The Postal Service opens Round 3 in the fight over the exigent rate increase

January 5, 2016

Yesterday the Postal Service filed a brief with the U.S. Court of Appeals, District of Columbia, arguing that the Postal Regulatory Commission was wrong in its most recent ruling on the exigent rate increase. 

The Postal Service wants the case remanded to the Commission for further review so that it can renew its arguments for an extension of the 4.3 percent surcharge, which otherwise will come to an end sometime this spring, probably in April.

Yesterday’s brief does not specify how much more money the Postal Service believes it is entitled to recoup from the surcharge, but back in June the Postal Service offered a couple of scenarios for recalculating lost revenue due to the recession. 

In one scenario, the Postal Service would be due another $3 billion in contribution (profit), which would extend the surcharge about a year and eight months.  In the second, the Postal Service would be due another $8.66 billion in contribution, which would extend the surcharge for almost five years.

The main issue at stake at this point in the proceedings is the Postal Service’s “ability to adjust” to lower volumes.  In yesterday’s brief, the Postal Service argues that the Commission has taken positions on this issue that are “illogical,” “absurd,” “hopelessly inconsistent,” “self-contradictory,” and ultimately “arbitrary and capricious” — the legal grounds for remand.

 

Round and round

The Commission has issued four orders on the exigent rate increase, and this is the third time the Postal Service has turned to the Court of Appeals to fight a ruling.  Along with yesterday's brief, the Postal Service filed an appendix containing all of the rulings, briefs, and comments filed on the case.  It runs to over 600 pages.

The Postal Service first filed a request for an increase in 2010.  The Commission’s first order (No. 547, September 2010) denied this request on the grounds that that the Postal Service had failed “to quantify the impact of the recession on postal finances, address how the requested rate increases relate to the recession’s impact on postal volumes, or identify how the requested rates resolve the crisis at hand.”

In response, the Postal Service petitioned the Court of Appeals, which remanded the case back to the Commission “to fill the statutory gap by determining how closely the amount of the adjustments must match the amount of the revenue lost as a result of the exigent circumstances.”

The Commission’s second order (No. 864, September 2011) clarified the meaning of losses “due to” the recession and directed the Postal Service to “quantify the net adverse financial impact of the exigent circumstances.”

That order went unchallenged and nothing much happened for a couple of years (aside from the mailers lobbying the Postmaster General not to renew the request), but then in September 2013, the Postal Service filed a new request for a permanent 4.3% increase.

The Commission’s third order (No. 1926, December 2013) granted the increase of 4.3 percent, but it put a limit on how much the Postal Service could collect — $2.8 billion in additional contribution, which takes about 18 months to make.  The increase went into effect in January 2014, and it was set to expire sometime in August 2015.

The Postal Service petitioned the court of Appeals for a second time, and in June 2015 the Court again remanded the case back to the Commission, saying the Commission had erred when calculating how much the Postal Service had lost due to the recession.  The Commission had counted each year's losses only once rather than carrying over one year’s losses to the following year.  

In its next order on the case (No. 2623, July 2015), the Commission corrected this “count once” flaw and extended the surcharge for an additional $1.2 billion in lost contribution.  That extended the surcharge another eight months.

In September 2015 the Postal Service returned to the Court of Appeals for a third time, and yesterday it filed its initial brief in the case.  If the Postal Service’s appeal is not successful, the surcharge will end sometime this coming spring.  If the Court remands the issue back to the Commission, the increase may be extended yet again.

The Year in Review: The Postal Service submits its Annual Compliance Report for FY 2015

December 31, 2015

Earlier this week the Postal Service submitted its FY 2015 Annual Compliance Report (ACR) to the Postal Regulatory Commission.  Over the next few weeks, the Commission will review the report, request more information, give stakeholders an opportunity to comment, and then, sometime in March, issue its own Annual Compliance Determination (ACD) report.  The USPS ACR is on the PRC website here; last year’s PRC ACD report is here.  

The main goal of this process, as described in 39 U.S.C. § 3652, is to "analyze costs, revenues, rates, and quality of service" in order to ensure that all postal products have complied with the law.  In particular, the compliance review in intended to determine if each product is covering its attributable costs so that one product doesn't subsidize another.  

The 2015 ACR runs to 73 pages, plus 42 library references available to the public and 29 others that are nonpublic.  It's a huge amount of material — and the Commission will ask for still more — but almost all of it is about costs, rates, and revenues.  

In order to satisfy the statute's requirement about "quality of service," however, the ACR contains a brief section (pp. 56-62) about service performance (delivery speed), customer satisfaction, and customer access to postal services (e.g., the number of post offices closed and suspended, wait time in line, etc.). 

It looks as though not a lot has changed over the past year with respect to customer access, and there's actually some happy news to report.  As in FY 2014, there were no post office discontinuances in FY 2015, and compared to last year, fewer emergency suspensions took place and fewer blue collection boxes were removed from the street due to low volumes.

On the other hand, the ACR shows that the average wait time in line at the post office has increased for the first time in a few years, and on-time service performance for delivery has declined from last year.  Perhaps as a result, customer satisfaction has dropped for a second year.  

More on these matters in a moment, but first a word about the main subject of the ACR, cost coverage.

 

Covering costs and cross subsidies

As in previous ACRs, the 2015 ACR shows that nearly all market-dominant products cover their costs (some by a significant percentage), but a few do not — Standard Flats, Standard Parcels, Periodicals, Media Mail, and Inbound Single-Piece First-Class Mail International mail. (The Library Reference on costs, revenues, and cost coverage is on the PRC website here and Google Drive here.  There more on the issues with International mail in this recent OIG report.)

Similarly, every competitive product covered its costs in FY 2015, with just a few exceptions, including two Negotiated Service Agreements (NSAs).  In addition, again as in years past, the workshare discounts on several products exceeded the estimated cost avoidance.  All of these issues will be addressed during the compliance review.

Another important matter will be the question of whether or not competitive products are being cross-subsidized by market dominant products. 

For several years, the United Parcel Service has been arguing that the products with which UPS competes — i.e., most USPS shipping services — are not generating enough revenues to cover their costs.  If true, it would mean that market dominant products are unfairly and illegally subsidizing competitive products.

UPS has therefore been pushing the Postal Service and the PRC to change the methodologies for allocating costs.  UPS made comments along these lines during the previous ACD review, and it will no doubt do so again.  A few weeks ago UPS also initiated a PRC docket (No. RM2016-2) that addresses the issues with cost allocation and proposes new methodologies.  To further its case, UPS has also sponsored a couple of reports by economist Robert Shapiro, which you can find here and here.  (There’s an excellent discussion of the subject in a previous post by Mark Jamison.)

While the issues about allocation get very technical, the bottom line is clear enough.  UPS wants to increase the amount of money that competitive products must contribute to the cost of operations, which would force the Postal Service to increase its prices on these products in order to cover these higher costs.  That would obviously be beneficial to UPS. 

In the ACR filed this week, the Postal Service challenges the UPS argument.  According to the Postal Service (as shown in this table), competitive products cost about $12.2 billion to process and deliver, while they brought in about $16.4 billion in revenues.  “Therefore,” observes the Postal Service, “based on these estimates, it is clear that competitive products in FY 2015 were not cross-subsidized by market dominant products, and thus were in compliance with subsection 3633(a)(1).”  That won't be the last word on the subject, however.

South Florida P&DC goes for $5.8 million more than the USPS sold it for, just two months ago

December 16, 2015

The City of Pembroke Pines, Florida, just got a nice Christmas present, courtesy of the U.S. Postal Service.

On October 23, 2015, the Postal Service closed on a deal to sell the South Florida P & DC to the City of Pembroke Pines for $17.88 million.  Today, less than two months later, the City announced that it had sold the 27-acre property to Miami-based Terra World Developers LLC for $23.5 million. 

The City of Pembroke Pines thus made a quick and hefty profit of $5.7 million, pretty much at the expense of the Postal Service. 

One has to wonder why CBRE, the Postal Service’s exclusive real estate agent, wasn’t able to get more for the property.  How was the City of Pembroke Pines able to find a buyer willing to pay $5.8 million more than the City had paid the Postal Service, just two months earlier?  It’s not as if property values have soared since October, and it’s not likely that the City made any improvements on the property that would be worth that kind of money. 

The CBRE flyer on the property doesn't provide an asking price, but when the property was first put up for sale in February 2015, the Sun Sentinel reported that the Broward County Property Appraiser’s Office had appraised the land (27 acres) at $13.2 million and the building (345,377 square feet) at $18.7 million.  That adds up to nearly $32 million — $14 million more than the Postal Service got for the sale.

When the Postal Service disposes of a property, it goes through a competitive bidding process, and that’s what happened in this case too.  The property was listed on the USPS-CBRE Properties for Sale website, and a CBRE VP told the Sun Sentinel in February that his company had already led three tours through the property with a dozen potential buyers.  No doubt many others looked at the property after that, perhaps including Terra World, since the company is also developing another nearby property.

The Sun Sentinel reports that the City of Pembroke Pines went through a similar bidding process to sell the property, and “Terra World won out over a dozen offers submitted to the city.”  It is unclear why was the City’s bidding process was so much more successful than CBRE’s.

The property, which is located at 16000 Pines Boulevard, had been owned by Postal Service since the early 1990s. The processing facility was closed in 2013 as part of phase one of the Network Rationalization plan.  A Post-Implementation Review (PIR) found the Postal Service is saving about $26 million a year from the consolidation.  

The Postal Service has maintained a retail post office on the property by leasing space from the City of Pembroke Pines, but it’s not certain that arrangement will continue once Terra World begins developing the building.  The company plans to turn the postal facility into a modern commercial and retail space, while the land will be developed into a subdivision with 120 single family homes. 

Pembroke Pines Mayor Frank Otis was very pleased with the deal his city had made on the property.  "This is outstanding for our city,” said the Mayor, “not only bringing in revenue but giving our residents and new residents the opportunity to purchase single family homes and shop at the same location."

This is not the first time Pembroke Pines has made a profit by purchasing and re-selling property.  Several years ago, the City bought up 80 acres for a civic center, and then earlier this year it sold the land to developers (including Terra World) and made a $3 million profit.  But in that case, the City's total investment for the land and improvements was $63 million — considerably more than the USPS property cost —  and many years had passed between the purchase and re-sale — not just two months.

The USPS Office of Inspector General has been investigating the Postal Service’s contract with CBRE, and it has issued several critical audit reports, even going so far as to recommend termination of the contract and to refer some sales to the Office of Investigations for further review into possible criminal violations.

One of the main issues has been whether or not CBRE has sold properties below market value.  That's the subject of a report by investigative journalist Peter Byrne entitled Going Postal: U.S. Senator Dianne Feinstein’s husband sells post offices to his friends, cheap.  (Available on Amazon here.)  Byrne looked at about 50 sales and found that 80 percent of the properties had been sold below their assessed value, sometimes to CBRE’s clients and business partners.

There may be a simple explanation for why the Postal Service sold the South Florida P&DC for nearly $6 million less than the City got for the property, but there may be more to the story.  Perhaps the OIG will look into the matter.

(Photo credit: Former South Florida P&DC: exterior; interior)

A Bill of Rights for the Post Office

December 7, 2015

Some people just love to complain about the Postal Service, but the vast majority of Americans are pretty happy with the service they receive at their post office.  In fact, several new surveys show once again that people think the post office is just fine.

According to a new Gallup poll, Americans rank the customer service they receive at post offices among the best in the nation — third behind banks and pharmacies. The survey found that 30 percent of adults say they received “excellent” service at a post office they visited during the past month, and another 49 percent said the service was “good.”

Another new survey by Pew Charitable Trust found that 84% of Americans have a favorable view of the Postal Service – the highest rating among 17 agencies and departments tested.

Earlier this year, the U.S. Customer Experience Index (a product of Forrester Research) similarly found that the Postal Service was at the top of the list for federal agencies. 

As Jim Nemec, vice president of Consumer and Industry Affairs at the Postal Service, told Nextgov.com in an article this week, “With customers, with employees — especially our mail carriers — we’re obsessed with customers and gaining their trust.  Everyone has a vested interest in being customer-centric.”

While postal employees may be doing a great job gaining the trust of customers, the Postal Service is not doing all it could to improve things at the place where most people experience the Postal Service — their neighborhood post office.  Unfortunately, the Postal Service doesn’t always give post offices the attention they deserve. 

After all, the big mailers (who are responsible for the vast majority of mail volumes) drop their mail at processing facilities and don’t use post offices.  In fact, the Postal Service would prefer that regular retail customers found other ways to do postal business, like online at USPS.com or at a private shipping company or at a counter in a Staples store — all of which are cheaper ways to bring in retail revenues than post offices.  (There’s more on that in this previous post.)

As a result, the Postal Service puts a lot of money and effort into encouraging customers to “migrate” from post offices to the alternative channels.  But vast numbers continue to use the post office anyway.

 

Visits to the post office

While the news is filled with stories and opinion pieces about how the Postal Service is becoming "obsolete," the number of people who use the post office continues to be immense.

The USPS 2014 Household Diary Study states that “in spite of a declining frequency of visits over the past several years, the use of post offices for mailing services continues to dominate the mail service industry.”  The survey found that 53 percent of all U.S. households patronize a post office at least once a month, and over 24 percent visit the post office three or more times a month.  

That translates into a huge number of visits.  According to a 2015 OIG report entitled "Window Retail Customer Service," in fiscal year 2012, the retail network had 840 million customers who conducted 1.7 billion transactions.  

Along similar lines, the USPS 2014 Postal Facts reports that there were nearly one billion “retail customer visits” to the post office in 2013.  That number doesn’t include all the other types of visits that don't involve a retail transaction, like picking up mail at a PO box or receiving a package at the window.

By the way, it’s interesting to note that the 2015 Postal Facts no longer includes data on customer visits to the post office.  The new Postal Facts instead emphasizes how many people are using online services — yet another indication of how the Postal Service encourages customers to migrate from the post office to alternative channels.

While the Postal Service may one day succeed in making post offices obsolete, we're a long way from that dubious goal right now.  Millions of people still depend on the post office, and use of the post office “continues to dominate the mail service industry.”   The Postal Service should therefore be doing everything it can to ensure that every post office is functioning as effectively as possible.

 

The 1967 Postal Bill of Rights

Improving service at the post office has been on the agenda for a long time.  Back in 1967, as part of a mandate from President Johnson to improve service at all federal agencies, the Postmaster General, Larry O’Brien, implemented a Postal Customer’s Bill of Rights.  

O'Brien, by the way, was instrumental in transitioning the Department of the Post Office into the quasi-independent Postal Service.  After serving as PMG (1965-68), he returned to work for the Democratic Party, and in 1972 his offices in the Watergate complex were burglarized.  He'd go on to become commissioner of the NBA.  

According to news reports at the time, O'Brien's Postal Bill of Rights was to be displayed on posters in the post office lobby and at service counters.  Its ten points specified the kind of treatment customers had a right to expect at the post office: 

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