UPS Continues Its “Wreck the Post Office” Campaign, Presses for Increases on Parcel Prices

Yves here. One of the “too many to count” looting operations underway is the effort to make the constitutionally-mandated Post Office uncompetitive in price terms so that private contractors like UPS and Fedex have a greater and more lucrative share of parcel and letter delivery.

The latest offense is an under-the-radar effort by UPS to argue that the Post Office is pricing its products unfairly, and overcharging on services like first class letter delivery to subsidize parcel shipments.

This post is a bit lengthy because it goes into important detail as to how UPS is mounting its attack and the procedural mechanisms it is using. The author, Mark Jamison, describes worryingly how the traditional Post-Office haters, which were stalwart right-wingers as well as Post Office competitors, have recently been joined by neoliberals.

I urge you to share this post widely, to family, friends, colleagues, and on your Facebook and Twitter accounts. Alert local newspapers and television stations to the issue. Please also call or write your Senators (contact details here) and Representative (contact details here) and tell them you’ve had enough of private companies, which have profit targets and no obligation to serve the public, need to be slapped back in their plan to pick the Postal Service’s carcass clean. Give a forceful, loud “no” to this stealth privatization.

By Mark Jamison, a retired postmaster. He can be contacted at markijamison01@gmail.com. Originally published at Save the Post Office

The United Parcel Service is very concerned that you might be paying too much for a postage stamp.  

If you’re wondering why UPS would be worried about something like that, it has to do with the way postal rates are set.  According to the law, each USPS product is supposed to cover its share of the Postal Service’s operating costs, which includes costs attributable to that product as well as a share of total institutional costs.  

UPS believes that market-dominant products — First Class mail, Standard mail, and periodicals — are covering more than their fair share of the Postal Service’s operating costs, while competitive products — Priority and most shipping services — are not paying enough.

As a result, argues UPS, the average customer who buys a First-Class stamp is paying too much because part of the stamp’s price is being used to subsidize competitive products.  UPS wants the cost allocation methodology changed so that competitive products pay a larger share of the Postal Service’s operating costs. 

Then the Postal Service will to have to raise the prices of the products that UPS competes with, which will put UPS in a better competitive position and increase its profits.  UPS doesn’t really care that some USPS customers are paying too much for postage.  UPS cares about UPS.

 

The UPS petition

UPS has been complaining about the costing methodology for many years, but in recent weeks it has intensified its efforts to get the Postal Regulatory Commission to do something about the problem.  In a petition recently filed with the PRC, UPS argues that the costing methodology used by the Postal Service and PRC is seriously flawed, and it recommends several changes that are intended to make the system fairer and bring it into compliance with the law.  (The UPS filing is in PRC Docket Number RM2016-2.)

Under the current system, says UPS, the Postal Service is using its monopoly powers to gain an unfair competitive advantage in the parcel delivery market.  UPS argues that the Postal Service should be allocating a larger share of its operating costs to competitive products, the products that compete with UPS.

If the PRC were to approve the UPS proposals, the Postal Service would need to raise the prices of its competitive products significantly — much more than the 9.5 percent increase announced a few days ago.  UPS would find itself in a much more competitive position.  It could raise its own prices and/or grab a larger share of the parcels market.  That would be good for UPS’s bottom line, but it would come at the expense of the Postal Service.

UPS is already the largest parcel delivery company in the world.  According to a 2014 Forbes article, the company claims 54 percent market share in the e-commerce package delivery market, as compared to FedEx, with 34 percent, and the Postal Service, with about 16 percent — a substantial part of which is providing last-mile service for UPS and FedEx.

In its most recent annual report, UPS shows earnings of $4.39 billion and earnings per share of $2.68. The report claims that UPS will return $30 billion to investors over the next five years.

This is not the picture of a company suffering from unfair competition.  But UPS apparently wants a bigger share of the pie.

The concerns that UPS raises in its petition in RM2016-2 are not wholly without merit, but they are overwrought and disingenuous.  That’s not surprising.  There’s a lot at stake. 

The proposals presented by UPS would affect not only affect the price of nearly every postal product but also the future viability of the Postal Service.  RM2016-2 promises to be a very significant docket.

 

A new line of attack

UPS is trying to convince not just the PRC but also Congress, stakeholders in the mailing industry, and the public that the Postal Service is unfairly competing with the private sector.  To step up its efforts to change the costing methodology, UPS has brought in some influential hired guns for help.

The PRC petition is supported by a report written for UPS by Dr. Kevin Neels, a principal of the Brattle Group, an economics consulting firm.  As his bio says, Dr. Neels has thirty years of experience in the regulatory field, and he is often called upon to give expert testimony.  His report runs to 125 pages, and it’s packed with technical analysis involving high-end mathematics and economics.

UPS has also given financial support to Robert Shapiro, a neo-liberal Democrat who worked for the Clinton administration and is now a principal of Sonecon, another economics consulting firm.  Shapiro has recently written two papers, both with UPS backing.  The first is about how the Postal Service benefits financially from its monopoly through unacknowledged subsidies.  The second, published just a few days ago, is about how cross-subsidies lead to unfair competition with the private shippers.

UPS’s effort has also been given an assist by another adviser to the Clinton-Gore administration, Elaine Kamarck, who has recently published a paper for the Brookings Institute arguing that the competitive products should be spun off into a privatized entity.  (There’s more on the Brookings paper in this previous post, and an excellent rebuttal by NALC president Fred Rolando here.)

It seems that we’ve entered a new phase in the attacks on a public postal system.  For many years, right-wing think tanks and conservatives in Congress have used false and greatly exaggerated deficit scenarios to make the case for cutting postal services, dismantling infrastructure, and eventually privatizing the Postal Service.

Now it appears we have moved into a phase where neo-liberals are joining the attack.  Their approach is to grossly inflate the value of the so-called postal monopolies as an excuse for the privatization of elements of the delivery infrastructure. The UPS petition is clearly a part of this new effort.

This line of attack on the Postal Service is part of a larger phenomenon.  The simple fact of the matter is that a large segment of the political and business elite — on the conservative right and the neo-liberal left — believes in the tenets of market liberalization and extreme deregulation.  

It is this kind of thinking that has led to skewed distributions of wealth and income.  The 1 percent grows richer, while the middle-class get hollowed out and public infrastructures like the postal system get neglected or gutted.

 

Not a new issue

The issue of cost allocation isn’t a new concern for UPS or FedEx.  UPS has been raising issues about cost allocation since at least 2003, when the company submitted testimony to the Presidential Commission on the United States Postal Service.  UPS argued then that the Postal Service needed better costing models that would attribute all costs to individual products.  In 2014, both UPS and FedEx raised similar issues and expressed concerns for the general mailing public when the Postal Service reduced rates for its competitive products.

The petition UPS has submitted to the PRC and the proposals it offers for changing the cost allocations are obviously self-interested.  That does not necessarily disqualify them as legitimate, but when they ignore basic premises in postal costing or seek to overturn long established methodologies, there is some sense that UPS’s claims to being concerned for the mailing public is more than a bit precious.

Before looking at the issues raised by the UPS petition, though, it is worth taking a moment to review what the current law says and how we got here.  (There’s more about this in several previous posts on Save the Post Office, which you can find here.)

 

From PRA to the Bush Commission

The Postal Reorganization Act of 1970 (PRA) began a process of moving the nation’s postal system towards a more privatized model.  Based on the work of the Kappel Commission, the PRA embraced a model of the Postal Service that was intended to be what was euphemistically termed “more business-like.” Some folks might have interpreted the term as meaning more efficient, but the real effect of the PRA was to reorganize the Postal Service to mirror a corporate structure.

Over the next thirty years, as neoliberal thinking unleashed policies of market liberalism and deregulation, discussions over the future of the Postal Service took a turn towards viewing postal networks as a target for privatization rather than as elements of national infrastructure.   

The culmination of this thinking was embodied in PMG Jack Potter’s 2002 Transformation Plan, which heavily influenced the report of the 2003 Presidential Commission on postal reform, Embracing the Future: Making the Tough Choices to Preserve Universal Mail Service.

The Commission’s report candidly discussed privatization of the mail system.  It recommended that the private sector play a larger role and that the Postal Service become more like a private business. 

As the executive summary states, “the Commission strongly recommends that the private sector become more involved in the delivery of the nation’s mail.”  At the same time, “the Postal Service must have the nation’s support in aggressively adopting private-sector productivity and cost-saving strategies and applying them to the public mission of delivering the mail.”  The report also recommends that the Postal Service make greater use of partnerships with the private sector.

While the direction of these recommendations is clearly toward privatization, the Commission was concerned that full and immediate privatization might be too disruptive and unwieldy, mostly because it might disturb private delivery markets.  Here’s what the Commission said (emphasis added).

In the judgment of the Commission, privatization of the Postal Service would today pose a substantial risk of doing great harm. Privatization of a commercial entity the size of the Postal Service could seriously disrupt the highly successful private delivery service markets. For the Postal Service itself, privatization could imply a decade or more of wrenching organizational changes. Most importantly, while the end result of privatization could be a dynamic and efficient private postal sector, the privatization process could undercut the stability and continuity that are the hallmark of a public service. Given the essential nature of universal postal service for the foreseeable future, the Commission believes that the least risky strategy is a more evolutionary approach. The Postal Service should be maintained as a public entity, but refocused and reorganized to enhance its efficiency and adaptability in the face of an uncertain, and ultimately more competitive, future. 

That the Presidential Commission of 2003 did not recommend complete privatization of the Postal Service was perhaps a recognition of practical problems but also an acknowledgement of the political impossibility of an abrupt change. The answer instead was a gradual segmented shift in the focus and direction of the Postal Service and the laws that govern its obligations and behavior.

The Postal Accountability and Enhancement Act of 2006 was the vehicle under which gradual, “evolutionary” privatization would take place.

 

What PAEA wrought

Over the last several years those interested in preserving a public postal system have focused on the retiree health benefits provisions of PAEA as cause of the Postal Service’s financial problems.  Certainly the dire financial predictions and the drumbeats that accompanied concocted postal losses have been used to undermine the infrastructure of the network, lower service to American communities, and reduce the quantity and quality of postal jobs. 

But the most serious damage done by PAEA was not the prefunding mandate.  It lies in the way PAEA separated postal products into market-dominant and competitive categories.

PAEA divided postal products into two separate bins, those that supposedly benefited from the two monopolies (mailbox and letter) granted to the Postal Service, like First Class mail, and those which had competitive offerings in the private sector, like parcels and expedited mail.

From the beginning, the distinction was problematic.  For large parts of the country — certainly rural areas but also many lower income suburban and urban areas — the presence, accessibility, and affordability of private package delivery companies are limited. For these areas, it was a false premise to claim that some USPS products were in competition with the private sector. 

The market-dominant and competitive nomenclature also betrays a certain prejudice.  Thinking that postal products and services could be separated so easily and completely ignores the very concept of the postal network as a public infrastructure. Making these distinctions involves accepting certain assumptions about how fairly markets work and whom they serve, particularly in the provision of services that act more as utilities or common carriers than mere commercial products or services.

A significant effort has been made in the field of economics over the last fifty years to argue that public goods and infrastructures can be operated in and accounted for in a fashion that mirrors that of a business-oriented, profit-seeking enterprise.  There has been something of a consensus across much of the ideological spectrum in this area.  

We’ve seen it, for example, in globalization and trade agreements like TPP.  We’ve seen it in the move towards privatized provision of what have been traditionally public services, like prisons and the military.  In the postal sector we’ve seen much of Europe move towards a “liberalized” or semi-privatized model of providing postal services.

The results on all these fronts have been, to say the least, mixed, and thankfully we are starting to see some pushback against the market as a sacred religious institution without flaws.

Unfortunately, however, PAEA wholeheartedly embraced much of the neo-liberal economic agenda. Nowhere is that clearer than in the sections that deal with the separation of products into market-dominant and competitive categories.  

 

The two categories

PAEA encouraged the Postal Service to move as many products as it could into the competitive category, where there would be more flexibility about pricing and less transparency with respect to reporting on cost allocation, service performance, and so on.  Moving products into the competitive category was also a way of moving the postal system toward a privatized model.

In recent years, the Postal Service has transferred most types of shipping services from the market-dominant to competitive categories.  In 2010, commercial Standard Mail Parcels was transferred to the competitive list, in 2011 commercial First-Class Mail Parcels was reclassified as competitive, and in 2012 Parcel Post was transferred as well.  The Postal Service is now in court with the PRC over the Commission’s decision not to allow the Postal Service to transfer lightweight First Class Mail Parcels (more on that here).

In creating the category distinctions, PAEA also set out the ground rules for moving products into the competitive category. The Postal Service had to seek approval from the PRC to make a switch, which required demonstrating that the products would be priced in a way that would cover their attributable costs, i.e., those variable costs which could be directly associated to the handling and delivery of the item.

The pricing also had to cover a share of the institutional costs, also known as fixed costs.  The PRC was charged with determining an appropriate level for competitive products generally, and the level was set at 5.5 percent.

The reason for this regulatory oversight was to ensure that the Postal Service didn’t use its monopoly advantage to cross-subsidize competitive products with the rates and fees of what have come to be called “captive mailers” – the users of First Class and other market-dominant products.

A lot gets packed into the ideas contained in the terms “cross subsidy” and “captive mailers.”  Suffice it to say that the legislators who crafted PAEA were at least as concerned about the fortunes of America’s corporations engaged in the delivery market as they were about the average citizen who relies on the postal network.  That message is clear in the Presidential Commission, and it’s one that the poor and downtrodden “competitors” of the Postal Service like UPS take very much to heart.

 

Under Seal

While the main thrust of the UPS petition is the push to transform the costing methodology, UPS has another complaint to register with the Postal Service and the PRC — the lack of transparency in the process.

Pretty much everything related to competitive products is filed by the Postal Service with the PRC “under seal,” and versions made public are significantly redacted, often to the point of being totally meaningless. 

A couple of years ago, I tried to get access to the “under seal” documents associated with the Postal Service’s contracts with Amazon and Staples.  Even though I met all the criteria under the law, I was quickly shot down.  That is inconsistent with the mission and oversight of an essential public institution like the Postal Service.  (More on that here.)

To this day, we don’t know the terms of the agreements the Postal Service has made with Amazon, Staples, UPS, FedEx, and many other companies.

The PRC has demonstrated superior technical competence over the years, but its staff is not above making mistakes and, like many regulatory agencies, it can be subject to the vagaries of the political process and the ideologies inherent those processes. The PRC administers law, and law is always subject to interpretation, and interpretation often turns on the fundamental assumptions and assertions one accepts – call it ideology or something else, but it is an inescapable element of social institutions.

Sunlight is the best disinfectant, or so it has been said.  Pretty much everything the Postal Service does ought to be open to public scrutiny and evaluation.  Unfortunately one of the consequences of the bastard that PAEA created is that by asking the Postal Service to operate at times under the incentives normally associated with the private sector we also create a situation where some information becomes proprietary.

There’s a bit of irony, however, to the cries for disclosure and more transparency made by UPS.  When it filed material in support of Dr. Neels, it made them “non-public.”

 

Distorting the free market

In what is at times quite emotional language, the UPS petition claims it conducted “an exhausting analysis” of Postal Service costing methods, and the resulting analysis demonstrates with “stunning clarity” that the Postal Service has shown a “disregard of the obligations placed upon it by PAEA.”  This, says UPS, “threatens to distort competition in parcel delivery markets and to harm the public and those captive mailers who must fund this expansion” of the Postal Service into parcel markets.

The report goes on to connect these artificially cheap postal parcel prices with the exigent rate increase and the decreasing service resulting from the abrupt reduction of the mail processing.

The UPS petition also accuses former PMG Patrick Donahoe of sacrificing the Postal Service’s public mission in order to build a parcel delivery company, something, which PAEA and subsequent Congressional hearings on postal reform seemed to endorse. It’s a fair criticism, and one we’ve made here at STPO, but coming from the largest parcel delivery company, one who has more than 50% of market share, the claim is beyond disingenuous.  

Moreover, the complaint is supported by self-serving analysis that fails to understand the nature of universal service. In addition, the report, though not openly, takes a slap at the PRC for failing to properly regulate competitive products.

The overall case UPS makes is not unreasonable and it fits the general trend in cost accounting over the last couple of decades.  The goal is to try to attribute as many costs as possible to individual products rather than lumping them into general categories. The thought is that if you are, for instance, a widget maker then you want to know as accurately as possible what it costs to make each individual type of widget so that you can better set prices. It’s an argument for taking a very focused look, one that can sometimes get overly complex and lose the forest for the trees, but it’s one that has gained a consensus.

One problem that ought to be immediately apparent with this thinking is that making or selling widgets is very different than providing a service that relies on a certain amount of network infrastructure. The differences get even wider when concepts of universal service are applied.  It’s the failure to understand those distinctions that pops up over and over in the report Dr. Neels created to support the UPS petition and proposals.

 

Three proposals

In its petition, UPS claims that current postal costing methods fail to properly attribute costs to individual products.  Consequently, says UPS, the Postal Service — with the acquiescence of the PRC — has failed in its responsibilities under section 3633 of PAEA to assign attributable costs to competitive products like Priority Mail.  

UPS says that this failure, besides being non-compliant with the law, causes the Postal Service to price its parcel products too low.  As a result, competitors like UPS are at a disadvantage, while postal consumers of market-dominant products like First Class Mail are paying higher prices that subsidize parcel mailers.  

UPS also claims that the 5.5 percent level for the institutional contribution for competitive products is much too low, and the PRC should raise it to something that recognizes changes in the Postal Service’s business.  In other filings UPS has also complained that because information related to competitive products and their costing is filed under seal the process lacks transparency.

In its petition, UPS presents three proposals to reform and improve postal costing systems. Proposal #1 looks at the way the Postal Service treats what are known as inframarginal costs. Proposal #2 deals with the classification of costs as fixed or variable.  Proposal #3 deals with the proportion of institutional costs that competitive products ought to cover.  

Basically, the first two proposals would shift some costs from the institutional category to the attributable category, while the third would increase the percentage of institutional costs borne by competitive products.  Together they would increase the share of total costs that competitive products would need to cover, which in turn would require increasing the prices of those products.

Let’s start with the third proposal, since it is the only one that has any real merit.  

 

Proposal #3: Changing institutional cost contributions

UPS argues that requiring competitive products to cover 5.5 percent of institutional costs is simply not enough.  UPS looks back at the history of PAEA, as well as the PRC’s attempt to meet the mandates of the law, and finds that the amount of 5.5 percent has become “arbitrary and capricious.”  That phrase is not just intended to persuade the PRC to take action.  It sets the stage for an appeal to the courts if the PRC does not provide satisfaction.

As UPS explains, the products in the competitive category have accounted for an ever-increasing share of postal revenues and costs — at this point in time, over 20 percent of each, which is significantly more than they were responsible for seven years ago when the 5.5 percent figure was set.

PAEA is a bad law but it is still the law and the law makes clear that the institutional contribution should bear some relation to reality. Right now it doesn’t, and the PRC should revisit the issue and reset the percentage going forward.

As of FY 2014, institutional costs represented 41.7% of total costs (about $28 billion out of a total $68 billion).  Even if this amount is reduced by proposals #1 and #2, shifting a significant percentage of these institutional costs from market-dominant products to competitive would have a major impact on pricing not only of competitive products but also market-dominant products.

Because of the complexity of postal cost accounting, however, it’s hard to tell what impact increasing the contribution level would have.  It certainly would mean that the prices for competitive products would rise, but how much they would go up would be subject to elasticities and other factors, like the new percentage that the PRC sets.

The UPS petition argues that the new percentage should be 24.6.  That is several times the current level of 5.5 percent, and it would mean shifting billions of dollars in cost from market-dominant to competitive.  

 

Proposal #1: Assigning inframarginal costs

While proposal #3 may be reasonable (depending on the new percentage), the other two proposals presented by UPS are seriously flawed.  They would dramatically reclassify a substantial portion of institutional costs as attributable costs.

The first UPS proposal is concerned with what are called “inframarginal costs.”  These can most easily be characterized as variable costs that arise from economies of scale.  In his report Dr. Neels gives the following example. 

Imagine a letter carrier delivering a bunch of letters.  It costs $1.00 to deliver the first letter, but since the carrier is already out on the route, it costs less to deliver a second, still less to deliver a third, so by the eighth letter the cost per piece is $.71. Obviously the costs vary as the number of pieces increases, but at some point the costs will stabilize at what is known as the marginal rate.

So in this example if the cost stabilizes after the eighth piece, then the cost for each additional letter remains $0.71.  The inframarginal cost is the difference between the first piece and the last piece, or $0.29.

UPS states that PAEA requires that the cost of each product to be assigned to the product, as accurately as possible, rather than being assigned to some general category like overhead. This is essentially true, but UPS argues that the Postal Service’s costing systems don’t assign the inframarginal costs to each competitive product.  Instead the Postal Service simply treats the marginal cost of the last piece as if it were the cost of every piece, which understates the costs of the “previous” pieces.

According to the following chart in Dr. Neels’ report this can lead to a large area of costs being unaccounted for:

UPS and Dr. Neels argue that the Postal Service and the PRC have essentially ignored the problem of inframarginal costs over the years and that this has allowed the Postal Service to price parcel mail lower than the law allows. The result is that consumers are harmed through less competition.  If the Postal Service priced its parcels higher, then UPS would be more competitive and consumers would benefit.  Or so UPS says.

 

Shapley to the rescue

But wait, it gets even more complicated than that. In the hypothetical example, the carrier was just delivering letters, but of course the carrier is delivering a variety of products, which makes it difficult to determine which product should bear which part of the inframarginal costs. If you put the products into some sort of order, then the likelihood is that you will misattribute costs to products.  

Dr. Neels resolves this problem by introducing us to something called the Shapley Value, a way of generating random ordering of products and assigning inframarginal costs to the random slices.  (It’s named after the mathematician who introduced the concept.)  This all gets very complicated, but Dr. Neels assures us that it is the solution to the problem he has articulated.

As he leads us toward the promised land, however, Dr. Neels seems to miss an essential point — the effect of the universal service obligation.  He mentions — and dismisses — the USO in a single line in his report.  But if the goal is to actually understand postal costing issues, that is a very big problem.

Dr. Neels’ analysis treats every postal product as being equal, which completely ignores the raison d’être for a public post operating under a USO.  The costs of the network are largely borne by the mandate to serve 160 million addresses, regardless of the profitability of any individual address.  

Since it doesn’t have a USO, UPS makes decisions every day on what areas of the country it will serve, and it adds surcharges for delivering to certain places due to costs like fuel and the type of delivery (residential, business, etc.).  The Postal Service can’t do this, doesn’t, and shouldn’t.  The Postal Service’s delivery network is designed to accomplish a different set of goals than the UPS network. The analytic technique Dr. Neels uses is therefore inappropriate and misleading.

 

Proposal #2: Reclassifying fixed costs as variable

The second proposal is intended to correct misapplication of fixed costs.  UPS argues that the Postal Service should do a better job of assigning fixed costs like headquarters expenses to individual products.  

In theory every cost in an organization could be assigned to an individual product or project.  With enough time and energy, and at considerable expense, a system could be designed that assigned every minute of every day for every postal employee to a particular postal product. We might find, for example, that PMG Brennan spends five percent of her time thinking about Priority Mail and we would then assign five percent of her salary, bonuses, and fringe benefits to the costs associated with Priority Mail.

Of course, such a system would likely be arbitrary in some cases.  In others, the collection and processing of information would be expensive, probably yielding very little benefit.

But it is important to see the differences between a manufacturing or retail company engaged in for-profit enterprise and an institution that serves as basic infrastructure.  A private sector entity might want to know the impact on its costs and bottom line if it eliminated a single product. That might apply on the fringes at the Postal Service, but the nature of the network and the USO call for the recognition of some base institutional costs that cannot be easily or productively attributed.

The tendency in some of this type of accounting and costing is to get overly granular and specific, often disregarding the fact that information costs money and resources and can often be a detriment as well as a help in managing a large organization.

 

A continuous discourse

UPS’s case for a wholesale rearrangement of postal pricing to avert competitive disaster and save “captive mailers” is overwrought.  Through the magic of statistical regressions run on small samples and the application of arcane techniques of data manipulation, Dr. Neels, like a modern day alchemist, has divined truth for his clients.  The truth, we’re told, is that the Postal Service is a bully that uses its monopoly leverage and an outdated accounting methodology to take advantage of competitors like UPS and the mailers who have no control over prices. 

Throughout its petition and Dr. Neels’ report, UPS claims that the Postal Service and the PRC have ignored the problems of accounting for inframarginal costs. The tone of the UPS filings might lead one to think that the Postal Service has done this intentionally to evade the law and that the PRC has been a willing accomplice. Actually nothing could be further from the truth.

Over the years the PRC has commissioned or solicited several reports on inframarginal costs and issues associated with properly attributing fixed and overhead costs to individual products when applicable. In his report Dr. Neels cites much of this work, although he seems to have ignored or misrepresented much of what has been written on the subject.

Several papers on the PRC website deal specifically with these issues. They include this one by Charles McBride titled “The Calculation of Postal Inframarginal Costs” which includes a detailed history of the literature.  Another one by Robert Cohen and John Waller looks at some of the very technical aspects of developing techniques to look at variable costs.  

Finally, John C. Panzar, one of the most respected and prolific students of postal accounting and economics, compared the effects of inframarginal costs in his paper “The Role of Costs for Postal Regulation” and found that the current system did a credible job in accounting for postal costs. The USPS Office of Inspector General has also done several reports on the subject, including “A Primer on Postal Costing Issues”.

The math in some of these papers can get pretty difficult, but the conclusions are accessible and they put the current UPS filing in a far clearer light.  What these papers tell us is that, contrary to the claims of UPS, there has been a long, thoughtful, and continuous discourse on postal accounting and costing issues.

There has been no attempt, as UPS asserts, to evade the requirements of PAEA.  No, the fact is that the PRC has performed its duties of regulatory oversight diligently.  Are there questions that need to be resolved on some of these costing issues? Yes.  But there is clear evidence that ongoing efforts are being made to make improvements.

 

Not much, just all

Last year I wrote a post entitled Giving Away the Store: The Postal Service Discounts the Mail, which raised questions about the discounts the Postal Service was giving Staples as part of the postal counters being set up in Staples stores.  The post also noted other problems with the way the Postal Service sets prices under PAEA.  

Workshare discounts, for example, have gone a long way towards transferring postal jobs and infrastructure to private-sector companies that often engage in mergers and acquisitions that result in mass layoffs.  The net result is of questionable benefit to postal customers specifically and the American economy generally.

There are also issues with the contracts the Postal Service has signed to provide last mile delivery for UPS and FedEx, something that Senator Claire McCaskill has raised questions about. Ironically, companies like UPS and FedEx have used cheap postal pricing to access the Postal Service’s last mile infrastructure. This brings those companies larger reach and wider penetration without having to invest in costly infrastructure.

One effect of the proposals outlined in the UPS petition is that UPS would end up paying higher prices for Parcel Select and other last-mile access.  Reading the UPS petition, though, one is struck that concepts like “competitive disadvantage” and “postal monopoly” cause a sort of knee jerk reaction in the corporate world. Then again it could simply be an example of the old Junior Wells cry, “I don’t want much, I just want it all.”

There are serious problems with postal pricing, but they are not to be found in the details of inframarginal costs and Shapley Values.  The problem is that the basic logic underlying PAEA is fatally flawed.  Adjusting methodologies around the edges won’t solve the problems.  

The problem isn’t that the Postal Service is pricing its competitive offerings too low, it’s that by embracing the false distinctions embodied in the market-dominant and competitive paradigm we have created a set of conflicting and often mutually exclusive incentives.  When it becomes subsidiary to profit incentives, the provision of universal service becomes a shadow, a mere talking point.

 

Valuing public infrastructure

The postal network is a form of infrastructure similar to the interstate highway system or a public utility. Its reach brings millions into the economy in ways that we never could accomplish with a private entity working merely on the profit motive.  

At the turn of the twentieth century, Parcel Post brought rural communities into the marketplace as full participants.  Today, when the Internet has changed the world so much, we see the same forces of infrastructure at work in the ability of the Postal Service to deliver parcel mail to every corner of the country at affordable rates.

For many people, access to the USPS parcel network is not a matter of access to simply another competitor. It is an essential and fundamental service, an infrastructure appropriately provided as a public service.

The problems the Postal Service faces are the result of the way PAEA gave formal shape to the desire to privatize public services.  In so doing, it ignored the value of public infrastructures, and actually laid out a way to destroy those infrastructures in the pursuit of profit.  

PAEA created a chimera, a hybrid creature that is neither public utility nor corporate entity. If there are problems in postal costing systems, they arise because of the misguided attempts to divide the nation’s postal network into a half-private bastard child. The distinctions between market-dominant and competitive products are false and undermine the concept of universal service.