Funding the Universal Service Obligation
March 21, 2016 (RARC-WP-16-005)
- Historically the purpose of the postal monopolies has been to ensure the Postal Service has adequate revenue to cover the cost of its universal service obligation.
- The combination of the decline in letter mail and the price cap on monopoly products has challenged the ability of the monopolies to earn sufficient revenue.
- The OIG looked at various funding alternatives and suggests three that are viable – monopoly with increased pricing flexibility, direct subsidy, and diversification.
Currently, the U.S. Postal Service has two legal monopolies — a monopoly on most letter mail and exclusive access to the mailbox. Historically, the purpose of these monopolies is to help ensure the Postal Service has adequate revenue to cover the cost of its universal service obligation (USO). However, the combination of the steady decline in letter mail and the price cap on the monopoly products has begun to decrease the monopoly-related revenue. This, in turn, has eroded the ability of the Postal Service to fund its USO.
In this paper, we look at several USO funding alternatives and suggest three viable options that can be used alone or in combination. They are
- the revenue from the current monopolies with greater pricing flexibility,
- direct subsidies to compensate the Postal Service for specific targeted obligations, and
- diversification, allowing the Postal Service to earn revenue from non-mail products and services.
Each of the alternatives has its own pros and cons, and policy makers will have to decide which alternative, or which mix of alternatives, is most suitable. For example, it may be possible to fix the funding issue by simply allowing the Postal Service to increase prices beyond the current price cap. However, if there is little tolerance for higher prices, price increases could be mitigated by using one or both of the other alternatives — direct subsidy and diversified revenue stream — in addition to more pricing flexibility. In conclusion, while there may be no one perfect funding mechanism for the USO, it may be possible to combine several alternatives to ensure that the Postal Service has sufficient revenue to cover the entire cost of the USO.