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).


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Periodicals mail also creates the need for first class (bills) and standard mail (renewal offers and direct mail new sub offers) and needs to be considered in whole.

That's a good point. Should the pricing rules be adjusted to consider the residual effects of the mail?

Periodicals are important to the Postal Service beyond dollars and cents and to the American people, which is why for more than 200 years they have received a rate preference. That's why the objectiove cap takes precedence over the subjective cost coverage "requirement." In addition, USPS should keep in mnd that Periodicals make money if you factor in all of the additional First-Class and Standard mail that Periodicals generate with ads, list rentals, renewal notices, payments, invoices, etc. Also, it's not all that clear that Periodials fail to cover costs, since the USPS costing methods are highly suspect. The Postal Service several years ago gave in to the PRC in a dispute over whther, as the PRC contended, nearly 100% of processing costs are attributable as volume variable, or whether, as USPS concluded, a significcant portion are fixed, as proven by the fact that there are economies of scale. The fact that costs continue to escalate even as volume declines, or in some cases fall far more slowly than volume, proves that volume variable and therefore attributable costs are overstated. Finally, the fact is that there is still a good deal of costly manual handling of machinable Periodicals, for a variety of reasons, none of which have to do with the makeup of the mail itself. The incremental costs of manual handling should not be attributed to Periodicals, just as the Alaska Air costs are not attributed to Parcels.

Thank you for your comment. Are you saying that a larger share of the Postal Service's costs should be considred institutional? Also, what are the reasons that there is a lot of manual handling rather than mechanized handling?

Yes, it does appear that a larger share of the Postal Service's costs are institutional, at least insofar as mail processing costs are concerned. Attributable costs are supposed to be volume variable, yet mail processing costs, as I suggested and as Jim O'Brien explained, do not appear to behave that way to the extent claimed by the PRC. Moreover, as we both wrote, while manual processing costs may, technically, be "attributable," they should not be attributed to Periodicals unless the manual handling was both necessary and undertaken for the benefit of Periodicals' mailers. Here's a simple, and likely realistic, example. Let's say that a facility manager can reduce Standard mail handling costs by $2 million annually by manually handling good deal of machinable Periodicals mail. Doing so adds $1 million to Periodicals costs but still leaves a net gain of $ 1 million. She would be encouraged and praised for doing so, because she has saved the Postal Service $1 million. But, in this example, Periodicals attributable costs have increased by $1 million, an increase incurred not for the benefit of Periodicals mailers but for the good of the system as a whole. Operating decisions are not made on a class by class basis, but if attributable costs are measured that way, inequities can result.

Periodicals represent the largest class of mail that is actually requested by the individual. Periodicals is also a key source for creating first and Standard A mail as well. Also look at the huge cost reduction the USPS has seen from the Printers creating co-mail and trucking the product outside the USPS across the country to the BMC's.

Interesting point about the relative "wantedness" of Periodicals. Do you think that the historic prices already have that consideration baked in?

The communication landscape has changed a great deal since the early days of the United States but there are a several facts regarding Periodicals mail that haven't, for example:

Periodicals are paid for (or requested) by the recipient. This increases the value to the consumer and gives them a reason to look forward to what the Postal Service has called "the mail moment." In fact, former PMG Bill Henderson said that Periodicals are the "anchor of the mailbox."

Periodicals are generators of mail. In addition to providing USPS revenue, Periodicals mailers also generate mail volume in all mail classes including First Class (bills), Standard Mail (direct mail solicitations and renewal notices), and Parcels (premiums). In addition, many Periodicals publishers rent their subscriber lists to direct mailers and this results in additional mail volume that the Postal Service would not receive in the absence of the Periodical. In NSAs this was referred to as the "multiplier effect." Periodicals are mail multipliers.

No one to date has been able to explain the incomprehensible rise in Periodicals costs during a period of substantial increases in mailer worksharing. Periodicals mailers have, in unprecedented numbers, migrated to co-mailing, co-binding, co-palletization, drop shipping, sack reductions, and increases in carrier route copies. How could this significantly more efficient mail lead to greater mail processing costs???

Is the USPS and PRC absolutely certain that the Periodicals cost base is accurately being measured? I think not.

In addition, Periodicals mail has always been suspected to be the recipient of "automation refugees" whereby the Postal Service automates other mail classes but fails to lay off any workers. These workers must then be assigned to something, so they are assigned to manually process a relatively small class of mail, i.e. Periodicals. Then when the IOCS data collectors perform their tallies, all of these automation refugees get charged to Periodicals mail. Could it be that Periodicals are covering 83% of an inflated cost base yet could be contributing over 100% if the cost base were more accurate?

Thankfully, the USPS and PRC are beginning to work on the Periodicals Report that was mandated in the PAEA. Hopefully, this will help all parties gain a better understanding of Periodicals costs, rates, and their place in the Postal universe.

Thanks for taking the time to comment. The Postal Service has whittled down workhours in recent years. Shouldn't this have reduced the phenomenon of automation refugees?

Good point about mailer efforts to reduce postal costs. Do you think those reduction efforts were not captured? Even if Periodicals processing has become more efficient, perhaps other classes have become even more efficient. In which case, Periodicals might see relatively higher cost increases.

Today, Time Warner will be filing comments with the PRC in response to order no. 269. These comments will directly address some of the questions that you're asking. Quite frankly, some of these questions have yet to be answered. For example, in FY 2008, when flats volume was so low that almost all of it should have fit on the sorting machines, and perhaps did, the Postal Service's costing system still attributed very large costs for manual sorting of Periodicals flats. With ample automated mail processing capacity, why is manual processing still required??? Hopefully, we'll get to the bottom of this issue once and for all.

Well said Jim.

And you made this post so you can try to nail the Post Office on offering a service that promotes the transmission of ideas? Hunting for leads ?

We want the OIG's blog to be a place to discuss all kinds of issues. This topic seemed interesting to us. That's why we picked it.

I love my magazines. Please keep their delivery affordable.

At a time when dissemination of information is being curtailed by the failure of newspapers and homogenized by the consolidation of the media, the rate preference for periodicals is more critical than ever. That preference is rooted in the First Amendment and should not fall prey to considerations that discount that amendment's importance to our democracy. I will be the first to note that finding out the latest shenanigans of Britney Spears has only a tenuous connection to the furtherance of democratic ideals. But toleration for such foolishness, and subsidies for it in print and broadcast, have always been the price we have had to pay to guarantee the widest dissemination possible of comments that are, indeed, critical to public discourse and to our democracy. The cap should stay in place. The continued creativity of the USPS should be brought to bear on seeing that it does.

Thanks for commenting.

This thoughtful post makes the point perfectly. This one area is one of the fundamental reasons why the Founders thought to address the Post Office in the Constitution.
As we address the challenges that confront this institution we do well to remember that the exchange of information is part of democracy's foundation. Calling the Postal Service the lynchpin of a $900 billion industry and thinking of us as "the company" have become the rage but the existance of this public institution is a critical element in sustaining democracy.

Most of my purchases are delivered by Fedex or UPS. Most of my bills are paid online. If it weren't for magazines coming to my mailbox...
Let's keep this affordable. Forcing more publishers to go online (where ad revenue can't be found to equal print) will only make the creation and distribution of well-researched material even more difficult to come by. And BTW: Because of my affordable paper magazines, the USPS has made a ton because of all the direct mail pieces I receive based on the sale of my subscription information. And I'd have to say, for the most part, these direct mail pieces are on target and are actually welcomed by me. Let's be smart about this, USPS!

How did failed past efforts to package mail for delivery (DPP) affect current pricing? Was that the fault of mailers? How is FSS going to be any different? Are these machines versatile enough to be useful? Does the 'human battery' run out after 6 hours in the street like the Segway's did? Are the tabbed booklets and folded self mailers mixed in with my flats being counted as potential FSS material? What is the opportunity cost of pursuing FSS? Is there a simpler alternative out there? Why isn't the actor in the Flat Rate Box commercials carrying FSS? Why is the USPS advertising on TV anyway? Is it because we can't automate our own post cards? Shouldn't the USPS be able to automate post cards before moving on to flats? What is the optimal number of bundles to carry in the street? Is it two? Do we know how to carry two? Do we know how to carry three? Is our workers' compensation deficit fixed?

Much of first class mail has already migrated to the web. Standard rate mail has done the same. Periodicals and the post office should have a symbiotic relationship. If USPS keeps raising the periodicals rates, more publications will continue to migrate to digital...in turn lowering the mail volume, in turn raising the rates again. It's a recipe for oblivion. It's a vicious cycle and USPS needs to understand that publishers will migrate to the web as the post office drives them toward it.
You know they caution drowing men not to jump on their rescue-ers when they appear as that could drown both of them. I caution USPS not to take up all down.

Does the term “Lemonade”, mean anything to any of the OIG’s technical staff?
Mobile Internet Applications i.e., Black-BERRIES, I mean mobile application PCD’s.
(PCD-Personal Communication Device)
I mean wireless apps…. inferred as paperless media..
Consider the electronic medical records (EMR)
a reality within 24 months. (est.)
Of course, Congress must first approve any current
Also, lets look at the facts 08/29/09 "I-Phone
sales increase 34 million units 3rd qtr. 2009."

Lastly is the issue of transportation assets during
an emergency event or disaster. While I was at FEMA,
then developing response plans, my first inclination was to identify vehicles under the government umbrella which could serve the response during an
Hoping I’m not off track here…. But, we are talking about fleet assets which presumably, are integrated into the intelligent transportation system network already, right?

It makes sense that a larger portion of the Postal Service’s costs are institutional. Also, as others have mentioned more of the manual handling should be automated.

Periodicals and magazines are important for information. We should figure out a way to increase the price on sale flyers and general junk mail. The majority of my mail is "junk" and goes straight into the trash. Car dealers should be charged double for advertising in though the mail. Also the weekly "coupon" mailing I get is useless.

We use the postal service for periodicals as well as many train the trainer course manuals for first aid, manual handling, fire safety etc and find the cost just goining up and up.

A cap for the small business would be a good idea.