Christensen Associates Assists the Postal Service Office of Inspector General in Analyzing Price Cap Issues

Categories: News, Studies

August 17, 2015 - Phil Schoech, Mark Meitzen, Casey Schuster, and William Jones

The U.S. Senate has been reviewing legislation that regulates Postal Service rates. In assisting the Senate with this review, the Postal Service Office of Inspector General conducted an analysis of the current price cap system, alternative forms of price cap regulation, and legislative language that has been used for regulating rates in other industries. The Postal Service Office of Inspector General engaged Christensen Associates to update and extend our 2013 analysis. The resulting update confirms that the current form of price cap regulation for the Postal Service is financially unsustainable.

Under Postal Service price cap regulation, which limits rate increases for “market dominant” mail classes to the Consumer Price Index (CPI) growth, the Postal Service has suffered substantial financial losses. Revenue from mail must cover both the direct costs of handling that mail as well as the costs associated with an expanding network of delivery points. But with mail volume now declining, Postal Service revenue has been unable to cover both the costs of delivering the mail and the costs of expanding the network. Consequently, the existing form of rate regulation is not financially sustainable.

Current Postal Service legislation specifies a narrowly defined price-cap formula. Postal rate increases can only exceed the CPI caps in the event of “exigent” circumstances. We reviewed the legislative language used in other industries with price cap regulation to see if alternative approaches yielded more maintainable results. We found that in other industries, the legislation specified overarching policy goals and left the details of the rate regulation system to the regulator. Such legislative flexibility allows regulators to design rate regulation mechanisms that respond better to changing market conditions. As part of our analysis, we developed an adjusted price cap and estimated its impact on Postal Service finances. We found that this modified approach could provide a financially sustainable alternative to the current price cap.

The Office of Inspector General sent the results of our analysis to Senator Thomas Carper on July 13th.