IT'S STILL ABOUT COSTING

The following is a perspective by postal commentator Gene Del Polito. The views expressed are the author's.

While customers of the Postal Service are concerned about quality of service, universal service, and the like, the fact remains that if the prices charged for the services received do not compare favorably with other methods of communicating and transacting business, mail will come out on the short end.

Today's ratemaking centers on what is called the "subclass" level, i.e., a grouping of mail that ostensibly receives the same level of service and shares similar operational and market-demand characteristics. The process begins with a determination of those activities that are said to be "caused" by any grouping of mail ("attributable costs"), continues on with an assessment designed to recover "a fair share" of nonattributable or "institutional costs," and often culminates with some discount off  some "fully recovered" base rate to reflect the savings the USPS achieves because of mailer worksharing.

For many years, this process of ratemaking worked satisfactorily. At the time of postal reorganization, worksharing was minimal, and market-demand within specific mail groups were not particularly discernible. Since reorganization, however, mailer worksharing has grown, and so has the complexity of determining the full measure of its avoided costs. In addition, the operational and market-demand characteristics within many subclasses have become noticeably different. A subclass that formerly could have been said to be "homogeneous" now evidences considerably "heterogeneity." Ratemaking has become a thornier exercise. In many respects, the "homogeneity" ascribed to some subclasses is nothing more than a regulatory fiction.

The Postal Service has benefitted from mailer worksharing. This fact was reaffirmed by the President's Commission on the Postal Service and the Government Accountability Office. Worksharing has permitted the USPS to offer more economically attractive rates at a time when its own operational costs had grown.

For worksharing to work, though, postal discounts must exceed mailer worksharing costs. When discounts fail to do so, worksharing just doesn't occur. Understandably, postal executives have had to balance the disincentives of risking "giving away the store," and the incentives ("rewards") designed to enhance mail's value. In recent years, however, the fear of disincentives has overshadowed potential benefits. Consequently, "discounts" sometimes discourage the kind of greater cost-efficiency that worksharing that was meant to stimulate.

For postal reform to be a success, the "incentives" that flow from postal rate design must comport with rational economic behaviors. To ensure this, ratemaking should be firmly grounded on as accurate as possible a determination of the resource costs consumed to produce any particular level of service. Instead of "discounting down," postal rates should be "surcharged up" to reflect more accurately resource use. A bottom-up approach to postal costing would make cost attribution more accurate and complete. Proper efforts could be made to ensure that rates also yield a reasonable profit (in accordance with sound market-based principles) at every level of postal network access.

These principles should have been built unambiguously into postal reform. This could have done without displacing the concepts of attributable and institutional costing, without negating Congress' desire to maintain recognition of educational, cultural, scientific, and informational value inherent in periodical, library, media, and nonprofit mail, and all while providing the Postal Service with greater postal regulatory flexibility. The issue of transparency also would have been addressed more appropriately than under the scheme that exists today.

Redesigning the postal network is one of the key provisions of the Postmaster General's transformation plan. It also figured prominently in the Presidential Commission's recommendations. "Realigning" the network, though, assumes an elimination of unnecessary and costly network redundancies--something you can't do until you really know which elements of your network are redundant. Simply put, a rate structure based on a "reformed" concept of ratemaking should make redundancies more apparent as mailers respond to rationally costed and priced incentives.

With all that said, however, neither the Postal Service nor the Postal Rate Commission have demonstrated much of an appetite to truly reform postal ratemaking. Both have said they would rather continue with today's approach to ratemaking with cost-bloated subclasses and top-down discounting.

Why? Because that's the way things always have been. Changing the way rates are determined might require the expenditure of some intellectual elbow grease--something that comfortable bureaucracies are often loathe to do. You also can forget the malarkey that less explicit reform would be sufficient as long as ratemaking remained within the hands of benign "people of goodwill." History has more than shown that postal regulators around the world embody a spirit more closely akin to manifest destiny than regulatory constraint. Without explicit instructions from Congress to the contrary, it would be no different here.