“The citizens who live in the next century will pay one cent for a postage stamp.”

In 1893, the Postmaster General made the brave – and foolish, it turns out – statement that a postage stamp would cost one cent in the 20th century. Where, oh, where did we go wrong?

Once upon a time, postage rates actually went down. What a thought! In 1863, a ½ ounce letter cost 3 cents to mail; in 1883, that rate went down to 2 cents. Then in 1885, the rate stayed the same, but the weight limit went up to an ounce; in effect cutting the then-current rate by half. Clearly, that trend was what suggested to the Postmaster General, 10 years later, that the rate would probably continue to go down. Foolish thought!

The image shown here is a stamp from 1890 to 1893, which sold for one cent. According to Wikipedia, the first US postcards were created in 1893 to promote the World’s Columbia Exposition in Chicago – the first “World’s Fair.” Shortly after that, the USPS allowed the production of a one-cent postcard (the "Penny Postcard") on the front of which the sender could write a message. The back was reserved for the address. Sorry, got off track there…

So what do those rates look like today – almost 145 years later? That 3-cent stamp for a half-ounce letter would be approximately 58 cents today. And the 1-cent stamp? It would cost about 22 cents. Reality sets in when we look at the rate in 1893, when it was 2 cents for a stamp. Let’s convert that based on inflation to today’s rates. It comes to about …. drum roll … 41 cents! Darn, we’re right on target! The rates to go into effect in May provide for a 41-cent First-Class stamp. Sigh! (If you want to see how postage rates have changed since 1863, take a look at this chart: http://www.akdart.com/postrate.html.)

To paraphrase Otto von Bismark: “[Postage rates] are like sausages, it is better not to see them being made.” However, since as much as 40% (or 50% or even 60%, depending on your source) of all printed matter ends up in the mail, it behooves us to understand a little about how postage rates are set.

Postal Rate Making – The Old-Fashioned Way

Never a simple process, setting postal rates has become increasingly more complex – and litigious – over the years. Computer technology has made it possible to crunch a huge amount of data that include postal costs, volumes, and revenues. But the human participants – the Postal Rate Commission (PRC), the mailers, the USPS, and its competitors – have found it nearly impossible to comprehend the analysis in the 10 months allowed by law.

Going back to the Postal Reorganization Act of 1970, when the old Post Office Department was transformed into a wholly-owned government corporation (the USPS), four basic points were made about postage rates:

Rates are not set by Congress or the President, but the process of ratemaking is conducted by the Governors of the Postal Service and the Postal Rate Commission (PRC), an independent federal agency.
All mail users must pay a full and fair share for their use of the Postal System. Different classes of mail pay different rates because they are prepared differently by mailers or handled differently within the mail system.
The Postal Service must operate on a “break-even” basis. The law clearly states that it cannot make a profit or a loss. Instead, rates must be set to cover any and all Postal Service costs – no more, no less.
No class of mail may subsidize another. Revenues for First-class mail, by law, cannot be used to underwrite advertising mail, and vice versa.

Once the USPS has prepared their analysis and determined the amount of revenue needed (and where it will come from) to maintain a “break-even” operation, a request for new rates is presented by postal operations to the Board of Governors. Assuming the Board approves, the request is filed as a case with the PRC.

Rate cases are like courtroom trials; the PRC reads and hears testimony for and against the rates requested by the USPS, acting as judge and jury. Interested parties, called “intervenors,” can participate in the case and question the facts, methods, and conclusions presented by the USPS. That’s where even UPS and FedEx get into the picture; they can question the USPS’ calculations, conclusions, and even the rates requested.

After several months of argument for and against, the Commissioners deliberate, debate, and prepare a recommended decision for the Postal Service governors. The Reorganization Act says the Postal Rate Commission must act within ten months of the rate request.

Once the PRC recommendations are received, the Postal Service Governors have several options:

The Board of Governors can approve the PRC recommendations.
They can reject the PRC recommendations and ask the Commission to reconsider its recommendations.
They can accept the PRC recommendations "under protest."

We are at that point right now. The Governors of the Postal Service voted to implement the Postal Regulatory Commission’s recommended rates under protest. The USPS will implement the rates that the PRC approved but have asked the PRC to re-examine specific rates.

Postal Rate Making – The New Way

Near the close of the 109th Congress, the House passed the “Postal Accountability and Enhancement Act” on December 8, 2006. The Senate passed the same bill the following morning. President Bush signed the bill into law on December 20 and it went into effect in January, 2007. If you really want to read all 66 pages of the legislation, click here and download a copy. ( 186 KB PDF)

The good news and the bad news about the reform act…First of all it really doesn’t tell us how the ratemaking process will happen in the future. It says that within 18 months the PRC – which now stands for Postal Regulatory Commission – will establish “a modern system for regulating rates and classes for market-dominant products.” Market-dominant products are those for which the USPS still holds a monopoly.

The section that has everyone jumping up and down is the limitation on rate increases to equal the change in the Consumer Price Index. That may be a delusion, since you will note that the calculation of the inflation of postage from 1893 to today – using a calculator based on the CPI – got us to the rate that will be implemented in May. What will happen though is that the new reform process will result in regular changes of predictable amounts. For better or worse, the new rates must be implemented within 45 days as opposed to as much as 10 months or more that the previous system allowed.

The Act also requires the USPS to establish “modern” service standards by the end of 2007. Those service standards are meant to “reasonably assure Postal Service customers delivery reliability, speed, and frequency consistent with reasonable rates and best business practices” and to “provide a system of objective external performance measurements for each market-dominant product as a basis for measurement of Postal Service performance.” This is an element of the reform act that has mailers applauding! Whether delivery standards stay the same or increase, the element of accountability is a great improvement.

The key financial elements of the Act:

The return of the military retirement cost burden (some $27 billion) to the US Treasury.
The elimination of the requirement that the USPS would pay $3 billion into an escrow account annually. This will free up about $78 billion in funds over the next 60 years; funds that can be used fund retiree health costs, pay down debt and keep postal rate increases in check, according to the article.

These types of financial constraints have contributed to higher rates in the past.

The “Postal Accountability and Enhancement Act” is a process in development which means we will see something new and different by the end of the year. While we don’t know what the new rate making process will look like, we do expect that the USPS will request one more increase under the old rate making system. By the end of 2007, the general consensus is that one more rate case will be in action, with rates to go up in 2008.

We’ll all be keeping a close eye on this! Stand by…