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

Pursuant to a congressional request, GAO reviewed the restrictions in
federal, civil, and criminal law on private letter delivery, focusing
on: (1) the Postal Service's experience in administering and enforcing
the private express statutes since 1970; (2) the growth and development
of private message and package delivery companies since 1970; (3) the
possible effects of changing private letter delivery restrictions on the
Service's mail volume, revenues, costs, and postal rates; and (4) other
countries' postal reform efforts, particularly regarding private letter
delivery.

GAO found that: (1) supporters believe that the private express statutes
are necessary to protect the Postal Service's revenue base and to ensure
that the Service provides universal service and meets other public
service obligations; (2) private carriers have challenged the assumption
that a monopoly results in lower postage rates and less service
disruption; (3) because of outside pressure, the Service has suspended
the statutes for extremely urgent letters and has stopped direct
enforcement of the statutes due to the difficulty in enforcing the
statutes; (4) in 1971, the Service faced little competition, but by
1994, the Service had only a 16 percent share of the expedited mail and
package delivery market; (5) the Service's volume and revenues for
protected mail classes has increased since 1970, but volumes and
revenues for classes subject to competition have shown little growth;
(6) despite the rapid increase in alternative mail delivery systems
since 1970, the Service delivers the vast majority of advertising and
periodicals; (7) if the statutes are changed or repealed, the Service's
loss of volumes and revenues would vary among mail classes, but Priority
Mail would be at the greatest risk; (8) postage rates would be affected
by the loss of first-class mail, but the effects of statutory changes on
the Postal Service's mail volumes are difficult to estimate; (9) the
Service has taken actions to become more competitive, but various laws
and regulations limits its competitiveness; and (10) some other
countries have narrowed their letter mail monopolies as part of their
overall postal reform efforts and have given their postal
administrations greater flexibility in providing universal mail service.

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

 REPORTNUM:  GGD-96-129B
     TITLE:  Postal Service Reform: Issues Relevant to Changing 
             Restrictions on Private Letter Delivery
      DATE:  09/12/96
   SUBJECT:  Mail transportation operations
             Competition
             Foreign governments
             Postal rates
             Government sponsored enterprises
             Statutory law
             Postal law
             Monopolies
             Privatization
IDENTIFIER:  USPS Neighborhood Mail Program
             Australia
             Canada
             France
             Germany
             Netherlands
             New Zealand
             United Kingdom
             Sweden
             
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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-96-129B Volume II

GAO/GGD-96-129B

Private Express Statutes

(240158)


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

  AAPS - Association of Alternate Postal Systems
  ACCA - Air Courier Conference of America
  AMMA - Advertising Mail Marketing Association
  APD - Alternate Postal Delivery
  BSI - BellSouth Services, Inc. 
  CPI - Consumer Price Index
  DMA - Direct Marketing Association
  EC - European Community
  ECI - Employment Cost Index
  GSA - General Services Administration
  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
  RPS - Roadway Package System
  TCMA - Third Class Mail Association
  TMC - total market coverage
  UPS - United Parcel Service
  UPU - Universal Postal Union
  USPS - United States Postal Service

PREFACE
============================================================ Chapter 0

This volume of GAO's report presents a detailed analysis of the
restrictions in federal, civil, and criminal law on private letter
delivery, the Private Express Statutes.  Volume I summarizes the
results of GAO's review, including issues relevant to potential
Postal Service reform and any future changes to the Statutes. 

In chapter 1, GAO provides background information on the Postal
Service's public service mission, the history and current provisions
of the Statutes, and the recent congressional interest in reforming
the Postal Service.  Included are the objectives, scope, and
methodology of GAO's review for this report.  GAO focused primarily
on the period from the Postal Reorganization Act of 1970 through
1995. 

The four chapters that follow cover various aspects of restrictions
on private letter delivery.  These are

  -- the basis for the restrictions in law, economic theory, and
     current Postal Service policy and some of the Service's
     experiences in administering and enforcing the Statutes since
     1970 (ch.  2);

  -- the growth and development of private message and package
     delivery capacity since 1970 (ch.  3);

  -- the risk of possible mail volume losses and estimates of the
     potential effects of such losses on the Service's revenue,
     costs, and rates (ch.  4); and

  -- the postal reform efforts of selected other countries, including
     changes to restrictions on private letter delivery (ch.  5)

Chapter 6 includes the Postal Service's technical comments on our
report and our evaluation. 

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. 

If you have any questions concerning 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


INTRODUCTION
============================================================ Chapter 1

Despite restrictions in law and regulation on private letter
delivery, the U.S.  Postal Service faces increasing competition from
private firms.  Moreover, growing demands are being made to open even
more of the Service's mail stream to competition.  At the same time,
some mail is reported to have been diverted to electronic
communications, such as facsimiles and electronic mail.  Although the
Service's overall mail volume continues to grow, the Service is
concerned that customers increasingly are turning to its competitors. 

In light of this competition, the former Chairman of the Subcommittee
on Federal Services, Post Office and Civil Service, and now Ranking
Minority Member of the Subcommittee on Post Office and Civil Service,
Senate Committee of Governmental Affairs, requested that we review
aspects of the Private Express Statutes.  To address his questions
and related concerns, our objectives were to (1) determine the
historical and current basis for restricting the private delivery of
letters, including the Service's efforts to administer and enforce
the restrictions; (2) document changes in private sector capacity for
letter delivery since 1970, including specific letter mail services
for which the Service competes; and (3) estimate the possible
financial effects on how the Service's revenues, costs, and postage
rates might change if current restrictions on private delivery of
letters were to be changed.  We also obtained information on whether
selected other countries require the provision of universal mail
service and if such countries restrict private letter delivery. 


   THE SERVICE'S PRIMARY MISSION
   IS TO SERVE THE PUBLIC
---------------------------------------------------------- Chapter 1:1

Although the Postal Service operates in an increasingly competitive
environment, it is neither chartered nor empowered to function like
its competitors.  Rather, the Postal Reorganization Act of 1970 (the
1970 Act) and related legislative history show that the Postal
Service is not expected to provide service to just those whose
business is profitable to the Service, but to all Americans.  When
reporting on a bill to reorganize the former Post Office Department
in 1970, a Senate oversight committee expressed its view of the
principal role of what became the U.S.  Postal Service as follows: 

     ".  .  .  the post office, however restructured, must be, first
     of all, responsive to the historic public need for, and reliance
     upon, a secure, swift, dependable, and inexpensive
     communications system." S.  Rep.  No.  912, 91st Cong., 2d Sess. 
     2 (1970). 

The House committee reporting on the reorganization bill was more
succinct, but just as emphatic: 

     "The Postal Service is--first, last and always--a public
     service." H.R.  Rep.  No.  1104, 91st Cong., 2d Sess.  19
     (1970). 

The legislative history of the 1970 Act shows that Congress also was
concerned about balancing the Postal Service's public service mission
with the expectation that postal managers would maintain and operate
an efficient service.  In the House Report quoted above, the
Committee stated that "The Postal Service is a public service but
there is no reason why it cannot be conducted in a business like way
and every reason why it should be." H.R.  Rep.  No.  1104 at pp. 
11-12.  To this end, Congress removed the Service from the political
arena by making it an independent establishment; giving sole power to
a Board of Governors to appoint and remove the Postmaster General and
his Deputy; and making the Postal Service exempt from many, but not
all, laws that apply to federal agencies. 


   THE U.S.  MAIL MONOPOLY:  ITS
   HISTORY AND CURRENT PROVISIONS
---------------------------------------------------------- Chapter 1:2

For over 200 years, the Postal Service and its predecessors have
operated with a statutory monopoly imposed by the Private Express
Statutes, which restrict the private delivery of most letters.  Over
the years, Congress has reaffirmed the need for the monopoly many
times.  However, the scope of the monopoly has been both broadened
and reduced at various times through statutory and regulatory
changes. 

The monopoly was created by Congress as a revenue protection measure
for the Postal Service's predecessor to enable it to fulfill its
mission.  It is to prevent private competitors from engaging in an
activity known as "cream-skimming," i.e., offering service on
low-cost routes at prices below those of the Postal Service while
leaving the Service with high-cost routes.  Those who favor retention
of the Statutes continue to cite the threat of cream-skimming as
their principal economic justification. 

The letter monopoly was not changed under the Postal Reorganization
Act of 1970.  Rather, Congress adopted then-existing restrictions on
private letter delivery with little debate. 

When it passed the 1970 Act, Congress directed the Board of Governors
to evaluate the need to modernize the monopoly and report any
recommendations to the president and Congress.  In response, the
Board recommended in its report ("Restrictions on the Private
Carriage of Mail:  A Report of the Board of Governors of the United
States Postal Service," dated June 29, 1973) that the Statutes remain
intact.  But the Board recommended that the Postal Service suspend
the Statutes by administrative action for certain items, including
intracompany and data processing communications, as well as
newspapers, periodicals, checks, and financial instruments that
historically were deemed outside the definition of a letter.  The
Service adopted most of the Board's recommended suspensions by
issuing regulations in 1974. 


      RESTRICTIONS ON PRIVATE
      LETTER DELIVERY ARE IN
      CRIMINAL STATUTES
-------------------------------------------------------- Chapter 1:2.1

The basic restrictions on private delivery of letter mail are in
seven sections of the federal criminal statutes (18 U.S.C. 
1693-1699).  These Statutes generally prohibit anyone from
establishing, operating, or using a private company to carry letters
for compensation on regular trips or at stated periods over postal
routes or between places where U.S.  mail regularly is carried. 
Violators are subject to fines or, in some cases, imprisonment.  The
current maximum fines are $5,000 for individuals and $10,000 for
organizations, and the maximum term of imprisonment is 6 months.  The
1970 Act also contains provisions (39 U.S.C.  601-606) dealing with
private delivery of letters. 


      STATUTORY RESTRICTIONS ON
      MAILBOX ACCESS PROVIDE
      SECURITY AND FURTHER PROTECT
      THE SERVICE'S REVENUE
-------------------------------------------------------- Chapter 1:2.2

Along with the statutory restrictions on mail delivery, Congress
passed a law in 1934 to restrict access to mailboxes (18 U.S.C. 
1725).  This law prohibits anyone from intentionally placing mailable
matter without postage into any mailbox.  The legislative history of
the 1934 law shows the purposes of the mailbox restrictions were
twofold.  First, the law was designed to stop the loss of postal
revenue resulting largely from public utilities using special
messengers to deliver customer bills to mailboxes without paying
postage.  Second, Congress sought to decrease the quantity of
extraneous matter being placed in mailboxes.  Violators are subject
to the maximum fines of $5,000 for individuals and $10,000 for
organizations, but not imprisonment. 


      POSTAL SERVICE REGULATIONS
      DEFINE A LETTER
-------------------------------------------------------- Chapter 1:2.3

Congress did not define what constitutes a letter.  Rather, the
Service has issued regulations to define a letter for the purpose of
administering the Statutes.  These regulations define a letter
broadly as "a message directed to a specific person or address, and
recorded in or on a tangible object." (39 CFR 310.1 (a)) However, the
regulations also exclude a number of items from that definition and
suspend the Statutes for other letters, notably "extremely urgent,"
i.e., overnight, letters and outbound U.S.  international letters. 


      CURRENT SCOPE OF THE
      MONOPOLY
-------------------------------------------------------- Chapter 1:2.4

The Postal Service has six major classes of mail:  First-Class, which
consists mainly of correspondence (business and personal) and
transactions, greeting cards, postcards, and some small packages;
second-class, which includes newspapers and magazines; third-class,
sometimes called "bulk business mail," which consists primarily of
advertising matter and nonprofit fund solicitations; fourth-class,
which includes parcels, library materials, and bound printed matter;
Express Mail, which includes expedited, overnight letters and
packages; and international mail, which includes all letters and
packages mailed between the United States and other countries.  The
Service also maintains certain subclasses of mail, such as Priority
Mail, which is heavier (more than 11 ounces) First-Class letters and
packages.\1

Under the current mail classification scheme, domestic letters
subject to the Statutes fall primarily into First-Class (including
Priority) and third-class mail.  These classes and subclasses
represented about 93 percent of the Service's total mail volume,
which totaled over 180 billion pieces, in fiscal year 1995.  These
same classes and subclasses accounted for almost 91 percent of the
Service's total 1995 mail revenue of $52.5 billion.  According to the
Postal Rate Commission, an estimated 83 percent of the Service's
total mail volumes and about 82 percent of its revenues are protected
under the Statutes. 

In July 1996, as a result of a mail reclassification decision, the
names of some mail classes used in this report changed.  While
current First-Class and Priority Mail designations remain the same,
Express Mail changed to "Expedited," second-class to "Periodicals,"
and third-class and fourth-class to "Standard Mail."


--------------------
\1 Primarily for market research purposes, the Service also has
broken its mail stream into six "product lines," namely
correspondence and transactions, advertising, expedited delivery,
standard packages, publications, and international.  A seventh
product line, retail, involves nonmail services, such as money
orders, post office box rentals, mailing supplies, and the like. 


   OVERALL REFORM OF THE POSTAL
   SERVICE RECENTLY PROPOSED AND
   DEBATED
---------------------------------------------------------- Chapter 1:3

During 1995 and early 1996, both the Senate and House postal
oversight subcommittees held several hearings in which they focused
in part or in whole on the need for changes in the 1970 Act.  A
report issued in December 1995 by the House Committee on Government
Reform and Oversight entitled "Voices for Change"\2

summarized the results of 10 hearings held by the Subcommittee on the
Postal Service in 1995.  Many witnesses at those hearings agreed that
the Service faces challenges because of new technology and
competition in the overall communications environment.  In the
December 1995 report, four key issues that emerged during the
oversight hearings were identified:  the mail monopoly,
labor-management relations, ratemaking, and new postal products. 
However, there was little consensus on specific solutions among the
more than 36 witnesses who testified at the hearings.  A final
hearing on November 15, 1995, "The Postal Reorganization Act 25 Years
Later:  Time for Change?" set the stage for the Subcommittee's 1996
agenda. 

One legislative proposal (H.R.  210, 104th Cong., 1st Sess.  (1995))
discussed during the House Subcommittee's November 1995 hearing would
turn the Postal Service over to its employees under an employee stock
ownership program.  This proposal provides for the continuation of
the Private Express Statutes only during the first 5 years of the
newly formed corporation's existence.  In a January 1996 hearing, the
Senate and House postal oversight Subcommittees jointly continued to
assess the need for Postal Service reform.  At that time, the
Subcommittees heard testimony on the postal reform experiences of
some other countries.  Representatives of postal administrations in
four other countries (Australia, Canada, New Zealand, and Sweden)
described major changes in those countries allowing the mail systems
to operate with greater commercial freedom. 

In June 1996, the Chairman of the Subcommittee on the Postal Service,
House Committee on Reform and Oversight, introduced legislation (H.R. 
3717) to reform the Postal Service.  Under this bill, delivery of
letter mail priced at less than $2.00 would be restricted to the
Postal Service.  According to the Subcommittee's analysis, more than
80 percent of the Service's letter mail volume would still be
protected by law if H.R.  3717 as introduced is enacted. 


--------------------
\2 H.R.  Rep.  No.  104, 104th Cong., 1st Sess., (1995). 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:4

The former Chairman of the Subcommittee on Federal Services, Post
Office and Civil Service, and now Ranking Minority Member of the
Subcommittee on Post Office and Civil Service, Senate Committee on
Governmental Affairs, requested that we review aspects of the Private
Express Statutes.  He requested the review after legislation (S. 
1541, 103d Cong., 1st Sess.  (1993)) was introduced in the 103rd
Congress to curtail the Postal Service's authority to enforce the
Private Express Statutes. 

Our objectives were to (1) determine the historical and current basis
for restricting the private delivery of letters, including the
Service's efforts to administer and enforce the restrictions; (2)
document changes in private sector capacity for letter delivery since
1970, including specific letter mail services for which it competes;
and (3) estimate the possible financial effects on how the Service's
revenues, costs, and postage rates might change if current
restrictions on private delivery of letters were to be changed. 
Because of the Postal Service's interest--and, subsequently, House
and Senate postal oversight Subcommittee interest--in how other
countries had reformed their postal administrations, we obtained
information on whether selected countries require universal mail
service to be provided, as this country does, and if such countries
restrict private letter delivery. 

To review the Statutes' history, current basis, and enforcement, we
(1) examined the legislative history of the Statutes and related laws
from 1782 to 1995 and their implementation through Postal Service
regulations; (2) interviewed Postal Service officials at headquarters
and at Service field offices in California, Colorado, Florida,
Georgia, Illinois, and Texas that we selected primarily because of
their involvement in specific enforcement actions; and (3) reviewed
relevant Postal Service data and reports.  We also examined records
summarizing Postal Inspection Service audits, completed from 1989 to
1994, of mailers' compliance with the Statutes.  We interviewed
representatives of selected companies in Georgia and Alabama that had
been audited by the Inspection Service, including one whose
experiences is related to proposed legislation (S.  1514, 103rd
Congress) that served as the impetus for this review and another that
the Inspection Service suggested because of the complexity of the
case and the magnitude of the resulting settlement. 

To document changes in private letter delivery capacity, we
interviewed representatives of private delivery firms, major trade
associations and mailer groups, knowledgeable industry observers, and
Postal Service and other government officials; reviewed available
literature; and analyzed relevant Postal Service and industry data. 
Specifically, we discussed private letter delivery activities with
representatives of (1) each of the five major expedited mail and
parcel delivery companies identified by the Postal Service as its
principal competitors, at locations in the District of Columbia and
in California, Pennsylvania, and Washington; (2) four national
alternate delivery alliances located in Washington, DC, and in
Georgia, Michigan, and New Jersey that were identified through a
nationwide alternate delivery directory; (3) 15 alternate delivery
firms located in California, Georgia, Michigan, Nevada, New Jersey,
New York, Pennsylvania, Oklahoma, Texas, and Washington that were
selected on a judgmental basis to ensure a broad range of geographic
locations and population levels, large as well as small companies,
and both independently and newspaper-owned firms; and (4) 25 trade
associations and industry experts representing carriers as well as
the majority of the Service's commercial and nonprofit customers
located in the District of Columbia, New Jersey, New York, and
Virginia. 

To estimate the possible financial effects of changing the Statutes,
we assessed such effects in the following two ways: 

  -- First, we estimated the relative risk (high, medium, and low) of
     the Service's letter mail stream, by class and subclass, from
     direct competition by private delivery firms (as distinguished
     from electronic communications media). 

  -- Second, we estimated the extent 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. 

To assess the relative risk of direct competition, we used data
obtained in our interviews, mentioned above, with representatives of
the private delivery industry and mailer associations.  We structured
the interviews to obtain insight into the ability of private delivery
firms to deliver letter mail now protected by the Statutes and the
interest of mailers in using such firms.  Along with these interview
results, we compiled, but were unable to verify, various shipment
data on private firms in order to estimate existing private delivery
capacity and compare the magnitude of private mail delivery to that
of the Postal Service. 

To estimate the effects of mail volume losses on the Service's
revenues, costs, and postage rates, we used estimated mail volumes
and other data that the Postal Service and Postal Rate Commission
used in a recent rate case (Docket No.  R94-1).  We assumed that for
fiscal year 1995, the estimated number of First-Class, Priority Mail,
and third-class mail pieces had been reduced in 5-percent increments
from 5 to 25 percent.  We used those percentages not to predict what
would happen, but rather to show the potential effects on postal
revenues, costs, and rates if the Service had lost these volumes of
mail.  We assumed that the financial effects of losing mail volumes
would result in changes to postage rates, not reductions in the
levels of service offered and not federal appropriations to offset
revenue losses. 

At our request and with the Service's approval, we also used a Price
Waterhouse LLP model, developed under contract with the Service, to
provide additional estimates for 10 future years of changes in the
Service's revenues, costs, and rates as a result of assumed future
mail volume losses.  Additional details on the methods and
assumptions used to estimate the effects of mail volume losses on the
Service's revenues, costs, and rates are included in appendix I,
volume II, of this report. 

To obtain information on postal administrations in other countries,
we reviewed several reports done by other U.S.  organizations,
including a February 1995 report prepared by Price Waterhouse for the
Postal Service.  We interviewed officials of several other postal
administrations, visited the Canadian postal administration--Canada
Post Corporation--in Ottawa, and reviewed annual reports and various
other documents provided by foreign postal administrations.  The
information in this report concerning the postal laws of other
countries does not reflect our independent analysis of those laws;
rather, it rests primarily on the views and analysis provided to us
by officials of those governments and other secondary sources. 

We requested written comments on this report from the Postal Service
and the Postal Rate Commission.  The Postal Service responded by
letter and an enclosure that presented its technical evaluation of
the estimated financial effects of changing the Statutes discussed in
our report.  We have reprinted the letter and enclosure in appendix
II, volume II.  Our overall evaluation of the Service's comments is
included in volume I, and we provide additional comments on the
technical evaluation in chapter 6, volume II.  The Commission chose
not to provide written comments, but Commission officials suggested
several changes to volumes I and II of our report to improve its
technical accuracy and completeness, which we made where appropriate. 

We also arranged for several knowledgeable parties, many of whom
provided information for our report, to review and comment on our
draft report, volumes I and II.  We made changes as appropriate to
the report on the basis of all comments we received.  They were
provided by Mr.  Murray Comarow, Executive Director of the former
Kappel Commission; and representatives of (1) Price Waterhouse LLP,
(2) the Advertising Mail Marketing Association, (3) the National
Association of Presort Mailers, (4) Federal Express, (5) United
Parcel Service, and (6) Haldi Associates, Inc.  (a consulting firm
that has studied Postal Service mailing costs.)

Our review was conducted primarily between May 1994 and February
1996.  It was performed in accordance with generally accepted
government auditing standards. 


RESTRICTIONS ON PRIVATE LETTER
DELIVERY PROTECT THE SERVICE'S
REVENUE BASE BUT ARE INCREASINGLY
DIFFICULT TO ADMINISTER
============================================================ Chapter 2

The Private Express Statutes play a fundamental role in determining
how mail service is provided to the general public.  However,
compared to 1970, providing mail delivery as a public service today
is far more difficult, and the Statutes have come to play a lesser
role in protecting the Service's revenue.  Some of the Service's
largest customers and competitors have questioned the need for and
the Service's enforcement of the Statutes.  Responding to pressures
to allow more private letter delivery, the Service suspended portions
of the Statutes and has virtually stopped enforcing them. 


   POSTAL SERVICE BELIEVES PRIVATE
   EXPRESS STATUTES ARE NECESSARY
   TO PROTECT THE SERVICE'S
   REVENUE BASE
---------------------------------------------------------- Chapter 2:1

According to the legislative history and current Postal Service
policy, the purpose of the Statutes has long been to ensure adequate
revenue to permit the government to meet various public service
objectives, including universal mail service to all communities.  The
Postal Service believes that any change in the Statutes could
jeopardize its ability to meet such public service mandates. 

The 1970 Act contains various public service objectives, such as (1)
requiring uniformity of certain rates, (2) providing criteria for
ensuring public access to services, (3) specifying how costs are to
be allocated and postage rates are to be set, and (4) providing free
or reduced rates to certain categories of mailers.  As discussed
below, these public services have changed over the years and differ
in some cases from what was anticipated in 1970. 


      POSTAGE RATES ARE LESS
      UNIFORM TODAY THAN IN 1970
-------------------------------------------------------- Chapter 2:1.1

The rate uniformity requirement, which is stated at 39 U.S.C. 
3623(d), requires that the rates charged by the Service for at least
one class of mail that is sealed against inspection must be uniform. 
The Service provides a uniform rate for First-Class letters delivered
anywhere in the United States, its territories, and possessions. 
However, the Service's rates are more complex today than in 1970. 
The Service has adopted a broader range of rates over the years that
more closely reflect its processing and delivery costs.  To
illustrate, in 1970, there were only two rates for 1-ounce
First-Class letters--an 8-cent rate for regular letters and an
11-cent rate for air mail.  For third-class mail, there were three
rates--23 cents per pound for circulars and 17 cents per pound for
books, with a minimum rate per piece of 4 cents.  No discounts were
offered to mailers who presorted their mail or performed other steps
that reduced the Service's processing time and costs. 

In contrast to the 1970 rates, current postage rates, which became
effective in January 1995, include a variety of First-Class and
third-class rates.  The single-piece, 1-ounce First-Class letter is
32 cents.  First-Class mailers who perform certain worksharing
functions that reduce the Service's processing costs are charged
lower rates.  The eight worksharing rates for First-Class letters
weighing 1 ounce or less range from 25.4 cents to 30.5 cents.\3

Similarly, the rates for letter-size third-class mail are different
today from what they were in 1970.  Currently, such rates vary
depending on the extent of transportation and preparation (i.e.,
presorting and prebarcoding) by mailers and the weight of the piece. 
For example, the rates for one piece of regular, bulk, third-class
letter-size mail with no mailer transportation or preparation is 22.6
cents but reduced to 11.7 cents if the mailer presorts it into the
order that it is to be delivered and transported to the postal unit
responsible for delivery.\4

Further, the volume of First-Class mail subject to the uniform rate
requirement has declined, as a percentage of total mail volume, since
1971.  In 1971, First-Class mail made up 59.2 percent of the total
volume, compared to 53.3 percent in 1995.  In contrast, third-class
mail increased from 23.6 percent of the total volume in 1971 to 39.3
percent in 1995. 

Currently, a relatively small percentage of the overall mail volume
is generated by residential customers.  In 1994, according to the
Service's studies, the volume of household-generated mail represented
10 percent of the total volume; the volume of household-to-household
mail was an even smaller part--only 3.6 percent of the total.  About
55 percent of the total mail stream was sent from business to
households, and about 35 percent was sent from business to business. 
The Postal Service did not have similar data for 1970 or other years
immediately following the 1970 Act on business and residential mail
volumes. 


--------------------
\3 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. 

\4 This is a bulk regular rate (meaning several hundred pieces are
given to the Postal Service in a single mailing) for letter-size
third-class mail pieces, each weighing 3.3071 ounces or less, and
sequenced by the mailer down to the carrier route to allow a
particular geographic area to be "saturated" with third-class mail. 


      ACCESS TO MAIL SERVICES
      PROVIDED PRIMARILY THROUGH
      POST OFFICES
-------------------------------------------------------- Chapter 2:1.2

Under the 1970 Act, the Service must provide access to the U.S.  mail
system through post offices and other means.  However, the Service
may not close a post office solely because it is operating at a
deficit, even though a more cost-effective means of providing access
may be available.  Rather, under the 1970 Act, a number of criteria
must be considered.\5 Further, any person whose service is affected
by any proposed post office closing may appeal the closing to the
Postal Rate Commission (PRC). 

Postal Service officials told us that the number of post offices not
producing sufficient revenue to cover the related operating costs has
grown since 1970.  This trend has occurred for three basic reasons. 
First, the make-up of mail has changed, with far more business mail
and far less residential mail.  Secondly, worksharing postage rates
introduced since 1970 encourage mailers to (1) bypass local post
offices and "drop ship" mail closer to the mail's delivery
destination; and (2) deposit large volumes of mail, already sorted
and barcoded, at the Service's mail processing plants rather than
local post offices.  Thirdly, in earlier years, postage stamps could
be purchased only from a post office or rural letter carrier.  Today,
they may be obtained from a variety of sources, including grocery and
other retail stores, vending machines, and mail carriers.  Stamps may
also be ordered by mail. 

The Service is exploring various ways, in addition to the traditional
post office, of providing ready customer access to all "retail"
postal services, such as placing "Postal Express" units in private
retail stores located in shopping centers and opening postal stations
in shopping malls. 

The Service is constrained, however, in upgrading its post office
infrastructure, which remains largely the same as in 1970.  According
to Service data, of the 39,149\6 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.  Under the 1970 Act, as amended in 1976,
the Service is required to follow specific procedures and criteria
for closing post offices.  These procedures include responding to
appeals that could be filed by any person whose service may be
affected by the proposed post office closing. 

Under the 1970 Act, the Commission has 120 days to make a decision on
each such appeal.  Of the 239 proposed post office closings in fiscal
year 1995, 22 were appealed to the Commission.  Fourteen closings
were upheld, 4 appeals were withdrawn, and 4 were sent back to the
Service for further review, i.e., remanded.  According to Commission
data, the time necessary to complete the appeals process was less
than 120 days in each of the 22 cases.  In some cases, however, the
total time taken to close a small post office ranged up to several
years from the date the Service began working with the affected
community to the date of the closing.  For example, in consolidating
a post office in Clarkia, Idaho, the Service began the process in
October 1993, and PRC issued a final document on the case stating
that the Service met statutory requirements in March 1996--about 30
months later.\7


--------------------
\5 Section 404 of Title 39 states that any decision to close a post
office must consider certain specific criteria, including (1) the
effect on the community served, (2) the effect on employees of the
post office, (3) compliance with the government policy that the
Service shall provide a maximum degree of effective and regular
postal services to areas where post offices are not self-sustaining,
(4) the economic savings to the Service, and (5) any other factors
determined to be necessary by the Service. 

\6 Of the 39,149 post offices operated in fiscal year 1995, 10,757
were small stations, branches and community post offices. 

\7 Most of this time (about 17 months) elapsed from the point when
the Service first polled the community to obtain views on the
proposed Clarkia post office consolidation until a member of the
Clarkia community appealed the planned action to the Commission.  The
Commission initially remanded the proposed closing to the Service and
later affirmed the Service's decision to consolidate the post office. 
These two actions took less than 120 days each. 


      ALL DOMESTIC POSTAGE RATE
      CHANGES ARE SUBJECT TO
      REGULATORY REVIEW
-------------------------------------------------------- Chapter 2:1.3

In line with its public service mission and restrictions on private
letter delivery in the 1970 Act, the Service and PRC must allow the
public, including competitors, to review and comment on proposed
changes to domestic postage rates and mail classifications.  Changes
to international mail rates are not subject to review outside the
Postal Service. 

The 1970 Act includes specific criteria and requirements for
allocating costs among classes of mail and for achieving various
public service objectives.  Achieving those objectives, while also
recognizing the impact of the competitive markets in which the
Service must operate, involves some trade-offs.  For example, in
setting rates under the 1970 Act, the Service and PRC must balance a
number of criteria, including the relative demand for the various
classes of mail and the need to be fair and equitable to all its
customers.  Achieving this balance has generated much debate and
disagreement among the Service, PRC, and many parties who participate
in ratemaking or are affected by the resulting rates.\8


--------------------
\8 For a more detailed discussion of policies, criteria, and issues
surrounding postal ratemaking, see:  U.S.  Postal Service:  Pricing
Postal Services in a Competitive Environment (GAO/GGD-92-49, Mar. 
1992); and U.S.  Postal Service:  Postal Ratemaking in Need of Change
(GAO/GGD-96-8, Nov.  1995). 


      COLLECTIVE BARGAINING
      FOLLOWS A PROCESS UNIQUE TO
      THE POSTAL SERVICE
-------------------------------------------------------- Chapter 2:1.4

The Service must follow some procedures and criteria prescribed in
the 1970 Act for bargaining with unions and resolving disputes over
working conditions, including employee pay and benefits, that are
unique to the Service.  Unlike other federal and private
organizations, the Service is also required by law to consult with
postmasters and supervisors before making any changes to pay and
certain other matters affecting these employees.  Postal Service
employees do not have the right to strike, nor does postal management
have the right to lock out striking employees or hire replacements. 
Instead, the 1970 Act provides for binding arbitration to resolve
bargaining deadlocks. 

When adopting this provision in 1970, Congress emphasized that the
parties were to make every attempt to reach agreement bilaterally
through earnest, good faith negotiations.  Arbitration was to be used
only as a last resort.  However, contract negotiations between postal
management and most of the major unions often have resulted in
impasses that were settled by an arbitrator.\9


--------------------
\9 For additional information on the Service's bargaining experience,
see our report U.S.  Postal Service:  Labor-Management Problems
Persist on the Workroom Floor (GAO/GGD-94-201A and 201B, Sept.  29,
1994). 


      PRIVATE EXPRESS STATUTES ARE
      BELIEVED NECESSARY TO MEET
      PUBLIC SERVICE OBLIGATIONS
      WITH CURRENT STATUTORY
      CONSTRAINTS
-------------------------------------------------------- Chapter 2:1.5

The Postal Service believes that the Statutes must remain intact if
it is to carry out its current public service mission in accordance
with the various requirements and constraints of the 1970 Act, some
of which we discussed previously.  No private sector organization
that competes with the Service has similar requirements or
constraints. 

The Service believes, for example, that its "double postage rule"\10
for private delivery of extremely urgent letters is necessary to
maintain adequate revenue for operation of the current system.  This
rule can result in additional cost to some mailers who choose to use
private carriers for nonurgent mail delivery and, in turn, agree to
pay required postage to the Service, under "alternative postage
agreements," which we discuss later in this chapter.  The rule also
sets a minimum price that any customer of a private delivery firm
must pay for certain letters. 

The Service believes that the protection provided under the double
postage rule is necessary for meeting its public service obligations. 
For example, the Postmaster General, as part of his testimony in 1995
before the Subcommittee on the Postal Service, House Committee on
Government Reform and Oversight, said that "If the double postage
rule for extremely urgent letter mail was suspended, all Postal
Service letter and flat [a larger size envelope] mail potentially
could be diverted." He said that eliminating the rule would
jeopardize the Service's mandate to provide universal service at
uniform rates because private carriers would resort to "cream
skimming." These practices were described in the Board of Governors'
1973 report on the Statutes and are discussed more fully below. 


--------------------
\10 This rule allows for the private delivery of a letter under the
presumption that if a customer is willing to pay twice the applicable
First-Class rate, including Priority Mail, or $3.00, whichever is
greater, the letter must be extremely urgent. 


   MAILERS AND COMPETITORS HAVE
   CHALLENGED THE ADMINISTRATION
   AND ENFORCEMENT OF THE STATUTES
---------------------------------------------------------- Chapter 2:2

While the Service views the Private Express Statutes as essential to
executing its public service mission, the administration and
enforcement of the Statutes have been challenged by mailers and
competitors.  These challenges have come in the form of questions
regarding the underlying economic theory cited by the Board of
Governors in 1973 for the Statutes and requests for the Service to
suspend the Statutes for certain letter mail.  Responding to
pressures from mailers and competitors, the Service suspended the
operation of the Statutes for certain letters in 1979 and 1986, only
to have its authority to make such suspensions questioned by
competitors and other parties.  Moreover, Postal Inspection Service
officials told us they have stopped direct enforcement of the
Statutes because of pressures from mailers, competitors, and some
Members of Congress. 


      PREMISE THAT A SINGLE
      PROVIDER RESULTS IN LOWEST
      OVERALL COST TO THE PUBLIC
      CHALLENGED
-------------------------------------------------------- Chapter 2:2.1

The restrictions on private delivery contained in the Statutes have
been defended by a number of parties, including the Kappel
Commission,\11 the Board of Governors in its 1973 recommendation to
Congress,\12 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 providers. 

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

  -- Postal services, historically, have been viewed to be of such
     importance 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. 

Whether the Postal Service does or can achieve these objectives more
effectively than if additional providers are allowed to participate
freely in letter mail delivery has been studied and debated often
since the Board's 1973 report.  Some of the Service's largest
customers and competitors, PRC, the Department of Justice, and many
economists have questioned the need for and economic justifications
of the Statutes in today's environment.  A complete analysis of all
economic perspectives on the Statutes was not within the scope of our
review.  However, we did examine two proposals for changing the
Statutes made by some of the Service's largest third-class customers. 
The proposals and the Service's responses, discussed below, were
predicated on discussions of economic theory concerning the letter
mail monopoly published since the Board of Governors' 1973 report. 


--------------------
\11 President Lyndon Johnson appointed the President's 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). 

\12 Stated differently, the Board concluded that the Postal Service
was a "natural monopoly" because important savings to customers
result from having a single supplier of mail service.  According to
the Board, these savings were due to economies of scale, wherein
increasing volumes result in a lower unit cost for each additional
piece of mail processed. 


      THIRD-CLASS MAILERS HAVE
      QUESTIONED THE ECONOMIC
      BASIS CITED FOR THE STATUTES
-------------------------------------------------------- Chapter 2:2.2

Some of the Service's largest customers requested that the Service
take steps to allow certain letters to be delivered by private
carriers.  Primarily because of concern for maintaining its revenue
base, the Service declined to allow such delivery. 

In March 1988, the Third Class Mail Association (TCMA), a trade
association representing more than 300 companies and other
organizations engaged in "distributed" advertising, requested that
the Postal Service suspend the Statutes for third-class mail.  TCMA,
which is now the Advertising Mail Marketing Association, believed
that the suspension would serve the public interest because the
Service's definition of a letter was not equitable.  For example,
advertisers who mailed catalogs of 24 pages or more could use private
carriers, but those whose catalogs were under 24 pages could not. 
TCMA also argued that the advertising industry did not receive
benefits from the Service that were commensurate with the rates
charged, and it should be allowed to use alternative delivery
services.  Finally, TCMA was concerned that the advertising industry
would bear an even heavier share of the Service's cost in the future
because of attempts to "balance" the perceived value of advertising
mail with other mail, such as business and personal communication. 

The Postmaster General responded that the requested suspension would
not be in the public interest.  The Service's principal argument
against the suspension was that third-class mail, which ranked second
to First-Class in revenue and volume, was too important to the Postal
Service as a whole.  The Service also pointed out that certain items,
such as books, were already excluded from the Statutes.  The Service
also disagreed with TCMA's view that third-class mail had been
assigned overhead costs disproportionately in comparison to other
classes.  Finally, the Service emphasized that all of the mail it
delivers is valuable and expressed concern about the public's
perception regarding the nature of third-class mail, which is
sometimes referred to by the general public as "junk mail," and its
contribution to the Service's financial well-being. 

In October 1988, TCMA submitted a complaint to the Commission to
compel the Postal Service to suspend the Statutes (under authority in
39 U.S.C.  601) for addressed, third-class mail.  The complaint did
not result in suspension.  However, PRC requested a written
compilation of theoretical views\13 regarding economic justifications
for the monopoly.  PRC held hearings and published its proceedings
but did not reach any conclusions or take any action on the complaint
or the related views it received.  At the same time, PRC reported
that relevant economic theory had advanced since 1970.  It said, "New
cost and pricing concepts have been developed that can provide
theoretical insights into both justifications for, and challenges to,
a statutory monopoly." Since the PRC monopoly inquiry, a number of
papers, articles, and books have been published concerning the
economic reasons for and against the postal monopoly. 


--------------------
\13 Monopoly Theory Inquiry, Docket No.  RM89-4, Postal Rate
Commission, November 1989. 


      UNRESOLVED ISSUE OF WHETHER
      MAIL DELIVERY IS A NATURAL
      MONOPOLY
-------------------------------------------------------- Chapter 2:2.3

Debates about the economic justification for the Statutes often focus
on whether postal functions fit the economic model of a natural
monopoly.  One argument is that among the various postal functions,
namely, collection, sorting, transportation, and delivery, those that
most closely resemble a natural monopoly are collection and delivery. 
Generally, this is because the economies of scale and scope
associated with such functions are believed to favor economic and
efficient provision by a single supplier.  In this regard, postal
services frequently have been compared to telecommunications
services.  Until passage of the Telecommunications Act of 1996, local
telephone companies maintained networks for call origination and
termination that have been compared to postal collection and delivery
functions.  Long-distance carriers provided services that more
closely resembled postal sorting and transportation functions, the
intermediate steps that occur between pickup and delivery.\14

Various competing economic theories, and their relationship to
current statutory restrictions on postal services, have been offered
and debated.  Some maintain that the provision of the most efficient,
universal, and affordable postal services requires maintenance of the
postal monopoly.  Others argue that postal customers will be best
served only under free and open competition.  Our research of
literature on the issue (see selected bibliography) revealed that
none of the materials that we reviewed indicated a need to expand the
scope of the Statutes--a conclusion also reached by the Board of
Governors in 1973.  The vast majority of the research results and
opinions that we reviewed indicated that (1) economic theory
supporting the Statues has changed since they were last reviewed in
1973, and (2) much more is known today about the Service's operating
costs than in earlier years. 

For example, in testimony before Congress in 1995, a United Parcel
Service (UPS) representative presented a paper prepared by two
economists in which they challenged the economic basis for the
Statutes.  The authors of that paper, subsequently published in book
form,\15 asserted that there appeared to be "no intellectually
defensible argument that the Postal Service's statutory monopoly
under the Private Express Statutes flows directly from a natural
monopoly that it purports to possess over mail delivery." Instead,
they said that private firms had proven mail markets to be
"demonstrably competitive" and called for repeal of the Statutes in
order to "encourage the entry of private firms into mail services
currently monopolized by the federal government." The authors also
concluded that universal service and geographic uniformity of rates
no longer depended on "public provision of the full range of postal
services." Rather, they argued that competitive provision of letter
mail service not only would ensure universal service, but likely
would "increase .  .  .  the integrity and efficiency of the mail
stream because of the superior incentive structures .  .  .  in
private firms."


--------------------
\14 For example, see:  (1) Crew, Michael A.  and Paul R. 
Kleindorfer, The Economics of Postal Service (Boston:  Kluwer
Academic Publishers, 1992); (2) Adie, Douglas K., Monopoly Mail (New
Brunswick, NJ:  Transaction Publishers, 1989); and (3) Panzar, John
C., "Competition, Efficiency, and the Vertical Structure of Postal
Services," in Regulation and the Nature of Postal and Delivery
Services, eds.  Michael A.  Crew and Paul R.  Kleindorfer (Boston: 
Kluwer Academic Publishers, 1993). 

\15 See Sidak, J.  Gregory and Daniel F.  Spulber, Protecting
Competition from the Postal Monopoly (Washington, DC:  American
Enterprise Institute, September 1995). 


      RELAXATION OF THIRD-CLASS
      MONOPOLY PROPOSED BY MAILERS
      AND CARRIERS IN 1995
-------------------------------------------------------- Chapter 2:2.4

In January 1995, a group of the Service's customers and competitors
called the Coalition for the Relaxation of the Private Express
Statutes\16 petitioned the Postal Service to initiate a rulemaking to
suspend the Statutes for all or certain categories of third-class
mail.  The Coalition said its members included "private carriers of
mail that would like to be able to compete more broadly with the USPS
and users of USPS third-class mail that would like the opportunity to
enjoy the benefits of such competition." Coalition participants
included the nation's largest alternate delivery networks and the
industry's recognized trade association, as well as the largest
third-class mailers' associations.  In other words, the Coalition
acted on behalf of organizations representing the vast majority of
those who mail third-class material and who deliver it outside the
U.S.  mail system. 

In its petition, the Coalition said that the world had changed
markedly since the Service examined the Statutes in 1973.  For
example, the Coalition cited such changes as (1) the Service's "de
facto relaxation of its monopoly over the transportation of mail;"
(2) increased competition in the telecommunications industry, which
had been used as a public service monopoly model to justify
continuing the letter mail monopoly; (3) better understanding of the
Service's mail delivery costs and the consequences of mail volume and
revenue losses; and (4) changes in economic thinking regarding the
application of natural monopoly theory to postal services. 

In response to the Coalition's petition, the Service's General
Counsel declined to initiate the requested rulemaking procedure.  She
said that for the most part, the developments discussed in the
petition predated the 1988 request discussed above.  She also argued
that to consider the issues raised by the Coalition "in a piecemeal
fashion" by focusing only on private express matters and one
particular class of mail would not allow the Service to address
broader issues, such as infrastructure and labor costs and pricing. 

Currently, private delivery of addressed, third-class letter mail is
prohibited under the Statutes and implementing Postal Service
regulations.  According to the Service's mail stream breakouts, the
vast majority of third-class mail meets its definition of a letter. 
Third-class mail represented 71.1 billion pieces, or nearly 40
percent of the Service's total mail volume, and $11.8 billion, or
almost 23 percent, of its total revenues in fiscal year 1995. 


--------------------
\16 The Coalition was organized by the president of Alternate Postal
Delivery, Inc., headquartered in Grand Rapids, Michigan.  Other
principal Coalition firms included the Advertising Mail Marketing
Association and the Direct Marketing Association.  Publishers Express
in Marietta, Georgia, (which later discontinued operations) and the
Association of Alternate Postal Systems also participated. 


      SERVICE'S SUSPENSION OF
      STATUTES FOR CERTAIN LETTERS
      QUESTIONED
-------------------------------------------------------- Chapter 2:2.5

As a result of requests made primarily by private delivery companies,
the Service has issued regulations to suspend the Statutes for
certain letters.  Included in the suspensions are extremely urgent
letters and international letters originating in the United States
for delivery in other countries.  However, some parties have
questioned the Service's authority to make such suspensions. 

In 1979, the Postal Service suspended the Statutes for extremely
urgent letters (39 C.F.R.  320.6).  The 1979 suspension allows
letters to be sent by private carrier without payment of postage if
the letters are deemed extremely urgent.  The regulations specify
criteria that must be met for a letter to qualify as extremely
urgent.  Relying on that suspension, some private companies began a
practice called "international remailing" wherein nonurgent letters
mailed in this country were transported by private carriers to other
countries for distribution and delivery to other countries.  For
several years afterwards, the Service tried to stop international
remailing.  Believing this practice was a misuse of the urgent-letter
suspension, the Service proposed to modify the 1979 suspension to
clarify that it did not allow for international remailing.  However,
U.S.  mailers' comments on the proposed clarification were
overwhelmingly negative.  Because of requests from mailers and
private carriers to continue the practice, the Service issued
regulations in 1986 to exempt all outbound international letters from
the Statutes.\17

To suspend the Statutes, the Postal Service cited a provision of the
1970 Act that (1) set forth certain circumstances in which private
delivery of letters is permitted (39 U.S.C.  601(a))\18 and (2)
allows the Postal Service to "suspend the operation of any part of
this section upon any mail route where the public interest requires
the suspension" (39 U.S.C.  601(b)). 

Some parties in both government and the private sector have
questioned whether Congress intended that the latter provision
(601(b)) be used to permit greater use of private carriers to deliver
letter mail.  They have argued that the purpose of 39 U.S.C.  601(b)
was to provide authority to the Postal Service to stop, not
facilitate, private delivery of letter mail. 

In 1973, when the Postal Service proposed regulations to suspend the
Statutes for certain items, PRC's legal staff reviewed the
regulations and concluded that use of the suspension authority would
violate the original legislative intent to stop private carriage of
letters.  In 1976, after the regulations were adopted, PRC decided
that it did not have jurisdiction over the Service's proposed changes
to the Statutes and therefore elected not to comment further on the
proposed rulemaking. 

Subsequently, the Service proposed to suspend the Statutes for
extremely urgent letters in 1979 after representatives of the private
delivery companies urged Congress to exclude such letters from the
Statutes.  Industry representatives, including ACCA, also contended
that the Postal Service's use of the suspension authority in 39
U.S.C.  601(b) violated its legislative intent.  They were concerned
that if the Service could unilaterally suspend the Statutes, it could
similarly revoke the suspension, and they contended that this would
create havoc for the existing private delivery companies and
jeopardize their financial stability.  They said the industry had not
taken the issue to court because resolving the matter through
litigation likely would be expensive and protracted. 

In 1988, the President's Commission on Privatization reported that ". 
.  .  there is a legal issue as to whether the Postal Service has the
authority to issue regulations (as in 39 C.F.R., Part 320 above)
suspending the criminal code.  If it does not, then all the private
express couriers are in violation of criminal law under Title 18."

A Postal Service official told us that the language of the Statutes
is broad enough to cover suspensions intended either to stop existing
private delivery of letters or to allow additional private delivery. 
In addition, the Postal Service believes that Congress concurred in
the Service's interpretation of the Statutes and use of the
suspension authority when Congress was reviewing the proposed
suspension for extremely urgent letters during hearings held in 1979. 


--------------------
\17 For additional information on the Service's role in international
mail markets and related competitive issues, see U.S.  Postal
Service:  Unresolved Issues in the International Mail Market
(GAO/GGD-96-51, March 1996). 

\18 Specifically, section 601 (a) of the 1970 Act says that a letter
can be carried out of the mail when (1) it is enclosed in an
envelope; (2) the amount of postage that would have been charged on
the letter if it had been sent by mail is paid by stamps, or postage
meter stamps, on the envelope; (3) the envelope is properly
addressed; (4) the envelope is so sealed that the letter cannot be
taken from it without defacing the envelope; (5) any stamps on the
envelope are canceled in ink by the sender; and (6) the date of the
letter's transmission or receipt by the carrier is endorsed on the
envelope in ink. 


      ENFORCING THE STATUTES HAS
      BECOME DIFFICULT
-------------------------------------------------------- Chapter 2:2.6

Despite criminal sanctions for violations, Postal Inspection Service
officials told us that direct enforcement of the Statutes rarely
occurs and has proven difficult for a number of reasons.  They
include past objections to enforcement by mailers, competitors, and
some Members of Congress.  Consequently, compliance with the laws and
regulations is largely voluntary. 

Enforcing the Statutes is difficult because violations can occur at
any household or business in the United States where letters
originate.  The difficulty of enforcing the Statutes is compounded by
statutory exceptions and regulatory suspensions that permit private
delivery of some letters, but not others.  For example, under the
suspension for extremely urgent letters, mailers determine whether
their letters meet the urgency criteria.  Consequently, nonurgent
letters may also be mailed privately without any easy means of
detection. 

Further, when the Service tries to enforce the Statutes, it finds
itself in an adversarial, and possibly self-defeating, position of
investigating and prosecuting its own customers.  Separately, private
carriers told us that they do not examine the contents of sealed
envelopes and packages tendered by their customers for overnight
delivery.  Rather, they suggested that primary responsibility for
compliance with the Statutes rests with mailers, not carriers. 
However, carriers also bear certain responsibilities under Service
regulations.\19

Postal Inspection Service data show that the Inspection Service
completed compliance audits and follow-ups\20 at 62 business and
government entities between October 1988 and June 1994.  Of these 62
entities, 39 (63 percent) had violated the Statutes, according to the
Inspection Service.  None were prosecuted, nor were any fines or
penalties assessed. 

Of those 39 entities, 22 said they had stopped sending nonurgent
letters via private carriers.  Another 13 chose to continue using
private carriers to deliver nonurgent letters and, through March
1995, had paid the Service about $1.2 million under "alternate
postage agreements."\21 Of the $1.2 million, about $989,000 (81
percent) was paid by one company.  Our review of the Inspection
Service audit reports showed that mailers generally wanted to use
private carriers because they charged lower rates and provided more
dependable delivery services than the Postal Service.  Two examples
follow. 


--------------------
\19 Service regulations (39 C.F.R.  310.4) state that private
carriers should take reasonable measures to inform customers of their
obligations under the regulations and should not carry any matter
that may reasonably be determined to be unlawful for private
carriage. 

\20 According to the Inspection Service, most follow-up visits to
mailers did not include additional audit work but were done to
administer ongoing alternate postage agreements. 

\21 Alternate postage agreements between the Service and mailers or
private carriers are used in lieu of requiring actual postage affixed
to letters sent privately. 


         BELLSOUTH
------------------------------------------------------ Chapter 2:2.6.1

BellSouth Services, Inc.(BSI), in Birmingham, Alabama, is an
affiliate of BellSouth Corporation, headquartered in Atlanta.  BSI
provides mailing and other services for BellSouth's regional
telephone companies--Southern Bell and South Central Bell.  BSI
initiated a cost-cutting move in the mid 1980s, whereby Southern Bell
stopped using its own employees to carry intracompany mail.  Instead,
it began using a trucking service, already under contract to
transport supplies, to also carry the mail at no additional cost. 

On their own initiative, BellSouth corporate officials determined
that this arrangement was in violation of the Statutes and that
postage should have been paid for letters sent by contract carrier. 
In August 1989, Southern Bell's Jacksonville, Florida, unit found
that it owed about $5,300 in postage for that month and paid that
amount to the local postmaster.  Subsequently, the Postal Inspection
Service initiated an audit at the Jacksonville unit in September 1989
and determined that the postage due from BellSouth on letters sent to
and from Jacksonville by the contract trucking service amounted to
over $69,000 per year.  BSI officials elected to continue using the
trucking service and signed an alternate postage agreement to pay the
Service for ongoing postage. 

BellSouth officials in Atlanta asked the Inspection Service to audit
other Southern Bell and South Central Bell operating units, and it
found violations at all but one unit.  In total, postal inspectors
conducted 23 audits, including follow-up visits, at BellSouth units
between fiscal years 1990 and 1994.  As of March 1995, the Inspection
Service reported total collections of about $989,000 from BSI under
various alternate postage agreements. 

BellSouth officials told us that the arrangement with the Postal
Service was satisfactory to them because they were still saving
postage costs.  However, company officials also indicated they did
not like having to pay the Postal Service for services it was not
providing. 


         EQUIFAX, INC. 
------------------------------------------------------ Chapter 2:2.6.2

Equifax, Inc., a credit reporting company in Atlanta, was audited by
the Inspection Service on the basis of a March 1991 lead from a
Postal Service employee.  Equifax initially denied the Inspection
Service access to company mailing records.  However, after the
Inspection Service submitted a written request to the company's
president, Equifax agreed to cooperate.  In order to determine the
amount of postage due to the Postal Service, the Inspection Service
analyzed mail sent by the company's primary private carrier between
June 1991 and March 1992 and conducted a 2-week survey of mail sent
by a secondary private carrier. 

The Inspection Service reported that Equifax used private carriers to
deliver nonurgent letters without required postage, thereby violating
Service regulations.  While the private carriers offered lower rates
than the Postal Service for some, but not all, zones, Equifax's
decision to use private carriers appeared to be based primarily on
service rather than cost considerations.  Consequently, Equifax
signed an alternate postage agreement for the 1-year period that
ended in September 1992 and agreed to pay $32,682 on letters sent by
private carriers.  Equifax and the Postal Service did not continue
the agreement beyond that year because Equifax said that it had
changed its policy on the use of private carriers.  The Inspection
Service did follow-up work in September 1993, determined that Equifax
was in compliance, and closed the case. 

Equifax officials told us that they viewed the audit experience as
"counterproductive." The audit resulted in payments to the Postal
Service totaling less than $33,000, compared with total postage
expenses of about $8 million that officials said the company pays
annually. 


      COMPLIANCE AUDITS
      DISCONTINUED
-------------------------------------------------------- Chapter 2:2.7

In 1993 and 1994, mailers and competitors questioned the Service's
authority to audit mailers' compliance with the Statutes and to
collect postage on letters sent by private carriers.  By June 1994,
the Postmaster General had deemphasized the Postal Inspection Service
role in ensuring compliance with the Statutes by shifting that
responsibility from the Chief Postal Inspector to the Senior Vice
President for Marketing.  This change was made after concerns were
raised in Congress regarding the Service's audits of various mailers. 
A bill (S.  1541, 103d Cong., 1st Sess.  (1993))\22 was introduced in
October 1993 to limit the Service's authority to fine or otherwise
penalize mailers who used private carriers.  The Inspection Service
has not initiated any new compliance audits since February 1994. 

Currently, the Postal Service tries to promote compliance by
educating mailers and private carriers about the Statutes.  It
believes that the Statutes act as a deterrent to illegal delivery of
letters by private carriers.  The education efforts include the use
of postmasters and other postal employees to apprise the public of
the Statutes' requirements and discussions by Service officials at
various symposia and conferences attended by mailers. 

In 1994, the Service established an office in Chicago with primary
responsibility for educational efforts regarding the Statutes.  The
office, which had two employees, reviews allegations of possible
violations of the Statutes coming into the Postal Service.  When
warranted, the office can forward apparent violations to the Postal
Service's General Counsel and request audit support from the Postal
Inspection Service.  Examples of educational activities conducted by
the Chicago office included participation in several national and
regional conferences with postal customers, presentations on the
Statutes to postal employees at various locations around the country,
coordination with Postal Service account managers assigned to work
with major commercial mailers, administration of existing alternate
postage agreements, and conduct of compliance reviews at mailers'
facilities. 


--------------------
\22 This bill was not enacted. 


PRIVATE MAIL DELIVERY CAPACITY HAS
GROWN SUBSTANTIALLY SINCE 1971
============================================================ Chapter 3

In 1971, the Postal Service faced little competition for delivery of
letter mail.  Its competition has grown substantially since that
time, partly as a result of the Service's regulatory suspension of
the Private Express Statutes for certain letters.  Although the bulk
of the Service's mail volumes has remained under the protection of
the Statutes, numerous national and local mail delivery firms exist;
both their numbers and the volume and variety of services they offer
are increasing. 

Generally, private delivery firms that we reviewed delivered (1)
expedited (or overnight) and 2-day and 3-day (also called deferred)
letters and parcels or (2) unaddressed advertising circulars or
periodicals.  These firms compete on a local, national, or
international basis for portions of delivery markets previously
served largely or exclusively by the Postal Service. 


   FEW PRIVATE MAIL CARRIERS
   EXISTED IN 1971
---------------------------------------------------------- Chapter 3:1

In 1971, the newly organized Postal Service faced limited competition
from two private carriers, the Railway Express Agency (REA) and
United Parcel Service (UPS).  This competition was largely confined
to the surface delivery of packages, although UPS did offer a
limited, second-day air package service beginning in 1971.  REA never
posed a strong competitive threat to the Postal Service.  Its
business had dropped off steadily since the late 1940s and, in 1975,
REA filed for bankruptcy and terminated all operations. 

Although UPS was a growing business, it trailed well behind the
Postal Service.  In 1971, UPS' surface deliveries totaled about 547
million packages.  By comparison, the Postal Service delivered
approximately 968 million pieces of fourth-class mail in 1971.\23 The
Postal Service held an even greater edge in second-day air services,
delivering about 197 million Priority Mail pieces in 1971, compared
to 11 million second-day UPS air shipments. 

In 1971, when the Postal Service introduced an experimental Express
Mail service, Federal Express (FedEx) was not yet operating.  FedEx
began overnight delivery operations in April 1973.  FedEx discloses
limited information on its delivery volumes but did report handling
an average of 35,000 packages per night at its Memphis, TN, hub in
1978.  If FedEx maintained this rate for 250 business days, its
package volume would have totaled nearly 8.8 million pieces in 1978. 
During that same year, the Postal Service delivered approximately 8
million Express Mail pieces.  Thus, on the basis of these data, it
appears that FedEx may have surpassed the Postal Service as the
leading overnight delivery carrier in less than 5 years. 

The limited competitive environment of the early 1970s was indicated
in a study of the Statutes mandated by Congress in the 1970 Act and
conducted by the Postal Service's Board of Governors in 1973.  In
that study, a Postal Service contractor, McKinsey & Company, was to
review the threat of private sector delivery to First-Class (letter)
mail.  However, to conduct the study, McKinsey had to construct two
hypothetical firms because it found that "no comparable real
ventures" existed. 


--------------------
\23 Comparisons between Postal Service fourth-class mail pieces and
UPS ground parcels should be considered only as an indicator, not a
precise measure of respective market shares.  We were unable to make
exact comparisons between Postal Service and UPS parcel volumes
primarily because the Service delivers an undetermined number of
small packages as First-Class and third-class mail.  These packages
generally weigh less than 1 pound and contain items such as
prescription drugs or film and photographs. 


   PRIVATE CARRIERS DOMINATE
   EXPEDITED MAIL AND PARCEL
   MARKETS AND INCREASINGLY ARE
   OFFERING DEFERRED DELIVERY
   SERVICES
---------------------------------------------------------- Chapter 3:2

In 1992,\24 a small number of large, private carriers dominated the
expedited letter and package delivery markets.  The Postal Service
competes for business in those markets through its Express Mail and
parcel post services, respectively.  Most of those private carriers
also have made substantial gains in the deferred delivery market by
offering 2-day as well as 3-day air shipments in competition with the
Service's Priority Mail. 


--------------------
\24 See U.S.  Postal Service:  Pricing Postal Services in a
Competitive Environment (GAO/GGD-92-49, March 1992). 


      SEVERAL LARGE NATIONAL
      EXPEDITED DELIVERY FIRMS
      COMPETE AGGRESSIVELY WITH
      THE POSTAL SERVICE
-------------------------------------------------------- Chapter 3:2.1

After the Postal Service suspended the Statutes for delivery of
extremely urgent letters in 1979, several private carriers joined the
Postal Service, UPS, and FedEx in the expedited letter and package
delivery markets.  In 1979, Airborne Freight Corporation, a
Seattle-based company, began offering expedited letter and package
deliveries through its subsidiary, Airborne Express.  In 1983, DHL
Airways, an established international air courier, entered the
domestic expedited mail market.  Roadway Package System (RPS) entered
the ground package delivery market in 1985. 

The Postal Service identified FedEx, UPS, Airborne, DHL, and RPS as
its chief competitors for expedited mail and package deliveries.  To
indicate their importance as competitors, we compared the revenues of
the Service's domestic Express Mail, Priority Mail, and fourth-class
business mail with the total domestic revenues reported by the five
firms for all of their expedited and ground parcel services.\25 The
aggregate domestic revenues for these services were about $31.7
billion in 1994.  Of that total, the Postal Service's share was just
under 15 percent.\26 Our analysis also showed that the Postal
Service's share of total revenue in the expedited letter and package
markets was less than the shares of either UPS and FedEx but greater
than those of Airborne, RPS, and DHL.  (See fig.  3.1.)

   Figure 3.1:  1994 Domestic
   Expedited, Deferred, and Parcel
   Delivery Market Shares (In
   Billions of Dollars)

   (See figure in printed
   edition.)

Source:  GAO analysis of U.S.  Postal Service and industry data. 

Postal Service officials estimated that the Service's share of the
expedited delivery market was 18 percent in 1994 and declining.  A
Postal Service marketing official attributed the loss of expedited
mail volumes to the following four factors: 

  -- the Postal Service's inability to engage in carrier "price wars"
     common to the highly competitive, expedited mail market, and the
     Service's inability to offer discounted postal rates to
     high-volume customers;

  -- competitors' greater capacities to provide shipment-related
     information services, such as automated package tracking and
     tracing;

  -- the less extensive geographic "reach" of the Service's dedicated
     Eagle air transportation network, which limits the number of
     locations where the Service consistently has been able to match
     or exceed its competitors' "next-day, morning" delivery
     performance; and

  -- public perceptions that private express carriers offer more
     dependable service than the Postal Service. 

Conversely, Service officials estimated that in 1994 the Service's
share of the ground parcel delivery market was 15 percent and
growing.  They attributed this growth primarily to three factors. 
First, because of higher per-piece delivery costs to residential
areas, UPS and RPS have imposed surcharges for residential ground
parcel deliveries in recent years, thereby making the Service the
low-cost provider in the more cost-sensitive, residential segment of
the parcel market.  Secondly, the Service improved its performance
for parcels drop-shipped for delivery within geographic areas covered
by the Service's bulk mailing centers.  Thirdly, the Service improved
its service by forwarding packages to recipients' work locations or
leaving packages at residences when no one was home, so customers did
not need to make a trip to the delivery post office during specified
service hours to retrieve the package. 

Although the Service has lost market share in the expedited letter
and parcel markets over the years, its overall mail volume has
continued to grow since 1970.  This growth was attributable primarily
to increases in mail volumes and revenues for those mail classes
largely protected by the Statutes, First-Class and third-class.  By
comparison, volumes and revenues in those mail classes and subclasses
subject to full or significant competition have shown relatively
little growth, as shown in figures 3.2 and 3.3. 

   Figure 3.2:  Changes in
   Domestic Mail Volume by Class,
   1971 to 1995 (Billions of
   Pieces)

   (See figure in printed
   edition.)

Source:  U.S.  Postal Service data. 

   Figure 3.3:  Changes in Postal
   Revenue by Mail Class, 1971 to
   1995 (Billions of Dollars)

   (See figure in printed
   edition.)

Source:  U.S.  Postal Service data. 

We recently reported that compared to private delivery firms, the
Postal Service's competitive position in the international mail
market also eroded after it suspended the Statutes for outbound
international letters in 1986.\27 Since that time, private carriers
have come to dominate this market, notably FedEx and DHL.  Together,
these two firms accounted for more than half of the $3.5 billion in
total international mail revenues in 1992.  The Service's share of
the international mail market declined because private firms offered
more competitive services and prices. 


--------------------
\25 More detailed comparisons by product lines were not possible
because the competitors did not make sufficient data publicly
available. 

\26 If an estimated $600 million in additional revenues reported by
the Postal Service for delivery of First- and third-class parcels
were included, the Service would pick up one additional point of
market share, to 16 percent, while both UPS and FedEx would drop one
point each.  The other carriers' shares would be unchanged. 

\27 The international mail market consists of standard letter mail,
expedited letters, and packages.  Private carriers dominate the
expedited and package segments of the market, while the Postal
Service still handles most of the standard letter segment.  For more
information, see:  U.S.  Postal Service:  Unresolved Issues in the
International Mail Market (GAO/GGD-96-51, March 1996). 


      MOST MAJOR PRIVATE DELIVERY
      FIRMS OFFER DEFERRED (2-DAY
      AND 3-DAY) PACKAGE DELIVERY
      SERVICES
-------------------------------------------------------- Chapter 3:2.2

All but one of the Postal Service's principal competitors for
expedited letter and parcel delivery services--DHL--also offered
deferred (2-day and 3-day) package delivery services, and most were
adding other services at the time of our review.  None of those five
firms disclosed detailed operating data by product line or type of
service.  However, we were able to compare publicly available data on
the kinds of services offered with similar services offered by the
Postal Service, as shown in table 3.1. 



                                    Table 3.1
                     
                        Comparison of Services Offered by
                          Expedited and Parcel Delivery
                                   Competitors

           Same-day   Overnight  Overnight  Deferred   Deferred
Carrier    express    letters    packages   letters    packages   Ground parcels
---------  ---------  ---------  ---------  ---------  ---------  --------------
Postal     Yes\a      Yes        Yes        Yes        Yes        Yes
Service

Airborne   Yes        Yes        Yes        No         Yes        No

DHL        Yes        Yes        Yes        No         No         No

FedEx      Yes        Yes        Yes        No         Yes        No\b

RPS        No         No         No         No         Yes        Yes

UPS        Yes        Yes        Yes        Yes        Yes        Yes
--------------------------------------------------------------------------------
\a Available only between selected airports. 

\b FedEx plans to offer a ground parcel service in 1996. 

Source:  GAO analysis of industry data. 

Of the services listed in table 3.1, only deferred letters are
covered by the Private Express Statutes.  As indicated, four of the
five private carriers offered deferred package service.  Only one of
the five carriers publicly offered a deferred letter service.\28 If
the Statutes were relaxed to permit private carriers to deliver
deferred letters, it appears the remaining firms easily could add
letters to their deferred delivery services for the localities they
now serve.\29 Thus, whether private firms deliver larger volumes of
letter mail in the future appears to depend less on private delivery
capacity than on statutory restrictions or the profitability of such
deliveries. 

Although the Postal Service considers the five carriers discussed
above to be its most prominent competitors, many other private firms
also offer expedited mail delivery services.  As one indication of
the number, the Air Courier Conference of America, a trade
association whose member firms compete with the Postal Service,
reported that it had 78 members in 1995, including most of the Postal
Service's principal competitors.  Similarly, the Express Carriers
Association listed 64 ground package express carriers in its 1995-96
directory.  Most of these carriers serve regional or local markets as
an "alternative to the regular common carrier."


--------------------
\28 UPS charged $6 for a 2-day letter, or twice the applicable
Priority Mail rate that became effective January 1995.  Postal
Service regulations say that the "urgency" requirement for private
letter delivery is presumed to be met if the rate for such delivery
is twice the applicable First-Class rate, including Priority Mail, or
$3.00, whichever is greater. 

\29 We were not able to obtain from the five principal competitors
specific data on localities they serve.  However, some of the
competitors, such as Airborne, FedEx, and UPS, advertise broad
geographic service areas by publishing lists of ZIP Code areas they
serve. 


      PRIVATE CARRIERS ARE LIKELY
      TO COMPETE AGGRESSIVELY FOR
      DEFERRED LETTER DELIVERY
-------------------------------------------------------- Chapter 3:2.3

As indicated above, private carriers have continued to dominate the
expedited letter and parcel markets since our 1992 report.  At that
time, private carriers reported that they were eager to expand their
deferred delivery business and to compete for a greater share of the
Service's Priority Mail volumes. 

Our current review showed continued strong interest in second-day and
third-day mail delivery.  Some of the carriers that offered deferred
letter or package delivery services (Airborne, FedEx, RPS, and UPS)
acknowledged that such services had been among their fastest growing
business segments in recent years, though none were willing to
provide specific data.  They generally predicted continued strong
growth in the deferred delivery market. 

Priority Mail represents the majority (about $3 billion, or nearly 58
percent) of the combined revenues from the Postal Service's Express,
Priority, and fourth-class mail services in fiscal year 1995. 
Priority Mail is a category of First-Class mail that the Service has
marketed as a competitively priced, 2- or 3-day delivery service
available throughout its domestic service areas.  Postal Service
officials estimated that as much as 70 percent of approximately 869
million Priority Mail pieces handled in fiscal year 1995 were letters
covered by the Private Express Statutes. 


   PRIVATE ADVERTISING AND
   PUBLICATIONS DELIVERY CAPACITY
   HAS GROWN RAPIDLY
---------------------------------------------------------- Chapter 3:3

Notwithstanding statutory restrictions on letter mail delivery, about
375 predominantly local and mostly small delivery firms operate in 47
states and compete in a fast-growing advertising mail market, a
subscriber publication delivery market, or both.  Known collectively
as the "alternate delivery industry," these firms compete with the
Postal Service for the delivery of third-class advertising mail that
does not fall within the definition of a letter and for second-class
publications mail.  According to an industry group, the Association
of Alternate Postal Systems (AAPS), these firms "provide delivery and
distribution of circulars, tabloids, magazines, catalogues,
directories, flyers, samples and other printed material and
advertising outside of the U.S.P.S.  mail stream." The number of
these firms grew rapidly in the late 1980s and early 1990s.  More
recently, many have entered into nationwide alliances to market their
services to national advertisers and publishers.  Collectively, they
represent a significant and growing source of additional private
sector competition for mail delivery. 


      GROWTH HAS OCCURRED LARGELY
      SINCE 1988
-------------------------------------------------------- Chapter 3:3.1

From the information we obtained, we determined that the contemporary
alternate delivery industry began to take shape in the 1970s and grew
rapidly in the 1980s and 1990s.  From 1982 to 1994, the number of
alternate delivery firms increased from 108 to 387, but they declined
slightly to 375 in 1995.  Most new start-ups (226 of the 375 firms)
occurred over roughly a 5-year period, from 1988 to 1993. 

Several events stimulated expansion and transformation of the
industry in the 1980s.  One was the growth of computerized database
marketing programs that allowed advertisers to target direct mail
advertising to specific geographic and demographic groups.  This led
to a proliferation of highly customized household mailing lists,
which also contributed to significant growth in third-class
advertising mail delivered by the Postal Service.  In addition, three
significant increases in the Service's third-class postage rates that
became effective in 1988, 1991, and 1995 prompted some advertisers to
seek lower cost delivery alternatives. 

Another event, and one that many industry experts believe was of
greatest significance, was the growing participation of newspapers
and other publishers in alternate delivery ownership and operations. 
Newspaper publishers owned about three-fourths of the firms that
entered the market between 1988 and 1994.  These publishers, who
account for the largest share of the overall advertising market,
traditionally relied heavily on revenue from advertisements printed
within a newspaper's pages, known in the trade as "run of press"
advertising.  However, many advertisers have shifted to less
expensive advertising inserts.  As this change took place, newspaper
publishers found themselves increasingly in direct competition with
the Postal Service.  For example, in discussions with us, newspaper
industry representatives were outspoken about losing revenue to the
Postal Service and the implications of any such losses to the
financial health of the newspaper industry. 

The developments highlighted above both stimulated new entrants to
the advertising delivery market and contributed to an unprecedented
growth in the Postal Service's advertising mail deliveries, despite
rate increases.  As previously illustrated in figure 3.2, the Postal
Service delivered about 20 billion pieces of third-class mail in 1971
compared to about 71 billion pieces in 1995.  As indicated previously
in figure 3.3, this growth rate far exceeded that of the larger
First-Class category and significantly narrowed the gap between
First- and third-class mail. 


      HOUSEHOLD DELIVERIES MADE
      WITHOUT ADDRESSES OR
      MAILBOXES
-------------------------------------------------------- Chapter 3:3.2

According to Postal Service regulations, advertising matter under 24
pages and addressed to a specific person or occupant is "letter mail"
and thus subject to the Statutes.  However, the firms we studied and
the Postal Service have found innovative ways of targeting and
delivering advertisements to households without using an addressed
envelope. 

Alternate delivery firms we interviewed used a variety of delivery
strategies.  Many firms made "saturation" deliveries once a week to
households to deliver such items as advertising flyers, local
government notices, product samples, unpaid community newspapers, and
telephone directories.  Typically, items were placed in plastic bags
and hung on a door knob, placed on a front porch, hung from a hook
placed on the mailbox post, placed in a delivery tube attached either
to its own stand or a mailbox post, or tossed onto driveways or
walkways. 

For alternate delivery firms owned by newspapers, the core delivery
product is what they call a "total market coverage" (TMC) package. 
Generally, a TMC package includes at least one item, such as a free
community newspaper or a weekly entertainment supplement, that would
qualify for second-class postage rates on the basis of its editorial
content if sent through the mail.\30 TMC packages also include
advertisements identical or similar to newspaper advertising inserts. 
The primary purpose of TMC deliveries is to ensure distribution of
advertisers' messages beyond the newspaper's subscriber base alone. 
Because the TMC packages also include an item qualifying as a
second-class publication, alternate delivery firms do not consider
TMC packages to be covered by the Statutes and the Postal Service
agrees.  Most newspaper-owned alternate delivery firms also deliver
one or more of the following products, either concurrently or
separately from TMC deliveries:  saturation advertising and product
samples, weekly newspapers and shoppers' guides not otherwise
contained in TMC packages, and consumer magazines and catalogs. 
Private delivery of the latter, however, has declined since 1994. 

The Postal Service also delivers some third-class advertising mail to
occupants and boxholders at specific addresses without an address
label on the mail itself.  For example, ADVO, Inc., one of the Postal
Service's largest customers, specializes in delivering "marriage
mail" by combining pieces from several advertisers in a single
mailing.  An address card, which is separate from the advertising
pieces, is sent on the same day.  Many product samples are delivered
in the same manner.  However, the Postal Service describes this mail
as "detached label" and still considers it to be "addressed."
Overall, about 17 percent of the Service's regular third-class
advertising mail was addressed to occupants and boxholders in fiscal
year 1994,\31

regardless of whether labels were affixed or detached. 

More recently, in 1995, the Postal Service announced it was planning
to implement an experimental "Neighborhood Mail" program.  In this
program, the Service proposed to allow mailers to send advertising
materials only to "Neighbor" or "Postal Patron" and to eliminate the
requirement that it bear a specific street or box address.  The
purpose of the neighborhood mail program was to provide lower
advertising delivery rates to small, local businesses for
unaddressed, saturation mail that did not require significant
handling and processing by postal employees.  The planned program
encountered strong opposition, primarily from the newspaper industry,
advertising mailers and companies that provide support services to
mailers (such as address lists and labels), and the alternate
delivery industry.  Consequently, the Service deferred the test and
later announced that it would not be done at all. 

Some newspaper and alternate delivery executives perceived the
proposed neighborhood delivery program as an attempt by the Service
to take business from them.  They questioned the Postal Service's
choice of sites, such as Baton Rouge and New Orleans, Louisiana;
Rochester, New York; and Sacramento, California, where alternate
delivery firms were already operating.  These executives were most
concerned about the Service's choice of Rochester.  That city's major
newspaper had discontinued a delivery operation in 1995, reportedly
after failing to make a profit.  Subsequently, Publishers Express
(PubX), a national alternate delivery network with which the
newspaper had been affiliated, established its own alternate delivery
operation in March 1995.  Rochester was the only location nationwide
where the firm performed its own deliveries instead of working
through a local affiliate; a company official believed PubX had been
targeted for harassment by local postal officials and workers. 


--------------------
\30 Some newspapers use the mail in part or in whole to deliver TMC
packages.  According to the Newspaper Association of America,
newspapers responding to a 1994 survey indicated that their primary
alternate delivery routes were about 78 percent private carrier and
about 22 percent U.S.  mail.  Of 680 newspapers that responded to the
survey (about a 42 percent response rate), 261--approximately 38
percent--said they were involved in alternate delivery. 

\31 The Postal Service conducts a biennial "Household Diary Study" of
"mail originating and destinating in households." According to its
fiscal year 1994 study, about 71 percent of all regular, third-class
mail was received by households.  The portion addressed only to
occupant or box holder noted above is expressed as a percentage of
all third-class mail, not just household mail. 


      NATIONAL ALLIANCES HAVE BEEN
      FORMED AND ARE GROWING IN
      SIZE AND DIVERSITY OF
      SERVICES
-------------------------------------------------------- Chapter 3:3.3

A common characteristic of the alternate delivery firms we reviewed
was the goal of increasing the volume and variety of items delivered
in order to develop and sustain profitable delivery operations.  One
strategy used to accomplish this objective was the formation of
national delivery alliances.  Several such organizations have been
established, some of which are discussed below.  To the extent that
several large publishers were involved as founders of or investors in
such organizations, they were primarily motivated by a desire to
reduce mailing costs and improve delivery service.  Locally owned
delivery companies affiliated with national networks in order to
benefit from the collective marketing of members' delivery services
to national advertisers or publishers.  Of about 261 newspapers
engaged in alternate delivery that responded to a 1994 survey
conducted by the Newspaper Association of America (NAA), about
one-quarter indicated they were affiliated with national delivery
networks. 


      ADVERTISING DELIVERY
      ORGANIZATIONS
-------------------------------------------------------- Chapter 3:3.4

All of the firms included in our review that were owned or operated
by newspaper publishers had contract or licensing agreements with one
of two national alternate delivery marketing organizations.  One of
these organizations, Alternate Postal Delivery (APD), Inc., is
headquartered in Grand Rapids, Michigan.  Originally formed in 1978,
APD issued its first stock offering in 1995 and now is publicly
traded.  APD has a network of about 40 private delivery affiliates
capable of delivering address-specific items to about 10 million
households and saturation materials to about 30 million households. 

The second organization, PubX, was established in 1989 by a group of
equity partners led by Time, Inc., and included other magazine
publishers, catalogers, printers, and paper companies.  PubX, which
was headquartered in Marietta, Georgia, built a national network
through licensing agreements with predominantly newspaper-owned
alternate delivery firms.  The number of PubX licensees peaked at 32
in 1994; collectively, they delivered about 60 million pieces that
year.  However, PubX licensees declined to around 25 by mid-1995, and
some of the remaining licensees cut back on second-class magazine
deliveries, which constituted the core of PubX's business. 

Both APD and PubX tried several marketing strategies to increase the
volume of pieces delivered.  Officials of both firms said that to
deliver magazines profitably and at rates lower than the Postal
Service's second-class postage rates depended on developing a market
for so-called "ride-along" advertising, i.e., normally third-class
mail pieces that may be delivered to specific addresses when included
as inserts with second-class publications.  However, ride-along
advertising did not develop as fully as anticipated, and many
newspaper publishers reduced or terminated magazine deliveries
arranged through APD or PubX.  Largely as a result of the decline in
private magazine deliveries, the combined number of APD and PubX
affiliates dropped from 82 in 1993 to 47 by the end of 1995. 

APD and PubX also have sought to increase the use of alternate
delivery by mail order catalog publishers.  Toward that end, some of
these publishers participated in a 1994 catalog delivery test
coordinated by the Direct Marketing Association (DMA).  Overall,
however, DMA found that Postal Service delivery resulted in more
orders and higher dollar sales than private delivery of the same
catalogs.  Separately, a representative of the Mail Order Association
of America said that for large nationwide catalogers, any delivery
cost savings associated with alternate delivery were not great
enough, given the industry's relatively limited geographic reach when
compared to the Postal Service, to justify shifting portions of their
deliveries to private carriers and bearing the additional
administrative costs of using multiple service providers. 

Nonetheless, the JC Penney Company, one of the nation's largest
catalogers, had distributed a portion of its catalogs through former
PubX licensees.  In January 1996, it terminated its agreement with
PubX and reverted to Postal Service delivery in those markets. 

In February 1996, PubX's board of directors voted to discontinue all
operations.  The board cited a number of factors for the decision,
including a period of stable postal rates, the "historically low"
increase in second-class rates that became effective in January 1995,
improved service by the Postal Service, and the Service's strong
financial results in fiscal year 1995.  The board said that "the
recent improvements within the Postal Service have diminished the
need for a hard copy delivery alternative.  However, if the USPS cost
trends revert to prior levels, hard copy delivery alternatives will
once again develop."

In a speech presented to the National Association of Postmasters of
the United States on February 20, 1996, Postmaster General Marvin
Runyon claimed credit for driving PubX out of business: 

     "We ran them out of business by improving service and keeping
     costs low!  I can't say that I am sorry to see them go.  But
     they taught us two valuable lessons.  First, if we don't do our
     jobs, somebody else will.  And second, when we get our act
     together, we can be one hell of a competitor."

APD and PubX also pursued, unsuccessfully, changes in Postal Service
regulations to permit greater competition with the Service for the
delivery of advertising letter mail.  As previously noted, they and
other parties were members of the Coalition for the Relaxation of the
Private Express Statutes that petitioned the Postal Service to
suspend the letter mail monopoly for some or all third-class mail in
January 1995.  The Coalition founder told us that its principal
target was catalogs of less than 24 pages. 

Despite the strong interest expressed by alternate delivery firms in
expanding their business, industry leaders have acknowledged that
they have a long way to go to increase capacity to levels that would
represent a significant competitive threat to the Postal Service.  In
its September 1995 stock prospectus, APD said that "to present a
viable alternative to USPS delivery and to attract a substantial
number of national customers, [it] must expand the scope of its
delivery services to additional ZIP Codes across the United States,
including additional major metropolitan areas." As an indication of
APD's aggressiveness in this regard, it announced in February 1995
that it had signed letters of intent to add 12 former PubX licensees
to its affiliate network. 


         PUBLICATIONS DELIVERY
         ORGANIZATIONS
------------------------------------------------------ Chapter 3:3.4.1

We obtained information on two national organizations that primarily
delivered publications--the National Delivery Service (NDS), of
Princeton, New Jersey; and Nationwide Alternate Delivery Alliance
(NADA), which is co-located in Washington, DC, and New York.  Both
organizations compete with the Postal Service for the delivery of
second-class mail and had plans to expand their delivery operations. 

NDS is a subsidiary of Dow Jones and Company, which publishes The
Wall Street Journal and Barron's.  Dow Jones began testing alternate
delivery of the Journal to business subscribers in the 1970s because
the publisher did not believe that the Postal Service could meet its
subscribers' demands for timely delivery, i.e., by the start of the
business day.  NDS was established as a separate organizational
division of Dow Jones in 1981.  NDS did not deliver advertisements
and had no plans to do so, according to an NDS official. 

NDS initially delivered the Journal primarily to businesses but
expanded deliveries to residential subscribers.  By July 1995, Dow
Jones had shifted about two-thirds of the Journal's estimated 1.55
million daily domestic subscriptions from the Postal Service to NDS,
about 60 percent of which NDS delivered to businesses and the balance
to residences.  NDS also delivered about 1.3 million copies of
Barron's each year to business and residential subscribers.  NDS has
begun to sell delivery services to other publishers but has limited
the service to business publications.  On the basis of information
provided by an NDS official, we estimated that NDS delivered roughly
280 million second-class publication pieces in 1995. 

In 1995, NDS's work force included about 3,500 carriers, over 90
percent of whom were part-time workers.  NDS also relied on some
independent contractors and, increasingly, affiliate newspapers to
make deliveries.  An NDS official said that under the affiliate
program, participating newspapers' carriers deliver the Journal at
the same time they deliver the local daily newspaper.  Eventually, he
said this will allow NDS to shift most of the remaining Journal
subscriptions from the Postal Service to private delivery. 

The other national delivery organization, NADA, was formed in 1990 to
market the collective delivery capabilities of its members to
national business publishers.  In July 1995, NADA membership included
74 independent newspaper and publication distributors operating in 55
metropolitan markets.  According to NADA's president, affiliates
deliver only second-class items, not third-class advertising
material.  Affiliates in larger markets typically deliver roughly
equal numbers of newspapers and business publications primarily to
businesses.  Affiliates in smaller markets typically deliver about 75
percent newspapers and 25 percent business publications.  He said
that if the Statutes were changed to permit more private delivery,
some affiliates might expand into third-class delivery. 
Collectively, NADA affiliates delivered about 5 million pieces every
week, or about 260 million pieces annually. 


      POSTAL SERVICE STILL
      DELIVERS MOST ADVERTISEMENTS
      AND PERIODICALS, BUT PRIVATE
      DELIVERY COULD GROW
-------------------------------------------------------- Chapter 3:3.5

Although the Postal Service delivers the vast majority of
advertisements and periodicals, the volume of these items delivered
by private firms could grow in future years if the Statutes were to
be relaxed or repealed. 

We obtained from an industry official estimates of about $500 million
in annual private advertising delivery revenue, which reportedly
includes "both local delivery markets throughout the United States
and the smaller national delivery market." This revenue, when
combined with the Postal Service's total revenues from advertising
mail of about $12.7 billion for fiscal year 1994, indicates that the
industry's portion of the total advertising delivery market was about
4 percent.  By combining volume estimates provided to us by selected
national firms, we developed an indication of the magnitude of
private periodical deliveries.  The combined annual volume estimates
provided by NDS and NADA were about 540 million pieces.  (Due to the
discontinuation of PubX operations in 1996, and the general decline
in alternate delivery of consumer magazines to residential
subscribers, we excluded APD and PubX second-class delivery volumes
from our analysis.) The Postal Service delivered about 10.2 billion
pieces of second-class mail, mostly periodicals, in fiscal year 1995. 
When compared with the NDS-NADA volumes, the Postal Service delivered
about 95 percent and those organizations and their affiliates about 5
percent of the total. 

The Postal Service could face greater competition for delivery of
advertisements and periodicals if the Statutes were relaxed or
repealed because relatively minimal investment is required to provide
these services.  A Service official also told us that with greater
competitive freedom, mail presort bureaus could enter the private
delivery market by expanding current operations or forming alliances
with alternate delivery firms.  Because presort bureaus already
regularly receive and sort letters for many mailers, the official
suggested that acquisitions, mergers, alliances, or other business
arrangements between these bureaus and alternate delivery firms could
be quite profitable ventures. 


ESTIMATED FINANCIAL EFFECTS OF
CHANGING THE PRIVATE EXPRESS
STATUTES VARY AMONG MAIL CLASSES
============================================================ Chapter 4

Primarily on the basis of (1) existing private mail delivery
capacity, (2) private firms' actions and stated interests regarding
expansion of mail delivery services, and (3) interviews with mailers,
we determined that a greater percentage of Priority Mail volumes than
other classes of letter mail would be at immediate risk if the
Private Express Statutes were to be relaxed or repealed.  Lower
percentages of First-Class and third-class letters also could be
diverted to private delivery, but probably not as quickly or to the
same extent as Priority Mail. 

On the basis of the Service's revenue and cost data, the financial
effects of volume losses would vary greatly among those classes of
mail largely comprised of letters.  A loss of most or all Priority
Mail would have a lesser effect on postage rates than a smaller loss,
such as 5 to 10 percent, of First-Class letter volume.  Similarly, a
loss of 25 percent of the protected third-class mail would have about
the same effect on the price of the First-Class stamp as a 5-percent
loss of First-Class letter volume.  However, a range of factors could
increase or decrease the Service's future mail volumes and postage
rates.  This makes it difficult to estimate how a change in the
Statutes might affect the Service's finances and postage rates. 


   THE RISKS OF POTENTIAL MAIL
   VOLUME LOSSES DIFFER AMONG THE
   LETTER MAIL CLASSES
---------------------------------------------------------- Chapter 4:1

On the basis of our interviews with the Postal Service's competitors
and mailers as well as analysis of various Service revenue, cost, and
postage rate data, we assessed (1) the relative risk of volume losses
of First-Class, Priority (a subclass of First-Class), and third-class
mail, which make up most of the Service's letter mail protected by
the Statutes; and (2) the estimated effects of such losses on postage
rates, particularly the basic First-Class letter mail rate, which is
currently 32 cents.  Our assessment showed that the risk of loss and
the likely impact of such loss at the time of our review and in the
near term would vary among the three segments of the Service's mail
stream.  (See table 4.1.)



                               Table 4.1
                
                 Assessment of Relative Risk and Likely
                Financial Impact of Changing the Private
                            Express Statutes

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

Other First-Class letters               Low             High

Third-class letters                     Low             Medium
----------------------------------------------------------------------
\a Priority Mail pieces weighing 12 ounces and over are generally
considered as packages and, therefore, not protected by the statutes. 

Source:  GAO analysis of industry data. 

Included in our analysis of the risk of loss were structured
interviews with private, nationwide express and parcel carriers
identified by the Postal Service as its chief competitors (Airborne,
DHL, FedEx, RPS, and UPS); a judgmental sample of alternate delivery
carriers of varying sizes located throughout the United States,
including both newspaper and independently owned firms; and various
organizations, mostly nonprofit associations, who collectively
represented most of the nation's commercial and institutional
mailers.\32 We also assessed the sensitivity of such losses by using
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, which was developed by Price Waterhouse LLP
(Price Waterhouse) under contract with the Postal Service. 

As discussed below, the risk of loss varied among the mail stream
segments because of (1) differences in delivery capacity, prices, and
past competitive actions of private firms that might deliver certain
letters that now are protected under the Statutes; (2) the extent to
which mailers indicated that they were satisfied with current service
and rates; and (3) differences among mailer representatives relative
to actions they might take in response to changes in the Statutes. 
The financial effects of volume losses also would vary, by mail
class, due to differences in the overall contribution to the Postal
Service's overhead costs among the various classes. 


--------------------
\32 In selecting mailer groups, we sought to identify organizations
that represented the major mailers for each class of mail, including
those that generally were open to competitive delivery.  A complete
list of all structured interview respondents, both carriers and
mailers, is included in appendix III. 


   PRIORITY MAIL LETTERS ARE AT
   GREATER RISK THAN THOSE IN
   OTHER CLASSES
---------------------------------------------------------- Chapter 4:2

Private delivery firms already have the capacity to deliver a
significant portion of those letters designated as Priority Mail,
currently covered by the Statutes.  Priority Mail consists of both
letters and packages.  Because such mail is sealed from inspection,
the Service does not know how many Priority Mail pieces are letters,
but it estimates that as many as 70 percent are.  Of the three letter
mail classes and subclasses, Priority Mail would be most susceptible
to immediate and strong competition if the Statutes were changed to
allow competitors to set prices freely and deliver such letters. 


      PRIVATE CARRIERS APPEAR
      EAGER AND ABLE TO DELIVER
      PRIORITY MAIL
-------------------------------------------------------- Chapter 4:2.1

As noted earlier, Priority Mail is a subclass of First-Class mail. 
The minimum rate is $3.00 for Priority Mail pieces.  Under current
Service regulations, competitors must charge at least $6.00, or
double the applicable Priority Mail rate, to provide expedited, 2- or
3-day delivery of items defined as letters and weighing 12 ounces or
more.  We asked private carriers the extent to which they would
pursue delivery of protected letters, and we also asked mailers the
extent to which they might divert such letters to private carriers,
by mail class and subclass, if the Statutes were changed. 

Of the Service's principal competitors, national express/parcel
carriers, four out of five said they were likely to pursue delivery
of Priority Mail letters.  Specifically, three said they were "very
likely" and one said it was "somewhat likely" to seek additional
2-day letter business; only one said it was unlikely to do so.  By
contrast, alternate delivery carriers, who compete largely for
second-class publications (mostly newspapers, magazines, and other
periodicals) and third-class advertising and lack the nationwide
delivery infrastructure of the national carriers, expressed little
interest in delivering Priority Mail.  Only 4 of 17 (24 percent) said
they were likely to seek a share of the Priority Mail letter business
if the Statutes were changed.  (See fig.  4.1.) Only 3 of 12 (25
percent) mailer groups told us they were likely to divert Priority
Mail letters to private carriers if the Statutes were modified, and 2
more said they were as likely as unlikely to do so.  Of the
remainder, five said they were unlikely to do so, and two were
undecided.\33

   Figure 4.1:  Mailer and Carrier
   Interest in Private Delivery by
   Protected Mail Classes

   (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 interview data. 

Both in our 1992 report and in our more recent discussions with
private carriers and Postal Service officials, we obtained other
information that suggested Priority Mail may be at greatest risk for
immediate and substantial volume losses to private carriers.  For
example: 

  -- Nationwide private carriers may be able to meet or surpass the
     Postal Service from a competitive perspective in terms of price,
     range of services, and reliability. 

  -- Airborne, FedEx, and UPS each claim to deliver to virtually all
     domestic U.S.  addresses; RPS expects to be able to do so by the
     end of 1996; and DHL advertises its overnight service is
     available "to all major U.S.  business centers." Thus, most of
     the private express and parcel carriers say that they maintain
     essentially universal delivery networks. 

  -- National carriers already have lobbied Congress to suspend the
     double-postage rule, discussed in chapter 2, in an effort to
     facilitate adding letters to their deferred package deliveries. 

  -- Declining growth in next-day morning deliveries has caused
     overnight carriers to consider expanding into the fast growing
     but less expensive next-day afternoon, second-day, and third-day
     delivery markets.  This trend is reflected in the Postal
     Service's Priority Mail volume, which increased nearly 64
     percent between 1990 and 1995, from about 518 million to 869
     million pieces, while its Express Mail (next-day) volume
     declined about 3 percent. 

  -- Some expedited mail delivered by private carriers is too large
     to fit in residential mailboxes, is delivered inside to
     businesses, or requires a signature for delivery.  Consequently,
     most private carriers we interviewed said they are not dependent
     on greater access to mailboxes in order to expand deferred
     deliveries. 

  -- Unlike the Postal Service, private carriers are able to offer
     both volume and negotiated discounts to their customers. 
     Further, many mailers perceive private carriers as more reliable
     than the Postal Service and find their tracking and tracing
     services superior to those of the Postal Service. 

  -- Priority Mail generates high revenue per mail piece, making it
     especially attractive to private carriers.  In 1994, on average,
     Priority Mail generated gross revenue of $3.45 per piece and net
     revenue of $1.79 per piece, compared to gross revenue of about
     35 cents per piece and net revenue of 12 cents per piece for
     First-Class mail.\34 For fiscal year 1995, Priority Mail
     represented less than one-half of 1 percent of all mail pieces
     handled by the Service but generated almost 6 percent of total
     revenues. 

  -- As noted in chapter 3, the five principal nationwide carriers
     already command an overwhelming share, about 85 percent, of the
     combined overnight, 2- and 3-day, and parcel delivery markets. 

The Service measures its mail volume on the basis of the following
origin and destination pairs:  business-to-business,
business-to-household, household-to-business, and
household-to-household.  In 1994, about 90 percent of all mail was
generated by businesses (about 55 percent of all mail went from
businesses to households, and 35 percent went from businesses to
businesses), while 10 percent emanated from households.  We asked
private carriers whether they were most interested in providing
business or residential service.  We asked mailers in which of those
market segments they were likely to divert some mail to private
carriers if given greater freedom to do so. 

Among the five national express/parcel carriers, all but one said
they were "somewhat" or "very likely" to pursue additional
business-to-business deliveries.  The remaining carrier said it was
as likely as unlikely to do so.  However, only two of the five
carriers (40 percent) said they were likely to pursue a greater share
of the business-to-household delivery market, while two others said
they were as likely as unlikely to do so.  None said they were likely
to pursue household-to-business deliveries, although one indicated it
might be as likely as unlikely to consider that market segment.  The
vast bulk of Priority Mail falls into the first two categories.  (See
fig.  4.2.)

   Figure 4.2:  Mailer and Carrier
   Interest in Private Delivery by
   Market Segment

   (See figure in printed
   edition.)

\a Each group was separately asked about their interest in mailing or
delivery (1) business to business mail, (2) business to household
mail, (3) household to business mail.  (Only the "likely:  response
is shown (i.e., "very likely" and "somewhat likely" combined).

Source:  GAO interview data. 


--------------------
\33 Of the 14 mailer groups we interviewed, 2 were national newspaper
associations.  Although they represented the majority of the
Service's second-class customers, many of their members also are
engaged in alternate delivery.  Consequently, questions normally
posed to mailers about their intentions to use private carriers for
various classes of mail if the Statutes were changed were posed to
these two groups in terms of whether their members intended to
deliver various classes of letter mail if the Statutes were changed. 
Those responses have been included with our results from structured
interviews with alternate delivery organizations, thus accounting for
only 12 rather than 14 responses to certain mailer questions. 

\34 Net revenue is total revenue for a mail class or subclass, less
its attributable cost. 


      MANY MAILERS DID NOT ASSESS
      PRIORITY MAIL AS BETTER THAN
      ITS COMPETITORS AND SOME
      WOULD SWITCH TO PRIVATE
      CARRIERS
-------------------------------------------------------- Chapter 4:2.2

We asked mailers to assess the Postal Service's performance relative
to its competitors for largely protected mail classes and subclasses. 
Specifically, we asked them whether the Service's performance on (1)
timeliness and dependability of mail delivery and (2) postage rates
was better, as good, or worse than its competitors.  The overall
results of our interviews where we combined responses for "as good"
and "better" are shown in figure 4.3. 

   Figure 4.3:  Mailer Assessment
   of Postal Service Delivery and
   Rates for Protected Mail
   Classes

   (See figure in printed
   edition.)

\a Mailers were asked their views on whether the Postal Service was
better, as good, or worse than its competitors on the dependability
and timeliness of each mail class and on the rates for each class. 
Only the combined responses "as good" or "better" are shown. 

Source:  GAO interview data. 

Our interviews showed that overall, mailers did not rate Priority
Mail service well in comparison to service provided by private
carriers.  Only 4 of 14 mailers (about 29 percent) said that the
Service was as good or better than its competitors with regard to
service timeliness and dependability.  Specifically, only one said
Priority Mail service was better than that provided by private
carriers, three said it was about the same, six said it was somewhat
or much worse, and four had no opinion.  The Service's on-time
delivery rates for Priority Mail generally have been below 90
percent.  For example, during fiscal year 1995, the Service delivered
82 percent of Priority Mail shipments within its 2-day standard and
94 percent within 3 days. 

Among the same respondents, 8 of 14 (57 percent) said that Priority
Mail rates were as good or better than private carriers' rates, 2
said the Postal Service charged more than its competitors, and 4 had
no opinion.  As noted in our 1992 report and confirmed in discussions
with nationwide carriers and mailers, Priority Mail users generally
tend to be more price- sensitive than overnight mailers. 

On the basis of our overall assessment of industry capacity and
interest, we believe that if private delivery of Priority Mail
letters were to be permitted and the double-postage rule were
eliminated, carriers would offer discounted rates to volume mailers
for deferred letters as they now do for overnight services and
deferred package deliveries.  This likely would reduce or negate the
Service's perceived price advantage and encourage even more mailers
to divert Priority Mail letters to private carriers. 

The actual price that competitors might charge for deferred
(second-day) delivery of letters cannot be determined easily for at
least two reasons.  First, pricing data are not readily available to
the public because private carriers do not publish their best prices. 
They are offered through individual contracts with customers and
considered by the carriers to be proprietary data.  Secondly, the
lowest prices that private carriers might charge on the basis of
their actual cost is difficult to predict because the Service's
double-postage rule results in an artificial price "floor" on rates
private carriers must charge for urgent letter delivery.  We are
unable to predict what rates private carriers would charge if allowed
to set prices freely based on market conditions. 

Available data indicate that private firms competing with the Service
for overnight, express deliveries currently offer contracted rates to
large-volume customers approaching the Service's lower Priority Mail
rates.  For example, under a contract with the U.S.  General Services
Administration (GSA), which was in effect during the entire period
covered by our review, FedEx charged federal departments and agencies
$3.75 for letters (up to 8 ounces), and $3.99 for packages weighing
from 1 to 3 pounds, for next-day delivery anywhere in the United
States, including Alaska, Hawaii, and Puerto Rico.  According to
information obtained from GSA covering an 11-month period from
February to December 1995, FedEx achieved monthly, on-time rates
ranging from 91 to 97 percent for overnight shipments delivered by
noon the next day, the standard in the contract, during 1995. 
Excluding the months when lapses in budgetary authority resulted in
partial government shut-downs--November and December 1995--monthly
on-time delivery rates ranged from 93 to 97 percent.  For the same
period, FedEx handled about 9.7 million shipments for government
mailers subject to next-day noon or earlier delivery requirements. 

In summary, the data we gathered and summarized in figures 4.1
through 4.3 indicate that (1) most mailers believed the Service's
Priority Mail rates were as good or better than its competitors but
the timeliness and dependability of Priority Mail service was not;
(2) most nationwide private carriers would be ready and willing to
deliver Priority Mail letters, particularly business-to-business
mail, if the Statutes were changed; and (3) about one-fourth of the
mailers we interviewed said they likely would divert Priority Mail
letters to private carriers if the Statutes were changed to permit
them to do so.  Private carrier interest and delivery capacity,
combined with mailers' willingness to shift some mail to private
carriers, indicated the Service could be at high risk to lose
significant portions of its Priority Mail volume if the Statutes were
relaxed. 


      FIRST-CLASS LETTERS APPEAR
      TO BE AT LESS RISK THAN
      THOSE IN OTHER CLASSES
-------------------------------------------------------- Chapter 4:2.3

Although significant portions of all three letter mail classes and
subclasses could be lost to private carriers, First-Class letters
appear to be at less risk than Priority Mail or third-class letter
mail.  As indicated previously, nationwide express and parcel
delivery carriers expressed little interest in delivering First-Class
letter mail compared to the more lucrative overnight and deferred
delivery markets. 

Most (65 percent) of the alternate delivery firms we interviewed
expressed some interest in delivering First-Class letters.  Most also
said that they were likely to pursue additional opportunities in the
business-to-business and business-to-household segments of the mail
market, which together account for nearly 90 percent of all
First-Class letters. 

Despite their apparent interest in delivering First-Class mail, most
alternate delivery carriers currently lack the capacity to sort large
quantities of addressed mail.  If the Statutes were changed, those
carriers may have a greater incentive to invest in the necessary
capacity, but any significant increases could take several years to
develop to the point where First-Class volumes could be affected
materially. 

Among the mailers we interviewed, only 2 of 12 (17 percent) said that
they were somewhat or very likely to use private carriers to deliver
First-Class mail, while 2 others said that they were as likely as
unlikely to do so.  Of the remaining eight mailers, six said that
they were unlikely to use private carriers if the Statutes were
changed, and two did not respond.  In addition, including 2 newspaper
associations, 11 of 14 mailers (79 percent) rated First-Class mail
service and rates as good or better as competitors' service and
rates. 

An additional factor of importance to mailers was safeguarding
personal or confidential information, which characterizes much of
First-Class mail.  Consequently, retaining the restrictions on
nonpostal access to private mailboxes likely would help shield the
Postal Service from private competition for delivery of First-Class
letters.  When asked generally if they would consider using private
carriers to deliver protected mail if they were denied access to
mailboxes, only one-third of the mailers we interviewed (4 of 12, or
33 percent) said they were likely to do so.  However, one-half of the
same mailers (6 of 12) said they were likely to use private carriers
to deliver letter mail if they were allowed to place it in
mailboxes.\35

Mailers who do regular billing of residential customers see the
restrictions on mailbox access as a reason to use the Postal Service. 
However, before the mailbox restrictions were imposed (in 1934), some
utility companies were using mailboxes for private delivery of
monthly billings.  Where utility companies still regularly read
residential water, gas, and electric meters, employees might deliver
monthly bills again if the access restrictions were lifted.  In
addition, some newspaper officials with whom we spoke indicated that
they would consider sending subscription statements via their own
private carriers if mailbox restrictions were lifted. 

The mailbox restriction would be less likely to shield the Postal
Service from competition for Priority Mail and heavyweight
First-Class mail.  Typically, this mail is delivered to businesses
and often is too large to fit in residential mailboxes.  In addition,
national carriers often rely on a signature for delivery.  In
general, they did not see lack of mailbox access as a barrier to
pursuing increases in their shares of these markets. 

Some heavier weight First-Class mail could be exposed to a level of
risk similar to Priority Mail if private firms could freely set
prices to compete with the Service.  For example, First-Class letters
weighing between 8 ounces and 12 ounces have postage rates ranging
from $1.81 to $2.62.  First-Class mail in this weight range could be
attractive for delivery by private carriers because they may be able
to deliver some or most of it profitably at prices competitive with
the Service's rates.  However, this mail represented less than
one-tenth of 1 percent of the Service's total volume in fiscal year
1995. 

To summarize, the data we gathered indicate that most mailers rate
First-Class postage rates and service as good or better than
competitors' rates and service.  If the Statutes were relaxed and
mailbox access restrictions remained intact, mailers would not be
likely to shift First-Class mail to private delivery.  Most private
carriers with existing, nationwide delivery capabilities expressed
little interest in pursuing First-Class letter mail delivery. 
Carriers who operated local delivery networks indicated they would
pursue some First-Class mail deliveries if the Statutes were relaxed
or repealed. 


--------------------
\35 These results generally track the primary mail classes associated
with mailers we interviewed.  Of the 14 mailer organizations included
in our structured interview survey, 5 were predominantly First-Class
mailers, 2 were largely second-class mailers, 6 were principally
third-class mailers, and 1 was largely a fourth-class mailer. 


      THIRD-CLASS ADVERTISING
      LETTERS AT LOW RISK
-------------------------------------------------------- Chapter 4:2.4

Although the alternate delivery industry has developed rapidly in
recent years, the Service still dominates the advertising mail
delivery market.  As noted in chapter 3, the Service's share of the
advertising delivery market, most of which is third-class mail, is
about 96 percent.  The Service's huge delivery infrastructure, high
volume of third-class mail, and relatively low postage rates, which
are structured to retain third-class mailers, reduce the likelihood
that the Service would lose as great a percentage of third-class mail
as Priority Mail over the next few years. 

Alternate delivery firms saw third-class mail as their primary market
niche.  Nearly 90 percent of the alternate delivery firms we
interviewed expressed an interest in pursuing additional third-class
mail business.  Specifically, 12 of 17 said they were very likely and
3 said they were somewhat likely to do so, while only 2 said they
were unlikely to seek additional third-class business. 

Similarly, 13 of 17 (76 percent) of the alternate delivery firms said
that they were interested in pursuing additional
business-to-household deliveries, without regard to mail class or
subclass.  According to the Postal Service, most third-class mail
(about 73 percent) falls into the business-to-household market
segment.  Most alternate delivery firms (about 65 percent) also
expressed an interest in adding more business-to-business deliveries
if the Statutes were changed.  Specifically, 11 of 17 said that they
were somewhat or very likely do so, while 2 more said they were as
likely as unlikely to do so.  By contrast, only 3 of 17 alternate
delivery firms said they were likely to pursue household-to-business
deliveries, and 1 said it was as likely as unlikely to do so.  (See
fig.  4.2.)

Among the mailers we interviewed, about 42 percent (5 of 12) said
that they would consider using private carriers for third-class mail
delivery, 2 more said they were as likely as not to use private
carriers, 3 said they were unlikely to mail privately, and 2 had no
opinion (see fig.  4.1).  Only 5 of 14 mailers we interviewed (36
percent) rated the timeliness and dependability of third-class mail
delivery and third-class postage rates as good or better than
competitors.  (see fig.  4.3). 

Recent actions taken by the principal third-class mailers' groups
suggest that their members want greater freedom to select carriers to
deliver advertising mail.  As indicated previously, the Advertising
Mail Marketing Association (AMMA), formerly known as the Third Class
Mail Association, twice has participated in formal requests to
suspend the Statutes for third-class mail.  Most recently, in 1995,
they were joined by the Direct Marketing Association (DMA). 
Collectively, AMMA and DMA members generate the vast majority of
advertising mail volume. 

While third-class mailers may be willing to divert more mail to
alternate delivery carriers, current delivery capacity is limited. 
Most alternate delivery carriers lack the capacity to process and
deliver large quantities of third-class mail.  If the Statutes were
changed, those carriers may have a greater incentive to invest in the
necessary capacity, but any significant increases could take several
years to develop to the point where the Service's third-class mail
volumes could be affected materially.  The Service, however, would
appear to have a competitive advantage for third-class mail delivery
in the foreseeable future, given the substantial volume of
third-class mail that it handles and its worksharing arrangements
with advertising mailers. 

In summary, third-class mailers were not as satisfied with the
postage rates they must pay or the timeliness and dependability of
third-class mail delivery as with competitors' rates and delivery
service.  Many of these mailers said that they would likely divert
third-class mail to private firms if the Statutes were relaxed. 
Similarly, most alternate delivery carriers said that they were
likely to pursue additional third-class and business-to-household
mail deliveries if the Statutes were relaxed.  Because the collective
capacity of the alternate delivery industry remains limited in
comparison to the Postal Service, we believe the Service faces a
lower risk of substantial third-class mail losses, compared to
possible Priority Mail and First-Class mail losses. 


   THE SERVICE'S POSTAGE RATES
   COULD BE AFFECTED MOST BY
   FIRST-CLASS VOLUME LOSSES
---------------------------------------------------------- Chapter 4:3

Although our analysis shows that Priority Mail likely would be at
greatest risk to private delivery and third-class mail would be at
low risk, the effects of a loss of such mail volume on postage rates
would be less significant than if the Service experienced similar or
smaller percentage losses of First-Class letters.  This is because
First-Class mail not only represents the largest single component of
the mail stream in terms of volume and revenue, but also contributes
substantially more than Priority Mail and third-class mail to the
Service's institutional costs,\36

which tend to equate to overhead in the private sector.  In fiscal
year 1995, First-Class mail accounted for 71 percent of the Services'
institutional costs, compared to 20 percent for third-class mail and
8 percent for Priority Mail.  (See fig.  4.4)

   Figure 4.4:  Comparison of
   Various Mail Classes
   Contribution to Institutional
   Costs in Fiscal Year 1995

   (See figure in printed
   edition.)

Note:  The terms contribution to institutional cost refer to the
portion of each mail class' revenue that cover the Service's overhead
cost, i.e., cost that is not attributable directly to a particular
mail class. 

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). 

Under the 1970 Act, the revenue derived from all of the Service's
mail deliveries and other revenue-producing activities, such as
philatelic\37 and money order sales, must cover all of its operating
costs, both in total and for each class and subclass of mail--the
"break-even" requirement.  To set postage rates, the Service assigns
some of these costs directly to First-Class mail, Priority Mail,
third-class mail, and other classes and subclasses.  The difference
between these costs and the related revenue is available to cover the
Service's "institutional" (or overhead) costs, which are costs not
attributed to any class or subclass. 

In theory, when the Service loses enough volume of a particular mail
class or subclass, some portion or eventually all of the cost
assigned to that mail class would be avoided altogether by the
Service.  In contrast, a decline in mail volume would not be expected
to reduce institutional costs similarly.  Thus, virtually all of the
institutional costs previously covered by the lost mail volume must
be redistributed. 

The extent to which the Service's rates for different classes and
subclasses of services would be affected by a decline in mail volume
depends in part on the extent to which the Service would continue to
incur the cost associated with that lost volume.  Conceptually, a
loss of mail in those classes and subclasses making the highest
contribution to institutional costs would have the most adverse
effect on the Service's rates.  Conversely, a loss of mail with the
lowest contribution to institutional costs would have the least
adverse effect.  As indicated above, compared to First-Class mail,
Priority Mail and third-class mail represent a relatively small
part--28 percent for the total of the latter two, compared to 71
percent for the former--of the Service's contribution to overhead. 


--------------------
\36 Contribution to institutional costs is a unique term of art in
ratemaking used by PRC and the Service.  It is defined as the revenue
resulting from a product less the costs associated with that
service--attributable costs.  The extent of such contribution by each
class and subclass of mail is important to the long-run financial
viability of the Postal Service because such contributions help to
cover the Service's basic infrastructure costs. 

\37 Phalatelic refers to stamp stock sold for the collection and
study of postage and imprinted stamps. 


      MAIL VOLUME LOSSES COULD
      AFFECT POSTAGE RATES VERY
      DIFFERENTLY
-------------------------------------------------------- Chapter 4:3.1

Our analysis showed that the greatest risk of financial impact on the
Service would result from losses of First-Class mail.  Losses of
third-class mail and Priority Mail would have a much lesser effect. 
Because the effects of statutory changes on the Postal Service's mail
volumes cannot be projected with precision for a variety of reasons,
some of which are discussed beginning on page 71, we 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. 

To provide an indication of the relative effects on postage rates, we
show the estimated effects on the current basic letter rate of 32
cents (for a First-Class letter weighing 1 ounce or less) assuming
various percentages of First-Class, Priority, and third-class letter
mail volume losses.  We used the First-Class rate because of the
Service's mandate in the 1970 Act to provide a uniform rate for at
least one class of sealed envelopes, which the Service designated as
First-Class letters.  The effects of First-Class letter volume losses
on the Service's basic letter mail rate would be far more significant
than if the same percentage losses occurred for Priority Mail and
third-class letters.  (See fig.  4.5.)

   Figure 4.5:  Estimated Effects
   on the Basic Letter Rate of
   Various Mail Volume Losses
   Ranging From 5 Percent Up to 25
   Percent in Fiscal Year 1995

   (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). 

The estimated 3-cent increase from 32 cents to 35 cents depicted in
figure 4.5 is not as large as some actual increases in the basic
letter rate in past years.  Since 1970, the cost of a First-Class
stamp has increased 7 times, and the increase has ranged from 3 cents
up to 4 cents.  The most recent rate increase, which took effect in
January 1995, was 3 cents. 

Even though our analysis indicates that the basic letter rate might
not significantly increase as a result of volume losses ranging up to
25 percent for Priority Mail and third-class mail pieces, the effects
of letter mail volume losses on the estimated revenue per mail piece
would differ among the Service's mail classes, subclasses, and
selected categories, as table 4.2 shows. 



                                    Table 4.2
                     
                     Estimated Effects on Average Revenue Per
                     Piece For Mail Classes, Subclasses, and
                     Selected Categories, Assuming 5 Percent
                       and 25 Percent Mail Volume Losses in
                       First-Class Mail, Priority Mail, and
                       Third-Class Mail in Fiscal Year 1995


                     Average per
                   piece revenue
Class, subclass,    before "what      5%     25%      5%     25%      5%     25%
or category           if" losses    Loss    Loss    Loss    Loss    Loss    Loss
----------------  --------------  ------  ------  ------  ------  ------  ------
First-Class               $0.345  $0.351  $0.378  $0.346  $0.348  $0.346  $0.350
 letter
First-Class                 .200    .202    .212    .201    .201    .201    .202
 cards
Priority                   3.626   3.693   4.020   3.632   3.659   3.637   3.683
Express                   12.921  12.998  13.374  12.928  12.958  12.933  12.986
Mailgram                   1.809   1.810   1.818   1.809   1.809   1.809   1.810
Second-class                .227    .228    .234    .223    .228    .227    .228
Third-class                1.594   1.596   1.609   1.594   1.595   1.594   1.596
 single piece
 rate
Third-class bulk            .172    .175    .186    .173    .173    .173    .174
 regular rate
 subject to
 Statutes
Third-class bulk            .185    .187    .197    .185    .186    .185    .187
 regular rate
 not subject to
 Statutes
Fourth-class               1.854   1.862   1.902   1.855   1.868   1.855   1.861
--------------------------------------------------------------------------------
Note:  At our request, PRC 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. 

\a Third-class Bulk regular rate subject to the Statutes. 

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

Although we believe that our analysis is useful as an indicator of
the possible effects on the Service's basic letter rate, the effects
of any mail volume losses on other postage rates likely would differ
significantly.  The effects depend on the amount of assumed
percentage volume losses among the affected letter mail classes and
subclasses.  For example, if First-Class mail volumes had been 25
percent lower in fiscal year 1995, the Priority Mail rate would have
increased by an average of 31 cents per piece (effective January
1995, the single piece rate for 2 pounds or less was $3).  Using the
same assumption, the rate for Express Mail (with a single-piece cost
of $10.25 for 8 ounces or less as of January 1995) would have
increased an average of 36 cents per piece. 

Consistent with the data shown above, estimates provided by Price
Waterhouse show that a 25-percent loss of First-Class mail volume
could have a greater effect on the Service's basic letter mail rate
than a 25-percent loss of either Priority Mail or third- class mail
volumes.  Specifically, the price of a First-Class stamp (for a
1-ounce or less letter) would need to be 41 cents in 2005 under the
"baseline" estimate, while an assumed 25-percent First-Class mail
volume loss would increase this price to 46 cents.  In comparison, an
assumed 25-percent loss of Priority or third-class mail would
increase the price to 42 cents.  (See fig.  4.6.)

   Figure 4.6:  Estimated Effects
   of 25-Percent Loss of
   First-Class, Priority, and
   Third-Class Mail Volume on the
   Basic Letter Mail Rate

   (See figure in printed
   edition.)

Note:  See appendix I for assumptions used in the Price Waterhouse
model. 

Source:  Postal Service and Price Waterhouse model. 

To provide a different estimate of the effects of a loss of Priority
Mail even greater than 25 percent, we requested that Price Waterhouse
use its model to estimate how the basic letter mail rates might
change over a 10-year period if the Service lost 50 percent of its
Priority Mail volume in 1 year.  As table 4.3 shows, a 50-percent
loss of Priority Mail volume would not have any effect on the
estimated baseline rates during 1996-2005. 



                               Table 4.3
                
                 Estimated Effects on the Basic Letter
                 Rate of a 50-Percent Loss of Priority
                             Mail in 1 Year

                                                          Assuming 50-
                                                       percent loss of
                                 Baseline assuming       Priority Mail
                                    no mail volume          volume (in
Postal year                      loss (in dollars)            dollars)
------------------------------  ------------------  ------------------
1996                                         $ .32                $.32
1997                                           .32                 .32
1998                                           .34                 .34
1999                                           .34                 .34
2000                                           .34                 .34
2001                                           .37                 .37
2002                                           .37                 .37
2003                                           .37                 .37
2004                                           .41                 .41
2005                                           .41                 .41
----------------------------------------------------------------------
Source:  Postal Service and Price Waterhouse model. 


      COMPETITION FOR SECOND-CLASS
      MAIL COULD INCREASE IF THE
      STATUTES WERE RELAXED
-------------------------------------------------------- Chapter 4:3.2

The Service's second-class mail, consisting mainly of newspapers and
periodicals, generally is not subject to the Private Express
Statutes.  However, if alternate delivery firms were allowed to
compete with the Service for delivery of First-Class or third-class
mail, many of these firms also might compete more aggressively for
second-class mail delivery.  In fiscal year 1995, the Postal Service
reported that it delivered 10.2 billion pieces of second-class mail;
although this mail generated revenues of almost $2 billion, it
contributed less than 1 percent ($53.1 million) of institutional
costs.  Thus, a loss of 25 percent of second-class mail would have a
minimal impact on the Service's overall revenue and postage rates, as
compared to a similar loss of First-Class mail. 


      REVENUE AND DELIVERY COST
      EFFECTS ARE DIFFICULT TO
      ESTIMATE
-------------------------------------------------------- Chapter 4:3.3

The Service's revenue and its delivery costs could be affected
differently among routes in the same part of the country if the
Statutes were to be changed and the Service lost mail volume.  This
is because variations in customer mail density can affect revenue per
delivered piece and cost per delivery. 

The Postal Service believes, and the results of our review tend to
support the Service's belief, that private firms would concentrate
their investments and marketing strategies in those areas that would
be the easiest to serve and most profitable.  If this occurred, a
change in the Statutes could have a different impact on the Service's
net revenue in areas where revenue per delivery stop was higher and
delivery cost per piece was lower than in areas where the revenue per
stop was low and the delivery cost per piece was high.  For example,
if the Service lost mail volume in some high-volume geographic areas,
carrier delivery costs could be unaffected after the volume decline
if the carrier must travel the same delivery route and make the same
number of stops along the route as before the loss.  In this case,
the Service would lose revenue to the extent of the volume loss but
would not reduce its delivery costs. 

Postal Service officials told us they had performed some analysis to
better understand and measure how revenue and delivery costs might be
affected in areas with different demographics as a result of mail
volume losses.  The analysis showed that a change in the Statutes
could most affect those types of mail pieces, such as bank
statements, bills, and retail advertisements, that were received in
greater numbers by households with higher incomes.  Households with
the greatest incomes received three times as much mail as those with
the smallest incomes, according to the Service's analysis.  If the
Service lost some mail now delivered to households with higher
incomes, it is likely that it would still have to deliver some mail,
but fewer pieces of mail, to those households each day.  This could
mean that the Service would collect less revenue from the mail
delivered to these households but still incur about the same costs
for the lesser amount of mail delivered to these same households. 

Our analysis showed that the geographic concentration of alternate
delivery firms specializing in distribution of third-class
advertising matter tended to correlate highly with population
density.  However, we also identified some alternate delivery firms
operating in more sparsely populated areas.  We visited one such firm
that had been in business since 1971 and, according to an independent
third-party auditor, made regular, weekly deliveries to more than 98
percent of all households within its geographic market area. 

Some empirical data exist to show that although private firms may
focus on more profitable geographical areas, delivering mail in all
but the most sparsely populated area could still be profitable. 
Postal Rate Commission staff reported the results (A Cost Comparison
of Serving Rural and Urban Areas in the United States, dated April
1993) of analysis done on the Service's historical delivery costs for
selected city and rural routes.\38

The study showed that the Service's average labor and vehicle costs
per mailbox and the average cost per piece did not differ greatly
between city routes and rural routes.  The study also showed that
rural mail routes were "profitable" for the Postal Service except for
very sparsely populated areas that contained less than 2.9 mailboxes
per mile.\39

Although we believe that the above analyses by the Service and the
Commission have provided interesting and useful information,
sufficient data were not available to estimate how the Service's
revenue, costs, and postage rates have been or might be affected as a
result of changes in mail volumes in specific geographic areas, such
as with varying customer mail densities.  Therefore, to estimate
financial effects relating to changes in the Statutes, we used the
systemwide, average revenue and cost per mail piece for the various
mail classes and subclasses that were used in the most recent
ratemaking proceeding (Postal Rate Commission Docket No.  R94-1),
which resulted in new rates effective January 1995.\40 For ratemaking
purposes, the Service does not differentiate its costs among
geographic areas of the country but rather uses "systemwide" averages
per piece for each class and subclass.  (See app.  I for further
details on the methodologies we used for estimating the effects of
mail volume losses on the Service's revenue, costs, and rates.)


--------------------
\38 Some rural routes provide delivery service to suburban
communities, and their delivery structure can be more like city
routes than rural routes. 

\39 In a more recent study, Cost and Returns from Delivery to
Sparsely Settled Rural Areas, dated June 1995, economists John Haldi
and Leonard Merewitz also found that most rural delivery routes were
profitable. 

\40 Systemwide averages for mail piece revenue and cost were
developed for ratemaking purposes. 


   FACTORS OTHER THAN STATUTORY
   CHANGES COULD INCREASE OR
   DECREASE THE SERVICE'S MAIL
   VOLUMES, OPERATING COSTS, AND
   POSTAGE RATES
---------------------------------------------------------- Chapter 4:4

Although we have analyzed the risk to future mail volumes and rates
assuming a change in the Statutes and a resulting increase in
"direct" competition from private firms, a variety of other factors
could affect the demand for mail services, operating costs, and
postage rates.  The effects of these factors on the Service are
difficult to predict and measure; they involve unknowns regarding new
communications technology--a form of "indirect" competition--and
future decisions by the Service, its competitors, and postal
customers. 

In particular, the Service could be affected significantly in the
future by losses of mail volume due to indirect competition, i.e.,
the diversion of correspondence and business transactions to
electronic forms of communication.  On the basis of the Service's
analysis of its competition, these effects could be as great or
greater than any impact that a change in the Private Express Statutes
might have on the Service and its rates. 

According to the Postal Service, six of its seven "product lines"
involve some form of mail delivery.  A seventh product line--retail
services--involves nondelivery activities.  Of the six delivery
products, all but standard parcels are subject to competition from
some form of electronic communication as well as private message and
package delivery firms.  As noted earlier, private carriers already
dominate the expedited and parcel delivery markets.  Table 4.4
summarizes the Service's assessment of the competition for the six
delivery product lines and the amount of mail volume potentially at
risk. 



                                    Table 4.4
                     
                       Postal Service Assessment of Market
                            Share and Competitive Risk


                                                          Percent of
               1994 Revenue     Percent of  Market           current      Pieces
                 (billions)   market share  share             volume  (billions)
------------  -------------  -------------  ----------  ------------  ----------
Corresponden          $24.5             54  Declining             11        9.00
 ce and
 transaction
 s
Advertising            12.7              9  Growing                3        2.00
 mail
Priority and            2.9             18  Declining             45        0.30
 Express
 Mail
Parcels                 2.0             15  Growing             None        None
Publications            1.7    (magazines)  Stable           Minimum     Minimum
                                        21
Internationa            1.4             28  Declining             10        0.15
 l
--------------------------------------------------------------------------------
Source:  U.S.  Postal Service. 

At our request, Price Waterhouse used its model to estimate the
effects on the basic letter rate over a 10-year period assuming the
mail volume losses shown above were to occur from 1996 to 2005. 
According to the Price Waterhouse model, if the above estimates of
possible mail volume losses occur, the current 32-cent First-Class
stamp (1 ounce or less) would need to increase from an estimated
baseline rate of 41 cents to 46 cents in 2005.  (See fig.  4.7)

   Figure 4.7:  Estimated Effects
   of Possible Mail Volume Losses
   Estimated by the Postal Service
   Considering Direct and Indirect
   Competition

   (See figure in printed
   edition.)

Note:  See appendix I for assumptions used by the Price Waterhouse
model. 

Source:  Postal Service and Price Waterhouse model. 


      THE SERVICE PLANS TO COMPETE
      MORE AGGRESSIVELY
-------------------------------------------------------- Chapter 4:4.1

Recognizing the possibility that its future mail volumes could
decline, the Service is taking steps to improve its competitiveness. 
Many of the Service's recent actions could have the effect of
reducing the effects of greater competition from electronic
communication and private delivery firms.  Examples of several of
these actions are described below. 

  -- Under Postmaster General Marvin Runyon's leadership, the Service
     was restructured in 1992 and a major emphasis placed on
     improving customer service.  The current national leadership
     includes recently recruited vice presidents from the private
     sector who head such functions as marketing, technology
     applications, facilities, finance, quality, and international
     business. 

  -- At the Service's request, PRC recently recommended
     reclassification of most postage rates, in part to encourage
     mailers to do more barcoding of letter mail.  This action, along
     with the Service's deployment of additional automated mail
     barcode sorting equipment, is expected to reduce the Service's
     mail processing and delivery costs, thereby helping the Service
     to set and maintain more competitive postage rates for most of
     its mail classes and thereby maintain overall mail volume. 

  -- The Service's business plans focus increased attention and
     resources on those markets that have strong growth potential and
     hold the promise of strong financial returns to the Service. 
     For example, as we discussed in our recent report,\41 the
     international mail markets offer strong growth potential.  The
     Service established a new international mail unit and introduced
     new international services to become more competitive in this
     arena.  More recently, the Service began testing a new structure
     and process for improving its Priority Mail delivery
     performance. 

  -- As detailed in our recent report,\42 the Service has a top-down,
     corporatewide initiative under way to focus all employees and
     management on improving service quality and customer
     satisfaction.  If successful, this initiative could lead to
     improvements in the Service's on-time delivery performance and
     help it to compete more successfully with private delivery
     firms. 

We cannot predict the outcome of these initiatives or changes in the
Service's future mail volumes.  Although the Service faces strong and
perhaps unprecedented competition, historically it has experienced a
steady growth in overall mail volume.  This growth has occurred
despite (1) the threats posed by new communications technology, which
has replaced some traditional mail services; and (2) regulatory
changes allowing private companies to compete for domestic overnight
deliveries and all international mail services. 

Although the Service has lost mail volume in certain classes, those
losses have been offset by increases in other classes.  For example,
the Service reported losing 35 percent of its business-to-business
First-Class mail since 1988 through diversion to electronic
communications.  Over this same period, however (from 1988 to 1995),
overall mail volume grew more than 12 percent.  For particular letter
mail classes and subclasses, the average annual rate of growth was as
follows:  for Priority Mail, 14 percent; and for all First-Class mail
(except Priority) and third-class mail, about 1.9 percent.  As
previously stated, the Service has lost most of its share of the
expedited mail and package markets despite recent increases in
Priority Mail and fourth-class mail volumes.  Overall, however, mail
volume has grown dramatically over the past 15 years, as shown in
figure 4.8. 

   Figure 4.8:  Total Mail Volume
   During Fiscal Years 1981
   Through 1995

   (See figure in printed
   edition.)

Source:  Postal Service data. 


--------------------
\41 U.S.  Postal Service:  Unresolved Issues in the International
Market (GAO/GGD-96-51, March 11, 1996). 

\42 U.S.  Postal Service:  New Focus on Improving Service Quality
(GAO/GGD 96-30, Dec.  20, 1995). 


      VARIOUS FACTORS LIMIT THE
      SERVICE'S COMPETITIVENESS
-------------------------------------------------------- Chapter 4:4.2

The Postal Service recognizes that despite its efforts to become more
competitive, it is constrained by various laws and regulations that
limit its ability to compete successfully with private sector firms. 
In particular, the Service's ability to control its operating costs
and competitively set postage rates is limited under the 1970 Act. 

Under the 1970 Act, the Service must allocate costs and set rates in
accordance with criteria that are tailored largely around its public
service mission rather than those factors that tend to drive price
and cost decisions in a competitive environment.  Similarly, the 1970
Act contains criteria that the Service must follow in providing
universal access to postal services through local post offices.  The
Service's competitors, on the other hand, have greater flexibility in
determining when and where it is most efficient and profitable to
offer their services. 

Further, under the current ratemaking process, the Service believes
that it lacks the flexibility to set or adjust postage rates quickly
for services that must compete with those of private delivery firms. 
The Service and various study groups have said that the cycle time to
implement new or adjusted rates can take up to 10 months and is a
barrier to competition that has resulted in lost mail volume and
revenue. 

The Service also may be unable to adjust its work force, in the short
run at least, to reduce operating costs commensurate with any future
decline in mail volumes.  The Service's approximately 600,000 craft
employees who collect, sort, and deliver mail generally have job
protection through union contracts.\43 This could complicate and
delay significant reductions of the postal work force and labor costs
to offset the effects of any quick downturn in mail volume. 

However, the Service has been able to make some reductions in the
career work force.  For example, as part of a long-range automation
plan initiated by former Postmaster General Anthony Frank, the
Service reduced the career work force from about 774,000 to 718,000
career employees, or 8.5 percent, between May 1989 and August 1992
through reduced hiring.  Postmaster General Runyon reduced the career
work force by an additional 7.1 percent, from about 718,000 to
667,000 career employees, from August 1992 to April 1993 by offering
employees monetary incentives for early retirement.  In total, the
Service reduced the career work force by almost 14 percent in about 4
years.  Since April 1993, however, the Service's career work force
has grown, by approximately 11 percent, to about 740,000 career
employees in November 1995. 

Overall, because of increased numbers of employees, higher wages and
benefits, and growth in mail volumes, the Service has been unable to
stop the growth of its labor costs.  These costs accounted for the
vast majority (more than 80 percent) of the Service's total operating
expenses in 1970 and in 1995.  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. 


--------------------
\43 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. 


SOME OTHER COUNTRIES HAVE NARROWED
THEIR LETTER MAIL MONOPOLIES AS
PART OF OVERALL POSTAL REFORM
============================================================ Chapter 5

Many postal administrations around the world have mail monopolies to
help meet universal letter delivery and other public service
obligations, much like the U.S.  Postal Service.  However, unlike the
Service, many of the postal administrations that we reviewed have
made major legislative and policy changes in the past 15 years to
give them greater freedom to operate like a private business.  Some
governments have narrowed their letter mail monopolies and one
government, Sweden, has eliminated the letter mail monopoly. 
However, all postal administrations we reviewed continue to make
certain postal services readily accessible to all citizens. 

As part of our review, we obtained information on the postal
monopolies in eight foreign countries:  Australia, Canada, France,
Germany, the Netherlands, New Zealand, Sweden, and the United
Kingdom.  Postal administrations in these eight countries were
described in a recent Price Waterhouse report\44 as among the most
"progressive postal administrations." Most of the eight have been
reformed in the past 15 years to change their structure and
operations and give them greater freedom from governmental control. 
The information in this report concerning the postal laws of other
countries does not reflect our independent analysis of those laws;
rather, it rests primarily on the views and analysis provided to us
by officials of foreign postal administrations and other secondary
sources. 

We previously reported\45 that the postal reform experiences of these
countries are relevant to postal reform in the United States.  The
scope of our work did not include an evaluation of the effectiveness
of postal reforms in these countries.  As we have reported, detailed
comparisons of the Postal Service's performance and specific
practices with other postal administrations can be difficult because
of size differences alone.  For example, the Service is required to
deliver to a larger geographic area than seven of the eight
countries.\46

Further, the Service has at least seven times the mail volume and at
least twice the number of employees as any of the other eight postal
administrations.  (See figs.  5.1 and 5.2.)

   Figure 5.1:  Mail Volume in
   1995 for U.S.  Postal Service
   and Postal Services in Eight
   Other Countries

   (See figure in printed
   edition.)

Source:  U.S.  Postal Service, foreign postal administrations. 

   Figure 5.2:  Employment in 1995
   for U.S.  Postal Service and
   Postal Services in Eight Other
   Countries

   (See figure in printed
   edition.)

Source:  U.S.  Postal Service, foreign postal administrations. 


--------------------
\44 A Strategic Review of Progressive Postal Administrations: 
Competition, Commercialization, and Deregulation (Price Waterhouse
LLP, February 1995). 

\45 U.S.  Postal Service:  A Look at Other Countries' Postal Reform
Efforts (GAO/T-GGD-96-60, January 25, 1996). 

\46 Canada is slightly larger in size than the United States, and
Australia is about eight-tenths the size of the United States. 


   POSTAL MONOPOLIES IN OTHER
   COUNTRIES ARE TO HELP ENSURE
   UNIVERSAL SERVICE
---------------------------------------------------------- Chapter 5:1

The governments of many other countries provide some form of
universal mail service and generally have restricted private delivery
of certain mail to ensure the financial viability of postal
administrations in those countries.  By way of background, it may be
helpful to summarize historical developments related to the
development of foreign postal monopolies.  In the mid-19th century,
European governments developed "universal governmental postal
service" to deliver mail to many homes and businesses and introduced
uniform postal rates.  These developments led to increased demand for
international as well as domestic postal services.  Since these
governments had asserted a monopoly over postal service, there was no
private mail system for international mail delivery.  Instead,
international mail was governed under bilateral agreements, which
resulted in a complex set of rates calculated under different
currencies, weights, and measures.  To address this issue, postal
administrations from 21 European nations and the United States agreed
in 1874 to form a permanent international organization, the Universal
Postal Union (UPU), to develop standard rules for exchanging
international mail. 

As discussed in our earlier report,\47 189 countries (including the
United States) participated in UPU in 1995.  UPU now functions as a
specialized agency of the United Nations and governs international
postal services.  Member countries have agreed to fulfill statutory
universal service obligations on an international level by accepting
mail from each other and delivering it to its final destination.  In
effect, each UPU member country has agreed to provide some form of
universal mail delivery service for international mail to be
delivered within their country. 

In the eight countries we reviewed, the postal administrations
provided certain services to their citizens at uniform rates before
reform and continued to provide them following reform.  However, the
definition of universal mail service varies somewhat from country to
country.  Some of the countries provided the same level of service
for urban and rural customers, while others had different service
standards for urban and rural areas.  For example, although Canada
Post is required by law to maintain service that meets the needs of
Canadian citizens, the service only needs to be similar for
communities of the same size.  Canadian citizens in very remote areas
in the far north may receive mail delivery less frequently each week
than those in some other areas of Canada. 

Similarly, some citizens in rural areas of Australia and New Zealand
receive mail delivery less often each week.  In Australia, the
frequency of rural delivery is based on a system agreed on between
Australia Post and the government that takes into account the cost of
delivery and special needs for educational materials and medical
supplies.  In New Zealand, a written agreement between New Zealand
Post and the government specifies the proportion of delivery points
that may receive delivery less frequently. 

The legal basis of universal postal service also varies from country
to country.  Universal service requirements can be based on the
country's constitution, statutes, written agreements between the
postal administration and the government, policies established by the
government minister who oversees the postal administration, or a
combination of these.  The way requirements are specified--and the
degree of specificity--also varies from one country to another. 

In some countries, changes in universal service practices have been
controversial.  For example, in New Zealand, New Zealand Post
increased a long-standing rural delivery fee for service, paid by the
addressee; this decision proved unpopular, and the fee was
eliminated, effective April 1, 1995. 

In Canada, changes in universal service have provoked debate and led
in some cases to further changes in policy.  After Canada Post was
incorporated in 1981, it started to close and consolidate some rural
post offices in order to increase the number of those that were
privately operated through franchises.  This policy was controversial
and, in February 1994, the government minister overseeing Canada Post
announced that rural post offices should no longer be closed. 


--------------------
\47 See U.S.  Postal Service:  Unresolved Issues in the International
Mail Market (GAO/GGD-96-51, March 11, 1996). 


      PRIVATE LETTER DELIVERY
      RESTRICTED IN MOST COUNTRIES
      THAT WE REVIEWED
-------------------------------------------------------- Chapter 5:1.1

Governments in seven of eight countries that we reviewed imposed
restrictions on the delivery of certain mail by private firms.  One
country (Sweden) recently eliminated its restrictions altogether,
while several of the other seven countries had reduced the
restrictions after reforming their postal administrations. 

A variety of conditions led to the reform of postal administrations
in other countries.  However, according to the Price Waterhouse
report mentioned above, a key reason for reform was an "increase in
competition in the delivery and communications markets." Further,
some other countries found direct enforcement of mail monopolies to
be difficult and used other means to achieve compliance with legal
restrictions on private mail delivery.  For example, like the Postal
Service, Canada's postal administration, Canada Post Corporation,
primarily uses education and persuasion rather than legal action to
get violators to comply with the Canadian law restricting the
delivery of certain letter mail. 

In many of the other eight countries, the mail monopoly exists for
reasons similar to those supporting the U.S.  mail monopoly.  For
example, Canada's mail monopoly has been justified on the grounds
that the Canadian government was believed to be the only entity that
could and would provide a postal service universal in scope. 
According to a recent study of Canada's postal system,\48

the private sector has been judged to be unwilling to make the large,
expensive investment in infrastructure and commitments required to
serve all areas, including outlying and low-density ones, with a full
range of postal services at equitable prices.  As a result of the
monopoly, a single charge has been levied for basic nonlocal letter
mail service in Canada since the nation was founded, regardless of
the distance traveled or any complications associated with the
route.\49

Although Canada reformed its postal laws in 1981, Canada Post
officials said that the monopoly, or "exclusive privilege," continues
to be justified on both economic and social grounds.\50

In contrast with the United States, none of the eight countries have
laws that give their postal administrations exclusive access to the
mailbox.  However, there may be certain limitations to mailbox access
in some countries.  For example, in Canada, if Canada Post owns the
mailbox, it is locked and only Canada Post has access to it.  In some
rural areas, there are mailboxes that are grouped together at various
crossroads and are locked for security reasons.  This also applies to
some centralized mailboxes in secure apartment buildings. 
Advertisers cannot have access to apartments that do not allow
door-to-door solicitation.  By comparison, mailboxes owned by
customers in Canada are accessible to anyone, including advertisers. 


--------------------
\48 From Robert M.  Campbell's major study of the postal service in
Canada, The Politics of The Post:  Canada's Postal System from Public
Service to Privatization, (Canada:  Broadview Press, 1994), page 11. 

\49 In 1968, Canada eliminated the local mail tariff that provided
for mail originating and destinating in the same geographical area to
be discounted by 1 cent. 

\50 Canada Post told us that "From an economic perspective, it is
believed that the provision of postal services exhibit material
economies of scale and scope implying least cost production via a
single producer but that competitive entry would occur in the absence
of legal barriers .  .  .  Such entry would erode the available
economies of scale and scope and, hence, CPC is accorded a legislated
exclusive privilege.  Further, it is argued that the absence of
competitive entry permits the use of simplified, highly averaged
rates within exclusive privilege products that permit material
savings in transaction cost and complexity."


      DEFINITIONS OF PROTECTED
      LETTERS IN OTHER COUNTRIES
      INCLUDES MEASURABLE
      CHARACTERISTICS
-------------------------------------------------------- Chapter 5:1.2

The postal monopoly is defined differently by individual postal
administrations.  However, a common practice among the eight
countries we reviewed was to define the scope of the postal monopoly
according to price, weight, urgency, or a combination of these
factors.  This is in contrast to the definition of a letter in this
country, as defined by the Postal Service, where these measurable
characteristics are not used except with regard to extremely urgent
letters, for which the Service has suspended the Statutes. 

In the other eight countries, the postal monopoly generally is
defined in terms of minimum dollar or weight limits for items that
may be delivered by private firms.  These restrictions are generally
contained in legislation.  In some countries, the definition of the
postal monopoly is clarified further by regulations.\51 (See table
5.1.)



                                    Table 5.1
                     
                     Key Price and Weight Limitations on the
                     Postal Monopoly in Eight Foreign Postal
                                 Administrations

Country             Price limit\a                  Weight limit
------------------  -----------------------------  -----------------------------
Australia           4 times standard letter rate   250 grams (8.8 ounces)

Canada              3 times the 50 gram letter     500 grams (1.1 pounds)
                    rate for items "of an urgent
                    nature" currently $2.13
                    Canadian ($1.55 U.S.)

France              No price limit specified for   None specified for monopoly
                    monopoly                       but 1 kilogram (2.2 pounds)
                                                   is the de facto weight limit
                                                   \

Germany             10 times standard letter rate  100 grams for bulk mail and
                                                   printed matter\b (3.5 ounces)

The Netherlands     Urgent mail\c: 11.90 NLG       500 grams (1.1 pounds)
(NLG)               ($7.21 U.S.) for domestic/
                    European Community mail or
                    17.50 NLG ($10.61 U.S.) for
                    mail to other countries\d

New Zealand (NZ)    80 NZ cents ($0.55 U.S.)       200 grams (7.1 ounces)

Sweden              No monopoly                    No monopoly

United Kingdom      1 ï¿½ ($1.56 U.S.)               None specified for monopoly
--------------------------------------------------------------------------------
\a Conversion to U.S.  dollars is based on the July 31, 1996, rate of
exchange. 

\b Competitors may obtain licenses to deliver these items above the
weight limit. 

\c Mail services that are significantly faster than the standard
express service currently provided by the Dutch postal administration
offer better guarantees in that respect and provide the tracing of
items during conveyance. 

\d Price threshold is not enforced at this time, pending new
definition in line with anticipated European Community directive. 

Source:  Foreign postal administrations. 

In the eight countries, common exclusions cover unaddressed
advertising mail, intracompany mail, and outbound international mail. 
In particular, like the United States, all seven countries with a
monopoly over letter mail excluded unaddressed advertising mail from
their monopolies. 

Sweden was the only country of the eight to have eliminated its mail
monopoly altogether.  Sweden's postal monopoly ended on January 1,
1993, when full competition was allowed for letter mail.\52 The
Swedish government, not the postal administration, has the obligation
to provide universal mail service.  The Swedish government currently
contracts exclusively with Sweden Post to provide universal
service.\53 The government can extend this arrangement in the future
to other competitors that are able to provide the entire service or
parts of universal service.  According to Sweden Post, as no
competitors currently fulfill this condition, an extension appears
unlikely in the immediate future.\54

The elimination of the postal monopoly in Sweden occurred in a
different context from that in the United States, where an estimated
82 percent of the U.S.  Postal Service's mail revenues are subject to
the Private Express Statutes and implementing Service regulations. 
When the Swedish postal monopoly was in effect, it was much more
narrowly construed.  Sweden Post has estimated that before the
monopoly was abolished, the revenues from business within the
monopoly represented about 30 percent of Sweden Post's total
revenues.  The monopoly applied to the regular transmission, for a
fee, of sealed letters and open items containing personalized
information. 


--------------------
\51 Court cases may also clarify the definition of the monopoly in
some countries, such as France. 

\52 Parcels were never included in the monopoly and the monopoly was
never enforced regarding courier services, according to Sweden Post. 

\53 The basic scope of universal postal service in Sweden is defined
in the Postal Services Act, which went into effect on March 1, 1994. 
The obligations of Sweden Post are specified in an agreement with the
government that went into effect the same date.  This agreement
states that Sweden Post undertakes to provide a daily, nationwide
mail and counter service.

The Swedish government also has the obligation to provide a payment
service.  Sweden Post provides a counter services network via post
offices and rural mailmen and operates the Postal Giro system, which
reportedly "is the normal way to pay a bill in Sweden." The
government does not pay Sweden Post for providing universal mail
service but does make a lump sum payment for a small number of post
offices that are not commercially justified and are located in places
where there are no other means of making payments.  The subsidy
covers less than half of the costs, according to Sweden Post. 

\54 Sweden Post's "only competitor of some importance" in delivering
mail, CityMail, "has so far not been a commercial success," according
to Sweden Post.  Sweden Post acquired a 75-percent share of CityMail
in 1995 shortly before it went bankrupt in December.  CityMail has
been reconstituted and, with the support of new private capital, has
been operating again in Stockholm.  CityMail has announced plans to
start operations again in additional parts of Stockholm as well as in
Gï¿½teborg and Malmï¿½. 


      POSTAL MONOPOLIES HAVE BEEN
      NARROWED IN SOME COUNTRIES
      AFTER POSTAL REFORM
-------------------------------------------------------- Chapter 5:1.3

Postal monopolies in several countries have been narrowed in the
years following postal reform.  Although many other countries were
reviewing the scope of mail monopolies at the time of our review, we
identified several countries that reduced the scope of their mail
monopolies in the wake of postal reforms. 

According to Robert Campbell's study of Canada Post, mentioned
earlier, protection under the monopoly was weakened as a result of
developments following passage of the 1981 law that established
Canada Post and defined the postal monopoly.  When a number of
utility companies and municipalities in Ontario began delivering
bills themselves, claiming they were not letters, Canada Post
proposed a changed definition of "letter" in July 1982.  After
considerable protest, Canada Post, businesses, and the government
agreed on a mutually acceptable definition that was approved in May
1983.  A letter was redefined to mean "one or more messages or
information in any form." New exemptions covered transmission of
electronic mail and allowed utility company employees to deliver
bills made up on the spot.  The monopoly was relaxed for minor
financial documents such as interbank transactions. 

Germany's postal monopoly was narrowed in January 1995, when licenses
were granted to private companies to deliver bulk advertising and
printed matter weighing more than 250 grams (about 8.8 ounces).  This
lifted the monopoly over advertisements and bulk mail, which opened
to competition about one-quarter of the estimated DM 3 billion ($2
billion U.S.) market in bulk printed material.  In January 1996, the
weight limit for granting competitors licenses to deliver direct mail
was lowered again, to more than 100 grams (about 3.5 ounces). 

In New Zealand, the monopoly weight threshold was reduced from 500
grams (about 1.1 pounds) to 200 grams (about 7.1 ounces) in 1990, and
the price threshold was reduced in phases from $1.25 NZ to 80 cents
NZ by December 1991.  In Australia, the monopoly price threshold was
reduced in 1994 from 10 times the basic letter rate to 4 times the
price, and the weight threshold was reduced from 500 grams to 250
grams.  Other changes lifted the monopoly over outbound international
mail, third-party carriage of intracompany mail, and carriage of bulk
mail between cities. 


      THE POSTAL MONOPOLY AND
      UNIVERSAL SERVICE WERE BEING
      REVIEWED IN OTHER COUNTRIES
-------------------------------------------------------- Chapter 5:1.4

As competitive pressure continues to increase, further postal reform
was being contemplated in some other countries, including additional
steps to narrow or eliminate the postal monopoly.  In 1995, various
postal policy issues, including the postal monopoly and universal
service, were under review in Australia, Canada, Germany, the
Netherlands, and New Zealand. 

In Australia, a review started in 1995 by Parliament was focused
primarily on public service obligations (PSOs) and postal performance
but also included an evaluation of the postal monopoly.  The
narrowing of the mail monopoly in 1994 generated concern in
Parliament over Australia Post's ability to maintain services to
rural and remote areas.  Even before the changes to the postal
monopoly became effective, the Country Mail Services Working Party (a
subcommittee of the Australian government's Primary Industries and
Energy Committee) reviewed the provision of Australia Post's PSOs. 
In February 1994, it recommended to the Minister for Communications
and the Arts, who oversees postal matters, that Australia Post's
services to rural and remote communities should be protected through
a review of PSOs once in the life of Parliament (i.e., every 3
years).  This recommendation was accepted by the government. 

As a result, the Minister requested that the Australian House of
Representatives' Standing Committee on Transport, Communications and
Infrastructure review rural and remote letter delivery services,
including "the effect of any further reduction in reserved services"
on Australia Post's performance of its public service obligations. 
In 1994 and 1995, 3.3 billion of the 4.1 billion pieces of mail were
covered by the postal monopoly, accounting for 56 percent of
Australia Post's revenues.  The Committee also was reviewing the need
for, extent, and cost of public service obligations, as well as
Australia Post's ability to maintain or increase performance
standards. 

The Committee had not yet reported back to the Minister when a
federal election was called.  Australia Post told us the review was
overtaken by the federal election, and thus a report had not been
issued.  The Post said "no legislation is expected" from the 1995 and
1996 review but added that a similar review process may take place in
the future.  In 1994, when the monopoly was narrowed, the Australian
government had announced its intention to further review the monopoly
in 1996 and 1997.  According to Price Waterhouse, the outcome of
future governmental review is uncertain but is likely to continue the
"gradual erosion of the postal monopoly."

In Canada, a comprehensive review of Canada Post was to be completed
by July 1996 on behalf of the Canadian government.  The review was to
consider whether Canada Post's letter mail monopoly should be
"adjusted or discontinued." In 1995, the mail monopoly covered about
half of the mail stream in Canada.  The review was to also identify
functions that Canada Post should continue to provided in the future,
postal rate setting, the financial position of Canada Post, and the
social costs of its "public policy functions," including how these
costs should be allocated.  In its submission to the review
commission, Canada Post restated its commitment to universal service,
defended its postal monopoly as necessary to support universal
service, and responded to concerns about the fairness of its postal
ratesetting. 

The New Zealand government announced in November 1994 that it would
introduce legislation to completely abolish the postal monopoly. 
Political pressures have held back legislative action, according to
Price Waterhouse.  New Zealand Post told us ".  .  .  it remains
Government policy to introduce legislation to remove the monopoly."

Although no final decision has been made, New Zealand Post officials
said last year that they had shaped their business plans to expect an
open, competitive environment.  New Zealand Post supported complete
elimination of the postal monopoly.  "Unfortunately the Government
has not had the Parliamentary support to be able to effect this
change," the Post said. 

New Zealand Post did not believe that monopoly protection was
necessary.  The Post explained that:  "Indeed, we believe that it
represents a barrier to our achieving a truly market and customer
focused positioning for our business.  The `monopoly' protection
risks breeding a false sense of complacency and certainly impacts on
public perceptions of our business.  New Zealand Post has actively
supported the Government Policy of completely deregulating the letter
market."

The German postal administration has been implementing postal reform
in stages, with privatization and deregulation planned for the near
future.  Under "Postreform I," started in 1989, separate entities
were established for postal administration, postal banking, and
telecommunications.  Under "Postreform II," the German postal service
was transformed on January 1, 1995, into a state-owned stock
corporation.  Under "Postreform III," further deregulation and
privatization is planned.  Deutsche Post declared in its 1994 annual
report that "the company's privatization will be completed when it
[partly] goes public in 1998."

Elimination of the postal monopoly in Germany has been under
consideration.  The German postal minister outlined legislation to
begin deregulating the postal market in 1998 and introduce full
competition in 2003.  In its 1994 annual report, Deutsche Post stated
that it "accepts the idea of a gradual and calculable limitation of
its reserved areas" provided that (1) liberalization is in line with
the postal policy of other European Community states, (2) competition
is on a level playing field, and (3) there is "realistic moderation"
based on the burden of universal service and payments related to
pensions that stem from the previous personnel statute. 

In the Netherlands, the government's Department of Transport had a
review underway in early 1996 regarding the scope of universal
service obligations and the postal monopoly.  The review was expected
to be completed in 1997, according to the Dutch postal
administration, PTT Post.  About 57 percent of PTT Post's sales in
1995 were derived from activities subject to competition.  PTT Post
strongly supported liberalization of postal monopoly restrictions,
provided there was "national and international reciprocity and a
level playing field for all suppliers of postal services."

Along with reform policies on universal service and postal
monopolies, some countries have sold or are contemplating the
transfer of some portion of ownership of postal administrations to
the private sector.  A majority share of the postal corporation in
the Netherlands is owned by private parties.\55

Canada passed legislation in 1993 authorizing the sale of up to
10-percent ownership of Canada Post to its employees, but this had
not been implemented as of August 1996.  The Dutch postal
administration remains the only partially privatized postal
administration in Europe.\56

In addition to these developments in individual countries, the
European Community has been considering the adoption of common limits
for the postal monopoly as part of an effort to achieve harmonization
in postal policy among member nations.\57 The European Commission\58
began a comprehensive review of public policy towards postal services
in 1988, which resulted in the 1992 publication of the "Green
Paper."\59 In this document, the European Commission expressed the
view that the universal postal service required throughout the
Community (1) should be affordable to all, of good quality, and
readily available; and (2) needed to be defined.  Additionally, the
Commission said that "this universal service objective can justify
the establishment of a set of reserved services (subject to the
decision of each Member State that this was necessary), which would
help to ensure the financial viability of the universal service
network."\60 It also said that "The list of services that could be
included in this set of reserved services should be established at
Community level."\61 In other words, the Commission supported a
system that would allow member states to retain a limited postal
monopoly, where necessary, to give postal administrations sufficient
economic resources to guarantee universal service. 

The Commission subsequently drafted a proposed directive\62 on common
rules for the development of Community postal services and the
improvement of quality of service, which could lead to changes in
member countries.  The directive declares that all countries in the
European Community

     "shall ensure that users enjoy the right to a universal service
     involving the provision of a good-quality postal service for all
     users at all points on their territory at affordable prices.  To
     that end, Member States shall take steps to ensure that the
     density of the points of contact, and of the points where mail
     is collected, take account of the needs of users."

The directive defines universal service as including "every working
day, and not less than five days a week save in exceptional
circumstances or geographical conditions:  one collection from the
clearance points, [and] one door-to-door delivery for every natural
or legal person."\63

The directive confirmed the member states' right to maintain a
defined area of "reserved services" that generate financial resources
for the maintenance and improvement of universal postal services. 
However, the directive proposes that: 

     "To the extent necessary to ensure the maintenance of the
     universal service, the services which may be reserved to the
     universal [postal] service provider(s) in each Member State are
     the collection, sorting, transport, and delivery of items of
     domestic [as opposed to international] correspondence\64

whose price is less than five times the public tariff for an item of
correspondence in the first weight step, provided that they weigh
less than 350 grammes [12.3 ounces]..."

The European Commission has told us "It is important to note that the
draft directive does not oblige member states to maintain any
monopoly in their postal sector, but allows them to do so within the
limits of the reserved services set out in the draft directive, to
the extent necessary to ensure the maintenance of the universal
service."

The draft directive also provides that "direct mail" (mass
advertising and marketing mail) and inbound international mail can
also be reserved to the postal monopoly, "wherever their reservation
is necessary for the financial equilibrium of the universal service
provider(s)", until December 31, 2000, at which time those services
must be opened to competition unless the European Commission decides
(by June 30, 1998) that the continuation of the monopoly in those
areas is justified beyond that date.  In addition, the draft
directive provides that outbound international mail is excluded from
the postal monopoly. 

The draft directive also sets out minimum standards of quality of
service (such as delivery times) to be met by the universal service
providers in each member state.  It provides for an overall review of
the application of the directive to be conducted 3 years after it is
adopted and at the latest by the first half of 2000.  Discussion on
the terms of the directive were taking place this year within the
institutions of the European Community.  In response to us, the
European Commission said "it is hoped that the directive will be
adopted in early 1997."


--------------------
\55 In early 1996, the Dutch government owned a 45-percent share of
Koninklijke PTT Nederland (KPN), the holding company of the Dutch
postal administration.  Its two divisions are PTT Post and PTT
Telecom.  KPN shares are traded on the London, Frankfurt, Amsterdam,
and New York Stock exchanges. 

\56 Singapore is the only other country where the postal
administration has sold shares to the public, according to Price
Waterhouse. 

\57 The European Community (also generally known as the European
Union) is a political and economic union of 15 European countries. 
Its member states are Austria, Belgium, Denmark, Finland, France,
Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands,
Portugal, Spain, Sweden, and the United Kingdom. 

\58 The European Commission functions as the executive body of the
European Community.  The European Commission drafts and proposes
European Community legislation and enforces the implementation of
Community laws. 

\59 Green Paper on the Development of the Single Market for Postal
Services, Commission of the European Communities.  Luxembourg: 
Office for Official Publications of the European Communities, June
1992. 

\60 "Green Paper," Chapter 9, Introduction, page 233. 

\61 "Green Paper," Chapter 9, 1.2, page 241. 

\62 According to the European Commission, "A directive is a
legislative instrument adopted at Community level which needs to be
implemented by each member state into national law within a certain
period of time." The Commission also said "the extent to which a
directive which has not been implemented into national law within the
required time frame 'automatically takes effect' in the law of the
state concerned depends very much on the exact nature of the
obligations at issue."

\63 According to the draft directive, "the universal service includes
the following minimum facilities:  the collection, transport and
distribution of addressed mail items and addressed books, catalogues,
newspapers and periodicals up to 2 kg [2.2 pounds] addressed postal
packages up to 20 kg [22.0 pounds], [and]services for registered
items and insured items.  Universal service in the draft directive
"covers both national and cross border services."

\64 "Item of correspondence" means a communication in written form on
any kind of physical medium to be conveyed and delivered at the
address indicated by the sender on the item itself or its wrapping. 
Books, catalogues, newspapers, and periodicals are not regarded as
items of correspondence. 


   OTHER POSTAL ADMINISTRATIONS
   WERE PREPARING FOR INCREASED
   COMPETITION
---------------------------------------------------------- Chapter 5:2

As a result of reform initiatives, some other postal administrations
were set up to operate more competitively than the U.S.  Postal
Service.  These postal administrations have been granted and were
using greater commercial freedom to meet growing competition from
electronic communications alternatives and private delivery firms. 
Among the actions that some have taken were downsizing the work
force; increasing productivity; and taking initiatives to compete in
electronic mail, facsimile, electronic bill payment, and other
electronic communications services. 

In addition, many foreign postal services have used their commercial
freedom to acquire subsidiaries, participate in joint ventures, and
contract out some functions that the U.S.  Postal Service handles
itself.  For example, according to Price Waterhouse, a number of
foreign postal services operated a majority of their post offices
through private franchises. 

Foreign postal administrations reported that they have used greater
commercial freedom to become more competitive and provide more
efficient and responsive postal services to the customer.  At the
same time, public concerns have surfaced in the wake of postal
reform, notably regarding the continued provision of universal
service, that have led to independent reviews and reexaminations of
some foreign postal administrations.  Despite these concerns, foreign
postal administrations were continuing to make changes to enable them
to respond to even stronger competition in the future. 

For example, Canada Post President and Chief Executive Officer
Georges Clermont said that Canada Post will undertake "a fundamental
renewal of our corporation" through making "a dramatic shift from an
operations-driven corporation to a customer-driven one." He said: 

     "Confronted with the reality of increasingly aggressive
     competition, higher service expectations from customers and an
     explosion of new communication technologies, Canada Post moved
     decisively to refocus its attention from its operations to its
     customers .  .  .  we must face the fact that change is our only
     real constant."\65

Similarly, in Australia, where the postal monopoly was narrowed in
December 1994, Australia Post Chairman Maurice Williams wrote:"...it
is clear that direct and indirect competition will continue to
increase," and he said the Post will function in "an increasingly
competitive environment where rapid technological changes are taking
place."\66

In Sweden, the postal administration stated: 

     "Sweden Post is in the midst of an ongoing--and
     accelerating--process of transformation.  This is based on a
     progressive technological shift and a changed competitive
     situation.  New information technology offers a path to a range
     of new opportunities for Sweden Post, but it also means that the
     Company will, by degrees, have to reshape its organization and
     working practices.  Through a combination of new technology and
     a local presence--in the form of the post office and mail
     delivery networks--Sweden Post can continue to deliver messages,
     goods and payments for the foreseeable future."\67


--------------------
\65 Annual Report 1994-1995 (Canada Post Corporation). 

\66 Australia Post Annual Report 1995. 

\67 Sweden Post 1994 Annual Report. 


POSTAL SERVICE TECHNICAL COMMENTS
AND OUR EVALUATION
============================================================ Chapter 6

We requested comments on a draft of volumes I and II of this report
from the Postal Service and the Postal Rate Commission.  The Postal
Service responded in a letter, with enclosure, dated August 29, 1996. 
Because the enclosure to the letter raised technical matters related
to the content of volume II, the letter with the enclosure is
reprinted in appendix II of volume II, and our comments on those
technical matters are provided below.  The letter is also reprinted
in appendix I of volume I, and our comments on the letter itself are
provided on pages 34-36 of volume I. 

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. 

In the letter portion of its comments, 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 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.  Our detailed response to the Service's concerns
in this regard is contained in volume I. 

In the enclosure to its letter, the Postal Service reiterated its
concern regarding estimates of financial conditions.  Thus, we
believe it is important for us to reiterate here that we did not
attempt to make long-range forecasts and predict future financial
effects of changing the Statues.  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. 


      USE OF FIRST-CLASS STAMP
      PRICE AS A PROXY FOR FUTURE
      FINANCIAL POSITION
-------------------------------------------------------- Chapter 6:0.1

The Service said that we used the price of a First-Class stamp as a
proxy for its future financial position.  It also said that this
measure does not consider certain future revenue and expense
requirements such as recovery of prior-year losses and funding of
future retirement and workers' compensation costs.  Further, the
Service said that we should have considered what happens to the price
of classes of mail other than First-Class because volume losses
across all mail classes would require it to lay off at least 100,000
employees. 

Our report presents a number of reasons why we chose the First-Class
stamp price as the major, but not exclusive, focus for examining the
price sensitivity of volume changes (e.g., see pp.  59, 61, and 64). 
A key consideration was that the First-Class stamp pays for about 70
percent of the Services overhead costs and, as such, reductions in
its volume would substantially impact the revenue available to pay
for these costs. 

With regard to the completeness of our estimates, the baseline
postage rates used by the Commission in our sensitivity analysis are
the same rates that the Service put into effect in January 1995 for
all classes and subclasses of mail.  These rates include all of the
revenue and expense items cited by the Service in its comments --
including estimates for recovery of prior year losses, employee
retirement, worker's compensation, and other revenue and expense
requirements used by the Service and the Commission. 

In addition, the Price Waterhouse estimates in our report include all
of the same revenue and expense requirements used by the Commission,
except for recovery of prior-year losses through higher future
revenue and postage rates.  According to Price Waterhouse, it had
made estimates at different times for the Service that included and
excluded the prior-year loss recovery.  When a revenue requirement to
recover such losses is included in the Price Waterhouse estimates,
the baseline postage rates are higher and other postage rates derived
from the model also are higher.  In this regard, it should be noted
that the effects of the Service's decisions to recover prior-year
losses and provide for other such expenses through future rate
increases would occur notwithstanding any change in the Statutes. 

We considered not only the First-Class stamp price but all mail
classes and postage rates.  However, in light of the Service's
concerns about how other classes of mail and the Service's total
revenue might be affected, we included additional information in
volume I (table 3) and volume II on the effects on various classes
and subclasses of mail if the Service were to lose mail volume in the
future. 

With respect to the Service's comments that at least 100,000
employees would be laid off, we did not attempt to measure the impact
of revenue losses on future postal employment.  Such impact could be
affected not only by possible mail volume losses but also by the time
period over which such losses might be sustained and the Service's
ability to adjust the postal work force commensurate with any reduced
mail volumes and workload.  We agree, however, that a 25-percent loss
of First-Class mail volume could have a significant impact on the
Service. 


      PRICE ELASTICITY
      CONSIDERATIONS
-------------------------------------------------------- Chapter 6:0.2

The Service also said that our estimates did not include the effect
of price changes on volume--commonly known as price elasticity. 
However, the estimates made by both the Commission and Price
Waterhouse for our report include price elasticity for each mail
class and subclass.  In response to the Service's comments, we have
further explained the elasticity rates used for our report, in
appendix I, volume II. 

The Service also said that if the Statutes are eliminated altogether
and the Service and its competitors operate in a nonmonopoly
environment, elasticity rates could change significantly.  We agree
with this basic proposition, but we did not make any assumptions
about how or to what extent--if at all--Congress might change the
Statutes or what elasticity rates might be in the future, both of
which are unknown.  For the purposes of our report, the Commission
and Price Waterhouse used the same elasticity rates that were used by
(1) the Service and the Commission for recent rate making purposes
and (2) the Service and Price Waterhouse for financial forecasting
purposes. 


      POSTAL SERVICE USED
      ALTERNATIVE SCENARIOS
-------------------------------------------------------- Chapter 6:0.3

In examining the assumptions underlying the estimates in our report,
the Postal Service analyzed three scenarios.  Its approach to
developing scenarios was similar to ours.  However, the Service used
different baseline estimates, assumed much larger volume losses, and
included higher elasticity rates than those used by the Commission
and Price Waterhouse when examining possible changes in postage rates
for our report.  For example, the Service assumed that it would lose
most presorted First- Class mail to private delivery firms by 2005. 
Because of these differences, the Service's estimates of the impact
on the First-Class, 1-ounce postage rate, which are presented on
pages 2 and 3 of the enclosure to its letter, are greater than the
estimates in our report. 


      POSTAL SERVICE EXPRESSED
      DIFFERENT VIEWS ON THE
      COMPETITIVE ENVIRONMENT
-------------------------------------------------------- Chapter 6:0.4

The Postal Service also estimated more severe effects on its revenue
than we did--particularly for Priority Mail.  In essence it suggested
that, because of the competitive environment, it could lose 85
percent of Priority Mail volume and calculated the effect of an
immediate 85 percent loss.  While we made no forecasts of future mail
volume losses, it appears to us that the Service's forecast is a
worse-case outlook for its Priority Mail business.  Even now, a major
portion of Priority Mail is not protected by the Statutes and
Priority Mail volume is growing. 

The Service also presents its view about the behavior of presort and
alternate delivery firms if the Statutes were removed or relaxed. 
Our assessment was that the relative risk of third-class mail volume
loss is low compared to that of Priority and First-class Mail.  Our
assessment was based primarily on existing private sector capability
as well as interviews with mailers and carriers.  A key factor in our
assessment was the Service's share of the expedited and advertising
(third-class) mail markets, i.e., an estimated 15 percent of the
former and 96 percent of the latter.  We have no basis to comment on
the Service's view that a substantial industry that combines mail
preparation and delivery capability could quickly emerge if the
Statutes are relaxed.  Our report recognized that the Service
believes this could occur, and we have revised volume I to further
emphasize the Service's view of this possibility. 


DESCRIPTION OF METHODS USED FOR
ESTIMATING FINANCIAL EFFECTS OF
MAIL VOLUME LOSSES
=========================================================== Appendix I

We used Postal Service and Postal Rate Commission estimates that were
used for the January 1995 postage rate increases as the principal
basis for the estimates in this report of how changes in future mail
volumes might affect the Service's revenue, cost, and postage rates. 
We also worked with Price Waterhouse LLP to utilize a model developed
under contract with the Postal Service to provide additional
estimates of changes in the Service's revenue, cost, and rates in the
event of future mail volume losses. 


   POSTAL SERVICE AND POSTAL RATE
   COMMISSION ESTIMATES
--------------------------------------------------------- Appendix I:1

Under the Postal Reorganization Act of 1970, the Service is required
to file a request for changes in rates of any services it provides to
the Postal Rate Commission (PRC).  As part of its request, the
Service is to provide detailed information and data to explain its
revenue needs, estimates of mail volumes, costs, prices, and rate
design.  PRC must hold public hearings and allow interested parties,
including the Service's competitors, to present their views on
proposed rate changes.  At the completion of the case, PRC submits
its recommendations to the Service's Board of Governors, which may
adopt them in whole or in part. 

To show how the Service's finances might have been affected from
assumed percentage losses in volume, we used the estimated volume,
cost, revenue, and rate data used by the Service, PRC, and other
parties in the most recent postal rate case (R94-1).  That data
resulted in the 32-cent basic letter rate, which is the cost of a
First-Class mail piece weighing up to 1 ounce, and rates for other
mail that became effective in January 1995. 


      GAO ASSUMPTIONS USED BY THE
      POSTAL RATE COMMISSION
------------------------------------------------------- Appendix I:1.1

We arranged with the Postal Rate Commission to estimate for fiscal
year 1995 the Service's revenue, cost, and postage rates assuming
that First-Class, Priority, and third-class mail volumes were each
reduced by 5 percent to 25 percent, in 5-percent increments, during
that year.  We used this range of percentage losses to help
illustrate some possible financial effects on the Postal Service if
its future letter mail volumes declined.  The estimates do not
represent predictions of the effect of relaxing the Private Express
Statutes, because there are too many unknowns about the future
decisions by the Service and its competitors and customers. 

For the Postal Rate Commission estimates, costs attributed to
First-Class Mail, Priority Mail, and third-class mail were reduced in
direct proportion to the percentage reductions of volumes cited
above.  According to PRC, this assumption regarding changes in
attributable cost was used in the R94-1 rate case.  "Institutional"
costs were not reduced overall but reallocated to classes and
subclasses on the basis of the original institutional contribution
percentages. 

For its analysis, PRC assumed that the deficiency in institutional
contribution was distributed to mail classes on the basis of their
same share of contribution to institutional costs in the R94-1 rate
case.  The revenue deficiency was not distributed to nonprofit mail. 
This analysis assumed that the Postal Service would capture the cost
savings in direct proportion to the revenue losses.  The Commission
used the same elasticity rates for its analysis as were used in the
R94-1 rate case.  It did not consider the second-generation volume
loss that would result from the higher rates required to make up for
the lost institutional cost contribution.  Had the Commission
included second generation volume loss, the basic First-Class letter
rate would not have changed, using our volume loss estimates. 


   POSTAL SERVICE AND PRICE
   WATERHOUSE LLP MODEL
--------------------------------------------------------- Appendix I:2

Price Waterhouse developed a strategic financial model in order to
help the Postal Service evaluate the financial impact of large
external and internal changes.  The model was a complex computer
program that translated "inputs," such as assumptions about
electronic diversion, labor rates, productivity, mail volume changes,
and other factors affecting costs, into "outputs" such as future
revenues, costs, and estimated postal rates.  The model provided
financial projections for each year through 2005. 

As part of its analysis, Price Waterhouse developed a baseline and
alternative scenarios.  Included in each scenario were estimates
regarding the following: 

  -- Mail volume changes, and the effects of electronic diversion and
     increased competition.  According to Price Waterhouse, mail
     volume changes were based on early 1995 Postal Service volume
     growth forecasts, adjusted for anticipated future changes in
     postal rates using Postal Service demand equations and price
     elasticities.\68

  -- Changes in postal employees' wages and benefits were based on
     the Employment Cost Index (ECI).  For the baseline, it is
     assumed that wages would increase at ECI minus one half of a
     percentage point (ECI-.5) until 1998 and at full ECI through
     2005.  Other cost elements were escalated on the basis of the
     Consumer Price Index (CPI).  The ECI and CPI forecasts were
     based on Congressional Budget Office projections through 2004,
     the last year available, and assumed to be the same in 2004 and
     2005. 

  -- Changes in the Service's productivity were based on changes in
     volume. 

  -- Changes in the composition, by craft, of the Service workforce
     were based on changes in the composition of mail handled by the
     Service. 

  -- Changes in the number of delivery points were based on
     historical trends. 

For the baseline scenario, assumptions in each of the above
categories closely paralleled Postal Service and Postal Rate
Commission assumptions, according to Price Waterhouse. 

According to Price Waterhouse, the model also recognized the effects
of the elasticity of demand.\69 For the baseline, elasticity
estimates were generally consistent with estimates used in rate cases
by the Service and PRC.  Price Waterhouse said that it projected
future labor requirements for the baseline using assumptions similar
to those used in rate cases by the Service and PRC, i.e., (1) if mail
volume increased, labor costs associated with that volume would
increase proportionately; and (2) if mail volume decreased, labor
costs associated with that volume would decrease proportionately. 

The baseline estimates in the model also assumed that the Service
would be required to break even throughout the 10-year future period. 
Thus, the Service could make a "profit" in some years, incur a loss
in other years, and break even in the longer term.  Further, it was
assumed for the baseline estimates that the Service's regulatory
environment would stay the same, and the Postal Rate Commission would
continue to recommend postal rates.  The estimates used in our report
and based on the Price Waterhouse baseline scenario assumed a 3-year
rate case cycle, with rate increases in 1998, 2001, and 2004. 
Selected results for the baseline scenario are shown in tables I.1,
I.2, and I.3. 



                               Table I.1
                
                   Price Waterhouse Baseline Scenario
                 Estimates for Selected Postal Service
                              Mail Volumes


                            First-      Third-    Priority       Total
Year                       Class\a     class\b        Mail    volume\c
----------------------  ----------  ----------  ----------  ----------
1996                        97,847      73,245         717     185,724
1997                       100,603      75,626         739     191,261
1998                       102,993      78,287         760     196,685
1999                       105,597      80,533         780     201,874
2000                       108,188      82,760         799     207,012
2001                       109,348      83,373         807     209,037
2002                       111,852      85,526         826     213,978
2003                       114,330      87,651         845     218,853
2004                       115,169      88,007         851     220,258
2005                       117,718      90,180         870     225,258
----------------------------------------------------------------------
\a Total of estimates for First-Class single piece, meter single
piece, and bulk. 

\b Represents the total of estimates for third-class commercial and
third-class nonprofit. 

\c Represents all classes of domestic and international mail,
including First-Class, second-class, third-class, fourth-class,
Priority, Express, and mailgrams. 

Source:  Price Waterhouse LLP. 



                               Table I.2
                
                   Price Waterhouse Baseline Scenario
                Estimates for Postal Service Work Years,
                      Labor Cost, and Mail Volumes

                                                               Volume/
                                             Labor cost/   work year\b
Year                            Work years   work year\a      (pieces)
----------------------------  ------------  ------------  ------------
1996                               857,169       $45,152       216,672
1997                               873,885        46,467       218,863
1998                               889,151        48,168       221,205
1999                               904,749        49,899       223,127
2000                               920,214        51,740       224,961
2001                               927,180        53,698       225,454
2002                               941,785        55,811       227,204
2003                               956,323        57,901       228,848
2004                               962,060        60,105       228,944
2005                               977,475        62,392       230,449
----------------------------------------------------------------------
\a Incorporates assumptions for increases in labor rates, the mix of
labor, and labor productivity. 

\b Incorporates estimates in volume (see table I.1). 

Source:  Price Waterhouse LLP. 



                               Table I.3
                
                   Price Waterhouse Baseline Scenario
                 Estimates for Postal Service Revenues
                               and Costs

                                                                Annual
                                     Total                    surplus/
                                   revenue    Total cost     deficit\a
Year                            (millions)    (millions)    (millions)
----------------------------  ------------  ------------  ------------
1996                               $57,251       $55,784        $1,467
1997                                58,970        58,675           295
1998                                63,637        61,886         1,751
1999                                65,367        65,266           101
2000                                66,998        68,849        -1,851
2001                                74,187        72,010         2,177
2002                                76,105        76,029            76
2003                                77,914        80,166        -2,253
2004                                86,450        83,794         2,657
2005                                88,415        88,464           -49
----------------------------------------------------------------------
\a Surplus/deficit equals revenues minus costs. 

Source:  Price Waterhouse LLP. 


--------------------
\68 Demand equations and price elasticities are used to compute the
degree to which mail volumes are sensitive to price increases. 

\69 Elasticity of demand is defined as the ratio of percentage change
in quantity demanded to percentage change in price. 


      GAO ASSUMPTIONS USED BY
      PRICE WATERHOUSE
------------------------------------------------------- Appendix I:2.1

At our request, Price Waterhouse provided us with its baseline
estimates of future mail volumes, revenue, cost, and rates that it
had developed for the Postal Service.  Using its model, Price
Waterhouse also provided us with the estimated effects on the
baseline estimates under alternative assumptions, which we made,
regarding Postal Service mail volumes.  Price Waterhouse used these
assumptions in the baseline scenario but, at our request, included
"what if" assumptions regarding mail volume as follows. 

  -- A loss of First-Class mail volume during 1996 through 2000 was
     assumed, at the rate of (1) 1 percent each year for a total
     5-percent decrease; and (2) 5 percent each year for a total
     decrease of 25 percent, and similar rates of volume losses for
     third-class mail and Priority Mail.  We used these percentages
     to provide examples of a range of possible effects of mail
     volume losses on the Service's revenue, cost, and rates. 

  -- A 50-percent decrease in Priority Mail during 1996 was assumed. 
     We used this estimate to supplement other estimates of the
     effects of Priority Mail volume losses, which showed that the
     loss of various percentages of Priority Mail ranging from 5
     percent up to 25 percent did not significantly affect the basic
     First-Class, 1-ounce letter mail rate. 

Price Waterhouse estimated changes in future mail volumes on the
basis of the Postal Service's analysis of competitive threats from
private firms and electronic communication.  The Service estimated
that First-Class mail volume could decline by 11 percent, third-class
mail by 3 percent, Priority mail by 45 percent, and Express Mail by
45 percent; and fourth-class would remain unchanged. 

We also arranged for Price Waterhouse to use its model to estimate
how postage rates might change using different assumptions about
changes in the Service's labor costs.  The baseline estimates in the
model assume that labor costs vary in direct proportion to changes in
mail volume and revenue.  For example, under this assumption, a
10-percent decrease in revenue within a particular mail class
resulted in a 10-percent decrease in labor costs associated with that
volume.  It is uncertain whether the Service can reduce its labor
cost at this rate, particularly if the volume loss occurs over a
short time period.  Further, the Postal Service and the Postal Rate
Commission differed in their views on the extent to which labor costs
could be and would be reduced with reductions in mail volumes. 

The assumptions made regarding changes in the Service's labor costs
as a result of mail volume changes could significantly influence the
estimated effects of such changes on the Service's postage rates. 
Because of this, we arranged with Price Waterhouse to show how its
baseline estimates would change using an assumption different from
that described above regarding changes in future labor costs.  This
alternate assumption was that labor costs decreased at one-half the
rate of the change in mail volume and revenue.  For example, under
this assumption, if First-Class mail volume and revenue dropped by 10
percent, the labor costs associated that volume would drop by only 5
percent.  We arranged for these estimates, which are presented in
volume I of this report, using a different assumption about labor
costs only for the purpose of indicating the sensitivity of the
Service's postage rates to these costs, which accounted for over 80
percent of the Service's total costs. 

Finally, we arranged with Price Waterhouse to use its model to
estimate the effects on the Services' postage rates assuming that
specific categories, such as bulk rate First-Class letters, were to
be lost and the Service would reduce, at different rates, its
attributable cost associated with the lost mail volume. 




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



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


LISTING OF GAO STRUCTURED
INTERVIEW PARTICIPANTS
========================================================= Appendix III


      NATIONAL EXPRESS AND PARCEL
      CARRIERS
----------------------------------------------------- Appendix III:0.1

Airborne Express, Seattle, Washington
DHL Airways, Redwood City, California
Federal Express, Memphis, Tennessee (in Washington, DC)
Roadway Package System, Pittsburgh, Pennsylvania
United Parcel Service, Atlanta, Georgia (in Washington, DC)


      ALTERNATE DELIVERY FIRMS
----------------------------------------------------- Appendix III:0.2

A&A Distribution, Inc., San Jose, California
Ad-Post Northwest, Inc., Burien, Washington
Advertisers Postal Service, Gaylord, Michigan
Alternate Postal Delivery, Inc., Grand Rapids, Michigan
Atlanta Journal and Constitution, Atlanta, Georgia
Distribution Systems of America, Inc., Brentwood, New York
H&H Advertising, Fort Worth, Texas
Houston Chronicle Express, Houston, Texas
Maxx Mail, New York, New York
Nationwide Alternate Delivery Alliance, Washington, DC
National Delivery Service, Princeton, New Jersey
The Philadelphia Inquirer, Philadelphia, Pennsylvania
Publishers Express, Inc., Marietta, Georgia
R-J Ad Service, Las Vegas, Nevada
Times Distribution, Inc., Kent, Washington


      MAILER ORGANIZATIONS AND
      ASSOCIATIONS
----------------------------------------------------- Appendix III:0.3

Advertising Mail Marketing Association, Washington, DC
Alliance of Nonprofit Mailers, Washington, DC
Association of Priority Mail Users, McLean, Virginia
Council of Public Utility Mailers, Washington, DC
Direct Marketing Association, New York, New York
 and Washington, DC
Mail Advertising Service Association, Alexandria, Virginia
Mail Order Association of America, Washington, DC
National Federation of Nonprofits, Washington, DC
National Newspaper Association, Arlington, Virginia
National Postal Policy Council, Arlington, Virginia
Newspaper Association of America, Reston, Virginia
Parcel Shippers Association, Washington, DC
U.S.  General Services Administration, Washington, DC
 (in Arlington, Virginia)


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IV


   GENERAL GOVERNMENT DIVISION,
   WASHINGTON, D.C. 
-------------------------------------------------------- Appendix IV:1

Michael E.  Motley, Associate Director
James T.  Campbell, Assistant Director
Barry P.  Griffiths, Project Manager
Charles T.  Angelo, Deputy Project Manager
Kenneth E.  John, Senior Social Science Analyst
Melvin J.  Horne, Evaluator


   DALLAS REGIONAL OFFICE
-------------------------------------------------------- Appendix IV:2

Louis G.  Tutt, Deputy Project Manager
Raimondo Occhipinti, Senior Evaluator
Linda Kay Willard, Evaluator


   NEW YORK REGIONAL OFFICE
-------------------------------------------------------- Appendix IV:3

Anne C.  Kornblum, Senior Evaluator


   OFFICE OF THE CHIEF ECONOMIST,
   WASHINGTON, D.C. 
-------------------------------------------------------- Appendix IV:4

Timothy J.  Carr, Economist


   OFFICE OF THE GENERAL COUNSEL,
   WASHINGTON, D.C. 
-------------------------------------------------------- Appendix IV:5

Jill P.  Sayre, Senior Attorney


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*** End of document. ***