• on Sep 29th, 2010 in Strategy & Public Policy | 7 comments
    The U.S. Postal Service is used to delivering large amounts of mail. Last year, it delivered more than 177 billion pieces. More mail pieces are sent per person in the United States than almost anywhere else in the world. But mail volume has been declining. How will the Postal Service change if volumes continue to fall? Is the Postal Service even financially sustainable at lower volume levels? The Office of Inspector General (OIG) asked the George Mason University School of Public Policy (GMU) to find out. The results of GMU’s work appear in a paper released today on our website. GMU researchers looked at how mail volumes of 150, 125, 100, and 75 billion would affect the Postal Service’s financial position and cost structure. Their results are encouraging. They found that the Postal Service is financially sustainable at volume levels down to 100 billion pieces per year, although price increases above inflation would be needed. The cost structure of the Postal Service would also change at lower volume levels. For example, delivery would account for a much larger share of total costs. GMU researchers also looked at the effect of various cost reduction initiatives and how they would impact the price increases necessary to break even. The paper describes their results and a description of the model they used for their analysis. What do you think? What are the biggest challenges for the Postal Service at lower volume levels? This topic is hosted by the OIG’s Risk Analysis Research Center (RARC).
  • on Sep 20th, 2010 in Delivery & Collection | 58 comments
    Although eliminating Saturday delivery has been heavily debated, reducing delivery to 5 days a week may not be enough. There has been some discussion of whether the viable model for the U.S. Postal Service of the future will incorporate 3-day delivery. A 2010 study by the Boston Consulting Group for the Postal Service forecasts that the average pieces of mail per delivery point per delivery day will drop from 3.8 to 2.8 by 2020. If this projection holds true, then more households will likely receive no mail on any given day. With the increasing availability of alternative communication choices, it is unlikely that the demand for mail delivery will ever return to previous levels. Therefore, postal delivery may only be needed 3 days a week. Some homes could receive mail on Monday, Wednesday, and Friday, while others, on Tuesday, Thursday, and Saturday. Delivery would still occur 6 days a week for Post Office boxes. This additional benefit for P.O. Boxes would meet the needs of customers who have need of 6-day delivery, while generating higher revenue and increasing traffic for the Post Office. For many customers in the future, the amount of mail they will receive on a given day may not warrant the effort required to check their mailboxes every day. Delivering 3 days per week roughly doubles the amount of mail a household receives on a given day, making the “mail moment” of receiving mail more significant. The savings could be significant. With the Postal Service estimating a $3.5 billion saving from cutting one day of delivery, cutting three days could save roughly $10 billion. An additional benefit of this every-other-day schedule is that about 50 percent of the mail will have an additional day to reach its destination. These savings can be realized through the use of less costly modes of transportation, additional use of hub-and-spoke mail consolidation network design, and additional load balancing for the mail processing equipment. What do you think? Can this model balance the need to be financially viable while meeting the needs of the public? This topic is hosted by the OIG’s Risk Analysis Research Center (RARC).
  • on Jul 7th, 2010 in Pricing & Rates | 13 comments
    The Postal Accountability and Enhancement Act of 2006 (PAEA) ushered in a new regulatory structure for the U.S. Postal Service. One key element was a price cap on market dominant products. (Most of the Postal Service's products are market dominant.) This means that price increases for market dominant products are capped by the rate of inflation as measured by the Consumer Price Index (CPI). PAEA, however, does allow the Postal Service to increase its prices beyond the CPI cap under “extraordinary and exceptional circumstances.” The Postal Service makes the exception by filing an ‘exigent’ rate case to the Postal Regulatory Commission (PRC). Before the Postal Service can increase prices, the PRC must agree with the ‘exigent’ request and find it to be reasonable, equitable, and necessary.

    This week the Postal Service proposed an exigent rate increase, an average of 5.6 percent across all classes of mail, effective January 2011. The direct mail industry has challenged the increase, threatening legal action and warning that the Postal Service will suffer large drops in mail volume. Much of the industry’s objection has centered on whether the Postal Service’s current circumstances are really “extraordinary and exceptional.” The Postal Service has based its case on the significant decline in mail volume and revenue, caused by the economic recession. In addition, because inflation has been low, the Postal Service has a small margin under the cap to raise prices. Some might argue that a price cap based on consumer items such as food, apparel, and electronics might not be the best metric for the Postal Service, because its costs are based on fuel, salaries, and health benefits. What do you think of the exigent price increase? Is it important to the continued viability of the Postal Service or should other revenue and cost reduction opportunities be explored first? This topic is hosted by the OIG’s Risk Analysis Research Center (RARC).

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