Direct Mail News & Resources

Why Postal Costing Should Matter to Everyone

When it comes to the question of where postal rates come from, the simple answer is that they reflect postal costs, but the underlying process of measuring and assigning those costs is what really matters.  Boring as the topic may be, it’s still the critical component in determining the prices ratepayers – mailing companies’ clients – pay for their mailings.

In that vein, below is a story about how the costing process is at the center of an argument between the Postal Service and UPS.  Though many in the mailing industry may have little interest in such a feud, let alone one on such an esoteric topic as cost attribution, that indifference is unwise.  Cost attribution directly drives postage rates – and not just those for parcels, but for all classes of mail including those typically of interest to mailing companies.

In a May 8 filing with the US Court of Appeals for the DC Circuit, the Postal Service was joined by Amazon, the Parcel Shippers Association, and the National Association of Letter Carriers in supporting the Postal Regulatory Commission as defendant in a suit brought by United Parcel Service.  UPS is seeking judicial review of PRC orders concerning the methodology the commission uses to allocate costs among products.  UPS claims that the current standard used to attribute variable costs doesn’t do so adequately in situations where multiple products share the cause of those costs, such as the transportation of a load of mixed products.

However, making sense of this current argument requires an understanding of the background behind it; the recent filing provides a good history:

“In Congressional hearings that culminated in the 1970 [Postal Reorganization Act], the Post Office Department stated that it planned to replace fully-allocated cost with incremental cost as a rate floor if the legislation passed. … UPS, a competitor of the Post Office Department, argued that the prices charged for parcel post service (the predecessor of today’s package delivery services) should be required to cover fully allocated costs. … The 1970 legislation, however, required only that the rates charged for each mail class cover its ‘attributable’ costs. …

“The Commission has repeatedly declined to attribute variable costs that are caused by two or more mail classes or products in common. … Cost attribution, the Commission held, required an ‘identified causal relationship’ between an individual mail class and the costs attributed to it.  Costs that do not vary with changes in output of a single class of mail are not caused by that class, and thus may not be attributed to it. …

“The causation test became the cornerstone of a two-tier system of rate regulation.  The first tier was attributable cost.  Each mail class, with some narrow exceptions not relevant here, was required to cover its attributable costs.  The second tier consisted of ‘institutional’ costs, which the Commission defined as all postal costs that could not be attributed to individual mail classes.  Institutional costs were to be recovered from individual classes and subclasses of mail based on relative demand elasticities and other non-cost factors. …

“UPS and others who favored a higher cost floor challenged both the causation requirement for attribution and the two-tier ratemaking system. … The Supreme Court ultimately resolved the issue … upholding both the causation requirement and the two-tier ratemaking system.

“Between 1984 and 2016, the Commission defined attributable costs of a mail class as the costs that were caused by marginal changes in its output.  Fixed and variable costs caused by two or more classes in common were not attributed to individual mail classes. …

“In 2006, Congress codified the Commission’s definition of attributable cost [in the postal reform law]. …

“Between 2006 and 2016, the Commission refined its cost attribution standards, but rejected several more proposals by UPS to resurrect cost attribution by allocating common costs.

“In 2007, the Commission adopted incremental cost as the test for cross subsidy under [the statute]. … The Commission rejected a UPS proposal that would have required competitive products to cover, in addition to incremental costs, a ‘fair share of the unattributable network costs from which competitive products benefit.’ … Instead, the Commission required only that ‘[e]ach competitive product must recover its attributable costs as defined in [the statute].’”

So, as that history illustrates, UPS has been nothing if not persistent in seeking to alter the cost attribution rules.

Of course, UPS’ purpose is obvious: if it can persuade the court to overturn the current PRC standards, and thus cause more attribution of costs to specific products, one result would be more costs being borne by parcels.  In turn, this would lead to the USPS raising its prices for parcels, and cause a loss of USPS business to UPS and/or enable UPS to raise its own prices while remaining competitive.  Either way, UPS would win.

Now here’s why this matters to mailers and clients who don’t send parcels.

UPS’ arguments are not just relevant to parcel costs.  Though it has no interest in the cost allocation or pricing for letters, flats, and other categories of mail (or services) in which it has no involvement, deconstructing “institutional” costs to yield a greater proportion of “attributable” (product specific) costs can have an impact all across the spectrum of postal products and services.

Using the example of transportation for mixed mail, parsing out more precisely (presumably on a national basis) how much of the related cost was to move parcels also can mean defining more specifically how much was for moving whatever else was being transported – like Standard Mail flats, Outside-County Periodicals, and Library Mail.  Aside from the statistical complexity that greater cost attribution might cause, the cost (and, therefore, price) consequences for mail not the target of UPS’s efforts, though unknown, isn’t necessarily going to be inconsequential.

A revised cost allocation methodology won’t be adopted just for what interests UPS, but rather might be implemented across-the-board.

And that’s why this seemingly arcane dispute between UPS and the PRC over cost attribution should matter to all ratepayers and mailing companies.

When it comes to postage rates, there’s no such thing as “it won’t affect what I mail.”


The preceding blog post was based on a recent article in Mailers Hub News, a biweekly publication distributed to Mailers Hub subscribers.  For more information, go to MailersHub.com.

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