H. MAIL RECOVERY CENTERS

The Postal Service operates two mail recovery centers (MRCs), located in St. Paul, Minnesota, and Atlanta, Georgia. These facilities are responsible for the final disposition of undeliverable-as-addressed (UAA) and non-returnable First-Class Mail and packages. During 2005 the MRCs processed approximately 3.2 million parcels and 79.7 million letters. The Postal Service works closely with mailer organizations to identify ways to provide better service and reduce operating costs. A direct result of this process is the Expanded Return Program, in which undeliverable items found in company-identifiable packaging are returned in bulk, as postage due, to 40 participating companies. In 2005 most mail received at the MRCs was determined to be of no obvious value and was destroyed. A total of 6.4 million of the remaining pieces of mail was returned to their rightful owners. The Postal Service continues to improve processes for identifying rightful owners of UAA mail.

I. CORPORATE CUSTOMER CONTACT

Corporate Customer Contact (CCC) provides customers with easy, toll-free access to a broad range of products and services through a comprehensive network of toll-free numbers. CCC handles a variety of general inquiries and transactions through 800-ASK-USPS. An additional toll-free number, 800-222-1811, handles international and domestic Express Mail inquiries, as well as domestic delivery and signature confirmation inquiries. CCC accepts customer orders for stamps through 800-STAMP-24, and also provides support for the majority of e-mail customer contacts through the Contact Us page on usps.com. The overall goal is to improve customer service, improve operating efficiency, decrease general information calls to local offices, and increase revenue. The CCC network has centers in Denver, Colorado; Orem, Utah; Jacksonville, North Carolina; and Columbia, Maryland. This contact center network responds to queries ranging from general information, such as mailing rates, hours and locations of local Postal Service facilities, and service problems, to stamp orders, track and confirm inquiries, and technical problems related to usps.com.

B. Mail Volume and Service Performance

1. Mail Volume

The Postal Service contracts with Global Insight, Inc., to provide ongoing economic analyses and projections and uses those forecasts in developing the annual Postal Service Integrated Financial Plan. In developing the revenue and volume forecasts of its 2006 Integrated Financial Plan, the Postal Service relied on what was Global Insight's projection, dated July 2005. Based on Global Insight's forecast, the Postal Service is planning for slow growth in both economic output and aggregate demand in 2006 in an economic environment less strong than that of 2005. Further, as projected by Global Insight, gross domestic product (GDP) growth will moderate to an annualized rate of 3.1 percent in 2006.

Postage rates increased on January 8, 2006, as required to meet the 2006 escrow funding obligation of P.L. 108-18. As recommended by the Postal Rate Commission and as approved by the Postal Service Board of Governors, rates for most mail classifications will increase by 5.4 percent while rates for all other mail classifications will be either slightly more or slightly less than that amount. In response to this first rate increase in 4 years, total volume growth is expected to slow even as overall revenue increases. Standard Mail again is expected to contribute the greatest share of volume growth, while First-Class Mail volume, particularly single-piece letter volume, will continue to decline.

Mail volume is positively affected by economic growth. Economic growth slowed slightly in 2005 after a strong 2004. In July 2005 Global Insight, Inc. projected 2005 growth in real GDP at 3.7 percent, following 4.6 percent growth in 2004. Economy-wide retail sales, an economic indicator for Standard Mail and workshare First-Class Mail, grew 5.0 percent in 2005 but are expected to slacken somewhat to 2.5 percent in 2006. Volatile energy prices, the cooling of the housing market, rising interest rates, and American auto manufacturers' elimination of price incentives are expected to reduce growth in spending on durable goods. A projected slowdown of retail sales in 2006 leads the Postal Service to project a lower growth rate for Standard Mail volume and to project a small decline in workshare First-Class Mail volume.

Employment has been an indicator for single-piece First-Class Mail volume. For many years now, despite increased total employment and strengthened economic growth, single-piece First-Class Mail volume has declined. The current decline in single-piece mail relates to the weakness of the economy, the absence of new hard-copy billing and statement applications, and electronic diversion of bills and statements. Future 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 in employment projected by Global Insight will not drive volume increases sufficiently to overcome the negative impacts of electronic diversion. The Postal Service is projecting a continuance of the multiyear downward trend in First-Class Mail volume despite the slight increase in 2005.

After 4 consecutive years of decline, Priority Mail volume rebounded in 2005. This rebound is likely the result of several factors. Private sector competitors have increased their prices while the Postal Service has kept its prices stable. Moreover, private sector competitors have instituted and increased surcharges to cover higher costs in such areas as delivery to residential customers, delivery to rural customers, and fuel. Concurrently, the Postal Service has made Priority Mail service easier to use by introducing the flat-rate box and by bringing the Post Office to the customer with online postage and Carrier Pickup service. The rate increase is expected to level Priority Mail volume growth in 2006. Express Mail volume also experienced a rebound in 2005, growing 2.5 percent after 4 years of declining volume. The 5.4 percent price increase is expected to reduce Express Mail volumes by 2.7 percent in 2006. Technological and demographic changes continue to retard any growth in Periodicals volume. The growth projected in Package Services is based on projected increases in Bound Printed Matter and Media Mail volumes. The Postal Service expects Parcel Post volumes to decline in 2006.