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.
What do you think?
This topic is hosted by the OIG’s Cost, Revenue, and Rates directorate.