A rational approach to price setting


August 22, 2017 


The Hill contributor Linda Thomas Brooks’ recent opinion piece (“Don't give the Postal Service virtually unlimited power to raise rates on its own”) misrepresents the facts concerning the Postal Service’s financial condition and its proposal regarding continued product regulation. Contrary to her opinion, the Postal Service’s proposal for additional authority to set prices for our market-dominant products is a necessary and rational step to addressing its current financial situation, and therefore adhering to the fundamental principle of postal policy that the Postal Service be self-funded.

The Postal Service has made, and is making, tremendous strides on not only service, but in right-sizing our network and infrastructure within the constraints of our existing business model and current legal obligations, increasing workforce flexibility, and establishing a more affordable, two-tiered wage system. This aggressive agenda of cost cutting, efficiency improvements, and innovation has resulted in approximately $14 billion in annual savings. Studies consistently show that the Postal Service is one of the most efficient posts in the world. We have also been very successful in growing package volume and revenue, which provides critical support to maintaining the network needed to deliver to each and every address in the United States, six days a week, and to provide to every American mail delivery no matter where they live, at an affordable rate.

However, despite our achievements in improving operational efficiency and growing revenue, we cannot overcome systemic financial imbalances caused by legal and other constraints. The current regulatory structure governing our ability to adjust prices of market-dominant products, which produce more than 70 percent of our revenue, is predicated on an austere price cap that does not take changes in Postal Service volumes and costs into account. As the past decade has clearly shown, this system is wholly unsuitable to ensuring the Postal Service’s continued ability to provide prompt and reliable universal services, and meet its other statutory obligations, in a self-sufficient manner. The Postal Service has been able to maintain cash to continue delivering the mail only by defaulting on over $33 billion in statutorily-mandated payments, exhausting its borrowing authority, and deferring necessary capital investments. If the Postal Service hadn’t taken such extraordinary actions, and also implemented a temporary exigent rate surcharge in excess of what the price cap allowed, it would have run out of cash long ago. It is therefore patently obvious that the current price cap has failed to enable the Postal Service to maintain financial stability, which is what the law requires.

Instead of the current price cap, the Postal Service simply seeks a structure that gives us the ability to set prices at levels necessary to ensure our financial stability. The Postal Service currently charges rates that are among the lowest in the industrialized world, and posts throughout the world have used price increases as one tool to address the financial challenges of declining demand for the mail. Moreover, despite the false claims to the contrary, under the Postal Service’s proposal the rates for market-dominant products would continue to be comprehensively regulated by the Postal Regulatory Commission (PRC). However, given the characteristics of the current postal marketplace, there is simply no longer a need for a price cap to ensure that the Postal Service has strong incentives to operate efficiently and to set reasonable prices.   

The Postal Service’s financial situation is serious but solvable. Continued innovation and aggressive management actions together with the passage of the provisions of H.R. 756 into law and a favorable outcome in the PRC’s 10-year review of the Postal Service’s pricing system will restore the organization to financial stability and allow us to continue to provide excellent service to the American public.

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