Giving away the store: The Postal Service discounts the mail


April 20, 2014

MARK JAMISON

In her book Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age, Susan Crawford describes how the American public has been imprisoned by monopoly arrangements in the delivery of broadband and wireless Internet services. Using pricing and discount strategies, communications corporations have colluded to circumvent competition and make private fiefdoms out of what should have been public infrastructure.  

It’s not a new strategy.  Back in the 1870’s, J.P. Morgan and the railroad barons worked with John D. Rockefeller and Standard Oil to use preferential pricing schemes and discounts to corner markets and consolidate their monopoly powers.

In its quest to act more like one of these giant corporations, the Postal Service has been using similar strategies, like fighting off regulation, making secret deals, manipulating prices, and offering discounts to become more competitive. 

Worksharing is probably the most notorious example of a discount of dubious merit.  Since the practice began in 1976, worksharing has grown dramatically.  Now about 80 percent of the mail arrives at the Postal Service pre-sorted to qualify for discount rates (as discussed in this OIG report).  Worksharing has spawned a huge private-sector consolidation industry that profits off the $15 billion (or more) in discounts that the Postal Service gives out each year.  As repeatedly documented in compliance determination reports by the Postal Regulatory Commission, many of the discounts are so large that they don't even cover their avoided costs.  Worksharing has led to the loss of tens of thousands of postal jobs.

Worksharing is not the only type of discount to be concerned about, however.  For large mailers, there are discounts for bar coding and an ever-increasing number of Negotiated Service Agreements.  For average customers, discounts are available for going online instead of going to the post office.  Now we’ve learned that the Postal Service is apparently giving discounts to Staples as part of the plan to put postal counters in big box stores.

Through the use of such discounts, the Postal Service has transferred large parts of its operations to the private sector.  Besides undermining postal jobs and the postal network, these discounts also threaten to create significant unregulated monopoly power in the communication, mail, and package delivery sector.

The Postal Service may say that the discounts are just good for business and that going online or using a postal counter in Staples is just more convenient for customers, but the real goal is to get rid of post offices, postal workers, and postal infrastructure.  From worksharing to Staples, the discounts mean one thing: The Postal Service is giving away the store. 

 

Discounts to Staples

Putting postal counters in Staples stores is clearly intended to replace postal workers in brick-and-mortar post offices.  The only way the deal can save the Postal Service any money is by reducing the number of clerks at nearby post offices and then closing post offices completely.  Maybe that’s why one of the provisions in Darrell Issa’s postal reform legislation removes the right to appeal a post office closure to the PRC if there’s a Contract Postal Unit within two miles of the post office.  There are over 1,200 post offices within a couple of miles of a Staples store. 

But there’s another aspect to the Staples deal that hasn’t got much attention.  The Postal Service is apparently giving Staples discounts on Priority and Express mail, domestic and global. 

These discounts have not been discussed publicly by the Postal Service, and the details are a closely guarded secret.  The APWU filed a complaint against the Postal Service and requested more information about the deal, including a copy of the Staples contract.  It received a long document of 58 pages, almost all of it blacked out.  (The APWU posted it here.)

Not everything in the document was redacted, however, and there was enough left to allow us to do a little detective work, which led to two PRC dockets covering Negotiated Service Agreements.  In comparing the APWU version and the PRC version of the documents, it seems almost certain that these NSAs involve the Staples counters.  (You can see some of the points of comparison here.)

Docket CP2013-84 covers an NSA for reselling Global Priority and Express mail, and CP2014-3 deals with an NSA for reselling domestic Priority and Priority Express.  If these indeed are the NSAs for the Staples deal, they tell us that one of the ways Staples is making money on its postal counters is by receiving commercial-based discounts on Priority and Express items.  We don’t know how much those discounts are, but one might reasonably conclude they are even more generous than those offered Click-N-Ship customers on the Postal Service website, which can be as much as 16 percent off retail. 

 

Trying to learn more

While the PRC documents are not as heavily redacted as the APWU version, they don’t reveal all the terms and conditions of the discounts.  I therefore filed a request to review the sealed materials in order to determine if the deals were meeting cost coverage and verify that there were no provisions that perhaps allowed the deal to initially meet cost coverage but then fall behind at some future point.  (That’s been an issue in some of the Postal Service sales promotions like the Summer Sale.)

Naturally, the Postal Service filed an objection to my request.  It also submitted a letter from an attorney for the “counterparty” that’s involved in the NSA.  The letter explains that the information in the contract is commercially sensitive, and if it were disclosed, it would put the counterparty at a “significant competitive disadvantage.”

It’s interesting to note that when I made a similar request a few months ago for access to the Amazon NSA (as discussed here), Amazon filed papers with the PRC objecting to the request.  When it filed the objection, though, Amazon put its name on the document, thus revealing its identity, which had been kept secret until then.  It looks as though the anonymous counterparty in these new NSAs didn’t want to make the same mistake.

As expected, the PRC rejected my request for access, so most of the key details of the deal remain secret.  It’s not even clear why the Postal Service is giving such discounts in the first place.  It doesn’t give these discounts to other Contract Postal Units.  That raises an interesting question, though: Are the Staples counters actually CPUs?

 

What are those Staples counters anyway?

When the Staples deal was first announced, a USPS spokesperson described them as “similar to contract postal units.”  But it’s not clear that this is what they are.

The Postal Service has a lengthy guide that deals with the policies and procedures for creating, operating, and closing CPUs. USPS Publication 156 covers almost every detail you can imagine about these units.  But is the Postal Service following these policies with its Staples counters?  That’s particularly important when it comes to what the Postal Service will do if it has to close one at a Staples containing a postal counter.  Staples recently announced the closure of 225 outlets.  What would happen if there were official CPUs in those stores?

It’s possible that the Postal Service does not consider the Staples postal counters as CPUs.  Perhaps they are a type of Approved Shipper, a retailer that provides some USPS products.  In fact, when the Postal Service began developing the plan that would eventually lead to the Staples deal, back in December 2012, it described it as an “Approved Shipper Plus Program Pilot” (see this Memorandum of Due Consideration).

But the Staples counters don’t sound like approved shippers.  These businesses mostly handle parcels, they also offer FedEx and UPS (which CPUs and the Staples stores won’t do), and they make their profit by adding a surcharge to the USPS fees — rather than getting a discount on them.

So if the postal counters in Staples are not CPUs and they’re not approved shippers, what are they?  The documents that surfaced in the APWU grievance refer to the Staples counters as part of an “Approved Postal Provider Pilot,” which is part of the “Retail Provider Expansion Program.” 

But what do these terms refer to?  The only place they seem to appear (according to a Google search, anyway) is on the Staples agreement obtained by the APWU.  Has the Postal Service invented a new category of retail outlet?  If so, where are the guidelines and policies that govern them?  How does the Postal Service intend to handle the most basic issues, like the security of the mail?  If a letter is dropped at a Blue Box in front of a Staples, it has clearly entered the Postal Service network, but what about packages mailed through Staples?  Are they considered to have entered the system when paid for at Staples or when they are turned over to USPS personnel?  Is the Postal Service eventually going to publish a guide similar to the Publication 156 for CPUs, or is it going to make up the rules as it goes along?

 

Avoid the lines, go online

One of the bright spots in the Postal Service story has been the increase in package volumes.  That’s thanks in part to the fact that the Postal Service has been very aggressive in promoting its competitive offerings in Priority and Express mail, as we can see in the Staples deal.  The Postal Service provides free boxes to mailers, it has gone through an expensive rebranding campaign to highlight Priority and Priority Express offerings, and it has created several flat-rate and regional-rate offerings designed to serve virtually every customer need.

The Postal Service has also been working hard to promote online postal transactions through the Click-N-Ship program on USPS.com and well as partnerships with companies like Stamps.com, and Express 1.  In an effort to attract website traffic — and to discourage people from going to the post office — the Postal Service gives regular retail customers and small businesses discounts and services normally available only to big commercial mailers. 

The Postal Services offers what it calls “commercial based pricing” to retail customers who purchase postage through the website.  In addition to these rather hefty discounts, the Postal Service offers free insurance and tracking options to customers who use the website to generate mailing labels and purchase postage.

Here’s how these online discounts end up working.  Go into your local post office to mail a package and you’ll be offered a few basic options.  There are Flat Rate boxes of various sizes, costing from $5.80 for a video size up to $17.45 for a big box.  These are the “if it fits it ships” options that may or may not be a good deal depending upon weight or distance. 

If your shipment doesn’t fit in the Flat Rate box, the alternatives are Standard Post and Priority Mail.  Mailing a ten-pound parcel from my home zip of 28788 in North Carolina to say, California, will cost me $24.77 for Standard Post or $36.15 for weight-based Priority Mail.  If I’m mailing to Florida, the Standard Post price goes down to $18.07 and the Priority goes down to $24.95.  If I’m mailing closer to home, like Raleigh, NC, there’s no Standard Post option available, but the weight-based Priority goes down to $15.15, and the Flat Rate box stops looking like a good deal. 

These are the prices I’ll pay at the post office.  But I can save a lot of money by going online.  If I take the time to register on the USPS website, print my mailing labels, and pay for my postage online, the Postal Service will suddenly fall in love with me.  

On that ten-pound package to California, there will be discount of $3.20 (over 8 percent) off the weighted Priority Mail price.  The Postal Service will knock $1.65 off the large Flat Rate box (over 9 percent).  Even better, the Postal Service will offer me Regional Rate box pricing that’s even cheaper than some of the Flat Rate offerings, and for all of these offerings, there’s also free minimum insurance. 

 

Discounts for what?

The bottom line is that if you go online to do buy your postage, the Postal Service will give you not just free boxes but big discounts and other services you won’t get at the post office.  But are the discounts really justified?

When I take advantage of the USPS website to get a discount, I still have to use almost the entire network to get that package delivered.  The only difference is that a window clerk wasn’t involved in the purchase transaction.  Of course, I’m still going to go to the post office to mail the package and the window clerk is still going to have to weigh it to make sure I haven’t cheated the Postal Service (on the website, I was on the honor system when I provided the weight), and the clerk will still have to scan the item as it enters the system. 

From there on, the package will be handled just as if it had been mailed the traditional way, without involving the website. The Postal Service is thus giving large discounts, often in excess of 10 percent, simply because the initial stage of the operation was handled using the website.  

Now, paying for postage online and creating a mailing label off your computer may be a convenience for some individuals and small businesses, but is it really something for which the Postal Service should be giving such large discounts?  Is the Postal Service really saving that much on the cost of conducting the transaction at the window?  Or has the Postal Service designed its pricing this way in order to discourage people from going to the post office?  Is the Postal Service trying to provide a convenience for customers, or is it simply making it easier to reduce window hours and staffing at post offices and eventually to close them?

The promotions for online transactions make it pretty clear that the brick-and-mortar post office is the ultimate target.  The Click-N-Ship website says, “Your Post Office Everywhere" and "Skip a Trip."   The Stamps.com website makes the point: “Never go to the post office again.”

 

Pricing competitive products

Besides giving Staples discounts on priority and giving regular customers discounts for online transactions, the Postal Service has created several product categories designed to benefit its largest partners.  Products like Parcel Select give large mailers, including UPS, FedEx, and Amazon, steep discounts for using the postal network’s last mile capabilities.  As with most competitive products, the details of these special programs are kept secret from the general public, so it’s hard to know what kind of discounts and services are being handed out.

That issue came up during last year’s Senate hearing titled “Outside the Box: Reforming and Renewing the Postal Service.”  During the first session, “Maintaining Services, Reducing Costs and Increasing Revenue Through Innovation and Modernization,” Senator Claire McCaskill of Missouri questioned Postmaster General Donahoe pretty closely on the sorts of discounts available to large mailers (hearing video, at about 1:26).

The exchange is interesting on several levels.  Senator McCaskill begins by asking the PMG if she can mail at the same costs as the larger mailers. The PMG is somewhat evasive but eventually explains that the Postal Service charges less for Parcel Select (available only to big mailers) than Priority Mail (the comparable product available to regular customers) because Parcel Select is exclusively last mile while Priority Mail uses the whole network. 

The Senator’s real concern in the exchange is that the fees being charged the large mailers do not sufficiently compensate the Postal Service for the cost of delivering this mail.  Underlying the issue is the arcane way that Congress, the Postal Service, and the PRC have decided how costs should be apportioned.

 

Covering costs and raising questions

Competitive products are required to cover their basic transactional costs, that is, the costs that are directly associated with the processing and delivery of the item.  Beyond that, competitive products are also required to contribute 5.5% to the overall institutional costs of the Postal Service.  That’s a rather low amount, especially since competitive products make up an ever-increasing share of postal revenues (and presumably costs).  In its recently released Financial Analysis of the Postal Service’s reported financial results and financial statements, the PRC shows figures that indicate competitive products make up about 20.5% of postal revenues.

How costs are apportioned — e.g., what is transactional and what is institutional — is a very complicated subject, and it has become a source of considerable controversy.   Some stakeholders, like UPS, argue that competitive products ought to support more of the institutional costs as their importance grows.  (See the comments UPS submitted for the current Annual Compliance Review.)

This is interesting because, on the one hand, UPS competes against some of the Postal Service’s competitive product offerings.  If those products had to contribute more to institutional costs, the Postal Service would have to charge more for them, which would make it easier for UPS to compete.  On the other hand, UPS benefits tremendously from low Parcel Select rates since it can rely on the Postal Service to supply the most expensive part of the network, the last mile.  The situation gets even more complicated when you consider that UPS, along with FedEx, has become essentially a monopoly transportation provider to the Postal Service. 

As a result of the complicated relationship between the Postal Service and corporations like UPS, all sorts of questions arise.  Why would UPS want to maximize the fees it charges the Postal Service for transporting mail, thereby raising costs?  Does UPS want to continue to benefit from low cost access to the Postal Service’s last mile network?  Is UPS concerned that the Postal Service’s package products like Priority mail and First class packages compete with its own offerings, so it wants the costing system to attribute a greater percentage of costs to competitive products, thereby likely raising prices on those products?

 

Pricing for the public interest

These are the sorts of questions that arise from the way costs are determined and apportioned under current law.  So Senator McCaskill was certainly on to something when she asked if the Postal Service was charging enough for Parcel Select.  There’s every reason to be concerned about the way large corporations like UPS, FedEx, and Amazon are influencing the policies of the Postal Service.

The Postal Service’s last mile capability was built on the need to get First Class mail to every home and business.  As the composition of mail shifts and as we find new uses for the network infrastructure, it’s clear that package delivery, especially that part arising out of e-commerce, is going to be very important in sustaining a public postal network.  If the postal network fills its traditional role, then we know that we’ll have a broad infrastructure that serves every American, an infrastructure that shares and spreads opportunity and that is inclusive rather than exclusive.

The pricing for Parcel Select is very cheap.  As we see on Table 26 on page 34 of the PRC’s Financial Analysis, there were about 1.3 billion pieces of Parcel Select mail in 2013.  This mail generated about $1.9 billion in revenue. That works out to about $1.48 per piece.  Because the data regarding pricing for Parcel Select to individual customers like FedEx or UPS is nonpublic, we don’t know what their volumes or price deals are.  But is a buck fifty a package enough to support a last mile network?  Is it enough to support a postal system committed to serving the public interest?

 

Get yourself a postage meter

Competitive products aren’t the only place where the Postal Service is giving away the store.  The rate increase that was implemented in January came with a provision that offered a one cent discount off the basic First Class letter rate for those who use a postage meter.  This basically subsidizes companies like Pitney Bowes and Stamps.com. 

Actually it gets even better.  A recent 10-Q report filed by Stamps.com with the SEC contains the following tidbit:

“Customers typically pay us a monthly service fee ranging from $15.99 to $39.99 depending on the service plan.  In certain circumstances, customers may be on a plan where they do not owe us any monthly service fees.  We have an arrangement with the USPS under which if a customer or integration partner prints a certain amount of Priority or Express Mail postage, they can qualify to have their service fees waived or refunded and the USPS compensates us directly.  In addition, we also have plans for less than $15.99 which offer more limited functionality targeted at retaining customers who print a lower volume of postage.”

In other words, not only do folks qualify for online discounts and commercial based pricing, but at certain levels the Postal Service will pay the service fees customers incur with private, for-profit companies.

 

From discounts to dismantling

Giving discounts to Staples and online customers and making deals with competitors like FedEx and UPS may look like good business practices, but there’s more going on here than the Postal Service wants to acknowledge. 

Putting postal counters in big box stores and encouraging people to go online instead of going to the post offing aren’t just about customer convenience — they’re about replacing post offices with cheaper alternatives.  Helping out FedEx and UPS with cheap prices for last mile delivery isn’t just about bringing in new revenue — it’s another way to facilitate the privatization of the postal system.

While Pat Donahoe says talk of privatization is a ruse, these discount deals, like so much else the leadership has done, inevitably take us in that direction. Congress may not be prepared to sell the Postal Service to a private conglomerate, but that doesn't prevent postal leadership from privatizing in a piecemeal manner.  It’s a lot easier that way.

(Image credits: Staples-USPS store (exterior and interior; Evan Kalish); redacted Staples contract; USPS CPU; Express 1 ad; Click-N-Ship ad; Senator McCaskill; UPS driver; PRC table; Stamps.com ad)

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