Beyond the Postal Service Monopoly

Updated: Draft 2 / November 5, 2004

Wissenschaftliches Institute für Kommunikationsdienste
Contestability and Barriers to Entry in Postal Markets
WIK: 7th Königswinter Seminar
17-19 November 2002

Beyond the Monopoly:

Other Legal Restraints on Entry

into U.S. Postal Markets

James I. Campbell Jr.

How does the law protect the United States Postal Service from potential competitors? The most visible barrier to market entry is the postal monopoly law. This ancient federal statute makes it a crime, with some exceptions, to transport letters in competition with the Postal Service. So apparent and absolute is the postal monopoly that discussions of postal policy often assume that repeal of the monopoly law would permit the Postal Service and private delivery services to compete like normal companies. This assumption is incorrect. The commercial position of the Postal Service is fortified not only by the postal monopoly but also by a broad range of legal privileges. This article offers a short survey of legal handicaps, other than the postal monopoly law, faced by those who would compete in Postal Service markets.

Several caveats are in order at the outset. First, "the law" is not a simple list of rules. The law is a tapestry woven from federal statutes and administrative regulations, international treaties, judicial decisions, state and local laws, and even contractual provisions. Reasonable men may differ on what body of rules constitutes "the law". While this article necessarily adopts one view, others may adopt a different view. Second, legislative effects should not be confused with legislative intent. Many, indeed most, of the legal measures described in this article were not adopted for the purpose of restraining competition. Rather, these provisions generally predate the modern (and still not universally embraced) perspective that the national post office is a commercial entity competing with other commercial entities and should compete fairly. Third, U.S. law places many extra burdens on the shoulders of the Postal Service that are not carried by private companies. A catalog of such legal impedimenta would be useful but is beyond the scope of this article. This article offers no assessment of whether the economic value of the Postal Service's burdens outweighs the economic value of its benefits, an inquiry that is probably fruitless in any case.

For purposes of exposition, it appears helpful to group the laws that create significant obstacles to entry into postal markets into three categories: (1) direct and indirect financial assistance given to the Postal Service, (2) exceptional treatment of the Postal Service under regulatory laws, and (3) effects of the governmental status of the Postal Service. This categorization is artificial, however, and in some degree arbitrary.

1 Financial Assistance

As a federal agency, the Postal Service has received, and continues to receive, financial support from the government. Financial support takes the form of (1) capital transfers, (2) contributions towards operating expenses, and (3) indirect financial benefits.

Unlike an ordinary corporation, the Postal Service did not raise its initial capital from private financial markets. Instead, Congress declared that "The initial capital of the Postal Service shall consist of the equity . . . of the Government of the United

States in the former Post Office Department." The value of this initial "investment" was officially set at $ 1.7 billion, a figure that substantially understates its true value because the Post Office's extensive real estate holdings were valued at original cost. Moreover, the president is authorized to transfer additional property to the Postal Service "with or without reimbursement". Congress, too, can make additional capital contributions at any time. As of the end of 2002, total capital contributions to the Postal Service amounted to $ 3.0 billion.

Government payments to defer the operational expenses of the Postal Service are provided under different labels. From 1972, the Postal Service's first year of operation, until 1983, the Postal Service received a "public service subsidy". It was provided "as reimbursement to the Postal Service for public service costs incurred by it in providing the maximum degree of effective and regular postal service nationwide, in communities where post offices may not be deemed self-sustaining."8 The public service subsidy was set at $1.3 billion in 1972 (ten percent of the operating budget of the Postal Service in 1971) and reduced in stages until it was ended in 1984.

The Postal Service also receives operational funds denoted as "revenue forgone" payments. In principle, this payment is set equal to "the difference between the revenues the Postal Service would have received . . . and the estimated revenues to be received" for the carriage of mail for which Congress has mandated special rates of postage. Since 1993, Congress has sharply limited eligibility for preferential postage rates, and revenue forgone payments have been on the order of $60 to $100 million per year.

A third type of operational subsidy comes in the form of specific ad hoc grants by Congress. For example, Congress appropriated a total of $ 1.0 billion to cover "accumulated operating indebtedness" in the years 1976 and 1977. In 2002, Congress gave the Postal Service $ 0.5 billion to help pay for increased security costs after terrorist activities in 2001. 11

Although governmental contributions towards the operational expenses of the Postal Service may be granted under different rubrics, the competitive effect appearsto be the same. By paying for part of the cost of providing some or all classes of mail service, Congress makes it easier for the Postal Service to compete with companies which provide alternative communications and distribution services. Even revenue forgone payments distort competition by subsidizing the customers of one delivery service while denying a similar subsidy if those customers choose a competing delivery service.

In addition to direct payment of capital and operating expenses, the federal government provides the Postal Service with indirect financial assistance. Most importantly, the government makes available to the Postal Service a substantial line of credit at low interest rates. By statute, the Postal Service is authorized to borrow up to $15 billion. By way of collateral, the Postal Service may pledge its assets and future revenues—i.e., public property, including revenue earned from the postal monopoly.13 The Postal Service's banker is the Federal Financing Bank, a special government bank for federal agencies. The FFB lends money to federal agencies at lower rates than available to most companies because it is able to obtain money from capital markets at better rates than private companies due to the large size and stability of government borrowings. By the end of 2002, the Postal Service had borrowed about $ 11 billion from the FFB.

Government also pays for certain expenses that a normal company would incur on its own account. The Department of Justice provides legal representation for the Postal Service. The Department of State pays for U.S. membership in the Universal Postal Union, an intergovernmental body devoted primarily to promoting the international business of the Postal Service. The Department of the Treasury trains police officers for the Postal Service. The Postal Rate Commission, the General Accounting Office, and other government analysts provide independent analyses and studies similar to those that a management consultant would perform for a private company.

A final category of indirect financial benefits are byproducts of the postal monopoly. As a brand name, the "Postal Service" has a degree of public recognition and trust that would a private company would pay a large fortune to replicate. The Postal Service's brand, however, is mainly derived from its status as the monopoly supplier of letter services. The monopoly mail stream also yields enormous economies of scale which can be exploited in the production of nonmonopoly services. For example, when the Postal Service purchases air transportation, it says to the airlines in effect, "If you want to contract to carry monopoly mail, you must provide top boarding priority to all mail, including competitive products like express mail." A similar advantage applies in the purchase of virtually all other inputs that are used in the joint production of monopoly and nonmonopoly services, from paperclips and mailbags to advertising and buildings.

Antitrust and fair trade laws govern the conduct of most commerce in the United States. As the Supreme Court has declared, "Congress mandated competition as the polestar by which all must be guided in ordering their business affairs". All except the Postal Service. Antitrust law does not apply to the Postal Service because it is federal agency. Similarly, the Postal Service's governmental status immunizes it from "any claim arising out of the loss, miscarriage, or negligent transmission of letters or postal matter" or any other "claim based upon an act or omission of an employee of the Government, exercising due care".

Other federal regulatory laws likewise give favorable, or at least different, treatment to the Postal Service. Unlike a private company, the Postal Service is not subject to federal corporate income tax. Until 1998, the Postal Service was exempt from regulation by the Occupational Safety and Health Administration, a federal agency whose workplace rules have been the subject of much complaint from American business. Aviation security regulations likewise give special consideration to the Postal Service.

Some statutes grant privileges to the Postal Service that are akin to special regulatory treatment. The most commercially significant of these privileges is the criminal law to prohibits anyone but the Postal Service from delivering mailable matter to a mailbox located on the side of the road. Since delivery to the mailbox is widespread in the United States and substantially less expensive than delivery to the door of the addressee, the mailbox access law gives the Postal Service a significant competitive advantage in competitive as well as monopoly products. The Postal Service is also the only delivery service permitted to issue pre-payment stamps "of the kind authorized and provided by" the Postal Service. Similarly, the Postal Service is the only delivery service whose employees and facilities are singled out for protection from harm under federal criminal laws. Only the Postal Service can offer a delivery service whose privacy is guaranteed by law. Only the Postal Service enjoys a legal presumption that a letter which has been dispatched is as good as delivered. And, in most localities in the United States, only the Postal Service enjoys the right to place collection boxes on public streets.

International postal services are regulated by two main systems of law: postal conventions and customs law. International postal conventions originated as a byproduct of the postal monopoly. When national governments insisted that letters could be transported across their territories only by their own public officials, postal service between countries became impossible without agreement between the governments concerned. In 1874, a multilateral postal convention, the Universal Postal Convention, replaced a patchwork of bilateral agreements. The Convention is revised every five years by a general Congress of member governments. The present Convention was agreed in Beijing in 1999.

Based as it is on the premise that an exchange between government monopolists is the natural way to provide international delivery services, the Universal Postal Convention establishes a legal framework that favours post offices over private delivery services and, in each national territory, favours the local post office over foreign post offices. Under the Convention, post offices agree on a fixed price for the delivery of international mail. This scheme allows the Postal Service to purchase delivery of documents and parcels from post offices in industrialized countries at lower rates than available to a private delivery service. It is as though the United States agreed to an international aviation agreement provided lower landing fees for one U.S. airline to the detriment of all others. Special delivery rates for national postal monopolists are reinforced by another section of the Convention that authorizes post offices to intercept international mail that is posted in the "wrong" country; i.e., mail that is transmitted by private means from one country to another and tendered to a foreign post office that offers better service or lower rates. If U.S. antitrust laws were applicable, the Postal Service's participation in such price-fixing and market allocation arrangements would almost surely be illegal.

Customs laws are the other major regulatory hurdle for international delivery services. These laws are not applied equally to shipments by the Postal Service and private carriers. In part, this is a result of administrative discretion. Federal law authorizes the Customs Service to issue regulations specifying procedures for shipments value less than $2,500. Pursuant to this authority, the Customs Service has adopted one set of procedures for low value shipments carried by the Postal Service and another set of procedures for identical shipments carried by private carriers. For postal shipments, Customs officials prepare customs clearance documents using information provided by the mailer in a form attached to the

package. For private shipments, the Customs Service requires the private carrier to prepare customs clearance documents using information it has elicited from the shipper. The private carrier is responsible for the accuracy of the information it provides, whereas the Postal Service is not liable for the accuracy of information provided by the mailer. The amount of information provided by the mailer is generally less than that required of the private carrier, especially in respect to small packets weighing two kilograms or less and valued less than $ 400. By imposing liability on the private carrier, the Customs Service forces the private carrier to do as much data collection and verification as possible, even for shipments yielding small amounts of duty. On the other hand, when it comes to documenting and checking low value postal shipments, Customs officials often find that they have more important tasks and low value postal items may be admitted without payment of duty, a virtual impossibility for privately carried shipments.

To the extent that such differences in customs procedures are grounded in law, they derive from two international treaties: the Kyoto Convention and the Universal Postal Convention. The revised Kyoto Convention provides that for postal shipments, "When all the information required by the Customs is available from the CN22 or CN23 and supporting documents, the form CN22 or CN23 shall be the Goods declaration." The CN22 and CN23 forms referred to are declaration forms for mailers established by postal officials under authority of the Universal Postal Convention. In short, postal officials have adopted their own, standardized and simplified customs forms for worldwide use, while private operators struggle with diverse customs procedures required by each country. In addition, the Universal Postal Convention declares that "Postal administrations shall accept no liability for customs declarations in whatever form these are made or for decisions taken by the Customs on examination of items submitted to customs control." As noted above, it is the potential liability for incomplete or inaccurate data that allows the Customs Service to demand extensive, and expensive, cooperation from private carriers.

3 Governmental Authority

The Postal Service's status as an agency of the federal government introduces another class of obstacles to ordinary competition. Foremost among these is the power to make rules and regulations that carry the force of law. On various occasions, the Postal Service also acts a policeman, judge, and executive department.

Under the postal code, the Postal Service may "adopt, amend, and repeal such rules and regulations as it deems necessary to accomplish the objectives of [the postal law]." Using rulemaking authority, the Postal Service has adopted regulations that have the effect of improving its commercial position. It has, for example, expanded the scope of the postal monopoly by declaring that its monopoly over the carriage of "letters" includes as well the carriage of printed advertisements. These regulations go on to lay down operating conditions for private delivery services that wish to carry tangible objects bearing information in competition with the Postal Service. Other Postal Service regulations declare that undeliverable mail sent to a private post office, unlike mail sent to a regular post office, will not be returned to the sender or forwarded free of charge. Another rule holds declares that a private delivery service may not attach an envelope or parcel to the outside of an addressee's roadside mailbox even though this mode of delivery may be agreeable to the householder and compatible with Postal Service access to the inside of the mailbox. The Postal Service has also issued regulations limiting the right of charities to use discount postage rates established by Congress. Even if these regulations are patently contrary to Congressional intent, they limit access to discount postage rates until a charitable organization expends enough money needed to litigate the issue through the courts.

The Postal Service exercises somewhat similar rulemaking authority in the field of international postal law. From 1971 through 1998, the Postal Service represented the United States at the Universal Postal Union with virtually no guidance from the U.S. government. Since the Universal Postal Convention and its regulations are binding on member governments. the Postal Service was, in effect, one of the leading members of the legislative body that wrote the regulations for international mail. In 1998, under pressure from private delivery services, Congress amended the postal law and placed the Department of State in charge of the U.S. delegation to the UPU. Even so, the U.S. position is strongly influenced by the Postal Service. Most U.S. representatives to the UPU on Postal Service employees. Most fundamentally, since 1994, the UPU has shifted more and more legislative authority from the Congress to the Postal Operations Council, a permanent committee composed of representatives "appointed by the postal administration of his country." The Postal Operations Council, rather than the Congress, is thus becoming the main legislative body for the UPU. The Postal Service has been a member of the Postal Operations Council since it was created in 1994.

The Postal Service also exercises a limited amount of police authority. Postal inspectors and policemen may conduct investigations, arrest persons, and seize property in the enforcement of laws relating to use of the mails and such other laws as the Attorney General may designate. Postal inspectors have played a prominent role in efforts to stop use of the mail to perpetuate fraud or promote immoral activities (e.g., dissemination of pornography). More prosaically postal inspectors and policeman guard postal facilities and investigate offenses such as theft from mails. In the past, the Postal Service has also used its police authority to intimidate customers of competitors.

The Postal Service even operates its own administrative courts. Under authority of the Judicial Officer, Postal Service officials adjudicate issues of potentially serious economic consequence for the persons involved. The Judicial Officer has adopted elaborate procedures for trying cases relating to offenses such as false representation, posting of non-mailable matter, and sending or carrying mail reserved under the postal monopoly. In an administrative hearing at the Postal Service, the presiding officer is typically the Judicial Officer or an administrative law judge. The General Counsel of the Postal Service acts as prosecutor or complainant. Final appeal is to the Postmaster General. While these quasi-judicial procedures seem little used, their existence underscores the Postal Service's capacity to exercise governmental authority.55

The governmental mantle worn by the Postal Service yields less direct benefits as well. When the Postal Service is a litigant before a normal federal court, it enjoys the respect that the judicial branch accords the executive branch. For example, after losing a case in district court and either failing to appeal or losing on appeal, an ordinary litigant must accept defeat. However, the Postal Service, like the Internal Revenue Service, takes the position that it can refuse to "acquiesce" in the court's decision. In one remarkable series of cases, the Postal Service claimed that it was immune from wage garnishment actions under state law. It relitigated the issue again and again, losing all final decisions. In the end, an exasperated Court of Appeals wrote:

For the sixth time in the courts of appeal, and for no less than the nineteenth time in the district courts, the government has sought to litigate the immunity of the United States Postal Service (USPS) to state garnishment proceedings. . . .[Such] circuit shopping by the government in quest of a favorable decision should not be allowed.57

More importantly, the Postal Service demands and receives judicial deference towards its regulations however self-interested. Under standard principles of administrative law, a federal court will uphold the regulations of a federal agency if the agency's ruling is based on a "permissible construction of the statute." In one case, a court of appeals upheld the Postal Service's claim of monopoly over printed advertisements—a highly dubious reading of the statute—with the following words: "Because the statute is ambiguous, the Postal Service is well within its prerogatives in attempting to resolve the ambiguity by regulation." To challenge the Postal Service in court, therefore, one must present not merely a better, sounder legal argument than the Postal Service but demonstrate that there is no possibility that Postal Service's administration of the law can be considered "permissible".

The supremacy of federal law to state law likewise accrues to advantage of the Postal Service. A state law may not, for example, interfere with the Postal Service's federally mandated obligation to provide deliver the mail. Thus, a state or local law cannot prohibit a letter carrier from crossing across private property to deliver the mail. Postal Service vehicles are immune from state sales taxes, real estate taxes, building codes, zoning ordinances, and vehicular licensing and parking regulations.62 While a private company must live with the costs of doing business under the diverse rules of multiple state and local jurisdictions, the Postal Service can rely on its immunity from such costly inconveniences.

Then, too, the Postal Service's role as governmental agency yields the unique privilege of dealing with other governmental agencies as a colleague rather than as a petitioner. The Postal Service is privy to inter-agency policy deliberations inaccessible to a private company. The Postal Service can call upon other federal agencies for assistance. A government investigation of practices in the postal services market will typically be sent to the Postal Service in draft form for comment, a "courtesy" less likely to be accorded private parities.

4 Summary: the Uneven Playing Field

The Postal Service is today a commercial enterprise. About 90 percent of mail is paid for by commercial enterprises and other types of organizations. Of the remaining 10 percent of postal services, almost all are purchased by individual consumers in the same manner as they purchase any other consumer good, such as telephone service, cable-TV, or milk. For most mailers in most cases, use of the post is weighed against the cost, convenience, and effectiveness of some other means of communication or distribution.

Federal law, however, treats postal service as a government service. Potential substitutes for the government's postal service—whether private delivery services or other means of distribution—are discouraged by a web of laws that flow from the governmental status of the Postal Service and insulate it from many of the financial and regulatory challenges faced by private companies. The cumulative effect of these laws is to establish a significant barrier to entry that is quite distinct from the outright prohibitions of the postal monopoly. These legal measures not only reinforce the postal monopoly but also extend entry barriers—or at least entry inhibitions—beyond the scope of the monopoly.

It bears repeating, however, that the advantages of law are not all on the side of the Postal Service. There are disadvantages as well. These render the Postal Service a less efficient and aggressive competitor than it would be organized as a private company. At the end of the day, it is the private delivery services, not the Postal Service, that have dominated most markets outside the postal monopoly. The legal measures discussed in this essay thus serve not only as restraints against entry but also, and perhaps to an even greater degree, as inhibitors of efficient and undistorted production by both the Postal Service and its private sector competitors.

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