PSA REPORT January 23, PSA Members, It s Time to RSVP

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1 PSA REPORT January 23, 2015 PSA Members, It s Time to RSVP psa@parcelshippers.org Wednesday, Feb 11 3:30-5:30 Executive Comm Meeting 6:30 Informal Members Dinner (Otello 1320 Conn Ave) Postmaster General Megan Brennan (Invited) (Agenda Attached) Thursday, Feb 12 8:30-2:30 General Membership & Board Meeting More on the Rate Adjustment As we reported last week, the Postal Service plans to increase prices for its Mailing Services products by an average of percent effective April 26, Note this applies only to First- Class and Standard Mail, Periodicals, and Bound Printed Matter, Media Mail, and Library Mail. The table below provides the average rate increase, effective April 26, for package products classified as Mailing Services. The rate increase for your company may vary from these averages and will depend on the characteristics (for example, weight and zone) of your packages. Product Average Rate Increase Bound Printed Matter Parcels 2.6% Bound Printed Matter Flats 0.4% Media/Library Mail 2.3% First- Class Mail Retail Parcels 10.2% Standard Mail Nonprofit and Marketing Parcels 9.8% 1

2 Additionally, the Postal Service announced that it will extend no- fee USPS Tracking services to First- Class Mail Retail Parcels, Bound Printed Matter Parcels, Media Mail, and Library Mail on the same date. In recent years, the Postal Service has implemented rate increases for Mailing and Shipping Services simultaneously. The Postal Service is likely to do so again this year and will likely announce new prices for Parcel Select, Parcel Select Lightweight, Parcel Return Service, First- Class Package Services, Priority Mail, and Priority Mail Express in the coming weeks. We will keep you posted. Thanks to Sandy Glick for this report. First- Class Mail Retail Parcel Case Becomes Interesting Sandy also reports On January 7, the Postal Service filed its reply in Docket No. MC ( Transferring First- Class Mail Parcels to the Competitive Product List ) to comments submitted last month by GameFly and the Commission s Public Representative opposing the proposed transfer. In their comments, GameFly and the Public Representative argued that First- Class Mail parcels should not be transferred because there is not sufficient competition from UPS and FedEx for this particular product (less- than- one- pound, 2-3 day, retail parcels) to prevent the Postal Service from substantially increasing First- Class Mail parcel rates if the product was no longer subject to the price cap. Citing to previous Commission decisions approving previous transfer proposals, including the Parcel Select Lightweight transfer that PSA opposed, the Postal Service's primarily reply was that the evaluation standard proposed by Gamefly and Public Representative was inappropriate. Instead, according to the Postal Service, the fact that it does not have a dominant position in the package delivery market as a whole is a sufficient basis for approving the First- Class Mail parcel transfer. Whether this transfer is approved or not is unlikely to have a large direct effect on the postage paid by most members. However, the standard that the Commission adopts in this proceeding for evaluating whether a product is market dominant or competitive could affect future parcel classification decisions. We will be closely examining the Commission decision, when issued, with an eye towards its implications for the appropriate classification of other parcel products. We expect the decision to be available before our February 12 meeting when we will be joined by Acting PRC Chairman Robert Taub and hope to discuss the decision with him at that time. 2

3 The appropriate standard for classifying products as market dominant (Mailing Services) or competitive (Shipping Services), a division created by the 2006 reform law, is an area that has not been fully fleshed out as yet through the regulatory process. If the Postal Service continues to try to move more services to the competitive side (to escape the price cap and gain the ability to negotiate rates), the appropriate division of products is likely to gain more attention. For more background on the pending retail parcel case, I attach the brief I gave the Board and the Executive Committee earlier this month. Questions Being Raised About Shipping Services Costs and Rules Related to putting products in the correct group, Mailing Services or Shipping Services, are the questions of how to measure the costs of each and how much of the common ( institutional ) overhead costs of the USPS must be borne by each. The 2006 law requires Shipping Services revenues to cover an appropriate share (which the PRC has defined to be at least 5.5%) of the Postal Service s overhead costs. With the growth in Shipping Services revenue and volume and declines in Mailing Services, Shipping Services now pay for more than 12%. Because of this, questions are being raised at the PRC and in the press about the sufficiency of the 5.5% appropriate share requirement; the methods for measuring Shipping Services costs; and the amount of Postal Service financial information that must be divulged to the public, including its competitors. PSA has commented in support of existing Commission rules in these areas frequently in the past and is tracking these issues closely. Also, as competitive products provide more and more revenue to the USPS, and some market dominant products continue to be a financial drag (Periodicals and Standard Regular flats together are losing close to $1 billion per year, according to Postal Regulatory) tension may grow over pricing these products, i.e. how much overhead should each side be required to bear? For The Detroit News take on this, see Postal Service must come clean on costs, which asserts the Postal Service has maintained a culture of secrecy around its finances. Amidst these unprecedented losses, and the looming possibility of a massive taxpayer- funded bailout, improving financial transparency should be a critical priority for the agency. Network Consolidation As you are well aware, the Postal Service is proceeding with Phase 2 of its Network Rationalization plan. The effort in Congress to block consolidations recently failed as the last Congress ended. Die hard Senators have again introduced legislation this Congress, but the rationalization is well underway now. 3

4 The consolidations should not directly affect package delivery, but if you have a problem, please let us know and we will try to help. The process is expected to continue through the end of the year. If you want more information and links to USPS FAQS, Postal Reporter has covered this well. USPS Phase 2 Network Rationalization FAQs includes some answers to service standards, VER, RIFs. Note FAQ 3: Q. The Postal Service is consolidating its network. How will this impact mail and package delivery? A. The consolidation of the processing network will not impact the delivery process. Postal Reform Post Mortem As you might expect, we were extremely disappointed that the last Congress failed to act on legislation to address the Postal Service s financial woes. PSA was a leader in forging an agreement between much of the mailing industry and postal labor that would have reduced USPS financial liabilities by close to $50 billion, (yes that is a B ), saved Saturday package delivery, introduced best practices of the private sector for financing employer- sponsored health care, and refunded pension fund overpayments to the Postal Service. This agreement would have substantially reduced financial difficulties that led to last year s exigency case and puts upward pressure on package delivery prices. In the end, we were faced with having to fight the Carper- Coburn bill, which the industry could not accept because it would have increased prices, eliminated Saturday delivery, and stripped the PRC of much its regulatory authority. As much as we like what PMG Pat Donahoe has done running the Postal Service, he had it completely wrong when he hit out at narrow interests that have blocked much- needed postal reform legislation in the past four years, as reported in Post & Parcel. US Postmaster General hits out at myopia blocking postal reform. We are back to the drawing board with the new Congress as leadership has changed on the House and Senate postal committees. The current situation with postal rates is, frankly, a real mess as we await Federal court decisions that could change everything. Also, and unnecessary health care liabilities continue to mount. Earlier this month, the Greeting Card Association, a member of our legislative coalition, told Roll Call what we had been trying to achieve. Better Options Exist for Postal Reform in OIG s Top Ten Stories of 2014 According to the Postal Service s Office of Inspector General the year 2014 was certainly historic on the postal and logistics front. Alibaba entered the U.S. market with a bang, setting a record with the largest ever U.S. initial public offering. 4

5 For the first time ever, non- mail revenues exceeded mail revenues for postal administrations around the world. Shippers braced for the full effect of dimensional weight pricing. And the U.S. Postal Service added its name to the growing list of agencies and companies to suffer a data breach....all in all, quite an eventful year. OIG staff sifted through the news and put together a top 10 list of postal stories, in reverse order of impact. Share your thoughts and take our poll to vote for your top story. To see the OIG s list, click here. We will be discussing these issues and much more at our February 12 meeting. Be sure to RSVP to psa@parcelshippers.org. We have a great program planned. As always, thanks for your support. Pierce Myers Executive Vice President & Counsel Parcel Shippers Association (cell) pierce@parcelshippers.org Pierce 5

6 From: To: Cc: Subject: Date: Pierce Myers (PSA) PSA Report "Toni Scott"; Michael Scanlon Parcel Case Update Monday, January 05, :50:12 AM To the Executive Committee and the Board, This is to alert you to a development in the case pending at the PRC in which the Postal Service proposes that First-Class Mail retail parcels be moved from the Shipping Services (Market Dominant) product category to the Mailing Services (Competitive) one. Sandy Glick has been monitoring this for us. No action is required of you, but if you have questions or would like to discuss this week let me know. Final comments are due January 7, but as explained below we do not intend to file in this case. However, we expect the division between market dominant and competitive products to have increasing importance as USPS package delivery volume grows and traditional market dominant products, such as catalogs, bills, and statements, face digital competition. The 2006 reform law (PAEA) provides that any product over which the Postal Service exercises sufficient market power cannot be included on the list of competitive products. It describes sufficient market power as the ability to effectively set the price of [the product] substantially above costs, raise prices significantly, decrease quality, or decrease output, without risk of losing a significant level of business to other firms offering similar products. In the past, product transfers from market dominant to competitive such as Standard Mail parcels, Parcel Post, and First-Class Commercial parcels, have been approved by the PRC rather routinely. In this latest instance, however, filings shortly before Christmas suggest the PRC is looking at the involved market and competitive issues much more closely than it has in the past. First, the PRC queried the Postal Service about the possible price effects of the change. Then, two days before Christmas the PRC rejected a separate (but similar) Postal Service request for a new competitive product to be called the Round-Trip Mailer. It found the Postal Service had failed to demonstrate that it did not have sufficient market power in the market involved. In other words, the Postal Service enjoyed pseudo-monopoly power in the market involved. In the First-Class Mail retail parcel case, Gamefly and the Public Representative have advanced a similar market power arguments in opposition to the product transfer. So the market power issue is well joined and argued, as it was with the Round-Trip Mailer case. That is where things stand until Wednesday when reply comments may be filed by any party. Then we will await a PRC decision probably later this month. It is not clear how the PRC will decide this. When we analyzed this case early on it appeared that PSA members may differ as to the business impact of moving First-Call Mail Retail parcels to the competitive product category. Sandy prepared the pros and cons below: Pros and Cons of PRC Approving Transfer of First-Class Mail Retail Parcel Product to Competitive Product List Pros Cons Improved integration of retail and commercial First-Class Broad definition of competitive product would promote Package Service rate schedules future transfers (e.g., Bound Printed Matter) to competitive Potential to include retail First-Class Mail parcels in competitive negotiated service agreements (NSAs) Increased competitive product volume to meet appropriate share (5.5%) requirement Immediate rate increase to at least $2.94 for lightweight (1-6 ounce) retail First-Class Mail parcels and elimination of First-Class Mail price cap protection Elimination of service performance reporting requirement for retail First-Class Mail parcels I plan to discuss this in more detail at our February meeting, but wanted to assure you that we are on top of things now, as always.