Is There Light at the End of the Postal Tunnel?

In the first of a two-part series examining the recent passage of the postal rate-making reform law and its effect on catalogers, this week I’ll provide background on the U.S. Postal Service’s rate-making policy and how the new postal reform law will benefit direct marketers.

First, let’s examine why and how catalogers found themselves on the short end of the stick following the implementation of new postal rates last May.

Way back in 1990, the USPS asked the Postal Rate Commission (PRC) to recommend postal rates that would begin to reflect the processing-cost differences caused by the shape of the mail. The least expensive shape for the USPS to process, transport and deliver is letter mail, followed by flat-shaped mail (most catalogs) and then parcels. The PRC agreed, and the letter/flat rate differential was born. This 1990 rate differential, however, was far smaller than the actual cost differential since the USPS wanted to phase in a full rate differential to avoid “rate shock.” This philosophy remained until 2007.

In this year’s rate case, the USPS held true to its 1990 philosophy and proposed Standard mail rates that continued to slowly increase the letter/flat rate differential. The Postal Regulatory Commission (as renamed and redefined under postal reform), however, decided that the rate difference should match the cost differential. Thus, the average 9 percent rate increase for Standard mail became a 20 percent to 40 percent rate increase for many catalogs.

Under the old 1970 postal law, postal rates were based on the cost of providing the service. The PRC decided that since flat-shaped mail is more costly to process, its postage should reflect that difference. Moreover, the PRC believed that catalog mailers could adjust their mailings to mitigate the effects of this high-rate increase.

Experts differ on whether or not the full cost differential is reflected in the current rates. (Personally, I think it is.) This difference in opinion helped lead the DMA to conclude that it wanted to avoid another old-law, cost-of-service rate case. Therefore, this year we worked with the PRC and the USPS to have the new rate-making procedure rules completed by the end of October, and they were.

That work has paid dividends. In October the PRC released final regulations to implement new, modern rate-making and classification systems for market dominant and competitive mail products. This came eight months ahead of schedule. Then on Nov. 15, the USPS Board of Governors decided that future prices will be adjusted using these new regulations. So the next postal rate change will be under the 2006 postal reform law, not the antiquated 1970 postal law.

Here’s how that affects you. First, expect a postage change in late spring or early summer of 2008. For Standard mail, First Class mail and single-piece parcels, the average increase by class will be limited to the consumer price index (CPI). Currently the CPI change is between 2 percent and 3 percent, but mailers should expect an average 3 percent postage increase. Not every mailer will receive the average increase, however, because the new law allows the USPS to differentiate among mail within each class. Fortunately, the CPI cap acts as a moderator of postal rate shifts within classes of mail. For example, flat-shaped mail comprises 25 percent of the volume of Standard mail and 34 percent of the revenue. With a 3 percent rate cap, the USPS couldn’t raise the flat-shaped mail rate by 20 percent without dramatic decreases in the rest of Standard Mail.

Likewise, it would be difficult for the USPS to decrease flat-shaped rates by 20 percent if the average increase was 3 percent. The cap, therefore, forces the USPS to continue with its 1990 philosophy — which it supported in the last rate case — of gradual change in rate relationships.

Next week in the second installment of this two-part series, I’ll look at how the shape of your catalog and the market effects (i.e., the amount of mail the USPS processes) may influence future rate increases.

Jerry Cerasale is senior vice president, government affairs, for The Direct Marketing Association. You can reach him at jcerasale@the-dma.org.