Standard Mail Postage Costs with and without Reform

Prepared for The Direct Marketing Association

Prepared by SLS Consulting, Inc.

October 7, 2005

Standard Mail Postage Costs with and without Reform

RESULTS

Enactment of postal reform legislation is likely to have a dramatic effect on postage payments for those who mail Standard Mail letters and nonletters. Postage payments for the next 10 years will be meaningfully smaller under either the House (HR.22) or the Senate (S. 662) bill, with those under the Senate bill smaller than those under the House bill. As Figures 1 and 2 below show, postage savings for Standard mailers of letters and of nonletters could be quite significant.

The postage savings are due to the net USPS cost savings from lifting the escrow and changing the retiree benefit payment mechanisms as prescribed by H.R. 22 and S. 662 as well as implementation of a CPI-based rate indexing system beginning in 2008.

Figure 1: Estimate of Potential 2006-2015 Savings From Postal Reform for Standard Mailers of Letters

(Millions of Dollars)

Figure 2: Estimate of Potential 2006-2015 Savings From Postal Reform for Standard Mailers of Nonletters

(Millions of Dollars)

METHODS

SLS modeled Standard Mail postage for letters and nonletters over ten year – from 2006 to 2015 – both with and without reform. For the reform cases, we used the provisions of H.R. 22 as passed by the House and the provisions of S. 662 as unanimously reported to the floor by the Senate Homeland Security and Governmental Affairs Committee. We modeled postage costs for mailers with annual volumes of 50 million, 100 million, 250 million, 500 million, and, for letters, a billion pieces of Standard Mail per year.

KEY ASSUMPTIONS

Like any model, our model embodies a number of important assumptions. Changes in these assumptions would lead to changes in our results:

• Annual mail volume was disaggregated by rate category based upon proportions from the Postal Service’s FY 2004 Standard Mail Billing Determinants report.

• 2006 postage for all cases are based upon the rates proposed by the Postal Service in the current rate case, Docket No. R2005-1.

• With or without reform, the Service increases rates again on January 1, 2007. Based upon a statement made by Jim Miller, Chair, USPS Board of Governors -- without reform, rates will be increase by mid single digits in 2007 – the model assumes that, without reform, the 2007 rate increase will be six percent. With reform, rates will increase less due to the rate relief provided by the reform legislation under consideration. The magnitude of this relief was developed based upon USPS cost estimates.

• After 2006, the model assumes that, with reform, postage will increase annually at the rate of CPI. Without reform, postage will increase annually at the rate of CPI+1.

• The model assumes that the percentage rate increase for Standard Mail letters and nonletters in all rate cells will be the same in any given year and will be so either with or without legislation. This assumes that either with or without reform, current rate relationship are retained and that the worksharing provisions of the bills do not affect rates. If, in fact, the rate relationships change dramatically, savings from reform will be affected and could be either greater or smaller than those shown in the figure above. However, given that these rate relationships have been relatively stable, we considered the assumption we selected to be reasonable and appropriate for this analysis.