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?