**COMMENTS OF**

**THE NEWSPAPER ASSOCIATION OF AMERICA**

**TO THE**

**PRESIDENTIAL COMMISSION**

**ON THE UNITED STATES POSTAL SERVICE**

**February 12, 2003**

**529 Fourteenth Street, NW**

**Suite 440**

**Washington, DC 20045-1402**

The Newspaper Association of America ("NAA") is pleased to submit these
comments to the President's Commission on the United States Postal
Service. NAA is a national trade association headquartered in Vienna,
Virginia, that represents nearly 2,000 newspapers in the United States
and Canada, accounting for nearly 90 percent of the U.S. daily
circulation. While most NAA newspapers are dailies, many weekly
newspapers are also members. Approximately sixty percent of NAA members
have a circulation below 20,000.

**Executive Summary**

Newspapers have a long history of use of and support for the Postal
Service. The first postmaster general -- Benjamin Franklin -- was a
newspaper publisher. Newspapers today are among the leading, local users
of postal services and, collectively, the industry spends an estimated
\$700 million annually across all classes of mail. Newspapers depend
upon the Postal Service, each day, for the delivery of newspapers and
our advertising preprint mail products to non-subscribers. Newspapers
also have strong interest in First-Class Mail since they, unlike most
businesses, receive the vast majority of their revenue through the mail.

Under the Postal Reorganization Act, the Postal Service was intended to
operate as a public service, providing hardcopy mail delivery at
reasonable and nondiscriminatory rates. NAA members are deeply concerned
that the Postal Service has not lived up to that purpose. Newspapers are
principally concerned that the Postal Service has strayed from its
public service mission by focusing on high volume mail, and thereby
favoring direct mailers who compete with newspapers for the distribution
of advertising[^1] -- all at the expense of First Class mailers who pay
monopoly rates that have consistently borne a disproportionate share of
overhead costs and remain excessively high, while First Class service
declines.

The Commission should also be aware that the vision of the Postal
Service outlined by its management in its Transformation Plan is
controversial and would create more problems than solutions. The
so-called "Commercial Government Enterprise" -- a term memorably
summarized by *The Wall Street Journal* as three oxymorons in a row --
reflects only the views of postal management -- not millions of mailers.
Such a government enterprise would preserve the inefficiencies and high
prices of the letter monopoly while only increasing its intrinsically
unfair, inefficient and distorting interference in competitive markets.

The newspaper industry believes many of the USPS' financial and
management problems are a result of the Postal Rate Commission not
receiving the authority or the regulatory tools it needs to ensure the
Postal Service is accountable to the American people, is financially
self-sufficient and stays on its public service mission. The Postal Rate
Commission should be strengthened, not weakened.

NAA respectfully offers specific comments on key issues that we believe
should be examined as you consider the future course of the U.S. Postal
Service.

# Newspapers and the U.S. Postal Service

## **The Postal Service Is A Public Service**

The Postal Reorganization Act provides that the Postal Service "shall be
operated as a basic and fundamental service provided to the people by
the Government of the United States, authorized by the Constitution,
created by Act of Congress and supported by the people."[^2] These
provisions, fully consistent with the history of the Post Office
Department since the inception of the nation, were meant to preserve and
retain the "public service character of the Nation's mail system."[^3]
Indeed, Congress declared "the Postal Service is---first, last and
always---a public service."[^4]

Newspapers are particularly mindful of the fact that Congress directed
the Postal Service to "bind the nation together through the personal,
educational, literary, and business correspondence of the people" and
that it "shall render postal services to all communities."[^5] This
language creates the Postal Service's mission of providing universal
delivery services. To help it accomplish this mission, Congress granted
a legal monopoly over the delivery of letter mail (including the unique
power to define the scope of its own monopoly). However, wisely fearful
of an unregulated monopoly, Congress also created the Postal Rate
Commission to ensure that proposed changes in rates and classifications
would receive an independent review before taking effect.

Today, with annual revenues in excess of \$66 billion, the Postal
Service dwarfs most major corporations. With an extensive delivery
network capable of touching every citizen and hamlet in the nation six
days a week, the Postal Service's reach is unparalleled. The combination
of the Postal Service's size, scope, legal monopoly, and numerous
governmental privileges and immunities[^6] makes it a powerful force in
American economic and social life.

## **The Postal Service Has Improperly Distorted Advertising Markets**

As Treasury Undersecretary Peter Fisher, the Postmaster General, and
others have stated, the Postal Service has for many years followed a
business model by which it relied on volume growth to cover the costs of
ever-increasing delivery points. We note that this principle directs
attention away from the Postal Service's fundamental statutory
obligation to operate on a fiscally self-sufficient basis,[^7] and
leaves it with no cushion if mail volumes do not meet expectations. And
in fact, the Postal Service has historically suffered financial losses
when its volume goals were not achieved, and its business model --
because it focuses on volume and not revenues -- has produced chronic
deficits and large debt.

Of particular concern to the nation's newspapers is the fact that, as
part of its quest to maximize volume to support its bureaucracy, the
Postal Service has taken sides in the private, competitive market for
advertising services. For more than two decades, the Postal Service has
favored one set of competitors -- namely large direct mailers -- over
newspapers in the battle for advertising revenues instead of providing
services as a neutral third-party. It has done so by adopting financial
practices, including comparatively low rates for advertising mail, which
encourage mail volumes instead of financial self-sufficiency. And it has
done so by misusing its authority and keeping First-Class Mail rates
unnecessarily high and bulk mail rates inappropriately low.

Newspapers do not mind competing with direct mailers or any other media
on a level playing field in the marketplace. They do strongly challenge
the federal government -- the Postal Service -- consistently taking the
side of newspapers' competitors out of a misperception that the Postal
Service has any legitimate institutional interest in the competitive
market for advertising services.

This unsolicited and unwelcome competition from the Postal Service has
come in many different forms over the years:

\- Neighborhood Mail (an abortive effort by the USPS to sell local ads
directly);

\- Auto Day (a proposed \$10 million campaign to divert automobile ads
carried in the Milwaukee Journal into the mail);

\- Utilizing millions of dollars out of a \$100 + million advertising
and marketing budget for a campaign touting direct mail over other
advertising media; and

\- An endless stream of rate proposals to shift costs off of advertising
mail onto First Class so that saturation advertising mail rates can be
lowered.

This deliberate effort to harm newspapers in favor of direct mailers was
most clearly presented in the United State Postal Service 1998 Marketing
Plans, which stated as one of the agency's objectives:

> Ultimately to establish "day certain" delivery for selected categories
> of Ad Mail, and create the platform for moving substantial revenues
> from pre-printed inserts into the mail.[^8]

In similar ways, the Postal Service has sought to become more
"competitive" in other markets well served by the private sector, such
as parcels and overnight delivery. Its performance has been dismal. In
the most recent omnibus rate case, the Postal Rate Commission forecast
that the USPS would earn only \$149 [million]{.underline} in
institutional cost contribution -- an amount equal to that raised by
0.0014 cents on a First Class stamp.[^9] By comparison, the Rate
Commission also forecast that the Postal Service would earn more than
\$18.1 [billion]{.underline} from First-Class Mail. Express Mail, the
agency's premium service, fares a little better, but still contributes
barely \$500 million towards the Service's common and overhead costs.
More recently, the USPS has heard the siren's call of e-commerce, a
field not only served extensively by private firms but also, in most
instances, having nothing to do with hardcopy mail. Like the advertising
market, these markets all share the same characteristic that there is no
market failure that justifies governmental intervention.

When Congress reorganized the U.S. Postal Service in 1970 it never
envisioned that the Postal Service would set out to compete with private
businesses when setting rates or offering services. As the Commission
examines how the Postal Service should be reorganized for the future, we
hope the Commission will strongly reaffirm that the Postal Service
should not compete with or attempt to influence private-sector firms by
exploiting its governmental advantages and its monopoly rate base.

## **The Postal Service Has Financed Its Market-Distorting Actions By Abusing Its Letter Mail Monopoly**

The Postal Service holds today the only remaining legal monopoly in
nationwide "utility" services. Newspapers do not object to the existence
of this monopoly, but we do object to its misuse by the Postal Service.
It is clear, however, that the Postal Service has taken advantage of its
letter monopoly in several ways.

First, the Postal Service has restricted the price choices that could be
available to a hundred million individual and business mailers by
requiring "personalized" correspondence (which the USPS defines
unilaterally) to be mailed at First-Class rates, rather than at lower
rates in other classes with different service features.

Second, the Postal Service has maintained excessive rates for
First-Class letter mail. It has done so by placing an excessive share of
its overhead or "institutional" costs -- those that it says are not
caused by particular classes of mail -- onto First-Class Mail and off of
"competitive" services, such as Express Mail, Parcel Post and local
advertising mail. Although the Postal Rate Commission has rejected some
of these proposals, the Postal Service's cost-shifting schemes have
succeeded to a substantial degree. This is shown by the shares of
revenues and contributions to institutional costs of the major mail
classes (all numbers based on Postal Rate Commission projections):

![](media/image1.wmf){width="6.975in" height="8.95in"}

Somewhat surprisingly, the Postal Service boasts that the price of a
single-piece basic First-Class stamp (now 37 cents) has remained steady
when inflation-adjusted since Reorganization. While the Postal Service
touts this steadiness, the fact remains that the price of a telephone
call has fallen dramatically over the same years, and the Postal Service
has not kept pace. This is particularly disturbing, given the huge
investments in highly sophisticated sortation equipment over the past
decade and the widespread use of barcoding, which one reasonably could
have expected would lead to a significant decline in the real cost of a
stamp after 30 years. On the other hand, it is important to recognize
that because a one-cent increase in the First-Class stamp raises roughly
\$1 billion, it is the most attractive and easiest way for the Postal
Service to raise revenues­, as individual mailers and smaller business
mailers are not organized to resist these small increases. In fact, in
enacting the Postal Reorganization Act, Congress expressly cautioned
about the danger that the Postal Service would try to charge higher
rates to First-Class mailers -- "where the big money is."[^10]

# The Role of the Postal Service in the 21^st^ Century and Beyond

Among the charges to this Presidential Commission is to address the
future role and structure of the Postal Service. Newspapers strongly
believe that there will remain a need for a nationwide hardcopy mail
delivery service in the 21^st^ century. Print media have desirable
features -- immediacy, flexibility, true portability and ease of use --
to readers and advertisers that neither broadcast media nor the Internet
can match. And it is appropriate that the Postal Service should continue
to provide a public service of universal mail delivery at reasonable and
non-discriminatory rates. Newspapers believe that the USPS should remain
focused on its core mission and should not seek to become a
"communications entity."

As you know, postal management believes that there are three options for
the future: privatization, a Commercial Government Enterprise, or a
government agency "with renewed federal subsidies." Not surprisingly,
postal management prefers the Commercial Government Enterprise, which
would allow it to continue to operate in much the manner that it has,
with relatively little supervision, oversight, or accountability, and
with freedom to interfere in whatever market it desires, regardless of
whether there is any demonstrated need. America's newspapers profoundly
disagree. The Postal Service should remain a public service restricted
to hardcopy delivery.

## **The Postal Service Should Remain A Public Service**

The Postal Service says in its Transformation Plan that it has not found
much support for a government agency. Evidently it did not survey the
nation's newspapers -- we strongly believe that it should remain a
government agency -- or mailers in the Main Street Coalition for Postal
Fairness.[^11] In addition, according to a survey conducted by the
Consumer Federation of America in May 2000 the public strongly supports
the preservation of USPS as a regulated, governmental body.[^12]

There are powerful reasons why the Postal Service should remain a
government agency and, as such, should be directed to focus on its
public service mission. Rooted in history and tradition is the
desirability that the letter carrier visiting every residential
household six days a week -- including entering private property to
deliver letters that include government benefits -- should be a
governmental employee.[^13] Indeed, it may well be that only a
governmental service, with a legal monopoly, realistically can be
expected to provide universal postal delivery services.

In light of the Postal Service's sheer size -- \$66 billion annually --
and its legal monopoly over letter mail, authorizing it to play an even
broader role in American economic life as a governmental entity of
[any]{.underline} kind should, on its face, give this Commission
considerable pause. It is abundantly clear, for instance, that the
Postal Service's sheer size can and does directly affect "downstream"
markets. Its attempts to shift print advertising from newspapers to
their direct mail competitors are a clear example. A budget of some \$10
million for an AutoDay pilot program in Milwaukee is miniscule to the
Postal Service, but had it proceeded, it could have had an enormous
impact on the market in that city.

NAA takes issue with the Transformation Plan's contention that a
properly refocused government agency with a strong public service
mission would require "renewed federal subsidies." That contention is
notably unsupported by the Transformation Plan itself. Moreover, it is
unsound both as a matter of theory and as a matter of practical
experience.

First, the claim in the Postal Service's Transformation Plan that a
renewed government agency would require additional subsidies was written
well before last fall's determination by the Office of Personnel
Management that the Postal Service, under current law, will overpay its
retirement obligations by \$71 billion. This should, at least, call into
question the conclusion. Furthermore, as an example of the moving ball
in postal finances, months after the OPM's analysis, the GAO projected
that the Postal Service's current overfunding of the retirement system
is \$4.1 billion, and future overpayments could exceed \$103
billion.[^14] To be sure, the GAO report raised other financial issues
not addressed by OPM, including the Postal Service's long-term
obligations related to postretirement health benefits.

At the least, the retirement funding issue should require a serious
reexamination of the Transformation Plan's premise that a properly
focused government agency would require ongoing federal subsidies.
What's more, the Plan ignored alternatives to the current business model
of relying on volume increases to cover delivery point growth. Several
quite reasonable alternatives exist including, for example, improved
cost management, downsizing to a more optimal size (the Postal Service's
deliberate underpricing pursuant to its volume maximization effort may
have generated a larger than necessary postal system), and more
appropriate pricing.

NAA supports statutory change to allow the Postal Service to reduce its
revenue contribution to the retirement system because of the
overfunding. However, such a change would also seriously undermine the
premise that the USPS cannot be self-sustaining as a government agency.
Even beyond the retirement funding issue, it is critically important
that the Commission examine the true financial condition of the postal
system. Two years ago, the General Accounting Office (GAO) reported to
Congress that the Postal Service lacked the appropriate measurements to
accurately forecast postal costs and revenues. In a recent report on
Postal Service management and program challenges,[^15] the GAO
reiterated its concerns about USPS financial reporting:

> The Service has made some improvements in its financial information
> since 2001; however, we continue to have concerns about the
> transparency of its financial and performance information. Although
> the Service has traditionally provided detailed financial data to
> stakeholders through the fiscal year, its periodic financial reports
> have not clearly explained changes in its financial condition and
> outlook or results of operations, and they have not been readily
> available to the public.

The Commission should take this opportunity to examine closely the
financial condition of the Postal Service.

##  {#section .unnumbered}

## **The Transformation Plan's Commercial Government Enterprise Model Is Seriously Flawed** 

The "Commercial Government Enterprise" model as proposed by the Postal
Service in its Transformation Plan would provide the Postal Service with
the benefits of a private business as well as the special privileges of
a government monopoly. The Commission should firmly reject this
combination of characteristics.

In principle, there is nothing wrong with a government agency "acting
like a business" in the sense of running its operations in a
"business-like" manner, such as increasing productivity and keeping its
overhead costs down. Such was, in fact, the intention of the Postal
Reorganization Act. However, there is a big difference between running a
government agency in a "business-like manner" and operating it as a
private sector business, as a CGE inevitably would be. The unique
mission and privileges of the Postal Service have produced an entity
that is protected from most aspects of the marketplace, and therefore is
institutionally incapable of "acting like a business" or being "market
driven." Instead, economists familiar with the Postal Service indicate
that it pursues a combination of budget and volume maximization.[^16] A
CGE arising from such a heritage, and retaining many of its privileges,
would inevitably create severe market distortions, would offer
traditional and non-traditional products in areas where there is no
market failure, and would be essentially unaccountable to the American
people.

The CGE model would allow the Postal Service to enter the e-commerce or
other communications markets. It should not be allowed to do so. There
is no market failure to correct. Countless private firms already
actively participate in e-commerce, a fact strongly suggesting that
there is no "market failure" that could justify governmental
intervention.

The Postal Service's failed ventures in e-commerce illustrate the point.
The Postal Service has lost many millions of dollars on its Post Office
Online and PosteCS services, and the GAO has reported that "financial
information related to \[the USPS's\] e-commerce and Internet-related
activities is not complete, accurate, and consistent" and that the
Postal Service's e-commerce activities were being cross-subsidized by
mailers.[^17]

\* \* \*

There is a role for the Postal Service in the 21^st^ century. However,
that role differs greatly from the self-aggrandizing role envisioned in
the Transformation Plan. The Postal Service should remain a government
entity, but one better focused on its objectives, and more modest in its
ambitions.

#  Pricing Flexibility

The Presidential Commission should examine quite critically the Postal
Service's plea of "pricing flexibility." Market economies, such as the
American economy, have precious little room for "pricing flexibility" by
government entities that seek to compete with private-sector firms. More
to the point, a case can be made that the Postal Service's misuse of the
considerable pricing flexibility that it currently has (to set its
domestic revenue requirement, to set non-postal rates, and to set
international rates) have contributed to its current problems. And the
Postal Service's performance in areas where it has been allowed some
pricing flexibility is discouraging.

Most importantly, what the Postal Service really means by "pricing
flexibility" is the ability to reduce rates selectively, without
effective prior oversight by the Postal Rate Commission. And the Postal
Service seeks this "flexibility" because it would further enable the
Postal Service to pursue its volume-maximizing strategy. In our view,
the Postal Service needs less pricing flexibility, not more, and its
record demonstrates the continued, and strengthened, need for effective
prior review by the Postal Rate Commission of rate changes.

As we noted earlier, to protect its universal service responsibilities,
Congress gave the Postal Service numerous legal privileges. These
include not only a legal monopoly over the large majority of the mail,
but also the prerogative of defining the scope of its monopoly, an
exemption from taxation, and favorable access to the federal Treasury.
These characteristics help define the Postal Service's unique government
service role.

The thrust of calls for pricing flexibility is that these advantages
listed above are not enough; that the Postal Service needs, in addition,
pricing freedoms. But notions that the Postal Service must be freed from
pricing regulation, including prior review of rate changes by the Postal
Rate Commission, must consider the whole picture.

*All* postal services face either direct or indirect competition. But in
a market economy, the government in the form of the Postal Service truly
has a legitimate reason for providing a service only in instances of
market failure. Where the Postal Service is addressing a market failure,
its package of governmental powers and privileges enable it to provide
the service and "pricing flexibility" is unnecessary. But in the absence
of a market failure, the Postal Service's enormous size and scope merely
distorts a competitive market, and little time and effort should be
devoted to attempting to bolster it through pricing rules.

## **The Postal Service Has A Poor Record Where It Has Flexibility** 

The Postal Service currently has pricing flexibility in three areas: (1)
it has unfettered flexibility to set the total revenue requirement for
domestic mail; (2) non-postal services; and (3) international postal
services. A brief review of its record in these areas is worthwhile.

As for the revenue requirement, the Postal Service has consistently
asked for insufficient revenues and has misused certain components used
in the calculation. And in non-postal services and international mail,
the Postal Service has consistently lost revenues or faced declining
profitability, shifted costs onto monopoly mailers, and interfered with
the private marketplace.

###  **Postal Service Domestic Revenue Requirement**

Through the Postal Reorganization Act of 1970, Congress directed that
postal rates and fees "shall provide sufficient revenues so that the
total estimated income and appropriations to the Postal Service will
equal as nearly as practicable total estimated costs of the Postal
Service."[^18] However, by keeping bulk mail rates low (in order to
appease large mailers as a key element of its effort to maximize
volume), the Postal Service has consistently failed to request domestic
rates from the Postal Rate Commission that would enable it to recover
past losses and satisfy the breakeven requirement.[^19] This is
demonstrated clearly by the very existence of the Service's large
indebtedness to the national Treasury.

Two items regularly included in the Postal Service's revenue requirement
deserve particular attention. These are the Contingency and the Prior
Year Loss Recovery. The Contingency is intended to be a certain amount
of money (generally set at 1 to 3 percent of actual costs) collected to
allow the USPS to handle "unknown unknowns." The Rate Commission
consistently recommends rates designed to recover these amounts.
However, in practice these sums are not set aside for contingencies, but
are simply spent in order to delay the time until the next rate case. As
a result, when a real contingency arises, the Postal Service has little
choice but to borrow money.

Even more futile is the regular component of the domestic revenue
requirement known as "Prior Year Loss Recovery." In developing the PYLR,
the Postal Service takes its total deficit since Reorganization, and
amortizes it over nine years so that, in theory, the new rates would
recover 1/9 of the deficit each year. This amounts, in effect, to an
interest-free loan to current mailers from future mailers. The problem
is that the assumed nine years of stable rates never occurs; instead,
the new rates are overcome by higher costs within a couple of years and
the total deficit soon begins to increase again rather than being
recouped in nine years. Put differently, the Postal Service has chosen
never to request a rate increase that would be sufficient to repay its
deficit and restore its equity within a reasonably foreseeable period.
As a result, it has run chronic deficits.

### **Non-Postal Services**

As noted above, the Postal Service has lost substantial sums in the
offering of non-postal products for such items as clothing, coffee mugs,
videos, telephone cards, bill processing services, etc. GAO also found
that the Postal Service has realized less than one percent of the
revenues upon which it had premised its e-commerce initiatives in
FY2001.[^20]

In one unusual business decision, the Postal Service tried to operate a
bill processing company called REMITCO. During its operation of REMITCO,
the Postal Service lost more than \$10 million before ceasing
operations. While NAA commends Postmaster General John Potter for
putting a stop to most of these non-postal services, the Postal
Service's experience in this area is a glaring example that postal
management has not made wise financial decisions when given flexibility
over services and prices.

###  **International Mail**

A look at the Postal Service's record in international mail, where it
has full pricing flexibility, is instructive. Since 1970, the Postal
Service has experienced growth in its international postal revenues (and
volumes). However, while it has also experienced growth in the
contribution to overhead costs made by international mail in the
aggregate, that growth has grown far more slowly than the revenue
growth.

Second, since 1970, the "markup" of international postal rates over
attributable costs has declined fairly steadily. This means that, over
time, the *share* of international postal revenues going to cover the
overhead (common or "institutional") costs of the Postal Service has
declined significantly (even though the total dollar amount of
contribution has risen). In particular, while in 1970 the markup of
international rates over costs was more than 100 percent, by 2001 the
corresponding markup was about 32 percent.

What should be of even more concern is that the Postal Service has, with
few exceptions, consistently overestimated the revenue and contribution
that it would actually receive from international postage for the fiscal
years that served as test years in the domestic omnibus rate cases.
Whether this is the result of market forces (the international postal
market is fairly competitive) or deliberate underpricing is unclear and
perhaps unknowable; in either case, the net effect has been to shift a
greater share of institutional costs to domestic mail.

## **Negotiated Service Agreements**

The term "Negotiated Service Agreement" (or NSA) is a central issue in
the debate over restructuring the Postal Service, and it has been
defined in many ways. There is an enormous fundamental difference
between NSAs that cover worksharing and are available on a
nondiscriminatory basis, and those that are offered to a selected
mailer.

Current postal rates include a plethora of discounts for so-called "work
sharing' activities such as mailer-applied barcodes and preparing mail
in carrier walk-sequence. These discounts have always been available to
all mailers who meet predetermined criteria for those rates, and not
made available on a selective and discriminatory basis to individual
customers. Mailers large and small can benefit from these activities.
Newspapers support such generally available work sharing discounts.

In contrast, some advocate, in the name of NSAs, volume discounts for
individual mailers. These would be special contract rates with
individual customers that would not be based on direct cost savings, but
on mail volume. The Presidential Commission undoubtedly will hear from
those who vigorously urge this kind of NSA.

The postal community is extremely divided on the wisdom of NSAs that
would give volume discounts to selected mailers. Generally speaking,
larger mailers (who believe they could negotiate a good deal for
themselves) favor such NSAs, and smaller mailers (who fear their postage
rates will inevitably go up to pay for reduced rates for others), oppose
them. In addition, postal interests concerned about inappropriate USPS
intervention in competitive markets also oppose NSAs. Because of this
controversy, Congress soundly rejected legislation that would have
provided the Postal Service with the authority to enter into negotiated
service agreements.

Newspapers believe volume-based NSAs would allow the nation's largest
mailers to obtain rate reductions based not on lower costs but on
negotiating prowess, and to obtain rates not available to other mailers
or to the general public. Over time, this would tend to insulate the
largest mailers from increased Postal Service operational costs that
would inevitably be passed on to small mailers. There are no
shareholders to pick up the costs or pressure postal management to
negotiate better deals.

That large mailers would benefit from volume-based NSAs is demonstrated
not only by the beneficiary of the Service's first proposed domestic NSA
(Capital One, which believes itself to be the largest First-Class
mailer) but by the Postal Service's track record in international
services where it has the authority to offer such deals. Despite a legal
requirement to offer contract rates "to similarly situated customers
under substantially similar conditions," in practice the Postal Service
has indicated that only the largest mailers should expect such favored
treatment:

> The Postal Service recognizes that . . . making ICM \[negotiated
> service agreements\] available to all existing and potential customers
> regardless of size or mailing patterns is not feasible. First,
> increased volumes amplify the beneficial effects of flexible pricing.
> The additional contribution to fixed costs realized from the Postal
> Service's entering into an ICM service agreement with a large business
> customer that had been using another provider would dwarf the
> additional contribution realized from any number of new household or
> small business customers. . .
>
> Second, volume of use determines the cost-effectiveness of flexible
> pricing . . . In general, the unit costs incurred by the Postal
> Service to administer this program are inversely proportional to the
> size of the mailing. Indeed, **for all but the largest volume
> customers, those costs in many instances could be greater than any
> additional contributions. . . .**

57 *Fed Reg*. 30,651, 30653 (July 10, 1992); *see also* 58 *Fed Reg*.
29,778, 29,780 (May 24, 1993) ("qualifying criteria were selected in
order to maximize the beneficial effects of flexible pricing. Requiring
an ICM user to be capable of generating a substantial amount of
international mail allows the Postal Service to focus it marketing
efforts on the large business customers . . . qualifying criteria also
service to limit the universe of potential ICM users to a manageable
size.")

There is little reason to expect the Postal Service would negotiate a
particularly good deal with an experienced, savvy private firm. In a
negotiation between a profit-oriented private firm and the USPS
(oriented towards volume or budget maximization), it is reasonable to
conclude that the private firm would have the upper hand to walk away
with a far better deal.

\* \* \*

Interestingly, current Postal Rate Commission regulations provide the
Postal Service with certain options to change rates more swiftly than in
an omnibus rate case. These have been little used.

Most to the point, in 1989 the Postal Rate Commission amended its rules
to allow the Postal Service to file expedited rate cases for changes in
Express Mail rates in response to competition in the market. The Postal
Service has *never* filed a case under these special rules. Indeed, the
Service evidently paid so little attention to these rules that they even
allowed the rules to expire from inattention before belatedly asking to
have them reinstated. Even after the Commission reinstated the rule, the
Service has still not even tried to use them. This belies its claims
that it needs pricing freedoms to respond more quickly to changes in the
marketplace.

The Rate Commission's rules also provide for expedited consideration of
a variety of experiments and minor changes. These have been used with
considerable success over the years. The Postal Service has not made the
case for their insufficiency.

#  Governance and Oversight Structure for the Postal Service

Since the Postal Service has a legal monopoly, a strong and independent
regulatory framework for prior review of postal rates and
classifications is absolutely necessary. The Consumer Federation of
America survey cited previously found that the public overwhelmingly
supports oversight of postal rates. Seventy-seven percent of survey
respondents said they would not favor allowing the Postal Service to set
First Class rates without the approval of an independent commission.

While the Postal Service and large mailers have repeatedly argued that
the Postal Rate Commission process in reviewing rates is too long,
cumbersome, and restrictive, others disagree. The newspaper industry
believe many of the current problems stem from the fact that the Postal
Reorganization of 1970 failed to give the Postal Rate Commission the
tools that it needed to oversee the financial and the rate setting
operations of the Postal Service. This has created problems that have
made the postal system less transparent and less efficient.

For example:

-   The Postal Service monopoly sets its own revenue requirement.

-   The Postal Rate Commission cannot require the Postal Service to
    submit timely and accurate data for the purpose of evaluating rate
    proposals.

-   The Postal Service's persistent refusal to respond to legitimate
    discovery requests for data has limited the ability of the Postal
    Rate Commission to oversee USPS rate proposals. A strong regulatory
    body must have subpoena authority to require the submission of data
    that will help the rate setting process.

-   The Postal Service contends that the Postal Rate Commission has no
    jurisdiction over non-postal services.[^21]

-   The Postal Rate Commission does not have final authority in the
    establishment of rates.

NAA respectfully recommends to the Presidential Commission that the
Postal Rate Commission be strengthened. The Postal Rate Commission
should receive powers comparable to other regulatory agencies, including
final determination over the revenue requirement, final say over postal
rates, and subpoena power. Doing so would have the additional benefit of
removing the peculiarity of the current law which allows the postal
Governors to act both as party and appellate court, inasmuch as they
approve the filing of a rate case and have the power to modify the
Commission's recommendations.

# Conclusion

The Newspaper Association of America is firmly committed to the promise
of a national postal system committed to universal service at
nondiscriminatory rates. The postal system, rooted in investments by the
taxpayer since the Constitutional Convention, is a national treasure
that should serve the nation equally. The widow, the immigrant, the
Social Security recipient, and the small businessman should receive the
same attention, and be equally valued to the Postal Service, as the
nation's largest mailers.

Respectfully submitted,

Newspaper Association of America

529 14^th^ Street, N.W.

Suite 440

Washington, D.C. 20045

[^1]: Newspapers, whether large or small, daily or weekly, serve as
    vehicles for news and advertising. Generally, there are two kinds of
    newspaper advertising: One, commonly called "ROP" (for "Run of
    Press") is printed on newsprint and appears on the pages of the
    newspaper. The other, called preprint advertising, consists of
    free-standing inserts, which are placed inside the folded newspaper.
    Direct mailers compete for both types of advertising, but most
    commonly for preprints.

[^2]: 39 U.S.C.§101 (a).

[^3]: Conf. Rep. No. 91-1363, 91^st^ Cong. 2d. Sess. 3654.

[^4]: *Id*. at 3668.

[^5]: 39 U.S.C. §101 (a).

[^6]: In addition to its statutory monopoly, the Postal Service enjoys
    numerous other business benefits from its governmental status. It
    does not pay federal, state or local taxes, is allowed to borrow
    with the Full Faith and Credit of the United States Government
    behind it, and is immune from most federal, state and local
    regulations and ordinances. The Postal Service has argued that it
    should not be subject to the "Truth in Advertising" provisions of
    the Lanham Act, or even to the nation's antitrust laws.

[^7]: 39 U.S.C. §3621.

[^8]: United States Postal Service 1998 Marketing Plans, October 1997 at
    AD page 40.

[^9]: Likewise, the Postal Rate Commission predicted that for-profit
    Standard advertising mail would contribute to overhead costs less
    than 1/6^th^ the amount contributed by First-Class Mail.

[^10]: *See* S. Rep. No. 912, 91^st^ Cong., 2d Sess. at 13.

[^11]: Main Street Coalition member companies and associations include
    the American Bankers Association, American Business Media, Computer
    Communications Industry Association, Reed Elsevier, Associated
    Church Press, Greeting Card Association, Hallmark Cards, Inc.,
    National Consumers League, and the National Rural Electric
    Cooperative Association.

[^12]: Caravan Survey of Opinion Research Corporation International
    surveyed 1,009 persons who constitute a representative sample of the
    U.S. adult population, May 2000.

[^13]: In television game show parlance, this is the "uniformed
    representative of the federal government." While UPS and FedEx also,
    of course, access private property uneventfully to deliver packages,
    these services more often deliver to business locations where the
    security concerns are less. Contrast this to the telecommunications
    and electrical industries, where the daily contact is through
    equipment, not in person.

[^14]: GAO-03-448R, *Review of OPM Analysis of USPS CSRS Costs*, January
    31, 2003.

[^15]: GAO-03-118, *Major Challenges and Program Risks* p.30, January
    30, 2003.

[^16]: *See* Sidak and Spulber, PROTECTING COMPETITION FROM THE POSTAL
    SERVICE AT 120 (1995). Increasing mail volume provides justification
    for continuation of the Postal Service as a communications "safety
    net" and for an ever-increasing workforce. Moreover, increasing mail
    volume corresponds to the incentive structure for lower level
    managers in the Postal Service. Postal wages are set by pay grade,
    which is a function of job scope and responsibility. Job scope, in
    turn, depends upon volume and employment levels. History
    demonstrates that the Postal Service, has, in fact, acted entirely
    consistently with this insight since Reorganization. The Service
    regularly has sought to exploit its statutory advantages to offer
    comparatively lower prices for certain services in an effort to
    boost mail volume, especially in classes of mail that face
    competition from tax-paying private enterprises.

[^17]: GAO-02-79, *U.S Postal Service Update on E-Commerce Activities
    and Privacy Protections*, pages 2-3 (December 21, 2001).

[^18]: 39 U.S.C. §3621. "Costs" include operating expenses, capital
    depreciation, debt service, and a provision for contingencies.

[^19]: One could contend that the chronic deficits are due to the Postal
    Service's lack of success in managing costs. This is somewhat beside
    the point, because the statute requires financial breakeven and the
    simple truth is that the Service's revenues have not recovered its
    costs, for whatever reason.

[^20]: GAO-02-79 at 17.

[^21]: Indeed, the Postal Service is currently contesting the legal
    authority of the Commission to consider a request to review the
    Postal Service's array of unsuccessful money-losing ventures.
    Perhaps the Postal Service -- a public service -- should be
    welcoming, not opposing, an independent review of such initiatives.