Testimony Of

Robert Cohen

On Behalf Of The

Postal Rate Commission

Before The

U.S. House Of Representatives

Committee On Government Reform

Subcommittee On The Postal Service

March 9, 2000
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Testimony

Chairman McHugh, members of the Committee on Government Reform,

Subcommittee on the Postal Service, I am pleased to testify here today on behalf of the

Postal Rate Commission. I am the Director of the Commission’s Office of Rates,

Analysis and Planning. For a number years I have prepared studies for international

mail conferences and worked with members of foreign postal administrations.

Consequently, the chairman gave me the responsibility of working with the State

Department when it became responsible for dealing with the Universal Postal Union

(UPU). For this reason he also asked me to testify here today.

First I intend to discuss briefly the Commission’s international mail report.

Because Chairman McHugh’s letter of invitation indicated that this hearing will

concentrate on U.S. policies concerning the international exchange of documents and

parcels, most of my testimony will deal with the recent transfer of authority for UPU

policy and representation to the State Department.

The Commission’s Report to the Congress

As you know, legislation amended Title 39 of the U.S. Code in November, 1998,

and required the Commission to provide Congress with a comprehensive report on

International mail costs, volumes and revenues. The Commission completed its first

report and transmitted it to Congress on June 30, 1999.

In order to carry out its new responsibilities, the Commission first asked

interested parties for their views on 1) the scope of the report, and 2) on what data the

Commission should require from the Postal Service in order to prepare the report. The

Commission sent a number of requests for data and information to the Postal Service.

The Service provided the data requested by the Commission, but it also pointed out that

under existing law, Postal Service business information which a private firm would not
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normally disclose must be kept confidential. For that reason, the Commission has not

made its entire report public. Instead it has provided the public with a version from

which a small amount of sensitive information has been redacted. The highlights of the

report are contained in the Attachment to this testimony.

After our report was issued, the Commission provided additional analyses in

response to a request from Chairman McHugh. One of the more difficult questions still

outstanding is the extent to which inbound and outbound mail flow data can, or should,

be combined. The Commission has tried to accommodate interested members by

providing data in disagregated form so that it can be combined as the user sees fit.

Since the preparation of the report did not involve a section 3624 proceeding,

members of the Commission’s Consumer Advocate’s staff worked with the advisory

staff on the study. In preparation for its second report the Commission has just

completed a formal rulemaking on the scope of the report and the data to be supplied

by the Postal Service. The Service will be submitting the data by March 15, and the

Commission will commence work on its second report.

A PRC Perspective on the Activities Resulting from the Transfer of Authority to

the State Department

In November 1998, at the same time the Commission was given its new

international responsibility, Congress also transferred responsibility for UPU policy and

representation from the Postal Service to the State Department. Soon after the

legislation was enacted, the State Department formed an interagency advisory group

consisting of the Justice (Antitrust Division) and Commerce departments, the U.S.

Trade Representative, the Postal Service and the Postal Rate Commission. State also

held public meetings and sought the views of individuals from the Postal Service and

other groups with an interest in UPU policy. Representatives of the State Department

met with officials of several European governments and posts and with officials of the

UPU. The State Department officials quickly grasped the complex issues of

international mail and formulated policy for the quinquennial UPU Congress. The
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interagency group approved the policy by consensus. This all happened relatively

quickly, beginning in January and culminating with the Congress in August.

At the request of Chairman Gleiman, Commissioner Ruth Goldway and I

participated in virtually every interagency advisory group and public meeting. Legal and

technical staff of the Commission also attended these meetings. We met informally with

other interagency advisory group members to provide background on postal matters

and to consider policy issues. The Commission sponsored a presentation for the

advisory group on the remail industry by a knowledgeable person from that industry.

When the State Department expressed an interest in our providing support at the

Beijing Conference, the chairman arranged for my attendance and that of

Commissioner Goldway.

Commission support of the State Department effort continued in December 1999

when I attended the first meeting of the High Level Group set up to consider reform of

the UPU. In addition, Commission staff and I have worked with Postal Service staff in

drafting a schedule of work (SOW) for a joint study on remail and terminal dues. The

SOW was circulated to the interagency advisory group and other stakeholders on March

2. Our intention is to revise the SOW taking into account the comments we receive.

The SOW will be included in a formal request for proposals in preparation of awarding a

contract for the study.

Rationale for transferring authority to the State Department

The Universal Postal Union (UPU) was organized in 1874 to facilitate the

international exchange of documents (including letters and cards) and parcels. The

goal of the UPU was the creation of a single postal territory composed of all member

states. That goal is facilitated by the universal service obligation (USO) imposed on the

postal administrations of the member states by their governments. Under this

arrangement, mail sent from any member country is accepted for delivery in any other

member country and receives the same universal service as domestic mail.
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For a century the UPU quietly succeeded in its purpose. Since there were no

alternative means for the regular exchange of documents and parcels, it was only

natural that governments (i.e., the members of the UPU) were represented at the UPU

by their national postal administrations. The 1970s, however, gave rise to the express

and remail industries that competed with the posts by providing more rapid and reliable

delivery of documents and parcels. Two domestic express companies, Federal Express

and United Parcel Service, became important suppliers to the international market. As

private operators siphoned off much of the high end of the market, the UPU began to

concentrate on assisting postal administrations now in competition with private

operators that had no legally binding universal service obligation.

Meanwhile, Australia, New Zealand, and the European Commission began to

question the scope of the mail monopolies enjoyed by their posts and to encourage

competition in traditional postal markets. Distinctions were made between governments

and postal administrations. Countries began sending representatives of both to the

UPU beginning in the early 1990s. This distinction is becoming increasingly important

as the scope of mail monopolies is being reduced around the world and as posts are

becoming commercialized, incorporated under ordinary commercial law, and privatized.

The International express industry is growing in importance with the globalization

of the economy. Indeed, as others have said, the industry makes globalization possible.

There is, however, an asymmetry in the way these companies’ interests are

represented at the UPU. The Dutch Post, which participates in the UPU, owns an

important international express company, TNT. Similarly, the German Post also

participates in the UPU and has a substantial minority stake in the international express

company DHL. Thus, these express companies at least, are indirectly represented at

the UPU.

Given the competition in the international exchange of documents and parcels, it

became increasingly clear that the U.S. Postal Service could not in fairness represent
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the divergent interests within the United States at the UPU. Recognizing this, Congress

transferred responsibility for UPU policy and representation to the State Department.

State Department’s UPU Policy and the Universal Service Obligation

In response to the diverse interests of the Postal Service, private operators and

international mailers, State’s main policy theme developed for the Beijing Conference

was that the UPU itself should be reformed to take into account the changes in the

international mail market and to be more open to the interests of the private sector. For

the first time representatives of the U.S. express industry and mailing industry were

included in the U.S. delegation to the UPU.

Many countries, however, opposed giving recognition to the interests of private

operators in Beijing. These countries felt that increased competition from private

operators could subvert the ability of national postal administrations to fulfill their

universal service obligations at affordable prices, and consequently, endanger the

single postal territory.

Thus, the question before policy makers is: “How much deference should

national postal administrations receive in international mail policy because they have a

USO?” In particular, should the U.S. Postal Service be given commercial advantages in

international mail because of its USO?

We should first note that international mail volume and revenue are small

portions of total volumes and revenues for the U.S. Postal Service (and for the other

industrial nations’ posts). In the United States, international mail accounts for one half

of 1 percent of the volume and 3 percent of the revenue. International mail on the

whole makes a smaller than average contribution to institutional costs but is not crosssubsidized.

The cost of the universal service obligation is the cost of providing services which

would not be performed by a profit-making competitive firm. This cost has not been
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calculated for the U.S. Postal Service or, as far as I know, for any other postal

administration. The Government grants the U.S. Postal Service a letter mail monopoly

to enable it to provide universal service. The monopoly is tantamount to the ability to

tax mail users, because it allows rates to be set higher than they could be set in a

competitive environment. The domestic letter mail monopoly accounts for more than 80

percent of the Postal Service’s revenue and nearly 90 percent of the contribution to its

institutional costs. If all international mail volume were lost, it would not affect the ability

of the Postal Service to pay for its universal service obligation. Thus, no commercial

advantage needs to be given to international mail in the United States in order to

maintain our Postal Service’s USO. I believe this same analysis would apply to all other

postal administrations of industrial countries.

This does not mean that the Postal Service does not have a universal service

obligation with respect to international mail. Data supplied to the Rate Commission by

the Postal Service and displayed at page 39 of our report to the Congress on

International Mail Volumes, Costs and Revenues shows that the preponderance of the

largest and most lucrative portion of outward international mail (air letters and cards),

were sent by households. Household mail is also an important constituent of air AO

(other objects) and air parcels. Additionally, households account for about 90 percent of

all surface parcels. The data we received from the Postal Service does not separately

break out small volume non-household mailers. A fair inference would be that they are

also important users of the air services which households use. Small volume

commercial mailers and household mailers do not have sufficient volumes to interest

consolidators and so have no affordable alternatives to the Postal Service. Their mail is

de facto monopoly mail. Therein lies the Service’s obligation to these mailers.

The Beijing Congress and its Aftermath

The Beijing Congress took two important steps from a U.S. policy standpoint.

One was the creation of a High Level Group to consider reform of the UPU. As I

mentioned, I attended the first meeting of this group in Bern in December. I must say

that I was surprised at the receptiveness of most of the delegations to the concept of
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reform. This was reinforced by remarks of the Secretary General, Mr. Thomas Leavey.

While some delegations were silent about the desirability of reform and one nation was

actively opposed, at this time I am guardedly optimistic about a successful outcome

from the High Level Group.

The Beijing Congress also ratified a new terminal dues agreement to take effect

in 2001. Terminal dues are the rates that the posts of UPU member nations charge

each other for letters, cards and autre objets (other objects). Because terminal dues

are set below domestic postage rates for comparable mail in industrial countries, and

because terminal dues rates are available only to postal administrations, terminal dues

have competitive implications. The new terminal dues agreement was supported by the

State Department because the new rates would be more cost-based than the current

terminal dues. State believes the new agreement begins the process of having terminal

dues based on costs, which would make them more competitively neutral.

State Department Defers to the Postal Service in Other Areas

The UPU is important to the U.S. Postal Service in dealing with its international

mail. The UPU is the means by which products, prices, means of payment, rules of

exchange, security and technical assistance for less developed nations are established.

The Postal Service has an excellent and dedicated staff that deals with these important

matters at the UPU. It is my observation that, except for terminal dues, the State

Department defers to the Postal Service on those issues, which are akin to commercial

arrangements.

Suggestions for the Policy Development Process

The Rate Commission agrees with the recommendation of the GAO that the

State Department set up an advisory committee under the Federal Advisory Committee

Act. Such a committee would institutionalize a consultative process which could not be

easily discarded. It would also guarantee the participation of interested parties. While

the Commission believes the ad hoc procedures adopted by the State Department

served it well in the hurried atmosphere of preparing for the Beijing Conference, more
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formal procedures would be helpful at this juncture. The Congress may wish to

consider mandating the establishment of such an advisory committee.

The Commission also suggests that when appropriate, State should issue and

publish in the Federal Register a formal statement of policy in which it explains the basis

for the policy and deals with all stated objections to that policy. We are contemplating a

process as similar to notice and comment rulemaking, in that the State Department

should solicit comments prior to issuing a final version. Statements of Policy would

memorialize decisions and explain why they were made. They would prevent arbitrary

changes in policy and ensure considered policymaking.

Finally, although the Commission reiterates the view that the State Department

has exercised its new authority in an extremely competent and skillful manner, it

believes that there is still a lack of expertise on international mail within the State

Department. The Postal Service has this expertise, but it is not disinterested in these

matters. While the Commission is prepared to continue to provide its support, we

believe the State Department may wish to take steps to supplement the knowledge

base of its staff so as to better ensure balanced decision-making, in the ongoing

representation of the interest of the United States.
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Attachment

MAJOR FINDINGS OF PRC REPORT ON INTERNATIONAL MAIL

♦ International mail as a whole is compensatory. It is not cross-subsidized by

domestic mail.

♦ The overall cost coverage for International mail is 113 percent compared to the

systemwide cost coverage of 158 percent.

♦ Four outbound services fail to cover their costs: (1) Surface AO, (2) Surface

periodicals, (3) Global Package Link, and (4) Global Priority Mail. New rates that

became effective 5/30/99 may alleviate the problem.

♦ Two inbound categories are not compensatory: (1) Air LC/AO and (2) Surface

LC/AO.

• Compensation in these categories is based on UPU terminal dues for 42 percent

of inbound mail. Bilateral agreements with 14 countries in Europe and Canada

account for the rest.

• Presumably the loss comes from UPU countries but because USPS doesn’t have

inbound regime-specific costs, we cannot analyze the revenue-cost relationship.

♦ Settlement costs (terminal dues, inward land charges, and imbalance charges)

directly affect outbound rates because the Postal Service includes them in the cost

base used to set rates.

• Rate = (mail processing cost + domestic transportation cost + other domestic

cost + international transportation cost + settlement cost) x cost coverage.

♦ The volume, revenue, and cost data are generally reliable and the cost coverages

are statistically significant except for inbound air LC/AO and Inbound EMS.