harm to the newspaper industry, which will lose revenue from advertising inserts?  In other words, why would the Postal Service want to benefit one customer at the expense of some its most loyal customers, with little or no benefit to itself?

That’s the kind of question one might best avoid examining very deeply.  Surely, as Queen Victoria warned her granddaughter, such a pursuit can lead only to disappointment, dissatisfaction, an unsettled mind, and misery.

Nevertheless, for those interested in postal issues, it seems a journey worth taking.  It will take us down a path that includes PAEA, NSAs, the Clayton Anti-Trust Act, the mailing industry in general, and that ever-present postal bogeyman, politics.

 

PAEA and the NSA

In 2006, Congress passed the Postal Accountability and Enhancement Act (PAEA).  One of its goals was to make the Postal Service more businesslike, which one supposes included the idea that businesses make deals (and deals make the business).  PAEA therefore created something called the Negotiated Service Agreement (NSA), thus formalizing a practice that had actually begun sometime before.  The idea was that good customers could and should be rewarded — “incentivized” — to be better customers by giving them special deals and cheaper rates for more volume or better barcodes.

The special deals complicated an already complicated rate system that has close to 10,000 different rates.  With a complex rate system like that, problems inevitably ensue, like making sure the rates are assessed appropriately or that customers actually pay the appropriate postage.  I recently had an e-mail conversation with someone at the Postal Inspection Service regarding methods of protecting revenue, and she said that in many cases there are no programs or protocols to assure revenue protection because the rate system is so complex (a discussion for another day).

Making things even more complicated, PAEA split Postal Service products into competitive and market-dominant classes and special classes within the latter (for more on that see my previous post).  Basically, the competitive class includes priority, express, bulk parcels, and international mail; market-dominant is just about everything else, like first class and standard mail.

In an effort to make the Postal Service more businesslike, which many have taken to mean more efficient, Congress created an infinitely complex system of classes and rates of mail, all with their own specific rationalizations and justifications.  Although I suppose one might argue that it’s all very simple, the Postal Service was instructed to make deals.

Again, the reasoning behind the provisions in PAEA that created both the division of mail into competitive and market-dominant products and that prescribed the potential for NSAs was that all of this separating and classifying would make the Postal Service more efficient because it would make it more businesslike.

Of course, the economic philosophy that supported some of this gets pretty complicated and involves looking at the way monopolies perform in the market.  Some of the discussions get very opaque and that may be intentional because the more complex and opaque one makes a system the more advantage one can build into that system, an obvious example being the instruments of financial mass destruction that were at the bottom of the financial crisis.

 

The Valassis case

This brings us to Valassis and its recent agreement with the Postal Service.  Valassis is a large mass marketing advertiser.  It prints saturation mailings under the title of Red Plum. These are mail pieces that, as the name suggests, saturate a route or a zip code. They generally have simplified addresses like “resident” or “occupant,” and they carry inserts from several different advertisers.

Valassis had $2.2 billion dollars of revenue last year, a significant part arising from mailings that went through the Postal Service.  In fact, Valassis mails about three billion pieces of mail to 60 million homes each year.  In other words, it’s a very big stakeholder, and it’s responsible for about 2 percent of USPS volumes.

The new Valassis deal offers the company rebates on postage if it mails at least an additional million pieces over the year.  It gets discounts of 20 percent off currently published rates, which comes to $.197 (nineteen cents) or less for pieces up to 6.5 ounces, and other fixed discounts for higher weighted pieces.  The agreement has provisions that determine which markets the mail must appear in, what may be advertised (primarily non-durable goods), and various other requirements designed to ensure that the mailings are in addition to, not in place of, what Valassis already mails.

It appears to be a good deal for Valassis and the Postal Service.  In its initial filing before the PRC, Valassis says that it should be a good deal for the Postal Service by adding as much as $107 million of gross revenue over three years, which translates into $15 million dollars of net revenue after rebates and attributable costs.

When notice of the deal was filed with the PRC back in April, it caused quite an uproar because the specific type of mail being discounted in the deal competed directly with a form of advertising that newspapers rely on.  Nearly forty sets of comments were filed with the PRC in response to the deal, mostly from members of the Newspaper Association of America (NAA).  The comments protest the special provisions that seemed only applicable to Valassis and decry the fact that the deal would undermine newspaper revenues in an unfair way.

The PRC docket was thoroughly reviewed and litigated.  It attracted attention from several members of Congress, some of whom even added their own comments.  The Postal Service argued that the deal was fair, that it could, in fact, be used as a model for other entities that also wished to play Let’s Make a Deal, even though the provisions of the deal seemed to be drawn very closely to the specific business requirements and capabilities of Valassis.

The PRC did a thorough job reviewing the docket, and in a four-to-one decision, (Commissioner Hammond dissented without comment), the Commission upheld the deal and its provisions, including the fact that the deal should be classified as market-dominant rather than competitive.  This provision makes it easier for the Postal Service to offer cheaper rates since the criterion of institutional cost coverage is applied differently for market-dominant mail.

After the decision an even greater ruckus ensued as the NAA asked for a stay on the order implementing the deal while it sued in the Federal Circuit Court of Appeals for DC to have the deal reversed.  That was followed by a letter from twelve Republican House members to Darryl Issa, chairman of the House Oversight Committee, requesting that he hold hearings into the deal.

 

An attitude problem

It seems that everyone wants the Postal Service to act like a business, to make deals, to be competitive — except when they don’t.

The problem with all of this is not that some provision of PAEA was applied unfairly or inappropriately.  It’s not that the Postal Service or Valassis violated the Clayton Anti-Trust Act.  It’s not that the deal unfairly damages potential revenues of the newspaper industry or that it presumes an ability to clearly divine the intent of Valassis and determine just exactly how much they might have mailed without the deal.

No, the problem is the whole construction, the basic idea that the postal network is nothing more than a business that should be making deals and picking winners and losers.

PAEA took an already complex and convoluted rate system and made it appreciably worse, all in the service of a misguided vision of so-called business efficiency.  Embedded in the current rate system are all kinds of provisions that offer unjustifiable discounts and pass throughs.

The end result of that is the cultivation of attitudes like the one expressed in this quote from the commercial mailers advocacy group, PostCom:

“Here’s a quote: ‘The Postal Service has been a kind of cash cow for the federal government for the last 40 years,” says Postal Regulatory Commission chairman Ruth Goldway.’  Now, let’s improve on the message.  No, it isn’t the Postal Service that has been Congress’ cash cow, it’s been the customers of the Postal Service, and business mailers in particular.  THAT’S where the Postal Service’s money comes from. In short, for several years mailers have been paying more in postal rates than what actually is necessary to keep the Postal Service self-sufficient.  When government dips into the private sector’s pocket for reasons of its own, it’s a TAX, plain and simple.”

The comment from PostCom expresses an attitude that is far too common today.  It’s an attitude that elevates the interests of narrow groups over the interests of the American people as a whole.  It’s an attitude that ignores the fact that cheap standard mail rates exist because of first class rates and that the network was built by and for the American public, not the remoras that ride along in the easy current.

 

The existential question

“Why is there something rather than nothing at all?” asks philosopher Martin Heidegger in the opening to his Introduction to Metaphysics.  We might ask the same of the Valassis deal: Why is there something — an NSA that gives Valassis very special rates — rather than nothing, that is to say, the absence of a special agreement?  Why give Valassis an even bigger discount than the exceedingly cheap rates it already gets for saturation mailings?

One cannot really answer that question without confronting the more basic, existential question:  “Why is there a Postal Service?”

Much like the highway system, the postal network is basic fundamental infrastructure.  The country’s founders understood the value of extending infrastructure, of providing a pathway for delivering communications across distances.  In a world without electric much less electronic communications, the founders realized that our new nation needed to establish a communications infrastructure that allowed for the dissemination of information of all varieties — news, opinion, and personal and commercial correspondence.  The foundational motive was a basic understanding that we needed an infrastructure, a postal network that allowed for the secure and neutral transmission of information.

In conjunction with the idea of the dissemination of information via a useful infrastructure, the early creators of the postal network also saw the value of granting preferential treatment to newspapers.  Delivering newspapers inexpensively — or even for free— served not only a practical purpose but also reinforced a public good thought essential to our incipient democracy.  News and opinion, the discussion of public matters, broadly provided for the education and enlightenment of the public, and knowledge underlies and supports the power of freedom.

Over the ensuing years the Post Office was challenged by technology, the telegraph, the telephone, and more lately the Internet.  It responded by continuing to build and adapt a broad network that became an engine of economic development.  By adding rural delivery and then parcel post, the postal network expanded commercial opportunity by connecting the nation together and offering a broader opportunity for sellers to not only advertise but also distribute their goods and services efficiently and effectively.

The Post Office was a system that worked.  Although it offered some preferential rates, particularly to newspapers and non-profits, its overriding characteristic was the fact that it was fairly and neutrally accessible to all comers, with transparent and reasonable rates. That’s critical because as much as politics may have been built into the system —the Post Office Department was a still a cabinet agency and postmasters were political appointees — there was still the presumption that everyone could ride the highway for rates that deviated by level or type of service but not based on who you were.

 

Turning something into nothing

It is reasonable to create different classes of mail based on different levels of service.  It is also reasonable to acknowledge the value of public goods by giving certain classes of mail like newspapers and non-profits preferential rates based on the added social and public value that is added by their existence and presence in society.

What’s not reasonable is continuing to justify the system created by PAEA, which is infinitely complex and filled with special and opaque privileges like those being granted to Valassis.  We build roads and offer access to everyone, businesses and individuals. We don’t offer trucking companies, businesses that benefit tremendously from the existence of infrastructure, extra discounts as bribes to use the roads. Yet the deal with Valassis, which already receives generous discounts, is exactly that, a bribe to use our common infrastructure.

The fact is that commercial mailers send pieces based on the business needs and plans of their advertisers.  Mail is not an end itself but a vehicle that enterprises use to attract customers.  Discounts to commercial mailers based on additional pieces mailed defy basic logic, especially in today’s sophisticated marketing environment where mailings and advertising are targeted and timed through complicated algorithms. This is not a case where two for one or buying the family size is necessarily a better deal.

Reducing the postal network to nothing other than stepchild of the direct mail industry turns a very useful and important something into nothing but another vendor.

However the Valassis case turns out, whether or not political pressure or the courts succeed in overturning the PRC’s acceptance of the NSA, we are all losers because the deal reinforces a vision of the Postal Service and the postal network that is both unsustainable and damaging to our basic principles.

[Mr. Jamison recently retired as a postmaster for the US Postal Service.  He can be reached at  Mij455@gmail.com.]

(Credits: Hamlet stamp; RedPlum; NAA logo; The Thinker.  The quote from Queen Victoria comes from Jim Holt’s Why Does the World Exist? An Existential Detective Story)

 

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