Challenges in the U.S. Postal Environment

Ruth Y. GoldwayChairman, U.S. Postal Regulatory Commission

UPU Forum on Postal RegulationNovember 10, 2011Bern, Switzerland

2

Role of the Postal Regulatory Commission

Establish more modern system of rate making

Monitor quality of service

Provide detailed, transparent information on Postal Service’s operations

Hear appeals from citizens on post office closings

Offer assistance in resolving rate and service inquiries

Hear customer complaints and provide redress if appropriate

Ensure level playing field between mailers (e.g. decide over allegation of rate discrimination)

Assure universal service six days a week

3

U.S. Postal Market Characteristics

USPS is an independent establishment of the Executive Branch of the Federal Government

Letter and mailbox monopolies Market dominant and competitive products Price cap (Consumer Price Index) Universal Service Obligation Limited diversification (hybrid mail, money transfer,

passport processing, electronic post mark) Mail is still the core business

4

U.S. Modes of Postal Liberalization

Upstream competition (workshare discounts)

Downstream access (local drop-ship)

Commercial licensing of postal indicia (postage and tracking services) to private companies

Competition in the express, priority and bulk parcel delivery market

5

The U.S. Postal Service Today

USPS self-sufficient – no government subsidies to support USO Declining volumes and revenues Increasing costs related to low rate of inflation Growing deficit

2011 - $10.0 billion (estimated) 2010 - $8.5 billion 2009 - $3.8 billion 2008 - $2.8 billion

$12.69 billion in debt to federal Treasury through June 30, 2011 $15 billion debt limit

6

Structural Challenges

Future Retiree Health Benefits Fund Average $5.6 billion annual payment for 10 years under 2006 postal reform law $20.9 billion paid from 2006-2010 ($45 billion in fund) Commission study estimated appropriate annual payments should be significantly

reduced

Pension Fund Overpayment identified by Commission and Postal Service Office of Inspector General Commission estimates overpayment between $50 and $55 billion

Cost of Universal Service Obligation/Value of Monopolies 2009 cost of USO - $4.9 billion 2009 value of monopolies - $2.1 billion Cost of USO is going up Value of monopolies is going down

U.S. Postal Service Cash Flow

Non-Payment of Retiree Health Benefits in FY 2011USPS Cash Flows FY 2007 - 2011

($ in Millions) FY FY FY FY FY 2007 2008 2009 2010 2011 Est.

Net Income/(Loss) (5,142) (2,806) (3,794) (8,505) (9,500)

Non-Cash Items and Other Cash Flows 2,539 2,367 5,367 5,213 9,800

Cash Flows from Investing Activities 500 (1,938) (1,806) (1,323) (1,400)

Cash Flows from Financing Activities 2,005 2,910 2,890 1,687 2,187

Net Increase/(Decrease) in Cash (98) 533 2,657 (2,928) 1,087 Cash Balance BOY 997 899 1,432 4,089 1,161

Cash Balance EOY 899 1,432 4,089 1,161 2,248

Debt Outstanding 4,200 7,200 10,200 12,000 15,0007

8

Impact of Inflation and Deflation

Workers compensation liability very sensitive to changes in inflations and discount rates 1% decline in discount rate adds about $1.4 billion to

workers compensation liability

1% increase in discount rate reduces liability by about $1.1 billion

Price cap limits Postal Service’s ability to increase prices in periods of deflation or relatively low inflations

9

Postal Service Response

Cut costs 4.0% reduction in Compensation and Benefits Costs in 2010 Reduction in work hours (6.0% in 2010)

Increase productivity 2.2% in 2010 Follows two years of productivity decline

Propose major cost-cutting initiatives Grow revenue

New products and services; and market tests Negotiated Service Agreements

10

PRC Role in Response

Advisory Opinion on six vs. five days of delivery

Actuarial review of Retiree Health Benefits Fund

Technical review of Pension Fund

Review of network consolidation and realignment

Review of closing of post offices and branches

Review of appeals to post office closings

Review of market dominant and competitive product classifications

Approval of new products and services

Review of new rates and conformance with price cap

11

Congressional Role in Response: Senate

Senate bipartisan legislation: Provides $7 billion to U.S. Postal Service from Pension Fund overpayment for

employee buyouts and other debt Allows renegotiation of health care benefits for postal workers Requires two years of study before ending Saturday mail delivery Spreads out current 10-year annual payment schedule of $5.5 billion per year

to prefund future retiree health benefits over forty years Requires Postal Service to study effects of closing post offices and mail

processing facilities further

12

Congressional Role in Response: House of Representatives

House of Representatives legislation H.R. 2309: Postal management replaced with restructuring authority if Postal Service fails to pay bills

for more than 30 days – financed with $10 billion line of credit fully collateralized by postal facilities

Gives Postal Service option of eliminating Saturday delivery six months after legislation enacted

Establishes two-year task force to recommend plan to consolidate redundant post offices

Mandates postal workers pay same health and life insurance premiums as federal workers and clarifies compensation parity with private sector

Allows Postal Service to sells advertising space on vehicles and facilities Allows Postal Service to pay $1 billion to future retiree health benefits fund this year and

pay balance in equal installments between FY2015 and FY2016 Provides for consideration of using net surplus in Pension Fund to fund cost of reducing size

of postal workforce

13

www.prc.gov