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OIG Sponsors Research on Pricing in the New Post-PAEA Environment

New Math Equals to Prison Time for Former Part-Time Carrier

The Postal Accountability and Enhancement Act (PAEA) of 2006 ushered in a new era of enhanced pricing flexibility and gave the Postal Service a profit incentive. It also exposed the Postal Service to antitrust scrutiny for the first time in its history. The Postal Service, its regulators, and mailers all face new choices in determining how they will adapt. The Postal Service must determine how to use its new pricing flexibility to retain earnings. The regulator must determine how to balance the Postal Service’s pricing flexibility against other regulatory goals such as ensuring a level playing field. Mailers have new opportunities to work with the Postal Service to create customized pricing agreements.

The Office of Inspector General (OIG) retained Professor John C. Panzar to examine the pricing incentives confronting the Postal Service in this new environment. Under the PAEA regulatory structure, the prices of most of the Postal Service’s products cannot as a whole grow faster than inflation. Dr Panzar analyzed the implications of this price cap on the Postal Service’s pricing initiatives, focusing on three areas: worksharing discounts, quantity discounts, and discounts for using particular methods of accessing postal services or “channels”:

  • Worksharing Discounts – Although historically, the Postal Service has generally set worksharing discounts equal to the cost the Postal Service avoids when it lets others take on this work, Dr. Panzar found the Postal Service faces a strong economic incentive to set worksharing discounts below the costs those activities avoid. This is permissible under PAEA, but it would break with long-standing practice and invite antitrust scrutiny.
  • Quantity Discounts – Dr. Panzar found that the Postal Service has an economic incentive to offer quantity discounts. Moreover, if the customers receiving discounts are not in competition with other less favored customers, quantity discounts are a “win-win” as the price cap automatically protects everyone. If customers are in competition, however, those who do not get quantity discounts are disadvantaged and may seek antitrust relief.
  • Channel-Based Discounts – PAEA allows cost-based discounts based on alternative distribution channels such as offering Internet prices at a discount to post office prices. Dr. Panzar found these types of discounts are likely to be attractive to the Postal Service — particularly when the channels are new.

Dr. Panzar is a Professor of Economics at the University of Auckland (New Zealand), and the Louis W. Menk Professor Emeritus at Northwestern University, He has authored two books and numerous articles on pricing and costing issues facing multi-product network industries like postal services.  His paper (Report Number RARC-WP-10-002) is available in the OIG's reading room.



Network Distribution Centers: A Successful Beginning in Postal Network Redesign

New Math Equals to Prison Time for Former Part-Time Carrier

In May 2009, the Postal Service activated the first three Network Distribution Centers (NDCs) in the northeast region of the United States. This realigned the distribution and transportation of standard, periodical and package mail at more than 40 Northeast, New York Metro, and Eastern Area postal facilities. The NDC concept retained the 21 bulk mail centers renaming those NDCs and established a three tier approach to fill containers and trucks early in the network to dispatch them as deep into the network as possible. The Postal Service hopes its NDC network will streamline the processing and dispatching of mail, ultimately generating new gains in service, efficiency, and customer value.

From September through November 2009, the Office of Inspector General (OIG) conducted a review of these recent efforts and found the Postal Service is off to a successful start. During the first phase activation of the NDC, management implemented live loads and unloads of all trailers, increased trailer utilization, streamlined some transportation trips, reduced mail processing workhours, and improved Package Service performance.

Management expected to see future workhour savings and transportation trip cancellations as a result of the activations. Despite the overall success of the first phase of activations, the OIG audit team determined postal management could enhance future NDC activations by completing customer supplier agreements and planning sufficiently for work reduction caused by the activations. Additionally, the audit team concluded postal management should develop and submit specific milestones in the activation planning documents.

In a future review, the OIG will assess the financial and operational impacts of the NDC activations and determine whether the activations achieved anticipated benefits. To read the report “Network Distribution Center Phase 1 Activation” (Report Number EN-MA-10-001)

click here.


Special Report

New OIG Study Estimates USPS Has Been Overcharged for the CSRS Pension Fund by $75 Billion

A study just released by the U.S. Postal Service’s Office of Inspector General (OIG) shows that the current system of funding the Postal Service’s Civil Service Retirement System pension responsibility is inequitable and has resulted in the Postal Service overpaying $75 billion to the pension fund. The OIG estimates that if the overcharge was used to prepay the Postal Service’s health benefits fund, it would fully meet all of the Postal Service’s accrued retiree health care liabilities and eliminate the need for the required annual payments of more than $5 billion. Also, the health benefits fund could immediately start meeting its intended purpose -- paying the annual payment for current retirees, which was $2 billion in 2009.

The report further illustrates the inequity in the methodology used to determine the Postal Service’s contribution to the CSRS fund. Key findings from the report: Read more



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