The Senate puts the PRC in the backseat — or maybe not even in the car

SteveBlog, Jamison Articles

BY MARK JAMISON

On Thursday of this past week, the Senate held the second of two hearings to mark up the postal reform bill, a.k.a. the manager’s or substitute amendment, submitted by Senators Carper and Coburn. At the first session held the previous week, on January 29, a controversy arose over Section 301 of the proposed bill, which deals with postal rates and the role of the Postal Regulatory Commission. The controversy resumed on Thursday.

As originally proposed in the manager’s amendment, Section 301 does several things. First, it takes the exigent rate increase that the PRC approved on a temporary basis and makes it the new base line. The bill thus essentially overturns the PRC’s ruling in December and makes the 4.3 percent increase permanent, rather than limiting it to the time frame required to bring in $2.8 billion in profit (about 18 months to two years).

Section 301 also raises the current limit on annual rate increases from the CPI to the CPI plus one percent. That would all but guarantee higher annual rate increases over the next few years.

In addition to dealing with these two specific rate matters, Section 301 transfers much of the responsibility for setting postal rates in the future from the PRC to the Postal Board of Governors. The PRC’s role would be reduced to reviewing the BOG’s decision after the fact, rather than approving increases before they’re implemented.

Finally, Section 301 gives the BOG the primary role in a 2017 rewrite of the ratemaking system. The PRC will be able to veto the rewrite, but that’s the extent of its role.

The mailers respond: The Baldwin amendment

The mailers were aghast at every element of Section 301, and they have been lobbying vigorously against the changes. They believe the exigent rate increase, even in the limited form that was granted by the PRC, was unwarranted and unfair, and they have taken the PRC to court to get the size of the increase reduced. The mailers are naturally even more strongly opposed to making the increase permanent. They also oppose the CPI+1 provision, and they don’t want the BOG given more power to set rates.

That’s not to say that the mailers are all on the same page on everything. For example, in comments to the PRC for the current Annual Compliance Review, Valpak argues that the PRC should force the Postal Service to bring rates for standard flats into compliance with current statute. Rates in this category have been “underwater” (they have failed to make required contribution) for several years, and Valpak thinks it is essentially subsidizing flats with the rates it pays. The catalog mailers take a different view, of course, and argue that increasing their rates will cause them “rate shock.”

For the most part, though, the big mailers share one view: Postal rates must be kept low for the sake of jobs and the health of the industry, and the solutions to postal problems are best found in further cuts to the postal workforce and postal infrastructure.

During the first markup session on the new bill, Senator Tammy Baldwin, the Democrat from Wisconsin, introduced an amendment intended to help out the mailers by replacing Section 301 of the Carper-Coburn bill with an alternative. While the text of Senator Baldwin’s amendment was not made available, it appeared to retain most of current ratemaking law.

It would have limited the exigent rate increase to two years as per the PRC order, maintained the rate cap at CPI, and continued giving the PRC final authority over ratemaking decisions.

In previous hearings Senator Baldwin has emphasized her concern for the mailing industry. She has pointed out the importance of the paper industry to her state and made visits to Quad Graphics, a large printing house and one of the largest presort mailers. In presenting

her amendment, Senator Baldwin reiterated her concern for the mailing industry and the jobs it supports in Wisconsin. She also expressed concern, somewhat in the context of her larger concern for mailers in her state, that the shift in emphasis for oversight from the PRC to the BOG left the postal monopoly poorly regulated.

As many news sites have reported, the discussion over Senator Baldwin’s amendment became both confused and contentious. Senators Coburn and Johnson both dismissed the value of the postal monopoly, essentially arguing that the BOG should be constrained by the market in setting rates, not by the PRC. On the other side, Senator McCaskill expressed genuine concern about the overall shift in regulatory authority, a concern shared by some of her Democratic colleagues, particularly Senators Heitikamp and Begich. A decision on the Baldwin amendment was tabled at the first markup meeting, with the discussion to be continued.

The PRC weighs in

During the debate over Senator Baldwin’s amendment at the January 29 markup, Senator Carl Levin of Michigan asked whether the PRC had been consulted over the changes that appeared in S.1486. There was a brief back-and-forth exchange between Senators Carper and Coburn and a committee staff member. The staff member indicated that the bill had been submitted to the PRC for review, but there had not necessarily been a request for comment. He said that generally the PRC was asked about technical aspects of legislation, but not specifically for opinions of the efficacy of legislations.

Senator Levin was adamant that the PRC ought to be asked its opinion of the proposed legislation, given that it filled the role of regulator and possessed expertise and knowledge

that would be useful in evaluating the bill. Since the committee chairs had not requested the PRC’s opinion, Senator Levin went ahead and did so himself. On February 4, PRC Chairman Ruth Goldway replied to the senator’s request with a letter about the proposed changes in Section 301. Senator Levin then forwarded the letter to Senators Carper and Coburn.

Chairman Goldway restates an opinion that she and other commissioners have previously articulated: The PRC serves an important role in regulating the two monopolies over the mailbox and letter carriage. In his cover letter to his colleagues on the Senate committee Senator Levin quotes the following key passage from Chairman Goldway’s letter:

“Regardless of how well-intentioned the Board (of Governors) may be, under the (Committee-adopted) substitute amendment the operator, not the independent regulator, would determine the pricing system applicable to market dominant products. The amendment offered by Senators Baldwin and McCaskill to section 301 preserves a process that ensures reviews by an independent, objective decisionmaker while affording all stakeholders, including the Postal Service, an opportunity to comment to changes to the current rate system.”

Chairman Goldway goes on to say that the system has worked well and as intended, and that “pre-implementation reviews” help avoid biased decisions by the Postal Service and give stakeholders an opportunity to have their views heard and considered. Limiting the Commission to “after-the-fact” reviews, as proposed by Carper-Coburn, could lead to confusion and problems.

A little history

The fact that it was Senator Levin, not Committee Chairman Carper, who solicited Goldway’s opinion on Section 301 is noteworthy. Senator Carper and Chairman Goldway have a little history .

Back in March 2011, Senator Carper expressed frustration over the PRC’s Advisory Opinion on five-day delivery, which raised many questions about the advisability of proceeding with the plan. In a statement, the Senator said that while he himself didn’t advocate ending Saturday delivery, he thought that such decisions should be left to the Postal Service, and he also criticized the PRC for taking so long to producing the opinion

In February 2012, Senator Carper took an interest in the travel habits of Ms. Goldway and wrote a letter criticizing her for what he considered unnecessary travel expenses at a time that the Postal Service was having financial problems. PRC travel records showed that the Chairman had engaged in no more travel than her predecessors and that the travel she did engage in was related to the PRC’s role as the United States’ representative in various international postal organizations, but Senator Carper nonetheless made a very public attempt to embarrass and marginalize both Goldway and the PRC.

In June 2012, Senator Carper wrote to the PRC again expressing concern over the length of time it has taken for the PRC to complete its advisory opinions and over the adversarial nature of the proceedings.

Senator Carper now apparently wants to make marginalization of the PRC a matter of law. Section 301 overturns the PRC exigent rate decision and shifts rate powers to the BOG. In addition, Section 201 directs the GAO to conduct a study about the Postal Service’s compliance with delivery time standards, just the kind of study now conducted by the PRC. It’s no wonder, then, that Senator Carper chose not to ask the PRC or its Chairman for an opinion about his bill.

The compromise on Section 301

During the week that passed between the two markup sessions, Senator Baldwin modified her earlier amendment. Instead of pushing for the status quo — the exigent rate increase only as approved by the PRC and the CPI cap — she offered a compromise with the Carper-Coburn bill’s provision for a permanent exigent and CPI+1. Baldwin proposed that the exigent increase would remain in place for one year and the maximum annual increase would CPI+1.

With respect to governance and rate review, her proposal would retain the current statutory role of the PRC.

Senator Carper than offered a second-degree amendment, i.e., a response to Senator Baldwin intended to be compromise with the original language. Under this new amendment, the exigent increase would be permanent but the annual cap would be the CPI, not the CPI+1. With respect to governance, the role of the PRC would be reduced, but not as much as in his original bill. Specifically, the 2017 rewrite of the rate system would be done by the Postal Service, but the PRC would be able to review the rewrite and have the authority to veto it. If the PRC rejected the Postal Service rewrite, the system in place, essentially rates limited to CPI increases, would remain in place.

Senator Baldwin called upon John Corcoran, the acting General Counsel of the PRC who was present for the meeting, to elaborate on Chairman Goldway’s letter to Senator Levin regarding the PRC’s position on the bill, particularly the section that gives the Postal Service the lead in developing a new ratemaking system in 2017.

Mr. Corcoran said the following: “The Postal Regulatory Commission has a history and expertise in soliciting comments from the community and developing a system of ratemaking.

While the amended language provides a role for the regulator in approving the finished product, it places development of that system within the control of the regulated entity.

The process may be better managed as a joint process among the Postal Service, stakeholders, and the Commission where the regulator balances competing interests in the development of a new rate making system.”

Despite the arguments offered by the mailers through Senator Baldwin’s amendment and the views expressed by Chairman Goldway and Mr. Corcoran, Carper’s committee went ahead and passed the bill with the PRC’s role significantly circumscribed.

The Postal Service in the driver’s seat

The postal rate system is complex, built upon many layers of assumptions developed over years. The Postal Accountability and Enhancement Act (PAEA) called for the PRC to develop a modern ratemaking system, but that system has had to deal with several limitations. For example, under the current system, some products, particularly standard mail flats, have remained underwater. The rate system also does not embody a clear philosophical rationale for reduced rates for nonprofits or periodicals and newspapers.

Despite the problems of the current system, the PRC has done a thorough job within the constraints of the law in reviewing Postal Service rate requests. The PRC has ensured that rates meet requirements for cost coverage, and it has tried to resolve the problems associated with underwater products and more controversial rates like workshare discounts.

For its part, on the other hand, the Postal Service has a long history of presenting problematic data in support of its requests for rate increases, changes in service, and other matters requiring PRC input. Sometimes important information is withheld (like the secret survey on lost revenue resulting from the plant consolidation plan), and sometimes the numbers just don’t add up. During the markup on the current bill, the Postal Service was asked by Senator Baldwin and the committee staff to provide cost and revenue projections. The results showed a discrepancy of $4 billion.

Overall, whether one agrees with its decisions or not, it seems that the PRC has served a useful role, so it is odd that the Senate bill, which for the most part is much more moderate

than the bill proposed by Congressman Issa in the House, has taken a much more radical approach towards rate setting. Issa’s bill tinkers around the edges but leaves the current rate system largely in place. Carper and Coburn want to change the system completely.

At Thursday’s markup, Senator Carper said that when it came time to rewrite the rate system in 2017, the bill he and Senator Coburn have proposed will give the PRC “a very minimal role in terms of actually deciding what that new rate structure would look like… We really put the Postal Service in the driver’s seat. I don’t even know if the PRC was in the car, but certainly the Postal Service was in the driver’s seat.” (video at 2:03:40)

Part of what’s going on with the Carper-Coburn bill may be a matter of ideological preferences. Senators Coburn and Johnson have been quite vocal in claiming that the value of the postal monopoly is limited and that the Postal Service should compete in the market on rates. Several Republican members of the committee have also stated their preference to, as Senator Johnson has often said, “Set the Postal Service free.”

Senator Carper may also want to give the Postal Service more control over rates simply because he agrees with much of Postmaster General Donahoe’s overall agenda. On several occasions, for example, he has taken time in his introductory remarks to praise the leadership of the Postal Service for the manner in which it has cut postal infrastructure and employee complement.

But approving of the PMG’s agenda is one thing; marginalizing the PRC is something else entirely. And whatever is behind it — history between Senator Carper and Chairman Goldway, ideological inclinations, or sympathy with the PMG’s agenda — sidelining the PRC will have far-reaching consequences, many of them unintended.

Non-paying customers

If Section 301 of the Senate bill makes it into the postal reform act that comes out of Congress in anything like its current form, the big mailers will not be very happy. Higher rates will be inevitable. In many ways, though, they have no one to blame but themselves. They have been saying all along that the Postal Service needs to be given more freedom and flexibility to adapt to the market place. By that, of course, they mean that the Postal Service needs to be given the authority to close facilities, lay off workers, and reduce services so that it can cut costs and avoid rate increases.

But more freedom and flexibility also means more authority to set rates without being hampered by regulations and a regulator. And that’s something the mailers have not bargained for.

The current rate system makes it very difficult for the Postal Service to raise rates as it sees fit. The request for an exigent increase was originally submitted back in 2010, and while the Postal Service did not pursue the increase as expeditiously as it could have, it took almost four years to get the increase approved [check dates 7/6/10 original request], and the PRC gave the Postal Service only a fraction of what it had requested.

The mailers naturally like the rate system the way it is. It fits with their sense of entitlement. The way many of the mailers look at things, the Postal Service ought to beholden to the big commercial mailers because they are the primary source of revenues.

Everyone else in the country is just a “recipient” of the mail.

This attitude is expressed very clearly in Valpak’s comments in the context of the PRC’s Annual Compliance Determination review:

The Postal Service generally regards both mailers and recipients of mail to be ‘customers.’ The Postal Service should note, though, that those who originate mail are paying customers, whereas those who receive mail (recipients or addressees) are non-paying customers. Why the Postal Service avoids reducing the premium level of service given free to some non- paying customers is unclear…. It would seem more reasonable for the Postal Service to be concerned about preferences of its paying customers.”

While most mailers don’t like to express themselves as clearly as Valpak does, this passage reflects an attitude on the part of the mailers that seems increasingly prevalent. It views the postal network as existing solely for the benefit of the mailing industry. The general public is seen merely as “non-paying customers” whose interests must come second to those who are paying the bills. The message is clear: cut services for average Americans in order to maintain low rates for big mailers.

Valpak and all the mailers who share this view somehow manage to forget that the postal network was built by and for the American people generally, not by and for a small interest group, and that its mission is to provide a public service, not private profit. Valpak dismisses the American public — its very own customers — as mere free riders who are undeservedly benefiting from a system that the big mailers are paying for.

Having it their way

Given this view of the postal system and average Americans, it’s understandable why some members of Congress may have decided it’s time to give the mailers their wish and let the Postal Service have more freedom and flexibility. If the mailers want the Postal Service to enjoy the prerogatives of a private entity — to be able to downsize the infrastructure and workforce without concern for “non-paying” customers — then maybe the mailers will simply have to adjust to a Postal Service than can raise rates without government interference or regulation.

But the mailers want it all their way. They want the Postal Service to have unregulated authority to downsize and cut costs, but they also want to ensure that its power to raise rates remains circumscribed by the law and the PRC.

The mailers need to recognize that the PRC must be able to regulate at both ends. It can’t just control rates. It must also have the authority to deal effectively with matters of service and infrastructure in ways that protect the interests of not only the mailers but also the country as a whole.

Rather than finding ways to marginalize the PRC when it comes to rates, Congress ought to be looking for ways to increase the role of the PRC. The Commission should be given more authority to compel the Postal Service to comply with the law on rate matters, it should be able to hold the Postal Service accountable for service deficiencies, it should have more power to ensure that the Postal Service conduct its affairs in as transparent a manner as possible, it should have the power to overturn the Postal Service’s decision to close a post office (rather than simply remanding the decision for further consideration), and it should have more power to deal with post office suspensions, relocations, and the preservation of historic post offices. The Postal Service doesn’t need less regulation. It needs more.

At the moment, the mailing industry is angry with the Postal Service because of the exigent rate increase, but can anyone doubt that without the presence of a strong and effective regulator, the relationship between the Postal Service and the industry would approach crony capitalism and that the interests of the American public would be reduced to that of bystanders?

Senator Carper’s version of the amendment prevailed, and at the end of the day a very flawed bill was passed out of committee and sent to the floor of the Senate.

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