Impacts of Large Rate Increases Prepared for National Postal Policy Council January 13, 2005

National Postal Policy Council: Rate Impacts2 Changing From “Pay As You Go” For Retiree’s Health Benefits Increases Postal Rates Substantially  Current service cost = $2.3 billion  Interest on obligation = $3.8 billion  Principal payment varies depending on payment period  Health payment now = $1.8 billion

National Postal Policy Council: Rate Impacts3 Changing From “Pay As You Go” For Retiree’s Health Benefits Increases Postal Rates Substantially Case 1: 10% inflation increase plus dynamic funding and 10-year mortgage less current payment Case 2: 10% inflation increase plus dynamic funding and escrow mortgage less current payment Case 3: 10% inflation increase plus dynamic funding and 40-year mortgage less current payment

National Postal Policy Council: Rate Impacts4 USPS Estimates Show Rate Increases Will Depress Volumes

National Postal Policy Council: Rate Impacts5 Big Impacts To Industry If No Alternatives

National Postal Policy Council: Rate Impacts6 Case Studies: Explore Alternatives  Focused on credit card and insurance industries  Probably similar to others  Available data

National Postal Policy Council: Rate Impacts7 Credit Card Industry Uses Mail for Solicitations and Bills  6.4 billion Standard solicitations to households  2 billion First-Class solicitations to households  Almost 4 billion bills to households  Additional bills and solicitations to business

National Postal Policy Council: Rate Impacts8 But There Are Alternatives  Big cost increases catch management’s attention  Firms can shift marketing resources to other channels  Firms can bill electronically and suppress paper

National Postal Policy Council: Rate Impacts9 Shifting Marketing Resources  Many firms have fixed marketing budgets  Initial reaction to increased rates holds mailing budget constant  Longer-term reaction shifts away from mail

National Postal Policy Council: Rate Impacts10 Shifting Marketing Resources: Constant Mail Budget  Built model to estimate volume shifts holding mail budgets constant  Used data from issuers with almost 25 percent of all general purpose cards  Extrapolated results to industry  Because model doesn’t account for shift to media outside of mail, actual volume effects are likely bigger

National Postal Policy Council: Rate Impacts11 Shifting Marketing Resources: Constant Mail Budget (14.1%) (10.5%) (7.8%)

National Postal Policy Council: Rate Impacts12 Shifting Marketing Resources: Cross Media Budget Shifts  Many firms allocate marketing resources based on cost-effectiveness  Used data from firms that ran media shift models  Extrapolated results to industry  Models accounts for shift to media other than mail  Results validate switching hypothesis

National Postal Policy Council: Rate Impacts13 Shifting Marketing Resources: Media Allocation Modeling (33.6%) (24.2%) (17.3%)

National Postal Policy Council: Rate Impacts14 Shifting Marketing Resources  For marketing mail, USPS overall financial position will NOT improve as a result of large rate increase  Volume drops, revenue drops, and costs drop, but overall position remains unchanged

National Postal Policy Council: Rate Impacts15 Bill Electronically/Suppress Paper  Modest so far - only several percent - but growing  Almost all billers technically capable  Big economic advantage – as big as 40 cents per bill  Customer acceptance biggest obstacle – but most technologically capable  Rate increases strong motivation to billers to speed customer acceptance

National Postal Policy Council: Rate Impacts16 Insurance Industry  Mail also used for both marketing and operational purposes  Same marketing effects as in credit card industry  No technology barriers to industry to switch operational mail  Easier to switch operational mail where firms are the clients

National Postal Policy Council: Rate Impacts17 Summary  USPS estimates large volume impacts from rate increases  Effects in some industries will be larger  Elastic demand causes big marketing shifts  Rate increase will add to operational mail shift