Redacted_Study.txt

TABLE 1
EFFECT OF REPLACING TERMINAL DUES WITH DOMESTIC POSTAGE ON THE
FINANCES OF INDUSTRIALIZED AND DEVELOPING COUNTRIES AND THE POSTAL
SERVICE (Amounts in Thousands)

FY 2000 Adjusted to Reflect Terminal Dues System Based on
Domestic Postage
4Payments from the U.S. to FPAs for the Delivery of US Outbound
mail 4/ 8/ 5 FPA Payments to the U.S. for the Delivery of Foreign
Origin Inbound Mail 5/ 9/ 6 U.S. Postal Service Net Terminal Dues
(L.4 - L.5) ($153,922) ($18,979) ($172,900)
7 Estimated Change in U.S. Postal Service Net Terminal Dues (L.6
- L.3) ($109,249) $50,159 ($59,090) FPA = Foreign Postal
Administration 1/ FY 2000 terminal dues essentially reflect the
current terminal dues system, except for
the 7.5 % surcharge on payments to DCs that go into a common
pool to be used
by DCs for improvements to quality of service. 2/ WT 13, Col. 4,
L.1. 3/ WT 11, Col. 1, L. 1 / 1000. 4/ WT 13, Col.3, L. 1. 5/ WT
11, Col. 1, L. 2 / 1000. 6/ WT 13, Col.4, L. 4. 7/ WT 11, Col. 2,
L. 1 / 1000. 8/ WT 13, Col. 3, L. 4. 9/ WT 11, Col, 2, L. 2 /
1000
If the U.S. Postal Service and FPAs were to pay each other
terminal dues applying full First Class mail rates to all LC and AO
mail exchanged, the U.S. Postal Service would both pay and receive
substantially larger sums. It should be noted, however, that the
Commission has not analyzed the impact of price elasticity on the
volumes of inbound and outbound mail. Table 1, line 6 shows that
under a domestic postage-based system, the U.S. Postal Service
would have paid $172.9 million more in FY 2000 than it collected,
an increase of $59.1 million (See line7, column 3). Table 1 further
shows that the total payments to industrialized countries would
increase from $ million to $ million, a 118 percent increase (In
column 1, compare line 1 to line 4). IC payments to the
U.S. Postal Service would increase from $ million to $ million.
(In column 1, compare line 2 and line 5). The balance of outbound
and inbound accounts would change from -$44.7 million to -$153.9
million, implying an increase of $109.2 million in international
mail expenses (See column 1, lines 3, 6, and 7).
and combined would account for percent of the increase in the IC
terminal dues net balance. would account for $ million and would
account for $ million. This is due partly to the relatively high
domestic rates for these two countries compared to U.S. domestic
rates and partly to the disparity in the mail volumes exchanged
between the U.S. and these two countries. and are among the three
largest recipients of U.S. outbound mail, the third being . U.S.
outbound mail to and exceeds the inbound mail from each of those
countries by about a -to-one ratio. Thus, the imbalance in the
volume of mail exchanged magnifies the effect of the relatively
higher rates in these countries. actually sent more mail to the
U.S. than it received.
Basing terminal dues on domestic postage would have the opposite
effect on the exchange of mail with developing countries. Table 1
shows that the U.S. Postal Service's payments to DCs would increase
from $ million to $ million (In column 2, compare line 1 to line
4), while DC payments to the U.S. Postal Service would increase
from $ million to $ million (In column 2, compare line 2 to line
5). Thus, the expenses associated with the exchange of
international mail to and from DCs would decrease by about $50.2
million under a domestic postage-based terminal dues system (See
column 2, line 7).
Overall, considering both the negative effect on expenses
associated with the exchange of mail to the ICs and the positive
effect on expenses associated with the exchange of mail to DCs, the
implication of this analysis is that a switch from the terminal
dues system in effect in FY 2000 to a domestic postage-based system
would have a negative effect on the Postal Service of about $59.1
million (Column 3, line 7). This amount represents 7.4 percent of
the revenues raised from international postage rates applicable to
LC and AO mail dispatched to foreign postal administrations
(excluding Canada). This result is valid to the extent that the
assumptions concerning the weight profile of the mail, and the
applicability of First-Class rates to such mail, are valid.
In addition it should be noted that the terminal dues changed on
January 1, 2001. The terminal dues that the U.S. Postal Service
paid to ICs and collected from ICs during FY 2000 essentially equal
the terminal dues in effect on January 1, 2001. However, the
terminal dues between ICs will increase gradually over a three-year
period, implying different results for subsequent periods. Another
change beginning on January 1, 2001 is a new 7.5 percent surcharge
on payments to DCs by ICs. The monies generated by the surcharge
flow into a common pool to be parceled out to DCs by the UPU for
quality of service improvements. The Commission chose the actual FY
2000 results as a convenient benchmark for measuring the effect of
a domestic postage-based terminal dues system. For this reason, FY
2000 actual results were not restated to reflect the effect of the
surcharge. However, the effect is relatively easy to calculate.
The 7.5 percent surcharge would have added $ million to the FY
2000 terminal dues cost (7.5% x $ million) in Table 1, line 1,
column 2 and column 3. This would also increase line 3, columns 2
and 3 by $ million. Thus, the U.S. Postal Service's FY 2000 net
terminal dues shown at line 3, column 3 would increase by $ million
from $ to $ . Since the surcharge would not apply in the "domestic
postage" scenario, none of the figures in lines 5 to 7 would
change. Table 1, line 7, column 3 shows the difference between the
U.S. Postal Service's actual net terminal dues in FY 2000 (-$113.8
million) and if the terminal dues in FY 2000 had been based on
domestic postage (-$172.9 million). The difference is -$59.1
million. Since the
7.5 percent surcharge on DC payments would have decreased the FY
2000 net terminal dues to -$ , this also would reduce the net
balance under a domestic postage-based system from -$59.1 million
(-$172.9 minus -$113.8) to -$ million (-$172.9 minus - $ ).
Effect on Cost Coverage and Institutional Cost Contribution.
Table 2 below displays the revenue, attributable cost, contribution
to institutional cost, and cost coverage for (1) actual FY 2000 and
(2) FY 2000 adjusted to reflect a domestic postage-based payment
system for the exchange of mail among countries. It should be noted
that Table 2 includes the revenues and attributable costs for the
volume of mail exchanged between the U.S. Postal Service and Canada
even though this study did not consider a change in terminal dues
rates with Canada, and Canada is the largest market for U.S.
International mail.


TABLE 2
EFFECT OF REPLACING TERMINAL DUES WITH DOMESTIC POSTAGE ON
INTERNATIONAL MAIL'S CONTRIBUTION TO INSTITUTIONAL COST AND COST
COVERAGE (Amounts in Millions)
FY 2000 1/ Incremental Outbound Inbound Cost Total
(1) (2) (3) (4)=(1)+(2)+(3)
1 Revenue 2 Attributable Cost 3 Contibution to Institutional
Cost 4Cost Coverage
$1,486 $291 -$1,777 $1,030 $322 $50 $1,402 $456 ($31) ($50) $375
144.3% 90.4% -126.7%
FY 2000 Assuming Domestic Postage Replaces Current Terminal Dues
2/ Incremental Outbound Inbound Cost Total
(5) (6) (7) (8)=(5)+(6)+(7)
5 Revenue $1,486 4/ 6 Attributable Cost 3/ $322 $50 7
Contibution to Institutional Cost ($50) $316 8Cost Coverage
-119.8%
1/ Postal rate Commission Report to Congress on FY 2000
International Volumes, Costs, and Revenues, June 29, 2001, p.42,
Table IV-1, Lines 3, 6, or 9, as applicable.
2/ For Columns 5 though 8, the only amounts that change in lines
1 & 2, compared to columns 1 through 4, are outbound
attributable cost and inbound revenue. Contribution and cost
coverage change to reflect those differences.
3/ Col. 1, L. 2 + WT 13, Col. 5, L.1 / 1000 + WT 13, Col. 5, L.4
/ 1000 4/ Col. 2, L.1 + Col. 3, L. 3/ 1,000,000
Table 2, line 3 shows that in FY 2000, outbound mail had a
contribution to institutional costs of $456 million. The
corresponding amount for inbound mail was a negative $31 million.
It should be noted that this raises an important policy issue.
Inbound mail could be viewed as a subclass of mail. By law,
subclasses of domestic mail must produce revenues equal to or
exceeding attributable costs.
International mail as a whole produced a contribution of $375
million. Lines 5 through 8 show the effect of changing the method
of payment for the exchange of LC/AO mail between the U.S. and all
other FPAs. Changing the terminal dues system affects the U.S.
Postal Service's inbound revenues and its outbound attributable
costs. Thus comparing line 1, column 2 to line 5, column 6, shows
that inbound revenues increased from $291 million to $ million,
while comparing line 2, column 1 to line 6, column 5 shows that
attributable costs increased from $1,030 million to $ million. The
net effect on the U.S. Postal Service's international mail finances
is to reduce the contribution to institutional costs from $375
million to $316 million, a reduction of $59 million. This amount
reflects the net increase in the terminal dues net balance that the
U.S. Postal Service would experience under a domestic postage-based
system, as expected (See table 1, Column 3, Line 7). It should be
noted that had the 7.5 percent surcharge on DC terminal dues been
in effect in FY 2000, the contribution under the current terminal
dues system would have been $ million lower and the reduction in
contribution from shifting to a domestic postage-based system would
be $ million compared to $59 million above.
The cost coverage for U.S. outbound mail, without considering
the 7.5 percent surcharge, would be reduced from 144.3 percent to
percent and the cost coverage for inbound mail would increase from
90.4 percent to percent. Combining outbound and inbound mail, and
including incremental costs would result in an overall cost
coverage of 119.8 percent compared to the FY 2000 cost coverage of
126.7 percent.
If the U.S. Postal Service wanted to recover the $59 million in
lost contribution, it could increase the rates on outbound LC/AO
mail, excluding outbound rates to Canada, by 7.5 percent.
Alternatively, if it wanted to maintain the FY 2000 overall cost
coverage of 126.7 percent, the U.S. Postal Service could increase
those same rates by at least 13.9 percent. There are, of course,
other contribution or cost coverage goals that could be
selected.
Reliability of the Analysis. There are four critical inputs to
this analysis: (1) the distribution of outbound mail by weight
interval, (2) the distribution of inbound mail by weight interval,
(3) U.S. Postal Service domestic postage rates, and (4) FPA
domestic postage rates.
The Distribution of Outbound Mail by Weight Interval. Like the
rates of the
U.S. Postal Service, the domestic postage rates of FPAs vary by
weight interval. Thus, the analysis requires a distribution of
outbound mail by weight interval. As part of its annual submission
of data and workpapers to the Commission to support the
Commission's Report to Congress on International Mail, the Postal
Service provided the FY 2000 billing determinant data for outbound
mail. This data include volumes by the weight intervals associated
with the U.S. Postal Service's rates for outbound international
mail. Because the data are not maintained by individual country,
except for Canada and Mexico, it was not possible to develop a
weight interval distribution for outbound mail unique to each
destination FPA. The Commission, therefore, assumed that the weight
interval distribution for all outbound mail sent to all FPAs,
excluding Canada, was a reasonable proxy for the weight interval
distribution for mail sent to each FPA. This distribution is
applied to the actual number of pieces sent to each country in FY
2000. Thus, distortion could enter the analysis of U.S. outbound
mail if there are differences between the proxy distribution and
the actual distribution. The Commission believes it unlikely that
this would have a meaningful impact on the calculation of terminal
dues based on FPA domestic rates.
The Distribution of Inbound Mailby Weight Interval. The analysis
also requires a distribution of piece volumes by weight interval
for inbound mail. The Commission, by a letter to the Postmaster
General, requested this distribution from the Postal Service. The
Postal Service responded that the information does not exist.
However the Postal Service did provide as much detail as is
collected a volume distribution by transportation mode and shape
for sixty individual countries.
In the absence of data showing the weight distribution of
inbound mail, the Commission employed, as a proxy distribution,
data developed by European postal administrations in the course of
preparing a new terminal dues system. The European system, called
REIMS II, relates terminal dues to domestic postage.
This distribution represents the aggregate distribution for the
REIMS II countries. The REIMS II countries are all industrial
countries, so the distribution is likely a reasonable approximation
for mail received by the U.S. Postal Service from industrial
countries.
Developing a distribution for inbound mail from DCs is more
problematic. The Commission was not able to obtain any data on
developing countries. Generally, LC mail is lighter than AO mail.
Further, studies by the Universal Postal Union indicate that the
average weight for each shape (envelope, flat, packet) of mail sent
from DCs to ICs is 10 to 30 percent less than the average weight of
mail from ICs to ICs. Hence, it appears likely that the proportion
of LC to AO mail is less for inbound mail than for outbound. In the
absence of specific data, however, the Commission assumed that the
REIMS II data would be a reasonable proxy for DCs also. This
assumption seems likely to result in an overstatement of the
domestic postage that would be collected on inbound mail. The
magnitude of the overstatement cannot be estimated with
confidence.
As noted, the REIMS II data was separated by shape: letters,
flats, and small packets. Because the U.S. Postal Service's
available inbound LC/AO volume data is reported separately for
surface and air, the Commission applied two separate REIMS II
distributions. For Air LC/AO mail, the distribution for all shapes
was used because inbound Air LC/AO contains all shapes. For Surface
LC/AO mail, the distribution for flats and small packets combined
was used for two reasons. First, the volume of inbound surface
letters is negligible. Second, the average weight per piece was 6.9
ounces in FY 2000. This implies that the surface mailstream is
composed of flats and small packets. These distribution keys appear
to reasonably reflect the distribution of inbound of mail, subject
to the caveats above.
The REIMS II data did not identify the volume of cards. Because
there are inbound cards, the Commission assumed that the
relationship between U.S. outbound cards and the total volume of
outbound Air LC/AO mail applies to inbound mail Air LC/AO. The
reasonableness of the assumption is unknown.
The Selection of U.S. PostalService Domestic Rates. Based on
field observations and some discussions with U.S. Postal Service
field personnel, the Commission determined that no inbound mail
would be likely to meet the eligibility requirements for domestic
bulk business rates. Thus any inbound mail piece would pay the
First-Class rate, or the Priority Mail rate for items weighing more
than 13 ounces. Although inbound books and records might be
eligible for the Media Mail rates, the amount of this mail is
minimal. For these reasons, the Commission has applied the U.S.
Postal Service's domestic rates for First-Class and Priority Mail
to the inbound mail distribution described above. Of course, if the
U.S. Postal Service made available domestic bulk business rates to
FPAs, FPAs might prepare inbound mail so that it would meet the
eligibility requirements. The Commission's analysis does not take
into account this possibility. However, because the discounts for
bulk mail are cost based, any lost revenues should be offset by
corresponding reduced costs.
The Selection of FPA Domestic Rates. To obtain FPA domestic
rates, the Commission used the available FPA web sites. The
Commission identified 21 sites with rates for industrial countries
and eight sites with rates for developing countries. Because U.S.
Postal Service First-Class/Priority Rates were applied to inbound
mail, the Commission tried to identify the corresponding rates for
the FPAs. Identifying these rates was problematic because many
countries do not have First-Class rates for heavy mail. U.S.
outbound LC/AO mail weighs up to 22 pounds. To fill the gap in
missing FPA rates, the Commission calculated an extra ounce rate
between the two highest weight intervals for which there were
rates. (The difference between the rates divided by the number of
grams in the weight interval). The proportion of volume covered by
this extrapolation procedure ranges from 0.1 percent to seven
percent. Although this approach seems reasonable, there is a
potential for substantial overstatement or understatement because
the amount of estimated domestic postage-based terminal dues
calculated under this procedure represents 4 percent of total IC
payments to FPAs and 14 percent of total DC payments. The potential
distortion is unquantifiable at this time.
The Commission also assumed that the average revenue per piece
for the 21 industrial countries whose rates were available applied
to the remaining 5 ICs whose rates were not available. Similarly,
the Commission assumed that the average revenue per piece for the 8
developing countries with available rates applied to the remaining
203 DCs without available rates. The latter assumption is probably
weak, but there is currently no way to improve upon it.
Potential Improvements to the Study. In this study, the
Commission has sought to provide its best estimates within the time
provided. The analysis so far suggests the following possibilities
for further study:
Industrialized countries. First, it would be to desirable to
develop a separate estimate of the international mail revenues
associated with outbound IC mail. This would allow an estimate of
the effect on international postage rates of shifting to domestic
postage-based terminal dues in the exchange of mail between
industrialized countries. The use of domestic postage-based
terminal dues appears most feasible among industrialized
countries.
Second, it would be informative to divide the IC mail exchange
into LC and AO components. LC mail is the most profitable mail and
the mail to which First-Class domestic postage rates are most
likely to be applicable in the future. It seems likely that U.S.
and foreign mailers would prepare AO mail so that it would qualify
for lower domestic rates applicable to printed matter and/or lower
priority delivery. Hence, a separate estimate of the financial
effects of shifting from terminal dues to domestic postage rates
for LC mail is likely to identify the most significant, persistent,
and predicable effects of a shift to domestic postagebased terminal
dues. To divide IC mail into LC and AO components, we need further
data from the Postal Service or to make additional assumptions.
Third, our estimate of the revenue from inbound IC mail could be
improved by a specific study of the weight distribution of inbound
mail received from IC FPAs, by class of mail. Our use of REIMS II
data as a proxy for this distribution appears plausible, but no
more.
Fourth, we need to obtain the domestic postage rates for New
Zealand and Israel, the only significant outbound IC mail flows
omitted from this analysis.
Developing countries. The first improvement needed in regard to
DC mail is a specific study providing the weight distribution of
inbound mail received from DC FPAs, by class of mail. This would
allow a plausible estimate of the revenue the Postal Service would
receive by applying domestic postage rates to such mail. Our use of
REIMS II data as a proxy for this distribution was necessary, but
not realistic.
Second, further work would likely allow us to develop, for a
higher percentage of outbound DC mail, (1) estimates of the
domestic postage costs that would be incurred if the Postal Service
paid domestic postage instead of terminal dues and, (2) the
outbound mail revenues associated with such mail flows. In this
effort, we would anticipate focusing on the most significant postal
destinations among the DCs rather than trying to analyze each and
every destinating DC.
The Commission is attaching a disk with the electronic
spreadsheets and a hard copy explanation of the procedures used.
The U.S. Postal Service considers the terminal dues amounts
contained in Table 1 commercially sensitive. The U.S. Postal
Service also considers the data in the electronic spreadsheets
commercially sensitive because they contain country-specific data.
If you have any questions, please contact Bob Cohen (202-789-6850)
or Charles Robinson (202-789-6854).
With best wishes,
Sincerely,
George Omas Vice Chairman