Implications of Electronic Mail and Message Systems for the U.S. Postal Service

Revenue/Cost Model and Results

Introduction

This chapter describes the revenue/cost
model used by OTA to project the impact of
U.S. Postal Service (USPS) involvement in
electronic mail and message systems (EMS)
on its finances and outlines the results of the
analysis. OTA originally intended to prepare
projections of USPS revenues and costs for all
classes of mail under the four alternatives con
sidered for the years 1985, 1990, 1995, and
2000. However, the USPS revenue and cost

structure proved to be too complex, and the
available baseline data too ambiguous, to
make complete projections. Instead, OTA has
focused on the financial impacts for first class
mail which, according to the results of the
market penetration analysis discussed in
chapter 4, will be affected most by EMS. The
revenue/cost model for conventional mail is
described first, followed by the model for elec
tronic mail.

USPS Revenue/Cost Model for
First-Class Conventional Mail

USPS revenue and cost relationships are un
usually complex for several reasons. First,
postal costs vary not only with the volume and
weight of mail delivered, but also according
to class of mail, number of route stops, speed
of service standards, size and shape of mail,
and whether (and how) the mail is ZIP coded
and presorted. Costs also may vary between
urban, suburban, and rural routes, although
USPS does not collect cost data based on mail
destination.
Second, cost analysis is complicated by the
problem of how to assign joint and common
costs properly to the different services they
support; for example, allocation of delivery
route costs by class of mail.
Third, there is a problem in determining
what costs are variable with volume changes
over various time periods. Thus, some costs
that appear fixed in the short run (e.g., 1 to
3 years) may be variable (i.e. adjustable to
meet volume requirements) over a 10 or 20
year period.
On the revenue side, postal revenues depend
on the volume of mail sent by customers in
each of the many service categories estab

lished by USPS, and on the rates in each cate
gory. Revenue projections are further compli
cated by the need to consider the impact of
inflation and public subsidies on rates, and in
turn the impact of rates on mail volumes in
each service category. There is a feedback
process, but its exact nature is unknown. That
is, changes in rates may have a significant ef-
fect on mail volume, which in turn affects mail
rates 1, 2, or 3 years later (in the next rate
setting cycle).
In order to simplify the revenue/cost analy
sis for the purposes of this study, OTA devel
oped a USPS revenue and cost model based
on the following assumptions:
.Percentage Fixed v. Variable Costs. To
the extent that a significant fraction of
USPS costs are fixed, declining volumes
would cause an increase in the average
cost per piece of mail. This higher cost
would have to be recovered by increases
in rates or postal subsidies or offset by
cost reductions through service cutbacks.
OTA assumed a USPS fixed cost of about
36 percent based on the revenue and cost
analysis used in the 1980 rate case before

United States. Congress. Office of Technology Assessment. Implications of Electronic Mail and Message Systems for the U.S. Postal Service. UNT Digital Library. http://digital.library.unt.edu/ark:/67531/metadc39480/. Accessed August 1, 2014.