Markets Wired

The Federal Trade Commission today issued a report entitled “Accounting for Laws that Apply Differently to the United States Postal Service and its Private Competitors,” which fulfills its requirement under the Postal Accountability and Enhancement Act (PAEA).

The report identifies and quantifies – to the extent possible – the Postal Service’s economic burdens and advantages that exist due to its status as a federal government entity, as well as those benefits resulting from its postal and mailbox monopolies. The report also examines the net economic effect of the relevant laws governing the Postal Service and its private competitors, concluding that the USPS’s burdens and benefits both create marketplace distortions: legal constraints increase the USPS’s costs, disadvantaging it as a competitor; implicit subsidies that the USPS enjoys partially mask the USPS’s higher costs from consumers, creating incentives for consumers to purchase more competitive mail products from the USPS than they otherwise would. The report further explores ways that the Postal Regulatory Commission (PRC) or Congress may be able to minimize or eliminate such distortions.

Report Conclusions

The report’s conclusions are based on comments received in response to a Federal Register notice announcing the study; the Commission’s consultations with the USPS, other governmental agencies, and private parties; and a review of relevant publicly available material. They include the following:

From the USPS’s perspective, its unique legal status likely provides it with a net competitive disadvantage versus private carriers:

Federally imposed restraints on the USPS’s operations increase its costs to provide competitive products by an estimated $330-$782 million a year.

However, because the USPS is a federal government entity, the USPS’s competitive products operations enjoy an estimated implicit subsidy of between $39-$117 million a year.

From a market-wide perspective, the federally-imposed restrictions that impose economic burdens on the USPS and the implicit subsidies that provide the USPS an economic advantage should be viewed as two distinct distortions that compound each other and negatively affect the provision of competitive mail products: the USPS’s legal constraints cause it to use more resources to produce competitive mail products, whereas its legal advantages partially mask these higher costs from consumers, creating incentives for consumers to purchase more competitive mail products from the USPS than they otherwise would. Taken together, these two distortions mean that more resources are used to produce the current volume of competitive mail products than is necessary.

• Congress may wish to consider acting to reduce the constraints on the USPS’s competitive products operations.
• At the same time, the PRC may wish to consider requiring the USPS to account for its implicit subsidies when making pricing and production decisions.
• In the longer term, a variety of options exist to eliminate the legal differences between the USPS and its private competitors:
• Congress and the PRC may wish to consider whether relaxing the current mailbox monopoly to allow consumers to choose to have private carriers deliver competitive products to their mailboxes would create net benefits for consumers.
• Congress may wish to consider whether the scope of the postal monopoly could be narrowed to allow greater competition while still maintaining universal service.
• Establishing the USPS’s competitive products division as a separate corporate entity – with either private or governmental ownership – arguably would eliminate many of the major remaining major legal differences between the USPS and its private competitors.

Finally, the report notes that, “Ultimately the PRC will need to determine the appropriate approach under its regulatory authority to require the USPS to account for the economic benefits it derives from differential legal treatment. Further, only Congressional action can eliminate the legal constraints that negatively impact the USPS’s competitive product operations.”

Structure of the Report

The report begins with an executive summary that contains an overview of the Postal Accountability and Enhancement act and how it relates to the FTC’s study. It summarizes the responses to the Commission’s Federal Register notice seeking public comments on the study, provides an overview of the operations of the Postal Service and competitive mail products, and summarizes the conclusions of the FTC’s report. The remainder is divided into five chapters, each addressing a specific theme.

Chapter I provides an overview of the postal and mailbox monopolies and the competitive products industry. It also includes a description of the structure of the competitive products industry. Chapter II presents the legal differences arising from the USPS’s status as a federal entity, including implicit USPS subsidies and a range of restraints on the agency’s operations. Chapter III focuses on the advantages arising from the USPS’s postal and mailbox monopolies and Chapter IV covers accounting for cost differences due to legal requirements. These include estimating and accounting for the agency’s economic burdens and benefits, their net competitive effect on the Postal Service, efficiency issues related to accountings and implicit subsidies, and competition issues related to these subsidies. Finally, Chapter V focuses on eliminating legal differences between the Postal Service and its competitors, including relaxing legal and political constraints on the agency’s operations, competitive neutrality, modifying or eliminating the mailbox monopoly, and the corporatization of the USPS’s Competitive Products Division.

The Commission vote to issue the report was 5-0, with Commissioners Pamela Jones Harbour and Jon Leibowitz issuing a joint separate statement in which they concurred in part. According to the statement, which can be found on the FTC’s Web site as a link to this press release, Harbour and Leibowitz, “ . . . join in the Commission’s finding that the USPS, because it is an agency of the government of the United States, ‘enjoys’ a net competitive disadvantage versus other firms selling competitive products. . . . Having answered the question posed to the Commission by the Congress, we would have ended the Report [there].”

Copies of “Accounting for Laws That Apply Differently to the United States Postal Service and its Private Competitors: An FTC Report” are available from the FTC’s Web site at http://www.ftc.gov and also from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580.