When Titans collide: UPS petitions the PRC to change USPS costing methodologies

October 26, 2015


The United Parcel Service is very concerned that you might be paying too much for a postage stamp.  

If you’re wondering why UPS would be worried about something like that, it has to do with the way postal rates are set.  According to the law, each USPS product is supposed to cover its share of the Postal Service’s operating costs, which includes costs attributable to that product as well as a share of total institutional costs.  

UPS believes that market-dominant products — First Class mail, Standard mail, and periodicals — are covering more than their fair share of the Postal Service’s operating costs, while competitive products — Priority and most shipping services — are not paying enough.

As a result, argues UPS, the average customer who buys a First-Class stamp is paying too much because part of the stamp’s price is being used to subsidize competitive products.  UPS wants the cost allocation methodology changed so that competitive products pay a larger share of the Postal Service’s operating costs. 

Then the Postal Service will to have to raise the prices of the products that UPS competes with, which will put UPS in a better competitive position and increase its profits.  UPS doesn't really care that some USPS customers are paying too much for postage.  UPS cares about UPS.


The UPS petition

UPS has been complaining about the costing methodology for many years, but in recent weeks it has intensified its efforts to get the Postal Regulatory Commission to do something about the problem.  In a petition recently filed with the PRC, UPS argues that the costing methodology used by the Postal Service and PRC is seriously flawed, and it recommends several changes that are intended to make the system fairer and bring it into compliance with the law.  (The UPS filing is in PRC Docket Number RM2016-2.)

Under the current system, says UPS, the Postal Service is using its monopoly powers to gain an unfair competitive advantage in the parcel delivery market.  UPS argues that the Postal Service should be allocating a larger share of its operating costs to competitive products, the products that compete with UPS.

If the PRC were to approve the UPS proposals, the Postal Service would need to raise the prices of its competitive products significantly — much more than the 9.5 percent increase announced a few days ago.  UPS would find itself in a much more competitive position.  It could raise its own prices and/or grab a larger share of the parcels market.  That would be good for UPS’s bottom line, but it would come at the expense of the Postal Service.

UPS is already the largest parcel delivery company in the world.  According to a 2014 Forbes article, the company claims 54 percent market share in the e-commerce package delivery market, as compared to FedEx, with 34 percent, and the Postal Service, with about 16 percent — a substantial part of which is providing last-mile service for UPS and FedEx.

In its most recent annual report, UPS shows earnings of $4.39 billion and earnings per share of $2.68. The report claims that UPS will return $30 billion to investors over the next five years.

This is not the picture of a company suffering from unfair competition.  But UPS apparently wants a bigger share of the pie.

The concerns that UPS raises in its petition in RM2016-2 are not wholly without merit, but they are overwrought and disingenuous.  That’s not surprising.  There’s a lot at stake. 

The proposals presented by UPS would affect not only affect the price of nearly every postal product but also the future viability of the Postal Service.  RM2016-2 promises to be a very significant docket.


Did yesterday’s election just kill mass conversion to cluster boxes in Canada?

October 20, 2015

Yesterday’s election in Canada may mean the end for Canada Post’s plans to convert five million addresses from door-to-door delivery to cluster boxes.

After a decade in power, the Conservatives were routed in a landslide by Justin Trudeau and the Liberal Party.  The Liberals had previously vowed to end the conversions and to conduct a thorough review of Canada Post.  On their website, the Liberals say this:

“We will stop the Harper Conservatives’ plan to end door-to-door mail delivery in Canada. We will begin a new review of Canada Post to ensure that the Crown Corporation is fulfilling its public mandate to provide high-quality service at a reasonable cost to Canadians — urban, suburban, and rural.  We disagree strongly with the Conservative decision to ask Canadians to pay more for a reduced quality of service.”

It doesn’t look like Canada Post has gotten all that far in the conversion to cluster boxes, known euphemistically in Canada as Community Mailboxes and Super Mailboxes.  According to a March 2015 progress report, about 100,000 addresses were converted in 2014, and the goal was 900,000 more in 2015. 

Even if Canada Post were to achieve that goal, which seems very optimistic, it would mean only about 20 percent of the total conversions would have taken place.  There will be four million more to go. 

It’s been clear to the leaders of Canada Post that a Liberal victory in the election could spell trouble for its cost-cutting plans.  One news report even suggested that Canada Post was trying to get as many community mailboxes installed before the election as possible, as suggested by the fact that October 19 — the day of the election — was the target date for another round of conversions.   Canada Post said, however, that the scheduling was purely coincidental.

Canadians have not been happy about the conversions, and the issue probably played a role in the election. The protests have taken many forms.  

In London, a city in Ontario, an internationally renowned visual artist and activist named Rob Benner has been creating garden-art installations on top of the concrete pads that Canada Post had laid for the mailboxes.  He calls it an act of "guerrilla gardening."

In Hamilton residents occupied one site for several weeks this summer to stop a community mailbox from being installed.  They set up a tent, camped out, sat on lawn chairs, parked cars to block off the area, and held a mini-block-party.  

In Edmonton, one man camped out on his front lawn trying to keep the mailbox from being built on his property.   After Canada Post had dug up the plot on his lawn where the box would sit, he covered it over and vowed to sit on his front lawn until Canada Post found a new location for the box.  It wasn’t long before he received a note from Canada Post saying the box would be moved up the block onto another person’s property.

Apparently that's not unusual.  According to CBC News, Canada Post has admitted that "fully 30 per cent of the mailboxes are eventually moved from their original planned locations, based on feedback from the residents and municipalities."

In Montreal, back in August, Mayor Denis Coderre took a jackhammer to a community mailbox under construction near a Montreal park, a location he claimed had been selected “without any consultation" with city officials.  Coderre called on the political parties to tell the public where they stand on the future of Canada Post and its decision to halt home mail delivery.

Some Canadians are concerned that the community mailboxes are lowering property values.  One realtor says he recently lost a sale because the home was next to a large super mailbox.  There has even been talk of giving homeowners a tax break because of a box on their property.  That actually happened back in 1998 when there was a previous push for cluster boxing.

In the meantime, here in the U.S., the Postal Service is taking more steps to install more cluster boxes.  It remains USPS policy not to change a customer’s mode of delivery without permission, but the Postal Service can do other things to promote cluster boxes. 

Using the Census to analyze USPS on-time performance

October 14, 2015

The mail has been slowing down all across the country, but are rural areas suffering worse on-time delivery than urban areas? 

That’s the question behind a recent GAO report about the Postal Service entitled “Actions Needed to Make Delivery Performance Information More Complete, Useful, and Transparent.”

The GAO report was done at the request of several senators representing rural areas who have been hearing from their constituents that the mail has been taking much longer to arrive than is normal.  

Just today there's an op-ed in the Idaho State Journal about how the mail delays in Idaho are "unacceptable," as well as a news report in which Senator Jon Tester of Montana is quoted saying, "Montanans tell me that there are serious delays in mail delivery."

The GAO criticizes the Postal Service and the Postal Regulatory Commission for not doing enough to ensure that rural areas are getting the same delivery service as urban areas.

Of course, slower delivery times are the norm these days, and the problems are national, not just rural.  The Postal Service relaxed its delivery standards in July 2012 and again in January 2015 as part of its effort to consolidate mail processing plants, and the quarterly service performance reports indicate that the Postal Service is having trouble meeting even these more relaxed standards.

But these lower standards and the poor performance results are not the main focus of the GAO report.  Instead, as its title indicates, the GAO report is about making the service performance reports more "complete, useful, and transparent."


Issues with measurement and reporting

When the GAO went to look at the issues with declining service in rural areas, it found basic problems with the way the Postal Service measures and reports its performance, problems that made it impossible to determine what was going on in rural America.  And since the PRC is supposed to be overseeing service performance, it too came in for its share of criticism from the GAO. 

According to the GAO, the USPS performance reports do not include “sufficient analysis to hold USPS accountable for meeting its statutory mission to provide service in all areas of the nation.”  That’s primarily because the reports don’t specifically include information about service performance in rural areas.

The Postal Service told the GAO that it would be “cost prohibitive” to improve reporting on delivery performance in the ways outlined in the report, particularly with respect to differentiating between urban and rural locations.

One of the GAO's recommendations, therefore, is that Congress should direct the Postal Service to provide estimates for what it would actually cost to change its measurement systems.

In response to the GAO report (even before it was published), the Postal Service and the PRC began working on how they might change things to improve reporting and oversight.  The situation is further complicated by the fact that the Postal Service has proposed significant changes to the way it gathers the data for the performance reports.  So it may be a while before they come up with a system that will measure urban and rural delivery performance — if that is even going to happen at all.

In the meantime, it’s worth looking at the basic question underlying the GAO report: Are rural areas getting worse on-time delivery service than urban areas? 

The short answer is perhaps, but not necessarily. 


The performance reports at first glance

If you look at the service performance reports that the Postal Service shares with the PRC, it appears that districts likely to be very rural often have better performance than highly urbanized districts. 

For example, consider the performance report for Single-Piece First Class Mail for the third quarter of 2015, year to date, which can be seen here.  (All of the performance reports are on the PRC website here, now easier to find in response to another GAO criticism.)

For the New York district, which is obviously very urban, 86.2 percent of 2-day mail arrived on time, and 66.3 percent of 3-5 day mail arrived on time.  For the Dakotas district, which is presumably very rural, 95 percent of 2-day mail arrived on time, and 73.8 percent of 3-5 day mail arrived on time. In this case, the rural district had better on-time performance.

Looking deeper into the service performance reports, it’s hard to generalize because it's not obvious which of the 67 USPS districts are predominantly “rural” and which are mostly “urban.”  That points to a basic issue with analyzing service performance.  

As the Postal Service told the GAO, every district contains at least one area that’s urban, so it is problematic to classify any district as either "urban" or “rural.”

But perhaps that's not necessary.  It might instead be helpful to consider which districts are more rural than others, i.e., which ones have a greater portion of the population living in rural areas.  The U.S. Census can help with figuring that out.


Return to sender, address unknown: USPS v. SCE and the high cost of undeliverable mail

October 11, 2015

I gave a letter to the postman,
He put it his sack.
Bright and early next morning,
He brought my letter back.
She wrote upon it:
Return to sender, address unknown.
No such number, no such zone.
“Return to Sender”
Lyrics by Otis Blackwell, Winfield Scott

A couple of weeks ago, James E. Boasberg, U.S. District Judge for the District of Columbia, issued a decision on a dispute between the Postal Service and one of its customers, Southern California Edison (SCE), the utility company.  The case goes back to 2008 and involves a fine the Postal Service wanted to charge SCE for the cost of mail that was undeliverable-as-addressed (UAA).

Judge Boasberg seemed somewhat disturbed by the irrationality of some USPS policies, and he wasn't above a little ridicule (as noted by Dead Tree Edition).  At one point his ruling says that following certain USPS regulations would create an “absurd consequence” that would put customers into a “Kafkaesque situation.”  The judge also couldn't pass up the opportunity to quote the lyrics from "Return to Sender."  

Even more irrational than the policies, however, was the huge bill the Postal Service sent SCE for UAA mail — $7.6 million.  SCE wouldn't pay, and the company had to take the Postal Service to court for relief.  Here's what happened.


The revenue-deficiency assessment

During an eighteenth-month period in 2007 and 2008, SCE sent out 82 million pieces of First Class mail, mostly invoices.  Because SCE had the mail presorted, it was given a substantial workshare discount. 

In May 2008, the Postal Service conducted a nationwide review of mail that was being returned as UAA.  It showed that a significant — but unspecified — number of mail pieces sent by SCE were UAA.

The UAA mail was costing the Postal Service a lot of money because of the additional expenses for forwarded or returned mail, and the Postal Service wanted to charge SCE a “revenue-deficiency assessment.”

The Postal Service argued that SCE had not followed USPS procedures for verifying customer addresses, a requirement for discounted postal rates.  In particular, SCE was not following the Move Update standards, which require “periodic matching of a mailer’s address records with customer-filed change-of-address orders received and maintained by USPS.”  

As explained in the court’s ruling, SCE would manually override Postal Service change-of-address information when “SCE had good reason to believe that the override would make the customer more likely to receive the mail.”

That may have seemed like a reasonable thing to do, but it violated USPS policies, and this, said Judge Boasberg, put customers in a Kafkaesque situation.  

Because SCE fell short of the Move Update standards, the Postal Service wanted to hold SCE liable.  The Postal Service and SCE argued about the issue for years, and in 2014 the dispute went to court.  At issue in the legal case was whether SCE owed an assessment, and if so, how much it should be.


Not reasoned decision-making

The controversial aspect of the case was that the Postal Service didn’t simply want remuneration for the extra expenses it had incurred dealing with SCE’s UAA mail.  Instead, the Postal Service wanted SCE to be liable for the difference between the discounted workshare rates and the regular non-discounted rates for all of the mailpieces sent at the reduced price — not just the portion that was UAA. 

In other words, the Postal Service wanted to retroactively cancel the workshare discount  and charge SCE the full price for all of the mail it had sent at the workshare rate.

According to the Postal Service, the difference between the workshare rate and the regular rate came to $7.6 million, and that’s how much the Postal Service wanted SCE to pay.

The court’s ruling doesn’t get into it, but the discounted rate was probably something like 33 cents per piece, 9 cents off the regular rate for single-piece First Class Mail at the time, bringing the total cost of the mailings to about $27 million.

Judge Boasberg’s ruling last week found that SCE should pay something for getting a discount while not fulfilling the Postal Service’s requirements for the discount, but he thought that the $7.6 million sought by the Postal Service was excessive. 

The court therefore remanded the case back to the Postal Service “to "correctly determine a reasoned and reduced sum for the proper revenue-violation deficiency assessment."

The court observed that the Postal Service never identified the precise number of mail pieces that were in noncompliance, which didn’t help with its case.  But the court went ahead and did some figuring on its own to show just how off-base the $7.6 million fee was.

During an eighteen-month period in 2007 and 2008, SCE sent 82.4 million pieces of workshare-discounted First Class mail.  In the revenue-deficiency letter sent to SCE, the Postal Service cited “large volumes” of problem mail — “approximately 80 pieces per day of forwarding order expired mail” and “over 2,000 pieces per day of Undeliverable As Addressed (UAA) mail.”

Based on those numbers, the court estimated that the problems encompassed “at most roughly 1,179,000 mailpieces out of SCE’s total of 82,452,608 mailpieces sent at workshare rates during this period, or about 1.4%.”

Given that that such a small portion of the mail was UAA, Judge Boasberg had this to say:

"USPS's position appears to be that even if a mailer complies with 99 percent of the requirements and incurs substantial workshare expenses to bring its mail pieces into compliance, a single form of noncompliance — even accidental, even inconsequential — is sufficient to render a revenue-deficiency assessment for 100 percent of a mailer's discounted rates."

The judge went on to say that to "issue a revenue deficiency for the entirety of plaintiff's discounted-workshare rate for 18 months is so disproportionate that it can hardly qualify as reasoned decision-making." 

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