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

Letter

Background

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.”

PRC Estimated the Value of USPS’s Monopolies to Be Over $5 Billion in 2015

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.

Relaxing USPS’s Monopolies Could Likely Have Varied Effects

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.

Postal Stakeholders, Experts, and USPS Believe Relaxing Postal Monopolies Could Reduce USPS’s Revenues and Threaten Its Ability to Provide Universal Service

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.”

Most Postal Stakeholders and Experts Agree That Relaxing USPS’s Mailbox Monopoly Could Affect Mail Safety, Security, and Efficiency

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.

Most Postal Experts Believe Relaxing USPS’s Monopolies Could Increase Competition, Efficiency, and Innovation

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.

Some Countries Reported Revenue Losses for Postal Operators, Increases in Competition and Efficiency after Elimination of Monopolies

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.

There is Broad Consensus That Potential Monopoly Changes Should Be Considered in Tandem with Broader Postal Policies

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.

Assessing the Impact of Laws that Apply Differently to USPS and Private Competitors Would Involve Various Considerations

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.

Study Objectives Would Need to Be Defined

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.

Scope Decisions Would Involve Multiple Considerations

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.

Methodology Considerations Would Involve Judgments

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.

Reporting Considerations

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.

Agency Comments and Our Evaluation

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.

Appendix I: Objectives, Scope, and Methodology

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.

Appendix II: Information on the Postal Regulatory Commission’s (PRC) Method for Estimating the Value of USPS’s Monopolies

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.

Statutory Monopolies May Confer Economic Value

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.

PRC Estimates the Value of USPS’s Monopolies based on Lost Net Revenues Due to Elimination of the Monopolies

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.

PRC’s Estimated Value of USPS’s Monopolies Has Risen in Recent Years Due to Increased Volumes of Contestable Mail

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.

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

Appendix IV: GAO Contact and Acknowledgments

GAO Contact

Staff Acknowledgments

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.