[\
Written Statement of Mike Eskew]{.smallcaps}

[Chairman and CEO]{.smallcaps}

[UPS]{.smallcaps}

[Before the President's Commission]{.smallcaps}

[on the Postal Service\
]{.smallcaps}

February 20, 2003

##### 

##### Overview

UPS understands the challenges facing this Commission as it works to
develop meaningful recommendations that provide for a balance of quality
and efficiency in the Postal Service ,and we appreciate the chance to
participate.

UPS supports a Postal Service dedicated to providing high quality
service in the physical delivery of letters, advertising and
periodicals. It has been and will, in the foreseeable future, be the
governmental infrastructure for physical delivery of written material in
support of communications and commerce.

Being generally viewed as a major competitor to the Postal Service, it
is easy to overlook the fact that we are also a major user of the mail
services. Our overall corporate operations (including MBE and mail
related functions) generated over \$220,000,000 in postal revenues to
the USPS in 2002. The Postal Service is one of our main avenues of
communication with our 360,000 employees and our customers. In addition,
UPS is a major benefactor of the advertising and catalogues that flow
through the mail -- it generates package volume for UPS and our
competitors.

We believe that the mission of letter mail mission can be accomplished
with more efficiency and reliability. The following comments are based
upon our 95 years of experience and our strong belief in the need for a
viable operating model for the U.S. Postal Service. UPS has business
interests that may at times conflict with the Postal Service's, but
those are marginal, with competitive products accounting for less than
1.5% of their total volume, 9% of their institutional cost support, and
less than 15% of total revenue.[^1]

Our comments are provided below in two parts; the first discussing the
role of the USPS in the 21^st^ Century and how its mission should be
focused, with clarity and certainty, on the delivery of hard-copy
information. In the transportation of goods, there is no market failure
necessitating the Postal Service, as a government agency, engaged in
this line of business.

The second part lays out the concerns and recommendations we have as a
competitor to several of the product lines of the Postal Service. It
addresses the harmful subsidization of products in competitive markets
and details why forays into the commercial parcel delivery market are
not appropriate. If the USPS as a government monopoly service provider
is to be engaged in direct competition with the private sector in other
lines of business, it is important that effective oversight occur. In
this second part, we discuss how existing pricing flexibility has not
been beneficial and how cost controls have to be based on effective and
transparent cost measurement techniques.

1.  **The Role of the Postal Service in the 21^st^ Century**

[Role/Mission: the foundational question]{.underline}

Establishing a clear and certain mission of the Postal Service is the
most critical issue that the Presidential Commission must examine.
Furthermore, determining the mission of the Postal Service should be the
[first]{.underline} question that is asked and answered by the
Commission. Without a clear answer to this question, it is impossible to
have a meaningful deliberation about how the Postal Service should be
structured, the changes that should occur to the current financing
model, and the flexibility the USPS should have.

Our concern with the current law is that its articulation of the USPS
mission is inadequate. The 1970 Postal Reorganization Act's statutory
direction to the Postal Service regarding its mission is ambiguous (with
little prioritization of customers and products) and at times
contradictory. The 1970 Act mandates the Postal Service to serve the
public, but to operate like a business; meet the needs of diverse
customers, but charge uniform rates; break even financially, but provide
universal service. For example, how should a new opportunity be
evaluated? What "root" priorities guide that decision: Is it to fulfill
a public service need in response to a failure of the private
marketplace? Or is it to seek a profit, no different than a private
commercial corporation? To say that the answer is "a little of each"
would perpetuate the same dilemma that has burdened the system, and the
market, for decades.

[What Need is Not Being Provided by the Private Sector?]{.underline}

In crafting a charter for this government entity, it is important to ask
what need is currently not being met by the private sector, and must be
provided by the U.S. Postal Service.

*Infrastructure for Delivery of Hard-copy Information:* While
technology, such as telephones, faxes, and the Internet provide
alternate means for information flow, there will continue to be an
on-going and critical need in the 21^st^ Century for the physical
delivery of information. The need will be there in the foreseeable
future, even though aspects of that need will surely change. Because
there are no readily available alternatives today -- due to the letter
monopoly, the mailbox monopoly, or otherwise -- this area must be the
focus of the Postal Service. It is the core "postal" role.

*Goods Movement*: In the area of the movement of goods, private carriers
(including UPS) have served the public well for decades. In light of the
robust private sector competition, this market should not be part of the
Postal Service's core mission, or even its broader mission.

In re-addressing the USPS's mission, we urge the Commission to delineate
what is not within the Postal Mission as well as clarify, in clear and
certain terms, what is included. UPS believes that the question "what is
the USPS mission?" is paramount. It will dictate and shape the answers
to the other questions to be addressed by the Commission.

UPS does not doubt that the USPS has been, and will in the foreseeable
future be, the governmental infrastructure for physical delivery of
written material supporting our nation's communications and commerce. No
clear lines are drawn for USPS activities outside its core letter mail
role. It need not, nor should it be, engaged in markets that are already
well served by the private sector. As a point of government philosophy
and pragmatism, a threshold question is: why is the Postal Service even
engaged in competitive commercial activities?

UPS believes that a cross-over between business and government is
inconsistent with our nation's core principles about the role of
government in a free enterprise economy. The same line of reasoning that
some use to justify USPS incursions into private markets, if applied to
other government operations, would put the Government Printing Office
(GPO) into publishing magazines, the Treasury Department into issuing
credit cards, and the Air Force into commercial air service. Much the
same justification could be given, for example, for having passenger air
transportation service provided by our military Air Force: it would
increase asset utilization, and the revenue would help offset its
governmental mission. But in those cases, as well as in the case of
package delivery, there is no failure in the private marketplace to
justify an exception to the general rule that governments should not be
competing with private industry.

[Impact on Monopoly Users of the Mail]{.underline}

As discussed in these comments, those in the competitive private sector
are not the only adversely affected parties. A former chairman of the
Postal Rate Commission described the harm to monopoly users:

> "A final disturbing aspect of the Postal Service comments and
> proposals is their complete focus on the competitive portion of its
> operation. The vast majority of the current mail-stream is within the
> noncompetitive arena. Most of the individuals and businesses that rely
> on the Postal Service for essential services use noncompetitive
> products. ... For the Postal Service to remain a valued and viable
> public service, it must focus its attention on providing service
> improvements the users of noncompetitive mail will need in the coming
> years. Mail users, and the nation, do not benefit if the entire
> intellect of postal management is focused on improving and
> supplementing its competitive product line ...leaving the majority of
> existing mail services to stagnate or even deteriorate." [^2]

**\
**

**2. Postal Competition with the Private Sector**

[The relative importance of USPS's Non-Core Services]{.underline}

UPS is the only Fortune 100 company that has the U.S. government as its
primary competitor in its core line of business. Arguments can be made
that the U.S. Postal Service's activities as a direct competitor in our
industry's market helps the Postal Service, but in truth it does not. It
redirects their energies away from their core monopoly functions and it
distorts a parcel delivery sector that is already well served. Expansion
of the USPS's competitive activities \-- through greater empowerment or
lessened oversight \-- will worsen an already bad situation.

From the Commission's viewpoint, however, it may be easy to
over-emphasize the extent to which the Postal Service is threatened by
UPS, FedEx, other private carriers, and thousands of small franchisee
operations. It is even easier to over-emphasize the importance of
expanding postal operations in the competitive package market as a
solution to their current problems. Instead, the problem -- and the
solution -- rests within their core letter mail monopoly.

This point is illustrated well by recognizing that Parcel Post -- a
competitive product -- would need to increase to four times its current
size to offset just a one percent decline in First-Class Mail
volume.[^3]

[\
\
Competitive Product Subsidies]{.underline}

The 1970 Postal Reorganization Act left too broad a discretion enabling
the USPS to shift institutional costs to consumers captive to the
monopoly, and under-price the competitive products. By being in both
monopoly and competitive businesses, the risks of subsidization of one
category to the other is ever-present.[^4]

Substantial subsidies flow from their monopoly to their competitive
products. It happens because of the disproportionate way overhead (or
"institutional costs") is included in the pricing of postal
products.[^5] The Postal Service 'marks-up' First-Class Mail, its core
monopoly product, to recover institutional costs at a greater rate than
other classes of mail. (see the table below) Because nearly 37 percent
of the total postal costs \-- or about \$25 billion -- is put into the
institutional cost category, the difference in markups amounts to huge
cost shifts from the competitive categories to the First Class Mail
users.

+------------------------------------------+---------------------------+
| *Product*                                | *Markup to Recover*       |
|                                          |                           |
| *Class*                                  | *Institutional Costs*[^6] |
+------------------------------------------+---------------------------+
| First Class Mail (monopoly)              | 81%                       |
+------------------------------------------+---------------------------+
| Parcel Post (competitive)                | 5%                        |
+------------------------------------------+---------------------------+
| Priority Mail (competitive)              | 39%                       |
+------------------------------------------+---------------------------+
| Express Mail (competitive)               | 38%                       |
+------------------------------------------+---------------------------+
| Systemwide Average (all products)        | 56%                       |
+------------------------------------------+---------------------------+

The most significant example is Parcel Post: if that product contributed
to supporting the system at the overall average rate, it would have a
margin of 56%, not 5%[^7].

The unfair loading of the burden of the postal system on First Class
Mail constitutes one of the major problems. A second related problem is
the failure to attribute costs to products to the fullest extent. Since
there is little incentive for moving costs from the "unallocated"
institutional category into a product specific category, everything left
behind gets disproportionately charged to the captive monopoly ratepayer
and not to products that should bear their fair share. The simplest
example of this is that the protected products represent 85% of their
revenue but a disproportionate 91% of institutional cost.

***What is a subsidy***: The concept of "subsidy" carries different
meanings to different groups. UPS considers a subsidy to be a special,
governmentally-derived advantage that has economic benefit (such as tax
exemptions, special operational privileges, or ability to leverage
governmental monopolies)[^8]. The Postal Service possesses two
significant advantages. The first is the enormous advantage it has when
it leverages its monopoly infrastructure to provide competitive
services. The second is that it is a government agency and therefore
exempt from taxation, licensing and other requirements that private
competitors are fully expected to meet.

###### **Advantage #1, Subsidies from the Monopoly Network:** The first -- and more significant -- subsidy that the Postal Service's competitive products enjoy is the enormous advantage it has when it leverages its monopoly infrastructure to provide competitive services. This infrastructure -- which the Postal Service itself describes as most of the costs associated with 38,000 post offices, 240,000 delivery routes to 138 million delivery addresses, 215,000 vehicles, technology infrastructure, and other overheads (see Appendix F of Transformation Plan) -- is an essential component of providing competitive products. Without this infrastructure, the Postal Service would not be able to provide competitive products at the rates it currently charge. 

Private carriers, on the other hand, do not have the luxury of
recovering their infrastructure costs with revenues from a letter mail
monopoly. Instead, private carriers must recover all of their
infrastructure costs from their competitive product offerings. This is
an enormous advantage for the Postal Service when they participate in
competitive markets, and one that is not recognized in the current
postal laws.\
***Advantage #2, Status as a Government Agency:*** Many "economic costs"
are not even recognized by the system because they are borne by others
outside of the postal system. Postal operations are mostly "tax free",
but only to those within the postal system. The taxes that they are
exempt from are, by necessity, made up by others people's taxes, who are
in effect, subsidizing the Postal Service's competitive ventures as well
as their monopoly services.

The Postal Service's tax exemption is broad and significant. The USPS is
not required to pay property tax to the states and localities where they
own facilities.[^9] In addition, they are not obligated to pay gross
receipts taxes, income taxes, sales taxes, and other taxes and fees
imposed on private businesses with which the USPS competes, or may
compete with in the future[^10]. These indirect subsidies may not show
up in the Federal Budget or when annual appropriations are made by
Congress, but they have an impact on taxpayers and competitive markets,
nonetheless.

> The tax exemptions are but one form of an indirect subsidy that can
> hide inefficiency and distort private markets. The power the USPS has
> to obtain property by condemnation (i.e. eminent domain power), the
> power to borrow from the federal Treasury at preferential rates
> significantly below appropriate market rates, immunity from local
> zoning, and certain traffic and parking rules, government provided
> services (e.g. adjudication of employee complaints) and its disparate
> customs treatment are but a few examples that have real, but as of
> yet, unquantified significance in the marketplace and our economy.

[Recommendations on How to Address the Subsidies]{.underline}

The concept of what categories of postal operations should rightfully
underwrite other categories needs to be considered, especially in light
of the public purpose of the Postal Service. In addition, the other
subsidies from taxpayers and special government privileges (and, yes,
any special obligations as well) that exist, but not quantified or even
fully understood, need to be addressed.

Since "everything is on the table" in the Commission's deliberations, an
effective, but bold solution to subsidization is available that also
addresses the "mission" issue. That solution is whether the public
interest is best served by having the Postal Service focus on its core
function of delivering hard-copy communications, and extracting itself
from competitive business lines unless the Commission determines that a
market failure exists and that the public is not well served by the
private sector.

If the USPS is to be in competitive lines of business, then it is
paramount that the subsidization be corrected. The first step in
addressing the problem is defining what a "subsidy" is, since a wide
discrepancy exists regarding its meaning. As said above, UPS considers a
subsidy to be a special, governmentally-derived advantage that has
economic benefit. Simply stated, the Postal Service engages in
subsidization when its competitive services are priced below what they
would otherwise be if it were not for its monopoly network advantages
and its status as a government agency. The second step is to applying
that definition against sufficiently detailed data to be able to
identify the existence of subsidies. The next step is to correct any
subsidies that do not comport to the USPS mission and public policy. The
final step is to establish ongoing procedures and meaningful oversight
to ensure that the public policy, as well as new and existing
regulations and statutes, are complied with fully.

Another improvement could be accomplished by the same solution discussed
in the preceding section: better cost identification, measurement,
attribution, and auditing. Those actions will not only facilitate better
rate-making, but will provide management tools to enable the USPS to
operate within its revenue. The subsidies within the Postal System,
especially in the competitive category, mask costs rather than promote
efficiencies.

Even in the absence of externally induced motivations to allocate costs
in one direction or another, it is a very difficult job to properly
assign network and institutional costs to particular products. There is
no natural bright line, just good business practices, which start at the
most elemental level. The task becomes a near-impossibility when there
are "rewards" for allocating the costs one way or another, and the
current system provides incentives to "move" costs from competitive
products onto products covered by the monopoly.\
[Pricing Flexibility and the Role of Oversight]{.underline}

The Postal Service seeks greater pricing flexibility as part of postal
reform and UPS believes that pricing flexibility could exacerbate the
subsidization of competitive products and undercut effective oversight.\
In considering the question about pricing, cost, and service
flexibility, the term "flexibility" itself carries positive
connotations. It is important to note that there is equally positive
value in what might be lost in providing additional "flexibility". For
example, greater "price flexibility" could mean increased discrimination
against consumers captive to the postal monopoly[^11].

While UPS agrees that improvements can be made in the process used under
existing law, a necessary threshold question needs to be addressed,
which is: What has been the result of similar authority that already
exists in law today? The following focuses on the USPS's existing
authority in two areas: (I) their broad discretion for international
mail, and their power to introduce and offer "non-postal" products, and
(ii) the existing flexibility afforded them at the Postal Rate
Commission.

> [Review of Existing Pricing Flexibilities]{.underline}
>
> ***International Mail:*** It is instructive to see how pricing
> flexibility has been used the USPS in the international mail and
> package arena, which is not subject to PRC review of its rates and
> services. In essence, USPS's international mail has functioned as an
> unofficial pilot program for pricing flexibility (including volume
> discounts), providing much of the very same authority for
> international mail that they seek now for domestic mail.
>
> First, the pricing flexibility the Postal Service has for
> international mail (or viewed conversely, the lack of regulatory
> safeguards) has not increased its share of contribution to
> institutional costs, and in fact it has fallen by half. From 1971 to
> 1980, the percentage of institutional costs covered by international
> mail was 2.6%. This decreased to 2.2% in the 1980's and decreased
> further in the 1990's to 1.3% of total institutional costs.[^12]
>
> How have postal customers, and the Postal Service network itself,
> benefited from having pricing flexibility for international mail? The
> package business category, such as Global Package Link and Global
> Priority Mail, with full pricing flexibility available to the USPS,
> (a) did not generate profits, (b) did not contribute to overhead
> (institutional costs), and (c) did not even cover its own attributable
> costs, according to the Postal Rate Commission report to Congress in
> 1998. The Commission found that the Postal Service's international
> expedited services -- Global Package Link and Global Priority Mail --
> actually lost money. (These services failed to cover even their
> attributable cost by \$11.6 million on a revenue base of only \$53.8
> million. Global Package Link was eventually discontinued in April
> 2001[^13]).

***[Postal Service's new product ventures:]{.underline}*** The other
example of existing pricing flexibility is for "non-postal" offerings by
the USPS. There is no clear and tested authority that the Postal Rate
Commission has oversight when the USPS decides that a new product is not
a "postal product". That product is not subject to the pricing
safeguards existing law provides for postal products. This is another
implicit "pilot" test of how the USPS has used pricing flexibility.

There is little evidence to indicate that greater pricing flexibility
provided in those competitive areas has done much for consumers or the
Postal system itself. For example, in papers filed at the Postal Rate
Commission in October 2002, the Commission's Office of the Consumer
Advocate found that "nearly all of the Postal Service's e-commerce and
other commercial ventures [not reviewed by the \[Postal Rate\]
Commission]{.underline} have involved large expenditures with near-zero
revenues."[^14]

[Use of Existing Pricing Flexibility]{.underline}

To what extent has the USPS used flexibility permitted for pricing mail
under the Postal Reorganization Act of 1970?

In comments submitted to this Presidential Commission by Commissioner
Ruth Goldway, she stated that "the Postal Service has been slow to take
advantage of the rate flexibility that exists under current law."[^15]
She went on to state that "...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."

Congress spent more than 6 years wrestling with the question of pricing
flexibility. Towards the end of that period, the Appropriations Act for
FY 2002 asked for reports from both the Postal Rate Commission and the
Postal Service as to the authority of existing law for market tests and
negotiated service agreements. The Postal Rate Commission's report last
year notes the Postal Service's very limited use of these flexibilities.

The Commission did state that the exercise of such power should not
undermine the fundamental due process rights of stakeholders -- an
implicit reminder that the USPS is not, at least at this time, a private
sector commercial corporation in a free market, but rather a government
agency charged with a public mission and therefore meaningful oversight
and accountability is needed. From the reports submitted to Congress, it
appears that the USPS has not been aggressive, until recently, in trying
to fully use the flexibility for pricing of mail that is provided by
existing law. It filed the Capital One NSA Case at the PRC in November
of last year as the first attempt to use the rate setting process for a
negotiated service agreement with a major First Class mailer. UPS
announced shortly thereafter that it would not intervene in that case.
(UPS does have concerns about NSA's in general and their impact on
competitive markets in particular, and will consider our position
regarding future NSAs and similar efforts on a case-by-case basis.)

####### [Importance of Proper Oversight]{.underline} 

To the extent that the Postal Service competes in private sector
markets, it must be on a level playing field. A level playing field
requires proper accounting, transparency, full disclosure, and
meaningful oversight. There are those in the postal community calling
for less, rather than more, oversight, including shortening or
eliminating prior review and approval of proposed rates. We urge you to
be cautious in considering such reforms.

One reform suggestion that needs careful review is the notion that
after-the-fact review of rate changes by the USPS could serve the public
interest better than prior approval. Such a regime, however, produces
long delays before a problem is identified and addressed. In the
meantime, significant harm can be inflicted on captive customers or the
competitive marketplace.

The Postal Service's criticisms about the current 10-month rate case
process should not be used to justify implementing a drastic change such
as after-the-fact review of rates. The 10-month time frame of a rate
case can be addressed by implementing more reasonable changes. One of
the primary reasons rate cases take as long as they do is the need to
evaluate thoroughly changes in costing methods and approaches proposed
by the Postal Service. We believe that changes in costing methods can be
evaluated in separate proceedings held between rate cases, rather than
during rate cases. This would then enable all parties to avoid the
time-consuming debates over new methods and studies that now occur
during a rate case, and permit the current 10 month rate case process to
be shortened.[^16]

[\
The Importance of Proper Cost Identification, Measurement, and
Review]{.underline}

To address its overall financial condition, as well as many of the
specific problems raised by us and others, it is imperative that the
Postal Service better understand the cost to provide its products in
order to avoid actually harming its bottom line though pricing
flexibility, rather than improving it. A business-based, product
specific accounting and costing system is needed: a common platform of
data and accounting systems.

In UPS's case, the detailed information that we collect on our
operations is a critical component of understanding all aspects of the
cost of doing business. At a detailed level, we understand the impact on
costs of a multitude of different package characteristics. We make sure
that these costs are known with precision, and are updated constantly.

Pricing flexibility will not solve the USPS financial problems.
Improvements, such as simplifying the process by separating rate cases
from methodology and classification cases, would speed up the process
without jeopardizing the safeguards the process intended to provide.

As an active participant in postal rate cases, we also understand the
quality of information that the Postal Service relies on for estimating
costs[^17]. It is essential that the Postal Service make the necessary
investments in cost management information to enable them to better
manage their business and better price their products -- before any
pricing flexibility is considered. Pricing flexibility that is applied
without this information will not only hurt the Postal Service -- it
will harm its customers and the competitive marketplace.

**[Concluding Comments]{.underline}**

[Financial Progress]{.underline}

The USPS has made significant strides recently to improve its financial
bottom line. UPS urges the Commission to empower the Postal Service to
accomplish that goal, consistent with the public nature of its
operations:

-   Moving away from e-commerce and greater apparent emphasis on its
    core operations. Efforts by the USPS to refocus on the USPS's
    efforts away from non-core ventures is commendable.

-   USPS is correct in looking to contract out certain activities,
    either to its customers (i.e. work sharing in its monopoly products)
    or to other suppliers. Such action acts as a discipline for
    controlling internal costs.

> [Necessary Next Steps]{.underline}

We are committed to participating in crafting policies that ensure the
viability of the U.S. Postal Service to meet its core letter mail
mission, since that mission remains important to American society. In
its core function \-- delivery of letter mail, advertising, and
periodicals \-- it is an essential infrastructure for our society for
communication and commerce.

> UPS is hopeful the Commission's work will generate a meaningful debate
> about the Postal Service's role in today's technologically advanced
> society, and ultimately produce recommendations that clarify the
> Postal Service's [mission]{.underline} (allow management to focus on a
> defined objective) and address the Postal Service's approach to
> competition with the private sector.

-   [A Clear Public Institutional Mission]{.underline}: Instead of
    directing its institutional talents and energy into areas outside
    its letter, advertising, and periodicals role, it should pursue
    major opportunities for improving its core mail monopoly offerings.
    Enhancements in service, product offerings, and creative solutions
    within the monopoly provide the biggest opportunity for a
    sustainable postal system.

-   [Focus on Cost Management:]{.underline} To the extent that its
    monopoly volumes are now threatened, the most appropriate response
    is fundamental cost reductions, and not seeking to negotiate rate
    reductions (such as volume discounts) to recapture those volumes.
    Cost reductions in the monopoly core activities, which represents
    85% of its revenue and 91% of its institutional support, is where
    the solution lies for a sustainable operating model for the Postal
    Service.

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-   [Strong Oversight]{.underline}: Inherent to any government granted
    monopoly is the need for strong oversight over that monopoly. The
    existing oversight needs to be strengthened \-- not relaxed. The
    currently applied methodologies and procedures fail to effectively
    safeguard against subsidization; sanctioning greater pricing
    flexibility for the future will make a bad situation worse.

> .

In the specific area of expedited envelope and package delivery, there
are three questions that we suggest to you: (1) Is the public well
served by the private carriers, i.e., is there a market failure
justifying government engagement in this line of business, (2) Should
this be part of the core mission of the Postal Service, and (3) If it is
included in the core or secondary mission of the Postal Service, how can
the public, the consumers and competitors, be effectively safeguarded?

[^1]: Summary of Revenue and Costs, FY 2001, PRC version (Preliminary);
    USPS RPW Report, GFY 2002. 

[^2]: Testimony of the Honorable Edward J. Gleiman, Chairman on behalf
    of the Postal Rate Commission, before the U.S. House of
    Representatives, Committee on Government Reform, Subcommittee on the
    Postal Service, February 11, 1999, p. 22.

[^3]: Uses financial data from 2001 Cost and Revenue Analysis (PRC
    Version)

[^4]: On March 20, 2001, the European Commission Competition authorities
    ruled that the German Post office (Deutsche Post) illegally used
    profits from its monopoly in delivery letters to subsidize its
    prices for business parcels.  Deutsche Post was required to pay a
    fine of more than \$25 million and agreed to split its operations,
    creating a separate entity to run its business-parcel service. On
    June 19, 2002 the European Commission ordered the German Post office
    (Deutsche Post) to repay more than \$900 million in public subsidies
    that were unlawfully used to undercut the prices of rivals in the
    parcel delivery market.

[^5]: Direct and even indirect costs that can be clearly attributed to a
    particular product are assigned to that product as "attributable
    cost". The remaining costs are "institutional costs", which are not
    assigned proportionately, but rather with fairly wide latitude under
    general criteria that permits some products to cover very little
    overhead, while other products -- such as 1^st^ Class Mail -- are
    required to do so at a level well above the overall average.

[^6]: According to the Cost and Revenue Analysis (PRC version) filed at
    the Postal Rate Commission in March 2002

[^7]: Even using the average rate implicitly reflects a presumption that
    Parcel Post, First Class Mail, and other categories share the same
    importance. If monopoly First Class mail were considered to be
    important and therefore deserving preferential treatment, then its
    share of the institutional cost burden should be reduced and shifted
    to less "mission critical" products where there are commercially
    available alternatives (as is the case with Parcel Post.

[^8]: This is contrasted to the definition some economists use that
    ignores the institutional mission and only looks to marginal costs.
    In other words, they believe that as long a new product covers its
    own marginal cost no subsidy exists, without regard to the purpose
    of the institution (e.g. military providing civilian cargo service
    using their vehicles and network as long as only the extra gas, etc,
    involved in the shipping is recovered).

[^9]: A recent example is Arden Hills, Minnesota, and the loss to the
    community of a \$488 million parcel of taxable property. 1/18/03,
    St. Paul Pioneer Press

[^10]: The USPS'sTransformation Plan, page 63, identifies six markets in
    which the Postal Service has core competencies and which they
    believe provide opportunities for economic growth for the Postal
    Service: retail, delivery (last mile), communications, financial
    services, logistics, and advertising.

[^11]: See comments of Commissioner Ruth Goldway, Postal Rate
    Commissioner, February 3, 2003. "...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 constraints, 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."

[^12]: Postal Rate Commission website.

[^13]: Postal Rate Commission Report to Congress on 1998 International
    Mail Volumes, Costs and Revenues, p. 9.

[^14]: Page 2 of joint letter by Consumer Action and the Office of
    Consumer Advocate (emphasis added).

[^15]: See comments of Commissioner Ruth Goldway, Postal Rate
    Commissioner, February 3, 2003.

[^16]: See S.946, S.948, S.949, Cong. Record (4/25/91) for examples of
    thoughtful improvements in the rate-making process.

[^17]: There are cases where data critical to current pricing is over 20
    years old or doesn't exist but is "proxied".