At first blush, Section 202 of postal reform legislation currently moving through the U.S. House and Senate is innocuous to the point of irrelevance. The language requires the U.S. Postal Service to maintain an “integrated delivery network of mail and parcels” and to deliver them in tandem six days a week except for weeks with federal holidays or in emergency situations. The provision codifies what the Postal Service has done for generations and what no one has any intention of forcing it to stop.
Its seeming insignificance notwithstanding, however, the section has caused a stir among postal stakeholders. One group said the provision prioritizes package deliveries ahead of first-class mail, which runs counter to the Postal Service’s statutory obligations and threatens to further degrade the reliability of mail service, which only the Postal Service can provide. Another said the language benefits the Postal Service’s private-sector rivals at the expense of the agency and of parcel shippers in general. A third called the language vague, wondered why it’s in the bill and argued it potentially creates a problem where none need exist.
The language is in both the House version and in companion legislation in the Senate. With the Postal Service warning that it stands to lose $160 billion over the next 10 years absent structural changes, and with the agency coming off probably the most difficult year in its 246-year history, momentum is building on Capitol Hill to quickly enact reform legislation. It’s unlikely that progress would be stifled by any wrangling over a relatively obscure amendment that both sides have already agreed upon. The Postal Service has said it supports the language.
Why the hubbub? It has to do with a 15-year debate over how the Postal Service manages its costs, and whether the agency’s last-mile parcel deliveries, Priority Mail and Express Mail services, all of which compete with private-sector companies, are subsidized by the Postal Service’s monopoly pricing on products like first-class mail, where it competes with no one.
In the arcane world of postal accounting, the agency is required to cover what are known as its “institutional” and “attributable” costs. An institutional cost, defined as a cost unrelated to a specific product line, would be the expense of running electricity to a sortation plant. By contrast, adding an employee to deliver parcels would be considered an attributable cost.
Kevin R. Kosar, a postal expert and resident scholar at the conservative American Enterprise Institute, said the language is vague and invites differing interpretations from courts and the Postal Regulatory Commission, which regulates the Postal Service, that could cause confusion and unintended consequences.
“I wish I knew why [Congress] used this language. But I have not found an explanation,” Kosar said in an email earlier this week.
Critics of Section 202 said it would end any hope of holding the Postal Service accountable for properly aligning its prices with its costs to serve. The language ”eliminates cost and pricing distinctions between mail — a public service which only the [Postal Service] can provide — and packages, a service that is competitive and for which consumers have many different options,” Paul F. Steidler, a fellow at the right-leaning think tank Lexington Institute who opposes the language, wrote last month on the website RealClear Markets.
Retailers and high-volume postal users which, unsurprisingly, support the language will benefit from downward pressure on parcel rates, according to Steidler. Meanwhile, Americans who rely on mail service for critical deliveries may end up paying more and receiving increasingly spotty service, especially with the Postal Service proposing to slow delivery times to certain long-distance and remote destinations, he said.
On the other side of the argument is the Package Coalition, a group of 25 retailers and retail interests including Amazon.com Inc. (NASDAQ:AMZN), eBay Inc. (NASDAQ:EBAY), Pitney Bowes Inc. (NYSE:PBI) and the National Retail Federation (NRF). In an op-ed that appeared late last month on the website TownHall, John McHugh, chairman of the group, said that killing the language would lead the Postal Service down the slippery slope of “parallel, duplicative industry network” for packages and mail that would drive up parcel-delivery costs and compromise the agency’s overall effectiveness.
UPS Inc. (NYSE:UPS), which competes against and collaborates with the Postal Service, is spearheading the effort to force the language to be removed, McHugh said, because it would give the carrier the cover it needs to raise its own prices. UPS, which has long alleged that the Postal Service leverages first-class mail rates to subsidize parcel prices, was not available to comment.
In fiscal year 2020, which ended last Sept. 30 and which saw unprecedented demand for parcel deliveries due to the pandemic, the Postal Service’s revenue was $11 billion above its costs, according to the group. The agency’s parcel and shipping division is considered profitable, but postal officials said it will never be as profitable as first-class mail because of the increased labor and equipment costs involved to process and deliver parcels.
Steidler, for his part, said neither Lexington Institute nor anyone else involved in the issue wants the Postal Service to operate separate delivery operations.
Until around the middle of last decade, the postal accounting issue received scant attention outside of the world of postal junkies. Electronic mail and other digital alternatives were threats, not full-brown realities. Parcel revenues were a sliver of total revenue. First-class mail, which is still the Postal Service’s most profitable postal line, was a powerhouse cash cow. Today, first-class mail is in secular decline due to the inroads of digital communications. Parcel services, meanwhile, account for more than a quarter of the agency’s total revenue.
The Postal Service’s fiscal year 2020 shipping and package revenue of $28.5 billion was nearly 40% of total operating revenue, and exceeded first-class mail revenue for the first full-year period in the agency’s history.