Article prepared by C. Clint Bolte, C. Clint Bolte & Associates, Chambersburg, Pennsylvania. For additional information please call 717-263-5768, fax 717-263-8945, or e-mail to clint@clintbolte.com.

Interesting Opportunities Evolving Amid the Gray Clouds of 2007 Postal Rate Increases

The "Postal Accountability and Enhancement Act" (S. 662; H.R. 22) passed the Senate in February 2006 and the House of Representatives in August 2005. However, little progress has been reported from the joint House and Senate committee assigned to work out the differences between their two separate versions of the bill. Not wanting to dampen the spirits of their clients with a rate hike request concurrent with their annual Postal Forum, the Postal Service lost little time following their April convention, to file for a rate increase. Affected industry associations, which were universely opposed to the huge price hike, quickly responded with trumpets blaring in urging their members to contact elected officials requesting Postal Reform legislation be completed as a hopeful relief from this cost driver.

At the beginning of May, the USPS announced that it has filed a formal request with the independent Postal Rate Commission (PRC) to raise postage rates by a system-wide average of 8.5% and an average increase of 9.0 % for Standard Mail. By class, the Post Office has proposed average increases as follows:

The filing triggers a ten month long trial-type administrative proceeding under law to examine the request. At the end of the ten months, the PRC will issue a recommended decision and rate schedule. Once approved by the Postal Service Board of Governors, the rate changes will most likely go into effect May 2007.

USPS Justification

"Under current law, the Postal Service has managed to keep the cost of postage below the rate of inflation," said Tom Day, Senior Vice President for Government Relations. "But this bill not only strips the Postal Service of much of its management authority but almost guarantees a hefty rate increase."

The time period of "below inflation rate" that Mr. Day is referring to is the 32 recent years during which there were over a dozen rate hikes.

Day said that should final legislation require the Postal Service to prefund retiree health benefits and retain a $27 billion obligation to fund military retirement benefits for its employees, postage rates could increase by up to 20 percent. The postage rate increase that was effective on Jan. 8, 2006 was implemented solely to generate the $3.1 billion necessary to fund an escrow account resulting from the 2003 legislation.

Postal operations are funded entirely by the sale of postal products and services, not through tax revenue.

Direct Marketing Association Comments on the Rate Case

Commenting on the filing at the PRC, DMA Senior Vice President for Government Affairs Jerry Cerasale said, "Postal rate increases are never good news for organizations that rely on the mail to get their messages and packages out, and this latest increase would mean millions of extra dollars in costs for commercial mailers and nonprofit organizations."

Faced with continued costly price increases that far exceed the rate of inflation, DMA warns that many business and nonprofit mailers will ultimately be forced to limit mailing campaigns and to seek less expensive ways of communicating with current and potential customers.

Moreover, DMA noted that cutting back on mailings would also affect downstream industries, such as paper and printing. This rate hike, the Association said, will further reduce USPS revenues, necessitating additional rate increases or even service cuts in order to keep the USPS afloat.

DMA Nonprofit Federation (DMANF) also expressed concern about the proposed rate hike for nonprofit mailings. "The increasing costs for mailing are difficult for charities that are working so hard to keep overhead costs to a minimum," said DMANF Executive Director Senny Boone.

Direct Mail Saves Energy

"These higher costs also come at a time of rising energy costs, which is unfortunate," added Cerasale. "Even though the Postal Service must deal with higher fuel prices just like the rest of us, direct mail actually helps in a small way to keep energy costs down."

According to a USPS study direct mail offers "car pool shopping" that reduces the amount of pollution emitted by automobiles and the amount of gasoline consumed by individuals. Based on a conservative assumption that a single shopping trip would replace three direct orders, 111.3 million shopping trips were replaced by catalog purchases in 2004.

By that same assumption, at an average round-trip distance of 14.9 miles per shipping trip, catalog mail reduced the number of miles driven in 2004 by 1.7 billion miles. This amounts to a reduction in carbon dioxide emissions of more than 35,000 tons, and a reduction in gasoline use of 75.9 million gallons. Even at a 2004 average price of $1.90 per gallon, this represents an annual savings of $144 million.

The USPS also indicated its intention to move to an annual cycle for rate adjustments, which is a common provision in both passed House and Senate Postal Reform bills.

DMA said it supports the goal of annual, predictable rate adjustments, but emphasized that increases should, in general, be tied to the overall inflation rate. "Today's proposed increases, and the ones that went into effect in January, are far higher than the current rate of inflation," added Cerasale. "Moreover, with annual increases, there is no need for a contingency provision, which in today's filing is approximately $700 million."

Rate Proposals Highlight Need for Postal Reform

Cerasale stressed, "This proposed increase highlights the desperate need for postal reform," adding "these frequent rate increases are just temporary fixes on a system that needs serious repair."

"Postal reform legislation would significantly reduce the impact of the USPS escrow payment," he said. In fact, he pointed out, "If the current House or Senate postal reform bills were in effect today, the proposed rate increase would be less than half of what the Postal Service is now asking for."

The Printing Industries of America (PIA) reacted in a letter to Congressional leaders that the USPS rate hike request is another indicator that the nation is operating under severely outdated postal laws. PIA also stated that a legislative overhaul is needed to keep the mailing industry--which accounts for 9 percent of America's GDP--viable in the future.

"The new proposed rate hike is another pocket-book reminder for business and individual consumers that the USPS is a 21st century entity operating under laws that do not allow for current communications trends, the Internet Age, increasing costs of health and labor benefits for USPS employees and retirees, and other modern-day marketplace realities," said Lisbeth Lyons, Vice President of Government Affairs for PIA.

Lyons also went on to say, "Under the leadership of Senator Susan Collins, Senator Tom Carper, Representative Tom Davis, and Representative Henry Waxman, Congress is on the cusp of approving the first major overhaul of postal laws in 36 years. While the bipartisan bills that passed overwhelmingly in both chambers do not solve all problems associated with postal reform, they do take great strides to improve the current situation. Now, especially in light of the USPS announcement, is the time for Congress to complete this important legislative work."

Key provisions in the Senate- and House-passed postal bills address problems in payments for postal employee pensions. They also tie future rate increases to the consumer price index to provide more predictability and affordability for mailing economy.

The printing industry is a key segment within the $900 billion mailing economy, which also includes paper, publishing, financial services, direct marketing, retail, and manufacturing industries, as well as general small business. PIA members across the country have delivered hundreds of grassroots communications to Congress in support of passing postal reform this year.

Rate Hike Also Includes Pricing Incentives Based Upon Shape

The U.S. Postal Service has unveiled proposed new pricing incentives that would effectively reshape the future of mail and provide benefits to both business customers and the Postal Service. The current pricing structure for postal products relies primarily on a weight-based system. The new plan - sent to the Postal Rate Commission (PRC) as part of a 2007 price adjustment proposal package - combines weight with shape to allow the Postal Service to better align prices with processing costs to ensure every type of mail covers its costs. Again these price changes would not occur before May 2007.

Current Postal Service prices do not distinguish between some letters, flats, and parcels. For example, in First-Class Mail, the current single-piece price is 63 cents to mail a 2-ounce letter, a 2-ounce flat, and a 2-ounce parcel. The new plan recognizes that each of these shapes has substantially different processing costs and should have different prices.

The new pricing plan, in effect, creates an adjustable rate system by giving mailers the opportunity to obtain lower rates as they find ways to configure their mail into shapes that reduce processing costs for the Postal Service. For example, if the contents of a First-Class flat can be folded and placed in a letter-sized envelope, the mailer can reduce the postage by as much as 20 cents per piece. If a First-Class parcel can be configured as a flat, the mailer will save 36 cents.

As the Postal Service emphasizes shape in it's pricing, it also proposes to reduce the additional ounce rate. As mail pieces become heavier, the proposed price increase declines. For letters over one ounce, the new prices are actually lower than today's prices.

"Our pricing proposal recognizes changes in underlying costs and market conditions, and includes pricing initiatives to improve efficiency, which helps keep rates affordable for everyone," said Postmaster General John E. Potter. "We will work closely with our business mailers in the coming months to show them how they can take advantage of the new pricing to keep their mailing costs as low as possible," added Potter.

Since this new processing cost driven price incentive appears to be similar to that followed by FedEx and UPS, clearly USPS is targeting the bulk mail market dominated by its private sector competition. The following chart illustrates the many opportunities to mitigate price increases as business mailers help the Postal Service to shape a more efficient future:

Regarding the USPS' proposal to give business mailers incentives to create more efficient mail pieces, based on weight and shape, Cerasale said, "While DMA supports providing discounts for organizations that use the mail more efficiently, this latest proposed increase is quite complex and demands close scrutiny by mailers."

Cerasale added, "the devil could be in the details with substantially higher rates for some categories of mail." For example, he said, the USPS noted a 90 percent increase for the price of mailing a two-ounce First-Class parcel.

On the other hand a number of information fulfillment vendors could find these reshaping incentives very attractive as they help their clients redesign various mailing and kitting projects to comply with these suggested modifications.

USPS Proposes a 'Forever Stamp'

Perhaps in an effort to offset the image of continually hiking prices when many businesses, such as printers, have been forced to absorb inflationary pressures on internal costs by shear productivity, the USPS has proposed a "forever stamp." In other words the constant make-up postage of 2 or 3 cents will not be necessary. Noting the USPS' plans for a so-called "forever stamp," Cerasale said DMA is pleased that the USPS is considering how to reduce the burden of annual rate changes for individual mailers.

Under this "forever stamp" proposal, customers would be able to purchase a special First-Class stamp that would be good for any future single-piece First Class letter mailing, no matter how prices might change beyond 2007. Clearly the buying behavior being recognized and encouraged by this pricing concept is that when a price increase implementation is imminent consumers may be expected to "invest" in a quantity purchase of the "forever stamps." Having an over abundance of first class stamps, which have already been paid for, the consumer may use them more often then they might otherwise. In the mean time the USPS has more cash in hand and can invest these funds in money market instruments that will presumably yield returns in excess of inflation.

First Negotiated Service Agreement to a non-financial institution

The Direct Marketing Association has applauded the Postal Rate Commission's decision to approve a negotiated service agreement (NSA) between the U.S. Postal Service and Bookspan.

This is the first such agreement the USPS has made with a non-financial institution and the first to allow volume discounts for Standard Mail mailings. Previous NSAs applied only to first class mailings.

The NSA provides a discount for the mailer on the basis of volume alone, and does not require additional work from the mailer.

"We applaud the efforts of the PRC, the Postal Service, Bookspan, and numerous interested stakeholders to bring about this agreement," said Jerry Cerasale, DMA senior vice president for government affairs in a statement. "We hope it opens the door for future agreements that will encourage large mailing projects and in turn, bring additional and much-needed revenue to the Postal Service."

"This historic decision was the product of extensive discussions and thorough analyses by the Postal Service and Bookspan," said Markus Wilhelm, CEO of Bookspan. "This victory benefits all users of the Postal Service for the long term as it creates a model to offer incentives to grow.

"We are hopeful that the PRC action will set a foundation for future similar arrangements so that the Postal Service can more effectively attract additional volume and compete in today's direct mail marketplace," noted Wilhelm.

Negotiated Service Agreements allow the USPS to negotiate mutually beneficial terms for service and price with large mailers. Under NSA rules, the terms of any approved agreement must then be extended to any other company with a project of similar scope.

For the past few years, the USPS has been making NSAs with various financial institutions. Last June, for example, it made such an arrangement with financial direct mailer HSBC North America Holdings Inc. that gave HSBC discounted rates for shifting volume from standard to first class postage rates and increasing the use of first class mail which was expected to result in savings of about $7 million for the Postal Service over the three-year term of agreement.

HSBC joined Capital One Service Inc., Bank One (now JPMorgan Chase) and Discover Financial Services Inc. in NSAs approved by the USPS Board of Governors.

Both the House and Senate versions of postal reform bills allow for the continuation of NSAs.

Author's Opinion of possible outcomes

President Bush has threatened to veto any Postal Reform legislation that is not "deficit neutral," i.e., does not increase the Federal deficit by forcing the military retirement liability for postal employees back on the United States Treasury. If he is successful with this bullying action, despite the fact that he is the only President to have never vetoed any legislation, the USPS will be forced to hike rates to set aside these retirement reserves. It really only has three ways of keeping future rate increases at below the level of the consumer price index.

The first hope is to continue to outsource major labor costs by means of innovative and successful NSAs such as the one described earlier in this article. I define a "successful NSA" as one whose financial incentives are far less than the actual out of pocket cost savings realized by the Post Office. In other words the net result is cash inflow to the USPS. While the Postal Unions argue to the contrary, virtually every NSA has truly been successful by this simple definition.

The second possibility concerns the USPS' long standing and to some extent aging labor force, a huge proportion of which is eligible for retirement by 2010. Hopefully the USPS, due to its own increasing productivity as well as these well-structured NSAs, does not have to replace its retiring labor force.

These first two initiatives are basic operational cost savings. But as any entrepreneur knows, you cannot "save your way to profitability." At some point there has to be a favorable swing upwards in revenues. If the USPS holds the line on rate increases while electronic information distribution continues to stagnate the main revenue sources, the only other choice is to create new revenue streams. The Post Office is aggressively pursuing this venue in two ways; first, teaching, nurturing and encouraging small businesses to jump on the proven Direct Mail Marketing Wagon. Second, encouraging new products that increase response rates such as Repositionable Notes (RPNs) and variable data printing. RPNs' proven success of raising response rates has resulted in the USPS charging more for the use of this vehicle, even though there is no cost increase to them. The same thing might well be true for variable data, on demand printing as it moves mainstream. In other words, while the Post Office cannot charge more for this product, it can reclassify some of these products from Standard to First Class Mail, which has the effect of raising revenues.

Additional Rate Case Information

For the USPS' proposed Standard Mail rate charts (other rate charts also to be added), visit the postal section of DMA's Web site at http://www.the-dma.org/postal

To retrieve the USPS' proposed rate charts, visit http://www.usps.com/ratecase

To retrieve the USPS' 179-page filing at the PRC, visit http://www.prc.gov/docs/48/48667/Request_R2006-1_Complete.pdf

To retrieve the USPS' press releases, visit http://www.usps.com/communications/news/press/welcome.htm

Article prepared by C. Clint Bolte, C. Clint Bolte & Associates, Chambersburg, Pennsylvania. For additional information please call 717-263-5768, fax 717-263-8945, or e-mail to clint@clintbolte.com.