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Chris: 00:00 Hi everyone. I’m Chris Lien. Welcome to Industry Corner. A podcast where I discuss postal industry news to help you stay informed. On today’s podcast, I discuss a recent PRC order that proposes expanding pricing authority for the United States Postal Service, a recent nomination by the President of the United States for another board of governors and a PRC semi-decision regarding 2020 price increases for first-class letters. So let’s get into it.
Chris: 00:30 Welcome to the podcast everyone. This is Chris Lien, president of BCC Software, and I’ve got a couple of topics that we’re going to talk about today since our last podcast. The first one is going to be a new order that the postal regulatory commission presented, and this is all part of the 10 year review that the Postal Service has been doing for calling on more than 10 years now. But what this does is it sort of expands on the 2017 order that they first put forth.
Chris: 00:51 And for our listeners, you might recall back in 2017 the Postal Service was initially granted additional pricing authority, specifically 2% of additional authority over CPI. And there were somewhat additional incentive ways for the post-service to gain additional pricing authority based on their performance measurement and a total factor productivity as well. So the PRC recently clarified and in some ways expanded and at the same time, in my opinion, it made it a little bit more complicated on how the Postal Service is going to get access to some of this expanded pricing authority. So let’s start a little bit with the proposal for this formula based approach for the 2% increase over CPI. And again, as a reminder to the listeners, the consumer price index is the cap by class that was established with the postal accountability enhancement act that was passed in 2006 and along with that cap came something very important the industry fought very hard for which is being able to have predictable pricing.
Chris: 01:46 So the challenge that we have with this is that now the starts getting to erode that a little bit because it’s based on this formula approach. So there’s a formula approach that the postal regulatory commission put forth that was supposed to try and look at two different things, volume density, and retirement obligations. As a reminder to the listeners, the pre-funded retiree health care is something that was also part of that 2006 law that was passed. And it really created this unnatural and in many ways, unnecessary financial burden for the postal service that they had to pre-fund the retiree healthcare. And that just really presented a tremendous amount of challenge for the Postal Service. They’ve responded by not funding or suspending that pre-funded retiree healthcare, but the postal regulatory commission in the absence of any legislation to correct that appears to have taken the approach of looking for a way to ameliorate that responsibility. And they’re doing that with this pricing authority.
Chris: 02:39 So the PRC gave an example of this formula method that’s all based on, first of all, with the density. We’ll talk about that. The density is based on this formula that’s looking at how historically mail volumes have adjusted and responded to digital replacement capabilities and things like that with mail volume adjustments. If you look at the formula that the Postal Service put forth in the filing as they look back, it really would have given the postal service a little over 1.2% additional pricing authority going back to like 2013 so it presents kind of this formula approach that is far more complicated than what we’ve seen before. And as I said before it, it makes it difficult to be able to get that predictability of pricing that we’ve looked for and we’ve relied upon for the last number of years since 2006.
Chris: 03:24 The other part of this is the adjustment of pricing authority for the retiree obligations. As I mentioned before, this is a result really of Congress not passing any kind of legislation that would help fix that. So in this situation, the postal regulatory commission, again put forth the kind of an example of how it would be calculated in that turns out to be just under 1% of additional authority each year. So combined the two together really is over 2% so in a lot of ways this recent proposal from the regulatory commission is actually worse from an industry perspective than what we saw in 2017 and again, it makes it less predictable because now it’s all based on these formulas. The other thing that they talked about in this as well has to do with these performance approach. As you recall in the 2017 pricing proposal, postal regulatory commission, there was going to be some additional pricing authority, a 0.75% if that’s tied to total factor productivity and another 0.25% if the Postal Service maintained their service performance.
Chris: 04:22 And so it was kind of an either or. You could get one or the other, maybe both if you did both of them. Now the postal regulatory commission is saying, let’s put those two together. So it’s kind of a package deal. But then that means that’s one additional percent that’s earned if the Postal Service does both of those together. There was also some talking in there about giving the Postal Service some additional 2% over and above their pricing authority for non compensatory products like periodicals and things like that. This would be discretionary for the Postal Service to use, which is actually welcomed because the postal regulatory commission and some of the earlier discussions had taken more of a stronger approach and really requiring the postal service to deal with those classes of mail and subclasses that are quote unquote underwater in terms of their cost coverage.
Chris: 05:03 But this does give the Postal Service a little bit more discretion and I think that that’s an important thing for the postal regulatory commission, hopefully to recognize is that the Postal Service is competing in a lot of ways compared to digital and other ways for marketers to communicate. I certainly am bullish and continue to be about the power of mail and I’m really pleased to see that all the different promotions and the informed delivery program continues to grow, but I think it’s important for the Postal Service to have a little bit of discretion on whether or not they apply this additional pricing authority. There’s also a requirement in this for some reporting for the annual compliance report that the Postal Service, this speaks more to to the transparency part of this and as a reminder to the listeners, you know work share discounts that this whole ecosystem is built upon is supposed to be directly related to the cost avoided to the postal service for handling that.
Chris: 05:50 And so the postal regulatory commission through their annual compliance report is really focused a lot on that part of it. And so it’s good that we’re having more transparency with this, but that is going to be something that’ll be required with it. Something else to note of this order has to do with the response period. So we have until February 3rd as an industry to respond to that. There’s going to be an additional reply, a commentary back from the postal regulatory commission on March 4th that’ll end there. And we don’t expect any of these changes to go into effect until 2021 I’m certain that there’s going to be a lot of associations that are going to rally their members to respond formally to this, but I do encourage our listeners to check out order number 5337 this is from the postal regulatory commission. You can view that at prc.gov for that information.
Chris: 06:34 Now onto the board of governors. So some great news on that front. So as we have talked before, the president of the United States has nominated and the Senate has confirmed a number of governors and that has been enough to get us to this quorum which is great and certainly welcomed. And I agree with the postmaster general when she states that the United States Postal Service is best served by having a full board of governors and it looks like we are continuing to move in that particular direction. On December 5th, the Senate confirmed Robert Duncan to the board of governors and that’s going to have a term that expires on December 8th of 2025. So we have Mr. Duncan in there for quite some time currently serving as the chairman of the board of governors. And then on December 11, just a few days after that, the president of the United States also nominated William Zollars from Kansas to be a governor for the United States Postal Service board of governors as well.
Chris: 07:24 That has to be confirmed by the Senate still, but it is a nomination from the president. And if confirmed, Mr. Zollars would be on that board of governors until December 8th of 2022 so well into, uh, you know, the, the next coming years here we’re going to have some governors, which is great. And as a reminder also for our listeners, the important role that the board of governors serve, and this is particularly true since the postmaster general Megan Brennan is formally retiring on January 31st of next year, is that the board of governors select who the postmaster general is going to be. And I understand that the currently actively searching for the next postmaster general, the postmaster general is selected by the board of governors. They serve at the pleasure of the board of governors. There’s no specific term period for that. It’s as long as the board of governors and the postmaster general want to continue to work together. And then the postmaster general and the board of governors select who the deputy postmaster general is going to be and the deputy postmaster general serves at the pleasure of the postmaster general. So once we have a full board of governors, that’ll be great. That’s nice to see that we’ve got five now. We could have six here soon with the Senate confirmation and that’ll be good because I agreed again with the postmaster general that a full board of governors is a great way for the postal service to continue responding to the needs of the mailing industry.
Chris: 08:38 The last topic that I wanted to talk about today is another postal regulatory commission order. This is order 5302. This is all related to the 2020 price increase that the postal service filed… end of October, November when the postal regulatory commission put forth their on that the PRC approved everything except first-class automation, presort letters, five-digit automation, presort letters because they had deemed that the 39.17 cent pricing that the postal service put forth was above the CPI class authority. And so the postal service took that remand, went back and came forward with a proposal of 38.9 cents. So they lowered that to be within the cap. The postal regulatory commission took a look at that and they determined that what the postal service filed on November 20th and again this is all related to that October 10th correction and that was originally filed on the ninth in October, that this does comply with the price cap limitations. And so they’re saying that this is correct. Now the Postal Service could move forward with that, but the commission says that they reserve a final disposition and their order, which kind of leaves open the question of is that really going to be the correct rate for five digit automation letters? Is there going to be some other rule coming later? So we’re kind of still watching that. I think at this particular point it’s fair for us to proceed assuming that that is the correct price.
Chris: 09:59 Thankfully from a software preparation aspect, it shouldn’t have any change whether it’s one price or another because it’s just a rate cell in a table that we’re updating. But we do have to watch that very carefully. And speaking of software updates, here we are, it’s mid-December, it’s Rochester, New York, it’s certainly cold, it’s got snow. But in the midst of all that, the engineers and product management is working tirelessly to make sure that the software is ready for our customers and that they’re able to continue to process and prepare the mail for the United States postal service. And that’s particularly important with the expanded solution set and the thousands of customers that we have now with the acquisition of Satori software that was done earlier this year. So for our customers that are listening in the podcast today, I do want you to stay tuned for the updates for the software that’s coming out. In the meantime, please check out our customer portal for the latest information of what’s going on with that. Make sure you take a look at the expanded knowledge base that we’re continuing to expand for our customers, and of course the free express learning sessions that we have posted out there for you as well. So that’s our wrap up for today, the three topics, and I’m looking forward to talking to you soon. Thanks everyone. Have a great day.