An NSA is a customized contract between USPS and a specific entity— often a mailer or foreign postal operator—typically lasting a year or more. NSAs provide customer-specific rates—generally lower prices on specific mail products—in exchange for meeting volume targets and mail preparation requirements. The goal of these agreements is generally to encourage additional mail volume and revenue. For example, an NSA may provide a postage rate discount, paid to the mailer as a rebate at the end of a fiscal year, for all mail volume above a specific threshold. The Postal Accountability and Enhancement Act (PAEA) authorized USPS to create NSAs for two discrete categories of mail products, market dominant and competitive, as outlined in table 1. The market dominant category includes products for which USPS has a monopoly or would be able to exercise substantial market power, such as First-Class Mail and Standard Mail. Competitive products are all other types of mail, and include primarily shipping services such as Priority Mail, Express Mail, and Parcel Select. The legal requirements for NSAs differ based on whether the postal products are market dominant or competitive. PAEA requires market dominant NSAs to improve the net financial position or enhance the performance of operational functions of USPS so long as the agreement does not cause unreasonable harm to the marketplace. Also, market dominant product NSAs must be made available to “similarly situated mailers.” PAEA requires competitive NSAs, as well as competitive products in general, to cover their attributable costs, meaning they must generate more revenue than the costs attributable to delivery of the products, such as the labor involved in handling that mail. Further, competitive products overall, including NSAs, must contribute at least 5.5 percent of USPS’s institutional costs—that is, overhead costs not directly related to the delivery of products. As directed by PAEA, PRC issued final regulations in 2007 that established procedures for its reviews of competitive and market dominant NSAs, as summarized in table 1. As with all postal rate changes, USPS must obtain approval from PRC prior to implementing NSAs. PRC has approved all NSAs proposed by USPS through fiscal year 2012. PRC also reviews NSAs after implementation for compliance with regulatory criteria, in its Annual Compliance Determination Report. To increase or sustain mail volume and revenue, USPS has also provided short-term discounts, called sales or promotions, on specific mail products for groups of mailers, in contrast to NSAs, which are agreements with individual mailers for longer periods. Sales—often called price incentive programs—have sought to increase, or curb the decline of, mail volume by temporarily offering a discount (paid through a rebate) to mailers whose mail volume exceeds a predetermined volume threshold during a specific period. Some sales were offered in the summer, when USPS stated it had excess capacity in its system. These sales were designed to generate revenue during the sale period and not necessarily to have long-term benefits. After 2010, USPS began offering promotions instead of sales, which also provide temporary discounts, but seek to increase the long-term value of mail by, for example, integrating mobile technology into mailers’ advertising campaigns. As with all postal rate changes, USPS must obtain approval from PRC prior to implementing sales and promotions. PRC reviews whether the proposed sales and promotions meet postal rate regulations that include several qualifying factors such as whether sales and promotions help assure adequate revenues for USPS. See appendix II for a full list of these objectives and factors of postal rate regulation. The number of NSAs, sales, and promotions has increased in most years since the enactment of PAEA. There were no new NSAs approved following the enactment of PAEA until PRC regulations governing NSAs were issued in October 2007. As seen in table 2, the majority of NSAs have been with competitive products. Starting in fiscal year 2011, USPS began using “umbrella” products that allow multiple mailers to agree to similar NSAs. As a result, the total number of NSA-product requests for approval in the table below appears to decline in 2011 and 2012, when in fact the total number of individual contracts with mailers has continued to grow. The first sales were offered in fiscal year 2009, in part as a response to the decline in mail volume resulting from the recession, and USPS has since offered a variety of promotions (see table 3 below). USPS data show that revenue generated from NSAs, sales, and promotions has generally increased each year since the enactment of PAEA, with most of the revenue generated by competitive product NSAs. We cannot report the specific revenue generated by competitive NSAs because of the proprietary nature of data related to competitive products. However, the total revenue generated as part of all NSAs increased over 240 percent from fiscal year 2009 to 2012, though it remains a small portion of USPS’s total revenue (see fig. 1). Market dominant NSAs generated a relatively small portion of this revenue, partly because there have been few such agreements. Beyond NSAs, sales and promotions have also generated limited revenue since the first sale in 2009. As discussed below, it is not clear how much net revenue USPS has generated from market dominant NSAs or sales and promotions. Since the enactment of PAEA, the number of competitive NSAs has grown substantially. PRC has approved 327 domestic and international competitive NSA product requests through fiscal year 2012. A number of these NSA requests are actually “umbrella” products that include numerous individual contracts, all with similar terms. Counting these individual contracts separately illustrates the substantial number of NSAs, with 446 domestic and international competitive NSAs active in fiscal year 2012 alone. According to USPS officials and a mailer we spoke with, the increased number of competitive NSAs was due mainly to increased experience with NSA contracts and product enhancements. For example, according to these officials, USPS and PRC processes associated with developing competitive NSAs have become more efficient as a result of improved costing techniques and additional experience developing contracts with mailers. USPS and PRC also worked together to develop umbrella products that allow multiple mailers to agree to similar discounts for related mail products. Product enhancements may have also increased USPS’s ability to attract more business with NSAs. For example, officials from USPS and a mailer we spoke with noted that USPS’s ability to track packages’ transit times and its delivery performance improvements for parcels have made USPS products more attractive to customers. The financial results of competitive product NSAs are not reported publicly, but according to PRC, most such agreements have covered their costs, and according to USPS, these agreements have generally been successful in enhancing revenue. According to PRC, all domestic competitive NSAs have complied with the legal requirements, including that they generate revenue that covers their attributable costs. Four international competitive NSAs in fiscal year 2012, however, did not cover their costs. According to PRC, the international competitive NSAs that did not cover costs were projected to cover costs when USPS filed its request. Although competitive NSAs are collectively profitable, these agreements generate a small portion of USPS’s total revenue and help cover less of USPS’s institutional costs than market dominant products. Competitive products overall, including NSAs, generate a relatively small part of USPS’s total revenue because they generally involve much lower mail volumes than market dominant products. Additionally, total revenue from competitive products covers less of USPS’s institutional costs than the revenue from the two major market dominant products, First-Class Mail and Standard Mail. USPS has implemented few market dominant NSAs. USPS has been granted approval by PRC to implement two domestic, market dominant NSAs since the enactment of PAEA, though only one of these was active, as of May 2013. In fiscal year 2012, there was one active market dominant domestic NSA, and eight active market dominant international NSAs. USPS has implemented few such NSAs in part because of the decline in demand for market dominant mail products, as discussed further below. Domestic, market dominant NSAs have likely generated limited, if any, net revenue (see fig. 2). Most of these agreements were implemented prior to the enactment of PAEA. According to USPS, all domestic market dominant NSAs have generated net revenue of $68.5 million dollars to date. However, PRC, using a different methodology that is discussed below, estimates a net loss of $11.8 million for all domestic market dominant NSAs. For example, the USPS and PRC estimates of net revenue for the Discover NSA approved in fiscal year 2011 differ substantially. USPS’s estimate of net revenue assumes that all volume greater than the projected volume is because of the rebate. USPS developed its estimates of projected volume based on Discover’s mail volume history as well as other qualitative factors. PRC used a quantitative methodology based on product elasticities—that is, the estimated sensitivity of total product mail volume to price changes—associated with the mail product involved. As a result, USPS estimated net revenue of about $24 million in the first year of the NSA with Discover, while PRC estimated USPS lost over $4 million. As discussed further below, PRC has encouraged USPS to identify a more reliable method for evaluating the impact of market dominant NSAs. International market dominant NSAs implemented since the enactment of PAEA consist mainly of agreements with foreign posts and are estimated to have lost approximately $25 million in net revenue in fiscal year 2012, according to USPS. However, PRC has noted that the volume sent under the NSAs generated smaller losses than what would have occurred if the volumes were sent under Universal Postal Union (UPU) international postal rates. According to USPS officials, agreements with foreign posts are governed by UPU rates, which are developed based on domestic postal rates.