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The House Should Pass Postal Reform Legislation

The House Should Pass Postal Reform Legislation

February 4, 2022

Congress is poised to vote on postal reform legislation Wednesday. House Committee on Oversight and Reform Chairwoman Carolyn Maloney (D-NY) 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-MI) and ranking member Rob Portman (R-OH) have introduced a bipartisan companion bill in the Senate.

As ITIF has long argued, good postal reform legislation is critical, because the market environment for the U.S. Postal Service (USPS) is filled with long-term and short-term challenges. Long-term, USPS faces challenges from the Internet with first-class mail declining 44 percent between 2006 and May 2020, and marketing mail, which comprises most “other” mail volume, declining 27 percent from 2007 to 2019.

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. And this increased growth is not likely to reverse, in part because tens of millions of Americans became comfortable ordering online during the pandemic.

These changes make passage of effective postal reform critical. The House bill makes a number of important legislative changes.

First, it reduces the unfair burdens on USPS to prepay its retirement obligations and reduces costs by requiring USPS employees to enroll in Medicare when they become eligible.

Second, Section 103 enables USPS to provide non-postal services for state and local governments. This is a valid compromise between those who want the Postal Service to stay out of new business and those who want it to get into all sorts of new businesses, like consumer banking (that would compete with the private sector and likely not yield significant revenue).

Third, the bill contains several provisions that address the growing importance of package delivery to the USPS. 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 not only for mail delivery, but for 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 will 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 would put into statute an annual rider requiring the Postal Service to deliver mail six days a week, and it would require USPS to operate using an integrated network for both mail and packages. Both are important because as packages grow, maintaining six-day-a-week delivery is key to satisfying consumer demands, and keeping an integrated network (not having separate deliveries for mail and packages) is critical to taking advantage of economies scale and keeping costs low.

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 has 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 that 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 enables the Postal Service to enjoy economies of scope between its letter mail and package operations.

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

In summary, H.R. 3076, the Postal Service Reform Act, makes a number of important and needed changes that will go a long way to ensuring USPS's financial viability going forward.

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