market segment. While the Postal Service has lost market share in these smaller markets, its First- and third-class markets have grown, protected by what has been a monopoly position. However, since 1984, the rate of growth for third-class mail has declined to its lowest level since the mid-1970s. Rising postal rates have encouraged competition and diversion to other forms of communication, causing part of the decline. Because of the substantial rate increases since 1988, some postal customers are actively seeking alternative means of communication. This competitive situation may create further decreases in Postal Service volume, reduce revenues lower than required to break even, and generate the need for more frequent rate increases to cover revenue shortfalls.2 This in turn could further erode the Postal Service's market share and create a vicious cycle of volume and revenue shortfalls leading to still more frequent rate increases. Given this possibility, the question arises as to whether the criteria set forth in the Postal Reorganization Act of 1970 that guide postal ratemaking are still adequate in light of the competitive and changing environment the Postal Service faces. The Postal Service has reported net operating losses from 1987 through 1991 totaling about $1.1 billion. About half of these losses were due in large part to legislative actions requiring the Postal Service to make unplanned payments for retirees' costof-living allowances and health benefit expenses. The Postal Service recognizes from its lost market share in parcel post and overnight delivery that to be competitive it must control the growth in operating costs; offer its customers a full range of services that are prompt, reliable, and courteously delivered; and price its services to reflect changing demands for Although it has begun to address the first two its products. issues through its strategic plan, the Postal Service is constrained--by legislative design--in its ability to set rates. Since the late 1970s, the Postal Service and the Postal Rate Commission have disagreed over the extent to which the ratemaking criteria allow the use of demand factors to be used in allocating the Postal Service's huge overhead burden among the various mail classes. This disagreement is the basic reason why the Postal Service's request in 1990 for a 30-cent First-Class stamp was reduced to 29 cents by the Commission and third-class rates were raised, on average, 8 percentage points higher than the Postal Service requested. The Commission also rejected volume discounts as a discriminatory pricing strategy when the Postal Service proposed such a discount for its Express Mail service. The ratemaking criteria set forth in the Postal Reorganization Act were established during a period when the Postal Service had less competition than it does now. Because the Postal Service is facing a changing and increasingly competitive environment that requires greater flexibility in pricing postal services, we believe that Congress should reexamine the nine criteria that the Postal Rate Commission considers in the ratemaking process to determine if the criteria are still valid in light of changing marketplace realities. We believe that demand pricing, which considers the "value-of-service" to the sender, should be given greater weight in the criteria used as a guide for allocating overhead costs and setting postal rates. Further, we believe that Congress should reexamine the question of whether volume discounts to large business users is in fact undue discrimination or preference given this practice's wide use by private carriers in competition with the Service. In the long run, if demandbased pricing is not given more weight in the criteria as one of several factors to be considered in ratemaking, the Postal Service could experience serious losses in its price sensitive third-class market as well as its second-class market and thus drive up the cost of First-Class postage to cover these losses. Congress could then be faced with demands to further open postal markets to competition or to subsidize the national delivery network through appropriations. POSTAL AUTOMATION Increased ratemaking flexibility will not, in itself, guarantee survival of the Postal Service in the competitive marketplace. Control of operational costs is also essential. Historically, mail volume growth every year has helped keep rate increases to about once every 3 years. Without such growth, revenue shortfalls combined with escalating operating expenses (up 6.9 percent in 1991) will generate the need for larger or more frequent rate increases. The major contributor to postal costs As a percentage and their growth is employee pay and benefits. of total operating expenses, employee pay and benefits have exceeded 80 percent for the past 20 years. Faced with the reality of not having complete control over employee pay and benefits, the Postal Service tries to make its workers more productive by making operational changes and capital investments in equipment and facilities. The latest and perhaps the most intensive effort to improve productivity is the automation program. This program, with optical character and bar code readers as core equipment, became operational in 1982. It received renewed emphasis in 1988 when the Postmaster General announced a goal of bar coding nearly all mail by the end of 1995. In response to congressional interest in automation, we have issued six reports on various aspects of this program since January 1983. The report being released today, prepared at the request of this Committee and its Postal Operations and Services Subcommittee, provides an assessment of the program's impact on productivity and labor costs during 1991.3 The Postal Service recognizes that automation provides one of the best and most effective ways to control costs if it is to stay competitive in the marketplace. However, although the Postal Service's automation program is producing savings in certain functional areas, it is unlikely to be a panacea that will reverse the persistent tendency for costs to outpace inflation. Publicly, former Given that the Postal Service has spent $2 billion on automated equipment and had a 9-digit bar code on 40 percent of the mail by the end of 1991, it is somewhat surprising that its measurement of savings remains ad hoc and inconsistent. Postmaster General Frank has cited the decline in the number of career employees as savings made possible by automation and related cost control initiatives in mail processing and delivery. This gross measure ignores the fact that workhours--the work actually put in by employees and paid for by the Service--have not fallen commensurately. When career employment was down 34,000 during 1991, overtime was higher by an amount equivalent to 15,000 full-time employees and work by non-career employees had increased the equivalent of another 3,000 full-time employees. 'Postal Service: Automation Is Restraining But Not Reducing Costs (GAO/GGD-92-58, May 12, 1992). |