Household and Small Business Consumers of Monopoly Postal Products and Services: Are Current Protections Adequate?February 9, 2012
Good morning. 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?
The 2006 reform legislation 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 while the Postal Service keeps 40-45 percent of its operating costs unattributed to specific products and services as institutional overhead.
First Class Mail is contributing half of the revenue it generates to institutional overhead (see Figure 1). Standard Mail, also defined as a market-dominant product, 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 PRC’s 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 (see Figure 2). 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.”
Which brings me to my first opportunity to raise the central question of this presentation: are current protections adequate to ensure that the Postal Service is not abusing its statutory monopoly and overcharging customers who purchase those products? In light of the well-documented and consistent trends I just mentioned, it would appear that there is little reason for confidence that the current protections are sufficient.
A second type of abuse of the First Class Mail monopoly is whether its consumers are forced to accept more than their fair share of reductions in service quality. As you know, the Postal Service in December proposed to change the service standards that dictate the speed and reliability of mail delivery. 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.
The Postal Service declared that the purpose for the proposed change was to enable management to save up to $3 billion in operating costs by 2015 through consolidations to their workforce. As Chairman Goldway has suggested, the impact the reduction in service quality would have on monopoly consumers would be significant. This too raises the concern that if captive customers of a government monopoly are to continue to endure disproportionate cuts in service as cost-cutting measures, doesn’t this constitute a significant subsidy to those other functions of the Postal Service that compete directly with the private sector?
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. I have been collecting newspaper clips documenting these disappearing boxes around the country for years, and nearly every article cites community concern over the loss and inconvenience.
Chairman 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.
Now that more than five years have passed since Congress last approved postal reform legislation, other important questions have arisen as well regarding how those changes have impacted consumers, and if the subsequent trends provide any indications whether current protections will be adequate moving forward? Let me briefly raise three such concerns.
First, 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.
Second, Congress created a Competitive Products Fund in 2006, and to help navigate the complications raised by poor financial transparency and allocation in Postal Service operations, sought to incorporate expertise from the Treasury Department and Postal Regulatory Commission in establishing the plan’s details. Today, the fund holds over a billion dollars. It is important at this point to pause evaluating this process to date, and in light of the changes in the postal marketplace that have occurred since it was created: How can these funds be allocated to best meet the needs of postal consumers, especially given the Postal Service’s bleak financial picture? Are the details of the plan the right ones, and are they sufficient to accomplish the goals Congress intended for the fund?
Third, because the 2006 legislation took the unprecedented step of establishing definitions, and rules, for market dominant and competitive products, what are the implications internationally? How can these provisions best be implemented without placing U.S. consumers and businesses at competitive disadvantages internationally in a fast-changing global market for postal services? Are our current processes and responsibilities for representing the United States at international forums of consequence, particularly the Universal Postal Union, ideal to serve the interests of U.S. consumers and businesses as well as those of the U.S. Postal Service?
The Consumer Postal Council is especially grateful for the Postal Regulatory Commission’s vigilance and concern on behalf of the Postal Service’s monopoly consumers. In particular, as you consider the strategic role of the Public Representative system moving forward, I have strong confidence that the consumer perspective will continue to hold a prominent place in PRC deliberations. To that end, let me conclude my remarks with a question and a request.
My request is that you consider the following question: How can the PRC ensure that your advocacy for consumers exists beyond the specific parameters of each open case or docket to which a public representative is assigned, where deadlines tend to be short, information and communication tend to be confined, and parameters for consideration tend to be narrow?
Many of the concerns raised here this morning are enduring ones, that have existed long before the current caseload and with implications falling both within and beyond the cases themselves. Are you confident that these concerns will receive optimal attention and representation within the current system, or would it be in the best interests of consumers to consider changes to ensure that they do?
And finally, let me return to the central question of this presentation. The Postal Service has shown an inclination to respond to its worsening financial outlook through reducing service and increasing prices. On behalf of those household and small business consumers who still rely on market-dominant postal products and services, what protections can they count on to ensure that they are not forced to accept more than their fair share of sacrifices as the Postal Service struggles to set itself back on the course to financial viability?
We appreciate the leadership and concern that Chairman Goldway and the Commission have provided, and we look forward to working together with you to solving these important challenges.