Postal Service Reform: Issues Relevant to Changing Restrictions on
Private Letter Delivery (Letter Report, 09/12/96, GAO/GGD-96-129A).

Pursuant to a congressional request, GAO examined the effects of certain
statutory restrictions on private letter mail delivery.

GAO found that: (1) the U.S. Postal Service (USPS) believes that private
express statutes are necessary to protect its mail volume and revenue
base; (2) it is difficult to enforce the statutes due to complaints from
mailers and competitors; (3) USPS has not initiated any audits to
determine mailer compliance since 1994; (4) USPS has issued regulations
suspending the statutes to allow private firms to deliver urgent and
international mail; (5) there is considerable debate as to whether USPS
is the only organization capable of providing efficient and economical
mail service; (6) USPS competitors account for more than 85 percent of
all U.S. domestic expedited letter and parcel delivery revenues; (7)
four USPS competitors could deliver USPS priority mail if given the
opportunity; (8) private delivery firms are increasing their capacity to
deliver USPS third-class mail by participating in national alliances
that broaden their delivery networks; (9) several countries encourage
private delivery firms to enter into agreements with postal
administrations to increase mail delivery competition; and (10) USPS
needs to determine how changes in private express statutes will affect
universal mail service and postal rates.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-96-129A
     TITLE:  Postal Service Reform: Issues Relevant to Changing 
             Restrictions on Private Letter Delivery
      DATE:  09/12/96
   SUBJECT:  Mail transportation operations
             Competition
             Statutory law
             Postal rates
             Government sponsored enterprises
             Postal law
             Monopolies
             Privatization
IDENTIFIER:  World Wide Web
             Internet
             
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Cover
================================================================ COVER


Report to the Ranking Minority Member, Subcommittee on Post Office
and Civil Service, Committee on Governmental Affairs, U.S.  Senate

September 1996

POSTAL SERVICE REFORM - ISSUES
RELEVANT TO CHANGING RESTRICTIONS
ON PRIVATE LETTER DELIVERY

GAO/GGD-96-129A Volume I

GAO/GGD-96-129A

Private Express Statutes

(240158)


Abbreviations
=============================================================== ABBREV

  AAPS - Association of Alternate Postal Systems
  ACCA - Air Courier Conference of America
  APD - Alternate Postal Delivery
  DMA - Direct Marketing Association
  EC - European Community
  NAA - Newspaper Association of America
  NADA - Nationwide Alternate Delivery Alliance
  NDS - National Delivery Service
  PRC - Postal Rate Commission
  PSO - public service obligations
  REA - Railway Express Agency
  ROP - run of press
  RPS - Roadway Package System
  TCMA - Third Class Mail Association
  TMC - total market coverage
  UPS - United Parcel Service
  USPS - United States Postal Service

Letter
=============================================================== LETTER


B-260012

September 12, 1996

The Honorable David Pryor
Ranking Minority Member
Subcommittee on Post Office and Civil Service
Committee on Governmental Affairs
United States Senate

As you requested, this report discusses the statutory restrictions on
the private delivery of letters.  You were concerned about how
possible changes to those restrictions and their enforcement by the
Postal Service might affect its ability to meet public service
obligations.  These obligations, which are spelled out in the Postal
Reorganization Act of 1970, include universal access to postal
services and a uniform rate for at least one class of mail. 

Mail service has long been a basic part of American culture and
business.  It is also generally considered to be an inherently
governmental function.  The Constitution empowers only Congress to
establish post offices, and it is a federal criminal offense for
anyone other than the government to deliver most letters. 

Some large mailers and private carriers want Congress and the Postal
Service to allow greater competition for letter mail delivery. 
However, some Members of Congress, Postal Service officials, and
others in the mailing community are concerned about how increased
private delivery might affect the Postal Service's ability to sustain
mail services traditionally provided by government, especially since
the Service now receives almost no federally appropriated money. 

Responding to that concern, our objectives were to (1) determine the
historical and current basis for restricting private delivery of
letters, including the Service's efforts to administer and enforce
those restrictions; (2) document changes in private sector letter
delivery capacity since 1970; (3) analyze the possible financial
effects on the Service's revenues, costs, and postage rates if
restrictions on private delivery of letters were to be changed; and
(4) obtain information on how some recently reformed foreign postal
administrations provide universal service and restrict private letter
delivery.  We also identified issues that may be relevant to
legislative deliberations.  For the purpose of our review, we assumed
that the longstanding national policy of providing universal service
to all communities and, for certain letters, a uniform postage rate
will remain in effect. 

The results of our review are summarized in volume I of this report. 
Our detailed findings are presented in volume II. 


   BACKGROUND
------------------------------------------------------------ Letter :1

For over 200 years, the Postal Service and its predecessor have
operated with a statutorily imposed monopoly restricting the private
delivery of letters.  The monopoly was created by Congress as a
revenue protection measure to enable the postal system to fulfill its
mandate of providing uniform rates for at least one class of letter
mail and delivery of letter mail to patrons in all areas, however
remote. 

The monopoly was established in a set of criminal and civil laws
called the Private Express Statutes (the Statutes) (18 U.S.C. 
1693-1699 and 39 U.S.C.  601-606).  A related law prohibits persons
from placing letters without postage into a mailbox (18 U.S.C. 
1725).  Violators of these restrictions are subject to maximum fines
of $5,000 for individuals and $10,000 for organizations and, in some
cases, imprisonment. 

For purposes of the Statutes, the definition of a letter is
established by the Postal Service in regulation.  The Postal Service
broadly defined a letter as any message directed to a specific person
or address and recorded in or on a tangible object.  (See 39 C.F.R. 
310.1.)

Although Congress has reviewed the need for the monopoly and has
broadened or reduced it at various times over the past 200 years to
accommodate changes in technology and transportation, the statutory
monopoly has generally remained intact.  The Postal Reorganization
Act of 1970 did not change it, but Congress directed the newly
established Postal Service Board of Governors to evaluate the need to
modernize the Statutes.  In a 1973 report, the Board recommended no
change, stating its belief that the Statutes were still needed as a
revenue protection measure to prevent "cream-skimming," i.e.,
competitors offering service on low-cost routes at low prices,
leaving the Service with high-cost routes. 

Since the 1970 reorganization, however, the Service has narrowed the
scope of the monopoly by exempting certain types of correspondence
from the definition of a letter in its regulations and by suspending
the Statutes for other letters. 

Under the Postal Reorganization Act of 1970 (the 1970 Act), Congress
expected the Service to operate in a businesslike manner while, at
the same time, fulfilling its mission as a public service.  To this
end, Congress removed the Service from its position in the Cabinet
and made it an "independent establishment of the executive branch."
It exempted the Service from many of the laws that apply to federal
agencies and gave the Board of Governors the sole power to appoint
and fire the Postmaster General and the Deputy Postmaster General. 
However, the Service is not a business entity.  It is subject to
congressional oversight and to certain laws that apply to other parts
of the executive branch.  It is also required to submit proposed
changes in postal rates and fees and in postal classifications and
products to the independent Postal Rate Commission.  Proposed changes
are subject to a review process, which includes public hearings where
interested parties, including the Service's competitors, can voice
their views. 

In 1995, about 90 percent of all U.S.  mail originated with business
or institutional mailers and the remaining 10 percent with
households.  Letters fall almost entirely into two classes: 
First-Class (including Priority Mail) and third-class, which consists
largely of advertisements.\1 The Service has defined a letter broadly
but has not determined precisely how much of the mail stream is
subject to the Statutes.  However, reasonable estimates of the
protected mail can be made on the basis of the Service's detailed
breakouts of the mail stream the Service used in setting postage
rates.  The Commission used these breakouts to estimate that the vast
majority (83 percent) of the Service's overall mail volume meets the
Service's definition of a letter and thus is subject to the Statutes. 
(See fig.  1.)

   Figure 1:  Estimated Postal
   Service Domestic Mail Volumes
   Subject to the Private Express
   Statutes, Fiscal Year 1995
   (Millions of Pieces)

   (See figure in printed
   edition.)

Note 1:  Total mail pieces in fiscal year 1995 were about 180.7
billion, about 464,000 pieces of which do not fall into the
categories shown and are excluded from this figure. 

Source:  Postal Rate Commission estimates based on Postal Service
data. 

In June 1996, the Chairman of the Subcommittee on the Postal Service,
House Committee on Government Reform and Oversight, introduced
legislation (H.R.  3717) to reform the Postal Service.  Under this
bill, among other provisions, a new system for establishing postage
rates, classes, and services would be established, and delivery of
letter mail priced at less than $2.00 would be restricted to the
Postal Service.  According to the Subcommittee's analysis, if the
bill is enacted into law, more than 80 percent of the Service's total
revenue would still be protected by law and therefore the Service
would still be provided sufficient revenue to carry out its mandates
to the American public. 


--------------------
\1 We have used the Postal Service's preferred capitalization for
First-Class, Express, and Priority Mail, which are registered
trademarks.  In a recently approved mail reclassification,
third-class mail was redesignated as standard mail, which also
incorporates parcels and other mail pieces formerly designated as
fourth-class mail.  The terms and contents for First-Class and
Priority Mail were not changed. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

The Private Express Statutes, which protect 82 percent of the Postal
Service's revenue from competition, have been justified by Congress
and the Service on the basis of both public policy and economic
considerations.  Specifically, it has long been the federal
government's policy that mail service will be provided to all
communities and that certain mail will bear a uniform rate.  The
Service believes that the Statutes in their present form are
necessary to protect its mail volume and revenue base, thus enabling
it to carry out that policy while also operating within various legal
and regulatory constraints.  From an economic perspective, the theory
underlying the Statutes is that a single supplier, i.e., the Postal
Service at present, can provide mail services at the lowest total
cost to the public. 

Although the purpose of the Statutes is to help ensure that the
Service has adequate revenue, enforcement and administration of the
Statutes have become increasingly problematic.  Because of complaints
and pressures from mailers, competitors, and Congress, the Service
has not initiated any audits to determine mailer compliance with the
Statutes since 1994.  The Service now relies largely on mailers and
private delivery firms to voluntarily comply with the Statutes. 
Because of these same pressures, the Service has issued regulations
suspending the Statutes in order to allow private firms to deliver
any letter considered to be extremely urgent, as well as all letters
bound for other countries.  Some parties have questioned whether
Congress intended that the Service should allow more private delivery
of letters by suspending the Statutes.  Moreover, various parties
have questioned the validity and appropriateness of the underlying
economic theory that a single organization can provide mail service
to the public more efficiently and economically than multiple
organizations.  These questions remain unanswered and continue to be
debated. 

Since 1979, after the Service suspended the Statutes to allow
overnight express delivery of extremely urgent letters by private
carriers, private letter delivery capacity has increased
significantly.  We estimated that the Service's five principal
competitors (Airborne Express, DHL Airways, Federal Express, Roadway
Package System, and United Parcel Service) account for more than 85
percent of all U.S.  domestic expedited letter and parcel delivery
revenues. 

Four of the competitors told us that they could deliver additional
letters, particularly those currently designated by the Service as
Priority Mail (2- to 3-day delivery time), if given the opportunity. 
Priority Mail consists of both letters, which are protected under the
Statutes, and packages, which are not.  Postal Service officials
believe that a significant portion and possibly up to 70 percent of
the Priority Mail volumes is letters.  Although Priority Mail
accounted for less than 1 percent of the Service's mail volume in
fiscal year 1995, it represented 5.8 percent (about $3.1 billion) of
its total revenue. 

Other private companies known as "alternate delivery" firms have
developed a growing capacity to deliver more of the Service's
third-class advertising mail.  According to Postal Service data,
second-class mail generally is not protected under the Statutes but
most third-class mail pieces meet the definition of a letter. 
However, the Statutes and Service regulations allow private firms to
deliver unaddressed advertising pieces, provided they are not put in
private mailboxes.  We identified 375 firms that already deliver some
advertisements in 47 states, most of which began operating within the
last 8 years.  Increasingly, many of these firms are participating in
national alliances to broaden their delivery networks.  We estimated
that the Service, however, still delivers about 95 percent of
advertising mail.  However, the Postal Service believes that
competition for advertising mail delivery could change quickly if the
Statutes were to be relaxed and if alternate delivery firms and
private mail-sorting firms combined their efforts to compete with the
Service. 

Our analysis of the Service's competition showed that if the Private
Express Statutes were to be relaxed or repealed, Priority Mail would
be most susceptible to private delivery.  The potential effects of
losing some First-Class, Priority, and third-class mail would vary
because of differences in their volumes and in the net revenues
generated by each of those three mail streams.  The Service's future
mail volumes cannot be projected with precision for a variety of
reasons, some of which are discussed in volume II.  Accordingly, we
made no predictions of what the Service's future mail volumes will
be.  Rather, we provide estimates of the possible financial effects
using a range of assumed percentage losses for First-Class,
third-class, and Priority Mail.  The estimates are provided to show
what might be the effects on the Service's rates if it were to
experience various volume losses. 

For example, on the basis of the Service's 1995 revenue and cost
data, an assumed 50-percent loss of Priority Mail volume in 1995
would not have resulted in an increase of the 32-cent First-Class
letter rate.  In contrast, if the Service's First-Class letter mail
volume had been 25 percent lower in fiscal year 1995, the basic
First-Class letter rate today would have needed to increase to 35
rather than 32 cents.  This difference is due to the critical
importance of First-Class letter volume to covering the Service's
overall operating costs.  Whether the Service will lose significant
mail volumes in the future is unknown, and we made estimates to show
how a variety of factors, such as its ability to reduce labor costs
in line with reduced mail volumes and revenues, could affect the
basic letter rate and the Service's other rates. 

Although circumstances differ in each country, several countries,
including Canada, Australia, New Zealand, and various European
countries, have instituted what have been described as progressive
reforms, in part to allow both their postal administrations and
private delivery firms greater freedom to compete for mail delivery. 
Governments in these countries have continued to require mail
delivery service to be provided widely and have at times taken steps
following postal reform to ensure that such services are continued,
such as entering into agreements with the postal administration. 
Postal administrations in some countries are relatively unconstrained
in setting rates for certain mail delivery services, such as those
subject to competition from private delivery firms.  Some of these
countries have eliminated or reduced the scope of their mail
monopolies.  Some other countries define letter mail monopolies
according to specific, measurable characteristics of a letter, e.g.,
price or weight.  This is in contrast to the Service's definition of
a letter, which is based primarily on its content.  The Service has
used a minimum dollar threshold for private delivery of only
extremely urgent letters, which accounted for less than 1 percent of
its total revenue in fiscal year 1995. 

A number of issues will be important in any consideration of
legislative proposals to change the Statutes.  These include the need
to recognize the Statutes' underlying purpose and--assuming a
continued commitment to this purpose--to determine how changes may
affect universal mail service and uniform rates for some letters. 
Further, since the Statutes and other provisions of the 1970 Act are
interrelated, changes in the Statutes to permit greater competition
may necessitate consideration of other provisions, such as existing
requirements for outside review of the Service's proposed postage
rate changes.  Also, changing the Statutes could affect not just the
Postal Service but various other parties as well.  For example,
provisions such as the monopoly restrictions and the mailbox
restriction may give the Service advantages over its competitors. 
Therefore, in considering possible changes, it is important to take
into account the possible consequences for all stakeholders,
including not only the Service but also the American public and the
Service's competitors. 


   THE SERVICE CONSIDERS THE
   STATUTES NECESSARY TO SUPPORT
   PUBLIC SERVICE MANDATES
------------------------------------------------------------ Letter :3

The basic purpose of the letter mail monopoly has not changed in more
than 200 years.  That purpose is to ensure that the Postal Service
has sufficient revenues to carry out its public service mandates,
including regular mail delivery service (typically 6 days a week) to
all communities.  The mailbox restrictions also protect the Service's
revenue as well as increase the security of the mail by limiting
legal access to mailboxes. 

Unlike its competitors, the Service has certain financial advantages,
such as no requirement to pay income taxes and does not provide a
return (e.g., dividends) to shareholders.  However, it must also meet
specific public service obligations and its ability to control
operating costs and set postage rates competitively is constrained by
law.  It is not chartered or empowered to compete with private firms
but rather is mandated to function as a public enterprise and provide
mail service to all communities, not just those that are profitable
to serve. 

Given its competitive environment and operating constraints, the
Service has changed postage rates to recognize some of the variations
in the cost of handling letters.  Consequently, postage rates
overall, including First-Class letter mail rates, have become less
uniform since 1970.  To illustrate, in 1970, First-Class mail had
just two 1-ounce rates:  8 cents for regular mail and 11 cents for
air mail.  In 1995, First-Class mail had 8 rates.  The rates now vary
depending on such things as whether large mailers participate with
the Service in "worksharing." For a First-Class letter weighing up to
1 ounce, the worksharing rates range from 25.4 to 30.5 cents,
compared to the 32-cent base rate.\2 Unlike contract rates that
private carriers negotiate with individual customers, these rates are
available to all qualifying mailers.  In 1970, no such discounts were
offered to any mailers. 

Maintaining the current post office infrastructure also has become
more expensive.  This has occurred, in part, because of changes in
the overall mix of mail.  The volume of residential services, such as
personal correspondence and stamp sales handled at post offices, has
declined, while business volume has increased.  For example, in 1995,
bulk advertising mail was a much higher percentage of total mail
volume than in 1970.  Bulk mail typically is accepted at the
Service's mail processing plants rather than at post offices. 

The effects of these changes in mail mix can be seen in the financial
operations of the Service's post offices.  According to Service data,
of the 39,149\3 post offices it operated in fiscal year 1995, 17,702
(about 45 percent) reported taking in annual revenues that were lower
than their aggregate expenses for the same year by about $1.1
billion.  The Service is taking steps to upgrade many post offices
and make them more accessible to customers.  However, the 1970 Act
contains detailed criteria and procedures that the Service must
follow to close a post office, such as announcing a proposed closing
and providing time for anyone affected to appeal the action to the
Postal Rate Commission. 

Where private delivery has been permitted, the Service often has been
unable to compete effectively because it charged higher prices or
provided fewer or less dependable services than its competitors. 
Private carriers often use negotiated sales agreements to offer their
customers lower rates and a broader range of services for overnight
letters and packages as well as 2-day and 3-day package deliveries. 
Therefore, if the Statutes are relaxed to allow greater competition
for letter mail delivery, the Service could lose more business to
private firms unless it reduces its prices and improves the quality
of its services.  If the Service loses more business to private
firms, it is concerned that its ability to provide the services
mandated in the 1970 Act could be jeopardized.  Its concern is
heightened by anticipated losses of business mail volumes to
electronic communications. 


--------------------
\2 Effective July 1, 1996, discounts for worksharing changed as a
result of a mail reclassification decision.  For a First-Class letter
weighing up to 1 ounce, the new worksharing rates range from 23 cents
to 29.5 cents. 

\3 Of the 39,149 post offices operated in fiscal year 1995, 10,757
were small stations, branches and community post offices. 


      LIMITED ENFORCEMENT OF
      STATUTES
---------------------------------------------------------- Letter :3.1

Despite criminal sanctions for violations, enforcement of the
Statutes rarely occurs and has proven to be problematic.  In response
to pressure from mailers and competitors, a bill (S.  1541, 103d
Cong., 1st Sess.  (1993))\4 was introduced in October 1993 to limit
the Service's authority to fine or otherwise penalize mailers who
used private carriers.  Also in response to this pressure, the
Service has not initiated a compliance audit against any mailer since
1994.  Limited available data suggest that violations of the Statutes
may be common.  For example, the Postal Inspection Service completed
audits of 62 mailers between October 1988 and June 1994.  It found
that 39 (63 percent) had violated the Statutes.\5

The Service believes, nonetheless, that the Statutes remain a useful
and necessary deterrent to widespread use of private firms for letter
delivery, and it now relies primarily on education as the principal
means of encouraging compliance.  The Service has assigned primary
responsibility for public education to its marketing staff. 


--------------------
\4 This bill was not enacted. 

\5 As a result of the audits, most of the mailers stopped using
private carriers for nonurgent letters.  However, 13 mailers
continued to use private carriers and had paid the Service $1.2
million as postage on nonurgent letters sent by private carriers
($989,000 of which was paid by one company). 


      AUTHORITY TO SUSPEND THE
      STATUTES HAS BEEN QUESTIONED
---------------------------------------------------------- Letter :3.2

At times, the Service has yielded to pressure from competitors and
mailers to allow more private letter delivery by issuing regulations
to suspend the Statutes for certain types of letters.  Several
parties, such as the Air Couriers Conference of America\6

and Postal Rate Commission staff, have questioned whether Congress
intended that the Service allow more delivery of private letters by
suspending provisions of the criminal statutes, thereby allowing more
private letter delivery. 

The Service believes that the Statutes allow the Postmaster General
to use such authority to permit private delivery of specified
letters.  However, some private sector competitors disagree with the
Service.  They are concerned that if private delivery of certain
letters is only authorized administratively, the Service could, at
any time, modify the regulations and restrict or eliminate
competitors' authority to continue delivering such letters. 


--------------------
\6 The Air Courier Conference of America is a trade association whose
member firms compete with the Postal Service. 


      ECONOMIC THEORY CITED FOR
      THE STATUTES QUESTIONED
---------------------------------------------------------- Letter :3.3

The restrictions on private delivery contained in the Statutes have
been defended by a number of parties, including the Kappel\7

Commission, the Board of Governors in its 1973 recommendation to
Congress, and some experts on the economics of postal services. 
These parties usually offer one or more of three basic
justifications: 

  -- A single provider, currently the Postal Service, can operate at
     a lower total cost to the nation than multiple suppliers can. 

  -- Without restrictions on private delivery, "cream-skimming" by
     private competitors in the most profitable postal markets would
     undermine the Service's ability to provide universal service at
     reasonable, uniform rates. 

  -- Postal services, historically, have been viewed as so important
     to binding the nation together that they should be essentially
     immune to disruption by labor disputes, bankruptcy, and other
     difficulties that private businesses face, regardless of whether
     this minimizes the cost to hard-to-serve customers or to the
     nation as a whole.  In other words, the Service may minimize the
     cost to hard-to-serve customers, even if it does not minimize
     cost to the nation as a whole. 

The Postal Service believes that the above justifications remain
valid today.  However, several federal agencies, some of the
Service's largest customers and competitors, and many economists and
other experts outside the Service question the justifications, either
because they do not consider the policy goals (e.g., uniform rates)
very important; or because they do not believe, as an empirical
matter, that the Statutes are the best way of achieving them. 

Relevant literature shows that various economic arguments for and
against the statutory restrictions on postal services have been made
and debated.  For example, many economists who have studied the
postal monopoly seem to agree that mail delivery has more natural
monopoly characteristics, i.e., lower unit cost per delivery as mail
volumes increase, than other postal functions, such as transporting
and sorting the mail.  Those who argue that mail delivery should be
treated as a natural monopoly suggest that with appropriate
regulation, a single supplier of mail delivery services--but not
necessarily other postal functions--would best serve the public
interest, i.e., result in the lowest overall cost to postal
customers.  Others argue that if mail delivery reflects natural
monopoly characteristics, a single service provider would emerge
under free market conditions and deliver at the lowest possible
cost.\8 (See vol.  II, ch.  2.)


--------------------
\7 President Lyndon Johnson appointed the Commission on Postal
Organization, which was headed by Mr.  Frederick Kappel and known as
the Kappel Commission, to determine whether the postal system was
capable of meeting the demands of the nation's growing economy and
expanding population.  Towards Postal Excellence:  The Report of the
President's Commission on Postal Organization, President's Commission
on Postal Organization, (Washington, DC:  Government Printing Office,
June 1968). 

\8 In this situation, many economists argue that some regulation may
still be necessary to ensure that the lower costs are passed along to
the public. 


   COMPETITION FOR MAIL DELIVERY
   SERVICES HAS GROWN
   SUBSTANTIALLY SINCE 1971
------------------------------------------------------------ Letter :4

Even though the Statutes have remained largely intact, numerous
national and local mail delivery firms are now in business. 
Moreover, their numbers have increased, as have the volumes and
variety of mail they deliver.  Generally, the private firms that we
studied can be separated into two groups, based on the types of
delivery services they offer.  One group primarily delivers urgent
(overnight) mail and 2-day and 3-day (also called deferred) letters
and parcels, all of which generally are referred to as expedited
mail.  The other group delivers unaddressed advertising circulars,
periodicals, or both.  Together, these groups compete on a local,
national, and international basis for portions of markets previously
served largely or exclusively by the Postal Service. 


      PRIORITY MAIL IS CURRENTLY
      SUBJECT TO STRONG
      COMPETITION
---------------------------------------------------------- Letter :4.1

The Postal Service's strongest competitors are five national firms
that offer expedited or parcel delivery services, including deferred
package delivery services.  Only one of these firms was operating in
1970, and most (three of five) entered the overnight package business
after the Service suspended the Statutes for extremely urgent letters
in 1979. 

All but one of these five competitors offered deferred package
delivery services in 1995.  Most were adding other services, such as
same-day delivery nationwide, at the time of our review.  None of
those five firms disclosed detailed operating data by product line or
type of service.  However, we used publicly available data to compare
their services with similar services offered by the Postal Service. 
As shown in figure 2, three of these five competitors offered or
planned to offer the same range of expedited letter and parcel
delivery services as the Postal Service offers, except for deferred
letters.  The Services regulations permit private delivery of
deferred letters under the urgency requirement, if the rate for such
delivery is twice the applicable First-Class rate, or $3.00,
whichever is greater. 

   Figure 2:  Comparison of
   Services Offered or Planned by
   Expedited And Parcel Delivery
   Competitors

   (See figure in printed
   edition.)

The five private firms and the Service view deferred (second- and
third-day) deliveries as a fast-growing market.  As indicated in
figure 2, four of the five private firms offered deferred package
service, and one of those four also published rates for deferred
letter service.\9 If the Statutes were revised or repealed to permit
private carriers to deliver deferred letter mail at lower rates than
is now required, it appears others could add letters to their
existing services with relative ease. 

The Service's Priority Mail is most comparable to the deferred
services offered by the private delivery firms we reviewed.  Priority
mail is a heavier weight (more than 11 ounces) subclass of the
Service's First-Class mail and is delivered at $3.00 per piece up to
2 pounds, with rates increasing to $77.09 on the basis of distance
(up to 8 zones) and weight (up to 70 pounds).  It is among the
Service's fastest growing product lines and one of its most
profitable as measured in net revenue per piece.  The Service does
not know how much Priority Mail is protected by the Statutes because
such mail is typically sealed from inspection.  Service officials
believe that a significant portion and possibly up to 70 percent of
the Priority Mail volume is letter mail, thus protected by the
Statutes. 

Unlike its competitors, the Postal Service cannot contract with
individual customers to offer negotiated or volume rate discounts. 
Many of the Service's customers told us that the Service is less
timely and dependable than its competitors.  For example, under a
contract awarded in 1990 to Federal Express (FedEx), the federal
government obtains overnight letter and small package delivery
anywhere in the United States, including Alaska, Hawaii, and Puerto
Rico.  Typically, that carrier's monthly "on-time" delivery
performance for government clients has been slightly better than the
Service's Express Mail performance and much better than the Priority
Mail performance.  Further, the Federal Express government rate was
much less than the Service's Express Mail rate but higher than the
minimum Priority Mail rate.  (See table 1.)



                                Table 1
                
                Comparison of Federal Express Government
                Contract Rates and Delivery Performance
                   to Similar Postal Service Products

                                        Range of rates         On-time
                                           for 8-ounce        delivery
                                          letter to 2-     performance
Carrier                                 pound packages        for 1995
--------------------------------------  --------------  --------------
Federal Express                            $3.75 -3.99           93-97
                                                             percent\a
Postal Service Express Mail              $10.75 -15.00      95 percent
Postal Service Priority Mail                     $3.00    82 percent\b
----------------------------------------------------------------------
\a Federal Express reported on-time deliveries to the General
Services Administration (GSA), which administers the governmentwide
contract, on a monthly basis.  Because of partial government
shut-downs that hampered normal delivery operations, on-time
performance for November and December 1995 are excluded. 

\b This represents the on-time rate reported by the Postal Service
for Priority Mail pieces subject to its second-day delivery standard. 
The on-time performance for pieces subject to a third-day delivery
standard (a much smaller portion of overall Priority Mail volume)
deliveries was 93 percent. 

Source:  Compiled by GAO from GSA and Postal Service data. 

GSA competitively awarded a new contract, effective August 16, 1996,
to replace the 1990 contract.  FedEx is again the contractor and is
to provide both overnight letter and 2-day package services.  The new
overnight rates are lower than those shown in table 1.  For example,
the minimum overnight letter rate dropped from $3.75 per piece to
$3.45.  The rates for 1- and 2-pound packages, respectively, are
$3.50 and $3.57 for overnight service and $3.40 and $3.45 for 2-day
service. 

We estimated that the Service's five principal competitors accounted
for more than 85 percent of all U.S.  domestic expedited and parcel
delivery revenues, compared to about 15 percent for the Postal
Service.  These competitors offer delivery services on demand to
virtually all domestic U.S.  addresses.  They also have lobbied
Congress to allow more private letter delivery.  These firms are not
constrained to any great extent by the prohibition on using mailboxes
because the items they deliver typically require a signature, are too
large to fit into residential mailboxes, or are delivered inside to
businesses.  However, if Congress allows more private letter
delivery, these constraints may become more important because the
firms might find the use of mailboxes desirable to improve
competitiveness. 


--------------------
\9 The price charged by United Parcel Service for deferred letter
service in 1995 was $6 for letters up to 8 ounces, or twice the
minimum Priority Mail rate. 


      SOME OTHER LETTER MAIL IS
      SUBJECT TO RAPIDLY GROWING
      COMPETITION
---------------------------------------------------------- Letter :4.2

Postal Service regulations consider advertising matter under 24 pages
addressed to a specific person or occupant as letter mail and subject
to the Statutes.  Even so, 375 firms operate in 47 states and compete
in a fast-growing advertising mail market, a subscriber publication
delivery market, or both.  Mostly small local firms, they are known
collectively as the "alternate delivery industry," and they compete
with the Postal Service for delivery of its third-class advertising
mail and second-class publications mail.  Collectively, these firms
represent a significant and growing source of additional competition
for private mail delivery. 

The number of such firms more than tripled (from 108 to 375) from
1982 to 1995.  Of the 375 firms, 226 were established between 1988 to
1993.  To develop and sustain profitable delivery operations, these
firms have increased the volume and variety of items they deliver. 
Many newspaper publishers have established alternate delivery
operations to serve their advertisers better, reduce mail costs, and
improve delivery service.  In addition, many alternate delivery firms
have formed or joined nationwide alliances to market their services
more effectively to national publishers or advertisers. 

On the basis of the limited data available, we estimated that the
Postal Service still delivers about 95 and 96 percent of the total
volume of all periodical and advertising mail, respectively. 
However, representatives of several large mailer groups whose members
depend heavily on third-class mail indicated that many of their
members would be willing to shift some portion of their mail to
private carriers if permitted to do so. 

According to an alternate delivery trade association, its member
firms deliver circulars, tabloids, magazines, catalogues,
directories, flyers, samples, and other printed materials and
advertisements, primarily from businesses to households.  The firms
we studied target and deliver advertisements to households without
using an address or mailbox.  Items may be delivered to all
households in a particular neighborhood and hung on a door knob or
from a hook on a mailbox post, placed on a front porch or in a
separate delivery tube, or tossed onto driveways or walkways. 

Although alternate delivery companies compete with the Postal Service
primarily to deliver third-class advertising and second-class
publications mail, some First-Class mailers also indicated a
willingness to use such firms.  However, restrictions on mailbox
access make delivery of First-Class mail by private firms less likely
than delivery of third-class mail. 


   POSSIBLE FINANCIAL EFFECTS ON
   THE POSTAL SERVICE OF REDUCED
   LETTER MAIL VOLUMES
------------------------------------------------------------ Letter :5

We judgmentally assessed the relative risk of the Service losing mail
volume to private delivery firms, primarily by reviewing private
sector delivery capacity and interviewing representatives of delivery
organizations representing most of the nation's business and
institutional mailers.  We also assessed the likely impact of various
mail volume losses on the Service's postage rates.  To do this, we
assumed that if the Service experiences any significant loss of mail
volume in the future, this would result in higher postage rates, not
in reduced services nor increased appropriated funds to the Postal
Service.  We used revenue, cost, and postage rate data provided to us
by the Commission, which it had used for setting the current 32-cent
basic letter mail rate and other new postal rates that became
effective in January 1995.  We supplemented our analysis of
historical ratemaking data by using a financial forecasting model
that presented estimates for 10 future years.  This model was
developed by Price Waterhouse LLP (Price Waterhouse) under contract
with the Postal Service. 

In assessing the risk of volume loss, we compared various factors,
such as private delivery capacity, mailer and carrier interests, and
service performance, for the letter mail classes and subclasses
against each other and then judgmentally assigned a risk level
ranging from "low" to "high." We compared the estimated financial
effects, e.g, relative change in net revenue and the basic letter
rate, of volume losses in each of those categories against each other
to similarly characterize the likely impact on the Service.  The
results of our assessments are shown in table 2. 



                                Table 2
                
                 Assessment of Relative Risk and Likely
                Financial Impact of Changing the Private
                            Express Statutes

                                            Relative      Likely
                                            risk of       financial
Mail class/subclass                         loss\a        impact
------------------------------------------  ------------  ------------
Priority Mail\b                             High          Low

Other First-Class letters                   Low           High

Third-class letters                         Low           Medium
----------------------------------------------------------------------
\a This risk of loss is related only to direct competition from
private delivery firms and does not include possible volume losses
from diversion of mail to electronic communications. 

\b Priority Mail pieces weighing 12 ounces and over are generally
considered as packages and, therefore, not protected by the statutes. 

Source:  GAO analysis of available data. 


      PRIORITY MAIL IS MOST
      SUSCEPTIBLE TO PRIVATE
      DELIVERY
---------------------------------------------------------- Letter :5.1

Given current private delivery capacity and prices, Priority Mail
letters would be most at risk if the Statutes were to be relaxed. 
Some First-Class and third-class letters also could be diverted to
private delivery, but the percentage of volume losses probably would
be much lower than for Priority Mail letters, as figure 3 shows. 

   Figure 3:  Mailer and Carrier
   Interest in Private Delivery by
   Letter Mail Class and Subclass

   (See figure in printed
   edition.)

\a Each group was separately asked about their interest in mailing or
delivering (1) Priority Mail, (2) First-Class mail, and (3)
third-class mail.  Only the "Likely" response is shown (i.e., "very
likely" and "somewhat likely" combined). 

Source:  GAO interviews. 

Most nationwide private carriers we interviewed said they would be
ready and willing to deliver letters designated as Priority Mail if
the Statutes were relaxed.  Given the success of nationwide carriers
when competition with the Service has been permitted, it is likely
that large numbers of mailers could shift some portion of their
Priority Mail letters to private carriers almost immediately if the
Statutes were to be changed.  In part, this is because mailers
perceive the quality of private carriers' services to be better than
that of the Service.  If private carriers were not required to charge
at least twice the applicable $3 Priority Mail rate for deferred
letter delivery, they could offer contract rates that could be more
competitive with the Service's rates.  This possibility, when
combined with customers' perceptions of the differences in service
quality, creates an even greater risk of Priority Mail volume losses
for the Service. 

Most mailers were satisfied with both First-Class postage rates and
service.  Our interviews indicated that unless both the Statutes were
relaxed and the mailbox access restrictions were lifted, mailers
likely would not shift much First-Class mail to private delivery. 
Most expedited letter and parcel carriers with existing, nationwide
delivery capabilities expressed little interest in pursuing
residential, First-Class letter mail delivery.  However, some local,
alternate delivery carriers indicated that they might pursue some
First-Class mail deliveries if the Statutes were relaxed. 

Most third-class mailers we interviewed said they were not fully
satisfied with postage rates\10 or the timeliness and dependability
of third-class mail delivery.  Many said they would likely divert
some third-class mail to private firms if the Statutes were relaxed. 
Similarly, most alternate delivery carriers said that they would
likely pursue additional third-class, business-to-household mail
deliveries.  However, the collective capacity of the alternate
delivery industry is limited when compared to the Postal Service's
capacity.  As previously indicated, we estimated that in 1995 the
Postal Service delivered about 95 percent of all periodical and
advertising mail.  Even so, the Service faces a lower risk of
third-class mail losses to private firms when compared to the
possible Priority Mail losses. 


--------------------
\10 Effective July 1996, due to a reclassification of third-class
mail, some third-class mailers who presort and prebarcode letters
will be paying lower postage rates than those who do not presort and
prebarcode letters. 


      FIRST-CLASS MAIL LOSSES
      WOULD HAVE GREATEST
      FINANCIAL EFFECT
---------------------------------------------------------- Letter :5.2

If some volume losses were to occur, the financial effects on the
Service would vary greatly among classes of mail consisting largely
of letters.  According to Service revenue and cost data, a loss of
most or all Priority Mail or a loss of, say, 25 percent of
third-class mail would have less effect on postage rates than a 5- to
10-percent loss of First-Class letter volume.  The Postal Service's
"margin," i.e., the difference between the rate charged and the
related cost, varies significantly among classes of mail.  Because of
this difference and the relative volumes of letters in the several
classes, the financial effects on the Service of losing a portion of
some classes of letter mail could be much greater than for other
classes. 

First-Class letter mail volume is critically important to the
Service's overall revenue and its ability to cover operating costs. 
Most (88 percent) First-Class mail is lightweight (1 ounce or less)
and is relatively easy for the Service to sort with its automated
equipment.  According to the most recent rate case data (Docket
R94-1), First-Class mail revenue was estimated to cover about $32
billion, or 66 percent, of the Service's total operating cost and
$11.7 billion, or 71 percent, of its total institutional cost
(overhead) in fiscal year 1995. 

At our request, the Postal Rate Commission and Price Waterhouse
estimated the change in postage rates for all classes and subclasses
of mail as well as the current basic letter rate of 32 cents (the
postage for a First-Class letter weighing 1 ounce or less). 
Following our instructions, they assumed various hypothetical
percentage losses of First-Class, Priority, and third-class mail
volumes, which are largely made up of letters, in fiscal year 1995. 
We included the basic letter rate for analysis because the 1970 Act
requires the Service to provide a uniform rate for at least one class
of sealed envelopes, such as First-Class letters.  As shown in figure
4, the effects of different First-Class letter volume losses--ranging
from 5 percent up to 25 percent--on the Service's current basic
letter mail rate would be more significant than if the same
percentage losses occurred for Priority Mail and third-class letters
in fiscal year 1995. 

   Figure 4:  Estimated Effects of
   Mail Volume Losses Ranging From
   5 Percent up to 25 Percent in
   Fiscal Year 1995 on the Basic
   Letter Rate

   (See figure in printed
   edition.)

Note:  This analysis assumes that the Postal Service would not incur
the attributable cost associated with the volume losses.  The loss in
overhead cost contribution resulting from the volume losses was
redistributed to mail classes on the same basis as their share of
contribution to overhead costs in the R94-1 rate case, except that no
redistribution of such cost was made to nonprofit mail. 

The Postal Rate Commission did not consider the second-order volume
loss that would result from the higher rates required to make up for
the lost institutional cost contribution.  See volume II, appendix I,
for additional information on our methodology and assumptions. 

Source:  Postal Service and Postal Rate Commission data used in
setting postage rates effective January 1995 (Postage Rate and Fee
Changes, 1994, Docket No.  R94-1, Nov.  30, 1994). 

As indicated in figure 4, a 25-percent loss of First-Class mail
volume in fiscal year 1995 would have resulted in the need to
increase the 32-cent basic letter rate by 3 cents to 35 cents.  By
way of comparison, since 1970, the First-Class stamp price has
increased 9 times; each increase ranged from 2 to 4 cents. 

Although we have estimated the effects on the 32-cent stamp, the
projected impact on revenue and rates associated with these volume
losses could be substantial for all classes.  For example, assuming a
25-percent loss each in Priority, First-Class, and third-class mail
pieces in 1995, estimated revenue losses could have ranged from $690
million for Priority Mail up to $8.1 billion for First-Class mail. 
(See table 3.)



                                Table 3
                
                Estimated Effects of Various Mail Volume
                 Losses on Postal Revenue and the Basic
                             Letter Rate\a

                                                             Estimated
                                                           First-Class
                                                           stamp price
                                             Estimated       needed to
                                          revenue loss    cover postal
                                        as a result of  costs assuming
                                           lost volume       lost mail
Mail class and assumed percentage loss      (millions)  volume (cents)
--------------------------------------  --------------  --------------
First-Class mail
----------------------------------------------------------------------
5                                              $ 1,618              33
10                                               3,236              33
15                                               4,855              34
20                                               6,473              35
25                                               8,091              35

Priority Mail
----------------------------------------------------------------------
5                                                  138              32
10                                                 276              32
15                                                 414              32
20                                                 553              32
25                                                 691              32

Third-class mail
----------------------------------------------------------------------
5                                                  330              32
10                                                 660              32
15                                                 990              32
20                                               1,320              32
25                                               1,650              33
----------------------------------------------------------------------
\a At our request, the Postal Rate Commission estimated the change in
postage rates assuming losses of First-Class, Priority, and
third-class mail in 5-percent increments from 5 percent up to 25
percent.  See appendix I for additional assumptions used by the
model. 

Source:  Postal Service and Postal Rate Commission data used in
setting postage rates effective January 1995 (Postage Rate and Fee
Changes, 1994, Docket No.  R94-1, Nov.  30, 1994). 

We assumed for our estimates that the costs specifically attributed
by the Service to these lost mail volumes would no longer be
incurred.  If the Service is able to reduce not only attributable
costs but also some institutional costs to offset revenue losses, the
effects of any losses of future mail volumes could be less than we
have estimated.  Conversely, to the extent that the Service is unable
to reduce attributable costs enough to offset the related revenue
losses, the effect on its rates would be greater than indicated. 

Price Waterhouse used its model to estimate the effects of varying
percentages of mail volume losses on revenue, cost, and postage rates
over a 10-year period, 1996 through 2005.  For this longer period,
the model shows that the relative effects on the basic 32-cent letter
rate for mail volume losses in the several classes are similar to
those estimates made on the basis of the recent ratemaking data
(Docket R94-1).  A loss of 25 percent of First-Class mail volume
could have a much greater effect on this rate than the same
percentage loss of Priority Mail and third-class mail volumes. 
Specifically, the letter mail rate is estimated to be 41 cents in
2005, according to the model's baseline assumptions.  The 41-cent
rate would need to increase to 46 cents in 2005 assuming a 25-percent
loss of First-Class mail volume.  The rate would need to increase to
only 42 cents in 2005, assuming a 25-percent loss of Priority Mail
volume or third-class volume.  (See fig.  5.)

   Figure 5:  Estimated Effect on
   the Basic Letter Rate, Assuming
   a 25-Percent Loss of
   First-Class Mail Pieces,
   Priority Mail Pieces, and
   Third-Class Mail Pieces,
   1996-2005

   (See figure in printed
   edition.)

Note:  We assumed a 5-percent loss of First-Class volume each year
from 1996 through 2000 and that other volumes will increase as
estimated by Price Waterhouse.  Also, postage rate increases are
assumed to occur in 1997, 2000, and 2002. 

See appendix I, volume II, for additional information on the
methodology and assumptions used for this analysis. 

Source:  Postal Service data and Price Waterhouse model. 


      MANY DIFFERENT FACTORS COULD
      AFFECT THE ULTIMATE IMPACT
      OF CHANGES IN THE STATUTES
---------------------------------------------------------- Letter :5.3

A range of factors relating to the Service's (1) future mail volumes,
(2) cost growth, and (3) service quality and ratemaking initiatives
could lead to increases or decreases in future mail volumes.  The
effects of these factors are unknown, making it difficult to estimate
how a change in the Statutes might affect the Service's revenues and
rates. 


      FUTURE MAIL VOLUMES ARE
      UNKNOWN
---------------------------------------------------------- Letter :5.4

Although the Service has faced competition for many years, it also
has experienced substantial growth in overall mail volume.  This
growth has occurred despite both new communications technology,
including facsimiles, desk-top computers, and the Internet's World
Wide Web, as well as suspensions of the Statutes under which private
companies now carry most extremely urgent (overnight) domestic and
outbound U.S.  international mail. 

Notwithstanding the historical growth in mail volume and whether or
not the Statutes remain intact, the Service anticipates losses of
some First-Class, Priority, and third-class mail volumes primarily
through diversion to electronic communications.  According to the
Postal Service, six of its seven "product lines"--correspondence and
transactions, expedited mail, publications, advertising, standard
packages, and international mail--are subject to competition from
some form of electronic communication, private message and package
delivery firms, or both.  Its remaining and only nondelivery product,
retail services, also faces increasing competition from private
"postal" service firms. 

Further, Service officials believe that private firms would compete
for delivery of large quantities of presorted, prebarcoded
First-Class and third-class mail.  They said that such mail is more
profitable to deliver and, therefore, more attractive to competitors
than smaller quantities of mail for which customers do little or no
presorting or prebarcoding.  Further, the Service believes that if
the Statutes are relaxed, presort bureaus and alternate delivery
firms would develop alliances or in some other way combine these
efforts to prepare and deliver letter mail in competition with the
Postal Service.  It believes that this development would occur
quickly after any change in the Statute. 


      COST GROWTH HAS CONTINUED
---------------------------------------------------------- Letter :5.5

With competition for delivery services increasing, the Service's
employment levels and related labor costs have continued to grow
since 1970.  We previously reported\11 that employee pay and benefits
account for the vast majority of the Service's costs.  Labor costs,
representing pay and benefits for nonbargaining executives, managers,
and supervisors, and bargaining craft employees, were over 80 percent
of the Service's costs in 1995.  That percentage has remained
virtually unchanged since 1969, the year before passage of the 1970
Act.  This trend has continued even though the Service has invested
or plans to invest more than $5 billion in automation equipment since
the early 1980s to reduce labor costs.  Between April 1993 and
November 1995, after the Service had largely completed a downsizing
effort, overall postal employment (career and noncareer) grew by
about 10 percent, from 782,000 to 855,000 employees.\12 Almost all
(98.6 percent) of this 73,000 increase represented career employees,
and more than two-thirds (69 percent) represented career clerk and
city carrier employment. 

The vast majority of the Service's craft employees, those who
collect, sort, and deliver mail, are protected from layoffs.\13 This
protection could result in more contentious labor contract
negotiations and delay the Service in reducing its work force and
labor costs to offset the effects of any significant downturn in mail
volume. 

The estimates of mail volume losses shown previously (see figs.  4
and 5) assume that the Service's attributable costs would decrease in
proportion to revenue decreases.  Under this assumption, attributable
costs would be expected to drop by 1 percent for each 1-percent drop
in postal revenue.  We believe that this assumption is reasonable,
particularly if any significant reduction in the Service's mail
volume were to occur over several years, because in some earlier
years the Service was able to make substantial work force reductions
through attrition as well as buyouts and other incentives. 

For example, during the 4 years from May 1989 through April 1993, the
Service reduced the career work force from about 774,000 to about
667,000, or almost 14 percent.  This reduction largely represented
clerks, carriers, mail handlers, and other unionized employees.  The
reduction occurred during a period when the Service's cumulative
growth in mail volume was about 12 percent.  However, to improve mail
service, the Service later added employees.  Between April 1993 and
November 1994, the career work force grew to about 740,000, or almost
11 percent. 

The Service's labor costs have grown for various reasons, such as
increases in wage rates and overtime as well as growth in total
Postal employment.  Therefore, the Service may not be able to reduce
attributable costs at the same rate that revenue drops.  Because of
this uncertainty, we arranged through the Service to have Price
Waterhouse estimate the basic postage rate (now 32 cents) assuming
that attributable labor costs were to be reduced at only one-half the
rate of postal revenue losses.  Assuming a 25-percent loss of
First-Class mail, the estimated increase in the basic letter rate
would differ if the Service reduced attributable labor costs (1) at
the same rate as revenue decreased and (2) at one-half that rate.  In
this scenario, the basic letter rate would need to increase from 32
cents in 1996 to 44 cents in 2005 if revenue and labor costs drop at
the same rate, or 46 cents if labor costs drop at one-half the rate
of revenue loss.  (See fig.  6.)

   Figure 6:  Comparison of
   Increases in Basic Letter Rate
   Assuming a 25-Percent Loss of
   First-Class Mail Volume and
   Different Reductions in the
   Postal Service's Attributable
   Costs, 1996-2005

   (See figure in printed
   edition.)

Note:  See appendix I, volume II, for information on the methodology
and assumptions used for this analysis. 

Source:  Postal Service data and Price Waterhouse model. 


--------------------
\11 See U.S.  Postal Service:  Labor-Management Problems Persist on
the Workroom Floor (GAO/GGD-94-201A/B, September 1994). 

\12 By June 1996, overall career and noncareer postal employment had
grown to 869,242. 

\13 Contracts between the Service and its major unions generally
prohibit the layoff of career employees who have at least 6 years of
employment with the Service. 


      IMPROVEMENT INITIATIVES
      UNDER WAY
---------------------------------------------------------- Letter :5.6

Recognizing the need to protect and increase its revenue, the Service
has many initiatives under way to enable it to compete more
successfully with private firms by improving existing services as
well as offering new services.  The Service recently began a top-down
initiative to improve internal processes that affect customer
satisfaction.  Its on-time delivery rates for overnight, First-Class
mail improved in 1995 and early 1996.  In 1995, it established a new
unit to compete more aggressively in the international mail markets,
where the Service's postage rates are not subject to the Postal Rate
Commission's approval.  The Service and mailers recently began
implementing a reclassification of mail that is expected to encourage
mailers to prepare mail better and thereby reduce the cost to sort
and deliver such mail.  The Service has also invested in market and
product research with a view toward offering new electronics-related
services in the future.  Many of these initiatives had just started
at the time of our review.  It is not yet clear how they may affect
the Service's competitiveness.  (See vol.  II, ch.  4.)


   SOME OTHER COUNTRIES REQUIRE
   UNIVERSAL SERVICE BUT HAVE
   ELIMINATED OR NARROWED POSTAL
   MONOPOLIES
------------------------------------------------------------ Letter :6

Many postal administrations around the world have mail monopolies to
help meet universal letter delivery and other public service
obligations.  Many of the eight postal administrations\14 we reviewed
have been reformed in the past 15 years to give them much greater
freedom to operate like private businesses.  In a recent study by
Price Waterhouse, these postal administrations were described as
among the "most progressive."\15 The governments in these countries
have used several different approaches, such as periodic reviews of
delivery practices and agreements between the governments and the
postal administrations, to ensure the continuation of universal mail
service after reform.  The scope of our work did not include an
evaluation of postal reforms in these countries.  Comparisons are
difficult to make given the greater size of the U.S.  Postal Service. 
Nevertheless, as we previously testified, postal reforms in other
countries do hold some relevance for the United States.\16

A variety of conditions led to the postal reform in other countries. 
A key reason was increased competition in the delivery and
communications markets.  In response, governments in most of the
eight countries have granted postal administrations greater
commercial freedom to meet growing competition.  Some foreign postal
administrations have taken a range of actions to become more
competitive, such as downsizing the work force; increasing
productivity; making changes to the postal retail network; and
pursuing initiatives to compete in electronic mail, facsimile,
electronic bill payment, and other electronic communications
services.  As competitive pressures increase, some other countries
are contemplating further postal reforms, including additional steps
to narrow or eliminate postal monopolies. 

Some of the countries we reviewed have redefined and limited their
letter mail monopolies, and Sweden has eliminated the postal monopoly
altogether.  A common practice was to define the scope of the postal
monopoly according to price, weight, urgency, or a combination of
these factors.  For example, the British postal administration limits
the monopoly to letter mail with postage up to 1ï¿½.  This is in
contrast to the definition of a letter in this country, where no
measurable characteristics are used except for extremely urgent
letters, for which the Service has suspended the Statutes.  In 1979,
the Service used a price limit as part of the criteria for suspending
extremely urgent letters from the Statutes.  Specifically, this limit
provides that private firms may deliver letters if the price charged
is at least twice the Service's First-Class postage rate or $3.00,
whichever is greater.  The Service believes this price limit--called
the double-postage rule--is necessary to clearly distinguish those
letters subject to the Statutes. 

None of the eight countries had laws that give their postal
administrations exclusive access to private mailboxes.  However,
practical limitations to mailbox access exist in some countries, such
as post office boxes and locked mailboxes accessible only to the
customer and the postal administration.  (See vol.  II, ch.  5.)


--------------------
\14 Australia, France, Canada, Germany, the Netherlands, New Zealand,
Sweden, and the United Kingdom. 

\15 "A Strategic Review of Progressive Postal Administrations: 
Competition, Commercialization, and Deregulation" (Price Waterhouse
LLP, February 1995). 

\16 See U.S.  Postal Service:  A Look at Other Countries' Reform
Efforts (GAO/T-GGD-96-60, January 25, 1996). 


   ISSUES RELEVANT TO PROPOSED
   CHANGES TO THE STATUTES
------------------------------------------------------------ Letter :7

As it now operates, the Service has assumed two distinct roles as (1)
a competitor with private delivery firms and (2) a federal entity
established to provide universal mail service.  Difficult policy
issues arise out of these potentially conflicting roles, including
(1) the extent to which the Private Express Statutes should restrict
competition and (2) whether the Service could continue to provide
universal service if the Statutes were relaxed. 

The Service's principal response to the growth in private mail
delivery has been to avoid mail volume losses by trying to compete
more aggressively.  It cannot, however, compete head-to-head because
it is charged by law with fulfilling a public service mission.  Many
of the 1970 Act's provisions, such as those for setting postage rates
and resolving collective bargaining disputes, are designed to enable
the Service to accomplish its mission as a regulated entity that
operates in a noncompetitive environment. 

As the Service prepares to compete more effectively and pushes for
greater freedom to compete, and as private capacity to deliver
letters grows, the Statutes are likely to become more controversial. 
Calls for Congress to consider whether to modify the Statutes, or
eventually eliminate them altogether, and make other changes in the
1970 Act are likely to become more intense. 

A number of considerations are particularly relevant to proposals to
change the Statutes.  These include (1) their underlying purpose, (2)
their relationship to other provisions of the 1970 Act, and (3) the
possible consequences for various stakeholders. 


      THE STATUTES' PURPOSE
---------------------------------------------------------- Letter :7.1

The Statutes' purpose is clear.  They exist to help ensure that the
Postal Service has enough revenue to provide universal letter mail
service to the American people.  The Service supports the view that
it should continue to be the sole provider of letter mail services. 
However, the validity of this view has been questioned repeatedly
since 1973 as the private mail delivery industry emerged and
flourished, as economic theory and research evolved concerning the
conditions under which monopoly services are supportable, as
knowledge about the Service's operating costs increased, and as
postal reform experience in other countries evolved. 

Consequently, it is not clear whether the underlying economic basis
for the Statutes cited by the Postal Service in 1973 and on later
occasions remains valid today.  Nor is it clear that economic theory
alone should guide policy decisions on what roles the Postal Service
and private firms should play.  Insufficient data exist to measure
and evaluate the total cost of mail services to the American public
and how such costs might differ if multiple firms provided such
services. 


      THE STATUTES' RELATIONSHIP
      TO OTHER PROVISIONS OF LAW
---------------------------------------------------------- Letter :7.2

The Statutes are but one of many interrelated provisions of the 1970
Act and other federal laws that, together, are intended to help
ensure that the Service remains a viable entity for providing mail
services to all communities and that the public interest is served. 

Other provisions require that the Service's costs and rates be
reviewed by the Postal Rate Commission.  Proposed changes in postal
rates can be contentious and can take up to 10 months to resolve.  As
we have reported,\17 two studies completed in fiscal year 1992 showed
that this process possibly could be shortened and streamlined to be
more responsive to the Service's current needs.  However, the
criteria and process for setting postage rates prescribed in the 1970
Act are relevant and important to achieving other objectives of the
act.  Two such objectives, which are fundamental to the Service's
public service mission, are (1) that each class of mail bear only the
direct and indirect postal costs attributable to that class and not
others, and (2) that parties affected by changes in postage rates be
given an opportunity to comment on such changes. 


--------------------
\17 These studies, one by the Institute of Public Administration and
the other by a joint Postal Service and Commission task force, are
discussed in our report U.S.  Postal Service:  Postal Ratemaking In
Need of Change (GAO/GGD-96-8, Nov.  15, 1995). 


      THE POSSIBLE CONSEQUENCES OF
      CHANGING THE STATUTES
---------------------------------------------------------- Letter :7.3

It is impossible to predict with certainty what the consequences
might be should the Statutes be relaxed.  The best available data
indicate that a sweeping change of the Statutes that opens the
Service's First-Class mail services to competition could affect
postage revenue and rates severely.  This prognosis, however, is
subject to some critical assumptions, such as (1) the Service would
not improve its service performance sufficiently to avoid large
losses of mail volume to private firms and (2) firms now competing or
those deciding to compete in the future would offer better prices or
services than the Service. 

Another assumption is that the consequences of a change in the
Statutes would flow not only to the Service but to all stakeholders,
including the American public, mailers, and competitors.  Assuming a
continued commitment to providing traditional mail service in all
communities and to providing a reasonable and uniform First-Class
postage rate, a key question is whether these goals are advanced by
protecting the Service's mail volumes by law.  If the Service could
meet these public service obligations and if increased competition
were permitted, the public could be free to choose less costly or
higher quality services.  It is important to consider how incremental
changes might affect all stakeholders in determining whether to relax
the Statutes. 

There has been a general pattern among the other countries we
reviewed of continuing to require universal service but also allowing
greater competition for letter mail delivery.  The scope of the
monopoly as it relates to the definition of a letter is more clearly
delineated in some other countries than in the United States.  As we
have stated, most other countries employ some combination of price
and weight to define monopoly-protected letters, whereas the
Service's definition relies mainly on content, except for extremely
urgent letters. 

The Service's 1979 regulations allow extremely urgent letters to be
delivered by private firms if the price change is above a minimum
dollar threshold.  According to the Service, this threshold is
necessary to provide clarity and thereby facilitate compliance. 
Neither the statutes nor the Service's regulations restricting
private delivery of other letters include similar dollar or weight
characteristics. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :8

Our review focused primarily on events and developments surrounding
the Statutes during the approximately 25 years since the Postal
Reorganization of 1970, which set up the U.S.  Postal Service.  We
reviewed the legislative history of the Statutes and related laws and
their implementation through Postal Service regulations; interviewed
Postal Service officials at headquarters offices and field locations
in Atlanta, GA; Chicago, IL; Dallas, TX; San Francisco, CA; and
Jacksonville, FL; and reviewed relevant Postal Service data and
reports.  We examined records summarizing Postal Inspection Service
audits of mailers' compliance with the Statutes and interviewed
representatives of selected companies in Georgia and Alabama audited
by the Postal Inspection Service. 

Our work on the development of the private sector message and package
delivery industry included interviews with representatives of private
delivery firms, major trade associations and mailer groups,
knowledgeable industry observers, and Postal Service and other
government officials.  We also reviewed available literature and
analyzed relevant postal service and industry data. 

To analyze the possible financial effects on the Service's revenue,
costs, and postage rates if the Statutes are relaxed, we estimated
the relative risk of the Service's letter mail stream, by class and
subclass, primarily on the basis of interviews with current Service
mailers and competitors.  We also estimated the degree to which the
Service's revenue and postage rates might have been affected if its
estimated fiscal year 1995 letter mail volumes, by class and
subclass, had been reduced by various percentages.  For these
estimates, we used Postal Service data that it had provided to the
Commission in early 1994 to request new postage rates, including the
32-cent basic letter rate that became effective in January 1995.  We
also arranged with the Postal Service and its management consulting
firm, Price Waterhouse, to develop estimates for us of possible
changes in postage rates assuming that the Service's letter mail
volumes were to be reduced by various percentages in future years. 

We obtained information on postal administrations in other countries
from several reports, including a February 1995 report prepared by
Price Waterhouse, and interviewed officials of several other postal
administrations; visited the Canada Post Corporation; and reviewed
annual reports and various other documents provided by foreign postal
administrations. 

Our review was conducted primarily between May 1994 and February 1996
in accordance with generally accepted government auditing standards. 
(See vol.  II, ch.  1.)


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :9

We requested comments on a draft of volumes I and II of this report
from the U.S.  Postal Service and the Postal Rate Commission.  The
Postal Service responded in a letter, with enclosure, dated August
29, 1996.  The letter is reprinted in appendix I of this volume, and
our comments on the letter itself are provided below.  Because the
enclosure to the letter raised technical matters related to the
content of volume II, the letter with the enclosure is also reprinted
in appendix II of volume II, and our detailed comments on those
technical matters are provided in chapter 6 of volume II. 

The Commission did not provide written comments.  However, Commission
officials suggested several changes to volumes I and II of the draft
to improve technical accuracy and completeness of the report.  We
incorporated those changes where appropriate. 

The Postal Service said that our report presents credible information
on the purpose and application of the Private Express Statutes and
related regulations.  However, the Service expressed concern that we
had ventured into speculating about the possible financial effects of
eliminating or substantially relaxing the Statutes.  The Service
believed that in so doing we seriously underestimated the magnitude
of revenue losses that would occur across all mail classes if
Congress removes the Statutes.  The Service said that such losses
could harm the Service's financial health and potentially undermine
the historic postal reform legislation currently being considered by
Congress.  The Service said that it is difficult to forecast the
Service's financial situation 5 or 10 years into the future and that
using different assumptions produces different results. 

We did not attempt to make long-range forecasts and predict future
financial effects of changing the Statutes.  Rather, our purpose was
to show the sensitivity of the Service's revenue, costs, and postage
rates to various "what if" assumptions about changes in mail volume
by class and subclass. 

Our principal method of examining these possible effects was to
arrange with the Postal Rate Commission to use the same baseline data
previously used by the Service and the Commission for estimating
revenue, costs, and postage rates for planning and ratemaking
purposes.  At our request, the Commission developed a broad range of
estimated effects on the Service's revenue, costs, and postage rates,
using various assumptions we provided about changes in mail volumes
for letter mail classes and subclasses.  It is important to note that
all other assumptions and data used in examining these possible
effects were those used by the Service and the Commission for
establishing the postage rates that became effective in January 1995. 
As such, these possible effects are based on the Service's official
volume, revenue, and cost estimates for 1 year (fiscal year 1995)
that it presented to the Commission in March 1994. 

To supplement the results of the Commission's work, we arranged for
additional estimates to be provided by Price Waterhouse, using a
financial model that it had developed for the Postal Service.  This
model included the Service's baseline estimates of such variables as
mail volumes and revenue for 10 future years, 1996 to 2005.  Using
its model, Price Waterhouse showed how the Service's baseline
estimates might change each year if the Service were to lose
specified percentages of its letter mail volume in each letter mail
class and subclass. 

Thus, we did not attempt to predict what the Postal Service's
financial condition would be in 5 or 10 years if the Private Express
Statutes were removed or relaxed.  Given the Postal Service's
comments, however, we have further explained in our report the
assumptions we identified for the analysis, how the estimates were
derived, and how we intended for them to be used.  We agree that as
the Postal Service noted, other assumptions could lead to different
results. 

Additionally, the Postal Service expressed concern about how removing
the Statutes might affect universal delivery service at uniform
rates.  The Service said that alternate delivery firms are interested
in serving the most profitable areas and not expensive-to-serve
areas.  The Service also said that (1) the Statutes provide the
financial underpinning for universal service, (2) removing the
Statutes could unintentionally result in the end of universal and
affordable mail service as the American people have known it, and (3)
Congress should proceed "with great caution" when considering changes
to the Statutes. 

We agree that the Statues have provided the financial underpinning
for universal service.  We identified the longstanding public policy
of providing universal mail service at uniform rates for some letter
mail as one of several key issues Congress needs to consider in
assessing the desirability of changing the Statutes.  However, we
also point out and discuss many other issues that are also relevant
to postal reform.  For example, the Service's net revenue and postage
rates and, in turn, universal service could be affected by many
factors--such as how Congress might change the Statutes, how the
alternate delivery firms and other competitors might respond, what
mail volume the Service might lose, and whether the Service can
improve service quality and control operating costs. 

In summary, it is unclear as to exactly how removing or relaxing the
Statutes might affect private mail delivery.  However, we believe
that our report and the Service's comments provide Congress with much
useful information for assessing the desirability of changing the
Statutes, including assessing the changes proposed in the Postal
Reform Act of 1996. 


---------------------------------------------------------- Letter :9.1

As agreed with the Subcommittee and unless you announce its contents
sooner, we plan no further distribution of this report until 30 days
from the date of this letter.  At that time, we will send copies to
the Postmaster General, to other Postal oversight committees in
Congress, and to other interested parties.  Copies will also be made
available to others upon request. 

The results of our review are presented in greater detail in volume
II of this report.  A list of major contributors is included in
appendix IV of volume II. 

If you or your staff have any questions about this report, please
contact me on (202) 512-8387 or James T.  Campbell, Assistant
Director, on (202) 512-5972. 

J.  William Gadsby
Director, Government
 Business Operations Issues




(See figure in printed edition.)Appendix I
COMMENTS FROM THE U.S.  POSTAL
SERVICE
============================================================== Letter 

for a copy of the Service's enclosure.  Our evaluation of the
enclosure is presented in vol.  II, ch.  6. 



(See figure in printed edition.)


*** End of document. ***