Thankfully, Congress Is Moving Forward on Postal Reform

For the last 50 years, Congress has intermittently focused on postal reform—from 1970, when it changed the status of the United States Postal Service (USPS) from a government department to an independent government agency, to the Postal Accountability and Enhancement Act of 2006 (PAEA). Given the dramatic changes in the business environment for USPS, especially in the last year, Congress is now revisiting reform again and rightly so.

House Committee on Oversight and Reform Chairwoman Carolyn Maloney (D-N.Y.) and ranking member James Comer (R-Ky.) have moved the 2021 Postal Reform Act through the committee. And Senate Oversight Committee Chairman Gary Peters (D-Mich.) and ranking member Rob Portman (R-Ohio) introduced a bipartisan companion bill in the Senate.

The House legislation does a number of things, including reducing the unfair burdens on USPS to prepay its retirement obligations. But it also has several provisions that address the growing importance of package delivery to the USPS.

The market environment for USPS was difficult in FY 2020, to say the least. First-class mail volume declined by 4.8 percent, following a decline in FY 2019 of 3.2 percent. And between 2006 and May 2020, volume declined 44 percent. USPS marketing mail, which comprises most “other” mail volume, declined from 75.7 million pieces in FY 2019 to 64.2 in FY 2020, a decline of 14.7 percent. From 2007 to 2019, it declined 27 percent.

At the same time, package volumes and revenue increased significantly in FY 2020, by 25 percent and 19 percent respectively. This is not surprising given the significant growth in e-commerce, as more Americans relied on this channel for everything from medicines to food to clothing.

Undoubtedly, the core strength of USPS is its integrated delivery network. The Postal Service efficiently delivers to over 157 million delivery points six days a week. By taking advantage of its economies of scale, USPS is able to keep costs down for not only mail delivery, but package delivery as well.

As such, any proposals requiring USPS to structurally separate package delivery from market-dominant mail, or charge prices as though the two functions were separate, would raise costs for USPS package delivery. This would lead to fewer package shipments overall (i.e., package shipment prices would increase, leading to less demand) and if competitors do not raise prices by the same amount USPS prices increase, it would lead to reduced USPS package market share. Forcing USPS to raise package prices this way would also decrease gross domestic product (GDP) by reducing the overall productivity of the package delivery industry because packages would shift from a more efficient low-cost production network to higher-cost ones.

It is also important to note that USPS’s competitors such as UPS and FedEx take advantage of these economies of scale by hiring the Postal Service to deliver millions of packages to the last mile. Moreover, in high-cost rural areas, USPS is able to deliver packages more cost-effectively than private companies that typically charge more for rural delivery. Indeed, the universal service mandate and performance of USPS is critical, even as we move to an e-commerce world, in part because USPS enables low-cost and timely package delivery to rural areas, as private package companies often charge more for rural delivery.

While USPS earns the majority of its revenue from regular mail, it increasingly utilizes its vast network to deliver competitive products, particularly e-commerce packages. As this portion of USPS business grows, maintaining a six-day-a-week delivery schedule becomes even more important. If the majority of what USPS delivers were first- and third-class mail, it might be able to cut delivery to five or perhaps fewer days a week (although even then there would likely be some reduction in mail). But with packages making up an increasing share of both volume and revenue, cutting delivery days would threaten the viability of its package delivery services.

This is why two provisions in the proposed legislation are critical.

Section 202 of the Postal Reform Act of 2021 would amend Section 101(b) of title 39, United States Code, by adding the following language: “The Postal Service shall maintain an integrated network for the delivery market-dominant and competitive products (as defined in chapter 36 of this title). Delivery shall occur, to the maximum extent practicable, at least six days a week except during weeks that include a Federal holiday or in emergency situations, such as natural disasters.”

USPS has abided by this principle until now and Congress has required it in annual appropriation riders. This amendment simply codifies this into law.

Section 203 requires the Postal Regulatory Commission (the body that oversees and regulates USPS) to review the accuracy and validity of the USPS methodologies it used to determine the cost attribution from the processing and delivery of packages. Competitors like UPS have argued that USPS is underpricing packages and should charge more for their delivery.

But in fact, the 2006 postal reform act both forbids the Postal Service from cross-subsidizing packages to make sure it competes fairly with companies such as UPS and FedEx and charges the Postal Regulatory Commission with enforcing this requirement. The Act requires the Postal Service to ensure package deliveries cover all their attributable costs plus an appropriate share of overhead.

Despite this, UPS and FedEx continue to argue that USPS is unfairly cross-subsidizing packages and want Congress to require USPS to increase package prices and use different cost allocation models from those in use now. It is appropriate for Congress to ask the PRC to once again study this issue to ensure there are no unfair price subsidies from regular mail to packages.

Given the decline in regular mail and the continued growth in packages, it would be a major financial blow to USPS if it is prevented from competing fairly and effectively in the package industry. A principal reason USPS should be able to price packages in a way that neither subsidizes them nor treats them as a “cash cow” is by delivering packages through its efficient last-mile network, it maximizes efficiency. As economist John Panzer concluded:

A major reason for the success of the Postal Service’s package business is the fact that its package business uses the same last-mile delivery network used for its letter mail delivery business. Because of the substantial economies of scale in delivery, the Postal Service’s cost of package delivery is less than using a stand-alone delivery network. Similarly, the costs of the Postal Service’s letter delivery operations are less on a per-piece basis when provided along with packages than would be the case if letter service were provided using a stand-alone delivery network. Thus, economies of scale in its delivery network enable the Postal Service to enjoy economies of scope between its letter mail and package operations.

In this sense, the provisions in Sections 202 and 203 of the House bill are needed and are important ones to assure the continued viability of the U.S. Postal Service.