USPS gets conditional approval from PRC to reclassify parcel products

Late last month, the United States Postal Service (USPS) announced its intention to petition the Postal Regulatory Commission (PRC) to reclassify Commercial First Class Mail Parcels as a competitive product rather than its current classification as a market-dominant product, as well as add “Lightweight Commercial Parcels” to the competitive product list.

Yesterday, the PRC came back to the USPS with a favorable reply, when it filed an order to conditionally grant the request to transfer Commercial Standard Mail Parcels to the competitive product list.

The PRC-required conditions include:
1-the USPS filing a notice of competitive price adjustment for Parcel Select rates, including Lightweight Parcel Select parcels, that demonstrates that the rates cover costs; and
2-the PRC issues an order finding that the Parcel Select rates in the USPS’ filing mentioned above cover costs.

As previously reported by LM, this filing is akin to one made by the USPS last August, when it petitioned the PRC to move its Standard Mail parcels from its market-dominant product list to its competitive products list. This measure would have enabled fulfillment parcels to become a lightweight subcategory of Parcel Select, a package delivery service geared towards large shippers. It was part of the USPS’s exigent price case to raise rates filed on July 6, which the PRC rejected in late September on the grounds that the USPS “failed to justify rate increases in excess of its statutory CPI (consumer price index) price cap.”

Assuming the PRC’s conditions are met, effective April 17, qualifying customers will receive Commercial Base Pricing for parcels weighing 13 ounces or less and can receive Commercial Plus Pricing for parcels weighing less than one pound. Commercial Base and Commercial Plus offerings are specifically geared towards shippers.

These changes could be a boon for the USPS , which has been under severe financial pressures for an extended period, as evidenced by a $329 million loss in the fiscal first quarter, following an $8.5 billion loss in fiscal year 2010.

In the PRC filing, it is stated that the USPS maintains “the current bifurcation of parcel products into Standard Mail Parcels weighing under one pound and Parcel Select for parcels weighing one pound and over complicates its ability to negotiate for shipping service with certain customers. It views the parcel shipping market as seamless. Neither its competitors nor commercial services that aggregate shipping options available from the Postal Service distinguish their parcel offerings based on weight.”

The filing added that the Postal Service’s market share for under one-pound ground parcels is contrasted with the market shares if all ground parcels are considered, and from that perspective its market share shrinks to 20.1 percent of all volume and 26.8 percent of all revenue. This, according to the USPS, is a more realistic view of the marketplace where USPS products cover their costs.

And it added that the primary competitors to its Standard Mail Parcels are the ground shipping services offered by UPS and FedEx, with each having the flexibility to price parcel products to maximize profitability, whereas the USPS contends that its current prices for this product to be transferred are below full cost coverage levels, due to what it described as a distortion in the competitive marketplace. The USPS, according to the filing, has previously attempted to structure profitable contracts with large shippers for lightweight parcels but failed because its efforts were undercut by its own Standard Mail Parcel prices.

While the transfer of Commercial First Class Mail Parcels to a competitive product is not immediate, it now gives the USPS an excuse to file for additional price increases for Parcel Select, including the transferred Standard parcels, which spells higher prices for shippers, according to Jerry Hempstead, principal of Hempstead Consulting.

Hempstead said that how much these prices go up remains to be seen, but he observed that the USPS could double current prices and not lose any volume because there are no competitors that price at their levels. What’s more, given the current financial state of the USPS, he said it is likely a done deal that that this transfer will gain the required approval, as per its PRC-required conditions.

“By moving the product to competitive classification, it would allow mailers to negotiate an agreement with the USPS, however, history has shown that they really have not done much practice at negotiating discounts, nor have they been generous in their process,” said Hempstead. “Not to the likes from which we experience from the private express carriers. And now that the approval to move is granted there is little [shippers] can do to mitigate or moderate increases through the PRC.”

Commercial First-Class Mail Parcels are a competitive product from the point of view that it is part of the parcel business and because these parcels weigh less than one pound does not mean it should stay on the monopoly—or market dominant—side, according to
Satish Jindel, president of SJ Consulting.

And making it a competitive product would allow the USPS to focus on what it does best and assist them in coming up with pricing for customers who tender small parcels to them in the USPS network in which they are most efficient in, said Jindel.

“It may be considered a competitive product, but it mainly will be a complimentary product for UPS and FedEx….allowing them to handle long-haul shipments from Los Angeles to Boston, for example, and then leverage the USPS to move shipments from Boston to surrounding areas in the Massachusetts area,” said Jindel.

According to SJ Consulting data, USPS First Class Mail Parcels represented 574.6 million shipments in 2010, with $1.134 billion in revenue.

“This product serves a highly competitive marketplace, with many participants offering similar products,” said Gary Reblin, vice president, Domestic Products, in a statement issued in February. “By moving to a competitive product classification, we have greater flexibility to make this offering more attractive to commercial shippers.”

For related stories, please click here.