Terminal dues are payments made to a destination country for the cost of delivering international mail. As these costs have a direct influence on international postage rates, the Postal Service worked together with the Department of State, in consultation with U.S. stakeholders, to develop positions that will ensure universal mail service at affordable rates. The 2004 UPU Congress adopted a new terminal dues system that will provide better cost-coverage for inbound mail, while managing costs for mail exported by the Postal Service to countries with high postage rates. In addition, the UPU Terminal Dues Action Group finalized a pay-for-performance program, which beginning January 1, 2005 will link terminal dues to the quality of letter post service provided by industrialized countries. By introducing incentives for high quality performance and penalties for poor performance, this program should lead to improved quality in industrialized countries that generate an estimated 80 percent of the world's international mail.

An extraterritorial office of exchange (ETOE) is a facility established by a postal administration or operator in another country for commercial purposes. ETOEs seek to enter items into destinating postal networks under UPU terminal dues without exercising reciprocal universal service obligations. Nearly 20 postal operators have established 100 ETOEs worldwide, with the largest concentration in the United States and Europe.The policy of the United States maintains that the traffic ETOEs generate abroad should be treated as other mail traffic from commercial entities, e.g., entered into the U.S. domestic mailstream under domestic rates and conditions and not under UPU terminal dues. More than 20 countries have announced similar policies, and a resolution consistent with this policy was adopted at the 2004 UPU Congress.

D. Mail Volume and Service Performance

1. Mail Volume

The Postal Service believes that the 2005 economic environment will be relatively favorable, with growth in economic output and aggregate demand, and moderate inflation. Also, 2005 will be the third year since the last increase in postal prices. Led by Standard Mail, the Postal Service expects total mail volume to grow slightly. But despite favorable economic circumstances, the Postal Service thinks First-Class Mail volume will continue to decline.

Mail volume is positively affected by economic growth. After a period of relative stagnation following the recession of 2001, economic growth picked up in 2003 and 2004, leading to 4.5 percent growth in the Gross Domestic Product (GDP) in 2004, as projected by Global Insight, Inc. The Postal Service relied on Global Insight's August 2004 projection, which was the latest available when the Postal Service developed its 2005 Integrated Financial Plan. Based on Global Insight's forecast, the Postal Service expects GDP growth to moderate to an annualized rate of 3.5 percent in 2005.

Economy-wide retail sales, an economic indicator for Standard Mail and Workshare First-Class Mail, grew 5.1 percent in 2004, but is expected to slacken, as a result of increased energy prices and interest rates. Increased energy prices are diverting consumer expenditures from other goods and services, and higher interest rates will dampen demand for mortgage refinancing and reduce the amount of cash consumers have available for large purchases. In addition, the stimulus from federal income tax cuts in 2003 caused a spike in retail sales during 2004 that will not be repeated in 2005. The projected 2005 retail sales slowdown leads the Postal Service to project a lower growth rate for Standard Mail volume and to project a small volume decline in Workshare First-Class Mail.

Employment is an indicator for single-piece First-Class Mail volume. For many years now, single-piece volume has declined. Total First-Class Mail also continues to decline despite increased employment and strengthened economic growth. Economic growth has only attenuated the declines in First-Class Mail volume and revenue because technological alternatives to mail are impacting the demand for First-Class Mail negatively. Some of the current decline in workshare mail relates to the weakness of the economy, but the decline is related to the absence of new hard-copy billing and statement applications and electronic diversion of bills and statements. The decline slowed toward the end of the year, largely due to economic recovery, but any volume growth should be transitory as First-Class Mail volume will continue to be affected negatively by long-term trends in communication and payment technologies. The moderate growth projected in employment by Global Insight is not sufficient to drive volume increases that overcome the negative impacts of electronic diversion. The Postal Service is not projecting a reversal of the multiyear downward trend in First-Class Mail volume.