On the border of the boundary wars: The PRC’s order on First Class Mail Parcels


Last month the Postal Regulatory Commission denied the Postal Service’s request to transfer retail, single-piece First-Class Mail Parcels from the market-dominant list to the competitive list, where it would have become a category of First-Class Package Services.

FCM Parcels are lightweight packages weighing 13 ounces or less, and they’re typically used by individuals and small businesses to ship things like eBay purchases, clothing, small tech products, and so on.  Larger single-pieces are usually sent Priority, and businesses that mail in bigger quantities use the commercial version of lightweight parcels, which costs less.  Commercial lightweight parcels have already been transferred to the competitive list, and the Postal Service wanted to complete the transfer with the retail version.

Classification cases like this are rather arcane and obscured by a lot of technicalities and legalities, and the PRC’s decision on FCM Parcels (Docket No. MC2015-7) is no exception.

But the FCM Parcels case is significant and deserves more attention than it’s gotten.  The case is likely to be cited as a precedent for future classification cases, and it involves fundamental issues about the core mission of the Postal Service and the scope of the postal monopoly.


An unusual case

The FCM parcels case was unique for a number of reasons.

First off, it took a long time.  The Postal Service filed its request in November 2014 and asked the Commission to reach an expedited decision by mid-January, before the next meeting of the Board of Governors.  The PRC ended up taking over nine months to issue its final order.

Since 2007, when the Postal Accountability and Enhancement Act (PAEA) divided the mail into the market-dominant and competitive categories, the PRC has heard about 365 classification requests.  The average length of time between the request and final order is about five weeks, and only a half dozen or so have taken longer than FCM Parcels took.

Second, the Commission almost always grants mail classification requests.  They usually just involve adding contracts with individual mailers to the competitive list, but a few have involved transferring products from market-dominant to competitive.  Looking at all 365 cases since 2007, it appears that only a couple of the requests have been turned down by the Commission.

One of the requests involved the rates for presorted First-Class Mail residual pieces and was considered a “minor” change (MC2013-30).  In the other case, the Postal Service wanted to move round-trip DVD mailers (the kind used by GameFly and Netflix) to the competitive list (MC2013-57).  The Postal Service argued that there was a lot of competition in the digital media delivery market, which would constrain its pricing, but the PRC rejected the request, finding that the Postal Service had “failed to verify that it lacked market power over the DVD mailers.”

The decision on FCM Parcels was unusual for a third reason.  Commission rulings on mail classification requests are almost always unanimous, but in the FCM Parcels decision, the Commissioners split, 3 to 2.  Commissioners Mark Acton, Ruth Goldway, and Nanci Langley voted to deny the request, and Commissioners Robert Taub and Tony Hammond voted to approve it.

Split decisions like this have occurred only a couple of times in mail classification cases.  In 2007, in one of the first classification cases after PAEA was enacted, the Postal Service requested approval for a Negotiated Service Agreement (NSA) with Bank of America, which also involved a mail classification change (MC2007-1).  Commissioner Dawn Tisdale dissented because he thought the Postal Service would lose money on the deal.

In 2014, the Commission approved the Postal Service’s request to add a new NSA with Valassis Direct Mail to the market dominant product list, which also required a change in the mail classification schedule (MC2012-14).  Commissioner Hammond dissented (for reasons not explained in a dissenting opinion).

In neither of these two cases does the dissent seem to have involved the sort of significant issues that the FCM Parcels case raises.

The FCM Parcels decision was unusual for another reason.  As Acting PRC Chairman Taub told the Parcel Shippers Association at its meeting February (while the case was still being heard), the PRC’s final order is likely to become a precedent for future cases involving the transfer of market-dominant products to the competitive list.  That may be why he and Hammond wrote such a lengthy, 14-page dissenting opinion.


The evolutionary approach

The market dominant and competitive categories were created by PAEA in 2006, but the idea for the two categories goes back a few years before.

In 2003, the President’s Commission on the U.S. Postal Service recommended that mail products be divided into competitive and non-competitive, later known as “market dominant.”

At that time, the rate-setting process was seen as “cumbersome and time-consuming,” so the idea was to let the marketplace determine the price for products where there was competition.  For non-competitive products, the law would limit increases and a Postal Regulatory Board (a new version of the Postal Rate Commission) would provide oversight.

The non-competitive or market-dominant products were to include those for which the Postal Service had a monopoly.  These included First-Class mail, standard mail, periodicals, and parcels.  The prices on these products is now limited by law to the rate of inflation (the CPI cap), with the exception of exigent increases for unusual circumstances (like the Great Recession).

All other types of mail were to be categorized as competitive, which currently includes most shipping services such as Priority Mail, Express Mail, and Parcel Select.  The Postal Service can set prices pretty much as it sees fit on these products (so long as they cover costs), but prices are supposed to be constrained by competition with private shippers.

These recommendations on classification and rate setting occurred in the larger context of what the 2003 President’s Commission was all about — privatization of the Postal Service.

The Commission had been created by President George W. Bush, and it’s clear from the report that the ultimate goal, at some distant point in the future, was full privatization.  But as the Commission’s report states, an “abrupt privatization” would be “far too risky and would unnecessarily destabilize universal mail service.”  Instead, the President’s Commission called for a gradual, “evolutionary” approach in which the scope of the postal monopoly would be “narrowed over time.”

One of the functions envisioned for the new Postal Regulatory Board was therefore, as the report states, to “periodically review the scope of the monopoly with an eye toward narrowing it over time, so long as a greater reliance on a thriving private postal marketplace can occur without sacrificing universal, affordable access to essential postal services.”

Thus, when the PRC approves a request from the Postal Service to add a product to the competitive list, something fundamental is going on: The Postal Service and the PRC are narrowing the scope of the postal monopoly as part of the evolution toward privatization.


The boundary line

Since 2006, when the recommendations of the 2003 President’s Commission were realized in PAEA, the PRC has approved the Postal Service’s request to reclassify several types of mail from the market-dominant category to the competitive.  Some of the most significant of the transfers have involved parcels.

In 2010, commercial Standard Mail Parcels was transferred to the competitive list (MC2010-36). In 2011, commercial First-Class Mail Parcels was reclassified as competitive and renamed Lightweight Commercial Parcels (MC2011-22).  In 2012, Parcel Post was transferred to the competitive list as well (MC2012-13).

Since commercial lightweight parcels had already been transferred to the competitive list, it seemed inevitable that retail, single-piece First Class Mail Parcels would also be transferred at some point.

This brings us to another reason why the PRC’s decision on this docket is potentially so significant.  Lightweight parcels represent a unique position in the postal system.

According to the 2003 President’s Commission, the “core mission” of the Postal Service is the delivery of letters, newspapers, magazines, ad mail, and parcels.  But as the Commission’s report states, this mission still leaves open a “complex web of questions” commonly referred to as the “boundary wars” between the Postal Service and its competitors.

The President’s Commission wanted to transform the Postal Rate Commission into what it called the Postal Regulatory Board, and one of its new responsibilities would be to “deliver clarity and certainty” about the scope of the Postal Service’s monopoly.

Toward that aim, the President’s Commission proposed what it called a “boundary line” setting the limit of the postal monopoly.  The monopoly would cover “any hard copy communication” that weighed less than 12 ounces and cost less than six times the price of a First Class stamp.  Private express carriers would be permitted to handle mail of less than 12 ounces, so long as they charged at least six times the price of a First-Class stamp.

That’s apparently how First Class Mail Parcels came to be defined as mail that weighs 13 ounces or less.  That is also why the Postal Service, if it had been permitted to transfer the product to the competitive list, was planning to raise the base price for the first three ounces from $2.45 to $2.94 (6 x $.49).

This hefty price increase — about 20 percent — was one of the main reasons the Postal Service wanted approval for the re-classification.

According to the revenue and pieces report, FCM Parcels brought in about $590 million in revenue in FY 2014.  A price increase of 20 percent would have meant another $118 million a year in revenue.  This is also one of the reasons Commissioners Taub and Hammond wanted the request approved.  (They put the estimate for additional revenue at $108 million.)

There are other reasons for transferring products to the competitive list.  Compared with market-dominant products, competitive products are subject to less transparency with respect to reporting requirements and less oversight in terms of service performance (i.e., delivery speed) — a concern expressed by Commissioner Langley in her concurring opinion.

While higher prices and less oversight may have been the immediate rationale for transferring FCM parcels to the competitive list, the transfer would have had a more significant impact.  It would have narrowed the scope of the Postal Service’s monopoly by changing where “the boundary line” is drawn.


The arguments

In order to persuade the Commission to approve the classification request, the Postal Service argued that it did not have “substantial market power” in the parcels business — one of the criteria for moving a product to competitive.

The logic behind this element of PAEA is that if the Postal Service has too much power in the market place, it will be able to set prices without being constrained by competition.  It could set the prices lower than the private carriers, which takes away some of their business and drive them to lower their prices.

The Postal Service therefore made a case that it has a relatively small portion of the overall parcel market.  For 2-3 day and ground markets under one pound, the USPS market share is 28.7 percent.  For the entire parcel market, the USPS market share is only 7.2 percent.

As a competitive product, argued the Postal Service, retail FCM Parcels would therefore not have a dominant market share, whether measured as a percentage of the under-one-pound segment of the market or the entire parcel market.

The Postal Service also argued that its pricing would be constrained by competition with its own Flat Rate Boxes and by competition with UPS and FedEx, which also handle lightweight parcels for retail customers.

The Postal Service’s arguments were countered by the PRC’s Public Representative and GameFly, the only stakeholder to comment on the case.

In its comments, GameFly argued that single piece FCMP did not really compete with FedEx and UPS because their products are priced significantly higher.  While the current price for FCM Parcels is $2.54 (with the exigent surcharge added on), the cheapest UPS and FedEx products cost much more —  $6.24 for UPS and $7.50 for FedEx.

As for the notion at the USPS Flat Rate Boxes would serve as a check on prices for FCM Parcels, GameFly argued that Priority Mail Flat-Rate Box cannot be seen as a competitive constraint on the price of First-Class Parcels because the Postal Service sets the prices for both.

The Public Representative made similar points and also complained about the Postal Service’s failure to provide sufficient evidence and for pressuring the PRC to expedite review of the request.  “The Postal Service,” concludes the PR, “should file sufficient documentation with its Requests in the first instance rather than seeking to pressure the Commission to approve an unwise and unjustified Request that obviously lacks critical supporting data.”


The opinions

The dissenting opinion submitted by Commissioners Hammond and Taub argues that the Commission had previously approved other parcel transfers to the competitive list, and this request was not significantly different.  They also criticized the Commission’s order for denying the request because the Postal Service had failed to provide enough evidence for its arguments.  The evidence was not much different than in the previous parcel cases.

The dissenting Commissioners point out that as a result of not being able to make the classification change, the Postal Service will lose out on well over $100 million a year.

“Equally important,” they go on to state, “the Postal Service’s competitors could face a market that is potentially distorted by an artificially underpriced product.”

“On a practical level,” the dissent concludes, “this mismatch between the Postal Service and its competitors potentially leads to artificial underpricing by the Postal Service and a potentially distorted market for everyone, with market share that would have flowed to private sector carriers possibly diverted to the Postal Service, simply due to First-Class Mail Parcels’ classification as market dominant.”

According to the dissent, rejecting the Postal Service classification request for FCM Parcels thus deprives the Postal Service of much needed revenue, is unfair to competitors, and disrupts the otherwise natural operations of the marketplace.

Despite the persuasiveness of these arguments, three commissioners voted to deny the Postal Service’s request.

Commissioner Acton seemed inclined to vote with Taub and Hammond, but he felt that the Postal Service had not provided enough evidence.  One gets the impression that his vote could swing the other way if the Postal Service returns with a more robust case.

Commission Langley suggests that the evidence shows there are really two markets for lightweight parcels — one for retail customers and one for commercial mailers.  She expresses concern for individuals and small businesses located in rural and remote areas because they do not have other options.

Commissioner Goldway’s opinion points to the issue of the postal monopoly itself.  As GameFly had argued during the case, “First-Class Mail Parcels is covered by the postal monopoly and may not be transferred out of the market dominant category.”

Goldway said that this concern “has merit,” and she concluded that in any future filings about parcels the Postal Service would have the burden of showing how the service is not covered by the postal monopoly.


Serving the public

As Mark Jamison has suggested in a previous post about transferring PO boxes from the market dominant to competitive lists, the existence of the two categories created by PAEA reflects two visions of the postal system : Should the post office be primarily a service to the country, or should it be a business that behaves like any other private company?

For those who believe in the ideology of the free market, government monopolies like the Postal Service are a problem because they “artificially” disrupt the equilibrium of the marketplace.  The laws of supply and demand can’t function properly in this kind of situation.

But the free market is perfectly capable of creating its own monopolies, which also causes distortions in the market.  Along these lines, it’s useful to recall the history of Parcel Post.

Back in the late 18th and early 19th centuries, four large private shippers controlled almost the entire parcel market.  According to postal historian Wayne E. Fuller, the private express companies “arrogantly served the public, rendered only mediocre service, made inordinate profits, and confused the public with some 600,000,000 rates” (as quoted by Christopher Shaw in Preserving the People’s Post Office).

At the time, the Post Office carried parcels that weighed four pounds or less, but the public, especially rural residents, wanted more service, and in 1913, universal parcel delivery became a reality.  As Shaw writes, “Parcel Post was introduced because citizens were fed up with the private express companies’ stranglehold on the industry.”

Nearly a century later, in 2004, this same concern for rural customers was on the minds of Congress when House and Senate committees were working on PAEA.  The House committee wanted to classify single-piece Parcel Post as a competitive product, but the Senate committee did not.

In its report on the proposed legislation (108-318), the Senate committee explained that “it decided to make single-piece Parcel Post a market-dominant product because of the negative impact we feared a competitive classification would have on those postal customers who live in parts of the country with fewer package delivery options.”

The committee left open the possibility that the Postal Regulatory Commission would at some point contemplate approving a transfer of parcel post to the competitive list.  If that should happen, the committee urged the Commission to “pay particular attention during their deliberations to the impact their decision could have on the affordability and availability of package delivery services in those communities without a fully-developed competitive package market.”

In 2012, Parcel Post was in fact transferred to the competitive list, as the Senate committee had envisioned.  It seems likely that First Class Mail Parcels will eventually be transferred as well.  The transfer won’t be an earth-shattering event, but it will further narrow the scope of the postal monopoly.  Eventually, the very raison d’être for the monopoly may cease to exist.

(Photo credit: First Class Mail Parcels by Homespun Haley; sending electronics, from a video on saving money with FCMP)

(A special thanks to Mark Jamison for his help on this post.)