The U.S. Supreme Court on Monday declined an appeal by UPS Inc. (NYSE: UPS) of a lower court ruling that effectively validated how the U.S. Postal Service (USPS) is allowed to price its parcel products and services.
The Supreme Court's ruling, which was issued without comment, upholds a decision by the U.S. Court of Appeals for the District of Columbia Circuit. The appellate court sided with the interpretation of the Postal Regulatory Commission (PRC), an independent agency that approves, rejects and modifies postal rates, in determining to what degree parcel prices should cover "institutional" costs of the USPS, or the expenses required to operate the organization.
Under a 2006 federal law that created the modern-day USPS, the Commission is mandated to prohibit the subsidy of parcel products that compete with UPS and FedEx Corp. (NYSE: FDX) by monopoly products like first-class mail. In addition, the Commission must ensure that each so-called competitive product covers its attributable costs, and that all competitive products, in aggregate, cover what the Commission deems to be an "appropriate share" of USPS' institutional costs.
In 2006, competitive products were assigned a 5.5-percent allocable share. That percentage has essentially remained the same, even though parcel and shipping –the fastest-growing segment of USPS business –accounts for nearly 30 percent of total revenue. In 2015, USPS told the PRC that competitive products accounted for 24.6 percent of the agency's overall costs. Parcel costs, relative to first-class mail, are significantly higher because of the increased labor expense in handling and delivering parcels. First-class mail, by contrast, is far more automated.
UPS has argued for years that USPS' parcel operations are being unfairly subsidized by first-class and another monopoly product, marketing mail. If parcel costs and the revenue it generates were more closely aligned, USPS' parcel costs, and by extension parcel rates, should rise substantially, to offset those escalations.
In April 2017, Christian Wetherbee, an analyst for Citigroup Inc., (NYSE: C), concluded that the USPS would have to raise its artificially low parcel rates by as much as 50 percent in order to break even on its fast-growing parcel offerings.
In a statement Monday, Kara Ross, a UPS spokeswoman, said the company was "disappointed that the Supreme Court decided not to hear this case. We will continue to work with the Postal Regulatory Commission to advocate for transparent cost accounting at the USPS."
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