U.S. Postal Service: Vulnerability to Fluctuating Fuel Prices Requires Improved Tracking and Monitoring of Consumption Information
Published: 2007-02-16T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The U.S. Postal Service (the Service) is dependent on fuel to support its mail delivery and transportation networks, as well as to heat and operate the over 34,000 postal facilities it occupies. The Service has been challenged by recent fuel price fluctuations, and the Postmaster General stated that gas prices were a primary reason for the proposed 2007 postal rate adjustment. Based on this challenge, Congress asked GAO to review (1) how the Service's fuel costs changed recently and the impact of these cost changes on the Service's financial and operating conditions, and (2) how the Service's actions to control fuel costs and mitigate risk compare to leading practices and federal requirements. GAO collected fuel cost and price information; interviewed Service fuel officials; and compared the Service's actions against leading practices and federal requirements.
section_title: What GAO Found
paragraphs: The Service's transportation and facility fuel costs have grown in recent years as fuel prices, particularly for gasoline, diesel, and jet fuel have increased. For example, fuel cost growth for its vehicle fleet was due to rising prices rather than consumption. While fuel costs have directly pressured its financial condition, increasing compensation and benefits were the primary driver of the $3.4 billion operating expense increase in fiscal year 2006. The Service absorbed fuel cost increases through costcontainment efforts and increased revenues from the January 2006 rate increase, allowing it to achieve net income for the year. Nevertheless, the Service remains vulnerable to fuel price fluctuations, due in part to its purchasing process, which involves buying fuel as needed, often at retail locations. The Service is challenged to control fuel costs due to its expanding delivery network and inability to use surcharges. GAO found some of the Service's actions to control fuel costs to be generally consistent with procurement and consumption practices advocated by leading organizations and federal requirements for purchasing alternative fuel vehicles. However, GAO also identified areas where more actions could be taken. Taking actions to address data inconsistencies will be important, even as the Service develops a new energy strategy. These inconsistencies will limit the Service's ability to understand consumption changes and impacts and where to target potential cost-saving opportunities. Furthermore, additional progress is needed in reducing reliance on petroleum-based fuels because of the more stringent federal fuel consumption requirements that were recently passed.

section_title: Letter
paragraphs: The U.S. Postal Service (the Service) delivered over 213 billion pieces of  mail to over 146 million delivery points in 2006. Almost $72 billion was  spent in providing these and other postal services required as part of  meeting its universal service mandate. The Service is one of the major  users of fuel in the federal government, spending over $2.3 billion on  transportation and facility-related fuel in 2006. Its vehicle fleet of over  216,000 vehicles is the largest civilian fleet and consumed over 123 million  gallons of gasoline and diesel fuel. The Service also incurs fuel expenses  as part of its mail delivery and transportation contracts with highway  trucking companies and air carriers. Another area where the Service  incurs fuel expenses is in heating and operating the over 34,000 facilities it  occupies. The Service relies primarily on electricity, natural gas, and  heating oil for these operations. The Service is also subject to certain  federal energy conservation requirements as part of the Energy Policy Acts  of 1992 and 2005. The Energy Policy Act of 1992 (EPAct 1992) required  federal agencies to increase their purchase of alternative fuel vehicles  (AFV), and the Energy Policy Act of 2005 (EPAct 2005) details  requirements for federal fleets to use alternative fuels in these AFVs.  EPAct 2005 also requires agencies, to the maximum extent practicable, to  install meter systems at federal buildings to track energy consumption.
Prices for fuels such as gasoline and diesel spiked in late 2005 due to  Hurricanes Katrina and Rita, and gradually increased until September 2006  when prices began to fall. These fuel price fluctuations have greatly  affected fuel costs for public and private organizations. Unlike its private- industry counterparts, however, the Service is unable to make offsetting  surcharges for rising fuel prices as part of its postal rates and fees. The  Service continues to identify fuel price fluctuations as one of its major  challenges. The Postmaster General stated that gas prices were a primary  reason for the proposed 2007 omnibus rate adjustment. Furthermore, the  Service has recently stated that a 1-percent increase in fuel and natural gas  costs would result in an, on average, $48 million increase in expenses.  Although the Service has taken actions to help address this challenge, it  continues to state that rising fuel costs are a serious concern and that fuel  cost increases are driving transportation cost increases, which  cumulatively grew by about $745 million over the last 2 years.
In recent years, we have reported and testified on the overall significant  financial and operational challenges facing the Service. In 2001 we placed  the Service’s transformation and long-term outlook on our high-risk list,  due in part to difficulties it had in controlling costs. The Service has made  progress since that time by improving productivity, achieving record net  incomes, and downsizing its workforce. Additional progress was also  made when Congress enacted comprehensive postal reform legislation in  December 2006, which provides a framework for modernizing the  Service’s rate-setting processes and addresses the Service’s long-term  financial obligations. Thus, in January 2007 we removed the Service’s  transformation and long-term outlook from our high-risk list. Major  challenges continue to exist, however, that will require close monitoring in  the future. These challenges include generating sufficient revenues as  First-Class Mail volume declines and the changing mail mix provides less  revenue contribution; controlling costs as compensation and benefit costs  rise; and providing reliable data to assess performance.
Based on the challenges facing the Service, you asked us to review (1)  how the Service’s fuel costs changed recently and the impact of these cost  changes on the Service’s financial and operating conditions and (2) how  the Service’s actions to control fuel costs and mitigate risk compare to  leading practices and federal requirements.
To describe changes in the Service’s fuel costs and the impact of these  changes, we collected data on the Service’s transportation and facility- related fuel costs and cost-saving initiatives, as well as fuel price  information from the Department of Energy’s (DOE) Energy Information  Administration (EIA). The Service was only able to provide cost data for  most fuel categories for 2004, 2005, and 2006. We conducted reliability  tests on this data and found it to be reliable for the purposes of our review.  We also reviewed the Service’s procedures for documenting, measuring,  and reporting cost savings for its purchasing activities as well as the  methodology for specific fuel-related initiatives. For the purposes of this  engagement, the procedures, methodologies, and cost savings data  appeared to be reasonable and contain appropriate levels of review. We  also interviewed various Postal Service officials, including staff from the  Transportation Asset Management (TAM) group which procures  petroleum-based fuels; energy procurement group; vehicle operations and  maintenance; and finance to gather information on how the Service has  been impacted by rising fuel costs. To assess the effectiveness of the  Service’s actions to control fuel costs and mitigate risk, we compared  these actions against practices advocated by leading organizations that  could be applied to the Service’s fuel-related activities. We reviewed  information from a variety of sources including our past work on fuel use  and consumption, as well as from reviews of the purchasing efforts at  various federal agencies and private organizations that were recognized as  acquisition leaders (IBM, ChevronTexaco, Bausch & Lomb, Delta Air  Lines, and Dell). We also reviewed the Energy Policy Acts of 2005 and  1992, particularly the federal requirements and guidance pertaining to  alternative fuel vehicles and facility energy management. We also  interviewed federal officials whose operations focus on fuel use; an expert  on purchasing volatile commodities; as well as various executives and  contractors affiliated with the National Star Route Mail Contractors  Association who represent roughly 17,000 small business men and women  who contract with the Service for the over-the-highway transportation of  the mail. Based on this and other information, we identified key practices  related to (1) purchasing fuel—aggregating purchases to leverage buying  power and size; enhancing organizational structure; utilizing public/private  partnerships; and tracking and monitoring fuel information and (2)  consuming fuel, including reducing reliance and use of petroleum-based  fuels. We also discussed planned actions with the Service’s newly  appointed Executive Director for Energy Initiatives. Appendix I contains a  detailed discussion of our scope and methodology. We requested  comments on a draft of this report from the Service, and its comments,  which are reproduced in appendix II, are discussed later in this report. Our  work was conducted from April 2006 to February 2007 in accordance with  generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: The Postal Service is an independent establishment of the executive  branch mandated by the Postal Reorganization Act of 1970 to provide  postal services to the nation. The Service’s customers are provided,  regardless of where they live, with postal services that include mail  delivery at no charge and access to postal retail services. The act also  required the Service to be self-supporting from postal revenues and  attempted to eliminate legislative, budgetary, and financial policies that  were inconsistent with efficient modern management and business  practices. Providing the postal services required by the Postal  Reorganization Act requires a significant transportation and facility  network. To support this network, the Service spent approximately   $2.3 billion on fuel in 2006.
subsections: section_title: Components of the Service’s Transportation Fuel Expense
paragraphs: The majority of the Service’s fuel costs—over $1.7 billion—was used for  transportation-related fuel. Figure 1 summarizes key operating statistics  for the Service’s transportation network.
Other includes alternative fuels such as biodiesel, compressed natural gas (CNG), ethanol,  electricity, and liquefied petroleum gas.
Other includes rail and water transportation.
As shown in figure 1, the Service relies heavily on highway and air  transportation; diesel, gasoline, and jet fuel, all of which are petroleum- based fuels; and contractors to provide transportation-related services.
section_title: Highway Transportation
paragraphs: The Service uses its own vehicle fleet as well as other personal and  contractor-owned vehicles to carry out highway mail delivery and  transportation services. Information on these methods is provided below.
subsections: section_title: The Postal-Owned Vehicle Fleet
paragraphs: Key operating statistics for the Service’s owned fleet are provided in figure  2:  Postal-owned vehicles are typically fueled in one of three ways: (1) at a  retail fuel station using a Postal Service-issued purchasing card, (2) at a  Postal facility using an on-site bulk-fuel tank, and (3) at a Postal facility  using a supplier’s fuel truck.  1.  Retail Fuel for the Postal-Owned Fleet: The majority of Postal-owned  mail delivery vehicles are fueled primarily at retail fueling stations  nationwide. Purchases are made using a Postal-issued purchasing  card—the Voyager card. Under this program, which is administered  through GSA, a purchase card is assigned to a designated Postal  Service vehicle and can be used at over 200,000 retail locations  throughout the United States. The benefits to using this card, which  will be discussed later, include qualifying for rebates and volume  discounts.  2.  Bulk Fuel for the Postal-Owned Fleet: Postal facilities with fuel storage  tanks can provide on-site fuel for Postal-owned vehicles. Fuel for these  tanks is typically purchased through agreements with the Department  of Defense’s Energy Support Center (DESC). Under these agreements,  DESC aggregates the Service’s fuel requirements with other federal  agencies and then solicits offers from private fuel suppliers. After a  contract is reached between the Service (via DESC) and the private  fuel supplier, the fuel supplier is responsible for delivering fuel to the  Postal fuel tanks.
The Service also utilizes a limited amount of specialized bulk fuel  contracts and agreements. In typically smaller, more remote locations  where DESC fuel is not available and a fueling tank is located on-site at  a Postal facility, the Service enters into Basic Pricing Agreements  (BPA). The Service enters into a BPA with a fuel supplier to provide  fuel for the on-site Postal tank. The Service spent nearly $800,000 in  BPAs in 2006. Postal contracts are another specialized fueling method,  which are used primarily during peak seasons when demand for postal  services increases beyond normal operating capacities. The Service  spent nearly $1.6 million on these contracts in 2006.  3.  Mobile Refueling for the Service’s Fleet: Mobile refueling is a method  of fuel procurement used to refuel the Service’s internal fleet vehicles  during non-delivery hours and is used primarily in the Southeastern  United States. Mobile refueling occurs on-site at Postal Service  facilities, where its delivery vehicles are filled from mobile bulk tanks  by contractors. A Voyager fuel card is used for these transactions. This  is the most expensive refueling option primarily because of the  additional service requirements.
Table 2 summarizes fuel expenses for the Postal-owned fleet.
The Service stated that the majority of its nearly 126,600 rural mail carriers  use their own personal vehicles to carry out their postal responsibilities.  Because these carriers do not operate Postal-owned vehicles, they are not  eligible to use the Voyager fuel card for refueling (the Voyager card system  is used for the over 20,000 Postal-owned vehicles operated by rural mail  carriers). The rural mail carriers not in the Voyager program purchase fuel  for their vehicles at retail fueling locations and then are reimbursed as part  of the contractually agreed upon Equipment Maintenance Allowance  (EMA). In addition to fuel, the EMA also includes certain vehicle  maintenance and repair costs. The most recent EMA was set at $0.52 per  mile for routes over 40 miles long (routes under 40 miles are paid a higher  EMA per mile). In 2006, the Service spent nearly $163 million in fuel on  these rural routes.
section_title: Contracted Vehicle Fleet
paragraphs: The Service also utilizes contracted vehicle fleet services to carry out  some of its surface transportation needs. These contractors range from  major trucking companies that provide mail transportation between the  Service’s larger facilities to smaller box contractors who provide home  mail delivery in rural areas. As shown in table 3, the Service spent $648  million through (1) retail fuel, (2) quarterly adjustments for fuel purchases  for its contracted vehicle fleet, and (3) bulk fuel in 2006.
The following is additional information on each of the contracted vehicle  fleet categories:    Retail Fuel for the Contracted Vehicle Fleet: Retail fuel purchased for the  contracted vehicle fleet is bought in the same manner as retail fuel for the  Postal-owned fleet using the Voyager fuel purchasing card. Again, like the  Postal-owned fleet, Voyager fuel cards are assigned to individual vehicles  and can be used at over 200,000 retail locations throughout the United  States. The Service has aimed to increase the number of highway  contractors using the Voyager fuel card to purchase retail fuel, as the  Service can secure rebates and discounts with a great number of Voyager  card transactions.
Quarterly Adjustments for the Contracted Vehicle Fleet: The Service  utilizes quarterly adjustments for highway contractors who do not qualify  for the Voyager card program. Contractors may not qualify for the program  due to reasons such as an inability to reasonably estimate the annual  gallons used during a contract or that personal vehicles are used instead of  Postal-owned vehicles. According to Postal Service officials, since these  personal vehicles are not dedicated to Postal transportation, there is no  reliable way to separate out the gallons used for Postal-related work  versus the gallons used for personal travel. Under this adjustment system,  gallon projections are negotiated between the Service and the individual  contractor. The contractor is responsible for the initial fuel payment that  he/she makes at the fuel pump. The Service then reimburses the  contractor for these fuel costs based on an indexing system that adjusts  for changes in fuel prices on a quarterly basis using a Department of  Energy fuel index. Compensation rates are set at the beginning of the  quarter and readjusted every 3 months based on the average price of fuel  at the beginning and the end of the quarter. Highway contractors have  raised concerns about the 3-month lag between adjustments and have  stated that they would prefer a monthly adjustment. The Service is  considering converting to a monthly DOE fuel indexing system to more  accurately reflect actual fuel prices.
Bulk Fuel for the Contracted Vehicle Fleet: Under the Service’s contracted  bulk fuel purchasing program, the Service acts as a contract administrator  between fuel suppliers and highway contractors who qualify (e.g., they are  required to provide and maintain their own bulk fuel storage tanks). The  Service combines the volume of its contractor bulk purchases and solicits  and awards agreements with fuel suppliers. Fuel suppliers directly bill the  highway contractors for the fuel, and the Service subsequently reimburses  the highway contractors for the fuel used in fulfilling their obligations with  the Service. In 2006 there were 83 locations nationwide where contractor  bulk fuel tanks are located, with Texas, Michigan, and California having  the most sites—8, 6, and 6 respectively.
section_title: Contracted Air Transportation
paragraphs: The Service relies solely on contractors for its air transportation services,  and as part of those contracts, estimated that it spent over $551 million on  fuel in 2006. The majority of this annual cost is for jet fuel, which is  included in the contracts and adjusted monthly according to changes in  the Producer Price Index.
The Service also had limited fuel spending, about $14 million, on rail and  water transportation.
As illustrated in the examples above, the Service uses a variety of fuel  procurement methods for transportation fuels. According to Service  officials, they select procurement methods depending on various factors  such as price, availability, supply, and location. A Service official stated  that the various fuel procurement methods in order of cost-effectiveness  are:  1.  Bulk fuel purchased through DESC is the least expensive method  because of DESC’s ability to aggregate purchases, and the fuel is  purchased without any taxes included.  2.  Bulk fuel purchased for the highway contract routes because it is  bought wholesale.  3.  Voyager retail purchases because of the associated volume discounts,  rebates, and state excise tax exemptions.  4.  Fuel purchased as part of the rural carrier Equipment Maintenance  Allowance because it is tied to a contractually-agreed upon a mileage  reimbursement.  5.  Mobile refueling, which tends to be $0.30 to $0.40 more expensive per  gallon than fuel bought at a retail station due to additional costs  associated with having the fuel delivered to Postal facilities.
section_title: Components of the Service’s Facility Fuel Expense
paragraphs: The remaining portion of the Service’s $2.3 billion fuel costs—about $610  million—was used to heat and operate the over 34,000 facilities it occupies  nationwide. While the majority of this expense was for electricity, other  fuels such as natural gas, heating oil, and propane also were used (see  table 6).
Postal Service officials stated that most of its 34,000 facilities it occupies  are post offices under 2,500 square feet, and that the majority of its energy  use is in its larger processing plants. Additional information on the  Service’s efforts to control facility-related fuel cost is provided in the  following section.
section_title: Rising Fuel Costs Have Pressured the Service’s Financial Condition, but Have Not Prevented Positive Financial Results
paragraphs: While recent fuel cost increases have pressured the Service’s financial  condition, the Service was able to overcome these increases and achieve  net income from operations. Rising fuel prices—particularly for gasoline,  diesel, jet fuel, and natural gas—have been the primary driver of the  Service’s recent transportation and facility fuel costs increases. The  Service remains highly vulnerable to fuel price fluctuations, due in part to  its fuel purchasing process, which involves buying fuel as it is needed,  typically at retail locations. The Service is challenged by the need to meet  its universal service requirements and its inability to use fuel surcharges.  Rising transportation costs accounted for roughly 18 percent of the  operating expense increase in 2006—largely due to rising fuel costs— while compensation and benefit growth accounted for 68 percent of this  increase. Growth in compensation and benefit costs was also tied to fuel  costs, which are included in the calculation of cost-of-living adjustments  contained in union contracts. The Service was able to absorb these cost  pressures through cost containment efforts inside and outside of the fuel  program, as well as from increased revenues from the January 2006 rate  increase, allowing it to achieve a positive net income from operations.
subsections: section_title: The Service’s Fuel Costs Have Risen
paragraphs: Over the last 2 years, the Service has experienced a significant escalation  in its fuel costs (see table 7).
section_title: Transportation Fuel Costs Rose Due to Increasing Prices, but Related Cost Savings Helped Offset These Increases
paragraphs: Fuel costs for each of the Service’s transportation areas have continued to  increase over the last 2 years (see table 8). Highway and air transportation  costs continue to be responsible for the majority of this increase.
While some of the fuel cost increase can be attributed to volume and  delivery point increases, Postal officials stated that rising fuel prices were  the primary driver behind this cost increase. Postal Service transportation  relies heavily on diesel, gasoline, and jet fuel, and over the course of the  last 3 years, prices for these fuel types have generally increased (see fig.  6).
Analysis of the Postal-owned fleet’s fuel cost and consumption history  contained in GSA’s annual Federal Fleet reports confirms that price  increases, rather than consumption, drove fuel cost increases. As shown in  figure 7, fuel costs for the Postal-owned vehicle fleet increased 19 percent  from 2005 to 2006, while consumption decreased by 5 percent.
The Service has cost reduction, savings, and avoidance programs in place  that have helped it offset these rising fuel costs. Some of these programs,  such as the Voyager program, have been in place for a few years, but  others have developed more recently. Descriptions of some of the  Service’s cost-savings initiatives are provided below:    Tax exemption and recoupment: Fuel purchased by Service employees  for Postal-owned vehicles at retail fueling stations is exempt from state  taxes where allowed by law. Largely through the Voyager card program,  which began in 2000, the Service has been able to more effectively apply  its exemption from paying the taxes at the pump and recoup tax payments  where taxes either were inadvertently paid or the tax exemption was not  allowable at the pump according to the applicable state law.
Highway contractor bulk fuel: Savings are derived in one of two ways: (1)  the savings achieved when getting a contractor into the bulk fuel  program—having them purchase fuel in bulk is less expensive for the  Service compared to purchasing it at retail; and (2) the costs that are  avoided when the Service finds that a highway contractor uses fewer  gallons than what is listed in its contractual agreement—the Service does  not pay for the gallons that are not used, and thus avoids that fuel cost.
Highway contractor retail: Savings are achieved in one of two ways, the  first of which is through a contract adjustment that occurs when the  Service brings highway contractors into the Voyager card program. Under  the previous system, these contractors claimed gallons as part of their fuel  expense line. The Service claims the gallons that they are no longer paying  for as part of this line item as savings. The second cost containment  strategy is similar to that for the highway contractor bulk fuel program, in  that the Service claims cost avoidance when highway contractors using  the Voyager card use fewer gallons than what was originally estimated in  their contractual agreement.
Voyager rebates and discounts: The Service is able to achieve cost  reductions in two ways for its Postal-owned vehicle fleet fuel purchases  made using the Voyager card. First, the Service is able to qualify for  rebates from the GSA portfolio of government-sponsored credit cards  through the use of the Voyager card. These rebates are based on the  volume of fuel purchases and the promptness of the Service’s repayment.  Second, the Service is able to secure discounts with participating retailers  due to the large amounts of fuel that are needed for use by the Postal fleet.
Holiday fuel savings: During the peak holiday season, the Service  contracts separately for the fuel needed for its dedicated air network. In  doing so, the Service consolidates fuel volumes to gain a lower price. The  savings amount reflects the price difference.
The table below shows that the Service reported transportation-fuel  related savings of over $53 million in 2006, with the majority of these  savings achieved through the tax exemption and recoupment efforts.
section_title: Facility Fuel Costs Have Risen, but Cost-Savings Targets Have Been Met
paragraphs: The Service’s facility-related fuel costs have also increased recently.  Spending on these fuels—which include electricity, natural gas, heating  oil, propane, and steam—increased each of the last 2 years (see table 10).
While a Service facility official stated that consumption of utilities and  heating fuel may have increased due to operational requirements such as  new equipment and safety and security concerns, the official attributed  most of the increase due to rising prices. In particular, the expenses for  natural gas were responsible for the largest percentage growth. For  example, figure 9 shows that the price for natural gas peaked in November  2005.
To help offset these rising costs, the Service has reported achieving nearly  $18 million in costs savings in 2006 from various facility fuel-related  initiatives. As shown in table 11, most of these cost savings were  achieved in one of two ways: (1) SES Contracts—a type of public-private  partnerships used to promote energy conservation and achieve cost  savings that will be explained in more detail in the subsequent section—or  (2) aggregated utility purchases. In select locations (e.g., within a specific  local utility service area or within a particular state), the Service has  achieved economies of scale and lower rates by aggregating electricity and  natural gas purchases. Outside of these two main areas, the Service has  achieved savings through other actions such as installing occupancy  sensor light switches, which the Service reported saved over $45,000 a  year.
Table 12 shows that the Service’s facility-fuel related cost-savings targets  have been met and exceeded each of the last 3 years. A Postal Service  energy official stated that the targets decreased over that time due to  sustained volatility in the electric and natural gas markets as well as  declining opportunities within these deregulated markets.
section_title: The Postal Service Is Vulnerable to Fuel Price Volatility
paragraphs: Recent fluctuations in transportation and facility fuel prices have revealed  the Service’s vulnerability to fuel price volatility. The Service remains  highly vulnerable to fuel price fluctuations, due in part to its fuel  purchasing process. A fuel procurement official at the Service stated that  price does not factor into a reduced consumption of fuel and provided the  following example—if the Service needs 1 million gallons of fuel to meet  its universal service requirements, it will need that amount regardless of  whether the fuel price is $2 a gallon or $3 a gallon. Furthermore, the  Service does not have fuel storage facilities available to purchase large  quantities of fuel when the price is lower and hold them in reserve. The  Service is also vulnerable to rising fuel prices through the cost-of-living  adjustment calculation used in its union contracts. These COLAs are based  on changes in the Consumer Price Index which contain a fuel component.  Another key component of its fuel program that increases vulnerability is  that other businesses may use fuel surcharges to help offset rising fuel  prices, but the Service can not. As such, the Service must absorb cost  increases due to growing prices while meeting its universal service  requirements.
section_title: Despite Rising Fuel- Related Transportation and Facility Costs, the Service Still Achieved Positive Financial Results
paragraphs: While fuel cost increases pressured overall fuel-related transportation and  facility costs, the Service was able to still achieve positive financial results  in 2006. Fuel expense is a key component for the following transportation  and facility cost categories included in its monthly Financial and  Operating Statements:    Transportation: The fuel component of the Transportation category  includes gasoline, diesel, and other transportation-related fuels used to  support the air, rail, and water transportation networks, as well as a  significant portion of its highway transportation needs. Fuel expenses  accounted for nearly 21 percent of these Transportation expenses in 2006.  The non-fuel component includes related contractual payments and  terminal dues.
Vehicle Maintenance Services: The fuel component includes some fuel  purchased at retail locations. Fuel expenses accounted for about 50  percent of Vehicle Maintenance Services expenses in 2006. The non-fuel  component is the expenses associated with maintaining Postal vehicles  (e.g., oil changes, repairs, etc.)
Utilities and Heating Fuel: The fuel component is the fuel used to heat and  operate Postal facilities (e.g., electricity, natural gas, heating oil, etc.). Fuel  expenses accounted for over 90 percent of Utility and Heating Fuel  expenses in 2006. The non-fuel component is expenses for sewer services  and trash removal.
Rural Carrier Equipment Maintenance Allowance (EMA): The Service  reimburses rural carriers outside of the Voyager program for fuel expenses  as part of the EMA. Fuel expenses accounted for nearly 26 percent of the  EMA in 2006. The vehicle equipment and maintenance expense are the  non-fuel components of the EMA.
Table 13 shows that costs have continued to increase for the three major  fuel-related line-items, all of which were over budget in 2006.
Rising fuel prices were the significant driver of the recent cost growth in  these categories, and why the Service stated that it was unable to offset  Transportation cost increases. In setting the budgets for 2006, the Service  set aside funding in the event that fuel prices or other unplanned events  had an adverse impact on Postal finances. As these officials were  monitoring the impact of rising fuel costs throughout the year and seeing  that costs for the fuel-related costs components were exceeding budgeted  targets, the Service had to utilize these reserve funds and make budget  adjustments nationwide.
Similar cost growth also occurred for the Service’s overall operating  expenses. The Service’s operating expenses grew by $3.4 billion in 2006,  which was the third consecutive year of growth. While rising  transportation costs accounted for roughly 18 percent of the operating  expense increase in 2006—largely due to rising fuel costs—compensation  and benefit growth accounted for 68 percent of this increase (see table  14).
Postal officials attributed a portion of the increase in compensation and  benefits to Cost-of-Living Adjustments (COLA) tied to increases in fuel  costs. This expense growth, however, was (1) somewhat tempered by the  Service’s ability to achieve productivity improvements throughout the year  and (2) offset by the growth in revenues largely from the January 2006 rate  increase. In addition to the $71 million in costs avoided through the  previously mentioned fuel-related initiatives, the Service reported avoiding  over nearly $185 million due to other cost savings and productivity  improvement efforts, which included various operational efficiencies as  well as automation and equipment enhancements. Operating revenue  growth was the primary reason behind the Service’s financial success in  2006. These revenues grew by 4.0 percent ($2.7 billion) largely due to the  January 2006 rate increase. This increase followed operating revenue  growth in the previous 2 years, largely due to growing mail volumes.
In each of the last 3 years, the Service was able to report net income from  operations. In 2004 and 2005, the Service benefited from a transitory boost  provided by 2003 pension reform legislation that changed its pension  obligations. As table 15 shows, the Service achieved net incomes of $3.1  billion and $1.4 billion during that time. This past year was the first in  which the Service was required to make annual escrow payments as part  of the 2003 pension legislation. Although the Service’s net income was  $900 million, the Service reported a $2.1 billion overall deficiency after the  $3.0 billion escrow payment. The Service borrowed $2.1 billion, in part to  cover the required escrow payment. The Postal Accountability and  Enhancement Act enacted in December 2006 repealed the escrow  requirement and designated that funds would instead be allocated to  prefund retiree health benefits.
section_title: The Service’s Actions to Improve Fuel Costs Are Generally Consistent With Leading Practices and Legal Requirements, but Issues Remain
paragraphs: The Service has taken actions in certain areas, such as implementing its  Voyager fuel card program, bulk purchasing, and SES contracts, that have  improved its fuel procurement and consumption, as well as its ability to  manage fuel cost and risks. Some of these actions appear generally  consistent with practices (1) advocated by leading organizations related to  aggregating purchases, improving organizational structure, and utilizing  public-private partnerships and (2) federal conservation requirements  contained in EPAct. We also identified areas where more actions could be  taken to identify further cost-saving opportunities and meet updated  federal fuel consumption requirements related to reducing reliance on  petroleum-based fuels. For example, the Service does not have  information on the fuel consumed as part of its air transportation  contracts or fuel consumed as part of heating and operating the majority  of its over 34,000 occupied facilities. This lack of information is  inconsistent with tracking and monitoring practices advocated by leading  organizations in that it inhibits the Service’s understanding of the extent to  which consumption is changing, how consumption has impacted overall  fuel costs, and potential opportunities to reduce costs and/or  consumption. Furthermore, financial and operational limitations related to  alternative fuel usage may limit the Service’s ability to reduce reliance on  petroleum-based fuels as required by EPAct 2005. Addressing these issues,  as well as continuing to look for additional cost-saving and risk mitigation  opportunities, will be important to assist the Service in managing its  vulnerability to fuel price volatility.
subsections: section_title: Key Practices Applied by Leading Organizations and Applicable EPAct Requirements
paragraphs: Based on information gathered from fuel officials at DOD, GSA, and DOE;  discussions with an expert on purchasing price-volatile commodities; and  our past work, we identified key practices advocated by leading  organizations that can be applied to the Service’s fuel-related activities. We  also reviewed the federal energy conservation requirements applicable to  the Service as part of EPAct 1992 and 2005. We grouped these practices  into two major areas: (1) procurement and (2) consumption.
subsections: section_title: Procurement-Related Practices
paragraphs: We have issued a number of reports discussing the actions that leading  private-sector organizations have taken to improve their purchasing, and  how some of these actions can be effective for federal agencies. We have  also issued a framework for assessing the acquisition function at federal  agencies. Many of these actions we reported on revolve around  implementing a strategic approach to procurements—one that includes  the following key practices/principles:    Aggregating purchases to leverage buying power and size: Organizations  should look for opportunities to aggregate purchases which would allow  them to leverage buying power and size and may result in better prices,  due to volume discounts, more stable prices, and improved service. In a  2003 report, we noted that leading private-sector organizations reported  saving hundreds of millions of dollars due to leveraging their spending.
Furthermore, vehicle fleet and facility energy managers from the General  Services Administration and fuel procurement specialists at DESC stated  that aggregating purchases has resulted in better prices and service from  fuel and energy suppliers.
Enhancing organizational structure: We reported that leading companies  found it necessary to change their business processes, organizational  structure, and employee roles and responsibilities to effectively manage  and coordinate their purchases. Leading organizations provide clear and  strong leadership through such mechanisms as establishing goals and  prioritizing initiatives that will enhance accountability for performance.  We have also reported on the importance of establishing commodity- specific managers. Considering the fluctuations of fuel and utility prices, it  is important to have officials who are consistently monitoring and tracking  the market changes for these goods to make informed purchasing  decisions.
Use public/private partnerships: We have reported that leading  organizations have found that more cooperative business relationships  with suppliers have improved their ability to respond to changing business  conditions and have led to lower costs. Over 20 years ago, federal  government agencies were encouraged to utilize an alternative source of  funding investments aimed at promoting energy-efficient projects. Under  these projects, a private contractor would identify, design, install, and  finance energy conservation measures in federal buildings in exchange for  a share of the resultant energy cost savings that would be paid back to the  contractor over a set period of time. These alternative funding  mechanisms take advantage of public/private partnerships to provide  incentives for cost savings and reduce energy consumption. These  contracts have been advocated by the President and the Department of  Energy as an effective energy conservation measure, and EPAct 2005  recently extended the authority for these financing mechanisms through  2016.
Tracking and monitoring: A key principle applied by leading companies is  obtaining improved knowledge on what is being spent by an organization.  This knowledge is gained through the implementation of processes and  systems to collect, maintain, and analyze data. This data would provide the  organization the ability to track and monitor performance over time as  well as to identify cost saving opportunities. We have reported on how  leading private-sector companies have focused on gaining knowledge  about how much is being spent for what goods and services, who are the  buyers, and who are the suppliers, thereby identifying opportunities to  leverage buying, save money, and improve performance, and how these  principles can apply to federal entities. A key benefit derived from  tracking and monitoring is gaining an understanding of an organization’s  fuel consumption: what types of fuel are being consumed, how much, how  these fuels are used (i.e., for transportation or facilities), and when they  are needed (i.e., throughout the year or seasonally), etc. EPAct 2005  contained specific provisions aimed at improving the tracking and  monitoring of energy usage at federal facilities. Agencies are to begin  taking actions to implement electric metering systems throughout their  facilities, with the goal of having this technology in all federal buildings by  October 1, 2012.
section_title: Consumption-Related Federal Requirements and Guidance
paragraphs: The federal government, through legal requirements contained in EPAct  1992 and 2005 and other guidance, continues to promote actions aimed at  reducing federal fuel consumption. EPAct 1992 and 2005 established  federal energy conservation efforts that target, among other things, the  need for federal agencies to take steps to reduce reliance on and use of  petroleum-based fuels. Key provisions in EPAct 1992 were aimed at  reducing the nation’s dependence on foreign oil by promoting alternative  fuel vehicles (AFV) in the federal government’s various vehicle fleets and  fuel diversification. EPAct 1992 required federal agencies, including the  Service, to increase their AFV purchases when buying new vehicles and  EPAct 2005 details requirements for alternative fuels to be used in these  vehicles.
EPAct 2005 also sought to set conservation goals for all federal agencies,  including the Postal Service. Provisions within EPAct related to facility  energy consumption include:    Federal agencies are to reduce their annual energy consumption by 2  percent per year from 2006 to 2015, based on the baseline year of 2003,  resulting in an overall energy reduction of 20 percent by 2015;    New federal buildings must be designed to achieve energy consumption  levels that exceed industry or international standards by at least 30  percent, provided the standards would be life-cycle cost-effective for the  facility.
In addition to these legal requirements, other federal guidance exists to  reduce fuel consumption. For example, in January 2007, President Bush  issued Executive Order 13423 to strengthen federal agencies’  environmental, energy, and transportation management. Major provisions  of this order included:    Vehicles: Use certain hybrid vehicles when commercially available at a  reasonable cost.
Petroleum conservation: Reduce total petroleum consumption in vehicle  fleets by 2 percent annually through 2015.
Alternative fuel use: Increase alternative fuel consumption by 10 percent  annually.
Energy efficiency: Improve energy efficiency by 30 percent by 2015.
Although the Service is not subject to the executive order, this federal  policy provides guidance on goals and practices that could be replicated to  improve transportation and facility energy efficiency. DOE has also  provided guidance aimed at improving vehicle fleet fuel efficiency and, in  general, reducing petroleum-based fuel consumption. Some examples of  these practices include:    observing posted speed limits;  removing excess weight from the vehicle;   keeping tires properly inflated; and    performing regularly-scheduled preventative maintenance.
We also reported in 2003 that the use of bypass filters in conjunction with  traditional oil filters are another option to improve vehicle fleet efficiency  by substantially reducing the number of oil changes for certain federal  agencies, including the Service.
section_title: Many of the Service’s Actions Are Generally Consistent with Leading Practices and Selected EPAct Requirements, but Issues Remain
paragraphs: We assessed the Service’s actions to control fuel costs and mitigate fuel  cost risk against these leading practices and EPAct requirements. The  Service’s actions generally appear to be consistent with the leading  practices for aggregating purchases, organizational change, and utilizing  public-private partnerships. Furthermore, the Service has generally  complied with the legal provisions contained in EPAct 1992 regarding the  purchase of alternative fuel-capable vehicles. Issues remain, however,  related to tracking and monitoring fuel consumption data and reducing  reliance on petroleum-based fuels that may hinder the Service’s ability to  achieve cost savings and/or meet updated federal requirements contained  in EPAct 2005.
section_title: Aggregating Purchases Are Consistent with Leading Practices
paragraphs: The Service’s actions related to aggregating its purchases and leveraging  its buying power appear consistent with practices advocated by leading  organizations. As table 16 illustrates, the Service has implemented multiple  actions aimed at aggregating fuel purchases, both internal and external to  the Postal Service.
section_title: Organizational Structure Appears Consistent with Leading Practices
paragraphs: The changes that the Service has made to its organizational structure  appear consistent with leading practices because it reorganized to include  commodity (fuel) specific experts and established a leadership position to  develop and coordinate the implementation of the Service’s energy  strategies. In 2002, the Service created its fuel purchasing organization as  part of its efforts to incorporate Supply Chain Management principles. A  2001 report by the Service’s Office of Inspector General (OIG)  recommended that the Service reexamine its fuel management systems. A  consultant-produced Fuel Management Business Plan study completed in  response to the OIG audit recommended the Service centralize its  procurement and management of fuels. The Service thus created the  Transportation Asset Management group, which is dedicated to managing  and conducting the Service’s transportation-related fuel purchasing  activity—for both the Service and its transportation contractors—as well  as for heating oil. Although heating oil is used in facility operations, since  it is a petroleum-based fuel the Service included it in the Transportation  Asset Management group. During 2001, a procurement team focused on  the utilities was also created. The Office Products and Utilities Category  Management Center was developed to manage utility procurement for  Postal facilities throughout the United States. The main energy sources  this group is responsible for are electricity, natural gas, water, and steam.  This group also manages all of the Service’s SES contracts with private  contractors.
The Service’s recent organizational changes related to its energy  management also appear consistent with leading practices related to  enhancing leadership and establishing an organizational strategy. In July  2006, the Service appointed an Executive Director for Energy Initiatives.  The current Executive Director stated that her responsibilities will  include:    Developing and managing the Service’s energy management strategy. The  Executive Director anticipates completing the Service’s energy  management strategic plan by mid-2007, which is expected to focus on  three key areas: (1) fuel purchasing using supply management, (2) fuel  demand for the Service’s facilities and its transportation networks, and (3)  risk management.
Serving as the Service’s primary point of contact for all other government  agencies—federal, state, and local—and the private sector regarding the  Service’s fuel and energy usage. The relationships built between the  Service, other government agencies, and private-sector organizations are  designed to keep the Service apprised of any opportunities or leading  practices that exist to reduce overall energy consumption.
section_title: Public-Private Partnerships Appear Generally Consistent with Leading Practices
paragraphs: The Service’s continued utilization of public-private partnerships through  Shared Energy Savings contracts appear consistent with some elements of  leading practices and with federal policies in this area. These contracts are  an alternative source of funding for energy-efficient investments. Under  these contracts, a private entity (typically an energy company) would fund  the initial installation of an energy savings project at a Postal facility.  Energy officials at the Service stated that it has advocated the use of these  contracts since 1992 as an effective alternative financing method and  energy conservation program, and that these projects are an investment  aimed at reducing consumption. The savings achieved as a result of these  projects would initially be used to pay back the private entity for the  installation costs—typically over a 10-year period. According to the  Service, savings could accrue (1) at the end of this pay back period, (2)  when the outstanding balance is paid prior to the contract’s expiration by  the Service using funding from other areas, or (3) during the payback  period as consumption is being reduced, actual energy prices exceed the  forecasted prices. Table 17 summarizes the Service’s SES contract  program, while table 18 shows that many 2006 SES projects are occurring  at sites in the Pacific and Southeast areas.
Some of the Service’s SES projects have been nominated for DOE’s  Federal Energy Efficiency Awards, and DOE has recognized that benefits  have been derived from the Service’s contracts. Our past work on similar  energy savings contracts for other federal agencies reaffirmed that these  types of contracts can offer various benefits including energy savings and  more reliable equipment, but noted attention is needed when evaluating  the contracts expected cost savings. We also noted that financing energy  savings projects through these alternative funding mechanisms may be  more expensive than up-front funding and that the performance of these  third-party participants should be carefully monitored and verified.
section_title: Inconsistencies Remain in the Service’s Tracking and Monitoring of Fuel Information
paragraphs: The Service’s limited tracking and monitoring of fuel consumption  information for the majority of its fuel spending is inconsistent with  leading practices (see table 19). This lack of information results in the  Service not having the necessary fuel information to gain a complete  understanding of the extent to which consumption is changing, how  consumption has impacted overall fuel costs, and identify potential  opportunities to reduce consumption. On the transportation side, the  Service has no mechanisms or systems in place to monitor fuel usage,  except for fuel purchases through its Voyager and holiday jet fuel  programs (these purchases combined account for about 35 percent of its  annual transportation-related fuel expenses). For example, the Service  does not have consumption information for its nearly 55,000 delivery  routes served by its rural carriers who use their own personal vehicles.  The Service stated that it estimates fuel usage in some of these instances.  Furthermore, the air transportation contracts pose greater difficulties in  this area because fuel purchases are tied to a contract measure such as  cubic feet or pounds of cargo. These measures are needed to estimate fuel  consumption for the Postal-related cargo because these flights may not be  dedicated to Postal Service transportation. The Service also does not  centrally track the amount of fuel used to heat and operate its nationwide  facility network. For example, the Service currently has metering  equipment at only 25 of its over 34,000 facilities. The Service tracks and  monitors the costs that are paid for its electricity, natural gas, and heating  oil, but does not track consumption amounts.
The Service has shown that in areas where it tracks and monitors fuel  information, positive results can be achieved. For example, the Service has  been able to increase its tracking and monitoring through the use of the  Voyager program and holiday jet fuel on the transportation side. The  Voyager program’s ability to gather, track, and monitor data has resulted  in direct fuel cost savings for the Service. The card provides significant  amounts of transactional data such as cost, location, fuel type, timing, and  quantity that is fed into two information systems—the eFleet program for  the Postal-owned fleet and the eFuel system for the highway contractor  fleet. According to Service officials, these systems require the monthly  reconciliation of all purchases and programs designed to monitor potential  fraud and abuse. These mechanisms contribute to cost savings and  avoidance. Furthermore, data collected from these systems has been used  by the Service to increase the accuracy of data for highway contractor fuel  consumption. Improved data tracking and monitoring for the Service’s  holiday jet fuel has resulted in improved and more accurate contracting  and reported costs savings.
On the facility side, the SES program requires specific tracking and  monitoring of the overall performance (costs, savings, and changes in  consumption) from these contracts. Furthermore, utility companies in the  Pacific and New York areas have provided the Service metering equipment  to track its fuel usage at designated Postal Service facilities. As discussed  earlier, the Service has set annual facility fuel-related cost-saving targets  that have allowed the Service to monitor and evaluate the performance of  these initiatives.
Considering the positive results associated with the tracking and  monitoring under the Voyager card and SES programs, similar efforts  could be beneficial in obtaining additional fuel-related cost saving  opportunities. For example, a GSA building official stated that its efforts to  track consumption data showed that nearly 60 of its owned or leased  facilities accounted for almost half of its energy costs. GSA was able to  target these facilities for their energy efficiency investments. The  upcoming EPAct metering systems installation requirements provide an  opportunity for the Service to make additional progress in tracking and  monitoring its facility fuel consumption. The Executive Director for  Energy Initiatives stated that financial and operational considerations  need to be made due to the composition of the Service’s facility network— 34,000 facilities nationwide, many of which are less than 2,500 square  feet. The Executive Director stated that the Service has some fuel  information that provides guidance on which facilities are key candidates  for energy efficiency investments. Specifically, the Service has identified  543 of its largest consuming facilities and is performing further reviews of  these facilities. The Executive Director acknowledged, however, that  improvements to the Service’s fuel information are needed and will be  included as part of the Service’s upcoming energy strategy. More complete  fuel cost and consumption information at its facilities would allow the  Service to gain a better understanding of where investments could be  made to reduce costs and improve fuel efficiency.
section_title: The Service Has Been Unable to Reduce Reliance on Petroleum-Based Fuels
paragraphs: Although the Service has purchased thousands of AFVs to comply with  provisions of EPAct 1992 aimed at reducing reliance on petroleum-based  fuels, financial and operational limitations have hindered the Service’s  ability to use alternative fuels in these vehicles. The Service has increased  its AFV fleet by nearly 20 percent from 2000 and currently possesses one  of the largest alternative-fuel capable fleets in the federal government with  nearly 40,000 AFVs. The majority of these vehicles are capable of  operating on ethanol or compressed natural gas (CNG), and also include  some that operate on electricity and liquefied petroleum gas. Most of the  Service’s AFVs, however, do not operate using alternative fuels, but  primarily use gasoline and diesel fuel. Alternative fuels accounted for  roughly 1.5 percent of the total fuel consumed by the Service’s internal  fleet in 2006.
Financial and operational limitations associated with higher fuel and  vehicle prices, lower fuel efficiencies, and an insufficient nationwide  alternative fueling infrastructure have limited the Service’s use of  alternative fuels. Postal Service officials stated these issues made  operating its fleet on alternative fuels cost prohibitive. For example these  officials stated that:    The Service found that the cost for a gallon of ethanol 85 (E85) is typically  17 percent more expensive than gasoline, is 26 percent less efficient, and  may result in higher maintenance costs because it is corrosive.
There is a limited supply of AFVs available for purchase by the Service,  and those that are available to the Service that meet the EPAct  requirements contain larger engines than generally needed for delivery  operations. As such, these unnecessarily large engines lower fuel  efficiency when using gasoline or alternative fuels, and reduce the  Service’s miles per gallon.
The limited nationwide alternative fuel infrastructure has hindered some  of its previous alternative fuel efforts. For example, the Service converted  some of its vehicles to operate on CNG in the early 1990s. While this was  successful in the short term, manufacturers that the Service worked with  to produce the CNG vehicles went out of business or simply stopped  producing the vehicles, and many fueling stations that had provided CNG  stopped selling it, leading to a shortage in the fuel. Furthermore, even  where alternative fuel pumps are available, their distance from a Postal  Service facility may be too great to justify the costs to refuel at that pump.  Service officials stated that only 0.6 percent of service stations across the  country offer alternative fuels.
Our past work, as well as officials from DOE and GSA have raised similar  financial and operational limitations. We recently issued a report on the  challenges associated with using alternative fuels, including that the  nationwide alternative fuel infrastructure is poor to nonexistent  throughout most of the country. For example, we reported that there are  a limited number of E85 fueling stations nationwide (mostly concentrated  in the upper Midwest), and that E85 cannot use the same infrastructure as  gasoline because it is more corrosive. As of January 2007, the DOE  Website indicates that only 1,003 E85 stations are located throughout the  country. Recent studies conducted by DOE have found similar decreased  fuel efficiency and increased cost results for ethanol. DOE is currently in  the process of finalizing guidance on a waiver to EPAct for federal fleets  based on factors that may include alternative fuel price and travel  distance.
A Service engineering director stated that discussions with DOE,  automobile, fuel industry officials, and the Service about these financial  and operational limitations have taken place, but progress has been  difficult to achieve. This official stated that the Service’s demand for AFVs  and alternative fuels is not large enough to result in significant changes to  the availability and price of AFVs or to the nationwide alternative fuel  infrastructure. We are continuing to look at issues surrounding the  nationwide alternative fuel infrastructure and plan on issuing a report in  the middle of 2007.
Service officials also noted that they continue to look at alternative fuel  vehicles and other options to improve vehicle fuel efficiency. For example,  the Service has recently focused testing on hybrid vehicles. These officials  noted, however, that while the mail delivery tests using hybrid vehicles are  going very well and are conducive to the stop-and-go driving of mail  delivery routes, hybrid vehicles are not considered AFVs and are ineligible  for EPAct 2005 credit because they are powered primarily by standard  gasoline. Nevertheless, the use of hybrids is consistent with the President’s  recent executive order requiring federal agencies to cut their energy  consumption by, among other actions, using hybrid cars. Officials also  noted that the Service takes other actions to increase fuel efficiency, such  as having regularly scheduled vehicle maintenance (oil changes, tire  pressure checks, etc.) that is consistent with the specifications of the  vehicle manufacturer. Another fuel efficiency option noted by a vehicle  operations official is that most of the larger vehicles in the Service’s fleet  were installed with bypass filters to minimize the intervals between oil  replacements. However, he stated that using bypass filters on the smaller,  delivery vehicles would not be cost-effective due to more expensive  installation costs.
section_title: Conclusion
paragraphs: Although the Service has taken some actions to mitigate fuel risk and  contain costs that are generally consistent with practices advocated by  leading organizations, it continues to be vulnerable to fuel price  fluctuations and challenged to meet the more stringent 2005 EPAct  requirements. The Service recognizes these challenges and is in the  process of developing a strategic plan to guide future actions in this area.  Immediate action is needed, however, to address deficiencies related to  insufficient consumption data in some transportation and facility areas.  Without sufficient consumption data, the Service will have difficulty  understanding fuel consumption changes and identifying opportunities for  additional cost savings.
section_title: Recommendation for Executive Action
paragraphs: We recommend that the Postmaster General take actions to improve  tracking and monitoring of transportation and facility-related fuel  consumption data. Taking immediate actions to address the lack of  consumption data will be important, even as the Service is developing a  new energy strategy.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Service for its review and  comment. The Service provided its comments in a letter from the Senior  Vice President, Operations, dated January 19, 2007. These comments are  summarized below and included in appendix II. The Service agreed with  our findings and recommendation, and stated that it has started the  process to improve the information systems needed to capture fuel  consumption information. In its comments, the Service stated that it plans  to increase the number of Postal-owned vehicles used by rural carriers.  These efforts should increase the Service’s ability to track and monitor  fuel usage due to the use of Voyager cards in Postal-owned vehicles. The  Service also stated that it will be challenged by the EPAct 2005  requirements. For example, the Service commented on the limited  availability of alternative fuel, and in particular, the increased cost and  decreased efficiency associated with E85. We recognized these issues in  our report and we are currently conducting additional work on alternative  fuel infrastructure issues that is scheduled to be completed in mid-2007.  The Service also commented on the financial challenges associated with  the EPAct 2005 advanced metering requirement. It stated that many of its  facilities are less than 10,000 square feet and requiring meters at all  locations would not provide a reasonable return on investment. EPAct  2005 established a process for agencies to seek waivers to the metering  requirements, DOE has established criteria for doing so, and the Service  has indicated that it may seek waivers for certain facilities.
Although we recognize that these financial and operational challenges  exist, the Service has an opportunity to build on its positive efforts and  make additional progress in meeting these requirements. For example, the  Service reported installing metering systems at only 25 of its 34,000  facilities, and the Service could extend this practice to other facilities.  Service officials stated that they have identified 543 of the Service’s largest  energy consuming facilities, and the information gathered from analyzing  these facilities may lead to practices that can also be applied to smaller  facilities. Furthermore, the recent attention from the Administration and  Congress on alternative fuel and energy conservation issues may provide  an impetus for addressing some of these limitations that have hindered the  Service’s progress. The Service stated in its comments that it would be  pleased to contribute to a national strategic plan for meeting the EPAct  alternative fuel consumption requirement.
We are sending copies of this report to the Chairman of the House  Committee on Oversight and Government Reform; the Chairman and  Ranking Member of the House Subcommittee on the Federal Workforce,  Postal Service, and the District of Columbia; the Chairman and Ranking  Member of the Senate Committee on Homeland Security and  Governmental Affairs; the Chairman and Ranking Member of the Senate  Subcommittee on Federal Financial Management, Government  Information, Federal Services, and International Security; the Postmaster  General; and other interested parties. We also will provide copies to others  on request. In addition, the report will be available at no charge on the  GAO Web site at http://www.gao.gov.
If you or your staff have any questions regarding this report, please  contact me at siggerudk@gao.gov or by telephone at (202) 512-2834.  Contact points for our Office of Congressional Relations and Public Affairs  may be found on the last page of this report. GAO staff that made key  contributions to this report are listed in appendix IV.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: For this report, our objectives were to review (1) how the Service’s fuel  costs changed recently and the impact of these cost changes on the  Service’s financial and operating conditions and (2) how the Service’s  actions to control fuel costs and mitigate risk compare to leading practices  and federal requirements.
To describe how the U.S. Postal Service’s (the Service) fuel costs changed  recently and what has been the impact of these cost changes on the  Service’s financial and operating conditions, we first defined what would  be included as fuels. For our analysis, we established the following two  categories:  1.  Transportation-related fuel, which included fuel used for highway, air,  rail, and water transportation. The types of fuel included in this  category were gasoline, diesel, jet fuel, biodiesel, ethanol, compressed  natural gas, liquefied petroleum gas, and electricity.  2.  Facility-related fuels, which included fuel used to heat and operate  Postal Service facilities. The types of fuel included electricity, natural  gas, heating oil, propane, steam, coal, and wood. In regards to  including electricity as a type of fuel, we felt it was necessary because  it was used both in transportation and facility heating and operations.
We also analyzed trends in fuel prices from information available from the  Energy Information Administration’s Web site, as well as through other  Department of Energy (DOE) sources consistent with guidance from DOE  officials. We also collected data on the following areas:    Fuel cost data from the Service regarding its various fuel types, purchasing  methods, and transportation methods. Due to data system issues from an  organizational change in 2003, the Service was only able to provide this  data for most areas for 2004, 2005, and 2006. The Service stated that it  needed to estimate fuel costs for multiple purchasing methods because  that data is not available to them. For example, the Service had to estimate  fuel costs for air transportation contracts.
Transportation and facility-fuel cost-saving initiatives. Although the  Service has specific definitions for its strategies to reduce, avoid, or save  costs (which are explained in Appendix III), for the purposes of this  review, we considered them all cost-saving initiatives.
Statistics from GSA’s Federal Fleet Report.
Specific information on its internal vehicle fleet from standardized vehicle  operations reports as well as its Shared Energy Savings projects from  detailed presentations.
Other financial and operating data from various Postal Service financial  reports including its audited year-end Annual Reports and Comprehensive  Statements, monthly Financial and Operating Statements, Quarterly  Reports, and Integrated Financial Plan.
We assessed the reliability of the fuel cost and savings data provided by  the Service for inconsistencies and missing values. In those cases where  we found discrepancies, we worked with the Service to address the  problems. We determined that the data were sufficiently reliable for our  review. We also reviewed the Service’s procedures for documenting,  measuring, and reporting cost savings for its purchasing activities as well  as the methodology for specific fuel-related initiatives. For the purposes of  this engagement, the procedures and methodologies appeared to be  reasonable and contain appropriate levels of review.
We also interviewed various Service officials, including staff from the  Transportation Asset Management group who procure petroleum-based  fuels; the Office Products and Utilities Category Management Center who  procure most facility-related fuels; Vehicle Operations; Vehicle  Maintenance at Merrifield, VA; Engineering at Merrifield, VA;  Environmental and Energy Management; and finance department to gather  information on how the Service has been impacted by rising fuel costs.
To assess the effectiveness of the Service’s actions to control fuel costs  and mitigate risk, we compared these actions against practices advocated  by leading organizations that could be applied to the Service’s fuel-related  activities. We reviewed information from a variety of sources. These  included our past work on fuel use and consumption and procurement  leading practices, which included reviewing the purchasing efforts at  various federal agencies (Departments of Defense, Veterans Affairs, Health  and Human Services, Agriculture, Justice, and Transportation, and the U.S.  Postal Service) as well as leading private organizations that were  recognized for their acquisition services (IBM, ChevronTexaco, Bausch &  Lomb, Delta Air Lines, and Dell). We also reviewed the Energy Policy Acts  of 2005 and 1992, particularly the federal requirements and guidance  pertaining to alternative fuel vehicles and facility energy management. We  also interviewed officials from Department of Defense’s Defense Energy  Support Center, General Services Administration, and Department of  Energy whose operations focus on fuel use; a procurement expert  affiliated with the Center for Strategic Supply Research who published a  report on fuel procurement practices; various executives and contractors  affiliated with the National Star Route Mail Contractors Association; as  well as Postal Service officials. We also conducted a review of current  literature on these topics. Based on this information, we identified key  practices that focused on purchasing and consumption activities. The  purchasing-related leading practices we identified were aggregating  purchases to leverage buying power and size; enhancing organizational  structure; utilizing public/private partnerships; and tracking and  monitoring fuel information. The consumption-related leading practices  we identified were reducing reliance and use of petroleum-based fuels and  conserving energy use in facilities.
We also discussed opportunities for further actions consistent with leading  practices with the Service’s newly appointed Executive Director for  Energy Initiatives. Our work was conducted from April 2006 to February  2007 in accordance with generally accepted government auditing  standards.
section_title: Appendix II: Comments from the U.S. Postal Service
section_title: Appendix III: U.S. Postal Service Definitions
paragraphs: The Service’s purchasing organization, Supply Management, has specific  procedures for documenting and evaluating the actions it takes to improve  its financial condition. These procedures include actions that are taken to  achieve cost savings, cost avoidance, or cost reductions. The following  represent the definitions and methodology behind these three cost  categories used by the Service.
Cost Savings: Identifiable and measurable reduction in expenditures or  costs that is the result of planned and deliberate supply chain management  actions that return quantifiable dollar savings to the Service’s bottom line.  Cost savings are the difference between baseline spend (historical, current  market price or initial suppliers bid) accounted for in a prior or current  year budget and actual spend achieved through planned and deliberate  supply chain management actions for the same or comparable supplies,  equipment, services, facilities or other supply chain activities. Cost savings  are only recorded in the first year of supply chain management impact.  After the budget has been adjusted to reflect the cost savings, all  subsequent years of supply chain management impact related to these  efforts are counted towards cost avoidance (see the definition for cost  avoidance below.)
Examples of cost savings include the following:    Example A: A purchase cost reduction achieved over a historical or  previously paid cost for the same products or services.
Example B: An actual staffing or headcount reduction, which reduces    Example C: An ownership cost reduction resulting from the elimination of  expenses associated with receiving, holding, and/or distributing inventory.
Savings related solely to general market trends, supplier price changes, or  reduced expenditures do not qualify as supply chain management impact.  Although these savings may have a bottom line benefit that is identifiable  and measurable, they do not result from the planned and deliberate action  or substantial involvement of supply management organizational area  enabling or leading the supply chain management initiatives.
Cost Reductions: Cost reductions are identifiable and measurable cost  savings that are the result of a planned and deliberate supply chain  management action that returns measurable savings to the Service’s  bottom line. However, instead of reducing the bottom line, the Service has  determined that these savings can be retained by the internal  client/program office and reinvested to enhance related or new program  initiatives.
Cost Avoidance: Identifiable and measurable elimination of a new cost  that would have otherwise occurred except for planned and deliberate  supply chain management action. In all cases, cost avoidance results  where a contractual obligation on the part of the Service has not yet been  made. Cost avoidance is the difference between the average quoted,  relevant market price or other acceptable industry pricing benchmark or  baseline and the price paid, which could be more or less than the initial  proposed price. The relevant market price is the price the Service would  expect to pay in the absence of planned and deliberate supply chain  management action. Cost avoidance captures the value of those initiatives  that reduce the need for an expense or capital expenditure, which unless  the supply chain management action were taken, would have resulted in a  higher expense or capital cost to the Service. Examples of cost avoidance  include:    Example A: A price reduction for a unique or first time purchase, as well  as for a purchase for which there is inadequate price history.
Example B: A total cost of ownership analysis supporting the reuse of  excess property and supplies versus purchasing new.
Example C: A published supplier price increase that is negated or lowered  through a particular supply chain management technique.
Cost avoidance does not qualify as cost savings because the avoided cost  is a “new” cost and, by definition, not included in prior year spend (or  prior or current year budgets) and the avoidance has no direct dollar-for- dollar impact on the bottom line. Supply chain management impact is still  created, however, because the cost avoidance minimizes or eliminates the  negative impact on current or future year spend.
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: Acknowledgments
paragraphs: In addition to the individual named above, Teresa Anderson, Joshua  Bartzen, Kathy Gilhooly, Brandon Haller, Carol Henn, Daniel Paepke,  Emily Rachman, and Karla Springer made key contributions to this report.