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UNITED STATES 

POSTAL SEm:E 

December 4, 2001 

Honorable George A. Omas 

Chairman 

Postal Rate Commission 

1333 H Street, NW, Suite 300 

Washington, DC 20266-0001 

Dear Mr. Chairman: 

We understand that Congressman John McHugh requested that the Postal Rate Commission 

(PRC) undertake a study on the financial impact for the U.S. Postal Service of using domestic 

postage rates as a basis for establishing terminal dues. On October 1 Congressman McHugh 

provided us with a copy of the Commission’s report on this subject. 

We have reviewed the study. We appreciate the Commission’s efforts to apply its expertise ofi 

this important topic. We have, however, identified several assumptions in the study that cause us 

to question its results. Thus, on October 16 we sent the enclosed letter to Congressman McHugh 

requesting that the study be accompanied by comments from the Postal Service before it is made 

available to the public through the PRC’s Web site or other means. The comments that the Postal 

Service has prepared are enclosed. We would be grateful if our comments could be made 

available with the redacted version of the study on ydur Web site and with any other public 

distribution of this study. 

Thank you for your cooperation. 

Sincerely, 

ohn E. Potter 
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-_ 

cc: Congressman John McHugh 

House of F!epresentatives 

Washington, DC 20515-3224 

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-- WPS GOVT RELATIONS 

October 16. 2601 

Honorable John M. McHugh 

Chairman, SubcommIttee on the Postal Service 

Committee on Government Refon 

House of Representatives 

Washington, DC 205156246 

Dear Congressman ?&Hugh: 

This replies to your letter of October 1 asking for,the US. Postal Service’s comments on the 

Postal Rate Commission’s study on applying domestic postage rates as terminal dues for the 

exchange of international mail. Specifically. you asked for our comments on the redacted version 

of the study that you would like to see posted on the Commission’s Web site. 

Our review of the redacted version of the study indicates that it contains no data that the Postal 

Service would consider commercially sensitive. We have no objection to posting the study on 

that account. 

We do. however, have a different perspective on the Commlssion’s conctuslons with respect to 

the impact of such a terminal dues structure on international rates. For this reason, we request 

the opportunity to prepare substantive comments on the study for.your consideration and to have 

those comments included with the study on the Commission’s Web site, so that both our perspectives would be equally available. 

Sincerely, 
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U.S. Postal Service Comments on September 2001 

Terminal Dues Study by the Postal Rate Commission 

The U.S. postal Service offers the following comments on the September 2001 study by the 

postal Rate Commission (PRC) analyzing the financial .consequences for the Postal Service of 

replacing currant terminal dues rates with domestic postage rates. This study was conducted at 

the request of Congressman John McHugh pursuant to his letter to Acting Chairman of the PRC, 

the Honorable George Omas, on July 17. 2001. 

1. Full domestic rate referencing is Impractical. 

It should be noted that no postal administration in the world charges the actual domestic rate for 

each piece of inbound international mail, as this approach entails substantial operational, 

statistical, and accounting requirements that are infeasible given the nature and volume of 

universal service traffic. The PRC study did not address the potential operational implications of, 

and administrative expense related to, domestic rate referencing to full first class rates, which 

would involve assigning rates by weight step. 

Additionally, the PRC study uses 100% of domestic rates when calculating terminal dues rates. 

Within the Universal Postal Union industrialized countries are currently working towards a system 

of domestic rate referencing at 60% of domestic rates. Even within Europe, where postal 

operators have more commercial freedoms, national postal operators are only considering 

alignment of terminal dues within a range of 70% to 80% of domestic rates. European postal 

operators have already reached consensus that the costs of international mail delivery do not 

include some costs that are specific to domestic mail only, such as sales, advertising, 

acceptance, collection and other processing costs. 

An attempt to negotiate bilateral terminal dues rates based on 100% of domestic rates would 

result in substantially higher payments than are currently being contemplated in any postal arena. 

An effort to neclotiate terminal dues based on 100% of domestic rates with Europe, for example, 

would likely be met with incr?dulity as the Europeans are not even contemplating 100% domestic 

rate referencing amongst each other. In any event. such agreement would create an environment 

where other foreign postal operators competing with the Postal Service for outbound traffic from 

the United States to Europe would be in a position lo offer U.S. customers far lower rates than the 

Postal Service and make the Postal Service unable to compete. 

2. Costs for inbound and outbound international mail should be considered separately. 

The PRC study identifies a n&t $59.1 million cost increase for the Postal Service. This figure of 

$5911 million is derived by offsetting potential terminal dues increases for outbound international 

mail with potential increases in terminal dues revenue from inbound international mail. This figure 

represents a net across all countries, industrialized and developing, except for Canada. 

The focus on a $59.1 million net cost increase may justify a more modest impact on international 

costs and rates than is likely to be the case. In setting international postage rates, however, the 

Postal Service does not offset the terminal dues costs of outbound international mail with 

revenues from terminal dues payments for the delivery of inbound international mail. The 

financial effecls or! inbound and outbound mail need to be considered separately. 

Thus, tho additional terminal dues expense attributable to outbound mail would be substantially 

higher than $59.1 million. The PRC report indicates an increase in outbound payment of 118% to 

industrialized countries and 8% to developing countries. The Postal Service would have to 

consider what impact these increases in terminal dues would have on rates. 
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3. The possibility of domestic rate referencing for industrialized and developing COUnkieS 

must be examined separately. 

Currently, developing countries access postal networks in developing and industrialized countries 

at worldwide average rates, which are generally lower than the rates currently paid by 

industrialized countries to each other. The Universal Postal Union (UPU) already faces a 

challenging tasks in working with developing countries to establish a transitional arrangement 

towards a system of terminal dues in which they will agree to pay higher rates to industrialized 

cpuntries. It would be even more challenging to persuade developing countries to move towards 

a terminal dues system in whitih~thay~wourd~pay indushialized~cob’ntries 100% of their domestic 

rates. In the case of the United States, for example. the PRC study indicates that developing 

countries would pay the Postal,Service a 170% increase in terminal dues. Developing countries 

constitute the vast majority of the UPU membership. 

Even if the Postal Service were to move outside of the UPU framework to negotiate terminal dues 

rates with developing countries on a bilateral basis, they will not agree to give the United States 

access to their domestic network at their domestic rates, which are often subsidized for the 

benefit of their own citizens. If the United States were to seek to unilaterally impose its domestic 

rates on other c:ountries, the developing countries might, in response, apply our own domestic 

rates or other, higher rates to the mail that we send to them, thus preserving their revenue 

margins. In any event, we would face increases in terminal dues costs to developing countries 

significantly higher than the 8% suggested in the PRC study. In order to avoid extreme positions, 

the UPU is seeking agreement on transitional arrangements to a more cost-based terminal dues 

system. 

4. Price elasticities and impact on volumes. 

Finally, while the Postal Service fully understands that the PRC was working under both time and 

information constraints. the significance of price elasticities should not be ignored, particularly in 

consideration of a potential 118% cost increase for mail to industrialized countries. The offsetting 

increase in international rates would have severe impacts on our mailers. Large-volume mailers 

would pursue alternatives as much as possible to reduce their costs, but small business mailers 

and single-piece household mailers would bear the brunt of the increase. Examining the volume 

loss and its impact on univeisal service and commerce should be carefully considered. 

5. The way forward. 

The Postal Setiice recognizes the importance of maintainlng adequate cost coverage for delivery 

of intern&tonal mail, while remaining mindful of the potential impacts on our mailers. With this in 

mind, the US. Government is working to advance a more cost-based terminal dues system within 

the UPU. In the case of industrialized countries, the U.S. Government has already agreed to a 

form of domestic rate referencing for the Postal Service through the UPU. The UPU is now 

seeking a way to transition developing countries to this system. 

The Postal Service continues to work closely with the Department of State, which now has 

responsibility .I0 oversee U.S. Government policy in the UPU. The Department of State leads an 

inter-agency process, which includes the PRC, to develop a balanced approach on the position of 

the United States in these matters. 

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