USPS – What to Do With 50 Percent

With annoying regularity, the Postal Service increases prices for first class postage. It’s annoying because first class postage is highly profitable and does not need a regular rate increase to remain profitable for many years. On the other hand, postal charges for parcels, especially those from ecommerce shippers, are somewhat underpriced. In effect, UPSP is using first class letters to subsidize parcels by about $1.46 per parcel. That is irritating and unjustified.

Recently President Trump tweeted a multi-part rant about the postal service and Amazon. Some suspect he is taking a view espoused by main-street retailers or by the real estate investors harmed by e-commerce operators. He also grumbled about tax payments and UPSP shipping rates for Amazon parcels.

Amazon is subject to the Supreme Court’s 1992 ruling that “that states couldn’t collect sales taxes gathered by mail-order catalog companies, unless the firms had a physical presence in a state.” The President could have been referencing the collection of taxes from Amazon’s customers or from third-party retailers that use the Amazon website. Amazon seems to be largely in compliance because it collects state taxes for 45 states plus the District of Columbia. Those co-resident retailers could collect their own taxes, or could assign that chore to a specialist such as Avalara.

When it comes to subsidizing Amazon parcels, the President may be right, but the logistics between USPS and Amazon involves “postal injection,” a tactic “available to all private carriers in which they ferry parcels to local postal centers near the final destination to save money on delivery.” This shaves all but the last-mile costs for handling the parcel. Postal injection makes shipping charges look smaller than expected because pickup, sorting, and longhaul transport costs are avoided.

Whether USPS’ parcel pricing for its e-commerce customers is justified depends on how the USPS aligns costs with revenues for its market dominant letters business and its competitive parcel business. Revenues are straightforward, but costs are trickier.

Variable costs for letters would include manual or machine letter sorting, “forever” stamp printing, and other costs that are not incurred by parcel handling. Fuel and delivery driver costs would need to be apportioned between letters and parcels. Fixed and institutional costs such as employee retirement benefits, buildings, delivery trucks and headquarters staff would also need to be apportioned.

A full cost accounting system is normally used by large scale businesses that need to tease apart costs as a result of sharing facilities. Local telephone companies endure both price controls and full cost accounting that justifies prices and stands up to pubic and expert scrutiny. If put in place, such a system would show the current degree of subsidy – that the USPS’s market-dominant services produce a contribution of 58 cents toward fixed and institutional services for every revenue dollar. It would also so, in contrast, USPS’ competitive services produce just 8 cents in contribution for every revenue dollar. It is that 50-cent per dollar discrepancy that the USPS is using to subsidize its whimsical hopes for success in competitive lines of business.  In essence, monopoly services appear to be subsidizing competitive services.

Full cost accounting is needed.

The USPS may have hopes of becoming a competitive business, but annual billion-dollar losses and huge debts demand that UPSP management use the market dominant 50 percent margin to fund employee retirement benefits and to pay down accrued debts owed to taxpayers. And for a change of pace, management can decrease the scale and frequency of rate increases for first class mail.

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