U.S. Postal Service: Key Considerations for Potential Changes to USPS's Monopolies
Released: 2017-07-24T00:00:00


Highlights: section_title: Why GAO Did This Study
paragraphs: USPS's mission is to provide universal delivery service while operating as a self-financing entity. Congress has provided USPS with monopolies to deliver letter mail and access mailboxes to protect its revenues, which enables it to fulfill its universal service mission, among other reasons. Despite its monopolies, USPS's poor financial condition has placed its universal service mission at risk. USPS's net losses were $5.6 billion in fiscal year 2016 and were greater than $62 billion over the past decade.

GAO was asked to review the postal monopolies. This report examines (1) what is known about the value of USPS's letter delivery and mailbox monopolies, (2) views on the potential effects of narrowing or eliminating these monopolies; and (3) considerations that would need to be addressed to estimate the effects of laws that apply differently to USPS and its private competitors. To address these questions, GAO reviewed reports issued by PRC and others; obtained views from USPS and PRC, as well as postal stakeholders and experts who have submitted public comments to PRC proceedings; and collected information from six countries—France, Germany, Italy, Japan, Sweden, and the United Kingdom—that have eliminated their postal monopolies, selected based on criteria including their share of global mail volume.

GAO is making no recommendations in this report. USPS disagreed with some stakeholder perspectives, among other things. GAO believes that the information is portrayed in a balanced way and added USPS responses, where appropriate.

section_title: What GAO Found
paragraphs: The value of the U.S. Postal Service's (USPS) letter delivery and mailbox monopolies was $5.45 billion in fiscal year 2015, according to the most recent estimate prepared by the Postal Regulatory Commission (PRC), the regulator of USPS. This figure suggests that USPS's net income would decline by this amount if its monopolies were eliminated. To develop these estimates, PRC identifies the mail covered under USPS's monopolies for which a potential entrant might compete to provide service if the monopolies were to be eliminated; such mail is referred to as “contestable.” PRC's estimated value of these monopolies has increased substantially in recent years—it was $3.28 billion in fiscal year 2012—and PRC staff expects that the value will continue to increase in the next few years due to increased volumes of contestable mail.

Narrowing or eliminating USPS's letter delivery and mailbox monopolies would likely have varied effects, according to views provided by postal stakeholders, experts, USPS, and PRC. For example, all parties agreed that allowing other entities to deliver letters could decrease USPS's revenues, and that additional strain would be placed on USPS's ability to continue providing the current level of universal service. Additionally, some stakeholders said that allowing other entities to deliver items to the mailbox could adversely affect the security of mail and increase clutter that would impair USPS's delivery efficiency. On the other hand, most of the postal experts we interviewed said that allowing entry to this market by private competitors could result in increased competition that would spur USPS to become more efficient. Officials from foreign posts or regulators in all six of the countries GAO contacted reported increases in competition after ending their postal delivery monopolies, and some of these countries also reported losses of revenue and market share for the carriers providing universal service. Stakeholders, experts, foreign officials, and USPS agreed that postal policies are interdependent and therefore need to be considered in tandem with one another; officials from all six countries we contacted told us that concurrent postal policy changes, such as increasing a post's degree of commercial freedom or decreasing the scope of its universal service obligation, assisted their transitions away from postal monopolies.

Estimating the effects of laws that apply differently to USPS and its private competitors would require steps including defining appropriate study objectives and assessing scope and methodological tradeoffs. For example, objectives would need to clarify the extent of financial effects to be estimated—whether for USPS as a whole, for only specific products, or for USPS relative to competitors. Scoping decisions would need to define the specific areas to be studied, the period of time to be reviewed, and the type of data to be collected. This would involve multiple considerations, including determining which laws to include and how to address differing stakeholder views. Additional judgment would be needed to address any lack of consensus on methodologies and to determine the appropriate degree of time and resources. For example, a comprehensive study estimating the effects of every law would require significant time and resources; if estimates were desired in a shorter time frame—or if financial resources were limited—tradeoffs would be required.

section_title: Letter
paragraphs: The U.S. Postal Service (USPS) is a critical part of today’s  communications and commerce. In fiscal year 2016, USPS delivered 154  billion pieces of mail to 156 million delivery points, generating revenues of  $71.5 billion. USPS has dual roles, one as an independent establishment  of the executive branch required to provide universal delivery service,  and the other as a self-financing entity operating in a business-like  manner. Congress has long provided USPS with revenue protection in  the form of statutory monopolies to deliver letter mail and access  mailboxes. These monopolies protect USPS’s revenues, which helps  USPS fulfill its universal service mission. The letter delivery monopoly has  prevented private competitors from engaging in “cream-skimming”  activity, wherein they could otherwise offer service on low-cost routes at  rates below USPS’s while leaving USPS with high-cost routes. The  mailbox monopoly was created to protect postal revenues by preventing  the private delivery of unstamped mail. Despite the revenue protection  these monopolies have offered USPS as it has carried out its mission to  provide prompt, reliable, and efficient services to the public, universal  service remains at risk due to USPS’s poor financial status. This is due, in  large part, to trends that include declining volumes of profitable First- Class Mail and growing expenses. USPS’s net losses were $5.6 billion in  fiscal year 2016—and are greater than $62 billion over the past decade— and USPS has reported that it expects continuing losses and liquidity  challenges for the foreseeable future under its current business model  and statutory framework.

Congress, USPS, and other postal stakeholders have considered a range  of different business models to address USPS’s financial difficulties and  define its future role in an evolving postal marketplace. As part of these  considerations, questions have been raised about the continued need for  the letter delivery monopoly and the mailbox monopoly and, more  broadly, about a variety of laws that apply differently to USPS and its  private delivery competitors such as United Parcel Service (UPS) and  FedEx. As your request noted, it is important that policymakers  understand the advantages and disadvantages of USPS’s status as an  independent establishment of the executive branch. This report focuses  on (1) what is known about the value of USPS’s letter delivery and  mailbox monopolies, (2) views on the potential effects of narrowing or  eliminating these monopolies; and (3) considerations that would need to  be addressed to estimate the value of USPS’s financial advantages and  burdens resulting from laws that apply differently to USPS and its private  competitors.

To determine what is known about the value of USPS’s letter delivery and  mailbox monopolies, we primarily focused on the latest estimates of their  value issued by the Postal Regulatory Commission (PRC)—an  independent establishment of the executive branch that regulates  USPS—by interviewing and obtaining supporting documentation from  PRC officials. To identify potential effects of narrowing or eliminating  (“relaxing”) USPS’s monopolies, we obtained views of 16 selected postal  stakeholder organizations (“stakeholders”) and 9 selected postal experts,  chosen because they had previously expressed views on these  monopolies and other postal issues. These perspectives are not  generalizable, but they provide a wide range of views on postal monopoly  issues—and they represent some of the key groups with whom Congress  interacts when developing postal policy. We also contacted selected  foreign postal operators and their regulators in six industrialized countries  that have eliminated statutory delivery monopolies to collect information  on their experiences; the six countries were selected based on several  criteria including their revenues relative to other nations who have  eliminated their postal monopolies. To identify considerations that would  need to be addressed to estimate the value of USPS’s financial  advantages and burdens resulting from laws that apply differently to  USPS and its private competitors, we reviewed criteria from the  government auditing standards, relevant laws, and a 2007 Federal Trade  Commission (FTC) report that identified federal and state laws that apply  differently to USPS private companies providing similar competitive  products. In addition, we obtained the views of postal stakeholders who  have previously submitted relevant public comments to obtain their views  on considerations regarding how these estimates could be updated. See  appendix I for more information on our objectives, scope, and  methodology.

We conducted this performance audit from December 2015 to June 2017  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Congress created USPS’s letter delivery monopoly as a revenue  protection measure so that USPS can meet its universal mail service  obligation, which includes service to all communities and uniform rates for  some mail. As a practical matter, mail covered by this monopoly primarily  consists of First-Class Mail and USPS Marketing Mail. Since USPS’s  original establishment, its letter delivery monopoly has been both  broadened and reduced at various times through statutory and regulatory  changes that have redefined which types of correspondence and other  materials are covered. For example, the enactment of the 2006 Postal  Accountability and Enhancement Act (PAEA) resulted in several changes  to USPS’s letter delivery monopoly, including establishing price and  weight limits on mail covered by the monopoly.

With regard to USPS’s mailbox monopoly, legislation enacted in 1934  prohibited the delivery of unstamped mail into mailboxes, essentially  granting exclusive access to mailboxes (“mailbox monopoly”) to USPS  which remains in place to this day. The U.S. Supreme Court upheld the  constitutionality of the mailbox monopoly in 1981, stating that mailboxes  are an essential part of national mail delivery and that postal customers  agree to abide by laws and regulations that apply to their mailboxes in  exchange for USPS agreeing to deliver and pick up mail. In addition,  USPS regulations restrict which types of items may be placed upon,  supported by, attached to, hung from, or inserted into a mailbox. The  Postal Inspection Service, a part of USPS, is responsible for enforcing  postal laws, including the restriction on placing mail without postage in  mailboxes and laws that prohibit mail theft, obstruction of mail, and mail  fraud.

PAEA also set forth reporting requirements on USPS’s letter delivery and  mailbox monopolies, its universal service obligation (USO), and laws that  apply differently to USPS and its competitors. Pursuant to these  requirements, PRC issued a 2008 report that, among other things,  estimated the value of USPS’s letter delivery and mailbox monopolies  and the cost of its USO. The Federal Trade Commission issued a 2007  report that, among other things, estimated the financial impact of laws  that apply differently to USPS and its competitors. FTC’s report  concluded that, “from USPS’s perspective, its unique legal status likely  provides it with a net competitive disadvantage versus private carriers.”

section_title: PRC Estimated the Value of USPS’s Monopolies to Be Over $5 Billion in 2015
paragraphs: Since 2008, PRC has conducted an annual analysis to estimate the lost  net revenues that USPS would incur if the monopolies were eliminated.  To conduct this analysis, PRC assesses the value of the monopolies  based on the volume of mail—and the associated net revenues—that  USPS would be expected to lose if its monopolies were eliminated and  new entrants were allowed to provide mail delivery. PRC also examines  the impact of eliminating solely the mailbox monopoly using the same  methodology. Most of the postal experts we interviewed said they consider PRC’s method of estimating the loss in mail volume and  revenues that USPS would experience if the monopolies were lifted to be  a reasonable approach to measuring their value. See appendix II for a  discussion of the methodology PRC employs to develop its estimates of  the value of USPS’s monopolies.

PRC’s annual estimate of the value of USPS’s monopolies has increased  substantially in recent years—from $3.28 billion in fiscal year 2012 to  $5.45 billion in fiscal year 2015. Similarly, the value of the mailbox  monopoly alone rose from $700 million to $1.03 billion over the same  timeframe. Moving forward, although USPS’s overall mail volumes are  declining, PRC staff told us that they believe the volume of mail that  entrants would be likely to successfully compete for if the monopolies  were eliminated will increase, and therefore the value of the monopolies  is expected to rise. Table 1 provides PRC’s annual estimates of the value  of USPS’s monopolies since 2007.

In addition to PRC’s efforts to estimate the value of USPS’s monopolies,  another study recently examined other financial implications of USPS’s  exclusive access to mailboxes. This analysis focused on the benefit that  USPS’s exclusive access to mailboxes provides, relative to competitors  that are not allowed to place items in mailboxes. In particular, the study  examined the extra costs that are involved in door delivery—the main  option available to USPS’s competitors—compared to delivery to  mailboxes, especially when mailboxes are located at the curbside, in  cluster boxes, or centralized mailrooms in large residential and  commercial buildings. Using the average costs of door delivery compared  to average delivery costs to these other mailbox locations that are less  costly to access, the study estimated that USPS’s costs would have been  $14.9 billion greater in fiscal year 2013 if it had to deliver all mail and  packages to the door, as its competitors generally do. It is important to  note that this work did not measure the value of USPS’s monopolies as  the reduction in USPS’s net revenues if they were to be eliminated; as  such, this work is not comparable to PRC’s analysis or estimates.

section_title: Relaxing USPS’s Monopolies Could Likely Have Varied Effects
paragraphs: Narrowing or eliminating (“relaxing”) USPS’s letter delivery and mailbox  monopolies could likely have a number of varied effects. While postal  stakeholders, experts, and USPS told us that relaxing these monopolies  could decrease USPS’s revenues and threaten its ability to continue  providing universal service as currently implemented, experts stated  doing so could also lead to greater efficiencies and innovation. The  experiences of selected foreign postal operators and regulators we  contacted illustrate that, while some postal operators saw decreases in  revenue and losses in market share, some also reported increases in  competition and efficiency. Stakeholders, experts, and the experiences of  selected foreign posts all suggest that USPS’s monopolies and other  postal policies are interdependent—particularly the specifics around  universal service—and therefore should be considered in tandem. We  have previously reported that, given the changing use of mail, many of  the statutory and regulatory elements that shape USPS’s structure and  service—as well as the broader delivery market—might be relevant to  reconsider.
subsections: section_title: Postal Stakeholders, Experts, and USPS Believe Relaxing Postal Monopolies Could Reduce USPS’s Revenues and Threaten Its Ability to Provide Universal Service
paragraphs: Stakeholders, experts, and USPS told us that narrowing or eliminating the  existing letter delivery and mailbox monopolies could likely reduce  USPS’s revenues and threaten its ability to provide the current level of  universal service.

Stakeholders: Eight of the 16 stakeholders who responded to our  questionnaire stated that the letter delivery monopoly is needed to protect  USPS’s ability to continue universal service at affordable rates. In  particular, some of these stakeholders said that, if the letter monopoly  were narrowed or eliminated, new entrants would be more likely to serve  profitable areas, such as cities, and leave less profitable rural areas to  USPS—assuming that it were to remain the nation’s universal service  provider. One postal management organization told us that removing the  letter delivery monopoly would result in a devastating shortfall between  USPS revenues and its costs related to meeting its universal service  obligation.

Experts: Likewise, eight of the nine experts we interviewed agreed that  relaxing USPS’s monopolies would likely result in greater financial burden  on USPS, and six of them said that doing so could lead to the need for  reduced provision of universal service. Despite this, seven of the nine  experts support pursuing such changes to USPS’s letter delivery  monopoly. Two of the experts favor narrowing—but not fully eliminating— the letter delivery monopoly, and five favor completely eliminating both  monopolies.

USPS and PRC: USPS stated that narrowing or eliminating the letter  delivery monopoly would place significant mail volume and related  revenues at risk, compromising its ability to provide high quality,  affordable universal service in a financially self-sufficient manner. Further,  USPS stated that narrowing or eliminating its letter delivery monopoly  would result in competitors diverting the most profitable mail volume,  which would significantly accelerate trends that are already very  challenging to its financial sustainability. According to USPS, additional  decline in mail volumes would pose a fundamental challenge because  economies of scale are crucial to its ability to provide a high level of  universal service at affordable rates. USPS also told us that there is no  basis to conclude that eliminating the letter monopoly is necessary for it to  promote efficiency, quality service, and innovative postal products. As in  the past, USPS strongly opposes any changes to its letter delivery and  mailbox monopolies. While PRC has not taken a position on whether  USPS’s letter delivery monopoly should be narrowed or eliminated, it  reported in 2008 that “…under the current system, the (letter delivery)  monopoly is maintained to offset the costs placed on  by the  USO.”

section_title: Most Postal Stakeholders and Experts Agree That Relaxing USPS’s Mailbox Monopoly Could Affect Mail Safety, Security, and Efficiency
paragraphs: Stakeholders: Nine of the 16 stakeholders believe that narrowing or  eliminating USPS’s mailbox monopoly could decrease mail security, and  they also oppose changes to this monopoly. One mailer association said  that the mailbox monopoly provides USPS customers with assurance that  their mail is secure. This stakeholder also said that USPS’s exclusive  access to mailboxes helps facilitate investigations of mail theft and other  mail crimes. One of the 16 stakeholders who responded to our  questionnaire favors relaxing USPS’s mailbox monopoly and stated that it  is unnecessary to protect the security of the mailbox, as criminal and civil  law punish theft and trespass.

Experts: Although seven of the nine experts we interviewed support  relaxing this monopoly, four experts cited increased concerns about mail  security if the mailbox monopoly no longer limited access to USPS’s  competitors. Two experts stated that having multiple entities with access  to the mailbox could cause problems such as cluttering. One expert  opposed to relaxing USPS’s mailbox monopoly noted that much of the  increased delivery to mailboxes—were access to be broadened—would  be advertising mail and suggested that it would be questionable to relax  this monopoly to primarily facilitate advertising distribution.

USPS and PRC: USPS stated that relaxing its mailbox monopoly could  negatively affect mail safety and security and that doing so would result in  both decreased efficiencies and service performance, and threaten the  financing of its universal service obligation. First, USPS stated that  removing this monopoly could increase opportunities for criminal activity  involving mail and complicate the enforcement of postal laws. USPS  added that, in addition to direct harm to consumers and employees who  could be harmed by dangerous substances in mailboxes, USPS and the  mailing industry could suffer from the resulting lack of public trust in the  mail as a secure communication medium. Second, according to USPS, its  efficiency and service performance could also be adversely impacted,  particularly regarding the delivery of market-dominant mail volumes. For  example, increased mailbox clutter due to the presence of items left there  by third-parties would mean that USPS letter carriers would have to  spend time determining which items to take with them (collection mail)  and which to leave behind (items delivered by alternative delivery  providers)—or may not be able to fit mail into a mailbox at all. Third,  USPS advised that allowing third-party mailbox deliveries could allow  competing providers to skim relatively profitable mail volume away from  USPS, leaving it with less revenue to finance the costs of its universal  service obligation. In regard to the mailbox monopoly, PRC cited its 2008  report, which stated that past public proceedings indicate a broad  spectrum of support for its continuation and cited disadvantages to USPS  if this monopoly were to be eliminated, including difficulty investigating  mail fraud, maintaining mail security, and efficiently collecting mail from  cluttered mailboxes.

section_title: Most Postal Experts Believe Relaxing USPS’s Monopolies Could Increase Competition, Efficiency, and Innovation
paragraphs: Seven of the nine experts we interviewed said that relaxing USPS’s  monopolies could create competition in the postal market. Additionally,  seven of these experts also said relaxing the monopolies could induce  USPS to become more efficient and increase innovation across the postal  market. Although experts offered mixed views regarding how much actual  entry into the postal delivery market would occur if the letter delivery  monopoly were withdrawn, they generally stated that the prospect of  competitive pressure would stimulate USPS to be more efficient through  both cost-cutting and general restructuring of the organization. One  expert told us that such changes would also benefit the economy as a  whole. Similarly, some of the experts we interviewed also said that  relaxing USPS’s mailbox monopoly would have beneficial effects. With  regard to USPS’s mailbox monopoly, four of the nine experts told us that  its elimination would stimulate USPS to be more efficient and six experts  said it would stimulate more innovation. For example, one expert noted  that the characteristics of mailboxes have changed little in decades and  suggested that opening them to competitive providers might bring  innovation to the mailbox itself.

section_title: Some Countries Reported Revenue Losses for Postal Operators, Increases in Competition and Efficiency after Elimination of Monopolies
paragraphs: A number of countries have narrowed or eliminated their postal  monopolies over the past two decades as part of overall postal reform  that expanded the commercial freedom of their postal services. In  responding to our questionnaire requesting information on the effects  experienced as a result of modifications to their respective postal  monopolies, a number of the selected foreign posts and regulators told us  that their respective changes resulted in losses of market share, mail  volume, and revenues for the incumbent carrier, as well as varying  changes in postal rates. Officials from all six of the countries we  contacted noted increases in competition; some also cited increases in  efficiency as well as improved customer service and performance.

Effect on Market Share, Mail Volumes, and Revenue: Officials from  Italy, Germany, and the United Kingdom reported that the  liberalization of their postal markets resulted in the incumbent carrier  experiencing a loss of market share, volumes, and revenues  generated by items previously covered by monopoly. In Germany,  Deutsche Post reported that it has lost about 12 percent of market  share compared with when it had a full monopoly. In the United  Kingdom, Royal Mail and its regulator both reported that, although its  market share for letters was minimally impacted, it has lost substantial  business from large senders of bulk mail. Officials from Japan,  Sweden, and France were unable to confirm whether the liberalization  of their countries’ respective postal markets resulted in such effects.

Effect on Postal Rates: Officials from Italy and the United Kingdom  reported that liberalization of their respective postal markets resulted  in changes to some postal rates. Italian officials reported that some of  Poste Italiane’s rates increased, but its business rates either remained  stable or were slightly reduced. In the United Kingdom, Ofcom  officials told us that a new regulatory framework was put in place  which allowed Royal Mail to rebalance its prices; Royal Mail then  increased the price of single piece stamped items substantially in  many cases, while bulk mail prices increased to a lesser extent.  Officials from Germany, Sweden, and Japan stated that the  liberalization of their postal markets did not result in increased prices  of services provided by their posts.

Many foreign posts also reported that changes to their postal monopolies  resulted in increases in competition and efficiency, as well as  improvements in customer service and performance. Specifically:  Increased Competition: The post and/or regulator from all six of the  countries that we contacted—Sweden, Italy, Japan, Germany, France,  and the United Kingdom—said the liberalization of their postal  markets resulted in increased competition. According to officials from  Italy, competition in the Italian mailing industry increased significantly  after liberalization, especially for bulk mail services. French officials  said that the number of providers has increased; however, they added  that the increase in competition has not been as great as some  stakeholders expected and La Poste maintains a dominant market  position.

Effects on Efficiency of the Collection and Delivery of Mail: Officials  from three countries—Germany, Sweden, and the United Kingdom— reported that the liberalization of their postal markets, which was done  in tandem with other postal reforms, resulted in increased efficiency of  the collection and delivery of mail. For example, in the United  Kingdom, officials from Royal Mail stated that it had to modernize its  operations to successfully compete in the current postal market.  However, officials from Italy stated that liberalization did not lead to  greater efficiencies, as increased competition resulted in a large  volume decline for Poste Italiane, which was forced to also maintain a  heavily fixed cost structure to meet its universal service obligation.

Effects on Customer Service and Performance: Officials from three  countries—Germany, Sweden, and the United Kingdom—stated that  the liberalization of their postal market resulted in improved customer  service and performance of their posts. According to German  officials, the speed and reliability of their nation’s postal services has  increased since liberalization. Officials from Royal Mail stated that  while it is meeting service targets, the changes to the way in which  services are delivered in the United Kingdom (e.g., post delivered  later in day or delivery offices relocating) have not always been  popular with customers; both residential and business consumers  have reported slightly higher levels of satisfaction with other postal  operators in recent years.

Effect on Universal Service Obligation: Officials from three countries— Germany, Sweden, and the United Kingdom—stated that liberalization  of their postal markets did not negatively impact their universal service  obligation for postal retail and delivery services. According to German  officials, no changes to its provision of universal service or financial  support were required. However, officials from Poste Italiane stated  that its competitors are free to enter whichever markets they like (i.e.,  potentially implement cream-skimming policies), a situation that has  put the sustainability of their ability to provide universal service at risk.

The experiences of these foreign posts illustrate the variety of effects of  making changes to existing postal monopolies. However, it is also  important to remember the context in which the posts operate differs  greatly from one country to the next—each country is in a unique situation  and uses specific measures to address its challenges and opportunities.  When compared with other countries, the United States lies in the higher  range of universal service obligation scope requirements, especially for  quality standards including frequency of delivery and coverage. USPS  officials said that some of the effects of liberalization among foreign posts  have no bearing in the United States, stating that some of the efficiency  advances that other countries have seen in recent years were made long  ago in this country. Although we did not directly evaluate the implications  of each liberalization experience or how it may apply to the United States,  these experiences nonetheless provide important context for the  consideration of any changes to USPS’s monopolies.

section_title: There is Broad Consensus That Potential Monopoly Changes Should Be Considered in Tandem with Broader Postal Policies
paragraphs: Postal stakeholders and experts—as well as both USPS and PRC— suggested that any consideration of changes to USPS’s letter delivery  and mailbox monopolies should take place within the context of broader  U.S. postal policy.

Stakeholders: Although eleven of 16 postal stakeholders oppose the idea  of narrowing or eliminating USPS’s monopolies, some noted that  additional postal policy issues should be included in discussion of  potential changes to the monopolies. For example, one stakeholder who  opposes modifying USPS’s monopolies said that, if they were to be  changed, policies to ensure universal delivery service would need to be  adopted. Another stakeholder stated that no change in law or regulation  could offset the adverse consequences that would come from narrowing  or eliminating USPS’s letter delivery monopoly, but suggested that the  financial burden of requiring USPS to prefund retiree health benefits be  eliminated. Another postal stakeholder explained that improved security  and more thorough background checks would need to be required for  businesses that would have access to the mailbox, in addition to laws to  which non-USPS firms must adhere when delivering to currently  prohibited mailboxes.

Experts: All nine of the experts we interviewed said that analysis of  possible changes to USPS’s monopolies should be conducted in tandem  with other postal policy considerations. Experts cited issues such as  USPS’s universal service obligation, postal pricing flexibility, and the fair  application of policies and rules across providers as important for  policymakers to consider.

USPS and PRC: USPS and PRC also stressed the importance of  considering any potential changes to USPS’s monopolies within the  context of the nation’s broader postal policy. USPS officials told us that  any modification of its monopolies would require Congress to make  significant policy decisions regarding how to ensure that existing postal  services could still be achieved in their absence. USPS officials also  stated that many foreign posts that have liberalized have not done so in  isolation, but rather along with other reforms including government aid  and measures to afford the incumbent carriers greater commercial  freedom to manage their businesses. PRC staff told us that the scope of  the monopoly and the cost of providing universal service are  interdependent, such that changes in one alter the value/cost of the other,  adding that any changes to the monopoly should carefully consider the  relationship of the monopoly and the universal service obligation.

Foreign Posts and Regulators: Officials from all six of the countries we  contacted told us that, as their respective postal markets were opened to  competition from new entrants, the concurrent implementation of other  postal polices helped to manage their transition away from their  incumbent providers’ monopolies. For example, officials from the United  Kingdom stated that The Postal Services Act of 2011 privatized Royal  Mail and gave it complete commercial freedom to raise funds for  modernization; Royal Mail was also relieved of its pension deficit of 10  billion pounds. In Italy, policymakers decreased the scope of Poste  Italiane’s universal service obligation to enable it to maintain its  obligations as competition increased in the market. According to officials  from the postal regulator in Japan, the Japan Post was granted greater  freedom to establish prices for first and second class mail items as part of  the process of the liberalization of the Japanese postal market.

We have previously reported that action by Congress and USPS is  urgently needed on a number of difficult issues to facilitate progress  toward USPS’s financial viability. The significant deterioration in USPS’s  financial condition, its increasing debt, and the grim forecast for declining  overall mail volumes over the next decade led GAO to add USPS’s  financial condition to its High-Risk List in 2009. Moreover, the financial  condition of USPS is but one outcome of the changing landscape of the  postal sector. We reported in 2010 that, given the changing use of mail,  many of the statutory and regulatory elements that shape USPS’s  structure and service—as well as the broader delivery market—might be  relevant to reconsider. These include (1) the appropriate universal  service obligation, in light of fundamental changes in the use of mail; (2)  whether USPS requires a monopoly over delivery of certain types of letter  mail and access to mailboxes to finance—in part or wholly—its universal  postal service obligation; and (3) whether USPS should be solely  responsible for providing universal postal service, or whether that  responsibility should be shared with the private sector. Such  considerations may assist Congress, USPS, and other postal  stakeholders as they work not only on issues related to the letter delivery  and mailbox monopolies, but also to address USPS’s financial difficulties  and define its future role in an evolving postal marketplace.

section_title: Assessing the Impact of Laws that Apply Differently to USPS and Private Competitors Would Involve Various Considerations
paragraphs: We have reported that, as long as it remains a federal entity protected by  the postal monopoly, USPS’s ability to compete with the private sector  should be balanced with appropriate oversight and adequate legal  standards to ensure fair competition. In this regard, some postal  stakeholders have maintained that USPS has competitive advantages  because it is exempt from some laws governing the private sector. On the  other hand, USPS has reported that it is subject to statutory requirements  to which its private competitors are not. Given these differences, it is  important to understand the constraints and limitations that would  complicate the process of arriving at estimates that would be useful for  policymakers. To help summarize the key considerations that would need  to be addressed to estimate the value of USPS’s financial advantages  and burdens resulting from laws that apply differently to USPS and its  private competitors, they are organized into four broad categories: (1)  objectives to study, (2) scope to be covered, (3) methodology to be used,  and (4) reporting.
subsections: section_title: Study Objectives Would Need to Be Defined
paragraphs: Consistent with government auditing standards, it would be important for  anyone examining the laws that apply differently to USPS and its private  competitors to carefully define the objectives of the study. As explained  by those standards, the objectives for any future study could be framed  as questions that the organization conducting the research would seek to  answer. Developing these questions is a critical step, as their answers will  guide decisions on what specific information will be needed for reporting,  which in turn will identify the parameters of the study’s scope and  methodology and lay the framework for the context in which the findings  are presented. Objectives for such a study could be defined as  questions related to the following:

What are the financial effects of laws that apply differently to USPS  and its private competitors on   USPS’s net income?

What are the financial effects of laws that apply differently to USPS  and its private competitors on   USPS’s competitive mail products?

What are the financial effects of laws that apply differently to USPS  and its private competitors on   both USPS and its private competitors?

As these questions demonstrate, a study’s objectives can become  increasingly complex, requiring more and varied sources of information.

section_title: Scope Decisions Would Involve Multiple Considerations
paragraphs: Defining the scope of any study is critical because, according to the  government auditing standards, the scope defines aspects of the subject  matter to be studied and other key data collection considerations—such  as the period of time reviewed and the type of data to be collected,  among other things. Scoping considerations for this type of study would  include, for example: (1) which laws to include, (2) whether to include  data already studied or collect new data, (3) how to address the difficulty  in quantifying some effects, and (4) how to handle differing stakeholder  views on scope.

Many Laws Apply Differently to USPS Than to Its Competitors  Many laws apply differently to USPS and its competitors (see table 2).  FTC found that some laws have positive financial effects on USPS, while  others have negative financial effects. These laws also affect private  competitors; for example, USPS’s letter and mailbox monopolies limit the  types of items competitors can deliver and where they can leave items.  The number and type of laws to be included in such a study would affect  its approach and eventual results. For example, significant time and  resources would be required for a study to estimate the financial effects  for all laws that apply differently to USPS and its competitors—as well as  the net effect of these legal differences. If results were needed more  immediately—or if financial resources were limited—decisions would  need to be made to narrow the scope.

The analysis of what laws to include and their impact on USPS’s  operations is further complicated because while some laws appear to  provide USPS with financial advantages, whether or not they actually do  may depend on how they are interpreted and applied in practice. For  example, FTC’s 2007 report stated that, although some jurisdictions  refrain from ticketing its vehicles, USPS has agreed to pay parking fines  in other jurisdictions; it is unclear whether USPS vehicles are exempt  from being ticketed. In another area, the FTC report found that USPS  benefits from “disparate customs treatment,” but did not offer explanation  for the reasoning behind this finding. Further, postal pension and retiree  health benefit fund assets for postal retirees are in funds that by law are  required to be invested solely in Treasury securities, which are backed  by the full faith and credit of the federal government. In contrast, private companies can and do invest retirement funds in more diversified  portfolios.

Use of Findings from Other Studies  Another consideration is what information to include from previous  studies. One would have to decide whether or not to use PRC’s annual  estimates and reports on the financial effects on USPS of laws related to  its universal service and public service costs and the value of USPS’s  monopolies. In postal labor negotiations, USPS has presented the result  of studies on the comparability of postal wages and benefits with the  private sector; however, the results have been contested by major postal  labor unions involved in collective bargaining.

Challenges in Quantifying Some Effects  In some cases, effects may be challenging to quantify—in part because  they have not been previously quantified, and in part due to the  complexity of developing estimates. For example, FTC’s 2007 report that  estimated the effects of laws on USPS wages did not attempt to estimate  the financial effects of every law. FTC’s report stated it would have been  difficult to quantify the effects of some laws, such as USPS’s ability to  obtain property through eminent domain and disparate customs treatment  for USPS and its competitors. Overcoming these challenges may require  additional time and resources, as well as the acceptance of risk beyond  the control of the team conducting the study, such as lack of available  data.

Addressing Differing Stakeholder Views on Scope  Key postal stakeholders hold differing views on what the scope of a  potential study might be. For example, although National Association of  Letter Carriers (NALC) officials told us that NALC does not see any  need for an update to the 2007 FTC report, they added that such an  update should not attempt to study the comparability of USPS wages to  the private sector. NALC officials explained that postal unions have  negotiated and debated with USPS over the definition of “comparability”  and “comparable levels of work.” NALC officials added that there is no  one objective or scientific definition of these terms, which must be  negotiated by the parties in the face of changing circumstances and  debate, and stated that the collective bargaining table is the appropriate  venue for this debate. In contrast, USPS officials told us that any future  study should estimate the comparability of both USPS wages and  benefits to the private sector.

section_title: Methodology Considerations Would Involve Judgments
paragraphs: Government auditing standards state that a study’s methodology  describes the nature and extent of procedures for gathering and  analyzing evidence needed to address its objectives, which should be  sufficient and appropriate to support findings to reduce the risk of  improper conclusions. When deciding upon a study’s methodology, one  would need to address such challenges as (1) lack of consensus on  methodology options, (2) constraints on time and resources, and (3)  limitations on publicly available data and supporting documentation. The  decisions made about how to address these challenges would help  determine the usefulness of the estimates to policymakers.

Lack of Consensus of Methodology Options  No consensus exists on the most appropriate methodology that should be  used to estimate the financial effects of certain laws that apply differently  to USPS and its competitors. For example, USPS officials told us that  there is no generally accepted consensus on how to measure the  comparability of postal wages and benefits and said it has used  numerous methodologies over the years to make estimates in this area. A  NALC official explained that USPS and postal unions have long disagreed  on the definition of “comparability” and “comparable” levels of work.  Depending on how a study approaches this issue, it could affect decisions  about methodology and data. USPS has preferred to define comparability  as the level of USPS wages and benefits for different jobs performed by  USPS relative to similar jobs performed by companies in the entire private  sector (e.g., similar jobs performed by USPS competitors and mail  processing jobs performed by private companies in the mailing industry),  while the postal unions have preferred to compare USPS with its large  competitors such as United Parcel Service (UPS) and FedEx.

Potential Constraints on Time and Resources  Some methodologies would require considerable time and resources to  collect the necessary data, and any constraints in these areas may  influence the choice of methodology. A study estimating the financial  effects of all laws that apply differently to USPS and its private  competitors would require significant time and resources; if estimates  were desired in a shorter time frame—or if financial resources were  limited—tradeoffs would be required. For example, USPS officials told us  that, when estimating the value of USPS’s exemption from property and  real estate taxes for USPS-owned properties, the most appropriate data  would be the current assessed value of each USPS-owned property and  the current applicable tax rate(s). However, they noted that USPS does  not have data on the assessed value for its owned properties. They  estimated that collecting data on a valid sample of USPS-owned  properties would require specialists such as tax assessors and  appraisers, and cost $7.6 million to $9 million—an amount they deemed  to be cost-prohibitive. With respect to estimating wage and benefit  comparability, USPS officials stated that the different types of work  performed by postal employees in the various bargaining units does not  lend itself to a one-size-fits-all approach to private sector comparability or  a single answer for all USPS employees. They said that USPS has  generally used multiple methodologies to estimate wage and benefit  comparability in each collective bargaining proceeding. They also noted  that some of these methodologies require a high degree of expertise  and/or subject matter knowledge, such as expertise in statistical or  regression analyses, as well as specialized knowledge and experience in  employee compensation and wage determination. These factors have  implications for the time and resources that would be required to estimate  wage and benefit comparability.

Additionally, USPS officials said that collecting data on the value of  USPS’s exemption from vehicle registration fees would require a review  of state registration fees for each state and vehicle type, as well as other  information.

Limitations on Public Data and Supporting Documentation  Some USPS data and documentation that could be useful for a future  study may not be publicly available, either because USPS has not been  asked to disclose it in public proceedings or because it is considered  exempt from public disclosure. For example, USPS is not required to  disclose information prepared for use in connection with the negotiation of  collective bargaining agreements, which would include USPS studies of  wage and benefits comparability prepared for such negotiations. While  data and documentation relating to USPS’s competitive products could be  instrumental to evaluating any specific financial effects of legal  advantages and disadvantages on competitive products, USPS often  classifies this information as proprietary and does not disclose it  publicly. In addition, according to USPS officials, certain data may need  to be collected from USPS’s private competitors who may consider such  data to be proprietary and exempt from public disclosure, such as trade  secrets. Thus, it is unclear whether these data and their supporting  documentation would be available to certain organizations conducting  such a study and, if so, under what circumstances and with what  limitations they may be able to be discussed in a publicly-available report.

section_title: Reporting Considerations
paragraphs: In order for estimates to be as useful as possible to readers, the report  would need to include sufficient information to allow for informed  discussion about the results. Government auditing standards state that a  report should disclose the objectives, scope, and methodology—as well  as the results, including findings and conclusions. According to these  standards, readers need this information to understand the study’s  purpose, the nature and extent of the research, context and perspective  on what is reported, and any significant limitations. In addition, the  standards also state that a report should describe the scope of the work  performed and any limitations, including issues that would be relevant to  readers, so they can reasonably interpret the findings, conclusions, and  recommendations without being misled. Further, according to government  auditing standards, a report should also discuss any significant  constraints imposed on the approach by information limitations or scope  impairments, which might include data that were unavailable due to  restrictions on time or resources. This discussion would help readers  understand how much confidence to place in the findings.

To put the importance of such reporting into context, USPS and many  postal stakeholders have made various proposals over the years to  change laws that apply differently to USPS and its competitors. A wide  range of reasons have been given in support of such proposals, such as  enhancing USPS’s financial position, assuring the continuation of  universal postal service or revising the universal service obligation to  better meet changing customer needs, and assuring fair competition.  Regardless of the reasons behind any given proposal, estimating the  potential financial effects of specific laws could provide Congress and  other stakeholders with information that could be used to consider  possible changes to these laws. Estimates of the effects of certain laws  on USPS, specifically on its competitive products, and on these products  relative to its competitors could be different in their nature and timeframes  than the information regularly provided by the Congressional Budget  Office (CBO) on the estimated financial effects of proposed laws on  federal government revenues and expenses.

Considering the longstanding disagreements over controversial issues in  this area, it would be particularly helpful for such a study to be conducted  by an independent party free of conflicts of interest. Any party tasked with  such an undertaking would require sufficient time and resources to  produce estimates of sufficient precision to prove useful for decision  makers and facilitate broad stakeholder acceptance and use of the  results.

section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to USPS, PRC, FTC, and the U.S.  Department of Justice (DOJ) for review and comment prior to finalizing  the report. FTC and DOJ did not have any comments on the report. We  received written comments from USPS, which are reproduced in  appendix III. USPS and PRC separately provided technical comments,  which we incorporated as appropriate.

In its written response, USPS stated that it appreciated our effort to  develop an understanding of its monopolies in supporting secure and  affordable universal postal service and other postal policy goals.  However, USPS disagreed with aspects of our discussion of (1) the  impact of relaxation of foreign postal monopolies, (2) PRC’s estimates of  the value of USPS’s letter delivery and mailbox monopolies, (3) the 2015  paper by Robert Shapiro, and (4) selected laws that apply differently to  USPS and its competitors.

In its comments, USPS stated that it appreciated our efforts to obtain  views from a broad cross-section of postal stakeholders, although it  stated that it does not agree with all of the perspectives expressed. USPS  emphasized that, while some believe that narrowing or eliminating its  monopolies might have some beneficial effects, it believes doing so would  divert revenue away from USPS, compounding its financial pressures.  USPS also wrote that, in the current financial environment, it would not be  responsible for policymakers to implement such changes while  maintaining the USO in its current form. Our report acknowledges these  points and states that postal stakeholders and experts agree that actions  to narrow or eliminate USPS’s monopolies could reduce its revenues,  placing a greater financial burden on USPS and threatening its ability to  provide universal service.

Regarding the relaxation of foreign postal monopolies, USPS emphasized  that other reforms were made in tandem with changes to postal  monopolies in other countries, including government aid and changes to  afford the incumbent carrier greater commercial freedom to manage its  businesses. Although our draft report stated that we found broad  consensus among postal stakeholders and experts—as well as both  USPS and PRC—that any potential changes to USPS’s monopolies  should be considered in tandem with broader postal policies, we updated  our report to include additional context in response to USPS’s comments.

USPS took issue with the information provided by officials from foreign  posts and regulators that the narrowing or elimination of their monopolies  resulted in increased efficiency, and noted that many other postal policies  were undertaken at the same time, as discussed above. Moreover, USPS  wrote that the effects of postal liberalization in other countries has no  bearing upon USPS because some of the efficiency advances that other  countries have seen in recent years were realized many years ago in the  United States. Our report states that it is important to remember the  context in which the posts operate differs greatly from one country to the  next, and that each country is in a unique situation and uses specific  measures to address its challenges and opportunities. At the same time,  we state that although we did not directly evaluate the implications of  each liberalization experience or how it may apply to the United States,  the experiences nonetheless provide important context for the  consideration of any changes to USPS’s monopolies. For additional  context, we also updated our report to include USPS’s perspective on this  issue.

In its letter, USPS also suggested further clarification regarding our  discussion of certain aspects of PRC’s estimates of the value of USPS’s  monopolies. In response to USPS’s suggested clarification of PRC’s  estimates presented in table 1, we added a note to make it clear that,  while PRC’s estimates presented in the table represent the effect on  USPS’s net income if its mailbox monopoly or both monopolies were to  be eliminated, it is not the case that subtracting the estimated value of the  mailbox monopoly from the estimated value of the combined letter  delivery and mailbox monopolies provides the value of the letter delivery  monopoly alone. In addition, USPS also expressed concern that the  discussion of the 2015 paper by Robert Shapiro could wrongly imply  equivalent credibility to the work performed by PRC. We recognize this  concern. Our report states that Shapiro’s work did not measure the value  of the monopolies as the reduction in USPS’s net revenues if they were to  be eliminated, but rather focuses on other financial implications of the  mailbox monopoly. We further state that the Shapiro work is not  comparable to that conducted by PRC.

Regarding our summary of selected laws that apply differently to USPS  and its competitors, USPS found it to be relatively thorough, but offered a  series of technical comments and suggested additional laws that could be  added to the summary. We incorporated technical comments to this  section, as appropriate. However, we did not include any additional laws,  as our intent was not to provide an exhaustive summary of laws, taxes,  and fees that apply differently to USPS and its private competitors.

As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to the  appropriate congressional committees, the Postmaster General, the  Chairman of PRC, and other interested parties. In addition, the report will  be available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact  me at (202) 512-2834 or rectanusl@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff making key contributions to this  report are listed in appendix IV.

section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives were to assess: (1) what is known about the value of the  U.S. Postal Service’s (USPS) letter delivery and mailbox monopolies, (2)  views on the potential effects of narrowing or eliminating these  monopolies; and (3) considerations that would need to be addressed to  estimate the value of USPS’s financial advantages and burdens resulting  from laws that apply differently to USPS and its private competitors.

To determine what is known about the value of USPS’s letter delivery and  mailbox monopolies, we reviewed relevant literature, and discussed  existing estimates with postal experts. Specifically, we reviewed the  Postal Regulatory Commission’s (PRC) 2016 annual report, which  includes an estimate of the value of the postal monopolies, as well as  PRC’s original 2008 study that described the effort’s methodology in  depth. We also reviewed several other studies conducted by other  researchers soon after the 2006 enactment of The Postal Accountability  and Enhancement Act (PAEA), studies that either described methods for  analyses or actually conducted analyses of the value of USPS’s  monopolies. In addition to reviewing PRC’s studies, we also met with  PRC staff to further discuss aspects of its analyses. Further, we reviewed  a study authored by Dr. Robert Shapiro entitled The Basis and Extent of  the Monopoly Rights and Subsidies Claimed by the United States Postal  Service, which discusses other financial implications of USPS’s mailbox  monopoly. Finally, we discussed both the analysis conducted by PRC and  Dr. Shapiro’s study with the nine postal experts we interviewed to obtain  their views on the methods and findings of these studies.

To identify the potential impacts of narrowing or eliminating USPS’s letter  delivery and mailbox monopolies, we took a series of steps. First, we  created and distributed a questionnaire to 21 postal stakeholder  organizations (“stakeholders”) that (1) testified and filed comments during  the public comment solicitations as part of the work of the 2003  President’s Commission on the USPS; (2) provided testimony or  comments to PRC on universal service and the postal monopoly, and (3)  GAO previously surveyed during audit work conducted in support of the  prior GAO reported titled U.S. Postal Service: Strategies and Options to  Facilitate Progress toward Financial Viability. We initially selected and  contacted 25 organizations—including postal unions, management  associations, mailing associations, and private companies—to which it  was planned to distribute the questionnaire. Subsequently, GAO learned  that two of these stakeholders were no longer in existence and that two of  them had merged into a single organization, resulting in a list of 21  stakeholders who received a copy of the questionnaire. GAO pretested  this questionnaire with two stakeholders to ensure that it was clearly  worded, unbiased, comprehensive, and that terminology was used  correctly and made changes to the content of the questions in response.  GAO received responses from 16 of the 21 stakeholders—a response  rate of 76.2 percent—11 of which were completed questionnaires and 5  were comprised of correspondence answering some or all the questions  posed. We also provided this questionnaire to USPS and PRC, both of  whom completed it. In addition, we also conducted structured interviews  with nine postal experts to obtain their views on the potential impacts of  narrowing or eliminating USPS’s monopolies. Many of these experts were  identified as postal consultants and individuals who worked on or  commented on PRC’s 2008 report on universal service and the postal  monopoly; others were recommended by stakeholders or agency  officials. We determined through a literature search and prior audit work  that each expert has substantial knowledge and experience in postal  issues. We created and pretested an interview guide with two experts to  ensure that questions were accurate, clear, and unbiased, and made  changes in response. We analyzed the responses received from postal  stakeholders and experts and summarized both their reasons for favoring,  opposing, or holding no position on whether USPS’s monopolies should  be narrowed or eliminated and what they believed the potential effects of  doing so may be. While the responses from the judgmentally-selected  group of postal stakeholders and experts are not generalizable, they  provide a wide range of views among those who have previously  expressed views on the postal monopoly and related policy issues—and  represent some of the key groups with whom Congress interacts when  developing postal policy.

Further, to determine what have been the experiences of foreign postal  administrations in selected industrialized countries that have narrowed or  eliminated its postal monopolies, we collected information from the top 20  major postal markets, as determined by the Universal Postal Union  (UPU), a specialized agency of the United Nations that coordinates  international postal polices. Using this information, we identified countries  (1) with the largest global shares of postal revenue and domestic mail, (2)  with developed economies (classified by their level of development as  measured by per capita gross national income); and (3) have fully  liberalized their postal monopoly laws. Based on these criteria, we  selected six countries–Germany, France, Japan, Italy, Sweden, and the  United Kingdom. Using a list of contacts provided by PRC officials, we  sent requests to both the postal administration and regulator in each of  these six nations to obtain information regarding their respective  liberalization experiences. While the responses from foreign postal  operators and their regulators in these judgmentally-selected countries  are not generalizable, they provide information and perspectives that  complement the views of experts and American postal stakeholders on  the potential effects of narrowing or eliminating the USPS monopolies.

To identify considerations that would need to be addressed to estimate  the value of USPS’s financial advantages and burdens resulting from  laws that apply differently to USPS and its private competitors, we  reviewed criteria from the Government Auditing Standards. These  standards provide a framework for performing high-quality performance  audits, including establishing an overall approach to obtain reasonable  assurance that the evidence is sufficient and appropriate to support the  findings. In addition, we reviewed relevant laws and a 2007 Federal Trade  Commission (FTC) report and obtained information from FTC on how  some of its estimates were compiled. We identified and focused upon four  of the largest financial effects of USPS’s legal status estimated in the  2007 FTC report: the comparability of USPS and private sector wages  and USPS’s exemptions from property real estate taxes, sales and use  taxes, and vehicle registration fees, and obtained information on how  these estimates were compiled. We contacted USPS and four postal  industry stakeholders who had submitted comments in the FTC  proceeding leading up to its 2007 report to obtain their opinion on  considerations regarding how these estimates could be updated,  considering the factors we had identified. These five stakeholders  represented different sectors, including USPS, some of its private  competitors, and some of its postal labor unions. We received responses  from USPS and the National Association of Letter Carriers (NALC) on  considerations for estimating financial advantages and disadvantages of  USPS’s unique legal status. Our analysis was limited to identifying key  considerations, some of which included different options, for how to  conduct research to estimate the financial effects of certain aspects of  USPS’s legal status; we did not evaluate these options or recommend  which should be pursued if a new study were to be conducted.

We conducted this performance audit from December 2015 to June 2017  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

section_title: Appendix II: Information on the Postal Regulatory Commission’s (PRC) Method for Estimating the Value of USPS’s Monopolies
paragraphs: This appendix describes the method used by PRC to estimate the value  of the U.S. Postal Service’s (USPS) letter delivery and mailbox  monopolies. In particular, this appendix discusses (1) why economic  value to USPS may derive from the statutory monopolies, (2) the method  that PRC employs to estimate the value of the monopolies, and (3) PRC’s  findings.
subsections: section_title: Statutory Monopolies May Confer Economic Value
paragraphs: Statutory monopolies are sometimes granted when the provision of a  good has certain cost conditions. In particular, in a case where one large  firm can produce a product for the entire market more cheaply, on  average, than a set of smaller firms, monopoly is sometimes viewed as a  preferred market structure, and a legal limitation on entry may be used to  ensure that the market remains monopolistic. In the case of postal  service, for example, USPS’s large and interconnected operational  network leverages both economies of scale and scope and, as such, it is  unlikely that it would be profitable for a new firm to compete against  USPS for all forms of mail or in all locations. However, certain segments  of the market may be more profitable to enter—both due to lower costs of  service and/or higher potential revenues. If entry is open, competitors  may be able to compete for business in these profitable submarkets,  leaving the incumbent carrier with higher average costs to serve the  remaining market. The loss suffered by the incumbent from the  elimination of a statutory monopoly can be viewed as the “value” that the  legal monopoly affords the incumbent firm—in this case, USPS.

section_title: PRC Estimates the Value of USPS’s Monopolies based on Lost Net Revenues Due to Elimination of the Monopolies
paragraphs: PRC’s method for estimating the value of USPS’s monopolies rests on a  counterfactual: how would USPS’s net revenues be affected if the  statutory monopolies were removed? As such, PRC estimates (1) the  extent to which entry, if it were to be legally allowed, into the mail delivery  market would be economically profitable; and (2) based on that entry, the  extent of lost net revenues USPS would experience. To do so, PRC  makes a variety of assumptions about the prospects for new firms to  profitably enter segments of the postal delivery market.

The first key element of PRC’s analysis is the identification of which types  of mail are “contestable.” PRC identifies contestable mail as those mail  items that are presorted and drop-shipped at local destinations—such as  advertising mail or First-Class Mail presorted by 5-digit ZIP Codes that  could be drop-shipped. Contestable mail is of most interest to an entrant  because there is minimal work related to sorting and transport. For the  analysis of the elimination of both monopolies, all contestable mail  categories are considered to be available to a potential entrant, should it  decide to serve the route. In the case of the analysis of the mailbox  monopoly alone, PRC only analyzes the contestable mail categories that  fall outside of the letter delivery monopoly. In the latter case, private  delivery companies are currently allowed to provide such service, such as  delivery of magazines and advertising mail not covered by USPS’s  delivery monopoly; however, because private delivery companies are not  currently able to place items in mailboxes, they may choose not to deliver  these items. There are fewer categories of contestable mail outside the  letter monopoly; therefore, when examining the value of only the mailbox  monopoly, the volume of contestable mail is less than half of that when  both monopolies are examined.

Once contestable mail volumes are identified, PRC makes a variety of  assumptions about the economic circumstances of the potential entrant,  relative to USPS. In particular:

PRC makes assumptions about the extent to which a potential entrant  would be able to deliver contestable mail with a lower cost structure  than USPS. Two key elements of an entrant’s cost advantage include:

The extent of the entrant’s reduced variable costs relative to those  of USPS, due to various efficiencies or cost advantages it may  enjoy—most notably lower labor rates. PRC’s base assumption is  that the entrant has a 10 percent cost advantage relative to USPS.

The extent of the entrant’s lower fixed costs, relative to USPS.  Reduced fixed costs are due largely to the assumption that an  entrant will not deliver mail 6 days per week, as USPS is required  to do. The base case assumption is that an entrant would deliver 3  days per week if both monopolies were eliminated and only 1 day  per week if only the mailbox monopoly were eliminated. The  reduction in delivery days would provide a cost advantage for the  entrant over USPS.

PRC also makes assumptions regarding the prices an entrant would  charge for its service, relative to USPS rates. PRC’s base assumption  is that the entrant’s prices would be 10 percent lower than USPS’s  rates.

Entrant’s Determination of which Routes to Serve  The PRC analysis focuses on the likelihood of entry—that is, the ability of  an entrant to make a profit—at the route level. PRC staff told us that  PRC’s analysis of entry decisions was conducted at the route level  because the data it obtained from USPS for this analysis are for individual  routes. To ascertain which routes an entrant might serve, PRC uses data  on mail volumes, by each type of mail category, for a sample of routes it  obtains from USPS. Based on that route-level volume data, and the  specific economic assumptions described above, PRC is able to calculate  the entrant’s prospective profitability on the set of sample routes—and  thus ascertain which routes the entrant would enter if the monopolies  were lifted. Once the entered routes are determined, PRC can estimate  USPS’s volume and revenue losses due to entry. PRC’s calculation of  USPS’s expected loss in net revenues is considered to be the estimated  “value” of USPS’s monopolies.

Some Considerations of PRC Method  PRC’s economic analysis informs, with caveats, stakeholders and  decision-makers about the value of USPS’s monopolies. However, some  elements of its analysis are important to consider when interpreting the  findings. In particular:

PRC assumes that if an entrant chooses to serve a route—that is, the  entrant believes it can make a profit on the route—it will immediately  garner 100-percent of the contestable mail volume on that route.  However, in practice, it may take time for an entrant to gain a  significant foothold in the market. Alternative assumptions or  sensitivity analyses that attempt to consider the time an entrant would  require to build its business—in part due to how mailers make  purchasing decisions when there are multiple competitors—might  shed light on the reasonableness of the model’s current assumptions  on the entrant’s market share.

PRC uses USPS data on individual postal routes as the geographic  level for this analysis. However, it is possible that potential entrants  could make decisions on a broader regional basis, particularly  because mailers (i.e., the entrant’s potential customers) might make  their purchasing decisions on a broader geographic basis. PRC staff  told us that routes abutting one another typically have similar volume  characteristics, which would minimize concerns about the small  geographic scope of the PRC approach. Nevertheless, it is difficult to  ascertain the extent to which using this small geographic scope in this  analysis would result in a pattern of entry in alignment with a viable  business plan.

section_title: PRC’s Estimated Value of USPS’s Monopolies Has Risen in Recent Years Due to Increased Volumes of Contestable Mail
paragraphs: Since 2008, PRC has conducted an annual analysis to estimate the lost  net revenues that USPS would incur if its monopolies were eliminated.  For 2015, which is the most recent year available, PRC estimated that the  elimination of both the letter and mailbox monopolies would result in  $5.45 billion loss in net revenues for USPS, while the elimination of solely  the mailbox monopoly would result in $1.03 billion in lost net revenues.  PRC staff told us that increases in the value of the postal monopolies in  recent years were due to growing contestable mail volumes, and added  that they expect these volumes to continue rising in the near future. As  such, PRC staff said that both the value of the combined postal  monopolies—and the value of the mailbox monopoly on its own—are  likely to continue to increase in the next few years.

section_title: Appendix III: Comments from the U.S. Postal Service

section_title: Appendix IV: GAO Contact and Acknowledgments
subsections: section_title: GAO Contact

section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Derrick Collins (Assistant  Director); Chad Williams (Analyst-in-Charge); Samer Abbas; Amy  Abramowitz; Antoine Clark; Pat Donahue; Jaci Evans; Kenneth John; Kim  McGatlin; Oliver Richard; Frank Todisco; Walter Vance; Michelle       Weathers; and Crystal Wesco made key contributions to this report.


Question-summary annotations: questions: question: What was the value of the USPS's monopolies in 2015?
answer: The value of the U.S. Postal Service's (USPS) letter delivery and mailbox monopolies was $5.45 billion in fiscal year 2015, according to the most recent estimate prepared by the Postal Regulatory Commission (PRC), the regulator of USPS.
child_questions: question: What does this suggest about the USPS if the monopolies were eliminated?
answer: This figure suggests that USPS's net income would decline by this amount if its monopolies were eliminated.
child_questions: question: How were these estimates developed?
answer: To develop these estimates, PRC identifies the mail covered under USPS's monopolies for which a potential entrant might compete to provide service if the monopolies were to be eliminated; such mail is referred to as “contestable.”

question: How have these estimates evolved over time?
answer: PRC's estimated value of these monopolies has increased substantially in recent years—it was $3.28 billion in fiscal year 2012—and PRC staff expects that the value will continue to increase in the next few years due to increased volumes of contestable mail.

questions: question: What effects would eliminating the USPS's monopolies have?
answer: Narrowing or eliminating USPS's letter delivery and mailbox monopolies would likely have varied effects, according to views provided by postal stakeholders, experts, USPS, and PRC.  For example, all parties agreed that allowing other entities to deliver letters could decrease USPS's revenues, and that additional strain would be placed on USPS's ability to continue providing the current level of universal service. Additionally, some stakeholders said that allowing other entities to deliver items to the mailbox could adversely affect the security of mail and increase clutter that would impair USPS's delivery efficiency.

question: How could an increase in competition affect the USPS?
answer: On the other hand, most of the postal experts we interviewed said that allowing entry to this market by private competitors could result in increased competition that would spur USPS to become more efficient.
child_questions: question: How has this been demonstrated in other countries?
answer: GAO contacted reported increases in competition after ending their postal delivery monopolies, and some of these countries also reported losses of revenue and market share for the carriers providing universal service. Stakeholders, experts, foreign officials, and USPS agreed that postal policies are interdependent and therefore need to be considered in tandem with one another; officials from all six countries we contacted told us that concurrent postal policy changes, such as increasing a post's degree of commercial freedom or decreasing the scope of its universal service obligation, assisted their transitions away from postal monopolies.

questions: question: What would estimating the effects of laws the apply differently to the USPS require?
answer: Estimating the effects of laws that apply differently to USPS and its private competitors would require steps including defining appropriate study objectives and assessing scope and methodological tradeoffs.
child_questions: question: What would need to be clarified in objectives?
answer: For example, objectives would need to clarify the extent of financial effects to be estimated—whether for USPS as a whole, for only specific products, or for USPS relative to competitors.

question: What would scoping decisions need to define?
answer: Scoping decisions would need to define the specific areas to be studied, the period of time to be reviewed, and the type of data to be collected.
child_questions: question: What considerations must this involve?
answer: This would involve multiple considerations, including determining which laws to include and how to address differing stakeholder views.

question: What would additional judgement be needed for?
answer: Additional judgment would be needed to address any lack of consensus on methodologies and to determine the appropriate degree of time and resources.

question: How would the speed with which estimates were desired influence the study?
answer: For example, a comprehensive study estimating the effects of every law would require significant time and resources; if estimates were desired in a shorter time frame—or if financial resources were limited—tradeoffs would be required.

questions: question: What is USPS's mission?
answer: USPS's mission is to provide universal delivery service while operating as a self-financing entity.

question: Why has Congress provided USPS with monopolies?
answer: Congress has provided USPS with monopolies to deliver letter mail and access mailboxes to protect its revenues, which enables it to fulfill its universal service mission, among other reasons.
child_questions: question: To what extent have these monopolies been successful?
answer: Despite its monopolies, USPS's poor financial condition has placed its universal service mission at risk.
child_questions: question: How has the USPS's financial condition deteriorated?
answer: USPS's net losses were $5.6 billion in fiscal year 2016 and were greater than $62 billion over the past decade.

questions: question: What was GAO asked to do?
answer: GAO was asked to review the postal monopolies.
child_questions: question: What did GAO do to address this?
answer: To address these questions, GAO reviewed reports issued by PRC and others; obtained views from USPS and PRC, as well as postal stakeholders and experts who have submitted public comments to PRC proceedings; and collected information from six countries—France, Germany, Italy, Japan, Sweden, and the United Kingdom—that have eliminated their postal monopolies, selected based on criteria including their share of global mail volume.

question: What does this report examine?
answer: This report examines (1) what is known about the value of USPS's letter delivery and mailbox monopolies, (2) views on the potential effects of narrowing or eliminating these monopolies; and (3) considerations that would need to be addressed to estimate the effects of laws that apply differently to USPS and its private competitors.