POSTAL and DELIVERY SERVICES: Pricing, Productivity, Regulation and Strategy Topics in Regulatory Economics and Policy Series

POSTAL AND DELIVERY SERVICES: Pricing, Productivity, Regulation and Strategy Topics in Regulatory Economics and Policy Series

Michael A. Crew, Editor Center for Research in Regulated Industries Graduate School of Management, Rutgers University Newark, New Jersey, U.S.A.

Previously published books in the series:

Crew,M.: Pricing and Regulatory Innovations Under Increasing Competition Crew, M., and Kleindorfer, P.R.: Managing Change in the Postal Delivery Industries Awerbuch, S. and Preston, A.: The Virtual Utility Gabel, D. and Weiman, D.: Opening Networks to Competition: The Regulation and Pricing ofAccess Zaccour, G.: Deregulation ofElectric Utilities Young, W.: Atomic Energy Costing Crew,M.: Regulation Under Increasing Competition Crew, M.A. and Kleindorfer, P. R.: Emerging Competition in Postal and Delivery Services Cherry, B.A.: The Crisis in Telecommunications Carrier Liability: Historical Regulatory Flaws and Recommended Riform Loomis, D.G. and Taylor, L. D.: The Future of the Telecommunications Industry: Forecasting and Demand Analysis Alleman, J. and Noam, E.: The New Investment Theory ofReal Options and its Implications for Telecommunications Economics Crew, M. and Kleindorfer, P. R: Current Directions in Postal Reform Faruqui, A. and Eakin, K. Pricing in Competitive Electricity Markets Lehman, D. E. and Weisman, D. L. The Telecommunications Act of 1996: The "Costs" ofManaged Competition Crew, Michael A. Expanding Competition in Regulated Industries Crew, M. A. and Kleindorfer, P. R.: Future Directions in Postal Reform Loomis, D.G. and Taylor, L.D. Forecasting the Internet: Understanding the Explosive Growth ofData POSTAL AND DELIVERY SERVICES: Pricing, Productivity, Regulation and Strategy

edited by

Michael A. Crew Center for Research in Regulated Industries Graduate School of Management Rutgers University Newark, New Jersey, U. S. A. and

Paul R. Kleindorfer Risk Management and Decision Process Center The Wharton School University of Pennsylvania Philadelphia, Pennsylvania, U. S. A......

Kluwer" Academic Publishers BostoniDordrechtILondon Distributors for North, Central and South America: Kluwer Academic Publishers 101 Philip Drive Assinippi Park Norwell, Massachusetts 02061 USA Telephone (781) 871-6600 Fax (781) 871-6528 E-Mail

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" Electronic Services

Library of Congress Cataloging-in-Publication Data ISBN-13:978-1-4613-7962-1 e-ISBN-13:978-1-4613-0253-7 DO I: 10.1007/978-1-4613-0253-7

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, mechanical, photo• copying, recording, or otherwise, without the prior written permission of the publisher, Kluwer Academic Publishers, 101 Philip Drive, Assinippi Park, Norwell, Massachusetts 02061

Printed on acid-free paper. CONTENTS

Authors vii Sponsors xi Preface and Acknowledgements xiii Liberalization and the Universal Service Obligation 1. Putty-Putty, Putty-Clay or Humpty-Dumpty? 3 Michael A. Crew and Paul R. Kleindorfer 2. Funding the Universal Service Obligation under Liberalisation 31 Philippe De Donder, Helmuth Cremer, and Frank Rodriguez 3. Assessing Liberalization in Context 53 Michael Bradley, Jeff Colvin and Mary Perkins 4. Sustainability of USO in a Liberalized Postal Market 75 Anna Lundgren 5. A Comparison of the Burden of Universal Service in Italy 87 and the United States Robert Cohen, Carla Pace, Matthew Robinson, Gennaro Scarfiglieri, Rossana Scocchera, Vincenzo Visco Comandini, John Waller, and Spyros Xenakis 6. The Welfare Economics of Universal Service Standards 107 and Service Quality Ian Reay 7 . Two-Tier Pricing under Liberalization 127 Michael A. Crew and Paul R. Kleindorfer

Cost and Demand Studies 8. Postal Services Cost Modeling 145 Jose Soares, Joao Con/raria, and Alberto Pimenta 9. An Econometric Study of Cost Elasticity in the Activities 161 of Post Office Counters Catherine Cazals, Pascale Duchemin, Jean-Pierre Florens, Bernard Roy and Olivier Vialaneix 10. Mail Demand in the Long and Short Term 171 Jean-Pierre Florens, Sarah Marcy, and Joiille Toledano vi CONTENTS 11. Productivity and the Substitution between Labor 191 and Capital in Postal Organizations Heikki Nikali 12. Disaggregated Letter Traffic Demand in the UK 203 John Nankervis, Sophie Richard, Soterios Soteri, and Frank Rodriguez

Strategic Issues 13. People and Privatization 221 Mary S. Elcano, Robert A.F. Reisner, R. Andrew German and Margaret P. Crenshaw 14. Modern Postal Reform Laws 247 James I. Campbell, Jr. 15. Evaluation of a Public Post Office: A Canadian Experience 271 Dale Clark and Geoff Bickerton 16. Saturday Delivery: Who Provides It? Who Needs It? 299 John Haldi, and John T. Schmidt 17. Postal Administrations and Non-Postal Products 317 Robert W. Mitchell 18. USPS Finances: Is there a financially viable future 331 Alan Robinson and David Rawnsley 19. Postal Infrastructures and Economic Development 355 Tim Walsh 20. Assessment and Responses of Postal Sector Operators 373 to Electronic Diversions Alan R. Kane, David E. Treworgy, Edward L. Gamache and Ellen Y. Wong AUTHORS Geoff Bickerton, Director of Research, Canadian Union of Postal Workers (CUPW)

Michael D. Bradley, Professor of Economics, George Washington University

James I. Campbell, Jr., Attorney

Catherine Cazals, Assistant Professor of Economics, GREMAQ and IDE!, University of Toulouse

Dale Clark, National President, Canadian Union of Postal Workers (CUPW)

Robert Cohen, Director, Rates Analysis & Planning, United States Postal Rate Commission

Jeff Colvin, Manager, Product Cost Analysis, United States Postal Service

Joao Confraria, Board Member, Instituto das Comunica~5es de Portugal

Helmuth Cremer, Professor of Economics, GREMAQ and IDEI, University of Toulouse and Institut universitaire de France

Margaret P. Crenshaw, Manager, United States Postal Service

Michael A. Crew, Professor of Economics and Director of the Center for Research in Regulated Industries, Graduate School of Management, Rutgers University

Philippe De Donder, Assistant Professor of Economics, GREMAQ and IDEI, University of Toulouse

Pascale Duchemin, GREMAQ and IDE!, University of Toulouse

Mary S. Elcano, Partner, Sidley Austin Brown & Wood LLP . Jean-Pierre Florens, Professor of Mathematics, GREMAQ and IDEI, University of Toulouse viii AUTHORS Edward L. Gamache, Manager, United States Postal Service

R. Andrew German, Managing Attorney, United States Postal Service

John Baldi, President, Haldi Associates, Inc.

Allen R. Kane, Senior Vice President, United States Postal Service

Paul R. Kleindorfer, Universal Furniture Professor of Economics and Decision Sciences and Co-Director of Center for Risk Management, Wharton School, University of Pennsylvania

Anna Lundgren, Postal Advisor, National Posts and Telecom Agency, Sweden

Sarah Marcy, Researcher, IDEI, University of Toulouse

Robert W. Mitchell, Special Assistant to the Commission, United States Postal Rate Commission

John Nankervis, Reader in Econometrics, University of Surrey

Beikki Nikali, Research Director, Finland Post Corp.

Carla Pace, Poste Italiane SpA

Mary Perkins, Graduate Associate Professor of Economics, Howard University, Washington, D.C.

Alberto Pimenta, crr Correios de Portugal SA

David Rawnsley, President, Postal Services International

Ian Reay, Liberalisation and Monopoly Policy Manager, Consignia pIc

Robert A.F. Reisner, Vice President, Strategic Planning, United States Postal Service

Sophie Richard, Senior Economist, Consignia pIc AUTHORS ix Alan Robinson, President, Direct Communications Group

Matthew Robinson, Postal Rate & Classification Analyst, United States Postal Rate Commission

Frank Rodriguez, Head of Economics, Consignia pIc

Bernard Roy, Head of the Economic Modelling Department, La Poste

Gennaro Scarfigiieri, Poste Italiane SpA

John T. Schmidt, Director - Postal Regulatory Affairs, Pitney Bowes, Inc.

Rossana Scocchera, Poste Italiane SpA

Jose Soares, Adviser to the Board, Instituto das Comunica\!oes de Portugal

Soterios Soteri, Senior Economist, Consignia pIc

Joelle Toledano, Head of Economics and Mail Strategy, Strategic Direction, La Poste

David E. Treworgy, Partner, PricewaterhouseCoopers

Olivier Vialaneix, La Poste

Vincenzo Visco Comandini, Director, Economic Analysis and Regulation Unit, Poste ltaliane SpA

John Waller, Postal Rate & Classification Specialist, United States Postal Rate Commission

Tim Walsh, Director International Affairs, Consignia pIc

Ellen Y. Wong, Consultant, PricewaterhouseCoopers

Spyros Xenakis, Economist, United States Postal Rate Commission SPONSORS CRRI, Graduate School of Management, Rutgers University Center for Risk Management, University of Pennsylvania Consignia pIc (formerly) Royal MaiI/U.K. Post Office United States Postal Service Deutsche Post FedEx LaPoste R.R. Donnelley & Sons Company United Parcel Service United States Postal Rate Commission CTT Correios (Portuguese Post) Pitney Bowes Postcomm - Postal Services Commission PostenAB PricewaterhouseCoopers Siemens Electrocom Finland Post Canada Post Corporation Correos y Teh~grafos (Spanish Post) ICP - Instituto das Comunica~oes de Portugal Linx (A Division of EDS) Post Danmark Poste Italiane DMA - Direct Marketing Association National Association of Letter Carriers New Zealand Post Association for Postal Commerce Haldi Associates Postal Services International Venable, Baetjer, Howard & Civiletti Finland Ministry of Transport and Communications PREFACE AND ACKNOWLEDGEMENTS

This book arises out of the Ninth Conference on Postal and Delivery Economics: "Challenges and Developments in Postal and Delivery Services," held in Sorrento, Italy, June 6-9, 2001. Leading practitioners, postal administrations, and the courier industry, as well as a number of regulators, academic economists, mailers, consultants, and lawyers came together to examine some of the major policy and regulatory issues facing the industry. Issues addressed included international postal policy, the universal service obligation, regulation, competition, entry, the role of scale and scope. economies, the nature and role of cost analysis in postal service, productivity, interaction of law and economics, future technologies, and service standards. The conference and the book follow our earlier conferences. In 1990, a conference was held at Coton House, Rugby, England, July 22-25, 1990, in honor of the one hundred and fiftieth anniversary of the Penny Post and the contributions of Sir Rowland Hill. The ensuing book, Competition and Innovation in Postal Services, was published by Kluwer Academic Publishers in 1991. In 1992, Regulation and the Evolving Nature of Postal and Delivery Services: 1992 and Beyond was held at Village PTT, La Londe les Maures, France, on March 18-21, 1992. This conference resulted in Regulation and the Nature of Postal and Delivery Services. published by Kluwer Academic Publisher in 1993. Both conferences were recognized by the European Express Organization with the Hermes Award 1992 at its annual award dinner in Munich on June 22, 1992. The first workshop, The Workshop on Postal and Delivery Economics, was held June 23-26, 1993 in Daun, Germany. In 1994 a Conference in Stockholm, Sweden, May 18-21,1994, and a workshop, in Hakone, Japan, June 1-4, 1994 combined to produce the volume Commercialization of Postal and Delivery Services. published by Kluwer Academic Publisher in 1995. A workshop was held in Naantali, Finland, June 7-10, 1995. A Conference was held in Monterey, California, May 22-25, 1996, and resulted in the book Managing Change in The Postal and Delivery Industries. published by Kluwer Academic Publisher in 1996. The next book, Emerging Competition in Postal and Delivery Services was a direct result of the Fifth and Sixth Conferences on Postal and Delivery Economics: The Evolving Structure of Postal and Delivery Industries held in Helsingor, Denmark, June 11-14, 1997; Emerging Competition in the Postal and Delivery Sectors held in Montreux, Switzerland, June 17-20, 1998. These combined to produce the book Emerging Competition in the Postal and Delivery Services, published by Kluwer Academic Publishers in 1999. The Seventh Conference on Postal and Delivery Economics, Current Directions in Postal Reform, was held in Sintra, Portugal, June 23-26, 1999. This resulted in the book Current Directions in Postal xiv PREFACE AND ACKNOWLEDGEMENTS

Reform, published by Kluwer Academic Publishers in 2000. The Eighth Conference on Postal and Delivery Economics, Future Directions in Postal Reform, was held in Vancouver, Canada, June 7-10, 2000. This resulted in the book Future Directions in Postal Reform, published by Kluwer Academic Publishers in 2001. The 2001 conference was made possible by the support of the following organizations: CRRI-Center for Research in Regulated Industries, Graduate School of Management, Rutgers University; Center for Risk Management and Decision Processes, The Wharton School, University of Pennsylvania; Consignia pIc (formerly Royal Mail/U.K. Post Office); UnitesdStates Postal Service; Deutsche Post; La Poste; R.R. Donnelley & Sons Company; United Parcel Service; United States Postal Rate Commission; Federal Express; CTT Correios (Portuguese Post); Pitney Bowes; Postcomm (U.K. Postal Services Commission) Posten AB; PricewaterhouseCoopers; Siemens Electrocom; Finland Post; Canada Post Corporation; Correos y Telegrafos; ICP-Instituto das Comunica~oes de Portugal; Linx (A Division of EDS); Post Danmark; Poste Italiane; National Association of Letter Carriers; DMA - Direct Marketing Association; New Zealand Post; Association for Postal Commerce; Haldi Associates; Venable, Baetjer, Howard & Civiletti; Postal Services International; Finland Ministry of Transport and Communications. We would like to thank sponsors not only for financial support, but also for their advice and encouragement, and for serving on the organizing committee. In particular, we would like to thank Stephen Agar, John Allen, Mary Bundy, John Campanelli, James Campbell, Catherine Churchard, Ken Churchill, Robert Cohen, Jeff Colvin, Joao Confraria, Gene Del Polito, Anders Due, John Dolling, Edward Gleiman, John Haldi, Peter HatIO, Gary Jensen, Luis Jimenez, Peter Johnson, Katja Kollmeier, Anton van der Lande, Matti Linnoskivi, Rohan Malhotra, Jose Marcos, Walter Maschke, Richard Moriarty, Heikki Nikali, Louis O'Brien, George Omas, Virpi Palo, Alberto Pimenta, Leon Pintsov, Bill Price, Sarah Prosser, David Rawnsley, Ian Reay, Kevin Richardson, Alan Robinson, Frank Rodriguez, James Sauber, John Schmidt, Christian Schunck, Nancy Sparks, Borge Spong, Martin Stanley, Elmar Toime, Joelle Toledano, David Treworgy, Vincenzo Visco-Commandini, Ian Volner, Sture Wallander, Tim Walsh, and Robert Weintzen. The host country plays an important role in these conferences. This year's conference, the Ninth Conference on Postal Delivery Economics, benefited greatly from the efforts of our hosts Poste Italiane. Vincenzo Visco Comandini provided advice, reminders, and assistance on numerous occasions in his role as Poste Italiane's representative on the organizing committee. PREFACE AND ACKNOWLEDGEMENTS xv

In the tradition of these conferences we very much enjoyed the speech by Corrado Passera, Chief Executive Officer, Poste Italiane, a distinguished executive in the postal sector. We thank him for his keynote speech initiating the Conference, which provided an outlook on the problems facing postal and delivery networks from the unique perspective of Poste Italiane Finally, we would like to thank Andrew Mearman of Wagner College and Jeremy T. Guenter for their assistance. Andrew provided editorial assistance, which added considerably to the clarity and readability of this volume. We are especially appreciative of the efforts of Jeremy T. Guenter, Administrative Assistant in the Center for Research in Regulated Industries, for his efforts in making this book possible. He performs all of the typesetting tasks in addition to his day-to-day administrative tasks. These include administrative support for all of the Center's conferences and workshops. He was of considerable assistance to us several ways, particularly the development of the Style Instructions, which were a great help in helping us meet the tighter deadlines and generally improved the production process. We would like to thank him not only as editors but also on behalf of the authors to whom he provided considerable assistance. He continues to develop a research tool available to all through the CRRI web site providing access to the many references used in this and other postal books in the series as well as regulatory economics more general. Researchers will not only be able to use this as a means of searching the literature but also be able to download them for listing in their papers. This is a continuing project involving frequent updating of the database. Visit us on the web at http://www.rci.rutgers.eduJ-cni. The usual disclaimers are applicable. In particular, the views expressed are the views of the authors and are not necessarily those of the sponsors.

Michael A. Crew Paul R. Kleindorfer