Vague Law Foments Debate Over USPS Parcel Pricing

Vague Law Foments Debate Over USPS Parcel Pricing

There’s been quite the hullabaloo raging over the U.S. Postal Service’s (USPS) pricing of parcels. President Donald J. Trump started a volley in late December 2017 by tweeting:

Why is the United States Post Office, which is losing many billions of dollars a year, while charging Amazon and others so little to deliver their packages, making Amazon richer and the Post Office dumber and poorer? Should be charging MUCH MORE!

Trump subsequently lobbed additional bombs, alleging a “scam” that was soaking USPS $1.50 for every parcel it delivered for Amazon.

The president was not just popping off randomly. The Postal Service’s parcel business has been a bone of contention for years. Postal unions and the U.S. Postal Service Office of Inspector General have flagged certain deals with shippers, alleging pricing and labor-cost issues. There also is a fundamental policy question involved: Should a government agency compete with private businesses?

The fight has grown more intense because the Postal Service has quickly become a big player in parcels. Ten years ago, parcels were little more than a rounding error for USPS — $1.8 billion of the agency’s $75 billion in revenues. Today, USPS rakes in $19.5 billion delivering parcels, which is 28 percent of its revenues. That amounts to 5.7 billion parcels delivered.

Not everyone bought the president’s argument. Josh Barro of Business Insider countered that the figure, which came from a Citibank analysis, was wrong. The analyst who came up with the original figure admitted he had looked at the legal floor for parcels’ cost coverage, not the actual reported figures. Barro pointed out that figures reported to the Postal Regulatory Commission, which oversees the Post Office, indicated USPS had profited on parcels. Indeed, the regulator reported that in 2017, 842 of 846 USPS parcel delivery deals with shippers were compliant with postal law’s pricing demands.

Back and forth the debate goes, with little sign that a definitive answer is emerging. Why is a seemingly straightforward question — whether the Postal Service is profiting on parcel deliveries — so hard to answer?

The reason, in great measure, is because postal law does not define the word “profit.” This is not a problem when it comes to assessing the financial health of the USPS as a whole. We can see a tally of the total revenues and expenses in the Postal Service’s annual reports, so we know the agency has been unprofitable most years. (Last year, it lost $2.7 billion.) Trying to determine which products and services are causing those losses, however, is another kettle of fish.

At first blush, it seems simple. The Post Office reports the revenue it earns for each type of product and service it provides, as well as the “attributable cost.” So in 2017, for example, we see first-class package service brought in $2.79 billion in revenue and had an attributable cost of $1.9 billion. That means USPS profited $0.8 billion on this line of business, right?

One would be forgiven for answering “yes” but then finding oneself mired in a paradox: USPS reports that nearly every one of its products and services brings in revenue that more than covers the agency’s attributable costs. First class mail covers 210.2 percent of its attributable costs. Priority Mail covers 132.9 percent of its attributable costs. And so on. Yet the Post Office itself hemorrhages money. Which prompts the question: How can USPS lose billions when the agency’s revenues exceed its costs?

The answer is that attributable costs are not the only costs for which USPS is liable. The Postal Service also has “institutional costs.” What’s the difference? The law defines attributable costs as “the direct and indirect postal costs attributable to such product through reliably identified causal relationships.” Institutional costs are the costs excluded by that definition. Thus, for example, if USPS hires an additional worker to carry parcels, that is an attributable cost. The electricity used to operate a mail sortation plant, on the other hand, is an institutional cost.

Last year, USPS’s total operational costs were $72.4 billion and its attributable costs were only $41.6 billion. That leaves $30.8 in institutional costs, or 42.5 percent of the agency’s overhead. How those institutional costs should be attributed to parcels and other classes of mail has been hotly contested for years, and the method used determines whether individual products are profitable.

Abstruse as the matter is, how USPS attributes costs is a big deal. It is hard for any commercial enterprise to survive if it cannot discern which of its products are money-losers and which are money-winners. Additionally, higher attributed costs associated with parcels or other products could necessitate USPS charging higher prices. This would affect consumers a little and big shippers a lot. Moreover, a longstanding objective of postal law is to ensure that USPS’s monopoly products (e.g., first class mail) do not cross-subsidize USPS products that compete with the private sector.

The law’s vagueness is the root of the problem. Congress could draft a law to clarify the matter, but its postal reform efforts have been mired in gridlock for a few years. USPS’s regulator is pondering the institutional cost issue and may release a new rule on the matter this autumn. But, absent the Postal Regulatory Commission apportioning a large chunk of USPS’s institutional costs among mail classes, it is hard to see the parcel pricing debate ever ending.

Kevin R. Kosar is the vice president of policy at the R Street Institute.

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