Pricing and Price Caps
Filed under Pricing & Rates
The Postal Accountability and Enhancement Act of 2006 (PAEA) changed the way the Postal Service sets rates. It divided postal services into two broad categories: market dominant (mailing services) and competitive (shipping services). Market dominant products constitute about 90 percent of postal revenue. They include First-Class Mail, Standard Mail, Periodicals, and some Package Services. Products such as Priority Mail, Express Mail, and bulk Parcel Post are considered competitive. The PAEA placed a cap on price increases for market dominant products. The Postal Service is now permitted to make annual price changes after limited review by the Postal Regulatory Commission, but the average increase for each class of mail cannot be greater than the rate of inflation as measured by the Consumer Price Index for All Urban Consumers (CPI-U). The Postal Service can request a rate increase above the cap due to extraordinary or exceptional circumstances.
When the PAEA was passed in December 2006, the Postal Service was still experiencing annual increases in mail volume. However, the recent, rapid drop in mail volume and revenue has forced the Postal Service into a financial crisis. The Postal Service’s Integrated Financial Plan for fiscal year 2010 forecasts a net loss of $7.8 billion. Since the Postal Service has substantial fixed costs, as mail volume falls, the Postal Service may have limited ability under the price cap to generate sufficient revenue to fund its network. Inflation was flat in 2009, so there was no room to raise prices under the cap this year. The Postal Service could have requested a rate increase above the cap due to extraordinary or exceptional circumstances, but it has announced that there will be no price increase in 2010 for First-Class Mail, Standard Mail, and Parcel Post.
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This topic is hosted by the OIG’s Cost, Revenue, and Rates directorate.
6 Responses to “Pricing and Price Caps”
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July 11th, 2010 at 9:16 am
The blog is helpful for price niche.
March 2nd, 2010 at 11:49 am
I can’t imagine that there is anything more inefficient than driving the same route day after day regardless of the amount of mail to be delivered on that route. That would be like Fedex or UPS stopping at your house everyday regardless of whether or not they had a package to deliver to you. It seems to me the USPS could change mail delivery to a Monday, Wednesday, Friday schedule and save a tremendous amount of money from reduced fuel cost and vehicle maintenance, not to mention the positive environmental impact. If the volume of traditional mail is falling, the model for the USPS needs to change and become more efficient. Simply raising rates to deal with budget shortfalls is not a good strategy of long term viability.
January 5th, 2010 at 9:31 pm
If there is going to be a cap on raising postage rates, there also should be a cap on the rates for PO Boxes, especially at the non delivery offices. People are giving up their PO Boxes at the small offices and going to rural delivery, which is a more costly option on our part. You might be gaining a few bucks on revenue by raising the rates, but you are raising your expenses a lot more at the same time.
The people who are coming in everyday for their mail are the ones less likely to pay their biulls online, and use our other services while they are there.
January 5th, 2010 at 2:50 pm
Not raising prices this year was a mistake that will haunt us for years. Their is a cost to delivering mail to each mail box 6 days a week, no matter if there is one letter or 20 letters, there is a cost even if there is no mail to every box. The route has to be driven the same each and every day. Currently we are not covering those costs and the reason is the Cola cap. We need to re-think our pricing. Appox 90% of the mail is advertising so we need to quantify the value of our customers to the advertisers and charge accordingly, forget, discounts there should be a premium for access to our customers. This is no different than companies charging advertisers for mailing lists, it just that advertiser think because we are the postal service, a government service, they should get access to these customers for nothing. We are the best value for advertisers to reach there customers in whole or in targeted groups, we should be expanding our reach with 7 day delivery and eliminate the surcharges so the advertisers get easily understood pricing. We have the equipment and the highly trained personnel to process there advertising, we need to recovery these costs not give the advertiser reason not use us.
January 5th, 2010 at 1:15 pm
Just stop paying all those high wages to managemnt. The post office was never a place to come and “get rich”!!! the post office is a public SERVICE!!!!
STOP THE WASTE AND EVERYONE WINS!!!
January 4th, 2010 at 10:15 pm
Suppose the Postal Service wants to deal optimally with its financial situation, and it has 4 options to use. The idea of using the best mix of 4 is relatively simple. But now suppose one of those options is precluded from being used, by a price cap. It must now choose a mix of the three remaining options. The result will be suboptimality, caused by the price cap, except in the unlikely event that prices would not have been used anyhow. Suboptimal solutions are always worse than optimal solutions.
But, you say, the price cap was supposed to help. Those able to explain any help it provided should write in. Keep in mind that the new law was supposed to give the Postal Service wherewithal that it did not have before. It did not. It may have reduced wherewithal.
The picture is not a pretty one. We accept suboptimality and a Postal Service without strength to fight. Congress sure is helpful.