If you've ever wondered how stamp prices are set, you're not alone. People use stamps everyday, and yet the process of setting stamp rates seems as secret and mysterious as nuclear physics. To see how the system works -- and to untangle the mystery -- let's go back a quarter of a century. Under the Postal Reorganization Act of 1970 (P.L. 91-375), the old Post Office Department -- then a Cabinet-level branch of government -- was transformed into a wholly-owned government corporation, the U.S. Postal Service (USPS).

WHAT CONGRESS REQUIRED

The Reorganization Act had a lot to say about rates, including four basic points.

• Rates are not set by Congress or the President. Instead, postal ratemaking is a responsibility shared by the Governors of the Postal Service and the Postal Rate Commission (PRC), an independent federal agency. Unlike other state and federal regulatory agencies, however, the Postal Rate Commission does not have the final say on what postal rates will be --the Governors do -- but the instances of disagreement between the two are rare.
  
• All mail users must pay a full and fair share for their use of the Postal System. Different classes of mail pay different rates because they require more or less from the Postal Service. For example, a First-Class letter dropped off at a corner mailbox must be picked up and taken to a local postal facility. It must be processed whether there is a ZIP code or not. Standard Mail [formerly known as "third-class" mail], what is known as "advertising mail," must be delivered to the Postal Service bundled in ZIP code order. With advertising mail, there is no guarantee of delivery by a certain date and no privacy -- advertising mail can be opened and inspected by postal officials at any time.
  
• The Postal Service must operate on a "break-even" basis. The law clearly states that it cannot make a profit or a loss. Instead, rates must be set to cover any and all Postal Service costs -- no more, no less.
  
• No class of mail may subsidize another. Revenues for first-class mail, by law, cannot be used to underwrite third-class mail, and vice versa.
  

USPS MUST BREAK EVEN

The Postal Service tries to satisfy its obligation to break even by looking at a "test year" in which it hopes revenues and expenses balance. In practice, however, postal rates are set so the Postal Service has enough revenue to keep stamp prices at a consistent level for a period of time. When cash needs begin to outpace revenue, the Postal Service then seeks higher rates from the Postal Rate Commission -- a complex process which can take up to ten months. Postal management must define the amount of new revenue needed to assure break-even operation, the so-called "revenue requirement." Since different classes of mail represent different costs, and since no class may subsidize another, the Postal Service must show how much each class of consumers will pay with documentation, testimony and other evidence.

THE FILING OF A RATE CASE

Once all documentation has been assembled, Postal Service management presents its case to the Board of Governors of the Postal Service, a panel which consists of the nine presidentially-appointed Governors, the Postmaster General, and the Deputy Postmaster General. If the rate increases proposed by postal management meet with the Governors' approval, management then is authorized to file a case with the independent Postal Rate Commission, which consists of five presidentially- appointed Commissioners whose full-time job is to regulate postal rates.

Once a plea for new rates is filed, the Postal Rate Commission (PRC) assigns the request a regulatory docket number. For instance, docket number "R2000-1" represents the first rate case to be conducted in 2000. The PRC then "notices" the Postal Service's request in the Federal Register, and the Postal Service itself also will provide notice to all who participated in the last rate case.

A TRIAL-LIKE PROCEEDING

Rate cases are somewhat like courtroom trials. The five Commissioners, sitting "en banc," read and hear all testimony and evidence and act as judges and jury. Interested parties, called "intervenors," can participate in the case and question the facts, methods, and conclusions presented by the Postal Service. The process of questioning the Postal Service is called "discovery."

Intervenors can introduce their own evidence and testimony. In turn, intervenors are subject to the same discovery rules that apply to the Postal Service. Any and all participants can cross-examine others orally and in writing.

When the discovery phase is completed, the Postal Service then has the right to file rebuttal testimony, which, again, is subject to oral cross-examination. Subsequently, intervenors may file rebuttals of their own and these are subject to cross examination as well. The Postal Service, if it wishes, may file final rebuttal ("surrebuttal") testimony, but consumers may not.

In the final phases of the case, all participants may file formal briefs -- their last chance to have a go at each other. Everyone also has an opportunity to present final oral arguments to the Postal Rate Commission.

After final oral arguments, the evidentiary record is closed, and the Commissioners go behind closed doors to deliberate, debate, and prepare a "recommended decision" for the Postal Service governors. The Reorganization Act says the Postal Rate Commission must act within ten months when the Postal Service requests higher rates. If the PRC fails to complete its work within the ten-month time frame, the Governors can authorize new rates on a temporary basis. In recent years, the PRC has never failed to complete its work within the allotted time.

GOVERNORS' OPTIONS

Once the PRC recommendations are received, the Postal Service Governors have several options. * The Governors can approve the PRC recommendations. If they do, they then can decide the date rates will be changed.

• The Governors can reject the PRC recommendations and ask the Postal Rate Commission to reconsider its opinion.
• The Governors can accept the PRC recommendations "under protest." * The Governors can unanimously override the PRC recommendations. What does it all mean?
• If the Governors reject the recommended decision, they can order the PRC to reconsider its opinion. If the PRC subsequently recommends a decision the Governors accept, the Governors then can decide when the new rates should begin.
• If the PRC again presents an unacceptable recommendation, the Governors can again ask for reconsideration. If the second reconsideration results in an acceptable decision, then the governors can order the implementation of new rates.
• If the PRC still is unable to recommend rates acceptable to the Governors, then the Governors have the option of overriding the PRC's recommendation. An override, however, must be unanimous. If the Governors agree unanimously to override, they then can set rates directly. If the Governors' decision is not unanimous, then the PRC's recommended rates either must be accepted or appealed.
• The Governors also can accept a PRC recommendation "under protest." In this situation, the Governors file an immediate appeal with the U.S. Court of Appeals.

Once the Governors approve or implement any recommended decision, any participant in the rate case may challenge the decision in a federal Court of Appeals. The appeals process can be lengthy and complex. Often the "victories" won in court have no immediate effect on the rates mailers pay, but set important precedents that guide subsequent rate cases. Occasionally, however, the Court orders either the Governors or the PRC to undue a wrong as quickly as possible through the available regulatory channels.

COSTING AND PRICING

In addition to seeking revenue in general, the Postal Service and the PRC also must determine how much should be paid by each class of postal users. To do this, the Postal Service and PRC must show which costs can be specifically traced back (attributed) to each class of mailers. For instance, bulk Standard Mail --formerly known as "third class mail"-- cannot be deposited in street-side letter collection boxes. It must be presented at official business mail entry units housed in various postal facilities. First-Class mail, on the other hand, enters the mailstream by way of street-side collection boxes. Consequently, the cost associated with the collection of mail from mailboxes is "attributable" to First-Class, but not to bulk Standard Mail.

Not all costs, however, are attributable. Some costs, such as the Postmaster General's salary, are not caused by any particular mail class or service but are costs associated with operating the Postal Service generally. The law requires that rates charged for each mail class and service be sufficient to recover a "fair and equitable" portion of the USPS' overhead expenses, so-called "institutional" costs.

Ratesetting is not unlike the process a business uses to decide how much to charge for goods and services. In the case of the Postal Service, the goal -- by law -- is to break even. But with more than 760,000 career employees and nearly 40,000 facilities, it's not always easy to figure out which costs are attributable to a given class of postal users or which costs represent general overhead.

The Postal Service makes every effort to define the costs that can be attributed to each particular mail class or service. ln addition to costs, the Postal Services must also obtain a fair and equitable "markup" to reflect overhead expenses.

"Costing" is an extraordinarily rigorous econometric exercise that involves a very detailed accounting of every mail service expense. A proper accounting must consider such items as mail collection, postage payments, mail verification and acceptance, postage canceling, methods and costs for various sorting and distribution schemes, long- and short-haul transportation expenses, carrier casing, carrier delivery expenses, and more -- much more. Because the accounting process is so complex, it is open to challenge by lawyers, economists, and postal consumers. The result is that substantial resources can be consumed in postal rate litigation.

"Pricing," on the other hand, is more an exercise in "judgment" guided by nine precepts found in Section 3622 (b) of the Postal Reorganization Act. Here the Postal Rate Commission enjoys considerable latitude to determine what does, or does not, represent a fair share of overhead costs. Here also is where critics (usually aggrieved parties) charge that the Rate Commission's "biases" are displayed.

Costing and pricing typically occur not at the class level -- say First-Class or Periodicals class (formerly know as "second class") -- but at the more specific "subclass" level. Subclasses are grouped according to their unique operational and marketplace characteristics. Subclasses are defined in a document known as the Domestic Mail Classification Schedule (DMCS).

CLASSIFICATION CHANGES

When and if the Postal Service wants to amend the mail classification scheme, it must submit its request to the PRC in much the same manner as it does with its requests for new rates. Unlike rate cases, however, mail classification cases can take longer than ten months to resolve. The Governors can accept or reject PRC mail classification decisions, and all proposed changes in classification are subject to appeal through the court system. Requested changes to the Domestic Mail Classification Schedule also may be submitted as part of any postal rate proceeding or in separate proceedings.

In addition to subclasses, the Domestic Mail Classification Schedule also provides for various "rate categories." Rate categories reflect so-called "worksharing" activities that enable the Postal Service to avoid certain operating costs such as sorting, barcoding, and transporting the mail. By law, the Postal Service must recognize and encourage mailers to undertake worksharing. In turn, when mailers do work that the Postal Service would otherwise have to perform, mailers receive discounts.

Rate and classification cases have great importance, not only to the Postal Service, but to postal users as well. That's why mailers and the Postal Service typically invest so much time, energy, and money in the rate and classification process. As an example, the Postal Service and other intervenors spent more than $30 million and several years litigating the 1990 rate case. Depending on what's proposed in 2000, mailers and the Postal Service ultimately may spend that much, and more.