NSA’S DOA for USPS

Issue Brief

The United States Postal Service has been promoting the idea of Negotiated Service Agreements (NSA’s) for its biggest customers. Proponents suggest that NSA’s would provide variable pricing that would encourage greater volume and would reward the Service’s best customers with discounts and premium services. But a closer look shows this idea to be a non-starter within the current monopoly framework.

While NSA’s could take many forms, the idea essentially is to permit the Postal Service to make special deals with its largest customers-deals that would be unavailable to the typical American family or small business. The premise is that this greater pricing flexibility could actually induce additional mail volume and thus help the Postal Service’s bottom line. For example, a large mailer that would pre-sort mail in a manner that would save time and expense for the Postal Service, could receive a lower rate than other mailers. But this seemingly attractive idea is, in practice, fraught with problems, particularly in a monopoly setting.

Of course, the Postal Service already charges different rates for mail that requires different levels of service. But NSA’s would permit the Service to go further, picking individual customers and conferring upon them even lower rates. This is unworkable given the nature of the Postal Service, which competes with private sector companies while generating the bulk of its revenues from monopoly-protected classes of mail.

The difficulties in preventing cross-subsidization would be severe. If certain high-volume customers received rates lower than the costs associated with delivering that mail, then other Postal customers would essentially subsidize the preferred mailers through the Service’s monopoly revenues. While this would generate volume for the USPS, and help keep its 900,000 employees busy, it would not solve the Service’s financial problems. Conversely, if the rate was sufficient to cover the Service’s costs, then why not make that rate available to all Postal customers who can meet those requirements? In other words, the present ratemaking structure already accommodates this process without permitting NSA’s.

In its five-year strategic plan for fiscal years 2001-2005, the Postal Service asserted that NSA’s “can be developed within the current framework of the law,” but the Service has also endorsed legislation that would “clarify” the use of NSA’s. Clearly, NSA’s would not work while the Postal Service enjoys monopoly protection. Historically, in fact, mail volume growth has not necessarily improved the Postal Service’s bottom line. The energy of postal management would be better-spent making mail affordable for all postal customers by improving efficiency and cutting costs.

— Charles Guy, Ph.D., is the former Director, Office of Economics, Strategic Planning, U.S. Postal Service. He and Michael Paranzino are currently Adjunct Fellows at the Lexington Institute.