COMMENTS TO THE PRESIDENT'S COMMISSION ON THE
UNITED STATE POSTAL SERVICE
SUBMITTED BY
RUTH Y. GOLDWAY, COMMISSIONER
POSTAL RATE COMMISSION 
FEBRUARY 3, 2003



OVERVIEW

From my vantage as a commissioner at the Postal Rate
Commission I have concluded, as have many others, that the
current regulatory model does not work. But I do not think
it has ever worked particularly well. Examples of chronic
productivity inefficiencies are legion. From a consumer
perspective, I would note that First-Class service has
deteriorated over the years, while First-Class mail pays an
ever-increasing share of overhead. Flexibility in rate
setting without other structural changes including increased
regulatory oversight will only worsen the problem.

The positive results we have seen from recent Postal Service
financial reports are being achieved despite a law that
grants a nationwide monopoly and provides very little
incentive for efficiency. The Postal Rate Commission, the
sole regulator, has limited powers. With no subpoena
authority, it can obtain only incomplete information on
which to base its recommended decisions. The Commission
cannot direct organizational change to lower costs. When
postal costs rise - regardless of the cause - we must
recommend rates to cover the increased costs. 

The current law provides only weak protection for household
or business mailers.  There is virtually no recourse or
restitution when the Postal Service fails to meet its
service commitments. And Postal Service product design and
advertising can leave consumers confused about the best
mailing options available. 
I agree that the Postal Service does not have the ability to
change rates or products fast enough to meet competition or
adverse economic conditions.  However, the Postal Service
has been slow to take advantage of the rate flexibility that
exists under current law. I would also caution that our
nation cannot afford giving a monopoly provider substantial
rate freedom. There has to be a trade-off in the form of
reducing or eliminating the First-Class and letterbox
monopolies. I am disappointed that the Postal Service does
not concede this to be the case in its Transformation Plan. 

One may ask, if the law is inadequate in providing
efficiency incentives, how does one account for the
Service's recent cost-cutting successes? Paradoxically,
these changes have been in reaction to competitive forces
that are just beginning to erode the monopoly. The computer
revolution, especially electronic billing and e-mail, offers
more convenient, less expensive and better quality
alternatives to major mailers and household consumers than
existed just a few years ago. 

But we cannot rely exclusively on the indirect competition
that is developing from technology. In the long run, the
Service needs to be privatized and the letter and letterbox
monopolies phased out. The best-intentioned laws cannot
provide the incentives and creative vigor that a competitive
market does. As I detail below, the "universal service" and
"natural monopoly" arguments used to justify the monopoly do
not withstand scrutiny. Even if one thinks local delivery
has natural monopoly elements, this does not mean delivery
competition should be eliminated. Local governments could be
given the authority to decide who can provide the best and
cheapest mail delivery service in their jurisdiction, at a
level of service their citizenry asks for. This is an
example of democracy and capitalism working in sync to reach
the best possible outcome for consumers.

In its Transformation Plan, the Postal Service suggests
reform should take the form of a government-sponsored
enterprise, or GSE, though the plan is not at all clear
about the structure a GSE should take. GSEs have many
downsides, including potential governmental liabilities.
While some say we need a governmental presence in the postal
industry, communications services critical to our well being
such as the Internet, telephone, and television are
privately owned. 

Nor can one identify any market failure that would justify a
GSE. A GSE may be justified where the private sector would
not provide a good or service, but our parcel and expedited
mail markets are examples of network-type mailing industries
that need little regulation and no special government
support. If a GSE is recommended, it should be one that
provides for a fixed transition to demonopolization and
privatization. 
My greatest fear is that special interests will construct a
GSE providing benefits for only the few, such as: (1) high
salaries for postal executives which are unconstrained by
meaningful shareholder review; (2) retention of the monopoly
on a permanent basis; (3) no plan for moving towards
privatization; (4) special rate deals for a few large
mailers; and (5) an even weaker regulator. 

Meanwhile, I believe there are important reforms this
commission should consider recommending that would assist
the Postal Service without giving it the expansion of
ratemaking authority and continued monopoly suggested by the
Transformation Plan. Briefly, Congress needs to remove
itself from day-to-day postal operations and allow the PMG
and the Governors to make significant institutional
reductions. The current pay system for USPS executives needs
fundamental change. The Service should be required to
develop service standards for all mail classes, not just
First Class, and report regularly and publicly on how well
it meets those standards. Its advertising needs to be
governed by the truth-in-advertising laws enforced by the
Federal Trade Commission. Its retail operations need to be
expanded even more quickly through joint ventures with the
private sector. Retail service adjustments may involve
closing many post offices, but will benefit the public if
other choices the Postal Service provides are cheaper, more
accessible to reach, and open longer hours. 

The USPS needs to identify opportunities for contracting out
some of its operations requiring high levels of expertise
widely available in the private sector, e.g., contracting
out its real estate operations. (I do not mean substituting
cheap labor for union jobs.) And whether or not we continue
with the current ratemaking system and monopoly protection,
the postal regulator needs subpoena power to ensure the best
data is made available for its decisionmaking. 

Below is some elaboration on my ideas as well as further
criticism of the USPS Transformation Plan and the current
regulatory scheme.

The current law never has worked very well. Beware of the
nostrum that we just need to fine-tune a law that worked
well until now. Here is just one example that debunks the
myth that the current system was not broken until recently.
Did you know that the average delivery time for First Class
letters is slower than it was two decades ago? The average
delivery time for a First-Class letter was 1.86 days in the
fourth quarter of Postal FY2002. For the same quarter in
1981 (the earliest Commission records) the average was 1.57
days.

But under current law we cannot effectively penalize the
Postal Service when service deteriorates for a particular
mail class. While we can lower rates for the class where
service is poor, that may unfairly penalize other
subclasses, since someone has to pay the institutional
bills. 

I can regale you with many stories about inefficiency; about
executives being given large bonuses even when the bottom
line was terrible, and the workers who actually processed
and hauled the mail got no bonuses in good or lean years;
about a flats mechanization program that for years was
increasing the unit cost of processing flats; about
non-productive labor time (breaks, clocking-in, etc.) in
mail processing escalating from 6.2 percent of direct labor
costs in 1969, the year before postal reorganization, to
31.4% in 1996.
Overall, the Service has not been a model of efficiency
because the current law does not provide the right
incentives. There is a measure of efficiency called Total
Factor Productivity, or TFP, that in varying forms is used
to measure productivity across all industries. Until the
last few years the Postal Service's TFP trailed the private
sector's increases badly. We have seen some spurts in TFP
recently, but the jury is out on whether this will last.
Similar spurts in the past caused solely by reducing staff
were temporary. In each of these cases service deteriorated
and the Postal Service was forced to hire more workers.
Fundamental operating reforms never occurred. I hope what we
have been seeing since 9/11 is the start of a comprehensive
efficiency program, blessed by Congress (at least by
congressional silence), in which unnecessary facilities are
cut and the Service takes maximum advantage of new
technologies. 

What does current ratemaking law have as an answer to
respond to the high costs and myriad losses caused by
inefficiencies? The PRC is required to give the USPS more
money. The Postal Service has found that, even if the big
mailers balk, one can always get money from the captive
First-Class mailers. And after the PRC considers all future
predicted and explained cost increases, and accounts for
them in recommending higher rates, we still have to give the
Service a further amount - a contingency -- for unexpected
occurrences. Typical amounts are in the range of
one-and-a-half to four percent above projected revenue
needs. Billions of "contingency" dollars since 1970 have
simply been absorbed into the fat of the system because the
Service spends this money on everyday operations rather than
"unexpected occurrences." If the contingency requirement had
been working, when the Postal Service endured the anthrax
crisis it would not have had to go to Congress for money to
recoup expenses. It should have had a rainy day fund built
up from all the contingency money given to it over the
years.

The current law does not protect consumers well. After
serving on the Commission for a year, I wrote an op-ed piece
for USA Today demonstrating that consumers were paying a
premium for a service - Priority Mail - that had about the
same delivery times as First-Class letter mail. The basic
rate for Priority Mail is about ten times more expensive
than for First-Class. Priority Mail has been just one
chronic problem area. In the last contested rate case our
Commission expressed discontent with the state of special
services, such as certified mail. Service choices are
confusing, and some of the promised service features are not
carried out well. Our Office of the Consumer Advocate issued
a report in 2002 that pointed out a number of long term
service problems. We are reading a growing number of press
reports reciting consumer complaints about late-evening
deliveries and long lines at some postal windows. These
worry me because of the Service's history in cutting
personnel to achieve temporary efficiency gains. Under
current law our Commission can only identify these problems
in our rulings and hope someone in postal operations sees
our concerns and acts on them.  
Moreover, the Postal Service enjoys legal advantages private
sector companies do not. Consumers are sometimes rudely
surprised to learn that they are bound by a bulky volume of
postal regulations that often reduces their rights. For
example, if you buy insurance when mailing a parcel you are
governed by a list of exclusions that is not widely
published. Private sector businesses do not have the
advantage of being able to keep the contractual terms under
which they do business buried in a thick volume under the
counter. The Postal Service says it wants to run itself like
a private business, but it is quick to clothe itself in
governmental legal immunities when it faces legal
challenges.

First-Class single-piece mail rates, the ones you and I use
to mail letters and pay our bills, have stayed even with
inflation since 1970. Is that progress? As I stated, the
small-volume First-Class mailer is paying an ever-increasing
share of the Service's overhead costs. We'd like to reduce
the Postal Service's dependency on the "Aunt Minnie"
ratepayer, but, e.g., advertisers can use other media, so
they can demand lower rate increases. 

There are two sides to the rate flexibility story. Yes, the
Postal Service needs rate flexibility. It is commonly known,
for example, that its competitors offer secret discounts off
published rates. 

However, economic theory states that giving more rate
flexibility to a regulated monopolist carries with it
significant and often unacceptable downsides. The monopolist
may try to cross-subsidize its competitive ventures with
revenues gained from its monopoly services. Further, freed
from "undue discrimination" legal restraints, the Service
would be able to pick winners and losers among its
customers. This would in turn affect competition in its
customers' markets and affect overall consumer welfare.
Ultimately the household and small business ratepayers will
be the ones squeezed most severely.

In a model where the Postal Service has fewer (or even no)
regulatory ratemaking constraints, one solution is to
balance increased rate making freedom with a strengthened
regulatory agency empowered to act on quality of service and
consumer issues, and to impose a progressive diminution of
the monopoly until total phase out occurs. A firm deadline
for ending the monopoly will provide the USPS with a major
incentive for making its operations more efficient.

Under current law omnibus rate cases are time consuming, a
price we pay for due process. But the Service fails to
mention that it can file niche classification cases, or
cases involving narrowly focused rate changes, that may take
little time. It has filed few experimental cases over the
years. I was disappointed in the position of USPS staff
during the postal ratemaking summit; they almost uniformly
dismissed what I thought were interesting, worthwhile ideas
on how to simplify the ratemaking process, such as
separating rate cases from methodology and classification
cases. Such a reform might make ratemaking into a fairly
quick exercise of plugging updated cost data into a formula.
I think the Postal Service needs to bring in consultants to
study the issue objectively rather than rely on a staff
comfortable with the status quo.
 
Paradoxically, current Postal Service increases in
efficiency are being driven by competition. I lived in
Finland where they have no paper checks. Eventually we will
come close to their system. Other sources of mail also will
dry up. Paper airline tickets are a rarity. The federal
government has been trying to reduce mailing costs
substantially, e.g., direct deposits of payroll and pension
checks. Treasury is trying to get us to file our tax returns
electronically.  

These trends are good for our nation as a whole - paper
checks are very costly (more than a dollar each) for society
to process. Such cost cutting will make the U.S. more
competitive. But it is bad news for the Service. First-Class
mail, which provides most of the financial support to the
USPS, is on the wane. 
PMG Potter's efforts to cut costs seem to be working. In the
latest accounting period revenues were up 6% over the same
period last year (SPLY), largely thanks to last year's rate
increase. Almost without precedent, total expenses were down
almost one percent, and total work hours were down 4.3% over
SPLY. But more work needs to be done. We all await detailed
plans (not just the promises) to consolidate facilities and
close unnecessary facilities. It is important for Congress
not to interfere with these efforts, and to recognize that
consumers as a whole will enjoy the benefits of lower costs.

Eventually, demonopolization and privatization are the
answer. To make the Postal Service truly efficient, it
eventually needs to lose its monopoly protections and be
privatized, as I stated over three years ago in a Washington
Post op-ed. Privatization introduces new incentives for
efficiency, including the incentive to lower costs. It
reduces political interference in decisionmaking, which has
been a past problem in the postal area. Crucially, it
enables capital markets to discipline management.
Privatization also is a means for the U.S. Government to
recover the assets it gave away for free in 1970 to the
current postal corporate entity. In a sense, those assets
have been parked in escrow while the USPS has been given
free use of them. Moreover, a privatized company would pay
federal and state taxes, which the USPS does not. I just
read of a Minnesota community, Arden Hills, that stands to
lose $488 million in taxable market value of prime
commercial real estate if the Postal Service is allowed to
take title for a processing and distribution center.

The USPS First-Class mail and letterbox monopoly protections
are not needed. The basic theory used to justify them holds
that natural monopolies need protection or else wasteful
competition will occur, e.g., two carriers serving the same
street where one would do. There is increasing and
persuasive evidence that postal services are not natural
monopolies. The Postal Service has found that private sector
transportation companies can move the mail better and more
cheaply and so primarily uses contract services. As to mail
processing, many private sector companies do mail
consolidation, sorting and drop shipping to profit from work
sharing discounts. To the extent these operations exist,
they are examples of someone doing it better and cheaper
than the Postal Service. 

The Postal Service faces strong competition in the parcel
and expedited mail delivery markets from several private
companies that traverse the same roads and have widespread
delivery networks. One of its chief rivals is highly
unionized.  And its service can be considered universal. Yet
I read nowhere in the Transformation Plan any
acknowledgement that competition works well in these
markets. Why are not these "natural monopolies?" It could be
that we have been misled about the need for the First-Class
monopoly. After all we have not needed monopoly protection
laws to enable buying food, gasoline, prescription drugs and
other vital commodities in all areas of our nation. 

There is good evidence that universal service would continue
under any scenario of demonopolization, for several reasons.
An incomplete network is not very valuable to mailers; e.g.,
a utility sending out bills wants wide geographic coverage.
The advantage of complete network coverage is why carriers
like UPS and FDX provide widespread service. 

The assertion that mail deregulation will hurt rural areas
is incorrect. PRC staff investigation has shown that there
is no distinct geographic pattern to high and low cost
service areas. Some urban routes are costly to serve because
of traffic congestion. Many rural routes are cheap to serve
because rural contract rates for carriers are lower than the
wages paid to city carriers. (We need to explore the rural
carrier method of compensation and work rules. It may be a
better way to compensate carriers on other types of routes.)
Moreover, the revenues brought in on routes vary according
to complex demographic factors, such as income levels, not
clearly associated with rural versus urban labels. In short,
it would be costly and inefficient for mailers and carriers
to segregate out unattractive routes. The free market will
provide universal service. In fact, it might provide more
service to, e.g., rural areas. For example, while there are
38,000 post offices, the retail pharmacy industry has about
55,000 retail establishments located in nooks and crannies
throughout the U.S. To remove fears that there will be some
instances of service voids, it is much less expensive to
authorize a targeted subsidy program as has been done at the
FCC for universal connectivity and at DOT for small
community airline service. For these reasons I am not
persuaded by the Transformation Plan discussion of reasons
for retaining the monopoly. See Transformation Plan Appendix
U-10, et seq. 

GSEs may not be the answer. I do not especially favor a GSE
approach unless it puts us well down the road towards
privatization. What market failure justifies dependence on
the GSE corporate form when the private sector parcel and
expedited delivery markets in this country run fine without
special governmental protections? Some believe that only a
government-operated or sponsored institution should move the
mail. In fact, much critical information moves by
unregulated media. The government does not sponsor or
control the Internet, where important financial transactions
are increasingly occurring. Businesses entrust their most
important financial documents to private courier services.
The public trusts companies such as UPS and FedEx and the
less-than-truckload trucking industry to move high-value
packages. For purposes of security of mind, the "sealed
against inspection" law can be made to apply to private
companies. The idea that the U.S. Postal Service is the only
trustworthy company is belied by USPS Inspector General
statistics showing that postal workers are human; the latest
OIG semiannual report indicates 300 employees were arrested
for mail theft, and it initiated 208 employee embezzlement
investigations. There is no persuasive reason to permanently
attach mail delivery to the federal government. 

GSEs have many downsides. They operate under the public
belief that there exists a moral (rather than legal)
obligation of the government to support the corporation in
event of financial instability.  Because of this a GSE can
issue debt obligations at a lower cost than a wholly private
company. Further, partial government ownership can confer
special benefits on the corporate entity, such as special
treatment under the bankruptcy laws and exemption from
various taxes and regulatory requirements. However, these
blessings have distorting competitive effects. A postal GSE
might create an uneven playing field that would unfairly
disadvantage or deter would-be entrants into the postal
market.  Further, GSEs require frequent congressional
involvement as markets change and as corporate charters
become outdated. Changes may take years to accomplish once
the initial statute is in place, witness the decades-long
debates involving Fannie Mae and Freddie Mac. One thing we
must avoid is creating a "reform" that takes three decades
to reexamine again before we decide it does not work.

A postal GSE with partial governmental ownership carries the
risk of significant legal liabilities for the U.S.
Government. Does the Treasury Department want to face the
issue of the government's moral or legal obligation to
compensate creditors of a postal corporation? By comparison,
under current law the government wisely has tried to
distance itself financially from the USPS, e.g., USPS
operations are not subsidized. 
One also has to consider the future scope of operations
permissible for the privatized corporation. To the extent
these future ventures are riskier than providing postal
service, the government would want to limit its guarantees
to creditors. Constructing such liability limitations may be
difficult to do in some circumstances and might lead to
competitive inefficiencies. For example, a privatized
corporation should be subject to the antitrust laws. One
would not want, e.g., this new corporation colluding with
competitors to fix prices. Yet if the government were part
owner of the enterprise, would the enterprise (and its
officers) be liable for treble damages or criminal sanctions
under the antitrust laws? Would the Justice Department or
the FTC have the incentive to prosecute?

However, if some form of GSE is recommended, it should be
tailored to maximize market incentives, and the elimination
of the monopoly should be preordained. This sunset provision
will be an important motivator to get the GSE into a
competition mindset. I am skeptical that even the
best-equipped and well-intentioned regulatory agency will be
able successfully to manage a hybrid system whereby half the
mail is subject to controls and the other half is not.
Accounting and cost allocation methods are arts, not
sciences. The last draft postal legislation circulated by
the House Committee on Government Reform in 2002 basically
threw up its hands and said: "Let the regulator figure it
out." This is not an acceptable approach. The difficulties
that have occurred in constructing an acceptable regulatory
approach over a half man, half horse agency suggests that we
need to severely limit the life of any GSE corporate
structure as we move towards privatization and
demonopolization. 

To those who fear the jarring effects of sudden
demonopolization, one can easily devise laws that gradually
reduce the monopoly. In Europe mail weights are an element
in the demonopolization schedule. Over time, more and more
pieces will be subject to competition. Gradual
demonopolization can also be done in operational segments,
as has been done in telecommunications and power generation.
The postal system has three components: retail acceptance,
processing, and delivery. Retail acceptance and mail
processing are clearly not natural monopolies. 

I emphasize that even if one concludes delivery is a natural
monopoly, which is open to doubt, that does not mean one
should have a single delivery provider across the entire
United States.  One way to demonopolize delivery would be to
give each local government the authority to decide who
provides local delivery, in much the same way that local
governments decide who gets to provide local garbage or
cable service. Citizens of the local government could choose
their preferred level of service; e.g., businesses might
want more frequent service. (Under the current system
Congress has decided we all want six-day service, which may
be a costly and incorrect supposition.) Bidding by companies
(including the USPS) for the rights to perform the specific
services a local community wants should drive costs down and
improve service. 

Constructing a new regulatory policy will take time, but
some reforms can be enacted that will ease the transition to
competition and provide a better mail system in the short
run. First, we must be patient while the PMG reduces the
number of mail processing facilities. Reacting to individual
constituent complaints, members of Congress sometimes
pressure the USPS to keep as many facilities and jobs as
possible in each district.  USPS should be required to
develop and implement a downsizing plan that is made public,
but be given assurances of congressional non-intervention.
If voluntary restraint fails, Congress could pass
legislation to establish a commission similar to that used
for closing military bases.

The Service's management bonus pay system should be
overhauled, tied exclusively to the size of the yearly
operating surplus. In the past the Service seemingly
readjusted its myriad bonus criteria to benefit managers
when it appeared the original performance objectives were
not going to be met.

The Postal Service should be required to develop service
standards for all mail classes, measure that performance,
and make the data public. It should not be allowed to
improve its bottom line by imposing additional costs on
mailers through inferior service. To quote Alfred Kahn,
"buyers can be exploited just as effectively by giving them
poor or unsafe service as by charging them excessive
prices." "Price really has no meaning except in terms of an
assumed quality of service . . . [p]rice regulation alone is
economically meaningless."    

The USPS exemption from the truth-in-advertising laws
embedded in the Federal Trade Commission Act should be
removed as soon as possible.  Truthful information is a
powerful source of marketplace competition.
Truth-in-advertising accountability would require USPS
management to be more responsive to the public's need for
accurate information.

Congress should enable the Service to revamp its retail
operations quickly by letting it sell stamps at a discount.
I understand that the Service is reforming its operations
over time. See Transformation Plan, p. 13 et seq. But if the
Service can cut costs faster and provide more convenient
service by selling stamps at discount (i.e., wholesale)
prices to contract offices and private sector retailers it
should be encouraged to do so. This may be a difficult
political issue, at least in the short run. Ultimately, the
nation will realize it needs fewer traditional post offices.
And the social role of some post offices as well as historic
postal buildings must be preserved. But if the Service is
correct that many post offices are big money losers, then
these excess system costs hurt all of us, and the poor
disproportionately so. 

This Commission also needs to examine whether the real
estate management and acquisitions operations of the Postal
Service should be privatized or contracted out so that cash
from the increased value of long-held properties could be
generated or lease revenues maximized. The long-term
strategic value of the USPS retail network and its community
support functions need a thorough analysis separate and
apart from a search for short-term gains. The Commission
could request such a report from the USPS and then make
appropriate recommendations.

This Commission should also suggest that Congress make
changes to the USPS pay system, which, unlike the federal
government pay system, does not have locality pay
adjustments. The postal pay system may have the unintended
effect of discriminating against minorities. My own brief
investigation showed that the cities with the highest
minority populations in the U.S. tend also to be the cities
with the highest costs of living. Because there is no postal
locality pay adjustment, the postal wage dollar does not
stretch as far for a worker in a high cost city like
Washington, D.C. 

Improvements to the ratemaking process under current law
have been considered and should be encouraged. One essential
legislative reform is for the Postal Rate Commission to have
subpoena powers over the Postal Service so we can get better
and timelier costing data. We are generally reliant on
studies and data sets prepared by the Postal Service.
Oftentimes we would rather see different slices of the data,
or have them retrieve different data. We cannot order them
to do so. For example, we have been saddled for years with
an outdated, inaccurate street carrier cost system. The
process of requesting updated or new data from USPS
necessary to hear rate cases properly often adds
considerably to the length of the hearing process, and to
the expenses of the parties.

CONCLUSION

In closing, I would stress that change is necessary, but any
proposed change should put us on the road to full
competition in the postal industry. Without market forces to
spur efficiency, the industry will not survive as an
effective communications option in the coming decades.