The news media are busy this weekend reporting on the Postal Service’s financial report for fiscal year 2013, which shows a $5 billion loss. If Congress weren’t requiring the Postal Service to pay $5.5 billion into the retiree health benefits fund, the Postal Service would have made a profit of over a half billion dollars. Not that this could stop talk about the Postal Service “hemorrhaging money.”
However big or small the deficit, most everyone believes that the Postal Service’s losses over the past few years are due to the changing habits of big mailers and average customers. As the Postal Service reminds us at every opportunity — like when it wants to close a post office or consolidate a processing plant — we’re all using the Internet and email more and more, so mail volumes are dropping, and they’re going to continue to drop for the foreseeable future. There’s nothing to be done but “rightsize” the infrastructure, i.e., close facilities, eliminate workers, and sell off properties.
The Postal Service’s propaganda feeds the pundits and politicians who are pushing for more downsizing as a step toward privatization. But the problem facing the Postal Service is not the Internet, as the recent upswing in package services shows. The real problem is the economy. While the Great Recession may officially have ended in June 2009, its lingering effects continue to take their toll on mail volumes. The overall impacts of the economic crisis and the slow recovery have been staggering.
To get an idea of the relative impacts of the Internet and the Great Recession, it’s helpful to take a look at what’s going on over at the Postal Regulatory Commission. The PRC is reviewing the Postal Service’s request for an exigent rate increase — that’s an increase above the rate of inflation as measured by the consumer price index (CPI). The Postal Service wants to raise rates by 4.3 percent on top of the CPI increase of 1.7 percent. An exigent increase like that would bring in about $1.8 billion a year and go a long way toward solving the cash flow problem.
At the heart of the exigent case at the PRC is this question: What portion of the losses suffered by the Postal Service can be viewed as due to the recession, and what part is due to the Internet?
The Postal Service’s rhetoric blames the Internet, but in the case for an exigent rate increase, the Postal Service says it’s time for a dose of reality, and the reality is that most of the losses are due to the recession.
The case for an increase
The key clause in the Postal Accountability and Enhancement Act (PAEA) is Section 3622(d)(1)(E), sometimes referred to as the “exigency provision.” It says that postal rates “may be adjusted on an expedited basis due to either extraordinary or exceptional circumstances” when “such adjustment is reasonable and equitable and necessary to enable the Postal Service, under best practices of honest, efficient, and economical management, to maintain and continue the development of postal services of the kind and quality adapted to the needs of the United States.”
In order to make its case, the Postal Service must go through each phrase in that passage and show how it has fulfilled the requirements. So the Postal Service’s request for an increase explains why the increase is “reasonable” and “equitable,” how the Postal Service has implemented an array of cost-cutting measures in order to be “efficient” and “economical,” and why the circumstances of the recession are “extraordinary or exceptional.”
The Postal Service initially requested an exigent rate increase in 2010, but it was turned back by the Commission, primarily because of the implications of two key words in the exigency provision — “due to.” In Order No. 547, the Commission found that the recession could be viewed as an “exigent event,” i.e., it was extraordinary or exceptional, but the Postal Service had failed to adequately quantify what portion of its losses in 2008 and 2009 were “due to” these circumstances.
The Commission did not consider revenue lost due to diversion to the Internet as cause for an increase since electronic diversion is a long-term, predictable, systemic, and not extraordinary phenomenon. Only losses that could be shown to be “due to” the recession could be considered as grounds for an exigent rate increase.
The Postal Service appealed the PRC order to the U.S. Court of Appeals for the District of Columbia Circuit. The Court made several rulings about the interpretation of “due to,” but the bottom line was that the Postal Service was told to return with a “sources of change” analysis showing what part of the losses it had suffered was due to the recession as opposed to other factors like diversion.
In its renewed request for an increase, the Postal Service provides a “sources of change” calculation for five fiscal years, 2008 though 2012. The analysis incorporates numerous variables, some of which would cause volumes to increase (like population growth) and some that would cause volumes to decrease (like declining employment). The calculations distinguish between variables associated with the recession and macro-economy, on the one hand, and those associated with pre-existing trends for diversion and other non-recession factors, on the other.
The Postal Service has produced a mountain of data for the Commission to review showing just how much of its losses over the past few years are due to the recession as opposed to diversion. The estimates are based on over thirty years of work on econometric analysis by the Postal Service, using variables, equations, and calculations that attempt to explain the past and predict the future.
Meet Mr. Thress
The main witness for the Postal Service on the “sources of change” question is Thomas Thress. He’s the Vice President of a consulting firm, he has been working on mail volumes for over twenty years, and he’s testified to the PRC on volume forecasts and related matters going back to 1994. Judging by his testimony and answers to questions, it looks like Mr. Thress may be the Nate Silver of mail volumes.
Mr. Thress has provided the Commission with page after page of testimony and responses to questions posed by the participants in the proceedings, as conveyed through Presiding Officer Information Requests (POIRs). The main players in the case are the big mailers, like Quad/Graphics, R.R. Donnelly, Time, Inc., and Valpak, along with the mailers’ associations, like the National Postal Policy Council, the Direct Marketing Association, the Alliance of Nonprofit Mailers, and the National Mailers Association. Needless to say, the mailers are not very happy about a possible rate increase, and their attorneys and technical experts have been asking a lot of questions aimed at poking holes in the Postal Service’s case.
Mr. Thress’s analytic work is not always easy for the lay person to understand, but this past week, in response to POIR No. 6, he provided a few graphs to better illustrate what he’s been trying to convey through his tables, equations, and explanations. The graphs go a long way toward explaining not only the Postal Service’s econometric analysis but also what’s been going on with mail volumes over the past two decades. Mr. Thress’s graphs are Thurberesque in their simplicity, and they speak volumes.
As helpful as Mr. Thress’s graphs are, they don’t fully convey just how much mail volume has been lost due to the Great Recession, so we’ve taken the liberty of using the data he provides in his testimony to prepare some bar charts and data tables to help illustrate what the Postal Service is saying in its case to the PRC.
Single Piece First Class
Mr. Thress’s first graph shows single piece, First Class mail (letters, cards, and flats). This is the mail that’s been hit hardest by diversion, and as the graph illustrates, there’s been a steady decline since around 1999.
The blue line here shows actual volumes, FY 1992 through FY 2007. The green line shows actual mail volume from FY 2008 through FY 2012. The red line in the middle shows Mr. Thress’s best estimate for where mail volumes would have gone if there hadn’t been a Great Recession. It basically follows the same trend established by the blue line. The yellow line at the top shows where mail volumes would have gone if there hadn’t been diversion or a recession. To put it another way, the gap between the green and red lines shows the effect of the recession, while the gap between the red and yellow shows the effect of diversion.
Here’s a chart focusing just on the recession years. It’s based on the same data used in the previous graph. The numbers come from Mr. Thress’s testimony (Table 2, page 8). All of the tables and charts in the following discussion can be found on this Google Docs spreadsheet.
As this chart shows, when it comes to single-piece First Class mail, the Great Recession and diversion have both had a huge impact, but the recession (in red) has clearly had a larger impact than diversion (in yellow).
The following table shows how much volume was lost, year by year, due to the recession and diversion. As you can see, diversion has been consistent — about 4.2 percent annually. The losses due to the recession were most obvious in 2008 through 2010, but they still continue.
| SINGLE PIECE FIRST CLASS (CARDS, LETTERS, FLATS) ANNUAL | ||||
| (in millions of pieces) | ||||
| FISCAL YEAR | ACTUAL VOLUME | LOST TO RECESSION | LOST TO DIVERSION | HYPOTHETICAL TOTAL |
| 2007 | 43,692.28 | 633.03 | 1,875.40 | 46,200.71 |
| 2008 | 41,718.42 | 2,333.59 | 1,763.24 | 45,815.24 |
| 2009 | 37,962.73 | 2,568.86 | 1,574.58 | 42,106.17 |
| 2010 | 33,833.12 | 2,231.00 | 1,421.34 | 37,485.45 |
| 2011 | 30,695.70 | 1,785.23 | 1,279.19 | 33,760.12 |
| 2012 | 27,610.51 | 1,408.93 | 1,166.94 | 30,186.38 |
It’s important to note that in this table each year’s losses are measured against the previous year. To get a full sense of the impact of the recession, however, it’s necessary to think about the losses in cumulative terms, i.e., compared to where things stood in 2007, before the economy started to head south. The following table shows the cumulative impacts.
| SINGLE PIECE FIRST CLASS (CARDS, LETTERS, FLATS) CUMULATIVE | ||||
| (in millions of pieces) | ||||
| FISCAL YEAR | ACTUAL VOLUME | LOST TO RECESSION | LOST TO DIVERSION | HYPOTHETICAL TOTAL |
| 2008 | 33,509.71 | 2,333.59 | 1,763.24 | 37,606.54 |
| 2009 | 30,066.66 | 4,902.45 | 3,337.82 | 38,306.93 |
| 2010 | 27,437.34 | 7,133.45 | 4,759.16 | 39,329.94 |
| 2011 | 24,722.16 | 8,918.68 | 6,038.35 | 39,679.19 |
| 2012 | 22,734.73 | 10,327.61 | 7,205.28 | 40,267.62 |
| FIVE-YEAR TOTAL | 138,470.60 | 33,615.77 | 23,103.84 | 195,190.21 |
| % OF HYPOTHETICAL TOTAL | 17.2% | 11.8% | ||
| % DIVERSION VS. RECESSION | 59.3% | 40.7% | ||
This is essentially the table that is represented in the right portion of Mr. Thress’ first graph, where the blue line splits up. The actual volume is shown in green, the sum of actual volume and “lost to recession” is shown in red, and the sum of actual volume, recession, and diversion is shown in yellow, which is the “hypothetical total.”
In this table, we see the total volume of single-piece First Class mail for the five-year period was about 138 billion pieces, but it would have been 195 billion pieces had it not been for the recession and diversion. Over the this period, the Postal Service lost a total of nearly 56 billion pieces of single-piece, First Class mail, 40 percent due to diversion, and 60 percent due to the recession.
Total First Class Mail
When we turn to total First Class mail (single piece and workshared), the story is similar, but diversion doesn’t become noticeable until around 2002, and the rate of diversion is much lower than with single-piece alone. Once the recession hits, an even larger share of the losses are due to the recession than with single piece mail. Here’s Mr. Thress’s second graph:
As this graph shows, if it weren’t for the recession and diversion, First Class mail volumes would have increased from 2007 to 2012, and ended up approximately where they were in 2000. The red line shows how volumes would have continued to drop due to diversion, but at a relatively gradual rate. The green line shows just how dramatically volume dropped when the economic downturn began, a couple of quarters before the Great Recession officially began, in December 2007.
Now here’s the bar chart focusing on the recession years.
The chart is similar to the chart on single-piece mail, but it shows that an even larger proportion of the total First Class mail losses were due to the recession. That’s simply because workshared mail, while less susceptible to diversion, was more sensitive to the economic downturn.
Here’s the table on which that graph is based:
| TOTAL FIRST CLASS (DOMESTIC) CUMULATIVE | ||||
| (in millions of pieces) | ||||
| FISCAL YEAR | ACTUAL VOLUME | LOST TO RECESSION | LOST TO DIVERSION | HYPOTHETICAL TOTAL |
| 2008 | 95,346.98 | 3,926.92 | 2,657.21 | 101,931.11 |
| 2009 | 90,671.18 | 10,037.03 | 5,086.89 | 105,795.10 |
| 2010 | 82,726.98 | 15,031.68 | 7,311.39 | 105,070.05 |
| 2011 | 77,591.60 | 19,044.00 | 9,366.55 | 106,002.15 |
| 2012 | 72,521.90 | 22,590.20 | 11,278.15 | 106,390.25 |
| FIVE-YEAR TOTAL | 418,858.64 | 70,629.83 | 35,700.19 | 525,188.66 |
| % OF HYPOTHETICAL TOTAL | 13.4% | 6.8% | ||
| % DIVERSION VS. RECESSION | 66.4% | 33.6% | ||
This table shows that over 106 billion pieces of First Class mail were lost during this period. That represents a drop of 25 percent, and it’s this number that the Postal Service usually cites when it wants to dramatize how badly mail volumes have fallen. But the main cause, says Mr. Thress, was not the Internet. One-third of the losses were due to diversion; two-thirds were due to the recession.
Standard Mail
The fact that it’s the economy not diversion that’s behind the deficit story is seen even more dramatically when one looks at Standard mail. Here’s Mr. Thress’s graph:
As you can see, this graph doesn’t have a yellow line. That’s because the Postal Service’s calculations do not measure the amount of Standard mail that may be lost due to the Internet. This is not because the Postal Service doesn’t think it has lost any advertising mail due to the Internet. Rather, it’s simply because even while the Internet was growing from 1992 to 2007, Standard mail volumes were also growing. The Internet may have had a negative effect, but it’s hard to measure a negative trend when volumes are going up. It’s even possible that volumes were going up due to the growth of the Internet. In any case, it’s obvious that something very dramatic happened in 2008 to cause volumes to plummet.
As shown by the red line, if weren’t for the Great Recession, Standard mail volumes would have been expected to increase at approximately the same rate that they were going up before the recession hit. By 2012, volumes would have risen to about 105 billion pieces, in contrast to the actual volumes of about 80 billion.
Here’s what all that looks like in a bar chart focusing on the years during and after the recession:
The bar chart dramatizes just how much volume has been lost each year due to the economy. Again, there’s no volume “lost to diversion” with Standard mail. It’s all about the recession.
Here’s the table on which that chart is based:
| STANDARD MAIL CUMULATIVE | ||||
| (in millions of pieces) | ||||
| FISCAL YEAR | ACTUAL VOLUME | LOST TO RECESSION | LOST TO DIVERSION | HYPOTHETICAL TOTAL |
| 2008 | 98,561.27 | 6,960.20 | 0.00 | 105,521.46 |
| 2009 | 81,913.35 | 23,928.59 | 0.00 | 105,841.93 |
| 2010 | 81,945.52 | 25,989.52 | 0.00 | 107,935.04 |
| 2011 | 84,056.56 | 27,397.04 | 0.00 | 111,453.59 |
| 2012 | 79,577.00 | 29,121.50 | 0.00 | 108,698.50 |
| FIVE-YEAR TOTAL | 426,053.69 | 113,396.84 | 0.00 | 539,450.53 |
| % OF HYPOTHETICAL TOTAL | 21.0% | 0.0% | ||
| % DIVERSION VS. RECESSION | 100.0% | 0.0% | ||
The Postal Service lost over 113 billion pieces of Standard mail during fiscal years 2008 through 2012 — about 26 percent of the $426 billion total — and 100 percent of it was due to the recession.
Total Market Dominant
In addition to First Class and Standard mail, Market Dominant mail includes periodicals and packages. Here’s Mr. Thress’s graph for Market Dominant.
As before, the blue and green lines show actual volumes. The red line shows what would have happened if there hadn’t been a recession, so it essentially continues the path set by the blue line. The yellow line shows what would have happened in the absence of both a recession and diversion. The key here is the large gap between the green and red lines compared to the relatively small gap between the red and the yellow.
Here’s the chart using the same data set but focusing on FY 2008 through 2012.
As this chart shows, the amount of volume lost to the recession is considerably more significant than the loss due to diversion. Here are the numbers on which this chart is based:
| TOTAL MARKET DOMINANT CUMULATIVE | ||||
| (in millions of pieces) | ||||
| FISCAL YEAR | ACTUAL VOLUME | LOST TO RECESSION | LOST TO DIVERSION | HYPOTHETICAL TOTAL |
| 2008 | 199,896.30 | 11,061.10 | 2,902.40 | 213,859.80 |
| 2009 | 174,127.20 | 34,759.20 | 5,564.00 | 214,450.40 |
| 2010 | 168,187.70 | 42,332.80 | 7,998.40 | 218,518.90 |
| 2011 | 165,024.00 | 47,980.80 | 10,253.70 | 223,258.50 |
| 2012 | 156,280.10 | 53,545.50 | 12,358.20 | 222,183.80 |
| FIVE-YEAR TOTAL | 863,515.30 | 189,679.40 | 39,076.70 | 1,092,271.40 |
| % OF HYPOTHETICAL TOTAL | 17.4% | 3.6% | ||
| % DIVERSION VS. RECESSION | 82.9% | 17.1% | ||
The totals in this table show just how huge the losses suffered by the Postal Service have been. Almost 230 billion pieces of mail were lost during this five-year period. According to Mr. Thress and the Postal Service, 83 percent of these losses were due to the economy, and only 17 percent were due to diversion.
It’s the economy, stupid
Since the recession began, then, the Postal Service has lost a staggering 190 billion pieces of mail as a result of the downturn in the economy, and the exigent rate increase is basically an attempt to recoup some of the lost revenue.
Translating these volume losses into dollars and cents was the job of Stephen J. Nickerson, Finance Manager at postal headquarters. Mr. Nickerson’s testimony offers the following table. (We’ve added the bottom line with the totals.)
|
VOLUME, REVENUE, AND CONTRIBUTION LOSSES DUE TO THE RECESSION |
|||
| (in millions) | |||
| VOLUME | REVENUE | CONTRIBUTION | |
| FY 2008 | -11,061 | -$3,398 | -$1,249 |
| FY 2008 thru 2009 | -34,759 | -$9,973 | -$3,642 |
| FY 2008 thru 2010 | -42,333 | -$12,763 | -$4,825 |
| FY 2008 thru 2011 | -47,981 | -$14,898 | -$5,780 |
| FY 2008 thru 2012 | -53,546 | -$16,883 | -$6,654 |
| TOTAL | -189,680 | -$57,915 | -$22,150 |
The Volume column in this table shows the difference between actual mail volumes and what they would have been if macro-economic conditions had not deteriorated and mail volumes had behaved as they were acting before the Great Recession began. In other words, these are the losses each year due to the recession.
As Mr. Nickerson explains, the loss for 2012 (which represents cumulating losses from 2008 to 2012) was 53 billions pieces, which translates into nearly $17 billion in lost revenues and $6.6 billion in lost contribution (that’s net revenues after accounting for the lower costs involved with delivering a lower volume of mail). Looking at the whole five-year period, the loss of 190 billion pieces translates into $58 billion in lost revenues and over $22 billion in lost contribution.
Mr. Nickerson doesn’t provide a comparable table for diversion, but a very rough estimate (based on numbers provided to the PRC for the Network Rationalization case) would suggest that losing 39 billion pieces to electronic diversion represents revenue losses of about $22 billion and a contribution loss of about $9 billion. Between diversion and the recession, then, during fiscal years 2008 through 2012 the Postal Service lost $31 billion, 30 percent of it due to diversion and 70 percent due to the recession.
Just to put all that in context, during these five years, the Postal Service reported losses of $35 billion. Of that $35 billion, the Postal Service paid (or owed) over $23 billion into the retiree health benefit fund. The Postal Service also lost $22 billion due to the recession, and $9 billion due to diversion. The total losses for these three causes add up to $54 billion. No wonder the Postal Service has been having a hard time. But diversion represents only 17 percent of this total.
As the calculations provided by the Postal Service demonstrate, diversion to the Internet is not the main culprit in the agency’s financial crisis. Postal officials nonetheless constantly point to the Internet as the source of their problems. If you want to close a post office or processing plant or switch customers over to cluster boxes or end Saturday delivery, you need a long-term problem, like diversion to the Internet.
It’s hard to justify such significant service changes by pointing to a cyclical phenomenon like the ups and downs of the economy. And besides, average customers know that they are on the Internet more than ever and sending fewer pieces of mail, so they are inclined to believe that diversion is the main problem. It’s not.
The mailers respond
The mailers who are opposing the rate increase aren’t buying Mr. Thress’s analysis showing that so much of the volume losses were due to the recession. At the heart of their case against the exigent rate increase is a counter-argument saying that Mr. Thress has underestimated how much impact the Internet has been having on mail volumes. The mailers, through their attorneys, lobbyists, and statisticians, have thus posed question after question challenging his assumptions, equations, and calculations.
One of the first questions was how could total loss in Standard Mail in 2012 — 29 billion pieces — be greater than the difference between volumes in 2007 (the starting point) and in 2012, which comes to $23 billion pieces. As Mr. Thress explains, the losses are calculated not against 2007 per se, but against what they would have been in 2012 if there hadn’t been a recession. The trend line shows that mail volumes had been going up for many years, so there was every reason to expect them to continue going up through 2012. In other words, the Postal Service is calculating losses due to the recession with respect to what volumes would have been in 2012, not what they were in 2007, before the recession began.
Another set of questions has involved Mr. Thress’s assumption that were it not for the recession, diversion of First Class mail would have continued at approximately the same rate, so that any increase in the rate of diversion would have to be seen as due to the recession. (In other words, returning to Mr. Thress’s graphs, the mailers are asking why one need expect the red line to follow the trend set by the blue.) The mailers argue that other factors — the instant popularity of tablets, the rapid spread of social media, etc. — have accelerated diversion, and it’s not just the recession that’s increasing diversion.
Mr. Thress has a good answer for that as well. He cites a slew of statistics suggesting that nothing very unusual happened in tech world during 2008 and 2009 that would explain the dramatic drop in mail volumes, while there were many obvious indicators in mail-related businesses that do explain the drop.
For example, the growth in the number of broadband subscribers in the United States actually slowed down after 2007, due largely to the fact that the market was becoming saturated (“fully penetrated,” as they say). Mr. Thress points out the following: “The number of Broadband subscribers grew from virtually none to more than 30 million from 1997 to 2004 and then doubled from 2004 to 2007. But since then, the growth rate of Broadband subscribers has slowed dramatically, falling from 16 percent growth in 2007 to under 5 percent in 2010 and 2011 and only 3.4 percent by 2012.” (Reply to POIR No. 3)
Mr. Thress also challenges the common assumption that the growth of the Internet necessarily means a growth in diversion. As he proceeds to explain, “There is a sense among some people that it has always been inevitable that the diversion of mail to the Internet would increase over time and continue increasing until it inevitably overwhelmed the Postal Service and there was no mail volume left at all.” But that’s not necessarily true. In the mid-2000s, for example, even as Internet use was expanding, there was a period during which the rate of diversion of First-Class workshared mail actually decreased.
While there’s not much evidence that changes in technology or Internet usage habits changed dramatically in 2008, there’s plenty to point to in the economy. Two factors of particular note are consumer debt and advertising revenues, which are closely tied to mail volumes.
The number of loan accounts is significant because it is tied to the number of credit card bills and solicitations that get mailed out and the number of checks that get sent back. Mr. Thress notes that the number of accounts grew at a rate of 1.8 percent from 2003 to 2008, then fell 9 percent annually for two years; the rate has continued to decline at 0.5 percent.
A similar story is told in the advertising industry. From 1991 to 2007, advertising expenditures grew at an average annual rate of 5.2 percent. In 2008 and 2009, the rate fell to -9.8 percent a year. For the next three years, it returned to positive growth, but at only 1.3 percent. As Mr. Thress points out, in FY 2009, Standard Mail revenue declined by 16.2 percent, and total U.S. advertising expenditures declined by almost exactly the same amount.
Another argument being presented by the mailers is that the rate increase should have some sort of time limit. That may seem to make sense. If the Postal Service lost $6.6 billion in contribution in 2012, why should the rate increase — which will bring in about $1.8 billion in 2014 — be in effect for more than three or four years?
But that’s focusing only on the losses in 2012. As explained above, the Postal Service may have lost $6.6 billion in contribution in 2012, but for 2008 through 2012, it has lost over $22 billion. On top of that, Mr. Thress projects additional volume losses of 5 billion pieces a year over the next two years, on top of the 53 billion in 2013, so that the total loss in FY 2014 will be 64 billion pieces for 2008-2014. That means continued contribution losses on the order of $6 billion a year.
In other words, the Postal Service has lost $22 billion due to the recession, and over the next two years it’s going to lose $12 billion more. At the rate of $1.8 billion a year — the amount the exigent increase is expected to net — It would take twenty years to recoup that loss.
An alternate scenario
The mailers are a powerful lobbying force, and they have many members of Congress on their side. A few weeks ago, just as the PRC was getting started on this latest round of the exigent case, Senator Susan Collins submitted comments to the Commission. The Senator was not waiting to hear from the Postal Service’s witnesses. She had an opinion from the get-go, and she wasn’t shy about sharing it.
In her letter, the Senator reminds the Commission that it had previously determined that losses due to the recession justify an increase, while losses due to diversion to the Internet do not. “I am therefore troubled,” wrote Senator Collins, “by the Postal Service’s latest request for approval of an above-CPI rate increase. While the Postal Service claims that the increase is justified by the 2007-2009 recession, it appears that virtually all of the losses claimed by the Postal Service result from the effects of electronic diversion in Fiscal Year 2012.” Senator Collins proceeds to criticize the Postal Service for “apparently asserting that this electronic diversion was caused by the recession” without providing any evidence of a causal link.
Senator Collins concludes by stating unequivocally that granting an exigent rate increase would not be consistent with the Postal Accountability and Enhancement Act. That’s quite a conclusion coming from one of the architects of PAEA, and it will probably weigh heavily on the Commission’s deliberations.
It might have been helpful if the Senator had waited for more of the Postal Service’s case to be presented. A close look at the testimony, tables, and responses to information requests indicates that the Postal Service has done an extremely thorough job with its Decomposition Analysis differentiating the effects of the recession from those of diversion.
The Senator seems to believe that “virtually all of the losses” suffered by the Postal Service in 2012 were due to diversion. That’s how the big mailers want to see things. But consider what it would mean. The following chart gives graphic representation to the notion that since the recession officially ended in 2009, the losses since then must be due to diversion.
This chart starts with Mr. Thress’s assumption that mail volumes would have increased somewhat were it not for the recession and diversion, but it redistributes the losses, giving more and more responsibility to diversion as the years go by. By 2012, “virtually all” of the loss is due to diversion, as suggested by Senator Collins.
The chart looks reasonable enough, but for this scenario to work out, the rate of diversion would need to increase dramatically, as illustrated in the following table (on which the chart is based):
| ACTUAL VOLUME | LOST TO RECESSION | LOST TO DIVERSION | HYPOTHETICAL TOTAL | RATE OF DIVERSION |
| -1.45% | ||||
| -3.55% | ||||
| -5.74% | ||||
| -11.89% | ||||
| -12.12% | ||||
In the years running up to the recession, the rate of diversion for single piece First Class mail was about 4.5 percent; for First Class as a whole, it averaged about 3 percent a year. For total Market Dominant, the average rate was about 1.5 percent (as shown in the table for 2008).
For this alternate scenario to have any truth to it, the rate of diversion would need to jump dramatically — to over 12 percent a year. What could cause the rate to increase over 800 percent? Did something happen in the world of computers and Internet communications that could possibly explain such a phenomenon? Did Twitter do that?
If the mailers can produce evidence for such an explanation, they may have a case. But at this point, the Postal Service’s interpretation of the data is much more convincing. The timing of the fall in mail volumes coincides too closely with the downturn in the economy for there to be any other reasonable explanation. The mailers can try poking all the holes they want in the Postal Service’s case, but Mr. Thress’s simple graphs — and the voluminous data and analytic work on which they are based — will be tough to refute.
The next chapter in the drama of the exigent rate increase unfolds this week. On Tuesday, November 19, Mr. Thress and another Postal Service witness will appear at a hearing of the PRC, where they will be cross-examined by attorneys for the mailers and the PRC staff. On November 20, Mr. Nickerson will appear. You can listen to the hearing on the PRC website. It should be interesting.
(Photo credits: Sorting mail, mural in Ariel Rios Building, Federal Triangle Washington D.C.; Postal workers sort mail at the Fond du Lac Post Office)
