Challenges in the U.S. Postal Environment Ruth Y. Goldway Chairman, U.S. Postal Regulatory Commission UPU Forum on Postal Regulation November 10, 2011 Bern, Switzerland

2 Role of the Postal Regulatory Commission  Establish more modern system of rate making  Monitor quality of service  Provide detailed, transparent information on Postal Service’s operations  Hear appeals from citizens on post office closings  Offer assistance in resolving rate and service inquiries  Hear customer complaints and provide redress if appropriate  Ensure level playing field between mailers (e.g. decide over allegation of rate discrimination)  Assure universal service six days a week

3 U.S. Postal Market Characteristics  USPS is an independent establishment of the Executive Branch of the Federal Government  Letter and mailbox monopolies  Market dominant and competitive products  Price cap (Consumer Price Index)  Universal Service Obligation  Limited diversification (hybrid mail, money transfer, passport processing, electronic post mark)  Mail is still the core business

4 U.S. Modes of Postal Liberalization  Upstream competition (workshare discounts)  Downstream access (local drop-ship)  Commercial licensing of postal indicia (postage and tracking services) to private companies  Competition in the express, priority and bulk parcel delivery market

The U.S. Postal Service Today  USPS self-sufficient – no government subsidies to support USO  Declining volumes and revenues  Increasing costs related to low rate of inflation  Growing deficit  $10.0 billion (estimated)  $8.5 billion  $3.8 billion  $2.8 billion  $12.69 billion in debt to federal Treasury through June 30, 2011  $15 billion debt limit 5

Structural Challenges  Future Retiree Health Benefits Fund  Average $5.6 billion annual payment for 10 years under 2006 postal reform law  $20.9 billion paid from ($45 billion in fund)  Commission study estimated appropriate annual payments should be significantly reduced  Pension Fund  Overpayment identified by Commission and Postal Service Office of Inspector General  Commission estimates overpayment between $50 and $55 billion  Cost of Universal Service Obligation/Value of Monopolies  2009 cost of USO - $4.9 billion  2009 value of monopolies - $2.1 billion  Cost of USO is going up  Value of monopolies is going down 6

U.S. Postal Service Cash Flow Non-Payment of Retiree Health Benefits in FY 2011 USPS Cash Flows FY ($ in Millions) FY Est. Net Income/(Loss)(5,142)(2,806)(3,794)(8,505)(9,500) Non-Cash Items and Other Cash Flows2,5392,3675,3675,2139,800 Cash Flows from Investing Activities500(1,938)(1,806)(1,323)(1,400) Cash Flows from Financing Activities2,0052,9102,8901,6872,187 Net Increase/(Decrease) in Cash(98)5332,657(2,928)1,087 Cash Balance BOY ,4324,0891,161 Cash Balance EOY8991,4324,0891,1612,248 Debt Outstanding4,2007,20010,20012,00015,000 7

Impact of Inflation and Deflation  Workers compensation liability very sensitive to changes in inflations and discount rates  1% decline in discount rate adds about $1.4 billion to workers compensation liability  1% increase in discount rate reduces liability by about $1.1 billion  Price cap limits Postal Service’s ability to increase prices in periods of deflation or relatively low inflations 8

Postal Service Response  Cut costs  4.0% reduction in Compensation and Benefits Costs in 2010  Reduction in work hours (6.0% in 2010)  Increase productivity  2.2% in 2010  Follows two years of productivity decline  Propose major cost-cutting initiatives  Grow revenue  New products and services; and market tests  Negotiated Service Agreements 9

PRC Role in Response  Advisory Opinion on six vs. five days of delivery  Actuarial review of Retiree Health Benefits Fund  Technical review of Pension Fund  Review of network consolidation and realignment  Review of closing of post offices and branches  Review of appeals to post office closings  Review of market dominant and competitive product classifications  Approval of new products and services  Review of new rates and conformance with price cap 10

Congressional Role in Response: Senate  Senate bipartisan legislation:  Provides $7 billion to U.S. Postal Service from Pension Fund overpayment for employee buyouts and other debt  Allows renegotiation of health care benefits for postal workers  Requires two years of study before ending Saturday mail delivery  Spreads out current 10-year annual payment schedule of $5.5 billion per year to prefund future retiree health benefits over forty years  Requires Postal Service to study effects of closing post offices and mail processing facilities further 11

Congressional Role in Response: House of Representatives  House of Representatives legislation H.R. 2309:  Postal management replaced with restructuring authority if Postal Service fails to pay bills for more than 30 days – financed with $10 billion line of credit fully collateralized by postal facilities  Gives Postal Service option of eliminating Saturday delivery six months after legislation enacted  Establishes two-year task force to recommend plan to consolidate redundant post offices  Mandates postal workers pay same health and life insurance premiums as federal workers and clarifies compensation parity with private sector  Allows Postal Service to sells advertising space on vehicles and facilities  Allows Postal Service to pay $1 billion to future retiree health benefits fund this year and pay balance in equal installments between FY2015 and FY2016  Provides for consideration of using net surplus in Pension Fund to fund cost of reducing size of postal workforce 12

13