Do U.S. Postal Consumers Receive Adequate Protections?

November 19, 2012

Published in: Encyclopedia of Consumer Safety and Protection (Reiboldt, W., & Horn Mallers, M., eds.) (2012, scheduled release). ABC-CLIO Publishers.

As the U.S. Postal Service confronts ever-increasing deficits and faces an uncertain future with a badly broken business model, it is reasonable for Americans to be concerned about what the future of the provision of their mail service will look like. But that is not the only area where their big-picture concerns merit consideration.

Can the Postal Service’s consumers of monopoly products and services be confident they are getting what they pay for? Or are they being required to pay more than their fair share, in terms of dollars and reduced quality of service, with the proceeds going to subsidize other Postal Service functions or activities? Whatever solutions are deliberated by policymakers in the months and years to come, American consumers have a major stake in whether any proposed outcome will improve their position in this regard.

To understand these questions, one first must appreciate that the United States Postal Service of today differs greatly in scope and mission from the role envisioned at any other point in its history. This largely reflects the major changes in the marketplace for postal services, not just in the United States but worldwide. In fact, meeting the needs of household consumers has become a secondary consideration in the decisionmaking of senior Postal Service executives, as it has for the leaders of national posts around the world.

Of tantamount concern to those household consumers is the extent to which the Postal Service business model requires them to subsidize its other business involving other customers. A major factor is the model’s inability to control its own costs due to a variety of factors, including inflexible collective bargaining agreements with employees and Congressional interference. As mail volume and the revenue it generates have declined precipitously in recent years, a trend most experts expect will continue, the danger that they will be expected to fund even steeper subsidies makes current reform deliberations concerning these questions crucial.

The United States Postal Service was created by decree of the Continental Congress in 1775, mainly to deliver mail between Congress and the armies. Helping to achieve the national goal of maintaining a well-informed electorate was a fundamental purpose.

Today, still wholly owned by the government, it delivers 168 billion pieces of mail each year to more than 151 million addresses. (i) The average household receives 21 pieces of mail per week. Of this now-declining total, the Postal Service estimates that 64 percent is advertising mail, 12 percent is bills, 5 percent is financial statements, 5 percent is periodicals, and only 4 percent is personal correspondence. (ii)

To accomplish this, the Postal Service has 546,000 career employees, down from 623,128 in 2009. If it were a private company, it would rank 35th on the Fortune 500. (iii) And, as Postmaster General Patrick Donahoe is fond of stating, there are more post offices in the United States than McDonalds, Wal-Marts and Starbucks’ combined. (iv)

Contrary to what most people may think, the modern Postal Service is not funded by appropriating taxpayer dollars. It generates its revenue from shippers and mailers. To make this work, the Postal Service presides over two statutory government monopolies, one for first-class mail and the other granting it exclusive use of postal mailboxes. In exchange for its monopoly privileges, Congress requires the Postal Service to provide Americans with universal postal service.

The exact meaning of the term and the obligation it carries is difficult to nail down. In fact, as noted postal historian James I. Campbell Jr. observes in his 2008 study on the subject commissioned by the Postal Regulatory Commission, that Title 39 of the United States Code, which contains the foundations within U.S. law for the modern U.S. Postal Service, does not use the term universal service even once. None of the major pieces of federal legislation detailing postal reforms, in fact, address central questions to defining the terms of the obligation. (v)

The Postal Reorganization Act of 1970, however, does state in Section 101 that “Postal rates shall be established to apportion the costs of all postal operations to all users of the mail on a fair and equitable basis.” This requirement still stands as a principle governing the provision of postal services in the United States, and serves to frame a pertinent discussion about whether today’s costs meet this standard for all postal consumers.

U.S. Postal Service Today

The price of mailing a first-class letter anywhere in the United States increases to 46 cents in late January of 2013 — surely by most standards that must constitute a bargain. It is, after all, among the lowest rates among industrialized countries.

But a more thorough understanding of the context of this pricing within the context of postal economics makes the extent of this bargain less clear. It also raises fundamental questions about whether consumers of the Postal Service’s monopoly products and services are in fact receiving pricing on the “fair and equitable basis” required in law.

This would appear to make a strong case that First Class Mail, the mail most household consumers use for correspondence and billpaying, effectively subsidize the delivery of the competitive and other, less-lucrative products.

The Postal Accountability and Enhancement Act of 2006 charged the Postal Regulatory Commission with ensuring that the Postal Service does not abuse its monopoly privileges by overcharging its monopoly consumers to subsidize its products that compete directly with the private sector. But this is easier said than done, especially because the Postal Service has consistently maintained 40-45 percent of its operating costs unattributed to specific products and services as institutional overhead.

In 2004, Secretary of the Treasury John W. Snow criticized “this large, unallocated portion [as] a sort of ‘elephant in the room’ that forces stakeholders, employees, competitors, the regulator, Board of Governor, USPS management, and others to invest substantial time, energy and expense calculating, debating or contemplating a myriad of important issues.” (vi) Secretary Snow went on to argue that serving the public interest and trust “demands” improved transparency in cost allocation and outweigh any confidentiality concerns the Postal Service management would employ to defend this non-transparent accounting. (vii)

First Class Mail, and particularly the single-piece First-Class Mail that consumers generally use, is contributing half of the revenue it generates to institutional overhead. Standard Mail, a business bulk-mailing product used mostly for advertising mail that is also defined as a market-dominant category, contributes about a third. But Priority Mail, the Postal Service’s flagship competitive product, contributes only one-fourth of its revenue to institutional overhead. Periodicals operate at a deficit according to this same calculation.

Cost Coverage, the official method of demonstrating the contribution each product makes to unattributed, general overhead, shows a very similar pattern: First Class Mail contributes the greatest percentage of its revenue toward institutional overhead. That’s precisely why the Postmaster General commented last year that, “Even with growth in our package business, we cannot replace the profit contribution of First-Class Mail that has been lost over the past few years and will continue to decline in the future.” (viii)

The risks that the Postal Service expects such subsidies to increase appear to only escalate as the Postal Service’s financial condition continues to decline. In March 2010, the Postal Service projected $115 billion in cumulative losses by 2020 if it achieved all cost savings that it asserted were under its control. USPS projected $238 billion in cumulative losses according to current trajectories without new reform strategies. (ix)

Ever mindful of trends in mail usage, the Postal Service has generally targeted the business mailing community as the customer base to generate new revenue to sustain its present business model. Its business strategy has relied heavily on generating increased mail volume through aggressive worksharing discounts, enhancing the program of services it offers domestic business mailers, and even a widely advertised 2009 “summer sale” for bulk mailers.

Postal Service management has repeatedly used targeted discounts to generate new business from corporate mailers. In January 2011, the Service reached a special “Negotiated Service Agreement” with Discover Financial Services is serving as a model for such agreements with other large, corporate mailers. Such agreements are generally priced based on either volume or worksharing discounts. But officials including some Postal Regulatory Commissioners have questioned with the Postal Service is negotiating such deals poorly, resulting in some cases in offering discounts that exceed the savings achieved. In such cases, it is once again the Postal Service’s monopoly consumers who are left subsidizing any such shortfalls.

In her concurring to a landmark 2007 Negotiated Service Agreement with major corporate mailer Bank of America, now- Chairman Ruth Goldway raised such concerns. In arguing that the agreement would result in losing $25-45 million for the Postal Service’s (a shortfall for which monopoly consumers must subsidize), she noted “the Postal Service is not yet capable of negotiating a good bargain…. [T]he complex bureaucracy of the Postal Service has not yet been capable of identifying, analyzing, and distributing the appropriate data needed to make accurate cost-benefit decisions.” (x)

Postal management also frequently discusses looking to the potential other new product offerings hold for generating additional revenue. But as noted in the August Senate hearing by Chairman Goldway, a longtime advocate for the Postal Service’s monopoly consumers, its past forays into nonpostal services have generally proven unsuccessful. (xi) The Government Accountability Office (GAO) noted that in the second half of the 1990s, USPS had publicly introduced 19 new product offerings. Three of these involved strategic alliances with private-sector companies, such as a deal with SmarTalk Teleservices, Inc to sell FirstclassPhonecard in post offices. But GAO noted that 5 of the 19 had been discontinued before 1998. More telling was its analysis that total revenues for the 19 offerings through 1997 was $148.8 billion, while total expenses totaled $233.5 million. (xii) What makes this critical to consumers is that when the Postal Service loses money on new products or services, it is monopoly consumers who must pay for them.

Service Reductions Targeted at Consumers

Another potential type of abuse of the terms of the First Class Mail monopoly is whether its consumers are forced to accept more than their fair share of reductions in service quality.

Postal cost-cutting strategies have been focused largely on monopoly consumers. The widespread removal of collection boxes, and the elimination of afternoon collection times from those boxes that remain, is another cause for similar concerns that often gets overlooked. Whenever newspaper clips documenting these disappearing boxes appear around the country, nearly every article cites community concern over the loss and resulting inconvenience.

Postal Regulatory Commission Chairman Ruth Goldway has noted that over 100,000 have already been removed from American neighborhoods. Besides the disappearing blue boxes, we often find that those that remain have fewer, and earlier collection times. If these trends are in fact part of a systematic strategy, it is a major concern that this strategy not come at the disproportionate expense of the monopoly consumer.

Two cost-cutting strategies that have received much discussion in recent months are eliminating Saturday delivery and closing some 700 post offices, would have significant, and arguably disproportionate impacts on household and small business consumers. Both have proven highly controversial amid strong resistance from postal labor unions and political leaders.

In December 2011, Postmaster General Patrick Donahoe proposed a reduction in service standards that would reportedly save the Service $3 billion annually, or less than 5 percent of annual expenditures. This reduction is part of a larger plan to reduce operating costs by $20 billion by 2015. (xiii) Under the proposed new standards, no longer would a consumer be able to mail a card or letter and expect it to arrive the next day.

Next, as Postal Service management seeks to address its badly broken business model and dire financial forecasts, ideas for new products and services with potential to generate new revenue are frequently being suggested. Some prominent examples have included offering the public eMailboxes, financial services, and even leveraging data collected from these and other postal services as a way for the Postal Service to create new income. Each of these areas would represent a serious challenge to the present regulatory infrastructure. It is also very likely that for some of these, privacy concerns, or simply the dangers of creating a money-losing and ill-conceived business debacle too far off the Postal Service’s core competencies, would ultimately prove too much to overcome. But for each new product that does emerge, it will be crucial that the same standards for consumer protections be applied from the beginning.

The Mailbox Monopoly — Benefit or Detriment to Consumers?

The second major Postal Service monopoly, on the use of consumers’ mailboxes, also can be observed as infringing on consumers’ rights and best interests. After all, consumers are themselves responsible for purchasing and maintaining mailboxes. But only mail for which postage has been paid through the U.S. postal service may be placed in mailboxes. Community notices, coupons delivered by hand from the local pizzeria or birthday party invitations to neighborhood children are barred from being placed in mailboxes. (xiv) Currently, the U.S. is the only country with such restrictions on mailbox access. (xv)

A 2003 Presidential Commission on the United States Postal Service proposed that consumers choose whether or not to allow private individuals or delivery companies to access their mailboxes, “so long as it does not impair the universal service or open homeowners’ mailboxes against their will.” (xvi)

A 2007 report by the Federal Trade Commission agreed. Congress enacted the restriction on mailbox access in 1934 in response to concerns about private companies, circumventing the postal service and placing circulars and account statements into mailboxes. Specifically, the statute states: Whoever knowingly and willfully deposits any mailable matter such as statements of accounts, circulars, sale bills, or other like matter, on which no postage has been paid, in any letter box established, approved, or accepted by the Postal Service for the receipt or delivery of mail matter on any mail route with intent to avoid payment of lawful postage thereon, shall for each such offense be fined under this title. (xvii)

The postal service’s monopoly on mailbox use “limits consumer choice and artificially increases the costs of private carriers,” it concluded.

The mailbox monopoly is particularly inconvenient to those who live in urban apartment buildings without a front desk or in rural areas. If consumers are unable to sign for delivery, their only choice is the post office. Increasingly, post office hours in many jurisdictions are limited, especially on weekends, and often require patrons to stand on long lines for service.

Conclusion

Americans have consistently told pollsters and interviewers that they not only like their mailman, but that they attribute value to daily mail delivery beyond simple transactional benefits, and they would like to see the United States Postal Service continue as a lasting entity in the future. But the arguments and examples described above raise serious questions about the extent to which the United States Postal Service is serving the needs of the consumers of its government monopoly at prices and with quality both fair and equitable, and if the protections provided to these consumers are adequate and consistent with federal law.

In official proceedings which determine the rates and service levels that define postal customers’ interactions with the nation’s post offices, household and small business consumers of monopoly products and services seldom receive the professional representation that regularly benefit other large and generally corporate customers or other interested parties. In order to ensure that their protections are adequate and compliant with existing legal frameworks, it will be crucial that postal decisionmakers ensure that the best interests of monopoly postal consumers be adequately represented in future deliberations, and considered in the decisions which will determine future directions for the provision of postal services in the United States.

Don Soifer is Executive Director of the Consumer Postal Council, based in Arlington, Virginia, www.postalconsumers.org.

Notes

(i) Postal Facts, United States Postal Service, http://about.usps.com/who-we-are/postal-facts/welcome.htm#H1

(ii) United States Postal Service, Household Diary Study FY 2010, Table A1-3.

(iii) Postal Facts, United States Postal Service, http://about.usps.com/who-we-are/postal-facts/welcome.htm#H1

(iv) Ibid.

(v) Campbell, James I. Jr. Universal Service Obligation: History and Development of Laws Relating to the Provision of Universal Postal Services, p. 21.

(vi) U.S. Treasury Secretary John W. Snow, Testimony before Joint Session of the Committee on Government Reform United States House of Representatives and Government Affairs United States Senate, March 23, 2004.

(vii) Ibid.

(viii) Postmaster General/CEO Patrick R. Donahoe testimony before the U.S. Senate Committee on Homeland Security and Governmental Affairs, September 6, 2011.

(ix) A Quick Reference on the U.S. Postal Service. Lexington Institute. Arlington, VA. May 2011.

(x) Postal Regulatory Commission Opinion and Recommended Decision on Rate and Service Changes to Implement Baseline Negotiated Service Agreement with Bank of America, October 3, 2007, Concurring Opinion of Commissioner Goldway.

(xi) Goldway, Chairman Ruth. U.S. Senate Committee on Homeland Security and Governmental Affairs: Subcommittee on Federal Financial Management, Government Information, Federal Services, and International Security. August 6, 2009.

(xii) Soifer, Don. Revenue Reality:  In a New Commercial Reality, Posts Learn to Diversify.Postal Technology International. Pg. 36-37. 2010.

(xiii) Postal Trendwatch Q1 FY 2012: Monopoly Service to Worsen, Competitive Service to Improve? Lexington Institute. Arlington, VA. 2012.

(xiv) Ibid. XI.

(xv) Ibid. XI.

(xvi) Soifer, Don. “Consumers can ‘police’ their own mailbox.” South Florida Sun-Sentinel. April 4, 2008. Retrieved from http://articles.sun-sentinel.com/2008-04-04/news/0804030208_1_postal-service-monopoly-mailbox.

(xvii) Federal Trade Commission.Accounting for Laws that Apply Differently to the United States Postal Service and its Private Competitors. Pp. 16-18. 2007.