Alliance Report – There is hope for near-term exigent surcharge removal

07/27/2015

Alliance of Nonprofit Mailer Report shares the Alliance’s view on exigent surcharge removal. Note that many in the industry believe we will see an update from the PRC at the end of this week. As soon as news is available, we will make it available here.

Alliance of Nonprofit Mailer ReportAlliance of Nonprofit Mailers:

Eliminating the “count once” constraint should have almost no effect if the Commission uses the correct unit contribution numbers

When the Court of Appeals on June 5 vacated the “count once” constraint on recession-related Postal Service (USPS) loss recovery, the USPS jumped to the mechanical conclusion that the action would add approximately $1.2 billion in lost contribution to the exigent surcharge. (Contribution is the postal regulatory term that is roughly equivalent to unit profit.)  A filing by the Alliance and nine other customer organizations shows that the calculations underlying that assumption are incorrect.

The lost mail volume occurred in 2008 through 2011, during and immediately following the most recent recession, until the USPS reached a “new normal” when the losses were no longer extraordinary or exceptional. Following the court decision, the USPS on June 8 argued that removing the “count once” constraint would increase its recoverable lost contribution from the original amount calculated by the Postal Regulatory Commission (PRC).

The practical impact of the USPS point of view would have been that the current exigent surcharge of 4.3 percent on all monopoly postal products would stay in place for about three quarters longer than the current endpoint in early August. That is, the surcharge would continue until next spring.

The comments that we filed at the PRC on June 26, however, show that an important mistake was made in the calculation of lost contribution. To convert lost mail volume to lost contribution, one needs to multiply lost volume by the per piece unit contribution that would have been earned on that lost volume. The mistake was that the USPS multiplied lost volume from Fiscal Years 2008, 2009, 2010, and 2011, not by per piece unit contribution rates in those years, but by the contribution rate in Fiscal Year 2014. Because unit contributions were generally higher in 2014 than during the four years in which the lost volume occurred, the USPS calculation is grossly inflated.

We recalculated the lost contribution with the “count once” constraint removed and the proper years’ contributions used.  We found that only $60 million in additional recession-related losses, not $1.2 billion, become recoverable if the “count once” constraint is removed. The exigent surcharge should end virtually on schedule in early August.

Significantly, the USPS itself recognized earlier the importance of matching the years for volume losses and contribution rates. In comments filed at the PRC on December 6, 2013, the USPS said (emphasis added):

“Thus, to more accurately use the lost volumes shown in the table to calculate a cumulative lost contribution, it would be necessary to take the estimates of lost volume in each separate fiscal year and apply to them the relevant unit contributions for that particular fiscal year, and then sum the resulting annual lost contributions across fiscal years.”

In its December 24, 2013 order granting the temporary exigent surcharge, the PRC reiterated what USPS said on this point (emphasis added):

“[The USPS] acknowledges that in order to obtain a cumulative amount of lost contribution over a series of years, it would be necessary to “take the estimates of lost volume in each separate fiscal year and apply to them the relevant unit contributions for that particular fiscal year, and then sum the resulting annual lost contributions across fiscal years.”

It is not clear why the PRC chose to depart from the basic and unexceptionable principle that calculating lost contribution in a given year requires multiplying the lost volume in that year by the unit contribution rates for that same year. It is clear that this error should be corrected in the recalculation of lost contribution. The result should be a small change in the exigent surcharge and its removal in early August.

The PRC will receive reply comments on July 6, and make its decision soon thereafter, presumably before the current early August deadline for the exigent surcharge is met.