Copyright 1999 Federal News Service, Inc.
Federal News Service
MARCH 4, 1999, THURSDAY
SECTION: IN THE NEWS
LENGTH:
2622 words
HEADLINE: PREPARED STATEMENT BY
DONNA E.
PATTERSON
DEPUTY ASSISTANT ATTORNEY GENERAL
ANTITRUST DIVISION
U.S.
DEPARTMENT OF JUSTICE
BEFORE THE HOUSE GOVERNMENT
REFORM COMMITTEE
POSTAL SERVICE
SUBCOMMITTEE
SUBJECT - H.R. 22, "THE POSTAL MODERNIZATION
ACT OF 1999"
BODY:
I am pleased to be here this
morning to present the views of the Antitrust Division on H.R. 22, the Postal
Modernization Act of 1999. My written statement and remarks here this morning
present the views of the Antitrust Division and do not purport to address issues
outside of our areas of expertise. Therefore, the Division's comments should not
be read as reflecting the position of the Department of Justice or the
Administration with respect to overall postal reform. At the
outset, I would like to provide a brief overview of the antitrust laws of the
United States and then turn to thoughts about the Postal Service and some
thoughts about H.R. 22.
THE ANTITRUST LAWS OF THE UNITED STATES
I would
like to start by discussing the purpose and scope of the antitrust laws. For
over a century, the United States has committed itself to protecting free and
unfettered competition in the vast majority of markets in the economy. The
Sherman Act, passed in 1890, has been called the Magna Carta of free enterprise.
In general, the United States operates a free-market economy subject to the
antitrust laws. Time and again, relying on free-market competition has allowed
consumers numerous benefits, including more innovation, more choice and lower
prices than that of economies where free competition has been limited.
The
main provisions of the Sherman Act are Section 1 and Section 2 of the Act, and
they are, in conjunction with Section 7 of the Clayton Act, the primary
antitrust enforcement tools. Section 1 of the Sherman Act prohibits contracts
and conspiracies in restraint of trade. Section 2 of the Sherman Act prohibits
monopolization or attempts to monopolize. Section 7 of the Clayton Act prohibits
mergers or acquisitions that may tend to substantially lessen competition. Let
me spend just a little more time on the types of activity that may violate these
sections of the antitrust laws.Collusion, which means that firms are agreeing
with each other to restrain competition among themselves, is a violation of
section 1 of the Sherman Act. It virtually always results directly in inflated
prices to consumers and denial of choices in the marketplace; indeed, that is
its purpose. The most common of these agreements are agreements to fix prices,
agreements to allocate markets, and agreements to boycott particular customers,
suppliers, or competitors. Price fixing includes not only agreeing on the
specific price, but also agreeing to increase or depress price levels, or
agreeing to follow a formula that has the intended effect of raising or
depressing prices or price levels. Allocation of markets includes not only
agreeing to divide up geographic areas to avoid competition, but also agreeing
to divide up customers or suppliers within an area, or agreeing to divide up a
sequence of bids. Group boycotts include any agreement among competitors that
they will deal with their customers or their suppliers only on particular terms.
A second type of antitrust violation is monopolization or attempting to
monopolize, which violates section 2 of the Sherman Act. Under section 2, it is
not necessary to prove an agreement. One firm can illegally monopolize by
itself. But section 2 monopolization cannot be proved just by showing that a
firm has engaged in restrictive conduct. The law also requires proof that the
firm has a monopoly and that it engaged in the restrictive conduct in order to
acquire or maintain the monopoly. Or, in the case of attempted monopolization,
it must be proved that the firm stands a "dangerous probability" of obtaining a
monopoly as a result of the restrictive conduct. To prove "dangerous
probability," the courts generally require, for starters, that the firm involved
in the restrictive conduct already has a quite large market share. And even a
large market share might not be enough, if other facts indicate that the
restrictive conduct is unlikely to succeed in creating a monopoly.
In
addition to prohibiting anticompetitive collusion and monopolization, the
antitrust laws also prohibit anticompetitive mergers and acquisitions. A merger
or acquisition that may substantially lessen competition in a product market and
geographic market violates section 7 of the Clayton Act. Under Clayton Act
merger review, the principal focus is whether the merger would change the
incentives and ability of competitors to such a degree that competition would be
substantially lessened. The remedy for a merger that violates the Clayton Act
typically is to sue to stop the merger, or to insist that it be modified to
remove the cause for antitrust concern.
The Division analyzes mergers
pursuant to Horizontal Merger Guidelines developed jointly by the Department of
Justice and the Federal Trade Commission (the Antitrust Division shares civil
antitrust enforcement responsibility with the Federal Trade Commission). The
analysis is aimed at determining whether the merger is likely to create or
enhance market power, or to facilitate the exercise of market power, in any
relevant market. Market power is the ability of a firm or group of firms to
raise the price they charge to customers -- or to lower the price they pay to
suppliers -- a small but significant amount without being defeated by
competitive responses by other competing firms.
PAST JUSTICE DEPARTMENT
VIEWS ON POSTAL ISSUES
Since the enactment of the Postal Reorganization Act
of 1970, the Department has engaged in an active program of competition advocacy
with respect to postal issues. In appearances before the Rate Commission and in
various Executive Branch communications, the Department has challenged efforts
by the Postal Service to expand the scope of the protections afforded under the
Private Express Statutes. We have suggested the need for a comprehensive review
of competition in domestic and international markets for mail services, noting
the USPS's expansion into competitive markets and the many ambiguities
surrounding its legal status under the Private Express Statutes. These are some
of the issues we have addressed:
- In 1977 the Department of Justice issued
a report on the Private Express Statutes which examined the basis of the postal
monopoly and suggested competitive alternatives.
- In 1979 the Antitrust
Division submitted comments to the Postal Service on the competitive impact of
its regulations and urged the repeal of regulations treating"data processing
materials" as within the scope of the term "letter" as used to delineate the
scope of the postal monopoly.
- In 1986 the Antitrust Division prepared
comments urging the USPS to suspend or limit its International Priority Airmail
Service pending development of a factual record adequate to ensure against
anticompetitive cross-subsidization; in a separate proceeding the Antitrust
Division urged the USPS to reject proposed rules that would restrict the ability
of remail services to compete for international mail traffic. - In 1988 the
Antitrust Division submitted comments critical of the USPS proposal for
modifications to the terminal dues system for delivery of international mail.
- In 1991 the Antitrust Division reiterated its opposition to the USPS
proposal for modifications to the terminal dues system.
- Most recently,
the Department of Justice prepared written comments in response to Chairman
McHugh's request for views on the antitrust and competition policy provisions in
H.R. 22. Our August 1998 letter continues to have general application to H.R.
22, notwithstanding modifications that may have been made to the bill currently
under consideration.
Last year we also took an active role in urging support
for a legislative amendment transferring responsibility for international postal
policy from the USPS to the State Department.
The President signed the
measure into law, thus formalizing the end of the USPS' direct representation of
US interests at meetings of the Universal Postal Union, the international
standards-setting body.The Department's position has not wavered on key
competition policy issues affecting domestic and international mail. In the
years since the reorganization of the United States Post Office, we have been
critics of attempts by the USPS to use its regulatory authority to expand the
scope of the statutory protections afforded by the Private Express Statutes, and
we have opposed efforts to erect restrictions on competition in international
mail services.
Furthermore, the Department takes the firm position that
statutory exceptions to the federal antitrust laws should be avoided whenever
possible. Federal competition policy objectives are best served when the federal
antitrust laws are applied uniformly, rather than allowing them to be distorted
to give special protections to certain classes of competitors or to selected
industries or economic sectors. We believe that Congress should create
exceptions to the antitrust laws only in the exceedingly rare instances when the
government's strong interest in preserving competition is outweighed by a
compelling and irreconcilable social policy objective, and that even in those
rare instances the exception should be as narrowly drawn as possible.
THE
PROPOSED LEGISLATION
Until recently, there has not been serious legislative
focus on possible modernization of the United States Postal Service since the
enactment of the Postal Service Modernization Act of 1970. Given that almost
three decades have passed, with accompanying technological and other changes, it
is not surprising that thought would again be given to whether changes to the
regulatory system in which the Postal Service operates are appropriate.
In
broad overview, the Postal Service now engages in a number of activities which
can be considered competitive. For example, there are a number of options for
people to send material to a recipient quickly (that is within 1 or 2 days),
typically referred to as express mail. At the same time, it appears unlikely
that other entities currently possess the infrastructure necessary to compete
for general first- class mail delivery at the size and scope necessary to
preserve universal service of mail delivery.
Given these competing
observations, the question for policy makers is whether an acceptable system can
be devised to put the Postal Service on roughly the same footing as other
competitors in those areas in which it faces competition. Such a system should
ensure that the Postal Service has neither inherent advantages nor disadvantages
over other competitors, while ensuring that the Postal Service has the ability
to efficiently meet the requirements of the universal service obligation and
provide the service for which they do not face competition.
This legislation
recognizes that certain of the activities currently engaged in by the Postal
Service, such as express mail, are subject to competition. Other services, such
as regular first class mail, retain an important universal service policy
dimension and are not subject to full competition at this point in time. The
legislation attempts to deal with this dichotomy by treating the competitive and
monopoly services differently.
Under the legislation, price regulation on
competitive products is limited substantially, requiring only that the prices
established by the Postal Service cover the direct and indirect postal costs
attributable to such products. Competitive products collectively must bear at
least an equal proportional mark-up for institutional costs as do all
non-competitive and competitive products combined. The rationale behind such a
requirement -- that the Postal Service should not be allowed to subsidize its
competitive activities by loading up its overhead costs in the noncompetitive
category of products, for which it earns a guaranteed return -- is a legitimate
competitive concern of cross-subsidization. At the same time, the intent of the
legislation is that as long as the cross-subsidization is avoided, the Postal
Service will have the same freedom to price its competitive goods and services
as its competitors. An important corollary to this structure is that the intent
of the legislation is to subject the Postal Service to the antitrust laws for
activities related to non- monopoly products.
This structure seems to place
the Postal Service closer to equal footing with its competitors with respect to
competitive products. It allows greater flexibility to the Postal Service while,
at the same time, subjecting it to the same antitrust laws that its competitors
face. It provides more pricing flexibility to the Postal Service while
attempting to ensure that inappropriate subsidization does not occur. Of course,
one of the keys in implementing such a regulatory pricing system will be to
ensure that direct and indirect costs are appropriately taken into account.
With respect to services for which the Postal Service remains a monopoly
provider, the legislation revises the price regulation method, going from a
cost-based system to a price-cap regulatory system. In general, price-cap
regulation tends to have advantages over a pure cost-based system in many
instances. The prime concern with a cost-based system is that the incentives for
cost control are seriously lacking and often inefficiency prevails. In a
price-cap system, on the other hand, there is more of an incentive for
attempting to lower the cost of the provision of the regulated services, since
cost savings can be retained by the entity subject to the price-cap regulation.
At the same time, since the mere increase in costs would not subject rates to
increases, there is likely to be less of an incentive to attempt to misallocate
costs from the competitive services to the monopoly services.
I would like
to turn now to comments on two specific provisions of the legislation, section
305, "Unfair Competition Prohibited" and section 603, "Equal Application of Law
to Competitive Products." Section 305 appears to create a regulatory regime
pursuant to which the Postal Regulatory Commission would prescribe regulations
to enforce statutory requirements that the Postal Service not, among other
things, create any competitive advantage for itself through regulation or any
agreement. We would like to discuss this section with the subcommittee. We are
somewhat concerned that the standards contained in this section appear to
diverge from the antitrust laws, and about the availability of different forums
for addressing the same conduct. It could be possible that legitimate and
procompetitive business practices may be inhibited by this section. It may be
that our concerns can be resolved by additonal discussion. Section 603 would
require the Department of Justice to prepare a comprehensive report identifying
Federal and State laws that apply differently to products of the Postal Service
in the competitive category of mail and similar products provided by private
companies. The Department of Justice is not an appropriate agency for such an
assignment. We are a law enforcement agency and have neither the resources nor
the expertise with State law to conduct such a study. We are concerned such a
requirement would require resources to be taken from antitrust law enforcement
and therefore detract from the appropriate enforcement of the antitrust laws. We
respectfully request that if this reporting requirement is retained as the
legislation goes forward, the job be assigned to a more appropriate agency.
CONCLUSION
Competition principles are at the core of the American
economy and should be maximized to the fullest extent possible in
reform legislation. We look forward to continuing to work with
the Subcommittee on the important issue of postal reform.
END
LOAD-DATE: March 6, 1999
