UPS Chairman wants US Postal Service to operate appropriately in the competitive marketplace

UPS Chairman, in written testimony to the House Government Reform Committee Task Force on the Postal Service said that he wanted "to call attention to the request that Congress enact postal reform to ensure that the Postal Service 'operates appropriately in the competitive marketplace.' This criteria is critically important to UPS, and it is essential to ensure fair competition in competitive markets, which include Package Services, Priority Mail, Express Mail, and International Mail. The timely and efficient distribution of core mail services, such as First-Class Mail, Periodicals, and Standard Mail, plays a vital role in this country and it is important that reform enable the Postal Service to be successful in this critical mission."

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I appreciate the opportunity to present a written statement for the record
expressing the views of UPS before the Special Panel on the Postal Service. The UPS
Board of Directors is meeting today, February 11 , 2004, and, as Chairman of the Board, th
it is imperative that I attend.
The Administration offered guidance to Congress as it considers the broad and
complex issues related to the United States Postal Service. In particular, I want to call
attention to the request that Congress enact postal reform to ensure that the Postal Service
“… operat[es] appropriately in the competitive marketplace.” This criteria is critically
important to UPS, and it is essential to ensure fair competition in competitive markets,
which include Package Services, Priority Mail, Express Mail, and International Mail.
The timely and efficient distribution of core mail services, such as First-Class
Mail, Periodicals, and Standard Mail, plays a vital role in this country and it is important
that reform enable the Postal Service to be successful in this critical mission. My
testimony covers four key points that UPS believes must guide legislative efforts to
reform the Postal Service.
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1. Postal reform must focus on core mail services.
The financial health of the Postal Service is determined by the performance of its
core mail services, which consist mostly of First-Class Mail, Periodicals, and Standard
Mail. Postal reform efforts must enable the Postal Service to succeed in delivering these
services, and UPS wants to be supportive of these efforts.
Core mail services account for 86 percent of total Postal Service revenues and
provide nearly all of the contribution to the Postal Service’s “institutional costs.”
Because of the importance of these services to the Postal Service’s financial
performance, postal reform must concentrate on this segment of the business.
It is often argued that additional pricing flexibility on competitive services is
essential to ensure the financial health of the Postal Service. However, this argument
ignores the fact that competitive services generate only 14 percent of total revenues and
account for only 8 percent of the contribution to the Postal Service’s “institutional costs.”
Therefore, competitive services can not possibly solve the Postal Service’s considerable
challenges.
This view is supported by testimony given to the Presidential Commission by the
Postal Service’s CFO that showed that extraordinarily large increases in competitive
volumes would be necessary to compensate for very small percentage declines in
monopoly products.
It has also been argued that allowing the Postal Service to expand into new lines
of business will provide additional revenue streams and solve the Postal Service’s
financial challenges. UPS strongly disagrees with this view. For example, the Postal
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Service’s own “non-postal” ventures have hurt, rather than helped, mailers and the Postal
Service.
The Presidential Commission recommended that the Postal Service be given a
focused, clear mission “to provide high-quality, essential postal services …” (p. xi,
emphasis added) The public is well served by private enterprises in all areas outside of
core mail services, thus the focus of the Postal Service should be the timely and efficient
distribution of core mail services.
2. Postal reform must include provisions to improve cost allocation and ensure
transparent reporting.
Sound cost management is a critical component of the financial viability of any
entity, and the Postal Service – as a government entity – is no exception. Therefore,
postal reform must improve the quality of cost allocation and ensure transparent
reporting. The Presidential Commission endorsed this position by saying that “… the
Commission recommends that the Postal Service significantly improve its cost-allocation
system.” (p. 67)
In addition, the Administration spoke to the importance of product costing when
it said that postal reform should be “guided by a set of clear principles” that address
transparency to “ensure that important factual information on the Postal Service’s
product costs and performance is accurately measured and made available to the public in
a timely manner.”
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Accurate cost allocation will allow the Postal Service to better identify the true
cost of its services. In addition, transparent reporting is absolutely essential as long as
the Postal Service is allowed to go to market with a government-granted monopoly.
3. Competitive products should not benefit from subsidies flowing from a
monopoly network.
Postal reform legislation must ensure that the Postal Service’s competitive
products do not get a free ride on a monopoly network. If they do, they are receiving a
subsidy from monopoly products that is not available to private enterprise.
The Postal Service’s government-granted mail monopoly allows it to subsidize
competitive products and unfairly compete with the private sector. Carrying competitive
products on this network, when the cost of the network infrastructure has already been
allocated to monopoly products, allows the Postal Service to unfairly leverage its
monopoly network. Private carriers, on the other hand, do not have the luxury of
leveraging a government-granted letter mail monopoly to compete in private markets.
Instead, private carriers must recover all of their infrastructure costs from competitive
product offerings. This is a significant advantage for the Postal Service when they
participate in competitive markets, and one that is not recognized under current postal
law.
UPS’s concern about the pricing of competitive services can be illustrated by
comparing the current pricing of competitive services to that of core mail services.
Postal services are priced based on their attributable cost plus a markup. The markup on
core mail services – which consist mostly of First-Class Mail, Periodicals, and Standard
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Mail – is nearly two-and-a-half times as large as the markup on competitive services.
This practice is inconsistent with how a government monopoly should be pricing its
services, and it should be addressed.
In addition, the Postal Service also enters competitive markets with all of the
advantages of a government agency, including exemptions from a variety of taxes and
exemptions from other laws that apply to its private competitors. These governmental
advantages are also not recognized in the current postal laws, and must be corrected.
UPS believes that addressing the subsidization of competitive products is at the
heart of the Administration’s call for the Postal Service to “… operat[e] appropriately in
the competitive marketplace.”
4. Postal reform must include a strong regulator.
A strong regulator must have the authority to: (a) ensure that prices for
competitive products are free of subsidy, and (b) ensure that attributable costs are
allocated correctly.
We cannot ignore the fact that the Postal Service goes to market with both a
government-granted monopoly and with products that compete in competitive markets,
which allows the Postal Service to charge a disproportionate share of its infrastructure
costs to monopoly services and a relatively minimal share of those costs to competitive
services. Therefore, additional pricing flexibility should not be permitted.
In addition, the Postal Service is a government entity with a public-service
mission. This unique status requires that a strong and independent regulator exist to
protect customers from the exercise of monopoly power.
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Finally, the current 10-month rate-setting process is often criticized as
unreasonably burdensome. This process can be improved and streamlined, as UPS
testified to the Presidential Commission. However, improvements to the rate-setting
process should not be confused with arguments for pricing flexibility.
A strong regulator must ensure that the prices for competitive products are free of
subsidies from a monopoly network and that costs are allocated to each service
appropriately. It is also necessary that the regulator be granted the powers to ensure
transparent reporting. This is simply the price of going to market with a governmentgranted
monopoly.
Closing
The President’s Commission on the United States Postal Service did an admirable
job examining the challenges facing the Postal Service, and developing a vision for its
future. UPS was an early proponent of the Commission and played an active,
participatory role in the Commission process. I testified before the Commission, as did
James Holsen, our Vice President of Engineering. Additionally, as the Commission saw
fit, we provided ancillary documents and made our staff and facilities available. I also
appreciate the steadfast efforts of Panel Chairman John McHugh and Committee
Chairman Tom Davis for their continued efforts on this complex and critical issue,
especially their joint effort with Panel Ranking Democrat Danny Davis and Committee
Ranking Democrat Henry Waxman. Additionally, I want to commend Postmaster
General Potter’s focus on efficiency and cost control and the overall financial
improvement of the Postal Service that has occurred under his leadership.
The U.S. economy is built on the principle of free enterprise. It has not been the
role of government to move into areas that are well-served by highly competitive, private
companies.
However, the Postal Service’s core mail services – which consist mostly of First-
Class Mail, Periodicals, and Standard Mail – play a vital role in this nation. In particular,
UPS recognizes the role that the Postal Service’s core mail products play in facilitating
commerce, and it is important that reform enable the Postal Service to be successful in
this critical mission.
UPS believes that legislative efforts to reform the Postal Service must address
four key issues: (1) focus on core mail services; (2) improve cost allocation and ensure
financial transparency; (3) ensure that competitive products do not benefit from subsidies
flowing from a monopoly network; and (4) strengthen regulatory oversight.
I look forward to continuing to work with Congress, the Administration, and the
postal community on this important issue.