A Wobbly Three-Legged Stool

Transcription

1 when Planning for the Future A Contents Executive Summary Year Review... 2 Background... 3 Findings and Proposal... 3 Catalogs and Marketing Mail Flats... 5 Marketing Mail Letters... 8 Magazines, Periodical Flats... 9 Timeline Legislative Considerations Background Impact Board of Governors Current Situation Impact The Full Wobble 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

2 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 day implementation period. This is a very fluid situation. It could be as early as June or push into Most expect the proposal will change and we won t see implementation in 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. Fairrington AN LSC COMMUNICATIONS COMPANY 553 S. Joliet Road Bolingbrook, IL (630) Page 2 of 12

3 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. 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. Fairrington AN LSC COMMUNICATIONS COMPANY 553 S. Joliet Road Bolingbrook, IL (630) Page 3 of 12

4 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 % for Periodicals % 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 is pulled from the following sources: Docket No. R2018-1, Notice of Market Dominant Price Adjustment (October 6, 2017) Annual Compliance Determination Report FY 2016 Annual Compliance Report 2016: Library References FY 2017 ACR at the end of December. At that time, the examples below will be reevaluated. Fairrington AN LSC COMMUNICATIONS COMPANY 553 S. Joliet Road Bolingbrook, IL (630) Page 4 of 12

5 Catalogs and Marketing Mail Flats Remember that the passthrough band is % with a three-year phasein to bring all existing discounts into compliance. Below shows cost coverage and passthroughs for origin-entered Marketing Mail Flats. Passthrough band of % Fairrington AN LSC COMMUNICATIONS COMPANY 553 S. Joliet Road Bolingbrook, IL (630) Page 5 of 12

6 The good news - most volumes are in dropship programs. When we look at dropship, we see many are well below 85%. This may be an opportunity for a reduced impact as rates are adjusted to meet the goals of the proposals. Many Below 85% Fairrington AN LSC COMMUNICATIONS COMPANY 553 S. Joliet Road Bolingbrook, IL (630) Page 6 of 12

7 When we look at Carrier Route, many passthroughs are also low. Solutions like co-mail to drive carrier route and high density will help reduce the impact for some mailers. Fairrington AN LSC COMMUNICATIONS COMPANY 553 S. Joliet Road Bolingbrook, IL (630) Page 7 of 12

8 Marketing Mail Letters Remember that the passthrough band is % 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. Fairrington AN LSC COMMUNICATIONS COMPANY 553 S. Joliet Road Bolingbrook, IL (630) Page 8 of 12

9 Magazines, Periodical Flats Remember that the passthrough band is % 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 noncompensatory products within classes that cover their costs. Passthrough band of %, Additional 2% Fairrington AN LSC COMMUNICATIONS COMPANY 553 S. Joliet Road Bolingbrook, IL (630) Page 9 of 12

10 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 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 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) % 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. Fairrington AN LSC COMMUNICATIONS COMPANY 553 S. Joliet Road Bolingbrook, IL (630) Page 10 of 12

11 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, Robert M. Duncan of Kentucky, for the remainder of a seven-year term, expiring December 8, 2018, and an additional term expiring December 8, David Williams of Illinois, for the remainder of a sevenyear term, expiring December 8, 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 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 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% %? The USPS also cannot move ahead with any rate increase without a board no usual CPI increase, no increase based on the PRC decision. Fairrington AN LSC COMMUNICATIONS COMPANY 553 S. Joliet Road Bolingbrook, IL (630) Page 11 of 12

12 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 Fairrington AN LSC COMMUNICATIONS COMPANY 553 S. Joliet Road Bolingbrook, IL (630) Page 12 of 12