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UPS Charges USPS Illegally Subsidizes Shipping Services

If UPS has its way, it could cost more to ship a package through the U.S. Postal Service.

The shipping giant is petitioning federal regulators to force the Postal Service to adjust the way it calculates its costs, arguing that the agency is using the proceeds from its monopoly First Class mail to subsidize the delivery of the shipping services where it competes with private carriers.

UPS is alleging that in keeping competitive shipping prices artificially low, the Postal Service is violating the 2006 Postal Accountability and Enhancement Act (PAEA), which granted the agency more pricing freedoms, but barred it from using its monopoly in letter mailing to subsidize competitive shipping products.

“In recent years,” UPS wrote in its petition, “the Postal Service appears to have shifted its focus from delivering the nation’s letter mail to competing against private companies to deliver parcels (such as packages from e-commerce retailers).”

The petition further asserts that the Postal Service has “gone beyond its regulatory mandate in order to compete head-to-head against private companies in unregulated markets.”

Kara Ross, a UPS spokeswoman, explained that the petition is not a direct appeal for the Postal Regulatory Commission to force an increase in shipping rates. At the same time, higher rates seem a likely outcome were the PRC to affirm the claims in the petition.

“UPS does not take a position on its competitors’ rates,” Ross said in an email. “Our focus, rather, is on whether or not costs that the U.S. Postal Services incurs with its competitive products (that compete with the private sector) are being covered with revenue from those competitive products, as the statute requires. We do believe there is evidence that First Class mail is subsidizing competitive shipping products.”

The Postal Service doesn’t see it that way. Spokesman David Partenheimer said, flatly, that “there is no recent shift in focus,” adding that the agency plans to “strongly contest UPS’ proposals.”

“The Postal Service’s recent efforts to compete effectively in the parcels market have not detracted from our obligations regarding letter delivery. In fact, growing our competitive products is essential to financing the network that we use to provide prompt, affordable and reliable universal service for letters and packages alike,” Partenheimer wrote in an email.

“The Postal Regulatory Commission has consistently found that competitive products are not subsidized by market-dominant products, and that competitive products are making an appropriate contribution toward covering the Postal Service’s institutional costs,” he added.

The Postal Service is already on track to implement a substantial hike in shipping rates next month. Those rate increases, which recently won regulatory approval from the PRC, will take effect Jan. 17.

Also included in the announcement of those rate changes was the news that the Postal Service is intending to phase out the Commercial Plus category of discounted shipping. Instead, the Postal Service affirmed its interest in pursuing more negotiated service agreements (NSAs), the individual deals that the agency reaches with large mailers.

Partenheimer dismissed the suggestion that the UPS petition had anything to do with the Postal Service’s coming rate hike, which is a sharp reversal of the shipping discounts the agency rolled out last year. The decision to push ahead with the rate increases was reached internally on Sept. 17, three weeks before UPS filed its petition with the PRC.

“Therefore, these dates make self-evident the lack of a connection between our rate changes and the UPS petition,” Partenheimer said.

He did not immediately respond to a question concerning the speculation that the Postal Service is angling to move more of its shipping rates to the NSA model, which is not available for public review.

The PRC has set a deadline of Jan. 20 for interested parties to comment on the UPS petition, and March 25 as the deadline for reply comments.

Gail Adams, a spokeswoman for the PRC, declined to comment on when the commission might make a determination on the petition, but affirmed the agency’s jurisdiction in the matter.

“The Commission has the authority to prescribe the methods by which costs are attributed to products,” Adams said.

The UPS petition comes as the latest sign of friction in the complex relationship between the Postal Service and the private shipping sector. John Callan, managing director of the shipping consultancy Ursa Major Associates, noted that the USPS has for years been engaged in a form of “coopetition” with carriers like UPS and FedEx, which are among its largest customers and vendors, while at the same time rivals in the growing package delivery business.

“From a market perspective, it’s not surprising to me now that UPS is doing this,” Callan said in an interview. “I think the overall premise is rational – any time you have a regulated body like that that is both operating in a monopoly environment on one hand and a competitive environment in another, you run this risk. It can be a legitimate question of cost accounting.”

Callan says he takes no position on the merits of UPS’ claims, but observed that the Postal Service has recently been moving to compete more aggressively with the private sector after Congress granted it greater latitude to set prices nearly a decade ago in the PAEA law.

“This was the beginning of coopetition,” Callan said. “When they created the competitive side of the product they deliberately did so to allow the Postal Service to compete in the market for parcels, but when that came about they were not so face-to-face competitive.”

As to how the PRC might handle the petition, Callan expects that acting Chairman Robert Taub will likely take a close look at the allegations, suggesting that he is sensitive to the tensions that can arise when government entities compete with businesses in the private sector.

“I think he’s very business-oriented and he’s fair-trade oriented, and I think he would take it very seriously,” Callan said. “If it’s legit, they will move on the Postal Service one way or another, and if not they will tell UPS to go away.”

Want to submit a comment to the PRC? Here’s the docket on this case, click on “How to Participate” to see how.

Kenneth Corbin on Linkedin
Kenneth Corbin
Kenneth Corbin
Kenneth Corbin is a freelance writer based in Washington, D.C. He has written on politics, technology and other subjects since 2007, most recently as the Washington correspondent for InternetNews.com, covering Congress, the White House, the FCC and other regulatory affairs. He can be found on LinkedIn.