**Comments to the President's Commission on the**

**United States Postal Service**

**Submitted by**

**Rick Merritt, Executive Director**

**PostalWatch**

Recently failed attempts at postal reform legislation demonstrate little
agreement among stakeholders as to the direction postal reform should
take, however most will agree the postal status quo is unsustainable.

Some may argue that the existing statutory structure has served us well
for thirty-three years and thus only minor modifications to pricing
flexibility and ratemaking procedures are needed. While others support
formalizing Postal Service status as a Government Sponsored Enterprise
(GSE), as the agency's Transformation Plan suggests.

Conversely, the challenges the Postal Service now faces are the direct
result of its flawed structure as a quasi-government sponsored
enterprise. This structure has not produced an efficient provider of
important and relevant services to the American People, but instead a
bloated hybrid government bureaucracy, addicted to growing mail volume
and revenue, intent on expanding its scope and scale solely in the
interest of self-edification.

Postage rates have increased several times faster than inflation in
recent years while service levels have deteriorated. The agency has
squandered countless millions of ratepayer dollars and valuable
resources on disruptive competitive follies while increasing
productivity negligibly from tens of billions of dollars invested in
automation initiatives. In its vain attempts to gain competitive
advantage in private markets the Postal Service hides behind its
governmental immunities to engage in deceptive trade practices and abuse
its power to regulate competitors. Reports of waste, fraud and abuse are
commonplace and employee moral is so low it is hard to imagine it
sinking any further. These results are NOT indicative of a successful
structure that has served us well.

In his January 8^th^ testimony before the Commission the Postmaster
General stated, "The potential significant diversion of letters to
electronic medium challenges our basic business model. That model
assumes that mail volume and revenue growth will finance the Postal
Service's growing infrastructure of some 1.7 million additional delivery
points per year."

In other words, \["for the first time we are facing true competition and
we can no longer pass on the cost of our increasingly inefficient
operation to our previously captive customers who can now choose more
efficient, reliable and cost effective providers."\]

Postal executives seem infatuated with the private sector and its
vernacular. They adopt the business-like titles of CEO and CFO, abandon
the usps.gov Internet domain in favor of the commercial sounding
usps.com and refer to their operation as having a "Business Model" when
in fact 90% of its revenues are derived from a governmental monopoly.

The Postal Service's current "Model" is quite simple. When the Postal
Service spends more than it takes in, it petitions the Postal Rate
Commission to recommend a rate increase, which for the most part, the
Commission is required to approve and postage rates increase
accordingly. The model is unsustainable because it is predicated on the
false assumption that the demand for monopoly postal services is
non-price-elastic. The increasing availability of alternatives, a
development favorable to consumers, businesses and the economy alike,
will no doubt continue to increase the price-sensitivity of postal
services.

The market is merely correcting the inefficiencies that have accumulated
from thirty-three years of monopoly-protected postal services. Despite
all the business-like rhetoric and best intentions of lawmakers, the
Postal Service is an instrumentality of government and like all
governmental institutions the absolutely last thing it will ever do is
downsize itself.

The Postmaster General goes on to imply that simply downsizing the
agency to meet the reduced demand for its services, the logical course
of action, is unthinkable because we must "...finance the Postal
Service's growing infrastructure of some 1.7 million additional delivery
points per year. As new homes, towns and cities are built; the Postal
Service must grow with them."

While it is true that the number of delivery points increases by roughly
1.7 million per year, this is only roughly a 1% growth rate and is not
the insurmountable burden postal executives would have us believe.
Importantly, while delivery points increase, geographic territory does
not and contrary to popular opinion, postal services do not enjoy
significant economies of scale but instead benefit greatly from
economies of density. In effect, increasing delivery points, increases
delivery density and thus lowers the marginal cost per delivery point
system-wide.

Additionally, due to the long stand moratorium on new "to-the-door"
service, the vast majority of new delivery points added in recent years
are either drive-up rural boxes or increasingly, centralized cluster
boxes - both significantly less costly to service than conventional door
delivery. In fact, according to the 2002 Annual Report, while delivery
points increased by 5.3 million or 4% during period between 1999 and
2002 the total number of carriers, the only significant cost center
impacted by increasing delivery points, actually decreased by more than
3,300 or roughly 1%.

##### Pseudo-competition has corrupted the Postal Service

The thirty-three year experiment combining public policy
responsibilities with competitive business interests has failed and is
no longer sustainable. While protecting the mail monopoly from market
forces, the Postal Reorganization Act encouraged the Postal Service to
expand into private markets. This pseudo-competitive structure has not
produced the efficient business-like public service organization the
legislation intended. Instead, inherently incapable of competing on a
level playing field, the Postal Service finances and subsidizes
competitive ventures with ratepayer monies while leveraging its monopoly
and governmental powers to compete unfairly with private businesses.

It is well documented that single-piece first-class mail, or so-called
Aunt Minnie mail, pays a disproportionately high portion of the Postal
Service's institutional costs, while its competitive products pay less.
Every competitive venture ever embarked on by the Postal Service has
been financed and subsidized with monopoly ratepayer dollars.

Contrary to conventional wisdom, its competitive adventures have
benefited the Postal Service little and the American People even less.
Today, after more than thirty years of competitive activities, the
agency generates a mere \$8 billion of its \$66 billion in revenue from
non-monopoly activities. More than half of its non-monopoly revenue
comes from the \$4 billion it generates from Priority Mail. According to
the Postal Rate Commission's Consumer Advocate, "The Postal Service
misleads the public by advertising Priority Mail as a 2-3-day service."

It is most disturbing that the Postal Service's most significant and
supposedly successful competitive enterprise, Priority Mail, is built on
the agency's ability use its governmental immunities to mislead and
deceive the very public it is mandated to serve. When a lawsuit charging
the Postal Service's 1995 national television campaign portraying
Priority Mail as better and less expensive than 2-day service provided
by its private competitors was *\"false and misleading\"* under the
Lanham Act, its government supplied lawyers from the U.S. Attorneys
Office argued the agency enjoyed governmental immunity from these
important consumer protection statutes.

## The Postal Service now faces Real Competition

Ironically, while the Postal Service was squandering rate-payer money
and valuable resources on failed attempts to compete in private markets,
its business model was changing and market paradigms were shifting to
create an environment where by, for the first time in its history, it
now face real competitive forces impacting its primarily revenue source,
the mail monopoly.

Postal Service is no longer a governmental delivery service provider, it
is now an advertising medium and although it still enjoys monopoly
protections over the mailbox, the mail stream is largely made up of
advertising mail. Many believe the Postal Service's primary competition
comes from private delivery firms, however in reality the Postal Service
derives less than 10% of its revenues from activities where it competes
with the private carriers. Conversely, nearly 50% of the agency's total
revenue comes from advertising mail, for which it competes directly with
newspapers, magazines, radio, television and the Internet.

In other words, despite its mail monopoly, nearly half of the Postal
Service's revenues are now subject to market forces and as postal costs
continue to rise, advertising dollars will flow to more cost effective
mediums.

**More of the Same Government Sponsored Enterprise is not the answer.**

Generally, the Postal Service is already a Government Sponsored
Enterprise (GSE) and formalizing it has such without eliminating its
monopoly and governmental powers to compete unfairly would only
perpetuate and further exacerbate the fundamental problems associated
with its current structure. It will do nothing to address the systemic
problem of its inefficient monopoly cost structure but will instead,
further encourage and legitimize ever increasing forays into private
markets.

Government competing with the private sector and small businesses in
particular is extremely poor public policy, founded in flawed logic and
ultimately destined to fail. Those supporting expansion of governmental
competitive enterprises may see the revenues from such activities as new
money, as if somehow the mere entry of a federal competitor into a
market magically increases demand within that market to meet the new
supply.

Many markets operate as zero-sum-games, for example when Coca-Cola sales
increase, Pepsi sales generally decline, and visa versa. When the Postal
Service started selling passport photos, it did not suddenly increase
demand for overseas travel or passports, it merely disrupted the
existing market for passport photos forcing small merchants down the
street out of business.

The idea that any federal bureaucracy might successfully compete by
delivering goods and services more efficiently than a far more nimble
and entrepreneurial private sector competitor, [without unfairly
exploiting the competitive advantages inherent to its governmental
status]{.underline}, is clearly counterintuitive. Further, no government
establishment can be divorced from its competitive advantages, as these
advantages are inherent to its governmental status and as such, the
*level playing field* so frequently cited by GSE advocates is in reality
a fallacy.

Adding insult to injury, governmental competitive initiatives rarely, if
ever produce any substantive benefit for the agency involved and usually
fail eventually, an irony of little consolation to the small businesses
destroyed in the process. For example, a 1998 Government Accounting
Office report concluded the Postal Service had lost in excess \$84
million on nineteen competitive initiatives during a three-year period
and fifteen of those initiatives either continued loosing money or had
been abandoned. In 2001 government subsidized Amtrak posted a record
loss of \$944 million on \$886 million in total revenue, despite
obtaining 46% of that total revenue from non-core (non-passenger)
commercial related endeavors.

In fact, one is hard pressed, to find a single example of this
commercialization of government, which has not eventually resulted in a
major public policy nightmare; as the culture, mission, power and
structure of governmental establishments are fundamentally incompatible
with free markets and the pro-competitive principals on which our
economy is based.

Government competition in private markets is not, the politically
painless "*Win-Win"* some may believe, in fact it is a highly
destructive "*Lose-Lose"* that damages private businesses and the
economy while eventually proving to be little more than expensive
distractions for the governmental establishments involved.

# 

# Market forces are unavoidable and de-monopolization ultimately inevitable 

Monopolies are inherently inefficient and counterproductive to the
pro-competitive principals on which our economy is based. Generally
unlawful, monopolies only exit legally where government deems a
particular monopoly necessary to proved a important and relevant service
that would not otherwise be provide by the private sector. The
inefficiencies and anticompetitive disruptive qualities inherent to the
Postal Service's monopoly are further exacerbated by its governmental
status and the oligopoly of labor groups controlling its workforce.

The only plausible public policy argument for creating or in this case,
sustaining a governmentally sanctioned monopoly is to meet a "compelling
public interest". There can be little doubt as to the "compelling public
interest" served by the availability of cost effective postal services,
as the livelihood of millions of workers and nearly one trillion dollars
of commerce annually are dependant upon the efficient delivery of postal
services.

Increasingly, the inherent inefficiencies of the very monopoly intended
to facilitate the efficient delivery of postal services is now
threatening its future. As an institution, the Postal Service is being
threatened, not by "electronic diversion" or competition from private
carriers, but instead by its own "Business Model" and mail monopoly. Its
thirty-three year monopoly over the Nation's mail has insulated it from
market forces and fostered inefficiencies to the point where it is
rapidly pricing itself out of the market. Continuing protections or
efforts to further insulate it from markets forces will only serve to
enable more inefficiencies, followed by rising prices which will in turn
accelerate the so called "diversion" to alternative forms of
communications.

Market forces will now and forever impact the Postal Service. It is no
longer fundamentally possible for lawmakers to protect the agency from
those forces. The important policy issue is whether lawmakers will
choose to increasingly narrow the Postal Service's scope around its core
mission and gradually allow market forces to drive it towards a smaller
and more efficient provider of postal services or whether they will
chose to continue protecting its mail monopoly and inefficient cost
structure from market forces until such time as the market for
non-cost-effective postal services disappears.

# 

# Looking forward

Millions of workers involved in the postal services industry, including
some 800,000 postal workers livelihoods' depend on the Postal Service
reversing course and becoming an efficient provider of postal services.
This will not occur until the Postal Service abandons its misguided
commercial mindset and refocuses all its energies to single-mindedly
lower its cost structure in order to provide the most efficient mail
service possible.

The Postal Service should be de-commercialized and its scope limited to
providing efficient mail service as soon as possible. It should be
banned from entering any additional markets and should present Congress
with a plan for an orderly exit from those competitive markets in which
it is currently engaged. Congress should ban all marketing and
sponsorships, limiting advertising expenditures to only those that
educate the public on effectively utilizing its core services.

All products and service should be required to contribute equally to the
intuitional cost of the Postal Service. Regularly scheduled independent
audits commissioned and administered by its overseers should begin as
soon as possible. Financial audits should calculate the agency's
long-term obligations and fair market value of its assets. Operational
audits should calculate the incremental share of institutional cost to
be attributed to each product during rate-setting, identify the cost of
the various operational functions and include the measurement of
productivity and delivery performance while

The Postal Rate Commission should be granted full subpoena power and all
Postal Service operations, purchasing and finances should be subject to
public disclosure under the Freedom of Information Act.

Regulating competitors should be prohibited and all exemptions from
consumer protection and administrative procedure statutes should be
repealed. Any exemptions from anti-trust statutes granted for mail
delivery should clearly adopt the narrowest interpretation practicable.

# Conclusion

If the past thirty-years has taught us anything, it should be that
encouraging the Postal Service to seek revenues outside its core mission
is counterproductive to optimizing efficiencies within its core. These
insignificant revenues do not subsidize the Postal Service's core
mission but instead are subsidized by its core mission, further driving
inefficiency and waste. It is therefore paramount, that the Postal
Service be required to match its scale as an institution with the demand
for its core services and not be permitted to expand its scope for the
mere sake of institutional edification.

\###

Rick Merritt, Executive Director

PostalWatch

3631 Virginia Beach Blvd., #100

Virginia Beach, VA 23452

\(877\) 576-7825

policy@postalwatch.org