Association for Postal Commerce

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1901 N. Fort Myer Dr., Ste 401 * Arlington, VA 22209-1609 * USA * Ph.: +1 703 524 0096 * Fax: +1 703 524 1871

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THERE IS A BETTER WAY

The following is a commentary by Jim O'Brien, Chairman of the Board of Directors of the Association for Postal Commerce. His comments most definitely DO reflect the official views of the association as well as thoughts of his own. All PostCom members are urged to read this.

As the Chairman of the Association for Postal Commerce (PostCom), I have the unique responsibility of achieving the goals of a diverse group of mailers, while at the same time meeting the goals of my employer, Time Warner. The Postal Regulatory Commission (PRC) now finds itself wrestling with the exact same issues that I’m facing at PostCom. Within PostCom, we have a number of the world’s largest catalog mailers, including Williams-Sonoma, LL Bean, and Lands’ End. In addition, our membership includes some of the largest Standard letter mailers including Bank of America, JP Morgan Chase, and Time Warner. To make matters a bit more complicated, our membership also includes the printing companies who produce the catalogs as well as Time Warner’s magazines. My challenge is to simultaneously serve the needs of this diverse group of constituents. In this article, I’ll attempt to explain the situation that exists within PostCom’s membership, provide some perspective on the PRC’s dilemma and state my opinion on what a “just and reasonable” solution could be.

Let’s begin with PostCom. Many catalog mailers are facing rate increases of 20% or greater on May 14, 2007. As a result, they are doing two things. First, they are evaluating how they spend their marketing dollars and looking at ways of reducing their mailing costs in the upcoming fall mailing season. Second, they are writing letters to the USPS’ Board of Governors (BOG) and PRC to explain their situation and the devastating effect that a 20% increase could have on their companies, the USPS, the printing industry, and the U.S. economy. At the same time, the letter mailers have provided 2007 budget projections to their companies based upon the PRC’s recommended rates. Any of you who have dealt with a CFO know that once you provide projections they immediately become etched in stone. The letter mailers are now worried that if the rates between Standard flats and Standard letters are adjusted, letter costs will rise and they will be forced to review their marketing practices and reduce their letter volume to meet the budget projections. Caught in the crossfire of this issue are the printers and lettershops that provide services to both the catalog companies and the letter mailers.

Now let’s move to the Commission. The two omnibus rate cases preceding the 2006 case resulted in settlements. These settlements were very good for both the mailing industry and the USPS at the time but they produced an unintended consequence. When the PRC approves a settlement, it does not necessarily recognize shifts in costs and/or the cost differential between letters and flats. It simply evaluates the available data to guarantee that the proposed settlement will result in rates that meet the USPS's revenue requirement and complies with the requirements of the Act. As a result, in R2006-1 the PRC was challenged with recognizing several years of cost shifts in one fell swoop. To make matters more difficult for the Commission, they weren’t sure (and still aren’t) if Postal Service will would file one more case under the old law or instead migrate to the new Postal Accountability and Enhancement Act (PAEA) that became law on December 20, 2006. If the next rate changes are made under the new law, there is a possibility that an unbalanced letter/flat differential would remain in effect for many years to come. To address this issue and operate within the letter of the law, the Commission issued the recommended decision that we are all now attempting to address. I fully understand their position of needing to satisfy a diverse constituency and, at the same time, issue a decision that will withstand legal scrutiny.

So, where do we go from here?  Let me preface this by saying that I am not an attorney, have never served in a Government position, and officially announce that I will not be running for President of the United States in 2008. Given that, here’s what I would favor doing if I were a member of the PRC. First, I would recognize realize that adjusting rates between Standard letters and flats is a zero sum game. If someone’s rates go down, another’s will rise and in either case the USPS will lose some volume. The question then becomes, “Is there a way to avoid the zero sum game and still operate within the law?”  I believe that the answer is yes, and here’s how:

In R2006-1, the USPS admitted that its demand elasticity assumptions for Standard flats were questionable. If there is substantial doubt about the precision or reliability of these assumptions, then there is some scope for the exercise of Commission discretion to make adjustments to them. If I were on the Commission, I would favor adjusting the volume assumptions to reflect higher catalog volumes this fall based upon a lower rate than what was issued in the PRC’s recommended decision. Even with a reduced rate, this would yield the exact same revenue in the test year but would reduce the devastating impact upon the catalog mailers. With such a decision, the catalogers would re-evaluate their mailings and be more likely to generate the anticipated volume levels. In addition, the letter mailers would continue to provide their projected volumes because their rates would not change from those in the recommended decision. In short, there would be peace within the mailing community and it would make my job (and the PRC’s) a great deal easier. The solution I propose will go a long way toward maintaining a stable Postal Service and a robust U.S. economy.