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entitled 'U.S. Postal Service: Opportunities to Increase Revenue Exist 
with Competitive Products; Reviewing Long-Term Results Could Better 
Inform Promotions Decisions' which was released on July 25, 2013. 

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United States Government Accountability Office: 
GAO: 

Report to Congressional Requesters: 

June 2013: 

U.S. Postal Service: 

Opportunities to Increase Revenue Exist with Competitive Products; 
Reviewing Long-Term Results Could Better Inform Promotions Decisions: 

GAO-13-578: 

GAO Highlights: 

Highlights of GAO-13-578, a report to congressional requesters. 

Why GAO Did This Study: 

For several years USPS has not generated sufficient revenues to cover 
its expenses. Although much focus has been on USPS’s costs as a way to 
close the gap between its revenues and expenses, generating additional 
revenue is also needed. To increase mail volume and revenue, USPS has 
implemented NSAs, sales, and promotions with a variety of products. 

As requested, GAO reviewed (1) the trends and reported results of 
USPS’s sales, promotions, and NSAs, as well as (2) any opportunities 
and challenges related to generating additional revenue from them. GAO 
reviewed USPS documents, PRC decisions, and annual reports, and 
interviewed officials from USPS and PRC. GAO also interviewed mailers, 
which were selected in part based on participation in NSAs, sales, and 
promotions. Their views cannot be generalized to all mailers. 

What GAO Found: 

The U.S. Postal Service (USPS) has developed numerous negotiated 
service agreements (NSA), sales, and promotions since the enactment of 
the Postal Accountability and Enhancement Act (PAEA) in 2006, and they 
generate a small but growing portion of USPS total revenue. PAEA 
established two categories of products: “market dominant,” where USPS 
has a monopoly, and “competitive,” which includes all other products, 
such as shipping services. NSAs, sales, and promotions are generally 
designed to encourage additional mail volume and revenue through 
temporary discounts on specific mail products. For example, USPS has 
offered promotions to incentivize mailers to invest in technology that 
may increase the value of mail for those mailers over the long-term. 
No NSAs, sales, or promotions followed the enactment of PAEA until 
regulations were issued in late 2007. The number of NSAs, sales, and 
promotions has increased most years since. The revenue generated from 
NSAs, sales, and promotions has also increased overall. The most 
revenue was generated by competitive NSAs. Financial results of 
competitive NSAs are not reported publicly. According to the Postal 
Regulatory Commission (PRC), which exercises regulatory oversight over 
USPS, nearly all competitive NSAs have covered their costs. Market 
dominant NSAs generated little revenue, in part because few were done. 
Sales and promotions have also generated little revenue. 

Opportunities for increasing revenue from NSAs, sales, and promotions 
are primarily with competitive NSAs, though challenges may limit 
revenue, and it will likely not offset declines from other products. 
Continued growth in e-commerce is creating opportunities to generate 
additional revenue through competitive NSAs. Opportunities to generate 
additional revenue through market dominant NSAs are limited by low 
demand for those products. Also, it is difficult for USPS to determine 
whether any volume and revenue increases directly result from market 
dominant NSAs because it is difficult to accurately estimate mailers’ 
future mail volume. In addition, USPS and some mailers we spoke with 
noted that the process for developing both market-dominant and 
competitive NSAs can be burdensome, hindering the development of new 
agreements. USPS has taken actions, though, to streamline the process 
for developing competitive NSAs. Opportunities for generating revenue 
from sales and promotions are also limited by low demand as well as 
limited review of the long-term financial results before 
implementation. USPS has noted that promotions satisfy rate 
requirements by, for example, helping to generate revenues for USPS. 
In particular, promotions are used to encourage mail volume over the 
long term. However, USPS does not provide data and analysis about the 
potential long-term financial results when submitting promotions to 
PRC for its approval. As a result, PRC does not assess the 
methodologies for evaluating the long-term financial results of 
promotions before implementation. Given USPS’s financial situation, 
USPS should demonstrate how promotions may achieve positive long-term 
financial results, in order to help maximize the revenue generated by 
those postage rate discounts. 

What GAO Recommends: 

GAO recommends that when filing for approval, USPS provide information 
to PRC about USPS’s data collection and analysis plans for estimating 
the long-term financial results of promotions. GAO also recommends 
that PRC evaluate USPS’s data collection and analysis plans for 
promotions as part of its review. In commenting on the report, USPS 
disagreed with the first recommendation, and PRC agreed with both 
recommendations. USPS stated it does not believe the recommendation 
will significantly affect the PRC’s review process or improve the 
quality of USPS’s business decisions. GAO continues to believe this 
recommendation has merit, as discussed in this report. 

View GAO-13-578. For more information, contact Lorelei St. James at 
(202) 512-2834 or stjames@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Since 2007, USPS Has Developed Numerous NSAs, Sales, and Promotions 
That Have Generated a Small but Growing Portion of USPS's Total 
Revenue: 

Opportunities for Increasing Revenue from NSAs, Sales, and Promotions 
Are Primarily from Competitive NSAs, though Challenges May Limit 
Revenue: 

Conclusions: 

Recommendations: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: Required Objectives and Factors for Sales and Promotions: 

Appendix III: Comments from the United States Postal Service: 

Appendix IV: Comments from the Postal Regulatory Commission: 

Appendix V: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Requirements for Negotiated Service Agreements (NSA): 

Table 2: Negotiated Service Agreement (NSA) Requests Approved by PRC 
since the Enactment of PAEA, by Fiscal Year: 

Table 3: Number of Sales and Promotions Approved by PRC, by Fiscal 
Year: 

Table 4: Estimated Net Revenue of Sales and Promotions, Fiscal Years 
2009 to 2013: 

Figures: 

Figure 1: USPS Revenue from Negotiated Service Agreements (NSA) and 
Other Mail, Fiscal Years 2009 to 2012: 

Figure 2: Estimated Net Revenue from Domestic, Market-Dominant 
Negotiated Service Agreements, 2003 to 2014: 

Figure 3: How Mobile Quick Response (QR) Codes Work: 

Figure 4: Profit from Market Dominant Products and All Competitive 
Products, Fiscal Year 2012: 

Figure 5: Negotiated Service Agreement (NSA) Development Process: 

Abbreviations: 

NSA: negotiated service agreement: 

OIG: Office of Inspector General: 

PAEA: Postal Accountability and Enhancement Act: 

PRC: Postal Regulatory Commission: 

QR: Quick Response: 

UPU: Universal Postal Union: 

USPS: United States Postal Service: 

[End of section] 

GAO:
United States Government Accountability Office: 
441 G St. N.W. 
Washington, DC 20548: 

June 25, 2013: 

The Honorable Thomas R. Carper: 
Chairman: 
The Honorable Tom Coburn, M.D.
Ranking Member: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

The Honorable Susan M. Collins: 
The Honorable Carl Levin: 
United States Senate: 

For several years, the United States Postal Service (USPS) has not 
generated sufficient revenues to cover its expenses, putting its 
mission to provide prompt, reliable, and efficient service at risk. 
Although much of the focus has been on USPS's costs as the way to 
close the gap between its revenues and expenses, generating additional 
revenue is also necessary. As customers increasingly turn to digital 
communications and online payment methods, total mail volume has 
decreased precipitously, falling 25 percent from its peak in fiscal 
year 2006 to fiscal year 2012. As a result, USPS's revenue has 
declined substantially. In 2012, USPS reached its $15-billion 
borrowing limit and incurred a $15.9-billion net loss.[Footnote 1] 
USPS expects that its expenses will exceed revenue and that mail 
volume will continue to decline each year through fiscal year 2020. 

Among USPS's activities to enhance its revenue are negotiated service 
agreements (NSA), sales, and promotions designed to increase or 
sustain mail volume and revenue through temporary discounts on 
specific mail products. In 2010, we reported on various options to 
generate additional revenue, including the use of NSAs, as part of a 
broader report on options to facilitate USPS's progress toward 
financial sustainability.[Footnote 2] Since that time, USPS has 
developed dozens more NSAs, sales, and promotions, which you asked us 
to review. We examined (1) the NSAs, sales, and promotions USPS has 
developed and their reported financial results, and (2) any 
opportunities to generate additional revenue from NSAs, sales, and 
promotions and any challenges that could hinder their development and 
implementation. 

To describe the NSAs, sales, and promotions that USPS has developed, 
as well as their reported financial results, we reviewed public and 
non-public documents. To summarize the financial results of NSAs, we 
examined non-public versions of USPS's Cost and Revenue Analysis 
reports as well as other non-public USPS documents that included the 
volume, cost, and revenue of individual NSAs. We also reviewed USPS 
data collection reports for market dominant NSAs. To summarize the 
number of, and results from, USPS sales and promotions, we reviewed 
USPS documents requesting approval for sales and promotions and 
obtained additional data from USPS on the estimated results of sales 
and promotions. We assessed the reliability of these data sources by 
interviewing USPS officials, and determined that the data were 
sufficiently reliable for our reporting purposes. We also reviewed the 
Postal Regulatory Commission (PRC) conclusions about NSAs, sales, and 
promotions in their Annual Compliance Determination Reports.[Footnote 
3] 

To identify and assess any opportunities to generate additional 
revenue from NSAs, sales, and promotions, as well as challenges, if 
any, that could hinder their development and implementation, we 
reviewed USPS and PRC documents, and conducted interviews with 
stakeholders. Specifically, we reviewed relevant regulations, PRC 
proceedings, and internal USPS evaluations of NSAs. We also conducted 
interviews with officials from USPS, PRC, and 15 "mailers" to enhance 
our understanding of the circumstances in which NSAs, sales, and 
promotions are developed and implemented.[Footnote 4] We selected 
mailers that both have and have not participated in NSAs, sales, and 
promotions, as well as other factors. We also spoke with industry 
associations that represent major USPS mailers. The views of mailers 
and industry associations cannot be generalized to all mailers and 
industry associations because the sampled mailers were selected as 
part of a nonprobability sample. Appendix I contains a detailed 
discussion of our scope and methodology. 

We conducted this performance audit from September 2012 to June 2013 
in accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

Background: 

An NSA is a customized contract between USPS and a specific entity--
often a mailer or foreign postal operator--typically lasting a year or 
more. NSAs provide customer-specific rates--generally lower prices on 
specific mail products--in exchange for meeting volume targets and 
mail preparation requirements. The goal of these agreements is 
generally to encourage additional mail volume and revenue. For 
example, an NSA may provide a postage rate discount, paid to the 
mailer as a rebate at the end of a fiscal year, for all mail volume 
above a specific threshold. 

The Postal Accountability and Enhancement Act (PAEA)[Footnote 5] 
authorized USPS to create NSAs for two discrete categories of mail 
products, market dominant and competitive, as outlined in table 1. 
[Footnote 6] The market dominant category includes products for which 
USPS has a monopoly or would be able to exercise substantial market 
power, such as First-Class Mail and Standard Mail. Competitive 
products are all other types of mail, and include primarily shipping 
services such as Priority Mail, Express Mail, and Parcel Select. 

The legal requirements for NSAs differ based on whether the postal 
products are market dominant or competitive. PAEA requires market 
dominant NSAs to improve the net financial position or enhance the 
performance of operational functions of USPS so long as the agreement 
does not cause unreasonable harm to the marketplace. Also, market 
dominant product NSAs must be made available to "similarly situated 
mailers."[Footnote 7] PAEA requires competitive NSAs, as well as 
competitive products in general, to cover their attributable costs, 
meaning they must generate more revenue than the costs attributable to 
delivery of the products, such as the labor involved in handling that 
mail.[Footnote 8] Further, competitive products overall, including 
NSAs, must contribute at least 5.5 percent of USPS's institutional 
costs--that is, overhead costs not directly related to the delivery of 
products. 

As directed by PAEA, PRC issued final regulations in 2007 that 
established procedures for its reviews of competitive and market 
dominant NSAs, as summarized in table 1.[Footnote 9] As with all 
postal rate changes, USPS must obtain approval from PRC prior to 
implementing NSAs. PRC has approved all NSAs proposed by USPS through 
fiscal year 2012. PRC also reviews NSAs after implementation for 
compliance with regulatory criteria, in its Annual Compliance 
Determination Report. 

Table 1: Requirements for Negotiated Service Agreements (NSA): 

Competitive: 
Requirements: 
* For each competitive product, NSA must recover its attributable 
costs; 
* Competitive products, collectively, including NSAs, must contribute 
at least 5.5 percent of USPS's total institutional costs[B]. 

Mail products: Express Mail; 
Fastest expedited delivery. 

Mail products: First-Class Packages[A]; 
Packages less than 16 ounces. 

Mail products: Priority Mail; 
First-Class Mail more than 13 ounces and any other mail matter less 
than 13 ounces with expedited delivery. 

Mail products: Parcel Select; 
Ground delivery service for large and medium sized shippers. 

Mail products: Parcel Return Service; 
Return service for large and medium sized shippers. 

Mail products: International; 
All international competitive products. 

Market dominant: 
Requirements: 
* NSAs must either: 
- Improve the net financial position of USPS, or; 
- Enhance operational functions; 
* NSAs may not cause unreasonable harm to the marketplace; 
* NSAs must be available to similarly situated mailers. 

Mail products: First-Class Mail; 
Cards, letters, "flats"[C]. 

Mail products: Standard Mail; 
Advertising, circulars, catalogs, some small parcels. 

Mail products: Periodicals; 
Magazines, newsletters. 

Mail products: Package Services; 
Merchandise, printed material. 

Mail products: International; 
All international market dominant products. 

Source: GAO summary of Postal Regulatory Commission (PRC) regulations. 

[A] The First-Class Package Services product was moved from the market 
dominant to the competitive category in fiscal year 2012. 

[B] United States Postal Service (USPS) and PRC calculate total 
institutional costs for each fiscal year. All competitive products must 
generate revenue above costs attributable to the delivery of those 
competitive products at least as much as 5.5 percent of total 
institutional costs. 

[C] "Flats" are defined as mail pieces that exceed the dimensions of a 
normal letter but remain flat, such as large envelopes, newsletters, 
and magazines. 

[End of table] 

To increase or sustain mail volume and revenue, USPS has also provided 
short-term discounts, called sales or promotions, on specific mail 
products for groups of mailers, in contrast to NSAs, which are 
agreements with individual mailers for longer periods. Sales--often 
called price incentive programs--have sought to increase, or curb the 
decline of, mail volume by temporarily offering a discount (paid 
through a rebate) to mailers whose mail volume exceeds a predetermined 
volume threshold during a specific period. Some sales were offered in 
the summer, when USPS stated it had excess capacity in its system. 
These sales were designed to generate revenue during the sale period 
and not necessarily to have long-term benefits. After 2010, USPS began 
offering promotions instead of sales, which also provide temporary 
discounts, but seek to increase the long-term value of mail by, for 
example, integrating mobile technology into mailers' advertising 
campaigns. As with all postal rate changes, USPS must obtain approval 
from PRC prior to implementing sales and promotions.[Footnote 10] PRC 
reviews whether the proposed sales and promotions meet postal rate 
regulations that include several qualifying factors such as whether 
sales and promotions help assure adequate revenues for USPS. See 
appendix II for a full list of these objectives and factors of postal 
rate regulation. 

Since 2007, USPS Has Developed Numerous NSAs, Sales, and Promotions 
That Have Generated a Small but Growing Portion of USPS's Total 
Revenue: 

Number and Revenue Have Increased since 2007: 

The number of NSAs, sales, and promotions has increased in most years 
since the enactment of PAEA. There were no new NSAs approved following 
the enactment of PAEA until PRC regulations governing NSAs were issued 
in October 2007. As seen in table 2, the majority of NSAs have been 
with competitive products. Starting in fiscal year 2011, USPS began 
using "umbrella" products that allow multiple mailers to agree to 
similar NSAs. As a result, the total number of NSA-product requests 
for approval in the table below appears to decline in 2011 and 2012, 
when in fact the total number of individual contracts with mailers has 
continued to grow.[Footnote 11] 

Table 2: Negotiated Service Agreement (NSA) Requests Approved by PRC 
since the Enactment of PAEA, by Fiscal Year: 

Competitive: 

Mail Type: Domestic[A]; 
2007: 0; 
2008: 1; 
2009: 32; 
2010: 13; 
2011: 14; 
2012: 32. 

Mail Type: International[B]; 
2007: 0; 
2008: 16; 
2009: 34; 
2010: 112; 
2011: 50; 
2012: 23. 

Mail Type: Total Competitive; 
2007: 0; 
2008: 17; 
2009: 66; 
2010: 125; 
2011: 64; 
2012: 55. 

Market dominant: 

Mail Type: Domestic[C]; 
2007: 0; 
2008: 0; 
2009: 0; 
2010: 0; 
2011: 1; 
2012: 1. 

Mail Type: International[D]; 
2007: 0; 
2008: 0; 
2009: 1; 
2010: 3; 
2011: 3; 
2012: 4. 

Mail Type: Total Market Dominant; 
2007: 0; 
2008: 0; 
2009: 1; 
2010: 3; 
2011: 4; 
2012: 5. 

Mail Type: Total NSA requests approved; 
2007: 0; 
2008: 17; 
2009: 67; 
2010: 128; 
2011: 68; 
2012: 60. 

Source: PRC. 

[A] These figures represent the number of domestic, competitive NSA 
requests approved by PRC since the enactment of PAEA. One domestic, 
competitive NSA request was for an "umbrella" product that allows USPS 
to enter into individual contracts, all with similar terms, without 
filing the contracts with PRC for pre-implementation review. This 
product involves Priority Mail and was approved in fiscal year 2011. 
Overall, domestic, competitive NSAs have been approved for Priority 
Mail, Express Mail, Parcel Select, Parcel Return Service, and First-
Class Package Service mail products. Some agreements utilize multiple 
mail products. 

[B] As with domestic, competitive NSAs, these figures represent the 
number of NSA requests approved by PRC since the enactment of PAEA. 
Three international, competitive NSA requests were for "umbrella" 
products that allow USPS to enter into individual contracts, all with 
similar terms, which are filed at the PRC, but not for pre-
implementation review. 

[C] These figures represent the number of domestic, market dominant 
NSA requests approved by PRC since the enactment of PAEA. These 
figures do not include three NSAs that were filed after enactment of 
PAEA in December 2006, but before PRC updated its regulations 
governing NSAs in October 2007. 

[D] As with domestic NSAs, these figures represent the number of NSA 
requests approved by PRC since the enactment of PAEA. Most 
international, market dominant NSAs are with foreign postal operators. 

[End of table] 

The first sales were offered in fiscal year 2009, in part as a 
response to the decline in mail volume resulting from the recession, 
and USPS has since offered a variety of promotions (see table 3 below). 

Table 3: Number of Sales and Promotions Approved by PRC, by Fiscal 
Year: 

Sales and promotions: Sales; 
2009: 3; 
2010: 1; 
2011: 0; 
2012: 0. 

Sales and promotions: Promotions; 
2009: 0; 
2010: 0; 
2011: 3; 
2012: 2. 

Sales and promotions: Total; 
2009: 3; 
2010: 1; 
2011: 3; 
2012: 2. 

Source: GAO analysis of USPS documents. 

[End of table] 

USPS data show that revenue generated from NSAs, sales, and promotions 
has generally increased each year since the enactment of PAEA, with 
most of the revenue generated by competitive product NSAs. We cannot 
report the specific revenue generated by competitive NSAs because of 
the proprietary nature of data related to competitive products. 
However, the total revenue generated as part of all NSAs increased 
over 240 percent from fiscal year 2009 to 2012, though it remains a 
small portion of USPS's total revenue (see fig. 1). Market dominant 
NSAs generated a relatively small portion of this revenue, partly 
because there have been few such agreements. Beyond NSAs, sales and 
promotions have also generated limited revenue since the first sale in 
2009. As discussed below, it is not clear how much net revenue USPS 
has generated from market dominant NSAs or sales and promotions. 
[Footnote 12] 

Figure 1: USPS Revenue from Negotiated Service Agreements (NSA) and 
Other Mail, Fiscal Years 2009 to 2012: 

[Refer to PDF for image: stacked vertical bar graph] 

Fiscal Year: 2009; 
NSA revenue: $0.7 billion; 
USPS revenue from all other mail: $67.4 billion; 
Total: $68.1 billion. 

Fiscal Year: 2010; 
NSA revenue: $0.8 billion; 
USPS revenue from all other mail: $66.3 billion; 
Total: $67.1 billion. 

Fiscal Year: 2011; 
NSA revenue: $1.3 billion; 
USPS revenue from all other mail: $64.4 billion; 
Total: $65.7 billion. 

Fiscal Year: 2012; 
NSA revenue: $2.3 billion; 
USPS revenue from all other mail: $62.9 billion; 
Total: $65.2 billion. 

Source: USPS. 

[End of figure] 

USPS Has Developed Numerous Competitive Product NSAs; Most Have 
Covered Costs and Generated a Small but Growing Portion of Total USPS 
Revenue: 

[Side bar] 

“Competitive” products are those for which USPS does not have a 
monopoly or is not able to exercise substantial market power. These 
products primarily include shipping services such as Priority Mail, 
Express Mail, Parcel Select, and Parcel Return. 

Source: GAO summary based on USPS information. 

[End of side bar] 

Since the enactment of PAEA, the number of competitive NSAs has grown 
substantially. PRC has approved 327 domestic and international 
competitive NSA product requests through fiscal year 2012. A number of 
these NSA requests are actually "umbrella" products that include 
numerous individual contracts, all with similar terms. Counting these 
individual contracts separately illustrates the substantial number of 
NSAs, with 446 domestic and international competitive NSAs active in 
fiscal year 2012 alone. 

According to USPS officials and a mailer we spoke with, the increased 
number of competitive NSAs was due mainly to increased experience with 
NSA contracts and product enhancements. For example, according to 
these officials, USPS and PRC processes associated with developing 
competitive NSAs have become more efficient as a result of improved 
costing techniques and additional experience developing contracts with 
mailers. USPS and PRC also worked together to develop umbrella 
products that allow multiple mailers to agree to similar discounts for 
related mail products. Product enhancements may have also increased 
USPS's ability to attract more business with NSAs. For example, 
officials from USPS and a mailer we spoke with noted that USPS's 
ability to track packages' transit times and its delivery performance 
improvements for parcels have made USPS products more attractive to 
customers. 

The financial results of competitive product NSAs are not reported 
publicly, but according to PRC, most such agreements have covered 
their costs, and according to USPS, these agreements have generally 
been successful in enhancing revenue. According to PRC, all domestic 
competitive NSAs have complied with the legal requirements, including 
that they generate revenue that covers their attributable costs. Four 
international competitive NSAs in fiscal year 2012, however, did not 
cover their costs. According to PRC, the international competitive 
NSAs that did not cover costs were projected to cover costs when USPS 
filed its request.[Footnote 13] 

Although competitive NSAs are collectively profitable, these 
agreements generate a small portion of USPS's total revenue and help 
cover less of USPS's institutional costs than market dominant 
products.[Footnote 14] Competitive products overall, including NSAs, 
generate a relatively small part of USPS's total revenue because they 
generally involve much lower mail volumes than market dominant 
products. Additionally, total revenue from competitive products covers 
less of USPS's institutional costs than the revenue from the two major 
market dominant products, First-Class Mail and Standard Mail. 

Since Enactment of PAEA, USPS Has Developed Few Market Dominant NSAs 
and Generated Limited, if Any, Net Revenue from Them: 

[Side bar] 

“Market dominant” products are those for which USPS has a monopoly or 
would be able to exercise substantial market power. These primarily 
include First-Class Mail, Standard Mail, Periodicals, and some types 
of Package Services. 

Source: GAO summary based on USPS information. 

[End of side bar] 

[Side bar] 

“Net revenue” refers to the revenue, minus attributable costs and 
discounts, above what would have been earned by USPS in the absence of 
the NSA, sale, or promotion (called “net contribution” by USPS). 

Source: GAO summary based on USPS information. 

[End of side bar] 

USPS has implemented few market dominant NSAs. USPS has been granted 
approval by PRC to implement two domestic, market dominant NSAs since 
the enactment of PAEA, though only one of these was active, as of May 
2013. In fiscal year 2012, there was one active market dominant 
domestic NSA, and eight active market dominant international NSAs. 
USPS has implemented few such NSAs in part because of the decline in 
demand for market dominant mail products, as discussed further below. 

Domestic, market dominant NSAs have likely generated limited, if any, 
net revenue (see figure 2). Most of these agreements were implemented 
prior to the enactment of PAEA. According to USPS, all domestic market 
dominant NSAs have generated net revenue of $68.5 million dollars to 
date. However, PRC, using a different methodology that is discussed 
below, estimates a net loss of $11.8 million for all domestic market 
dominant NSAs. 

For example, the USPS and PRC estimates of net revenue for the 
Discover NSA approved in fiscal year 2011 differ substantially. USPS's 
estimate of net revenue assumes that all volume greater than the 
projected volume is because of the rebate. USPS developed its 
estimates of projected volume based on Discover's mail volume history 
as well as other qualitative factors. PRC used a quantitative 
methodology based on product elasticities--that is, the estimated 
sensitivity of total product mail volume to price changes--associated 
with the mail product involved. As a result, USPS estimated net 
revenue of about $24 million in the first year of the NSA with 
Discover, while PRC estimated USPS lost over $4 million. As discussed 
further below, PRC has encouraged USPS to identify a more reliable 
method for evaluating the impact of market dominant NSAs. 

Figure 2: Estimated Net Revenue from Domestic, Market-Dominant 
Negotiated Service Agreements, 2003 to 2014: 

[Refer to PDF for image: illustrated vertical bar graph] 

Capital One; 
USPS Net Value Estimate: $39.0 million; 
PRC Net Value Estimate[A]: $22.1 million; 
Timeframe: 2003-2007. 

Discover; 
USPS Net Value Estimate: $5.7 million; 
PRC Net Value Estimate[A]: $1.4 million; 
Timeframe: 2005-2007. 

Chase/Bank One; 
USPS Net Value Estimate: $16.7 million; 
PRC Net Value Estimate[A]: -$7.5 million; 
Timeframe: 2005-2008. 

HSBC[B]; 
USPS Net Value Estimate: $0; 
PRC Net Value Estimate[A]: $0; 
Timeframe: 2006-2008. 

Bookspan; 
USPS Net Value Estimate: $4.0 million; 
PRC Net Value Estimate[A]: $21,000; 
Timeframe: 2006-2009. 

Bank of America[C]; 
USPS Net Value Estimate: -$2.4 million; 
PRC Net Value Estimate[A]: -$2.4 million; 
Timeframe: 2008-2009. 

Bradford; 
USPS Net Value Estimate: $1.0 million; 
PRC Net Value Estimate[A]: -$16,000; 
Timeframe: 2008-2011. 

Lifeline; 
USPS Net Value Estimate: $702,441; 
PRC Net Value Estimate[A]: $129,000; 
Timeframe: 22008-2011. 

Discover; 
USPS Net Value Estimate: $24.8 million; 
PRC Net Value Estimate[A]: -$4.3 million; 
Timeframe: 2011-2014. 

Source: GAO summary of USPS and PRC documents. 

[A] USPS and PRC have used different methodologies for estimating the 
net revenue generated by domestic, market dominant negotiated service 
agreements. 

[B] No discounts were paid pursuant to the HSBC contract because it did 
not reach the discount threshold during any of the three contract 
years. 

[C] The Bank of America contract was canceled after the first year of 
the contract because of the estimated loss of revenue. 

[End of figure] 

International market dominant NSAs implemented since the enactment of 
PAEA consist mainly of agreements with foreign posts and are estimated 
to have lost approximately $25 million in net revenue in fiscal year 
2012, according to USPS. However, PRC has noted that the volume sent 
under the NSAs generated smaller losses than what would have occurred 
if the volumes were sent under Universal Postal Union (UPU) 
international postal rates. According to USPS officials, agreements 
with foreign posts are governed by UPU rates, which are developed 
based on domestic postal rates. The U.S. has low domestic postal rates 
compared to other countries, and as a result, its UPU-established 
inbound mail rates do not allow some international NSAs to cover their 
costs.[Footnote 15] As PRC explained in its 2012 Annual Compliance 
Determination Report, the "current UPU formula [for setting 
international postal rates] adversely affects the financial 
performance of inbound mail [NSAs]." Similar to competitive domestic 
NSAs, the first international market dominant NSAs after PAEA were 
active in fiscal year 2009.[Footnote 16] 

Since Enactment of PAEA, USPS Has Increased Sales and Promotions but 
Generated Limited, if Any, Net Revenue: 

USPS has implemented six sales and three promotions, all of which 
offered temporary discounts to mailers to sustain and grow mail 
volume. USPS estimates that these sales and promotions have earned a 
maximum net revenue of about $184 million (see table 4). According to 
USPS data, some sales and promotions are estimated to have generated 
little to no net revenue during the program periods. However, 
according to USPS officials, these incentives have generally been 
successful in that they will eventually help sustain mail volume. 
Officials said that mailers who have taken advantage of sales and 
promotions have increased their overall mail volume, while those who 
have not participated in these programs have kept their volume steady 
or reduced it. Further, USPS's long-term goal for promotions is that 
they will enhance the value of the mail for mailers and therefore help 
to keep mailers in the mail beyond the program period. It is unclear 
the extent to which sales and promotions are accomplishing this goal, 
as discussed below. PRC approves sales and promotions under the 
requirements for setting rates and has conducted after the fact 
reviews of two sales. According to PRC officials, they were unable to 
evaluate the results of the other sales or promotions because USPS did 
not provide sufficient data to PRC. 

Table 4: Estimated Net Revenue of Sales and Promotions, Fiscal Years 
2009 to 2013: 

Sales: 

Name of sale or promotion: Standard Mail Volume Incentive Pricing 
Program[C]; 
Fiscal year: 2009; 
Product(s): Standard Mail; 
Duration of program period: 4 months; 
USPS estimate of net revenue (during program period)[A]: $24.1 million; 
PRC estimate of net revenue (during program period)[B]: -$36.9 million. 

Name of sale or promotion: Saturation Mail Incentive Program[D]; 
Fiscal year: 2009 - 2010; 
Product(s): Standard Mail; 
Duration of program period: 12 months; 
USPS estimate of net revenue (during program period)[A]: $18.9 million; 
PRC estimate of net revenue (during program period)[B]: Not estimated. 

Name of sale or promotion: First-Class Mail Incentive Program[E]; 
Fiscal year: 2009; 
Product(s): First-Class Mail; 
Duration of program period: 3 months; 
USPS estimate of net revenue (during program period)[A]: $18 million; 
PRC estimate of net revenue (during program period)[B]: -$7 million. 

Name of sale or promotion: Standard Mail Volume Incentive Pricing 
Program[C]; 
Fiscal year: 2010; 
Product(s): Standard Mail; 
Duration of program period: 5 months; 
USPS estimate of net revenue (during program period)[A]: $48 to $65 
million; 
PRC estimate of net revenue (during program period)[B]: Not estimated. 

Name of sale or promotion: Saturation-HD Mail Incentive Program[F]; 
Fiscal year: 2011 - 2012; 
Product(s): Standard Mail; 
Duration of program period: 23 months; 
USPS estimate of net revenue (during program period)[A]: $14.5 million; 
PRC estimate of net revenue (during program period)[B]: Not estimated. 

Name of sale or promotion: "Reply Rides Free" - First Class Mail 
Incentive[G]; 
Fiscal year: 2011 - 2012; 
Product(s): First-Class Mail; 
Duration of program period: 23 months; 
USPS estimate of net revenue (during program period)[A]: $14.3 million; 
PRC estimate of net revenue (during program period)[B]: Not estimated. 

Promotions[H]: 

Name of sale or promotion: Mobile barcode promotion[I]; 
Fiscal year: 2011; 
Product(s): First-Class and Standard Mail; 
Duration of program period: 2 months; 
USPS estimate of net revenue (during program period)[A]: $13 million; 
PRC estimate of net revenue (during program period)[B]: Not estimated. 

Name of sale or promotion: Mobile barcode promotion[I]; 
Fiscal year: 2012; 
Product(s): First-Class and Standard Mail; 
Duration of program period: 2 months; 
USPS estimate of net revenue (during program period)[A]: -$5 million 
to $2 million; 
PRC estimate of net revenue (during program period)[B]: Not estimated. 

Name of sale or promotion: Holiday mobile shopping promotion[I]; 
Fiscal year: 2013; 
Product(s): First-Class and Standard Mail; 
Duration of program period: Two weeks; 
USPS estimate of net revenue (during program period)[A]: - $1 million 
to $14 million; 
PRC estimate of net revenue (during program period)[B]: Not estimated. 

Source: USPS. 

[A] Net revenue refers to the revenue, minus attributable costs and 
discounts, above what would have been earned by USPS in the absence of 
the sale or promotion (called "net contribution" by USPS). 

[B] PRC has not evaluated the results of most sales and promotions 
because of data limitations. 

[C] Offered a 30 percent postage discount on Standard Mail volume 
above a threshold volume tailored to each mailer. 

[D] Offered postage discounts for saturation mail volume above 
threshold volumes tailored to each mailer. 

[E] Offered 20 percent postage discount on presorted First-Class Mail 
volume above a threshold volume tailored to each mailer. 

[F] Offered postage discounts on saturation and high density volume 
above a threshold volume tailored to each mailer. 

[G] Offered postage discount for First-Class Mail automation letters 
above a threshold volume tailored to each mailer. 

[H] USPS has noted that many of these promotions are designed to have 
an impact on mail volume and revenue beyond the program period by, for 
example, helping to increase the value of mail for mailers. However, 
USPS has not reported any estimates of the long-term financial results. 

[I] Offered postage discount to First-Class and Standard cards, 
letters, and flats that included a two-dimensional mobile barcode. 

[End of table] 

Sales: 

USPS offered sales on First-Class Mail and Standard Mail products to 
encourage additional mail volume and revenue during a historically low-
volume period. For example, USPS's first sale was held during 4 months 
in the summer of 2009, offering a 30 percent discount for Standard 
Mail on incremental volume above a threshold volume tailored to each 
participating mailer. USPS stated that it had the ability to offer a 
steep discount on any mail volume sent above what the customer mailed 
during the same four month period in the summer of 2009 because it had 
significant excess capacity and, as a result, there was little 
incremental cost for USPS to mail the additional volume. USPS 
conducted a similar sale in the summer of 2010 because of the 
estimated profits from the first sale, as well as continued excess 
capacity. 

USPS estimated maximum net revenue of $126 million for the sales it 
has conducted, though PRC has estimated different results than USPS in 
every case where PRC has examined the net revenue. Specifically, PRC 
estimated that the 2009 sales programs--Standard Mail Volume Incentive 
Pricing Program and First-Class Mail Incentive Program--lost money for 
USPS during the time in which it offered the discount. PRC estimated a 
$7 million net loss for the First-Class Mail Incentive Program, and an 
approximately $37 million net loss for the Standard Mail Volume 
Incentive Pricing Program. As with domestic, market dominant NSAs, PRC 
used a different methodology than USPS to estimate the net revenue 
generated by these sales. The different methodologies used by PRC and 
USPS to evaluate discount programs for market dominant products are 
discussed further below. According to PRC, they have not evaluated the 
results of all sales because of corrupt or missing USPS data. 

Promotions: 

USPS estimated a maximum net value of about $58 million for promotions 
conducted to date (see table above). USPS has offered promotions as 
temporary discounts on First-Class Mail and Standard Mail products to 
help connect physical mail to technology, which USPS assumed would 
increase the value of mail for mailers and help sustain mail volume 
and revenue in the future. For example, USPS promotions encourage 
retailers to print Quick Response (QR) codes on physical mail pieces, 
which allow the consumer to scan the QR code with their mobile device, 
directing them to the retailers' website, as illustrated in figure 3. 

Figure 3: How Mobile Quick Response (QR) Codes Work: 

[Refer to PDF for image: illustration] 

Mailer prints QR code on letter mail; 
Consumer scans QR code using mobile device; 
Consumer is directed to mailer's mobile website. 

Source: GAO. 

[End of figure] 

USPS has used promotions to increase the value of the mail for mailers 
so that they sustain their use of mail. Specifically, USPS uses 
promotions as tools to develop innovative products, such as the use of 
discounts as incentives for mailers to invest in technology that may 
increase the value of mail over the long term. For instance, USPS 
implemented the 2012 holiday mobile shopping promotion for 2 weeks and 
gave a 2 percent discount to First-Class Mail and Standard Mail cards, 
letters, and flats that included a QR code.[Footnote 17] With this 
promotion, USPS sought to provide incentives for more mailers to use 
mobile barcodes to direct consumers to their websites for more 
information on sales. Officials told us that USPS believed direct mail 
that included such barcodes is more valuable because it makes the mail 
a multi-media experience. USPS noted that by increasing the value of 
its mail products it can retain as much advertising revenue as 
possible. An additional component of this promotion was the potential 
for customers to earn an additional 1 percent discount if their volume 
exceeded specified Priority Mail thresholds. Although USPS has 
estimated the financial result of promotions for the program period, 
it has not provided any estimates of the long-term financial results 
to PRC, as discussed in more detail later in this report. 

Opportunities for Increasing Revenue from NSAs, Sales, and Promotions 
Are Primarily from Competitive NSAs, though Challenges May Limit 
Revenue: 

Opportunities Exist to Generate Additional Revenue from Competitive 
NSAs but Will Likely Not Offset Declines from Other Products: 

Opportunities Exist Because of Continued Growth in E-Commerce: 

Opportunities exist to generate additional revenue through competitive 
product NSAs primarily because of merchandise shipments associated 
with the continued growth in e-commerce.[Footnote 18] USPS projects 
that total shipping and package volume will grow by about 33 percent 
by the end of fiscal year 2017, after increasing about 7.5 percent in 
fiscal year 2012. Expansion of e-commerce has been a key factor in the 
growth of these products, most of which are competitive. Moreover, e-
commerce continues to grow and has not reached its full potential 
because of accessibility, returns, payment, and security concerns. 
Companies that can solve these shortcomings may garner additional 
business, and USPS may be able to develop NSAs with these companies. 

Other factors may allow USPS to continue taking advantage of the 
growth in e-commerce and generate additional revenue through 
competitive product NSAs. First, even if USPS moves to a 5-day 
delivery schedule, it has proposed that it would continue to deliver 
packages on Saturday to maintain its advantage of delivering to every 
household 6 days a week without a surcharge.[Footnote 19] Second, 
although USPS faces private-sector competitors with entrenched market 
share of the package delivery business, USPS has certain competitive 
advantages. Although FedEx and UPS lead the high-volume business-to-
business package delivery market, it can be very expensive for them to 
deliver single items to residential addresses, particularly in rural 
areas. Along with such "last mile" delivery advantages, USPS also has 
special access to some large residential buildings. 

While the growth and opportunities associated with competitive 
products are substantial, additional growth is not likely to offset 
declines in other products. Competitive products taken as a whole are 
a modest piece of USPS's total revenue, and generate relatively low 
profits, compared to the most profitable market dominant products, 
First-Class Mail and Standard Mail (see fig. 4).[Footnote 20] Even 
with robust growth in competitive products, including NSAs involving 
those products, it is extremely unlikely that this additional revenue 
will offset the projected declines in First-Class Mail and other 
products. 

Figure 4: Profit from Market Dominant Products and All Competitive 
Products, Fiscal Year 2012: 

[Refer to PDF for image: vertical bar graph] 

Product type: First-Class Mail; 
Profit: $15.462 billion. 

Product type: Standard Mail; 
Profit: $5.496 billion. 

Product type: Periodicals; 
Profit: -$670.1 million. 

Product type: Package Services; 
Profit: -$38.5 million. 

Product type: All Other Market Dominant Products; 
Profit: $432.4 million. 

Product type: All Competitive Products; 
Profit: $3.042 billion. 

Sources: USPS cost and revenue analysis report, fiscal year 2012. 

Note: Profit refers to revenue above attributable costs, and does not 
reflect USPS's institutional costs. 

[End of figure] 

Process for Developing Competitive NSAs Could Limit Additional Revenue: 

USPS's ability to generate additional revenue from competitive product 
NSAs may also face challenges because of the length of the process to 
develop NSAs. The USPS Office of Inspector General (OIG) reported in 
2011 that, despite improvements, the preparation and review process 
for new product approvals puts USPS at a competitive disadvantage in 
terms of speed to market.[Footnote 21] Three mailers we spoke with 
that had NSAs with USPS said that the time it took to develop and 
obtain approval for NSAs was long when compared to negotiating 
contracts with USPS's competitors, and three other mailers also 
described the process as lengthy (see fig. 5). Four of the mailers we 
spoke with that had not developed NSAs with USPS also told us that 
they perceive the process of developing NSAs as burdensome, which 
deters them from pursuing such agreements. 

Figure 5: Negotiated Service Agreement (NSA) Development Process: 

[Refer to PDF for image: illustration] 

A mailer seeking to enter into an NSA with USPS must submit a proposal 
to the USPS. 

Mailer and USPS enter into negotiations to establish an NSA, and agree 
to terms and conditions specific to the mailer. 

USPS Board of Governors reviews and approves proposed NSA. 

USPS must request a decision from PRC before USPS may implement the 
NSA. 

If NSA involves market dominant products: 
* Postal Regulatory Commission (PRC) establishes a docket for the 
proposed NSA, publishes notice of the filing in the Federal Register, 
and posts the filing on its website; 
* PRC reviews the proposed NSA, the associated data, and the comments 
thereon, and issues an order announcing its findings; 
* USPS and the mailer implement NSA. 

If NSA involves competitive products: 
* PRC reviews the NSA and associated data and issues an order 
announcing its findings; 
* USPS and the mailer implement NSA. 

Source: GAO summary of USPS and PRC documents. 

[End of figure] 

USPS officials said that they employ a "risk-based" process for 
evaluating proposed NSAs, which involves differing levels of scrutiny 
depending on the size of the proposed agreement. Specifically, USPS 
has a multi-step internal process for developing and approving 
competitive NSAs. First, the agreement is generally negotiated by 
sales representatives using costing templates, which allows them to 
develop agreements that are estimated to cover the costs of the 
particular product involved. USPS's finance office also examines each 
agreement to ensure that it is projected to cover its costs. USPS 
conducts a "business evaluation" to ensure that the agreement is 
likely to generate profit for USPS. USPS's Law Department reviews an 
agreement throughout its development. USPS officials noted that 
carrying out business evaluations can be difficult because of the 
availability of the data and the ability to turn the analysis around 
quickly. Competitive NSAs are also authorized by the USPS Board of 
Governors, subject to internal USPS review, as well as review by PRC. 
The officials said that the competitive, dynamic, nature of the 
marketplace requires them to "go to market" quickly, which has to be 
balanced with the review process to ensure agreements generate profit 
for USPS. 

USPS officials noted that the PRC review process for competitive 
product NSAs offers competitors the opportunity to undercut USPS's 
price. In 2011, PRC noted that "mailers have expressed concerns about 
the time and expense associated with NSAs" but concluded that 
"experience suggests that the time and effort required to put an NSA 
into effect is due, in greater part, to negotiating with the Postal 
Service and internal Postal Service review and approval rather than to 
the Commission's limited regulatory review."[Footnote 22] Two mailers 
we spoke with also noted that they spent the majority of the time 
developing NSAs with USPS, not waiting for a PRC review. USPS 
officials noted that the time and effort that they spend on internal 
review and approval for international NSAs in particular are largely a 
result of the PRC's Rules of Practice. If the regulatory review were 
further streamlined, according to USPS, the time and effort needed to 
develop NSAs would be substantially reduced. PRC officials noted that 
as USPS and PRC have gained experience with competitive NSAs and 
streamlined the process, the average time has steadily decreased. 

USPS has taken actions to streamline the process for developing 
competitive NSAs. First, to expedite and simplify the review of some 
competitive NSAs, USPS and PRC developed "umbrella" products. These 
products allow USPS to enter into NSAs that fall within a range of 
prices. A mailer may enter into such an NSA without pre-implementation 
review by PRC. According to USPS officials and PRC, this structure has 
facilitated the development of many NSAs, while maintaining an 
appropriate level of oversight. Second, USPS officials employ risk-
based internal reviews, submitting NSAs with larger potential revenues 
to greater internal scrutiny than those with more limited potential 
before they are provided to PRC for review. Finally, USPS has 
developed costing "templates" for its sales force. These templates 
include mail products' attributable costs, facilitating the sales 
forces' ability to offer discounts to mailers that allow USPS to at 
least cover its costs with the NSA. 

To further streamline the process for developing NSAs, USPS has 
advocated for "after the fact" reviews of all competitive product 
NSAs. These reviews could improve NSAs' speed-to-market, as is 
currently done with the "umbrella" products discussed above. According 
to PRC officials, they have determined that it is best to allow after 
the fact reviews of certain types of NSAs only after USPS and PRC have 
gained experience with those types of NSAs and determined how to best 
improve data quality and collection. 

Opportunities to Generate Net Revenue from Market Dominant NSAs Are 
Limited by Low Demand and Other Challenges: 

Price Increases for Market Dominant Products May Generate More Revenue 
than Discounts in NSAs: 

Opportunities to generate net revenue through market dominant product 
NSAs are limited. USPS's current estimates, as well as those of 
Christensen Associates on behalf of the USPS's OIG, suggest that First-
Class Mail has low price elasticity.[Footnote 23] These estimates mean 
that First-Class Mail volume is relatively insensitive to price 
changes and that recent volume declines are not related to the price 
of the postal products but to other factors, such as the lower cost of 
electronic communication. As a result, many mailers are not likely to 
respond to price decreases, such as discounts in NSAs, with additional 
mail volume, or to price increases with less volume. USPS's estimates 
also suggest that Standard Mail has relatively low price elasticity. 

As a result of these price elasticities, price increases for some 
market dominant products may actually generate more revenue than 
discounts in market dominant NSAs. Indeed, it is likely that First-
Class Mail as a whole could weather higher prices, according to the 
USPS OIG.[Footnote 24] In theory, an attractive target for price 
increases would be products with low price elasticities, as modest 
price changes would likely have relatively minor effects on volume. As 
USPS commented in 2011, it might be rational, in some cases, to 
increase prices of profitable products with low elasticities.[Footnote 
25] First-Class Mail, and to a lesser extent Standard Mail, are highly 
profitable for USPS and have low price elasticities. There may 
therefore be additional revenue potential in the remaining First-Class 
Mail and Standard Mail volume, and capturing this intrinsic value by 
increasing prices is a common business practice. However, there may 
also be a point at which rate increases are self-defeating, 
potentially triggering large, permanent declines in mail volume. Also, 
market dominant products are subject to a price cap for each class of 
mail, limiting the extent to which USPS can increase the prices on, 
for example, First-Class Mail. 

Data Limitations Create Challenges for Analyzing Market Dominant NSAs: 

USPS faces the difficulty of determining whether market dominant NSAs 
will increase volume and revenue. To show that market dominant NSAs 
improve the net financial position of USPS (i.e., create net revenue), 
PRC requires USPS to provide details about the expected improvements 
in USPS revenue resulting from any proposed NSA.[Footnote 26] 
Estimating the net revenue generated by an NSA depends on accurately 
estimating how much mailers would mail in the absence of an agreement. 
Accordingly, PRC has directed that USPS provide it with details of 
projected mailer-specific costs, volumes, and revenues absent the NSA 
and as a result of the NSA.[Footnote 27] To satisfy this requirement, 
USPS has generally used mail volume data, as well as expectations of 
future economic conditions, to develop projections of mailers' future 
volumes. However, USPS has not described to the PRC its precise 
methods for using past mail volume data and other qualitative factors 
used to develop these projections. 

While PRC has noted that "it is incumbent upon the Postal Service to 
develop a quantitative approach that incorporates the factors it is 
using to estimate volumes," this approach can be challenging because 
of data limitations.[Footnote 28] One possible quantitative approach, 
suggested by PRC, to estimate mailer-specific volumes both in the 
absence of and as a result of an NSA is an elasticity model, using 
mailer-specific elasticities (that is, a measure of the mailer's 
sensitivity to price for a specific product). Using mailer-specific 
elasticities would allow for a precise estimation of volumes in the 
absence and as a result of an NSA. However, developing mailer-specific 
elasticities can be very difficult. According to PRC officials, 
estimation of mailer-specific price elasticities depends on having 
many observations of a mailer's volumes at different prices, in order 
to use statistical models to isolate the effect of price from all 
other factors that influence a mailer's volume. PRC has reported that 
when it is not possible to develop a mailer-specific elasticity, "the 
system-wide average for products will generally provide usable 
proxies."[Footnote 29] However, as USPS has noted, the use of average 
product elasticities to estimate the results of NSAs, rather than 
mailer-specific elasticities, can be problematic, particularly when 
the response of individual mailers to NSAs are very different than the 
average response.[Footnote 30] Further, according to a mailer we spoke 
with, USPS has little choice but to evaluate the projected net value 
of an NSA based on historical mail volumes and qualitative factors. 
The mailer explained that the projection of future mail volumes is 
inherently uncertain; even the mailer did not know how much it was 
going to mail in the next year. 

In a 2010 proceeding, PRC "sought suggestions from interested persons 
for new methods to estimate volume changes resulting from pricing-
incentive programs of the Postal Service."[Footnote 31] After comments 
from stakeholders, PRC concluded that "it is not persuaded that the 
alternatives offer a demonstrable improvement over the current 
method."[Footnote 32] PRC encouraged USPS to identify a more reliable 
method for evaluating the impact of NSAs, sales, and promotions and to 
continue collecting data that could be used for that purpose. PRC said 
that the accuracy of analysis could be improved by USPS's willingness 
to collect mailer-specific, or even industry-specific, information. 
The lack of this data has frustrated PRC efforts to evaluate their 
financial impact. Ultimately, though, the case for pursuing NSAs must 
be a matter of business judgment by USPS management, according to USPS. 

Although these data limitations may increase the risk that market 
dominant NSAs will lose money for USPS, they are partially mitigated 
by provisions in recent NSAs. USPS has implemented early-out clauses 
in NSAs to mitigate the risk posed by unclear projections of net 
revenue. For instance, the recent Discover NSA may be canceled at the 
end of any contract year, by either party, should the experience prove 
to be at odds with the parties' expectations. Further, when approving 
the Discover NSA, PRC estimated that the NSA was unlikely to improve 
USPS's net financial position but stated that "allowing this 
negotiated service agreement to proceed will allow management to 
enhance its knowledge of potential tools to slow the overall declining 
trend for First-Class Mail volume."[Footnote 33] However, in the 2012 
Annual Compliance Determination Report, PRC recommended that USPS re-
evaluate the benefits and costs of continuing the NSA if it is not 
realizing a net benefit. As of May 2013, USPS had not canceled the 
contract. 

Mailers View the Process for Developing Market Dominant NSAs as 
Burdensome: 

Another challenge to generating additional revenue from market 
dominant product NSAs is that the process for developing these 
agreements can hinder the development of new agreements. Market 
dominant product NSAs are reviewed by PRC as part of a public 
proceeding. According to four mailers we spoke with, the fact that 
such NSAs go through a public process is a disincentive to developing 
such agreements. These mailers are sensitive about allowing any 
company-specific information to become public through the PRC review 
process. According to a 2011 USPS OIG report, transparency 
requirements, although prudent, make operating in a competitive 
marketplace difficult.[Footnote 34] PRC officials told us, though, 
that the transparency of these proceedings helps balance the increased 
pricing flexibility granted to USPS under PAEA with the need for USPS 
accountability. Further, PRC regulations allow USPS to file 
confidential or proprietary information under seal, so that it remains 
nonpublic.[Footnote 35] 

Beyond the transparency concerns, many mailers are concerned about the 
time and resources needed to obtain a market dominant NSA. Many 
mailers we spoke with expressed concern about the length of time it 
took to develop NSAs. Officials from Valassis told us that they spent 
about 2 years negotiating its recent market dominant NSA, and 
officials for Discover said their negotiation lasted about a year. 
According to another mailer we spoke with, such long negotiations can 
hinder the ability to agree on an NSA because during these time 
periods the marketplace can shift, changing the incentives for 
mailers. PRC review times for these NSAs can also be substantial, 
though this time has decreased. For domestic, market dominant NSAs 
approved since the enactment of PAEA, the average review time was 88 
days, whereas the average review time for those NSAs prior to PAEA was 
214 days. 

A major reason for the substantial time and resources needed to 
develop market dominant NSAs is that many such agreements have faced 
substantial opposition from mailers and stakeholders. In particular, 
some mailers and mailer industry associations have claimed that some 
proposed market dominant NSAs would harm the marketplace. By statute, 
market dominant NSAs "may not cause unreasonable harm to the 
marketplace."[Footnote 36] In the proceeding for the most recent such 
NSA, with Valassis, a majority of commenters opposed the agreement 
because they claimed it would create an unfair competitive advantage 
for Valassis and harm the marketplace. Commenters said that the 
agreement would prevent other direct mail companies from competing on 
a level playing field, since Valassis would have a discount on its 
mail as part of the agreement. Some commenters also expressed concern 
that the NSA could negatively affect local newspapers by replacing the 
Sunday or weekend newspaper's preprinted advertising package--a 
crucial source of income, according to newspapers--with stand-alone 
direct mail from Valassis. Despite such opposition, though, PRC has 
approved both market dominant NSAs proposed since enactment of PAEA. 
[Footnote 37] 

Opportunities for Generating Net Revenue from Sales and Promotions Are 
Limited by Mail Use Changes and Limited Analysis of Long-term Impact: 

Opportunities to generate substantial additional revenue through sales 
and promotions are limited because of changes in the use of mail. 
Sales and promotions have been used for the market dominant products 
First-Class Mail and Standard Mail. As noted above, though, estimates 
indicate that demand for these market dominant products is low, and 
the volume for these products continues to decline. Further, the small 
scale of sales and promotions--often with short time frames and 
relatively small discounts--limit their impact for large mailers, 
since they may be unlikely to change their mailing patterns in 
response to a relatively small incentive. Two mailers we spoke with 
maintained that USPS's sales and promotions are most effective for 
small and medium sized mailers. 

USPS has noted that by encouraging additional mail volume and revenue, 
sales and promotions provide pricing flexibility to mailers and help 
assure adequate revenues for USPS. By statute, sales and promotions 
must "help achieve" several objectives, such as assuring adequate 
revenues, to maintain financial stability.[Footnote 38] Additionally, 
the system for regulating rates must take into account several 
factors, such as the requirement that each class of mail bear the 
direct and indirect costs attributable to that class of mail. (See 
appendix II for a list of all objectives and factors.) 

In support of sales and promotions when filing for approval with PRC, 
USPS has provided estimates of the financial result during the program 
time period. A few of these estimates for recent promotions have 
projected USPS to lose money during the program period. For example, 
USPS estimated that its 2011 mobile barcode promotion would reduce 
revenue by as much as $4.63 million. USPS has maintained, though, that 
promotions in particular can have value after the program period ends, 
so evaluating the financial effect based solely on mailer performance 
during the program period does not accurately reflect the true value 
of these programs. Indeed, USPS has stated that the long-term goal of 
promotions is to enhance the value of the mail for mailers, thereby 
helping sustain mail volume. USPS continues to implement a variety of 
such promotions, with six new domestic promotions planned for calendar 
year 2013. 

According to USPS, it continues to refine the methodologies used to 
measure the long-term financial effects of sales and promotions, 
including tracking mailer behavior and surveying customers, but 
further data collection and analysis can be difficult. For example, 
without knowledge of mailers' planned mail volumes, USPS cannot 
precisely measure volume that would have been sent by mailers absent 
the sale or promotion. Further, attempts to gather data to estimate 
mailers' planned mail volumes can be difficult, as with market 
dominant NSAs. Nevertheless, USPS monitors the performance of 
promotion participants after the promotion period, and benchmarks 
their performance (i.e., mail volume) against their past performance, 
expected performance, and non-program participant performance. 

Although not required to when filing for approval, USPS has not 
provided details to PRC on the long-term goals, the information it 
plans to collect in support of those goals, and the analysis it plans 
to perform to assess whether the long-term financial results of 
promotions met the intended goals. As a result, PRC has not assessed 
USPS methodologies for evaluating the long-term financial results of 
promotions. As USPS has noted, its financial challenge leaves little 
margin for error. Providing detailed data collection and analysis 
plans to PRC before implementation of promotions would allow USPS to 
better justify how these incentives help assure adequate revenues. 
PRC's assessment of these plans, as part of its approval decisions for 
promotions, would also help ensure that USPS promotions have positive 
financial results. 

Conclusions: 

To achieve financial sustainability, USPS has been working to generate 
additional revenue to cover its costs. NSAs, sales, and promotions may 
help achieve this goal. Since enactment of PAEA in late 2006, USPS has 
made significant progress in using its increased pricing flexibility 
and generated billions of dollars in revenue through domestic and 
international NSAs. It is very unlikely, though, that additional net 
revenue created by NSAs will offset the revenue declines in other 
product areas. Additionally, the benefits, including long-term 
financial results, of promotions are not well understood by PRC and 
other postal stakeholders because USPS does not provide detailed 
information on its data collection and analysis plans to PRC before 
implementation. As a result, PRC has not had an opportunity to 
evaluate USPS's long-term goals and analysis plans for promotions. 
Though it can be difficult to collect and analyze data on the impact 
of promotions, given USPS's dire financial situation, demonstrating 
how promotions may achieve positive long-term financial results can 
help USPS maximize the revenue generated by those postage rate 
discounts. 

Recommendations: 

Because USPS faces a deteriorating financial situation, we recommend 
that the following two actions be taken to help ensure that future 
promotions generate net revenue for USPS: 

The Postmaster General should direct staff to provide specific data-
collection methods and analytical processes for estimating the net 
financial results of promotions to PRC as part of USPS's request for 
PRC approval of all promotions. 

The Chairman of the PRC should direct staff to evaluate USPS's data-
collection and analysis plans for USPS's proposed mail promotions and 
discuss these evaluations in the PRC decisions for those mail 
promotions. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to USPS and PRC for review and 
comment. USPS and PRC both provided written comments in response, 
which are summarized below and included in their entirety in 
appendixes III and IV, respectively. In USPS's written response, USPS 
disagreed with the first recommendation and noted concerns regarding 
the characterizations of promotions, sales, and NSAs in the report. In 
separate correspondence, USPS also provided technical comments, which 
we incorporated as appropriate. In PRC's written response, PRC agreed 
with both recommendations and provided comments on NSAs. 

Promotions: 

USPS stated that it disagreed with the first recommendation that USPS 
should provide specific data-collection methods and analytical 
processes for estimating the net financial results of promotions to 
PRC as part of USPS's request for PRC approval of all promotions. USPS 
stated that it does not believe the recommendation will significantly 
affect the PRC's review process, improve the quality of USPS's 
business decisions, or assure that promotions yield positive financial 
results. USPS noted that PRC has concluded that past promotions 
proposed by USPS comply with the relevant requirements, which 
emphasize the importance of pricing flexibility. PRC stated that it 
agreed with both recommendations and that it welcomes the opportunity 
to evaluate USPS's data-collection and analysis efforts for promotions. 

We continue to believe that providing additional information to PRC on 
the potential long-term results would allow USPS to better justify 
promotions, and provide PRC with valuable additional information for 
its evaluation. Promotions for market dominant products must comply 
with several statutory objectives and factors, including that they 
help assure adequate revenues. When filing for approval, USPS has 
provided information to PRC estimating that some promotions may lose 
money during the program period. However, as USPS has noted, 
promotions are designed to increase the long-term value of mail, 
thereby helping to sustain mail volume and revenue. Given its dire 
financial situation, USPS should be commended for using its pricing 
flexibility to try and enhance its revenue. However, USPS has not 
provided information to PRC demonstrating how promotions could achieve 
these long-term goals. Providing information about the potential long-
term financial results of promotions could help PRC better evaluate 
whether the proposed promotions help assure adequate revenues and 
comply with the other objectives and factors. USPS cannot afford to 
implement promotions without demonstrating how they can achieve 
positive long-term results. 

USPS also stated in its letter that the report does not articulate how 
USPS could improve upon the methodologies it is using to conduct 
evaluations of promotions. We agree. We did not intend for the report 
to proscribe the methodologies that USPS should use to evaluate these 
long-term effects. Rather, the report concludes, though, that USPS's 
methodologies should be made available for PRC's evaluation prior to 
the implementation of promotions. This review would allow PRC to 
better evaluate the extent to which the promotions satisfy 
requirements. 

USPS also provided additional comments related to promotions: 

* In USPS's letter, USPS stated that the draft report concluded that 
promotions should not be offered unless USPS had "assurance" that 
promotions will achieve positive financial results. USPS correctly 
notes that no business decision is ever accompanied by a guarantee of 
success, and we have revised the relevant statement in our 
conclusions. However, as USPS agreed, sound analysis should accompany 
every business decision, including the implementation of promotions, 
particularly given USPS's financial situation. 

* In its letter and technical comments, USPS stated that the report 
should more clearly delineate the differences between promotions and 
sales. In particular, USPS noted that promotions are designed to help 
sustain mail volume and revenue over the long-term. Sales, though, are 
designed to generate additional mail volumes, but only during the sale 
period itself. We have revised the relevant text throughout this 
report to better distinguish between the different goals of sales and 
promotions. 

* In USPS's letter, USPS also notes that some of the costs for recent 
promotions have been recovered through the creation of additional 
price cap authority, mitigating the risk of financial losses from the 
most recent promotions. USPS is to be commended for seeking ways to 
mitigate the financial risks of any postage rate discount, as it has 
done with early-out clauses in market dominant NSAs. However, in a 
recent decision approving a promotion, PRC did not accept the price 
cap treatment proposed by USPS.[Footnote 39] 

* In its letter, USPS also requested that we characterize the data 
provided by USPS to PRC on some sales not as "corrupt" but 
"incomplete" or "insufficient." The term "corrupt" is not meant to 
imply that USPS intended to make data provided to PRC unusable. 
However, according to PRC, data provided to it by USPS on an early 
sale was "corrupt" and hindered PRC's ability to evaluate the 
financial results of that effort. We did not modify the report related 
to this issue. 

NSAs: 

USPS also disagreed with the statement in the report that many mailers 
are not likely to respond to price decreases, such as discounts in 
market dominant NSAs, with additional mail volume. USPS stated that 
market dominant NSAs can provide promising opportunities to increase 
mail volumes and revenues in the future. Our conclusion about market 
dominant NSAs is based primarily on USPS's estimates indicating that 
market dominant mail products have low elasticities. These estimates 
are a measure of the degree to which mailers respond to price changes 
and alter their demand for products and services. However, these 
estimates are product-wide averages. To the extent individual mailers 
have elasticities different from the average, it may be possible to 
incentivize additional mail volume from those mailers through price 
decreases. Few mailers, though, are likely to have an elasticity 
different enough from the average to warrant such an agreement. 

PRC also clarified two points in the report related to market dominant 
NSAs. First, PRC noted that USPS's methodologies for assessing the 
financial impact of market dominant NSAs are not considered 
authoritative under statutory and regulatory requirements unless and 
until such methodologies are accepted by PRC as "accepted analytical 
principles" under sections 3050.10 and 3050.1(a) of the Code of 
Federal Regulations, Title 39. Second, PRC noted that after-the-fact 
review of NSAs works well for Non-Published Rate contracts, but is not 
applicable for agreements not subject to established, specific 
limitations that assure consistency with applicable statutory 
requirements. No change to the report was necessary based on these 
comments. 

As we agreed with your office, unless you publicly announce the 
contents of this report earlier, we plan no further distribution of it 
until 30 days from the date of this letter. At that time, we will send 
copies of this report to the appropriate congressional committees, 
Postmaster General, Chairman of PRC, USPS OIG, and other interested 
parties. In addition, the report will be available at no charge on 
GAO's website at [hyperlink, http://www.gao.gov]. 

If you or your staff have any questions regarding this report, please 
contact me at (202) 512-2834 or stjamesl@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. GAO staff who made key contributions 
to this report are listed in appendix V. 

Signed by: 

Lorelei St. James: 
Director: 
Physical Infrastructure Issues: 

[End of section] 

Appendix I: Scope and Methodology: 

To describe the NSAs, sales and promotions U.S. Postal Service (USPS) 
has developed, as well as their reported financial results, we 
reviewed public and non-public documents as well as additional USPS 
data. To summarize the financial results of NSAs, we examined non-
public versions of USPS's Cost and Revenue Analysis reports for fiscal 
years 2009 through 2012. We also reviewed non-public documents that 
included the volume, cost, and revenue of active competitive, domestic 
NSAs, for fiscal years 2009 through 2012. There were no active 
domestic competitive NSAs in fiscal years 2007 and 2008. We also 
reviewed non-public documents that included the volume, cost, and 
revenue of active competitive, international NSAs, for fiscal years 
2007 through 2012. We also reviewed the data collection reports for 
market dominant NSAs. To confirm our summaries of the number and 
results of NSAs, we also obtained additional data from USPS on the 
number of active NSAs, by fiscal year, as well as the estimated 
financial results of all market dominant NSAs. We also reviewed Postal 
Regulatory Commission's (PRC) Annual Compliance Determination Report 
for fiscal years 2007 through 2012, to identify, where applicable, 
which competitive NSAs PRC determined covered their attributable 
costs. We also reviewed PRC's conclusions in these reports about the 
financial results of market dominant NSAs. To summarize the number of, 
and results from, USPS sales and promotions to date, we reviewed USPS 
documents filed with PRC requesting approval for sales and promotions 
as well as PRC's Annual Compliance Determination Reports. We also 
obtained additional data from USPS on the estimated results of sales 
and promotions. 

To put the financial results of incentives into context of USPS's 
overall financial situation, we also examined other USPS documents. 
These included the Revenue, Pieces, and Weights reports for fiscal 
years 2007 through 2012 and the fiscal year 2012 Form 10-K filing. 
[Footnote 40] Further, we also obtained USPS projections of future 
mail revenue and volume. 

We assessed the reliability of these data sources by interviewing USPS 
officials. Based on this information, we determined that the data 
provided to us were sufficiently reliable for our reporting purposes. 

We also conducted interviews with USPS and PRC officials, as well as 
15 mailers that have participated in NSAs, sales, and promotions, on 
the financial condition of USPS and the results of those incentives, 
in order to enhance our understanding of the circumstances in which 
these incentives are developed and implemented. In these interviews we 
also discussed potential limitations to USPS and PRC analyses of 
incentives' results. See below for information on how we selected 
mailers to interview. 

To identify and assess any opportunities to generate additional 
revenue from NSAs, sales, and promotions, as well as challenges, if 
any, that could the hinder their development and implementation, we 
conducted interviews with a variety of stakeholders. We conducted 
interviews with officials from USPS, PRC, and 15 mailers that both 
have and have not participated in USPS incentives (see list below). In 
order to obtain a range of perspectives on the opportunities and 
challenges related to NSAs, sales, and promotions, we identified 
mailers that have participated in NSAs involving a variety of 
competitive and market dominant products, and both international and 
domestic mail. We also identified mailers that had not participated in 
NSAs. Among these mailers, we interviewed both large and small 
mailers, defined as whether the mailer had more or less than $250 
million in annual revenue in the most recent fiscal year for which 
data or estimates were available, as well as some that were 
recommended to us by a mailer association. Finally, we interviewed 
industry associations that represent major mailers in order to gather 
additional perspectives on the opportunities and challenges associated 
with NSAs, sales, and promotions, including the Association for Postal 
Commerce, Direct Marketing Association, National Newspaper 
Association, and Newspaper Association of America. The views of 
mailers and industry associations cannot be generalized to all mailers 
and industry associations because they were selected as part of a 
nonprobability sample. 

Mailers Interviewed: 

* 4imprint: 

* Amazon: 

* AT&T: 

* Barnes & Noble: 

* Canada Post: 

* Discover Financial Services: 

* FedEx SmartPost: 

* Gardens Alive!: 

* Harriet Carter Gifts: 

* Highlights for Children, Inc. 

* Pitney Bowes: 

* Quad/Graphics: 

* UPS: 

* Valassis: 

* Valpak: 

To further identify and assess opportunities and challenges related to 
NSAs, sales, and promotions, we also reviewed a variety of documents. 
First, we reviewed the 2007 PRC regulations governing NSAs. Second, we 
reviewed a variety of PRC proceedings, including its 2010 proceeding 
to investigate methodologies for estimating volume changes due to 
pricing incentive programs, and its recommended decisions for all 
domestic, market dominant NSAs approved to date. We also examined PRC 
approval decisions for other NSAs in order to document the length of 
the PRC review process. We also reviewed the internal business 
evaluations conducted by USPS for a variety of domestic, competitive 
NSAs. Finally, we reviewed findings from relevant USPS Office of 
Inspector General reports. We determined that the methodologies of 
these reports were sufficiently reliable for our purposes. 

[End of section] 

Appendix II: Required Objectives and Factors for Sales and Promotions: 

As part of the review for a proposed sale or promotion or market 
dominant products, PRC evaluates whether the sale or promotion 
satisfies the requirements of postal rate regulation.[Footnote 41] As 
listed below, these requirements include several objectives that the 
sale or promotion must be designed to achieve and several factors that 
PRC must take into account. 

Objectives: 

(1) To maximize incentives to reduce costs and increase efficiency. 

(2) To create predictability and stability in rates. 

(3) To maintain high quality service standards established under 
section 3691. 

(4) To allow the Postal Service pricing flexibility. 

(5) To assure adequate revenues, including retained earnings, to 
maintain financial stability. 

(6) To reduce the administrative burden and increase the transparency 
of the ratemaking process. 

(7) To enhance mail security and deter terrorism. 

(8) To establish and maintain a just and reasonable schedule for rates 
and classifications, however the objective under this paragraph shall 
not be construed to prohibit the Postal Service from making changes of 
unequal magnitude within, between, or among classes of mail. 

(9) To allocate the total institutional costs of the Postal Service 
appropriately between market-dominant and competitive products. 

Factors: 

(1) the value of the mail service actually provided each class or type 
of mail service to both the sender and the recipient, including but 
not limited to the collection, mode of transportation, and priority of 
delivery; 

(2) the requirement that each class of mail or type of mail service 
bear the direct and indirect postal costs attributable to each class 
or type of mail service through reliably identified causal 
relationships plus that portion of all other costs of the Postal 
Service reasonably assignable to such class or type; 

(3) the effect of rate increases upon the general public, business 
mail users, and enterprises in the private sector of the economy 
engaged in the delivery of mail matter other than letters; 

(4) the available alternative means of sending and receiving letters 
and other mail matter at reasonable costs; 

(5) the degree of preparation of mail for delivery into the postal 
system performed by the mailer and its effect upon reducing costs to 
the Postal Service; 

(6) simplicity of structure for the entire schedule and simple, 
identifiable relationships between the rates or fees charged the 
various classes of mail for postal services; 

(7) the importance of pricing flexibility to encourage increased mail 
volume and operational efficiency; 

(8) the relative value to the people of the kinds of mail matter 
entered into the postal system and the desirability and justification 
for special classifications and services of mail; 

(9) the importance of providing classifications with extremely high 
degrees of reliability and speed of delivery and of providing those 
that do not require high degrees of reliability and speed of delivery; 

(10) the desirability of special classifications for both postal users 
and the Postal Service in accordance with the policies of this title, 
including agreements between the Postal Service and postal users, when 
available on public and reasonable terms to similarly situated 
mailers, that: 

(A) either: 

(i) improve the net financial position of the Postal Service through 
reducing Postal Service costs or increasing the overall contribution 
to the institutional costs of the Postal Service; or: 

(ii) enhance the performance of mail preparation, processing, 
transportation, or other functions; and: 

(B) do not cause unreasonable harm to the marketplace. 

(11) the educational, cultural, scientific, and informational value to 
the recipient of mail matter; 

(12) the need for the Postal Service to increase its efficiency and 
reduce its costs, including infrastructure costs, to help maintain 
high quality, affordable postal services; 

(13) the value to the Postal Service and postal users of promoting 
intelligent mail and of secure, sender-identified mail; and: 

(14) the policies of this title as well as such other factors as the 
Commission determines appropriate. 

[End of section] 

Appendix III: Comments from the United States Postal Service: 

Nagisa M. Manabe: 
Marketing and Sales Officer: 
Executive Vice President
United States Postal Service: 
475 L'Enfant Plaza, SW: 
Washington, DC 20260: 
[hyperlink, http://www.usps.com] 

June 7, 2013: 

Ms. Lorelei St. James: 
Director, Physical Infrastructure: 
United States Government Accountability Office: 
Washington, DC 20548-0001: 

Dear Ms. St. James: 

Thank you for providing the United States Postal Service (LISPS) with 
the opportunity to review and comment on the draft report titled U.S. 
Postal Service: Opportunities to Increase Revenue Exist with 
Competitive Products; Additional Reviews Could setter Inform Promotion 
Decisions (GAO-13-578). To assist with the Government Accountability 
Office's (GAO) review of USPS's comments, this letter is divided into 
three sections. In the first section, USPS addresses its general 
concerns with the GAO's recommendation. In the second section, USPS 
addresses specific concerns regarding the GAO's discussion of 
Negotiated Service Agreements (NSA), In the third section, LISPS 
addresses specific concerns regarding the GAO's characterization of 
promotions and sales. 

General: 

While the LISPS is committed to providing the Postal Regulatory 
Commission (PRC) with any information or evidence it requests, it 
respectfully disagrees with the GAO's recommendation. In particular, 
the LISPS does not believe that the GAO's recommendation to the 
Postmaster General will significantly impact the PRC's review process, 
improve the quality of the United States Postal Service's business 
decisions, or assure that promotions yield positive financial results. 

First, as the GAO is undoubtedly aware, the regulatory review process 
for promotions is not aimed at concluding whether a promotion will in 
fact succeed in the long run. Rather, as provided by 39 U.S.C. § 3622, 
the PRC has the obligation to determine whether each promotion 
complies with statutory policies, including 21 objectives and factors, 
which emphasize, inter alia, efficiency, service levels, and pricing 
flexibility. Based on these standards, the PRC has repeatedly 
concluded (without the additional information recommended by the GAO) 
that the LISPS promotions provide pricing flexibility, represent 
important long-term strategies, and comply with the standards outlined 
in Title 39. See, e.g_, PRC Order No 1296, at 7-9 (Mar. 26, 2012); PRC 
Order No. 1424, at 7-10 (Aug. 7, 2012). 

Additionally, the LISPS disagrees with the GAO's conclusion that 
promotions should not be offered unless it has 'assurance" that the 
promotions will achieve positive financial results. GAO Report, at 26. 
While the LISPS agrees that sound analysis should accompany every 
business decision, it respectfully contends that no business decision 
is ever accompanied by a guarantee of success. Indeed, every business 
decision (including those aimed at reducing costs) poses risks that 
management must do its best to account for and overcome. If the USPS 
is to remain a viable entity well into the future, it must, despite 
its current financial constraints, continue to make strategic and 
innovative investments in its future. While every investment may not 
succeed as originally planned, postal management remains confident 
that the promotions are to make strategic and innovative investments 
in its future, While every investment may not succeed as originally 
planned, postal management remains confident that the promotions are 
having their intended long-term effect of sustaining mail volumes by 
increasing the value of advertising mail. 

NSA's: 

With respect to Market-Dominant NSAs, the GAO states that due to the 
low price elasticities" of First-Class Mail and Standard Mail "mailers 
are not likely to respond to price decreases, such as discounts in 
NSAs with additional mail volume." GAO Report, at 20. In this regard, 
USPS has argued during the review of past Market-Dominant NSA's that 
there are a variety of other factors (e.g. a customer's marketing 
strategy) and market conditions (e.g. competition amongst mailers) 
that can encourage a customer to generate new mail volume. Such 
factors militate in favor of the USPS entering into individual 
business arrangements with specific customers. Accordingly, the USPS 
continues to believe that the Market-Dominant NSAs can provide 
promising opportunities to increase mail volumes and revenues in the 
future. 

Promotions: 

With respect to promotions, the USPS would encourage the GAO to more 
clearly delineate the differences between promotions and sales 
throughout its report. As the GAO has accurately articulated in 
several locations, promotions are designed to generate additional mall 
volumes in the future by increasing the long-term value of mail. 
Promotions accomplish this goal by using postage discounts to 
encourage mailers to integrate technology (e.g. mobile barcodes) with 
physical mail pieces. In contrast, sales offer temporary postage 
discounts that are only designed to generate additional mail volumes 
during the sale period itself. The USPS feels that it is important to 
make this distinction throughout the report, since its institutional 
focus has recently shifted to promotions. 

Additionally, the GAO concludes that "the benefits, including long-
term financial results of promotions are not well understood because 
USPS does not provide detailed information on its data collection and 
analysis plans to the PRC before implementation." GAO Report, at 26. 
While the USPS agrees that it must monitor and track the long-term 
effects of promotions on mailer behavior, the GAO has not articulated 
how the USPS could improve upon the methodologies it is already using 
to conduct such evaluations. The GAO itself recognizes that "attempts 
to gather data to estimate mailers' planned mail volumes can be 
difficult." GAO Report, at 25. Without more specific recommendations 
for improvement, the USPS is concerned that the GAO's recommendation 
unnecessarily creates the appearance that promotions are somehow risky 
and should only be pursued if there are assurances of success. 

Such an appearance is unjustified given that nearly every USPS 
analysis, along with Table 4 of the report, indicates that promotions 
have had a net-positive financial effect during the promotion periods. 
The USPS believes that this net-positive financial result will only 
increase when the promotion's long-term impact on mailer behavior is 
evaluated. As the GAO notes, the USPS monitors these long-term effects 
by continuously tracking mailer behavior and by conducting surveys 
after each promotion. Through this monitoring, and through informal 
discussions with mailers, USPS has repeatedly learned about the 
positive impacts the promotions have already had on customers' 
behavior. Such positive impacts include: 

* Accelerating customer adoption of certain technologies;
* Increasing selected customers' overall mail volumes; and; 
* Elevating the status of mail (within our customers' marketing 
groups) as an essential tool for developing successful multi-channel 
marketing campaigns. 

Survey results supporting these findings, along with several customer 
testimonials, are included as Attachment A. 

Further, setting aside whether promotions generate additional volumes 
themselves. the GAO should consider the fact that some of the costs 
for recent promotions nave been recovered through the creation of 
additional price cap authority For example, in compliance with PRC 
rules USPS successfully recovered a large portion of the forgone 
revenue from its FY 2013 promotions through offsetting rate increases 
Accordingly regardless of the promotion s ability to immediately or 
prospectively generate additional mail volumes/revenues, USPS has 
taken steps to negate the risk of financial losses from its most 
recent promotions. 

With respect to sales the GAO states that according to the PRC "they 
have not evaluated the results of all sales because of corrupt or 
missing USPS data." GAO Report at 14 The USPS is concerned that the 
use of the term corrupt implies that it intended to make data provided 
to the PRC unusable Though the USPS admits that some of the data it 
has provided may have been imperfect, such imperfections were never 
intended and were always corrected when brought to the USPS. attention 
The USPS would encourage the GAO to replace the wore corrupt with 
"incomplete" or "insufficient." Such words would not only be more 
accurate but would also be consistent with the GAO's treatment of 
similar data issues throughout the report. 

In short, the USPS would encourage the GAO to do three things with 
respect to its discussion of promotions and sales: 1) clearly 
acknowledge the steps that the USPS has taken to ensure the success of 
each promotion and prevent financial losses; 2) clearly delineate 
promotions from sales and 3) replace the word "corrupt" with 
"insufficient" or "incomplete" when describing data provided to the 
PRC concerning sales The USPS hopes that these modifications will 
ensure that promotions are not needlessly cast in a negative light due 
to the GAO's own belief Mal the USPS should be acing more to analyze 
the long-term impacts of these programs. 

Again, the United States Postal Service thanks the GAO for the 
opportunity to comment on its draft report If you or your staff wish 
to discuss any of these comments further. I am available at your 
convenience. 

Sincerely, 

Signed by: 

Nagisa Manabe: 

Attachment: 

Attachment A: 
Mobile Commerce and Personalization (MCPP) and Holiday Mobile Shopping 
(HMSP) Promotions - Survey Insights and Customer Testimonials: 

* A sizable percentage of mailers initiated changes to their digital 
strategy as a result of the promotions. 

- Approximately 30 percent of MCPP survey respondents and 25 percent 
of HMSP survey respondents made changes to their website in order to 
meet the requirements for participation in the promotion. 

Omaha Steaks: 

"Encouraged by the postal incentive, (We) tested the inclusion of a QR 
(quick response) code on mailings as an easy way for customers to 
order through the website. Because of the response, the QR code has 
now rolled out in most of (our) mailings." 

* There was an impact on mall volume as a result of the promotions. 

- About 20 percent of MCPP survey respondents increased the number of 
pieces mailed because of the promotion. Additionally, approximately 46 
percent of respondents indicated that they would use the 2 percent 
savings from this promotion to send more direct mail and/or to 
increase the page count of mailings. 

- Approximately, 14 percent of HMSP respondents indicated they had 
increased mailing volume because of the promotion. Additionally, 48 
percent indicated they would reinvest the savings from the price 
discount to send more direct mail and/or to increase the page count of 
mailings. 

Amerimark/Dr.Leonard's: 

"Mail definitely does not "just happen." In fact, it is quite the 
opposite. Postage costs (for catalog mailing and package shipment) are 
the second largest expense of our business and our business model is 
extremely sensitive to decisions made by the U.S. Postal Service, as 
well as opportunities created by the USPS." 

"When promotions are offered, we analyze the financial impact end 
often increase the quantities of our catalog mailings to test the 
idea/promotion, but just as importantly prospect for new customers and 
grow cur business, resulting in higher levels of future postage 
(catalogs and packages)." 

IBIS World: 

"During the year, operators will benefit from programs implemented by 
the U.S. Postal Service to encourage commercial mailers. This factor 
is expected to contribute to revenue growth of 0.3 percent during 
2013." 

* The promotions had a limited but measurable impact on improving 
perceptions of the USPS brand. 

- Approximately 38 percent of MCPP survey respondents and 35 percent 
of HMSP survey respondents strongly agreed with the statement that 
they perceived the U.S. Postal Service as being more innovative than 
they did before as a result of the promotion. 

Carol Klierwers': 

The LISPS is our primary delivery carrier due to their ability to 
deliver our Standard Mail flats and letters, Parcel Select light 
weight packages, First-Class Mail and Priority Mail effectively. We've 
been fortunate enough to work with high caliber leaders, within their 
organization, that bring us solutions and recommendations that enable 
us to provide our clients the best service in the industry today. With 
the support of our Strategic Account Manager, the Business Service 
Network and Business Mail Entry Unit Management, we enable our 
Logistics network to utilize the LISPS resources to the benefit of our 
clients and customers and exceed their expectations. Over the past few 
years, the USPS has brought innovative ideas to our attention for 
deployment that help us stay current." 

* Approximately four-fifths of HMSP survey respondents who used mobile 
barcodes in the past , representing about three-fourths of all 
participants in the promotion, could be fairly characterized as 
"entrenched users" of mobile barcodes by virtue of the fact they now 
have employed mobile barcodes on at least two mailings and say that 
they will continue to use them in the future. 

[End of section] 

Appendix IV: Comments from the Postal Regulatory Commission: 

United States of America: 
Postal Regulatory Commission: 
Ruth Y. Goldway: 
Chairman: 
901 New York Avenue, NW: 
Suite 200 West: 
Washington, DC 20268-0001: 

June 5, 2013: 

Ms. Lorelei St. James: 
Director, Physical Infrastructure: 
Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 

Dear Ms. St. James: 

Thank you for the opportunity to offer comments on the Government 
Accountability Office's (GAO) draft report titled U.S. Postal Service: 
Opportunities to Increase Revenue Exist with Competitive Products; 
Additional Reviews Could Better Inform Promotions Decisions (GA0-13-
578). 

The GAO made two recommendations in this draft report: 

(1) As part of its requests for approval, the U.S. Postal Service 
(Postal Service) should provide the Commission with specific data 
collection methods and analytical processes for estimating the long-
term net financial results of promotions. 

(2) As a follow up to the first recommendation, the Commission should 
evaluate the long-term Postal Service data collection and analysis 
plans for mail promotions provided to the Commission under the first 
recommendation. 

The Commission agrees with both recommendations. 

Prior to review of this draft report, the Commission was not aware 
that the Postal Service was collecting data on the effectiveness of 
promotions by tracking mailing behavior, surveying customers, and 
benchmarking promotion participants' performance against past 
performance, expected performance, and non-program participant 
performance. The Commission welcomes the opportunity to evaluate such 
data collection and analysis efforts. 

The Commission found the report well-researched and balanced. However, 
there are two points that the Commission would like to clarify. First, 
the Postal Service's methodologies for assessing the financial impact 
of market dominant negotiated service agreements (NSAs) are not 
considered authoritative under statutory and regulatory requirements 
unless and until such methodologies are accepted by the Commission as 
"accepted analytical principles" under 39 CFR 3050.10 and 3050.1(a); 
see also 39 U.S.C. 3652 (requiring the Commission to prescribe "the 
content and form of the public reports...to be provided by the Postal 
Service."). 

As noted in the draft report, the Commission initiated a proceeding to 
consider updating the accepted methodology with respect to more 
accurately and reliably measuring both the expected and actual 
financial impacts of NSAs and other pricing incentives. In its 
comments in that proceeding, the Postal Service concluded that, while 
quantitative evaluation methods might help inform the decision making 
process, "ultimately, the case for pursuing incentive programs must be 
a matter of business judgment by Postal Service management." 
Recognizing its responsibility for basing decisions on more reliable 
and accountable grounds, the Commission terminated the proceeding and 
retained the prior accepted analytical principles regarding the 
measurement of the expected and actual financial impacts of NSAs and 
other pricing incentives. As with all accepted analytical principles, 
at any time interested parties, including the Postal Service, may 
request that the Commission review its approved methodology for 
assessing the impact of NSAs and other pricing incentives. See 39 CFR 
3050.11. 

Second, the draft report states that "according to PRC officials, they 
have determined that it is best to allow after-the-fact reviews of 
certain types of NSAs only after USPS and PRC have gained experience 
with those types of NSAs and determined how to best improve data 
quality and collection." The Commission notes that this statement 
refers to agreements known as Non-Published Rates (NPR) contracts, 
which are based on a contract template that ensures compliance with 
all statutory and regulatory requirements. While this approach works 
well for the applications to which NPR contracts are best suited, it 
is not applicable for agreements not subject to established specific 
limitations that assure consistency with applicable statutory 
requirements. 

Thank you for the opportunity to comment on this draft report. The 
Commission appreciates GAO's collaboration and careful efforts on this 
report. Consistent with its statutory responsibilities, the Commission 
remains committed to providing helpful and accurate reviews to better 
inform Postal Service revenue generation opportunities. 

Sincerely, 

Signed by: 

Ruth Y. Goldway: 
Chairman: 

[End of section] 

Appendix V: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Lorelei St. James, (202) 512-2834 or stjamesl@gao.gov. 

Staff Acknowledgments: 

In addition to the contact named above, Teresa Anderson (Assistant 
Director), Ken Bombara, Kyle Browning, Colin Fallon, Imoni Hampton, 
Josh Ormond, Sara Ann Moessbauer, and Crystal Wesco made key 
contributions to this report. 

[End of section] 

Footnotes: 

[1] The $15.9 billion net loss includes $11.1 billion for two required 
payments to prefund future retiree health benefits. Originally due at 
the end of fiscal year 2011, USPS's $5.5 billion retiree health 
benefit payment was delayed until August 1, 2012. Pub. L. No. 112-74, 
§ 632, 125 Stat. 786, 928 (Dec. 23, 2011). USPS missed that payment as 
well as the $5.6-billion payment that was due on September 30, 2012. 
Even though USPS did not make these payments, it recorded a loss for 
the obligation to make these payments. 

[2] GAO, U.S. Postal Service: Strategies and Options to Facilitate 
Progress toward Financial Viability, [hyperlink, 
http://www.gao.gov/products/GAO-10-455] (Washington, D.C.: Apr. 12, 
2010). 

[3] The PRC's Annual Compliance Determination Report is an after-the-
fact review of the performance of USPS, focusing primarily on 
financial transparency and compliance with pricing and service 
performance standards. 

[4] We defined a "mailer" as an entity that prepares and/or presents 
mailings to USPS. 

[5] Pub. L. No. 109-435, 120 Stat. 3198 (Dec. 20, 2006). 

[6] USPS had the ability to create NSAs prior to enactment of PAEA. In 
2002, PRC determined NSAs were legally permissible under the Postal 
Reorganization Act of 1970 (PRA) because it gave USPS "a clear mandate 
to innovate by developing effective and efficient services adapted to 
the needs of the Nation's mail users." See PRC, Report to the 
Congress: Authority of the United States Postal Service to Introduce 
New Products and Services and to Enter Into Rate and Service 
Agreements with Individual Customers or Groups of Customers (Feb. 11, 
2002). According to PRC in 2011, "there was a consensus among 
stakeholders that the standard regulatory process used to evaluate 
NSAs under the PRA was unnecessarily complex and time consuming." See 
PRC, Section 701 Report (Sept. 22, 2011). 

[7] Pub. L. No. 109-435, § 201, codified at 39 U.S.C. 3622(c)(10). 

[8] Pub. L. No. 109-435, § 201, codified at 39 U.S.C. 3633(a)(2). 

[9] PRC, Order Establishing Ratemaking Regulations for Market Dominant 
and Competitive Products, Order No. 43, Docket No. RM2007-1, October 
29, 2007. 

[10] Market dominant products are subject to a price cap for each 
class of mail equal to the annual Consumer Price lndex--All Urban 
Consumers. 

[11] Table 2 includes NSA requests approved by PRC since the enactment 
of PAEA, rather than active NSAs, for two reasons. First, many NSAs 
are active across multiple fiscal years, so reporting active NSAs can 
produce misleading totals. Second, there were active NSAs in fiscal 
years 2007 and 2008 that were approved before the implementation of 
new regulations in October 2007, and are thus not directly comparable 
to later NSAs approved under PAEA regulations. 

[12] For the purposes of this report, "net revenue" refers to the 
revenue, minus attributable costs and discounts, above what would have 
been earned by USPS in the absence of the NSA, sale, or promotion 
(called "net contribution" by USPS). 

[13] In its fiscal year 2012 Annual Compliance Determination Report, 
PRC directed USPS to modify its international competitive NSA cost 
models for certain international products to accurately develop costs, 
or to increase its cost contingency factor to accommodate costs that 
cannot be modeled. 

[14] For the purposes of this report, "profit" refers to revenue above 
attributable costs. 

[15] Some USPS agreements with foreign posts are long-standing 
agreements that were in place before the enactment of PAEA. Though 
some of these agreements do not cover costs, the agreements improve 
the net financial position of USPS by allowing contract-specific rates 
for above-UPU cost coverage rates where applicable. 

[16] International NSAs prior to the enactment of PAEA were classified 
as International Customized Mail Agreements (ICM) and were not 
comparable to NSAs after the enactment of PAEA. 

[17] Mobile barcodes, called Quick Response "QR" codes, when scanned 
by a mobile phone, can direct the user to an Internet website. 

[18] Electronic commerce, or e-commerce, refers to conducting business 
(e.g., buying and selling products and services) on the Internet. 

[19] Provisions in annual USPS appropriations since 1984 mandate 6-day-
a-week delivery and rural mail delivery at certain levels. These 
provisions have specified that "6-day delivery and rural delivery of 
mail shall continue at not less than the 1983 level." See e.g., Pub. 
L. No. 111-117, 123 Stat. 3200 (Dec. 16, 2009). 

[20] While these products generated a profit, USPS also had 
significant institutional costs, which along with required payments to 
prefund its future retiree health benefits, contributed to a $15.9 
billion net loss for USPS in fiscal year 2012. 

[21] USPS Office of Inspector General, Risk Analysis Research Center, 
Postal Service Revenue: Structure, Facts, and Future Possibilities, 
RARC-WP-12-002 (Oct. 6, 2011). 

[22] PRC, Section 701 Report. 

[23] USPS Office of Inspector General, White Paper, Analysis of Postal 
Price Elasticities, RARC-WP-13-008 (May 1, 2013). 

[24] USPS OIG, Postal Service Revenue: Structure, Facts, and Future 
Possibilities. 

[25] PRC, Section 701 Report (USPS Response to Commission's Draft 
Section 701 Report). 

[26] Market dominant NSAs must either improve the net financial 
position of USPS or enhance the performance of mail operations. 39 
U.S.C. § 3622(c)(10)(A). 

[27] PRC, Order Establishing Ratemaking Regulations for Market 
Dominant and Competitive Products. 

[28] PRC, Order Adding Discover Financial Services 1 Negotiated 
Service Agreement to the Market Dominant Product List, Order No. 694, 
Docket No. MC2011-19, March 15, 2011. 

[29] PRC, Rate and Service Changes to Implement Functionally 
Equivalent Negotiated Service Agreement with Bank One Corporation, 
Opinion and Further Recommended Decision, April 21, 2006. 

[30] In its fiscal year 2012 Annual Compliance Determination Report, 
PRC also acknowledged "that the elasticity of individual mailers may 
differ from that of the class as a whole." They used average product 
elasticities, though, "because they are the only available elasticity 
estimates at this time." However, PRC officials also told us that the 
USPS model for estimating products' elasticities has not been updated 
to reflect new products and that such an update would likely have an 
impact on the accuracy and reliability of USPS's forecasts and NSA 
evaluations. 

[31] PRC, Notice of Proposed Rulemaking Concerning Methods to Estimate 
Volume Changes Caused by Pricing Incentive Programs, Order No. 469, 
Docket No. RM2010-9, June 8, 2010. 

[32] PRC, Order Terminating Proceeding, Order No. 738, Docket No. 
RM2010-9, May 27, 2011. 

[33] PRC, Order Adding Discover Financial Services 1 Negotiated 
Service Agreement to the Market Dominant Product List. 

[34] USPS OIG, Postal Service Revenue: Structure, Facts, and Future 
Possibilities. 

[35] 39 CFR § 3007.10. Also see PRC, Dockets Protected Materials 
Procedures. 

[36] 39 U.S.C. § 3622(c)(10)(B). 

[37] PRC ultimately approved the Valassis NSA, noting that the deal 
would not cause unreasonable harm to the marketplace since the prices 
under the NSA are compensatory (i.e., in excess of attributable costs) 
and thus not anti-competitive. See PRC, Order Approving Addition of 
Valassis Direct Mail, Inc. Negotiated Service Agreement to the Market 
Dominant Product List, Order No. 1448, Docket No. MC2012-14, August 
23, 2012. This decision has been challenged and is being reviewed by 
the U.S. Court of Appeals for the District of Columbia Circuit. 

[38] 39 U.S.C. § 3622(b)(5). 

[39] PRC, Order Approving Technology Credit Promotion, Order No. 1743, 
Docket No. R2013-6, June 10, 2013. USPS sought to recover revenue 
equal to the rebates from the promotion by creating new pricing 
authority that it could use at the time of the next annual price 
adjustment. This issue is also under broader review by PRC (see PRC 
Docket No. RM2013-2). Several parties have advised PRC to bar USPS 
from recovering as rate adjustment authority any revenue that is 
forgone because of promotions. 

[40] The Form 10-K report is also called the Annual Report Pursuant to 
Section 13 or 15(d) of the Securities Exchange Act of 1934. 

[41] See 39 U.S.C. § 3622. 

[End of section] 

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