US Postal Service 2003 Annual Report Download - page 27

2003 annual report united states postal service | 25
management discussion & analysis
operations
Rate-Making Activity
Until 1971, Congress set postage rates
through legislation, and the relationship
between the revenue from those rates and
the actual costs of operating the postal
system varied greatly. Since 1971, however,
the Postal Reorganization Act has required the
Postal Service to establish postal rates that
cover the cost of operating the postal system.
The rate-making process is lengthy and
complicated and begins when management
determines that current rates will not be
adequate to meet our mandate of “covering
costs” in the future. The Postal Service, with
approval of the Board of Governors, submits a
request for a recommended decision on rate
and fee changes to the Postal Rate
Commission, an independent establishment
of the executive branch of the government.
The submission is accompanied by detailed
rate proposals supported by extensive testi-
mony and lengthy documentation.
The Commission’s proceedings take up to
10 months. It holds public hearings, during
which interested parties such as mailers,
competitors and consumer representatives are
authorized to challenge or support the Postal
Service’s proposals and submit their own
testimony and proposals. At the conclusion of
the proceedings, the Commission sends its
recommended decision to the Governors. The
Governors may approve, reject, allow under
protest, or, under certain limited circum-
stances after more proceedings, modify the
Commission’s recommendations.
Contribution
Contribution is the difference between
revenue and volume-variable costs. As the
term implies, volume-variable costs are those
costs that vary directly with changes in mail
volume. For example, a high percentage of
mail processing costs are considered volume-
variable costs since changes in mail volume
directly affect the number of hours clerks and
mail handlers have to work. On the other
hand, only a small fraction of postmaster
salaries are considered volume-variable costs
since these cost are, for the most part, unaf-
fected by mail volume. In 2002, the latest
year available, volume-variable costs totaled
more than $38.4 billion, or about 57% of total
costs. The more than $29.0 billion remaining
costs are non-volume-variable and must be
borne by the combined revenue of all classes
of mail. In 2002, First-Class Mail, Priority Mail
and Standard Mail combined to provide 94%
of our volume and 90% of our contribution to
non-volume variable costs.
Compensation and Benefits
Operating costs fell $1,332 million in 2003
due primarily to pension reform and work hour
reductions. This decline in costs was tempered
by wage increases and increasing health
benefits cost for current and retired employ-
ees. Compensation and benefits make up
nearly 80% of our operating costs.
Compensation and benefits costs decreased
$2,614 million or 4.9% due to the retirement
system reform act and our reduction in work
hours. Our health benefits payments expense
for current employees were $325 million
greater than last year, driven mainly by
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20032002200120001999
billions of peices of First-Class Mail
millions of delivery points