Back in November, the US Postal Service filed a request to move First Class Mail Parcels (FCMP) from the market-dominant product list to the competitive product list as a retail subcategory of First Class Package Service (FCPS). But on Wednesday, the Postal Regulatory Commission denied the request.
FCMP is similar to the FCPS. Amine Khechfe, co-founder and general manager of Endicia, had explained the differences to EcommerceBytes last fall. Both services have the same ounce-based weight options and delivery standards, but for First-Class Mail Parcel, online sellers have to go to their Post Office to purchase (called retail), while online sellers can purchase First-Class Package Service online and take advantage of Commercial Base prices and free tracking.
The PRC explained a primary reason for denying the request.
A product is eligible to be transferred between the market dominant and competitive product groups upon a demonstration of compliance with the market power, postal monopoly, and additional considerations provisions of 39 U.S.C. – 3642(b).
The Commission finds that the Postal Service does not provide sufficient evidence demonstrating that it lacks market power. 39 U.S.C. – 3642(b)(1). This is controlling in this case. To transfer the product, the statute requires the Postal Service to demonstrate that it lacks market power such that it is precluded from effectively setting the price of Single-Piece, First-Class Mail Parcels substantially above costs, raising prices significantly, decreasing quality, or decreasing output, without risk of losing a significant level of business to other firms offering similar products. Therefore, the Single-Piece, First-Class Mail Parcels product may not be transferred from the market dominant category without violating the prohibitions of 39 U.S.C. – 3642(b)(1).
As we explained in November, the USPS said it was necessary to raise First Class Mail Parcels rates so that it would not be forced to inspect the parcels to verify that they don’t contain letters – the base rate would have to be raised to at least $2.94 – six times the cost of a first class letter.
While the USPS would have the flexibility to raise rates beyond that if the request had been granted, the Postal Service said from a business standpoint, it couldn’t raise prices above those for a small Priority Mail Flat Rate box, otherwise, FCMP volume would shift to Priority Mail. “Thus, as a practical matter, the price for a small Priority Mail flat rate box would effectively act as a cap on the prices for First Class Mail Parcels.”
The decision was not unanimous among the commissioners. In their joint dissent, Acting Chairman Taub and Vice Chairman Hammond wrote that the Postal Service could lose more than $100 million in revenue annually with the decision at a time when its continued viability necessitates that it collect all the revenue to which it is legally entitled. “This amount would likely rise in future years, given the nature of the competitive pricing framework.”
“Equally important,” they continued, “the Postal Service’s competitors could face a market that is potentially distorted by an artificially underpriced product.”
“Here, by leaving First-Class Mail Parcels market dominant, the Order permits the product to be priced without regard to the cost of the postal network – right now, the product just barely covers its attributable costs, whereas the postal network is an institutional cost. In contrast, when the Postal Service’s competitors price their products, they generally must begin at a price floor that covers both attributable and institutional costs if they are to remain profitable.
“On a practical level, this mismatch between the Postal Service and its competitors potentially leads to artificial underpricing by the Postal Service and a potentially distorted market for everyone, with market share that would have flowed to private sector carriers possibly diverted to the Postal Service, simply due to First-Class Mail Parcels’ classification as market dominant.”
