EVENTS

Date:	Wednesday, April 30, 2003
Time:	10:30 AM -- 12:30 PM
Location:	Wohlstetter Conference Center, Twelfth Floor, AEI 1150 Seventeenth Street, N.W., Washington, D.C. 20036

April 2003
The Mission of the Postal Service and the Universal Service Obligation

President George W. Bush recently established the Commission on the United States Postal Service, whose final report in August 2003 may lay the groundwork for the first major reform of the U.S. Postal Service in thirty years. Mirroring the administration’s initiative, AEI is sponsoring its own Postal Reform Initiativ--a series of conferences and publications to assess the mission and operations of the U.S. Postal Service, propose a vision of a modern postal industry, and suggest how the United States could arrive at this destination. In order to solve the problems that have bedeviled the U.S. postal industry, the AEI project examines the potential of modern communications technology and a more open and competitive market environment and reviews the experiences of other countries that have enacted postal reform in recent years.

On April 30, the second session of the AEI Postal Service Initiative was held. This conference focused on the mission of the U.S. Postal Service, how technology has affected this mission, and the meaning of universal service.

Michael Crew
Rutgers University

The universal service obligation (USO) is the obligation of a postal office to provide ubiquitous service at a uniform price and at a reasonably uniform standard of quality. Although advantages to the USO, such as brand name recognition and economies of scale, do exist, the associated costs and obligations present a burden. For instance, postal offices cross-subsidize between high-cost and low-cost routes. Without some form of protection, such as regulatory intervention, postal offices will be subject to competition along the low-cost routes, which will leave them with insufficient revenue to support the high-cost routes. A regulatory framework could administer the USO by balancing the rights of the customers and competitors while protecting the obligation to serve.

Some question whether the USO (defined as ubiquity of service, uniformity of price, and some uniformity on quality) without an explicit tax subsidy or reserved area? The experiences of postal offices in Finland, New Zealand and Sweden show that such a change is indeed possible.

Another postal issue is privatization. Contrary to popular belief, privatization and the USO are not necessarily inconsistent. The Netherlands successfully began the wave of privatization, followed by Germany’s Deutsche-Bundespost, which was transformed into the partially-privatized Deutsche Post AG shortly thereafter. Neither liberalization adversely affected universal service. However, whether the USO is worth retaining at all remains an open question.

Damien Geradin
Harvard University

Europe abandoned its tendency to follow the American lead on liberalizing monopolies and regulated industries and the EU began liberalizing the postal offices of member states many years ago. The EU’s reason for liberalization include the poor performance of public monopolies, industry pressure, incompatibility of monopoly rights with the European single market, and successful market-opening reforms in some member states (e.g. Great Britain and Sweden). Obstacles to postal liberalization include powerful trade unions, fear that reform will lead to major job losses, fear that liberalization will have a negative impact on universal service, and opposition by some public postal operators to reform.

In fact, the future of postal workers is a sensitive political issue. Postal employees’ wages represent a large proportion of the total cost of the USO, and member states that have liberalized their postal service report that, once modern technology is fully implemented to improve efficiency and productivity, post-liberalization wages form a smaller proportion of the total cost of the USO compared to pre-liberalization wages. The potential threat to the employment of a large number of (politically organized) civil-service employees has slowed liberalization in some countries.

Most Europeans view the USO as a social right that must be protected. EU Directive 97/67 relating to the USO was adopted five years ago. Article 3.1 of this directive defines universal service as the duty of the member states to:

"ensure that users enjoy the right to a universal service involving the permanent provision of a postal service of specified quality at all points in their territory at affordable prices for all users."

Article 12 deals with tariffs (postage prices), and requires that tariffs be affordable, geared to cost, transparent, and nondiscriminatory. However, the application of a uniform tariff does not exclude the universal service provider(s) from negotiating private agreements with customers. Article 16 sets out the quality standards of the USO. For national services, standards are set by member states individually, and for cross-border services, the European Parliament and Council set standards.

Two questions are raised on the issue of funding. First, should operator(s) entrusted with the USO be granted a reserved or monopoly area so as to be able to cross-subsidize profitable and loss-making postal services? Second, if the answer is yes, what should the scope of the area be?

The European Union cases of Corbeau and Deutsche Post have held that a reserved sector can be justified as necessary to fund the USO, although the reasoning is vague. Directive 97/67 suggests that member states can have a reserved area for cross-subsidization under certain circumstances. The preamble reads:

"The maintenance of a range of those services that may be reserved, in compliance with the rules of the Treaty and without prejudice to the application of the rules on competition, appears to be justified on the grounds of ensuring the operation of universal service under financially balanced conditions."

Article 7 of Directive 97/67 defines the scope of the reserved sector and puts the burden of proving the necessity of cross-subsidization on the postal service. Directive 2002/39, a directive dealing also with USO, affects the scope of the reserved sector by decreasing the price and weight limits under the new Article 7.1. Directive 2002/39 also states that the provision of wholesale services to bulk users and competitors should be done on the basis of "avoided costs." In addition, the cross-subsidization of universal services outside of the reserved sector is prohibited except in limited circumstances.

Some challenges faced by the European postal sector in liberalization include substitution caused by increasing reliance on email services, limited development of e-commerce relative to the U.S., failed strategies of diversification, and labor movement.

Robert Cohen
United States Postal Rate Commission

The core meaning of universal service is ubiquity, where everyone receives mail and has reasonable access to collection and counter service. The cost of universal service is the cost of those services that would not be provided in a competitive market.

Some speculations about which services may be eliminated to increase the efficiency of the USPS are as follows:

Core Elements:

1. Eliminate unprofitable delivery routes.
2. Close many small post offices.
3. Abandon Alaska Air subsidy.
4. Curtail expansion of delivery network.

Non-core Elements:

5. Reduce number of delivery days.
6. Convert park and loop routes to curb routes.

Potential savings from core universal service elements could reach $3.12 billion, or 5 percent of total cost. Potential savings from non-core universal service elements would be as much as $3.36 billion, or an additional 5.3 percent of total cost.

Inefficiencies that plague the United States Postal Service (USPS) include a high wage premium (12 to 20 percent of total cost), overstaffing, the ease of implementing rate increases that exceed the rate of inflation, and low productivity increases (only 9.2 percent from 1970 to 1999). As illustrated by Germany, Great Britain, New Zealand, and Sweden, liberalization reduces inefficiencies. Work forces in those countries were reduced by between 15 and 40 percent after liberalization.

Technology plays an increasingly important role in the USPS, and computerized sorting of mailing lists resulted in huge productivity gains over physical sorting. This has led to presort discounts, worksharing discounts, and the "last mile" strategy (i.e. delivering large amounts of mail to local post offices, where the mail undergoes minimal processing before being delivered). In addition, computerized targeting has fueled dramatic growth in bulk mailing by advertisers, which provides substantial revenue to the USPS.

AEI intern Adelene Tan prepared this summary.