Debt-Free Status, Favorable Economic Events Argue for Contingency-Free Case

The following is a perspective by postal commentator Kate Muth for the PostCom Bulletin. 

Many questions surround the next rate case. It’s not clear exactly when the Postal Service will file the case and no one is sure how big the rate request will be, although at one time, the Board of Governors suggested it would be in the single digits. It’s not apparent if this position holds.

Mailers have been expecting a mid-spring filing but few want to bet the house on this assumption any longer. That’s because some people feel the timing of a rate-case filing could be affected by postal reform legislation. Will the Postal Service wait to see if a final bill passes in late spring or early summer before building their final case? Or will it move on an R2006 rate case in the next month or two and then file one last rate case under current law before the new laws take effect?

Answers remain elusive. But one thing is crystal clear to the mailing community. The Postal Service should not ask for a contingency fee in this upcoming case.

The Postal Service is debt-free for the first time in its history. Borrowing should be the first option for handling any unforeseen events, such as higher fuel costs (can they go any higher?) or natural disasters that add to infrastructure costs.

The Postal Service asks for a contingency in rate requests to cover the expenses of unforeseen or unforeseeable events. From the R74-1 case through R2001-1, the contingency has averaged 2.8 percent. The USPS did not request a contingency in the most recent rate case, R2005-1, because revenue from the new rates was needed solely to pay the escrow account. The highest contingency request has been 4 percent and the lowest has been 1 percent. The closer in the test year is in a case, the smaller the contingency can be because it leaves less time for bad things to happen.

A contingency of just 2 percent adds nearly $1.6 billion to the revenue request. That is roughly the equivalent of a 1¢ increase in the price of a stamp. This is a significant burden on mailers. 

The USPS might argue that borrowing the money to pay for an unforeseen event will still require the ratepayers to pay for it. The cost just gets pushed off to a future year. That’s true. But there’s also a good chance the USPS won’t need any extra money for an unforeseen or unforeseeable event. Economic events are more favorable than they have been in the past few years. Gas prices and transportation costs are likely to come down rather than increase. The costs of workers’ benefits can’t possibly be sustained at 15 percent growth per year.

One lingering fear is that the USPS will seek a normal-sized contingency just to boost the revenue requirement so that when it moves to an indexed-based ratesetting scenario – as the reform bills direct it to do – it will start from a higher baseline.

Given the USPS’ debt-free status, the contingency should not be requested in this case. Borrowing is a better option than a contingency, which just gets baked into the rate base. If the contingency funds aren’t needed, the money isn’t refunded to ratepayers. This puts a burden on mailers because they have to pay this cost up front, with no opportunity for a refund.