When it comes to postal products that don’t cover their costs, the U.S. Postal Service finds itself in a no-win situation. The law that governs the U.S. Postal Service, the Postal Accountability and Enhancement Act (PAEA), requires the Postal Service to make sure all products cover their direct costs. But it also caps the price increase on market-dominant mail classes at the increase in inflation.

So what happens when a product falls below costs (a so-called underwater product) and raising its prices means piercing the price cap? The Postal Service has opted not to raise prices above the price cap on those underwater products, saying the PAEA won’t allow cap-busting increases. But keeping the products below costs also violates the PAEA.

Our recent audit report looked at all the Postal Service’s underwater market-dominant products and its management of strategies to make those products cover their costs. Five of the seven products that failed to cover their costs came up short by a total of $1.2 billion for FY 2015. These products, including the two products that make up the entire Periodicals Class of mail, have been underwater for 7 years in a row. Our report recommended the Postal Service develop a strategy for managing underwater products.

Given these challenges maybe it’s fortuitous that the Postal Regulatory Commission (PRC) will begin its review of the Postal Service’s rate setting process this year – as mandated by the PAEA. After December 20, 2016, (the 10-year anniversary of PAEA) the PRC will open a docket to review the price cap system for regulating market dominant products – First-Class and Standard Mail, Periodicals, Package Service and Special and Ancillary Services. The PRC will decide if the system is achieving its statutory objectives and, if it is not, will make changes to achieve the objectives.

What approach do you think the Postal Service should take to improve the cost coverage of underwater products? What, if any, changes should the PRC make to the rate-setting process?

Comments (7)

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  • anon

    The issue with PAEA is the cap. The problem with the cap is the interest rate. Most of us know the actual inflation rate for goods and services is higher than the published rate from the fed; if you buy milk or candy bars, you know inflation is more than 2% a year. If the price cap was tied to a gallon of milk instead of the posted interest rate, this would probably be a non issue. In all seriousness, I think the only solution available without an act of congress is to create a new service name for the offending class of post; a product offering nearly identical services at or slightly above current costs, then discontinue the below cost product. Although the solution sounds ridiculous, under the current law as explained, I don't see another way to retain the customer and stop losses unless the PRC steps in. If PAEA is revamped, I really hope it's not tied to the published interest rate again, unless it's worded like a credit card rate, up to 10 points over prime. Just my 2¢

    Jul 25, 2016
  • anon

    If we continue to provide pkg services. A stat report should be implemented to accomplish what sells where the best. A study done by the T-7 could be highlighted when they do their inventory accountability. Thus cutting back on items that don't sell often.

    Jul 25, 2016
  • anon

    This market may have matured to the point that privatization makes more sense. Douglas Mallach

    Jun 29, 2016
  • anon

    Do what any well run business would do . . . a one time permanent rate adjustment to meet the cost coverage requirement. This could not be simpler.

    Jun 26, 2016
  • anon

    If products have rate structures that don't/can't cover their costs, and raising rates to the cap won't cover them, a more reasonable option may be to discontinue these products, rather than attempting to "manage" them. While mailers would pay more they would be using products that conform to the self-sustaining law requirements. As periodicals (in paper form) are in decline, perhaps Periodical mail class product offerings ought to decline with them.

    Jun 21, 2016
  • anon

    Perhaps many of these "under water" products have a lot of water over them because of the cost sharing program....Is USPS giving away the ranch to the companies which "prepare" the mailings and get a price break whjich is way out of line? Could USPS actually make a profit by bringing back in house a lot of the processing and sorting internally? Why "pay" somebody to do the work which we can do inhouse if we can do it cheaper?

    Jun 20, 2016
  • anon

    Since the USPS' costing methodologies are highly suspect - and downright erroneous in many cases - it is impossible to tell if products are actually "underwater" or not. Everything starts with capturing and reporting on the costs correctly, and until that is done, any action taken is going to be false. It all comes down to reporting costs accurately first.

    Jun 20, 2016

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