a wobbly three-legged stool...more than the 10-year review when planning for the future a wobbly...

More than the 10-Year Review when

Planning for the Future

A Wobbly Three-Legged Stool

Contents Executive Summary .......................................... 1

10-Year Review ................................................ 2

Background ................................................... 3

Findings and Proposal ................................... 3

Catalogs and Marketing Mail Flats ............... 5

Marketing Mail Letters.................................. 6

Magazines, Periodical Flats........................... 7

Timeline ........................................................ 8

Legislative Considerations ................................ 8

Background ................................................... 8

Impact ............................................................ 8

Board of Governors........................................... 9

Current Situation ........................................... 9

Impact ............................................................ 9

The Full Wobble ............................................. 10

UPDATED: USPS FY 17 ACR Data Executive Summary On December 1, 2017, the Postal Regulatory

Commission, PRC, announced their 10-Year

Review proposal. But the conversation needs to

go beyond their findings. There are several forces

at work to take into consideration when planning.

This article takes a deeper dive into not only the

PRC’s findings beyond our December 1 posting.

It also provides a recap of the USPS Board of

Governors situation as well as legislative

considerations. While independent discussions,

the movement in one area may impact the others

or compound the effects. For example, if

legislation was passed during the comment

period, it is unknown if the PRC would change

their findings or if we could have a situation that

adds proposed increases by the PRC to a partial

exigent postage increase through legislation.

For planning, the approved January

2018 rate increase is the certain item.

The rest, a bit of a wobbly stool…

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Fairrington AN LSC COMMUNICATIONS COMPANY 553 S. Joliet Road Bolingbrook, IL 60440-3631 (630) 783-9200 of 10

More than the 10-Year Review

Wobbly Three-Legged Stool

The legs of this wobbly three-legged stool include:

PRC 10-Year Review: Important to note that this is a proposal and not a final rule. It contains a

+2% - 3% on top of CPI. There is a 90 day comment period with a 30 day period for reply comments.

That 30 days could extend longer. If it did move forward, the there is an anticipated 45 – 90 day

implementation period. This is a very fluid situation. It could be as early as

June or push into 2019. Most expect the proposal will change and we won’t

see implementation in 2018.

Legislative Considerations: Discussions are still active, but there is no

timetable. If existing legislation moved forward that includes the 2.15%, it is

unknown if the PRC would revisit their findings. Also, if the prefunding

requirements were approved, the Postal Service’s balance sheet would be

dramatically improved and could prompt the PRC to revisit their proposal.

USPS Board of Governors: Confirmation is still required by the Senate;

however, there is no timeline. The USPS is unable to make rate adjustments

or approve promotions without a Board.

Each one has an impact on stability and predictability and all are key considerations when planning budgets and

future initiatives. Unfortunately, there isn’t a straightforward answer. We encourage all mailers and partners get

engaged in the issues and share the potential impacts to their business with the decision makers.

10-Year Review Fairrington is actively involved with industry associations to analyze the details to fully understand the potential

impacts. The finding below summarize the PRC’s statements and then map the proposed changes to specific mail

classes.

Chairman of the PRC, Robert G. Taub stated that, “This notice is just that — a proposal. Nothing in this proposal

will be final until after public comments are received and considered by the Commission and a final rule is

adopted.” There will be a 90-day public comment period.

At an open industry meeting held on December 5th, Postmaster General Megan Brennan stated that the Postal

Service will be preparing comments. Their position has been made public in a response through their Industry

Alert system stating, “We continue to believe that any price cap is unnecessary in the rapidly evolving postal

marketplace, for which all of our customers have alternatives to using the mail.”

Associations are expected to file comments, and litigation is also expected. The proposal could mean significant

price increases for mailers. We encourage all mailers to engage with associations to understand the issues, share

their perspective and file their organization’s comments.

The PRC statement is available on their site as well as the full order.

https://www.prc.gov/sites/default/files/pr/10%20year%20Order%20and%20NPR%20Release.pdf

https://www.prc.gov/docs/102/102715/Order4258.pdf




Background

In 2006, the Postal Accountability and Enhancement Act (PAEA) was put in place to regulate rates and

classes for market-dominant products. Part of the law required the PRC review the past 10 years of the rate

and classification system to determine if the system achieved the goals of PAEA which were to create a flexible,

stable, predictable, and streamlined ratemaking system that ensures the Postal Service’s financial health and

maintains high quality service standards and performance.

The PRC determined that some of PAEA objectives are being met:

Predictable, stable rates

Less burdensome process

Improved transparency

Some are not

Adequate USPS revenues

Pricing efficiency

o Non-compensatory products

o Workshare passthroughs

Findings and Proposal

The Commission concluded that the system achieved some of the goals of these areas, but the overall system has

not achieved the objectives taking into account the factors of the PAEA.

Their proposal included the following key areas:

CPI Cap: The Commission proposal would maintain a price-cap system. The Commission determined that it is

necessary to maintain such a mechanism to create predictability and stability, and seeks to build upon, rather than

replace the CPI price cap by providing discrete amounts of additional rate authority.

2% Over CPI: Proposes a 2% rate authority over the CPI cap for five years

1% Performance-Based Authority: Proposes an additional 1% performance-based rate authority. The

PRC divided the 1% point of performance-based rate authority between an operational efficiency-based

standard (0.75 percentage points), and service quality-related criteria (0.25 percentage points).

2% Non-Compensatory: For products that do not cover costs, the PRC proposes price increases that are

2% higher than other elements of the class. The below table is from the PRC proposal.




What could this mean? It is a compounding issue. Let’s say that we base the increase on a 2% CPI + the 2%,

mailers could face over 21% increases or more. This does not account for the additional 1% performance-

based authority or in the case of Periodicals, where the entire class is non-compensatory, add an additional

2% as the increases are calculated.

CPI + 2% + 1% + 2% (in some scenarios)?

But it is still not as adding up the percentages. Rate authority is not applied equally across all rate cells. Instead,

the authority has historically been applied to optimize revenue, applying to higher-volume sortations, or used to

improve cost coverage. We will explore this more as we look at areas of risk and opportunity for specific types

of mailings.

Workshare: Per Chairman Taub, “The 2006 Law tasked the Commission

with ensuring that these discounts do not exceed the cost that the Postal

Service avoids as a result of workshare activity unless certain limited

exceptions are met. Objective one of the 2006 Law required that the Postal

Service, quote, maximize incentives to reduce costs and increase efficiency,

end quote. The rate-making system achieves pricing efficiency when prices

adhere as closely as practicable to what is known as efficient component

pricing. To adhere to efficient pricing, workshare discounts should be set

equal to the costs avoided by the Postal Service when the mailer performs the

workshare activity, thus producing what’s termed passthroughs of 100

percent. In our review, the Commission finds that the Postal Service, during

the past 10 years, set most discounts substantially above or substantially

below 100 percent. This is problematic because such discounts send

inefficient price signals to mailers, and therefore reduce productive efficiency

in the postal sector.”

The Commission proposes passthrough bands of 75-125% for Periodicals

85-115% for all others

These bands include a three-year phase-in to bring all existing discounts into compliance.

Workshare discounts are used to drive mailer behavior. These have created opportunities to balance postage

budgets. As we look at specific mailing types, we will see that there are passthroughs that far exceed 100% and

passthroughs that are well below that mark. Those that are below the proposed bands may be an opportunity to

soften the impact of the proposal.

In the information below, we highlight some extreme examples and provide context, and then focus on rates that

are most used in the mailing profiles we see.

The information has been update to reflect the USPS Annual Compliance Report RY 2017.




Catalogs and Marketing Mail Flats

Remember that the passthrough band is 85-115% with a three-year phase-

in to bring all existing discounts into compliance. Below shows cost

coverage and passthroughs for origin-entered Marketing Mail Flats.

Marketing Mail Flats were also listed in the 2% Non-Compensatory chart.

Passthrough band of 85-115%




Marketing Mail Letters

Remember that the passthrough band is 85-115% with a three-year phase-in to bring

all existing discounts into compliance. Note that the Postal Service has adjusted

dropship discounts to address the PRC’s directive to reduce passthroughs over the last

two rate filings. Once the ACR is available at the end of December, we will have a

better picture of the situation.

Marketing Mail Letters were not listed in the 2% Non-Compensatory chart.

Passthrough band of 85-115%




Magazines, Periodical Flats

Remember that the passthrough band is 75-125% with a three-year phase-in to bring all existing discounts

into compliance. Also in the case of Periodicals, where the entire class is non-compensatory, the PRC

proposes that USPS must use all available rate authority including an additional 2 percent as applies to non-

compensatory products within classes that cover their costs.




Timeline

90-Day Comment Period

Without adjustments, the proposal’s impact will be significant. Once

the 90-day comment period is complete, the PRC could choose to

move forward or adjust their findings. If they do move forward and a

Board of Governors is in place, the Postal Service could file an

additional increase which would be effective in 2018. In a public

meeting the Postmaster General stated they have not ruled this out.

Typically price adjustments are limited to once per year to allow

USPS system changes and time for the industry to prepare their

systems.

Legislative Considerations Talk of legislation continues, but there is no certainty.

Background

Some in the industry believed that Jason Chaffetz, former Chairman of the Committee on Oversight and Government Reform

was going to reintroduce the postal reform legislation from the last 2016 session as early as February 2017. That

did not happen and Chaffetz has left the House. Representative Trey Gowdy (SC-04) now serves as Chairman of

the Committee on Oversight and Government Reform.

The proposed legistlation reinstates half of the 4.3% exigent increase (2.15%) and makes it a part of the rate base.

Impact

It is unknown what the impact of legistlation could be on the PRC’s findings. For example, if proposed legislation

moved forward with the included 2.15%, it is unknown if the PRC would revisit their findings or if the 2.15%

would be added on top of their proposal.

CPI + 2% + 1% + 2% (in some scenarios) + 2.15%

It is also unknown if a push for legistlation would continue if the PRC proposal moves forward, and if it did,

whether the 2.15% would be removed.

Also, if the prefunding requirements were approved, the Postal Service’s balance sheet would be dramatically

improved and could prompt the PRC to revisit their proposal. The Postal Service’s balance sheet was one of the

key factors considered by the PRC when they concluded that the current system is not providing sufficient

revenues.




Board of Governors The third leg of this wobbly stool of prediction is the USPS Board of Governors (BOG).

Current Situation

The White House announced nominations for three individuals to be postal

governors. They are Calvin Tucker of Pennsylvania, Mike Duncan of

Kentucky and David Williams of Illinois.

Calvin R. Tucker of Pennsylvania, for the remainder of a term,

expiring December 8, 2023.

Robert M. Duncan of Kentucky, for the remainder of a seven-year

term, expiring December 8, 2018, and an additional term

expiring December 8, 2025.

David Williams of Illinois, for the remainder of a seven-

year term, expiring December 8, 2019.

Confirmation is still required by the Senate; however, there is

no timeline. Under the Obama administration, nominated

governors were blocked by Senator Sanders. No nomination has

been confirmed since 2010. It is unknown if similar roadblocks

will be encountered. Some anticipate that they will be approved

as a group and will be in place by February 2018.

Impact

The lack of Governors is the stated reason the USPS does not have a 2018 promotion

schedule. For many mailers, this is being viewed from a budget perspective as an

additional 2% increase to the January 2018 rates. The USPS stated that they are

preparing promotions and hope to be able to offer some in 2018 on an adjusted

schedule. Before promotions could be made available, they need Postal Executive Leadership review, BOG

approval and to be sent through the PRC.

CPI + 2% promotions + 2% + 2.15%?

The USPS also cannot move ahead with any rate increase without a board – no usual CPI increase, no increase

based on the PRC decision.

https://www.whitehouse.gov/the-press-office/2017/10/26/president-donald-j-trump-announces-key-additions-his-administration




The Full Wobble It is a wobbly three-legged stool with each leg – the PRC 10-Year Review, legislation and USPS Board of

Governors - having an impact on stability and predictability.

PRC 10-Year Review

In current form, significant rate

impacts, CPI + 2–5%

90 days of comments followed by

reply comments, full timeline is

unknown

Possible 2018 rate increase if it does

move forward

Legislation

Last versions included 2.15%

Timeline, unknown

Impact to PRC proposal, unknown

Board of Governors

Timeline, unknown, but three have

been nominated

No promotion schedule without a

BOG

But… no rate increase without a

BOG

All of these are key considerations when planning budgets and future initiatives. Unfortunately, there isn’t a

straightforward answer. We encourage all mailers and partners get engaged in the issues and share the impacts to

their business with the decision makers.

Costs and passthroughs will be updated once the USPS releases the updated ACR at the end of December and we

will provide updates as we learn more.

Watch Fairrington’s Industry News for the Latest Updates

http://www.fairrington.com/industry-updates/

http://www.fairrington.com/industry-updates/

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