• on Aug 17th, 2009 in Pricing & Rates | 24 comments
    Since the earliest days of the Post Office there has been a public policy goal of promoting the dissemination of information throughout the country. This goal was also part of all 14 of the rate cases conducted under the Postal Reorganization Act. By law, rates had to consider “the educational, cultural, scientific, and informational value to the recipient of mail matter.” This provision generally tempered the increases for Periodicals, or at least kept the “institutional cost burden” for Periodicals to a minimum. In fact, in the final rate case in 2006 before the new price cap system of the Postal Accountability and Enhancement Act took effect, the “markup” on Periodicals was only 0.2 percent. Periodicals prices were set so that revenue was only 0.2 percent above attributable costs. The average for all mail was 79.3 percent.

    The two price adjustments since that final rate case have been capped by inflation. Under the old rate case process, the increases would have likely been greater so that the prices covered the Postal Service’s costs for handling Periodicals. In fiscal year (FY) 2008, Periodicals revenue did not cover costs. In fact, the cost coverage (the ratio of revenue to attributable costs) was only 84 percent. (In rate cases, the recommended prices had to be at least 100 percent of costs.) The new law includes the price cap as an incentive for cost containment, but also says products should cover their costs.

    So what do you think? Should the Postal Service try to increase Periodicals prices beyond the cap? What role do Periodicals play in the mailstream? What takes precedence: the cap or a requirement that products cover cost? Should the price for a flat that happens to be a magazine be significantly lower than the exact same flat that happens to be a catalog?

    This blog is hosted by the OIG's Risk Analysis Research Center (RARC).

  • on May 22nd, 2009 in Pricing & Rates | 3 comments
    Sale is not a word usually associated with the Postal Service, but there is a first time for everything. Mail volume has dropped significantly this year, and the Postal Service is proposing a “Summer Sale” to encourage mailers to send more Standard Mail. The Postal Service believes it can use its excess capacity to deliver the additional mail volume at a relatively low cost.

    How will the proposed Summer Sale work? Qualifying mailers will receive a 30 percent rebate on any Standard Mail letters and flats sent from July 1 through September 30 this year above their individual threshold. Only mailers that sent at least 1 million Standard Mail letters and flats between October 1, 2007, and March 31, 2008 can participate, and mail service providers — companies that consolidate mail for others — are not eligible for the program. The threshold for each mailer will be based on the mailer’s previous summer volume and current volume trend. The Postal Service will also double check each participating mailer’s October 2009 volume against its trend. If it appears as though mailers shifted volume to the summer and mailed less in October, the Postal Service will reduce the rebates to account for the lost October volume.

    The Summer Sale is designed to increase mail volume and help the Postal Service gain some knowledge about how to improve its data systems and become more efficient at developing and implementing new offerings in the future. The Postal Service believes the program will provide an incentive for profitable new mail and boost a key customer segment, while enhancing its financial position.

    However, the Summer Sale is not without risks. If mailers simply shift volume to the summer months or switch advertising pieces they used to send as First-Class Mail to Standard Mail, the Postal Service will be giving discounts for mail volume that would have been sent anyway. Another potential risk is the administrative costs of the sale. The Postal Service expects these to be less than $1 million compared to potential revenue gains of $38 to $95 million; however, if its estimates prove inaccurate, it is possible the costs of the program could exceed the benefits.

    The Postal Service notified the Postal Regulatory Commission about the program on May 1, 2009, and the case (Docket No. R2009-3) is currently pending. What do you think about the proposed Summer Sale? Will it succeed? Do you foresee any difficulties in administering the program?

    This topic is hosted by the OIG's Cost, Revenue and Rates directorate.

  • on Mar 2nd, 2009 in Pricing & Rates | 5 comments

    Have you ever wondered why the Postal Service offers free rates for the blind, balloting materials for overseas voters, and items sent by some consular officials? Or why it offers reduced rates to qualified nonprofit organizations, election officials, local newspapers, and publishers of educational material? It is because Congress mandates that the Postal Service provide free or reduced rates to these mailers and then appropriates money to reimburse the Postal Service for the revenue “forgone.”

    Initially, Congress reimbursed the Postal Service for all types of reduced rate mail. Over the years, as rates increased and the number and size of nonprofit organizations grew, the revenue forgone appropriation more than doubled from $441 million in fiscal year (FY) 1972 to $970 million in FY 1985. The increase spurred a debate about who should bear the cost of reduced rates: taxpayers or other mailers. To address these concerns as well as other matters, the Congress passed the Revenue Forgone Reform Act of 1993. Under the Act, the annual appropriation for free postage for the blind, overseas absentee balloting materials, and consular officials continued; however, new appropriations for reduced rate mail stopped. The Act required nonprofit mailers to cover more institutional or overhead cost and shifted the rest of these costs to other mailers.

    Currently, nonprofit mailers that use Standard Mail pay approximately 60 percent of commercial Standard Mail regular rates. The remaining share is absorbed within rates charged to other mailers. Congress continues to reimburse the Postal Service for revenue forgone for free mail, but the amount appropriated is usually less than the Postal Service requests. For example, although the Postal Service requested $124 million in FY 2008 to cover the costs of revenue forgone, free mail and adjustments from previous years, it received only about $89 million.

    What do you think are some of the pros and cons of offering free or reduced rates to certain organizations? Tell us what you think.

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