International Mail: Information on Changes and Alternatives to the Terminal Dues System

In 2016, USPS handled over 1 billion pieces of international mail—both inbound (received from other countries) and outbound (sent to other countries). International mail is governed by the UPU, which is comprised of over 190 member countries, including the United States. The UPU establishes remuneration rates, called terminal dues, for certain types of international mail exchanged between member countries. Questions have been raised about how current and future planned rates for terminal dues affect USPS and other stakeholders that are involved in international mail. GAO was asked to review the terminal dues system.

Among other issues, this report examines the financial effects of: (1) the current UPU rates for terminal dues and (2) the planned changes to those rates on USPS and mail stakeholders. GAO analyzed USPS's mail data for fiscal years 2012–2016; USPS's, the Postal Regulatory Commission's (PRC), and UPU's policies and documents; and applicable U.S. statutes. GAO interviewed USPS, PRC, and Department of State officials, and mail stakeholders, including U.S. companies, such as FedEx and UPS, and consultants. These stakeholders were identified through public comments made to PRC on proposals related to terminal dues. While not generalizable, the views provide illustrative examples.

This is a public version of a sensitive but unclassified report issued in August 2017. Information related to USPS's revenues, costs, and volumes for international mail that USPS has deemed proprietary has been omitted from this report.

The Universal Postal Union (UPU), a specialized agency of the United Nations, created the terminal dues system so that designated postal operators in member countries could compensate designated postal operators in other countries for delivering mail in those countries. GAO found that it is not possible to quantify the financial effects of the terminal dues system on various U.S. mail stakeholders because the data needed to conduct such an analysis are not readily available. However, stakeholders GAO spoke with and literature GAO reviewed described differing impacts of the terminal dues system on U.S. stakeholders. For example,

Analysis by the United States Postal Service (USPS)—the U.S. designated postal operator—found that the rates for inbound international terminal dues mail does not cover its costs for delivering that mail in the United States. As a result, USPS's net losses on this type of mail more than doubled between 2012 and 2016. In contrast, USPS analysis indicates that the rates for outbound international terminal dues mail has resulted in net positive revenues for USPS, which offset the losses from inbound terminal dues mail.

U.S. businesses that send outbound terminal dues mail may benefit to the extent that their costs to mail items to certain countries through USPS may be lower than the actual mail delivery costs in those countries.

U.S. consumers who receive imported products may pay lower mailing costs for products originating from low terminal dues rate countries.

Express consignment operators such as FedEx and the United Parcel Service said the terminal dues system creates a competitive disadvantage for them. Representatives from these companies said that they have difficulty competing for some international mail business because they cannot offer pricing as low as the postage based on the terminal dues rates offered by designated postal operators.

The UPU adopted increased terminal dues rates for member countries starting in 2018. GAO found that these planned changes could affect U.S. stakeholders differently, but the effects are also difficult to quantify because of limited information and forecasting variability. Nevertheless, stakeholders identified examples of the potential effects that the planned changes could have on them. For example:

For USPS, an increase in inbound terminal dues rates should reduce related losses for delivering this mail; although USPS's costs may increase from paying higher terminal dues rates to countries where USPS sends most of its outbound terminal dues mail.

U.S. businesses that send outbound terminal dues mail may have to pay higher postage to USPS to cover the increase in terminal dues rates to send mail to other countries, thus increasing costs to them.

U.S. consumers who receive lower-priced imported products may experience a reduced benefit because of the higher terminal dues rates for inbound mail.

The increased rates for inbound terminal dues mail may allow rates offered by express consignment operators to become more competitive as they may be able to offer their mail products at more comparable costs.

In fiscal year 2016, the United States Postal Service (USPS) handled  over 1 billion pieces of international mail—either “inbound” mail that was  sent to the United States from foreign countries or “outbound” mail that  was sent to foreign countries. The movement of international mail is  facilitated by the Universal Postal Union (UPU), a specialized agency  within the United Nations that includes over 190 member countries. UPU  member countries designate postal operators, which must collect, receive  and deliver mail to and from other countries at set rates. These rates for  letter mail are called “terminal dues.”

Questions have been raised regarding these dues and the overall effect  of the UPU’s terminal dues system on USPS and other U.S. stakeholders,  such as domestic e-commerce businesses and consumers. Specifically,  some have argued that the current terminal dues rates USPS receives  from other countries may not cover USPS’s costs to deliver some mail  from certain countries or may be less than the postage charged to a  domestic U.S. customer for similarly sized mail. For these reasons, some  argue that this system may create competitive disadvantages for some  businesses such as:  1.  express consignment operators (ECO)—such as FedEx and the  United Parcel Service (UPS), which compete with USPS and  designated postal operators for some international business—and  2.  U.S. businesses that compete with foreign businesses that send mail  under the terminal dues system (or “terminal dues mail”).

While UPU terminal dues rates will increase starting in 2018, some  stakeholders have questioned if these changes will be sufficient to  address the competitive disadvantages created by the terminal dues  system. Not all international mail is subject to the terminal dues system.  Mailers can use alternatives, such as USPS expedited mail for inbound  and outbound international mail.

You asked us to review issues related to the UPU’s terminal dues system.  This report describes the financial effects on domestic stakeholders of the  following: (1) the rates under the current UPU terminal dues system, (2)  planned changes to those rates, and (3) alternatives to the terminal dues  system.

To describe the effects of the current UPU terminal dues system on  stakeholders, we first identified the relevant stakeholders affected by  terminal dues based on our reviews of comments submitted to the Postal  Regulatory Commission (PRC) on proposals related to terminal dues for  the 2016 UPU congress, as well as interviews with USPS, PRC,  Department of State (State), and industry consultants. We reviewed six  economic models and analyses that estimated effects of the current  terminal dues system on various stakeholders. We determined that each  of these analyses appropriately include, though with certain limitations,  the key elements of an economic analysis.

To determine the current rates under the UPU’s terminal dues system  and the effects of these rates on selected stakeholders, we analyzed  USPS data and reports on inbound and outbound international mail,  including volume, weight, costs and revenue from fiscal years 2012  through 2016 and UPU information on the current terminal dues system.  We assessed the reliability of USPS’s data on the volume, costs and  revenue for international mail by reviewing documentation related to how  the data are collected and processed. We found these data to be  sufficiently reliable for the limited purpose of presenting this descriptive  information. We reviewed federal statutes, PRC reports, USPS and UPU  mail manuals, and other studies on international mail and terminal dues  impacts. We also interviewed stakeholders such as USPS officials,  representatives from ECOs and U.S. businesses, and consultants.

To assess the effect of planned changes to the current terminal dues  system on domestic stakeholders, we analyzed UPU documents detailing  the planned changes to the terminal dues system. We reviewed  estimates of the financial effects of the planned changes to the terminal  dues system prepared by USPS and others. USPS based its estimates  on information from the UPU on the changes and USPS’s historical  revenues, costs, and volume of terminal dues mail.

To describe alternatives to the terminal dues system and estimate the  effects of those alternatives on domestic stakeholders, we reviewed  USPS documents, such as:

USPS’s agreements with other designated postal operators, and

PRC’s documentation of its reviews of USPS’s bilateral and  multilateral agreements and of USPS’s international mail products.

Likewise, we analyzed USPS’s revenue, cost, and volume information  from fiscal years 2012 through 2016 on alternatives to the terminal dues  system. We assessed the reliability of USPS’s information on the  volume, costs and revenue associated with its alternatives to the terminal  dues system for international mail by reviewing documentation related to  how the data are collected and processed. We found this information to  be sufficiently reliable for the limited purpose of presenting this descriptive  information.

For all of our objectives, we interviewed USPS, PRC and Department of  State (State) officials, representatives of nine U.S. businesses or  business associations affected by terminal dues, and three consultants  for their views. We selected the businesses and consultants based on  published reports documenting their knowledge of international mail and  terminal dues issues, recommendations from stakeholders interviewed  and comments submitted to PRC dockets soliciting public comments prior  to the 2016 UPU congress. The views of these interviewees are not  generalizable but illustrative of the issues faced by stakeholders affected  by the terminal dues system. We also applied standard economic  principles to describe effects on domestic stakeholders. For more details  on our scope and methodology, see appendix I.

The performance audit on which this report is based was conducted from  May 2016 to August 2017 in accordance with generally accepted  government auditing standards. Those standards require that we plan  and perform the audit to obtain sufficient, appropriate, evidence to provide  a reasonable basis for our findings and conclusions based on our audit  objectives. We believe that the evidence obtained provides a reasonable  basis for our findings and conclusions based on our audit objectives. We  subsequently worked with USPS from June to October 2017 to prepare  this public version of the original sensitive report. This public version was  also prepared in accordance with these standards.

This is a public version of GAO-17-571SU that we issued in August 2017.  This report excludes information that was deemed to be proprietary by  USPS and that must be protected from public disclosure. Therefore, this  report omits proprietary information and certain data related to USPS’s  revenues, costs and volumes for international mail. Although the  information provided in this report is more limited in scope, it addresses  the same objectives as the sensitive report and the methodology used for  both reports is the same.

In fiscal year 2016, USPS handled over 1 billion pieces of international  mail, which included over 976 million pieces of letter mail. According to  USPS statistics, about 371 million pieces of letter mail (38 percent) was  sent to other countries or “outbound” mail, while the majority of  international letter mail, 605 million pieces (62 percent), was sent to the  United States from other countries or “inbound” mail.

UPU member nations agree to provide a “single postal territory” for  international mail, meaning designated postal operators must deliver  inbound international mail to the recipient in their own country (i.e.,  provide universal service). The UPU created the terminal dues system in  1969 to establish a means for paying destination countries’ designated  postal operators for the cost of delivering the mail that originated in  another UPU member country. UPU member countries vote every 4 years  on the annual payment rates.

The current terminal dues system was designed as a single rate structure  for the delivery of letter mail, regardless of shape (i.e., letters, flats or  packets). The system takes into account that this rate varies based on  UPU’s estimation of each nation’s postal cost structure and economic  development. As such, the UPU divides its member countries into country  groups based on the UPU’s “postal development indicator,” which is  largely based on gross national income per capita and attempts to factor  in the cost to deliver a letter based on statistics from the United Nations,  the World Bank, and the UPU. Designated postal operators from  transitional (formerly called “developing”) countries generally pay a lower  terminal dues rate for their mail to be delivered by designated postal  operators in target (formerly called “industrialized”) countries (see app. II  for a list of the countries in each UPU country group). UPU limits the rates  through caps and floors to minimize year-over-year variability.

In addition to USPS, numerous domestic stakeholders are affected by the  terminal dues system, for example:

ECOs, such as FedEx and UPS, that collect, transport, and deliver  documents and packages sent to the United States from other  countries. As they are not designated postal operators under the  UPU, ECOs are not part of the terminal dues system and do not have  access to terminal dues rates.

Some U.S. businesses that compete with foreign companies for U.S.  customers, including large e-commerce businesses, such as Amazon,  and much smaller e-commerce related businesses, as well as U.S.  businesses that obtain goods from other countries via international  mail.

U.S. businesses that send mail to other countries—such as business  correspondence, advertisements, or e-commerce packages—and that  have an interest in paying the lowest postage rate.

U.S. consumers—mainly individuals who send or receive  correspondence, gifts, or commercial goods through international  mail.

Government also plays a role in the terminal dues system. The  Department of State (State) represents the United States to the UPU, and  State officials participate in the negotiations at the UPU congress, held  every 4 years, that determine terminal dues rates. State also solicits input  on terminal dues and other international postal issues through a Federal  Advisory Committee on international mail that consists of USPS and PRC  officials, other federal agencies with jurisdiction over related issues (e.g.,  the U.S. Department of Commerce), and representatives from affected  businesses.

PRC also has a role in international mail issues including terminal dues,  USPS bilateral agreements, and USPS international mail products. First,  State is required by statute to request PRC’s views on terminal dues  proposals before they are adopted by the UPU every 4 years to ensure  that the U.S. positions on the relevant UPU proposals are consistent with  PRC’s standards and criteria for regulating USPS rates (or if not  consistent, provide a foreign policy or national security interest  justification). State then is required to ensure that the terminal dues  proposals for market-dominant mail are consistent with PRC’s views  unless there is a foreign policy or national security concern. Second,  PRC is required by statute to review USPS proposals for international  mail products to ensure compliance with legal requirements, such as  requirements relating to cost coverage. Third, PRC has also sponsored  studies on terminal dues issues in recent years.

USPS officials stated that designated postal operators send mail to USPS  for delivery to U.S. addresses under the UPU’s Universal Postal  Convention. Designated postal operators pay for the collection and  transportation of mail to the United States and hand off mail to USPS at a  USPS International Service Center (ISC) for sorting and final delivery  (see fig. 1). USPS presents the inbound mail to U.S. Customs and Border  Protection (CBP) for inspection at the ISC. Once the mail clears CBP  inspection, the mail enters USPS’s domestic mail stream for delivery. The  process is reversed for outbound international mail collected by USPS for  delivery to foreign addresses.

Current Terminal Dues Rates Benefit USPS despite Revenue Losses on Inbound Mail and Have Mixed Effects on Other U.S. Stakeholders

The Current Rates Benefit USPS, as Increasing Gains from Outbound Mail Outweigh the Increasing Losses on Inbound Mail

According to USPS analysis, USPS has generated positive net revenue  from all terminal dues mail, which has increased from fiscal year 2012 to  fiscal year 2016. This occurred even though losses from inbound mail  more than doubled from $66 million to $135 million from fiscal year 2012  to fiscal year 2016 (see fig.2). Net revenue for outbound terminal dues  mail increased during the same time period.

To understand this trend of declining net revenue for inbound terminal  dues mail, it is important to understand the differences in inbound versus  outbound mail. As USPS is the designated postal operator for the United  States responsible for ensuring universal service under UPU agreements,  it is required to accept and deliver all mail tendered to it from other  designated postal operators (inbound mail), including mail sent under the  terminal dues rates adopted by the UPU.

USPS’s recent losses on inbound terminal dues mail are due in part to  the shift in this mail from primarily letters and flats to more packets (which  are more costly for USPS to handle and deliver)—which outpaced the  corresponding terminal dues revenue earned by USPS (see fig. 3).

These losses are exacerbated by the rising volume of inbound terminal  dues mail. According to USPS, there has been an 86 percent increase in  all inbound terminal dues mail between fiscal year 2012 and 2016— including a 19 percent increase between fiscal year 2015 and 2016  alone—with much of the increase attributable to international e- commerce. E-commerce mail consists mainly of packets that are  heavier and irregular (see fig. 4 for examples). Most inbound letter mail to  the United States in fiscal year 2016 was “packets,” defined by the UPU  as small packages that weigh no more than 2 kilograms (about 4.4  pounds), often generated by e-commerce. USPS officials stated that  packets generate higher costs as USPS’s delivery and processing costs  for packets are higher than they are for letters. The current terminal dues  system does not distinguish mail based on shape, and there is no  separate rate for packets. A recent report commissioned by PRC found  that the current terminal dues system, by reducing the price of  international packet mail below what it would be without the system, is  responsible for increasing the demand (and hence volume) of packets  sent through USPS. According to the report, this increase in terminal  dues packets reduces the demand for other types of international mail  and ECOs.

As mentioned above, losses occur because USPS’s costs to deliver  inbound terminal dues mail are higher than the terminal dues revenues  for that mail. Specifically, PRC has recognized that terminal dues have  not covered USPS’s costs to deliver inbound letter mail since fiscal year  1998 and has reiterated this recently. USPS recently stated that the  failure to cover USPS’s costs for inbound mail was caused by the terminal  dues system. For example, currently, USPS is paid between $1.13 and  $1.87 in terminal dues to deliver a 10-ounce packet from a developing  country, an amount that does not include any additional surcharges for  tracking and other features. Conversely, USPS officials told us that the  published domestic rates for a 10-ounce piece of mail range from $1.61 to  the highest commercial rate of $3.46. However, comparing these  products is complicated, because they offer different features. According  to USPS officials, packets sent under the terminal dues system do not  include any tracking and have a delivery time of up to 3 weeks from some  countries, while all USPS domestic mail products include tracking and  have delivery times from as short as one day to an average of 2 to 3  days. In addition, 85 percent of USPS domestic mail receives discounted  rates for mail that is entered in bulk and prepared in a way that reduces  USPS’s costs, including barcoding, presorting, and being entered into  USPS’s system closer to its final destination.

Net Revenue Increases for Outbound Terminal Dues Mail

USPS reports show that net revenue for outbound terminal dues mail  increased from fiscal year 2012 to fiscal year 2016. The increased net  revenue allowed USPS to more than offset its losses from inbound  terminal dues mail. The increase in net revenue came despite a decrease  in outbound terminal dues mail volume over the same period.

The Current Terminal Dues System Also Benefits U.S. Businesses That Rely on Outbound International Mail and U.S. Consumers

According to stakeholders we interviewed as well as our economic  analysis, businesses that send outbound international mail and U.S.  consumers also benefit from the current terminal dues system similar to  USPS (see table 1).

These stakeholders benefit for the following reasons:

U.S. businesses that send outbound terminal dues mail, for example,  e-commerce shippers or magazine publishers, may pay lower postal  rates than what would be set by the destination country’s designated  postal operator to deliver that mail. This is the case for mail sent to  many developed countries, such as in Europe, where most U.S.  outbound international mail is sent. In this case, the postage charged  by USPS to the business reflects the relatively low terminal dues rate  paid by USPS to those designated postal operators, rather than a  higher rate that better reflects the designated postal operator’s  delivery costs.

U.S. consumers also benefit from the current terminal dues system.

As described above, U.S. consumers have spurred a significant  increase in inbound international mail, especially from Asia where  terminal dues rates are lower than USPS’s costs, which contributes to  low shipping prices for U.S. consumers. For example, the USPS’s  Office of Inspector General (OIG) conducted a case study in 2015 that  found that five low-cost items shipped from China cost about $1.60  per item in shipping charges, while equivalent published domestic  postage for the same items cost between $2.04 and $2.22 per item,  depending on their exact weight. Studies by the USPS OIG and  WIK-Consult GmbH (WIK Consultants) have found similar benefits for  consumers from the current terminal dues system. U.S. consumers  may also see the same kind of benefit from lower mailing prices as do  U.S. businesses that send terminal dues mail to certain outbound  countries, such as in Europe, that have higher delivery costs than the  terminal dues paid to them by USPS.

Current Terminal Dues System Results in Competitive Disadvantages for Some Stakeholders

Despite creating some benefits for some U.S. stakeholders, the current  terminal dues system also creates competitive disadvantages for other  U.S. stakeholders (see table 2).

The terminal dues system puts ECOs at a disadvantage because  according to representatives from ECOs we spoke with, their volume for  international items that are similar to those currently shipped at terminal  dues rates is low, and they cannot compete on price with designated  postal operators. Instead, they compete using other features such as  tracking and delivery speed. Businesses overseas, like e-commerce  companies such as Alibaba, can use the terminal dues system as a low- cost alternative to ECO service for items which have much slower  delivery standards than offered by ECOs. This disadvantage is especially  pronounced when ECOs compete with designated postal operators for  business from countries with relatively low terminal dues rates, such as  many countries in Asia.

U.S. businesses that compete with foreign companies that use inbound  terminal dues mail are also disadvantaged by the current terminal dues  system. Foreign businesses that send products from countries with low  terminal dues to U.S. consumers through USPS may have a competitive  advantage over domestic businesses, which may have to pay a higher  domestic postage. Representatives from two small U.S. businesses we  spoke with stated that the disparity between postage charges available to  foreign mailers under the terminal dues system versus the domestic  postage available to them was a significant factor in reduced sales in  recent years, although the disparity between postage charges is not the  only disadvantage they faced from foreign competition. We found this  outcome may be less of a competitive disadvantage for larger  businesses, such as Amazon, which may be able to obtain discounts on  the domestic mailing prices from USPS based on volume, presorting, and  other worksharing arrangements while smaller domestic mailers may not  be able to secure such discounts. Even with discounting, the domestic- mailing price may still be higher than the foreign-mailing price charged by  a designated postal operator a price that is based on, in part, a lower  terminal dues rate. However, USPS officials cautioned that such  comparisons are complicated because:  1.  Terminal dues rates do not include other costs, such as the cost of  collection, international transportation, and other costs that may be  included in the price charged to the foreign mailer by the designated  postal operator.  2.  Significant amounts of international mail are sent in large quantities  from foreign designated postal operators to USPS, making this mail  not analogous to USPS’s single-piece mail rates.  3.  U.S. commercial customers may pay non-published rates established  in negotiated service agreements that may be lower than USPS’s  single-piece published rates.

While we described above how different stakeholders are affected by the  terminal dues system, it is not possible to quantify the system’s impacts.  For example, according to USPS officials, while the current system has a  single rate for three shapes of terminal dues mail, USPS has over 3,000  rates for domestic mail, making rate comparisons of terminal dues mail  products to domestic mail products imprecise. In addition, the terminal  dues rate is a payment between designated postal operators, not the  price paid by the foreign mailer. This price information may not be publicly  available as designated postal operators in other countries might also  have non-published prices.

Planned Changes to Terminal Dues Rates Should Reduce USPS’s Losses and Could Affect Other Stakeholders

Changes Should Reduce USPS’s Losses from Terminal Dues System

Based on our analysis of the changes to the terminal dues system  recently adopted by the UPU and of USPS’s estimates of the financial  impact of those changes, increased terminal dues rates should help  reduce USPS’s losses for inbound mail. All terminal dues rates will  increase for inbound mail starting on January 1, 2018—especially for  certain countries, which will increase by 13 percent per year specifically  for packets. By 2021, all but the least developed countries will have the  same terminal dues rates for packets. As the majority of terminal dues  mail handled by USPS is inbound, the increase in revenue resulting from  higher terminal dues may likely more than offset the increase in USPS’s  costs that will result from increases in terminal dues rates to the countries  where most USPS outbound terminal dues mail is sent.

The UPU also created a new rate category for packets, in addition to a  new tracked-packet surcharge, which will increase USPS’s revenue. As  described previously, the current terminal dues rates do not distinguish  between letters, flats, or packets—even though packets are more  expensive to handle and deliver due to their irregular size and heavier  weight. This change should lead to higher terminal dues revenue for  USPS. In addition, the UPU adopted the Integrated Product Plan (IPP) at  the 2016 UPU congress; that, among other things, will require commercial  goods to be sent under the terminal dues system as packets. According  to USPS officials, this change could also increase terminal dues  revenues, as all commercial items will be sent via packets, which will  have higher terminal dues rates starting in 2018. However, decisions on  other aspects of the IPP are expected to be made at a special UPU  congress in 2018.

According to USPS projections, USPS will start earning positive net  revenues for inbound terminal dues mail as a result of these changes. As  terminal dues rates increase, USPS projections show that USPS will  cover costs for inbound terminal dues mail from the 15 countries that sent  most of the inbound terminal dues mail to the United States in fiscal year  2015. The State Department official who coordinated the U.S.  delegation to the 2016 UPU congress stated that these changes will  achieve the government’s goal of dramatically improving USPS’s cost  coverage for the delivery of inbound terminal dues mail, such as packets,  from China and other developing countries, when the changes take effect  in 2018.

However, other stakeholders we spoke with disagree on the extent of  improvement. While PRC staff officials stated that the UPU has made  some progress in closing the gap between terminal dues rates and  domestic rates for equivalent domestic mail, they also stated that there is  still a way to go to make the rates equivalent to each other. Similarly,  PRC’s Chairman stated that while the changes will improve USPS’s cost  coverage, they will not eliminate the negative impacts of the current  terminal dues system and may in fact exacerbate them over the 2018– 2021 period. In addition, he stated that while USPS projected that  terminal dues proposals in 2008 and 2012 would increase USPS’s cost  coverage for inbound terminal dues mail, the improvement was negligible,  casting doubt on the accuracy of USPS’s projections for the planned  changes for the 2018–2021 period. A consultant who has experience in  international mail issues stated that, given some assumptions about  changes in international mail volume, the terminal dues increases will still  not be equal to the delivery costs for domestic postage for inbound  terminal dues mail to countries such as the United States. He estimated  that the difference between the new terminal dues rates and equivalent  domestic postage for packets will be reduced from about 57 to 73 percent  (depending on the sending country) in 2016 to about 50 percent by 2021.

Changes Could Affect U.S. Stakeholders Differently, but Effects Are Difficult to Quantify

According to stakeholders we interviewed as well as our analysis of  UPU’s terminal dues rates, the projected increase in terminal dues rates  caused by the planned changes to the terminal dues system may  negatively affect U.S. businesses that send outbound terminal dues mail  and U.S. consumers (see table 3). U.S. businesses and U.S. consumers  that send mail to other countries will pay higher postage rates for terminal  dues mail, to the extent that USPS increases its prices to reflect the  higher terminal dues USPS must pay to designated postal operators.  However, increased terminal dues rates may still be less than the cost to  deliver that mail for designated postal operators in relatively high cost  countries, such as Norway and Germany. U.S. businesses and  consumers benefit from this disparity as the postage they pay USPS to  send mail to those countries is based on the terminal dues rates to those  countries, not the delivery costs, which may be higher. U.S. consumers  may also see shipping prices increase for inbound terminal dues mail, for  example e-commerce packets, to the extent that any increases in postage  charged to foreign mailers resulting from increased terminal dues rates  are passed along to U.S. consumers.

ECOs and U.S. businesses affected by inbound terminal dues mail  should become more cost-competitive due to the planned increased  terminal dues rates, although the planned changes may not eliminate all  of the existing competitive disadvantages (see table 4). A State  Department official stated that these new rates may still not fully cover the  cost of delivery in some countries with very high postal delivery costs,  potentially impacting ECOs’ competitiveness in those countries. A  representative from a small business that competes with overseas e- commerce businesses for U.S. consumers stated that any increase in  terminal dues would make his business more price-competitive with  foreign competitors. However, a representative from one small business  affected by inbound terminal dues mail we spoke with stated that his  business had already suffered due to the terminal dues system. He added  that other factors also make it harder to compete and therefore it would  be harder to recover even with higher terminal dues rates.

While these changes may have different effects on U.S. stakeholders, it is  difficult to quantify the future effects because of limited information and  forecasting variability. As a result, it remains to be seen what the effects  of these changes to this system will be on domestic stakeholders. USPS,  USPS OIG, PRC, and others have developed or adapted models and  analyses that try to show the economic impacts of the terminal dues  system on different stakeholders and estimate the impact of any changes  to that system. We analyzed six recent models and analyses—including  the USPS’s, USPS OIG’s, and PRC’s models—that describe either  different effects of the terminal dues system on USPS, all designated  postal operators, or other stakeholders. Some of these studies also try  to measure how terminal dues rate increases may affect these  stakeholders. Our review determined that these models and analyses can  help inform stakeholders about the different overall effects of terminal  dues. However, we also found that the analyses are limited in how they  can predict or describe the effect of the terminal dues system, in part due  to a lack of complete information on the following issues:  the volume of mail, including its type and weight, that flows between  each UPU member country; equivalent domestic postage rates that would be charged to domestic  mailers for service equivalent to inbound terminal dues mail;  the presence of alternative international mail agreements, such as  bilateral and multilateral agreements;  the number of U.S. businesses and consumers that receive or send  international mail covered by terminal dues rates;  the number and market characteristics of U.S. businesses that  currently compete with imported products that are sent under terminal  dues; how terminal dues rates and changes in those rates would affect  supply chains between businesses in the U.S. and other countries;  and,  the share of postage costs of U.S. businesses for outbound mail that  is covered by the terminal dues system and the proportion of total  business costs; how important postage and shipping costs are to total  costs of doing business, domestically and globally.

Our analysis also found that some of the models and analyses we  reviewed did not make adjustments to factor in some or all of these  potential mail-related changes, such as changes in:  volume of international mail reimbursed by terminal dues changes in  response to increases in terminal dues rates or changes in other  international mail products offered by USPS or express consignment  operators; monetary exchange rates, as all terminal dues are denominated in  Special Drawing Rights, a combination of five major currencies, which  all vary over time, introducing uncertainty to any projection of terminal  dues rates; and, other international trade issues, such as customs duties, tariffs, labor  costs, other shipping costs, and regulatory costs.

In the absence of models or analyses that take these factors into account,  it is difficult to quantify the impact of terminal dues rate increases on other  domestic stakeholders.

Alternatives to the Terminal Dues System Mainly Benefit USPS, While the Effects on Other Stakeholders Are Unclear

USPS Offers Several Alternatives to the Terminal Dues System for International Mail

Not all international mail is sent through the terminal dues system. USPS  officials and mail stakeholders told us and USPS data indicate that  mailers send a significant portion of U.S. inbound and outbound  international mail using the following alternatives: bilateral and multilateral  agreements, parcels, express mail service, and direct entry. USPS data  show that that while terminal dues as a percentage of inbound  international mail volume increased from about 50 percent in fiscal year  2012 to about 60 percent in fiscal year 2016, a significant portion of  international mail comes into the United States via these alternatives.

Each of these alternatives is described in greater detail below.

USPS negotiates bilateral and multilateral agreements for a  number of countries, wherein USPS and other designated postal  operators both pay higher rates for different mail products (inbound  and outbound) with desirable features not available for terminal dues  mail, such as tracking and faster delivery. For example, USPS is  party to the multilateral PRIME agreement, which gives priority  delivery and performance bonuses (paid in addition to terminal dues)  to mail from 31 countries. According to USPS officials, bilateral and  multilateral agreements have improved USPS’s financial position. In  reviewing these agreements, PRC has found that they improve  USPS’s financial position relative to what it would have been in the  absence of these agreements.

USPS offers products that provide UPU parcel service for both  inbound and outbound mail, which includes tracking, liability  insurance, and signature confirmation at delivery. Parcels are sent  under UPU parcel rates, which are higher than what USPS would  receive under the terminal dues system for comparable letter mail.  USPS also offers “e-Commerce Parcel,” a new parcel service  established by the UPU in 2016. The e-Commerce Parcel product is  aimed at the e-commerce marketplace and provides tracking, but no  liability or signature confirmation. Under e-Commerce Parcel,  designated postal operators determine the inbound delivery rates,  which are expected to be lower than parcel service due to the service  limitations. USPS officials stated that they are implementing the e- Commerce parcel service and reviewing its pricing strategy.

USPS also provides Express Mail Service (also referred to as EMS)  for both inbound and outbound international mail. Express Mail  Service products provide express delivery of documents and  merchandise, which take priority over other postal services and  include signature confirmation and liability insurance for damaged or  lost mail. Express Mail Service rates for inbound products can be set  by bilateral agreements or determined by the receiving designated  postal operator. During fiscal year 2016, inbound Express Mail  Service products included shipments from 149 countries, including  China, Japan, Korea, Canada, and France. Express Mail Service  products for outbound U.S. mail include Priority Mail Express  International service, a high-speed USPS mail service available to  certain countries and available at designated USPS facilities, and  Global Express Guaranteed service, a USPS international expedited  delivery service provided through an alliance with FedEx.

Mailers use direct entry as a way of accessing USPS domestic mail  services from foreign countries without sending the item through a  foreign designated postal operator. Under USPS’s Global Direct Entry  Wholesaler Program, third party companies, such as foreign e- commerce businesses selling products in the United States, send the  items to the United States as cargo that bypasses designated postal  operators, circumventing the terminal dues system entirely. Once the  items clear customs, they are entered to USPS’s system at domestic  postage rates. Some of these items are entered into USPS’s system  outside of USPS’s Global Direct Entry Wholesaler Program. For  example, we spoke with a representative of a U.S. company that  provides direct entry services for foreign mailers, preparing items for  easier entry through customs, for example by labeling items with  barcodes that describe the product, and for USPS by applying U.S.  domestic postage. The company representative stated that once the  items clear customs, the company transports the items to one of 140  USPS distribution points (i.e. USPS’s domestic mail processing  facilities) to facilitate timely and efficient delivery.

As we discuss in more detail later, these alternatives may offer various  benefits and disadvantages to customers that may choose them based on  a combination of price, available features, and speed of delivery.

Alternatives to the Terminal Dues System Mainly Benefit USPS and U.S. Consumers, While the Effects on Other Stakeholders Are Unclear and Difficult to Quantify

USPS officials stated that alternatives to the terminal dues system earn  increased net revenue for USPS, for example,

Rates negotiated as part of bilateral and multilateral agreements, UPU  parcel rates, and Express Mail Service product rates set by USPS are  higher than terminal dues rates; this difference means negotiated  rates provide better cost coverage and generate higher net revenues  than terminal dues rates.

Direct entry mail generates greater net revenue for USPS, because  shippers enter the mail directly into USPS’s domestic mail stream at  domestic postal rates. USPS also realizes operational efficiencies  from these alternatives due to mail entry and preparation  requirements, leading to lower USPS costs. Direct entry mail is  subject to the same preparation requirements as domestic mail  entered in bulk quantities, such as being presorted and entered close  to its final destination.

Although alternatives to the terminal dues system account for a significant  portion of international mail handled by USPS, terminal dues mail  continues to grow at a higher rate. From fiscal year 2012 to fiscal year  2016, the volumes of (1) USPS terminal dues mail, (2) mail covered by  bilateral and multilateral agreements, and (3) parcels increased, while  Express Mail Service volume decreased.

U.S. consumers may also benefit from all four alternatives due to faster  delivery than under the terminal dues system and from special features  such as tracking, especially for higher-value items. However, U.S.  consumers may pay more to use these alternatives given the special  features they offer.

The effects of the alternatives on ECOs are unclear. Representatives  from ECOs told us that USPS bilateral and multilateral agreement mail  products and Express Mail Service products enjoy certain advantages,  such as easier customs clearance, that make USPS’s products more  attractive to customers. However, the representatives added that the  effects of USPS bilateral agreements on their business are unclear,  because USPS considers the rates to be proprietary information that is  not publicly available. The representatives also noted that they did not  believe their products are able to compete directly with USPS bilateral  and multilateral mail products because the rates for these products are  based on comparatively low terminal dues rates. A 2015 USPS OIG study  found that ECOs’ rates are generally much higher than rates for USPS  bilateral agreement and direct entry products, therefore ECOs’ products  are not price competitive with USPS’s products. Express Mail Service  and parcel products are priced higher than terminal dues rates and offer  special features similar to those offered by ECOs, such as priority  shipping and tracking, making those products more attractive for higher  value and time sensitive items, and thus may compete with ECOs’  products.

The effects of the alternatives on other international mail stakeholders,  such as U.S. businesses that are affected by inbound or outbound  international mail, are also unclear. For example, USPS bilateral  agreements may increase mailer options by providing faster service and  more product features, all at a lower price that discourages competition  from ECOs. However, the full effects of bilateral agreements are unclear,  in part because these rates are not public. The extent that U.S.  businesses related to outbound mail have access to and use direct entry  options into other countries is also unclear. In addition, other non-postal  related factors such as monetary exchange rates and product prices  affect the competitiveness of U.S. businesses that are affected by  inbound or outbound mail could be more important than mailing prices to  their international competitiveness.

It is also difficult to quantify the effects of alternatives to the terminal dues  system because of limited information. The information needed to  determine the effects on domestic stakeholders from Express Mail  Service products and bilateral agreements are not publicly available, as  USPS regards this information as business proprietary. Effects on  stakeholders from direct entry mail are also unclear, in part because this  type of inbound mail may be difficult to distinguish from other domestic  USPS mail, and information on direct entry mail is not collected by USPS.  Use of alternatives also depends on terminal dues rates and other  factors, such as overall mail volume trends, and the models and analyses  we reviewed do not take these alternatives into account when modeling  international mail trends. For example, none of the models and analyses  we reviewed took into account bilateral agreements due to the lack of  publicly available information.

We provided a draft of this product to USPS, PRC, and the Department of  State for their review and comment. In USPS’s comments, reproduced in  appendix IV, USPS generally agreed with our findings, described the  impact of upcoming terminal dues changes, and emphasized that USPS  has been taking efforts to improve its cost coverage and collect more  revenue for international mail. In PRC’s comments, reproduced in  appendix V, PRC generally agreed with our findings. State did not provide  any formal comments. USPS also provided technical comments, which  we incorporated as appropriate. PRC and State did not provide any  technical comments.

If you or your staff have any questions about this report, please contact  me at (202) 512-2834 or rectanusl@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in appendix VI.

Appendix I: Objectives, Scope, and Methodology

This report describes the financial effects on domestic stakeholders of the  following: (1) the rates under the current UPU terminal dues system, (2)  planned changes to those rates, and (3) alternatives to the terminal dues  system. For all of our objectives, we interviewed officials at the U.S.  Postal Service (USPS), the Department of State (State), U.S. Customs  and Border Protection (CBP), and the Postal Regulatory Commission  (PRC); industry consultants; and selected mail stakeholders affected by  terminal dues. We selected stakeholders affected by terminal dues based  on our reviews of comments submitted to PRC on proposals related to  terminal dues for the 2016 UPU congress, as well as interviews with  USPS, PRC, State officials, and industry consultants.

To obtain background information and provide context for this report, we  reviewed relevant federal statutes and U.S. policies; documentation from  the UPU, State, USPS, USPS Office of Inspector General (USPS OIG);  and knowledgeable consultants. Relevant legal sources that we reviewed  include Title 39 of the U.S. Code and the 2006 Postal Accountability and  Enhancement Act. In addition, we reviewed the UPU constitution, UPU  general regulations, and UPU agreements reached at the 2016 UPU  congress, which define the terminal dues system. We reviewed  documents of State’s Advisory Committee on International Postal and  Delivery Services under the Federal Advisory Committee Act, including  minutes and proposals, and USPS and USPS OIG reports on terminal  dues and international mail flows. We also reviewed related studies by  third parties, including PRC-sponsored reports by Copenhagen  Economics on the economic impacts of terminal dues and other terminal  dues related reports. In addition, we reviewed GAO reports on related  postal issues, as well as relevant academic literature, industry journals,  books, and other publications, including news articles. We analyzed  available USPS information for fiscal years 2015 and 2016 on  international mail to and from the United States and to and from UPU- designated target and transitional countries to determine the most  significant mail flows. USPS information for inbound and outbound  international mail by country was only available beginning in fiscal year  2015.

To determine the current rates under the UPU terminal dues system and  the effects of these rates on selected stakeholders, we reviewed and  analyzed UPU documentation on terminal dues rates, and we identified  and interviewed affected domestic mail stakeholders to obtain their views  on the potential impacts of the current terminal dues system. We  judgmentally selected stakeholders through interviews with USPS, State,  PRC, and industry group officials and consultants and our review of mail  stakeholder comments submitted to PRC pursuant to PRC proceedings  on terminal dues and international mail related proposals and  agreements. In addition, to select business and consultant stakeholders,  we also reviewed published reports documenting their knowledge of  international mail and terminal dues issues. We interviewed USPS and  CBP officials and observed international mail processing by USPS and  CBP at two USPS International Service Centers (ISC). We applied  standard economic principles to describe effects of the current terminal  dues system on domestic stakeholders.

To describe the effects of the current terminal dues system on USPS  specifically, we reviewed USPS position papers, analyses, and reviewed  and analyzed terminal dues models and analyses showing the effects of  terminal dues, and reviewed UPU documents describing the terminal  dues system, relevant USPS OIG reports, and PRC proceedings and  Annual Compliance Determination Reports. We analyzed USPS  information and reports on inbound and outbound international mail,  including volume, costs, and revenue from fiscal years 2012 to 2016 and  UPU information describing the terminal dues system and rates from  2014 to 2017. We assessed the reliability of USPS’s information on the  volume, costs, and revenue for international mail by reviewing  documentation related to how the data are collected and processed. We  found this information to be sufficiently reliable for the limited purpose of  presenting this descriptive information. We also visited the Chicago  O’Hare International Airport and the New York John F. Kennedy  International Airport International Service Centers to observe how USPS  processes inbound and outbound international mail and how USPS  interacts with CBP to clear international mail for delivery to U.S.  addressees. We selected the Chicago O’Hare International Airport and  the New York John F. Kennedy International Airport International Service  Centers because they process most inbound international mail volume,  as well as their location and interviews with USPS and CBP officials.

To determine planned changes to UPU terminal dues rates, we reviewed  UPU documents that described the changes to the terminal dues system  resulting from the 2016 UPU congress, including the 2018 through 2021  terminal dues rate structure. We also reviewed USPS and State  proposals to the 2016 UPU congress and stakeholder comments  submitted to PRC on proposals to the 2016 UPU congress. We applied  standard economic principles to describe effects of the planned changes  on domestic stakeholders.

We reviewed six economic models and analyses estimating different  effects of the current and future terminal dues system on global postal  flows and on various stakeholders. We selected the six models and  analyses for analysis based on how current they were and whether they  produced empirical findings related to the effects of terminal dues or  changes in terminal dues. These models and analyses were taken from  the published academic literature, economic papers, government reports,  and government analyses. The studies used a range of methodologies  from simulation modeling to experimental methods, in part due to the  paucity of data on a number of variables such as trade flows or how  terminal dues affect certain stakeholders, such as consumers and  businesses. Our overall review of the studies was based on economic  criteria and GAO guidance which included: the purpose of the model, the  assumptions used, the data or lack of data, model validation methods,  transparency of the model and data, sensitivity analysis, and peer review.  Where appropriate, we also compared the results of the models or  analyses to other similar modeling results. The analyses we assessed  address different questions relating to various mail stakeholders. We  determined that these analyses appropriately include, though with certain  limitations, the key elements of an economic analysis. Our overall  assessment is that while these models and analyses include limitations  and caveats, they still inform decision-makers and stakeholders about the  different economic effects of terminal dues.

To determine the alternatives to the terminal dues system used by U.S.  mail stakeholders and the implications of those alternatives for  stakeholders, we interviewed USPS, PRC, and State officials,  representatives from mailing industry companies, express consignment  operators and other selected stakeholders affected by the terminal dues  system, international mail consultants, and freight shipping and  forwarding firms. We analyzed USPS information and reports on inbound  and outbound international mail from fiscal year 2012 through fiscal year  2016, including volume, cost, and revenue data. We assessed the  reliability of USPS’s information on the volume, costs, and revenue for  international mail by reviewing documentation related to how the data are  collected and processed. We found this information to be sufficiently  reliable for the limited purpose of presenting this descriptive information.  We selected the four alternatives offered by USPS to the terminal dues  system, including USPS bilateral and multilateral agreements with other  designated postal operators, Express Mail Service products, parcels, and  direct entry mail.

To describe these alternatives and determine their implications for mail  stakeholders, we reviewed and analyzed USPS bilateral agreements with  other designated postal operators, stakeholder comments on proposed  bilateral agreements, PRC decisions on the proposed agreements, and  USPS and USPS OIG documents and reports describing our selected  alternatives. We reviewed USPS’s bilateral agreements with China Post,  Canada Post, Hong Kong Post, Korea Post, and Royal PostNL in the  Netherlands, which were in force during the course of our work.

We applied standard economic principles to describe effects of these  alternatives on domestic stakeholders.

Appendix II: List of Countries by Universal Postal Union’s (UPU) Country Groups from 2014–2017 and from 2018–2021

The UPU divides its member countries into country groups based on the  UPU’s “postal development indicator,” which is largely based on gross  national income per capita and attempts to factor in the cost to deliver a  letter based on statistics from the United Nations, the World Bank, and  the UPU. The UPU uses the country groups to, among other things, apply  terminal dues rates to international letter mail sent between member  countries. The UPU consolidated its five country groups for the 2014– 2017 period into four country groups for the 2018–2021 period: Group I  includes the most developed countries, Groups II and III include  developing countries, and Group IV includes the least developed  countries.

Appendix III: Average Annual Rate-Cap Increases of the Universal Postal Union’s (UPU) Terminal Dues

Appendix IV: Comments from the United States Postal Service

Appendix V: Comments from the Postal Regulatory Commission

Appendix VI: GAO Contacts and Staff Acknowledgments

In addition to the contact named above, Derrick Collins (Assistant  Director); Greg Hanna (Analyst-in-Charge); Barbara El Osta; Camilo  Flores; Kenneth John; Mike Mgebroff; Malika Rice; and Amy Rosewarne  made key contributions to this report.


Drinking Water: Status of DOD Efforts to Address Drinking Water Contaminants Used in Firefighting Foam

According to health experts, exposure to elevated levels of PFOS and PFOA could cause increased cancer risk and other health issues in humans. DOD has used firefighting foam containing PFOS, PFOA, and other PFAS since the 1970s to quickly extinguish fires and ensure they do not reignite. EPA has found elevated levels of PFOS and PFOA in drinking water across the United States, including in drinking water at or near DOD installations.

This statement provides information on actions DOD has taken to address elevated levels of PFOS and PFOA in drinking water at or near military installations and to address concerns with firefighting foam.

This statement is largely based on a GAO report issued in October 2017 ( GAO-18-78 ). To perform the review for that report, GAO reviewed DOD policies and guidance related to PFOS and PFOA and firefighting foam, analyzed DOD data on testing and response activities for PFOS and PFOA, reviewed the four administrative orders issued by EPA and state regulators to DOD on addressing PFOS and PFOA in drinking water, visited seven installations, and interviewed DOD and EPA officials. This statement also includes updated information based on two 2018 DOD reports to Congress—one on PFOS and PFOA response and one on firefighting foam—as well as discussions with DOD officials.

GAO reported in October 2017 that the Department of Defense (DOD) had initiated actions to address elevated levels of perfluorooctane sulfonate (PFOS) and perfluorooctanoic acid (PFOA) in drinking water at or near military installations. PFOS and PFOA are part of a larger class of chemicals called per- and polyfluoroalkyl substances (PFAS), which can be found in firefighting foam used by DOD. In May 2016, the Environmental Protection Agency (EPA) issued nonenforceable drinking water health advisories for those two chemicals. Health advisories include recommended levels of contaminants that can be present in drinking water at which adverse health effects are not anticipated to occur over specific exposure durations.

In response to those health advisories, DOD's military departments directed their military installations to (1) identify locations with a known or suspected release of PFOS and PFOA and address any releases that pose a risk to human health, which can include people living outside DOD installations, and (2) test for PFOS and PFOA in installation drinking water and address any contamination above the levels in EPA's health advisories. For example:

As of August 2017, DOD had identified 401 active or closed military installations with known or suspected releases of PFOS or PFOA.

The military departments had reported spending approximately $200 million at or near 263 installations for environmental investigations and responses related to PFOS and PFOA, as of December 2016. According to DOD, it may take several years for the department to determine how much it will cost to clean up PFOS and PFOA contamination at or near its military installations.

DOD reported taking actions (such as providing alternative drinking water and installing treatment systems) as of August 2017 to address PFOS and PFOA levels exceeding those recommended in EPA's health advisories for drinking water for people (1) on 13 military installations in the United States and (2) outside 22 military installations in the United States.

In addition to actions initiated by DOD, GAO reported in October 2017 that the department also had received and responded to four orders from EPA and state regulators that required DOD to address PFOS and PFOA levels that exceeded EPA's health advisory levels for drinking water at or near four installations.

GAO also reported in October 2017 that DOD was taking steps to address health and environmental concerns with its use of firefighting foam that contains PFAS. These steps included restricting the use of existing foams that contain PFAS; testing foams to identify the amount of PFAS they contain; and funding research on developing PFAS-free foam that can meet DOD's performance requirements, which specify how long it should take for foam to extinguish a fire and keep it from reigniting. In a June 2018 report to Congress, DOD stated that no commercially available PFAS-free foam has met DOD's performance requirements and that research to develop such a PFAS-free foam is ongoing.

Thank you for the opportunity to be here today to discuss our report on  the Department of Defense’s (DOD) attention to drinking water  contaminants, part of our body of work on the federal government’s  environmental liabilities. The federal government is financially liable for  cleaning up areas where federal activities have contaminated the  environment. Today’s hearing addresses federal liability for and  procurement of per- and polyfluoroalkyl substances (PFAS), a large group  of man-made chemicals that include perfluorooctane sulfonate (PFOS)  and perfluorooctanoic acid (PFOA). PFOS, PFOA, and other PFAS can  be found in firefighting foam used by DOD since the 1970s for training  and emergency response activities to put fires out quickly while also  ensuring that they do not reignite.

Exposure to elevated levels of PFOS and PFOA could cause increased  cancer risk and other health issues in humans, according to the Agency  for Toxic Substances and Disease Registry. The Environmental  Protection Agency (EPA) has found PFOS and PFOA in drinking water  across the United States, including in drinking water at or near DOD  installations. EPA has not regulated PFOS and PFOA in drinking water,  but EPA did issue nonenforceable drinking water health advisories for  these contaminants in May 2016, which we discuss further in this  statement. Addressing PFOS and PFOA contamination represents a  potentially significant environmental liability for DOD because the  regulatory requirements are still evolving, the scientific community is still  developing the underlying science, and the scope of work needed for  cleanup is not yet known.

In our statement today, we discuss actions DOD has taken to address  elevated levels of PFOS and PFOA in drinking water at or near military  installations and to address concerns with DOD’s firefighting foam. This  statement is largely based on our October 2017 report on DOD’s efforts  to manage contaminants in drinking water. To perform our review for the  October 2017 report, we reviewed DOD policies and guidance related to  PFOS and PFOA and firefighting foam; analyzed DOD data on testing  and response activities for PFOS and PFOA; reviewed four administrative  orders issued by EPA and state regulators; visited seven installations;  and interviewed DOD and EPA officials. More detailed information on the  scope and methodology for that work can be found in the issued report.  This statement also includes updated information since our October 2017  report, based on our review of two 2018 DOD reports to Congress—a  March 2018 report on the department’s response to PFOS and PFOA  contamination and a June 2018 report on firefighting foam alternatives— and on our discussions with DOD officials about these issues and their  actions in September 2018.

We conducted the work on which this statement is based in accordance  with generally accepted government auditing standards. Those standards  require that we plan and perform the audit to obtain sufficient, appropriate  evidence to provide a reasonable basis for our findings and conclusions  based on our audit objectives. We believe that the evidence obtained  provides a reasonable basis for our findings and conclusions based on  our audit objectives.

EPA regulates drinking water contaminants by issuing legally enforceable  standards under the Safe Drinking Water Act that generally limit the levels  of these contaminants in public water systems. EPA has issued such  regulations for approximately 90 drinking water contaminants. Public  water systems, including the DOD public water systems that provide  drinking water to about 3 million people living and working on military  installations, are required to comply with EPA and state drinking water  regulations.

While EPA has not issued legally enforceable standards for PFAS in  drinking water, the agency has monitored water systems in the United  States for six types of PFAS chemicals—including PFOS and PFOA—in  order to understand the nationwide occurrence of these chemicals. This  monitoring effort was part of a larger framework established by the Safe  Drinking Water Act to assess unregulated contaminants. Under this  framework, EPA is to select for consideration from a list (called the  contaminant candidate list) those unregulated contaminants that present  the greatest public health concern, establish a program to monitor  drinking water for unregulated contaminants, and decide whether or not to  regulate at least 5 such contaminants every 5 years (called a regulatory  determination).

EPA’s regulatory determinations are to be based on the following three  broad statutory criteria, all of which must be met for EPA to decide that a  drinking water regulation is needed:  the contaminant may have an adverse effect on the health of persons; the contaminant is known to occur or there is a substantial likelihood that the contaminant will occur in public water systems with a frequency and at levels of public health concern; and in the sole judgment of the EPA Administrator, regulation of such contaminant presents a meaningful opportunity for health risk reduction for persons served by public water systems.

To date, PFOS and PFOA are unregulated because EPA has not made a  positive regulatory determination for these chemicals.

Even when EPA has not issued a regulation, EPA may publish drinking  water health advisories. In contrast to drinking water regulations, health  advisories are nonenforceable. Health advisories recommend the  amount of contaminants that can be present in drinking water—“health  advisory levels”—at which adverse health effects are not anticipated to  occur over specific exposure durations. Most recently, in May 2016 EPA  issued lifetime health advisories for PFOS and PFOA. These advisories  set the recommended health advisory level for each contaminant—or  both contaminants combined—at 70 parts per trillion in drinking water.  According to DOD, the department also considers information in these  health advisories when determining the need for cleanup action at  installations with PFOS and PFOA contamination.

DOD Has Initiated Actions to Address Elevated Levels of PFOS and PFOA in Drinking Water and Concerns with Firefighting Foam

DOD Has Initiated Actions to Identify, Test, Address, and Respond to Orders from Regulators Regarding PFOS and PFOA in Drinking Water

We reported in October 2017 that, following the release of EPA’s lifetime  health advisory for PFOS and PFOA in May 2016, each of the military  departments directed their installations to  identify locations with any known or suspected prior release of PFOS and PFOA and to address any releases that pose a risk to human health—which can include people living outside DOD installations; and test for PFOS and PFOA in their drinking water and address any contamination above EPA’s lifetime health advisory level.

We further reported that, as of December 2016, DOD had identified 393  active or closed military installations with any known or suspected  releases of PFOS or PFOA. Since we issued our report, DOD has  updated that number to 401 active or closed installations, according to  August 2017 data provided in a March 2018 report to Congress on the  department’s response to PFOS and PFOA contamination.

We stated in our October 2017 report that the military departments had  reported spending approximately $200 million at or near 263 installations  for environmental investigations and response actions, such as installing  treatment systems or supplying bottled water, as of December 2016.

The Air Force had identified 203 installations with known or suspected releases of PFOS and PFOA and had spent about $153 million on environmental investigations and response actions (accounting for about 77 percent of what the military departments had spent on PFOS and PFOA activities as of December 2016). For example, the Air Force reported spending over $5 million at Peterson Air Force Base in Colorado. During our visit to that installation in November 2016, officials showed us the current and former fire training areas that they were investigating to determine the extent to which prior use of firefighting foam may have contributed to PFOS and PFOA found in the drinking water of three nearby communities. Additionally, the Air Force had awarded a contract for, among other things, installing treatment systems in those communities.

The Navy had identified 127 installations with known or suspected releases of PFOS and PFOA and had spent about $44.5 million on environmental investigations and response actions (accounting for about 22 percent of what the military departments had spent on PFOS and PFOA activities as of December 2016). For example, the Navy reported spending about $15 million at the former Naval Air Station Joint Reserve Base Willow Grove in Pennsylvania. During our visit to that installation in August 2016, officials told us that the Navy was investigating the extent to which PFOS and PFOA on the installation may have contaminated a nearby town’s drinking water. At the time, the Navy had agreed to pay for installing treatment systems and connecting private well owners to the town’s drinking water system, among other things.

The Army had identified 61 installations with known or suspected releases of PFOS and PFOA and had spent about $1.6 million on environmental investigations (accounting for less than 1 percent of what the military departments had spent on PFOS and PFOA  activities as of December 2016), but had not yet begun any response  actions. At the time of our October 2017 report, the Army had not yet  completed testing its drinking water for PFOS and PFOA.

DOD’s March 2018 report to Congress provided updated information on  actions taken (such as providing alternative drinking water or installing  treatment systems) to address PFOS and PFOA in drinking water at or  near military installations in the United States, as shown in figure 1 below.  Specifically, DOD reported taking action as of August 2017 to address  PFOS and PFOA levels exceeding those recommended in EPA’s health  advisories for drinking water for people (1) on 13 military installations and  (2) outside 22 military installations.

We reported in October 2017 that, in addition to actions initiated by DOD,  the department also took action in response to state and federal  regulators. DOD responded to four administrative orders requiring that  DOD address PFOS and PFOA levels that exceeded EPA’s health  advisory levels for drinking water. One order was issued by the Ohio  Environmental Protection Agency at Wright-Patterson Air Force Base in  Ohio, and three orders were issued by EPA at the former Pease Air Force  Base in New Hampshire; Horsham Air Guard Station in Pennsylvania;  and the former Naval Air Warfare Center Warminster in Pennsylvania.  For example, at Wright-Patterson Air Force Base, levels of PFOS and  PFOA that exceeded EPA’s lifetime health advisory levels were found at  two wells on the installation in 2016. In response to the order from the  Ohio Environmental Protection Agency, the Air Force closed drinking  water wells, installed new monitoring wells, and provided bottled water to  vulnerable populations on the installation. Additional details on each order  and examples of actions by DOD to address the orders were reported on  in our October 2017 report.

According to DOD, it may take several years for the department to  determine how much it will cost to clean up PFOS and PFOA  contamination at or near its military installations. Additionally, DOD  officials told us in September 2018 that they believe a legally enforceable  EPA drinking water cleanup standard would ensure greater consistency  and confidence in their cost estimates because such a standard would  give them a consistent target to clean up to. In a January 2017 report on  environmental cleanup at closed installations, we recommended that  DOD include in future annual reports to Congress best estimates of the  environmental cleanup costs for contaminants such as PFOS and PFOA  as additional information becomes available. DOD implemented this  recommendation by including in its fiscal year 2016 environmental report  to Congress (issued in June 2018) an estimate of the costs to respond to  PFOS and PFOA.

DOD Has Taken Steps to Address Health and Environmental Concerns with Its Firefighting Foam

In our October 2017 report, we found that DOD was taking steps to  address health and environmental concerns with its use of firefighting  foam that contains PFAS. These steps included restricting the use of  existing foams that contain PFAS, testing DOD’s current foams to identify  the amount of PFAS they contain, and funding research into the future  development of PFAS-free foam that can meet DOD’s performance and  compatibility requirements (see table 1). Some of these steps, such as  limiting the use of firefighting foam containing PFAS, were in place.  Others, such as researching potential PFAS-free firefighting foams, were  in progress at the time of our review.

DOD’s military specification for firefighting foam, which outlines  performance and compatibility requirements, also requires that firefighting  foam purchased by the department contain PFAS. We reported in  October 2017 that, according to DOD, there was no PFAS-free firefighting  foam that could meet DOD’s performance and compatibility requirements.  As a result, the Navy—which is the author of the military specification— had no plans to remove the requirement for firefighting foam to contain  PFAS. However, Navy officials told us during our review that if a PFAS- free foam were to be developed that could meet DOD performance and  compatibility requirements the Navy would make any necessary revisions  to the military specification at that time. Navy officials also said during our  review that they were planning to revise the military specification to set  limits for the amount of PFAS that are allowed in firefighting foam,  following their testing on the amounts of PFOS, PFOA, and other PFAS  found in foam used by DOD.

In June 2018, DOD reported to Congress that its military specification for  firefighting foam was amended to set a maximum level of PFOS and  PFOA (800 parts per billion). DOD officials told us in September 2018  this maximum level applies to the amount of those chemicals in  firefighting foam concentrate before it is mixed and diluted with water to  create firefighting foam. The DOD officials also said that 800 parts per  billion is the lowest level of PFOS and PFOA that can be detected in  firefighting foam concentrate by current testing methods and  technologies, but DOD is working with foam manufacturers and  laboratories to achieve lower detection limits. According to the June 2018  report, DOD plans to establish lower limits for PFOS and PFOA in  firefighting foam in late 2018. The June 2018 report reiterated that,  according to DOD, no commercially available PFAS-free foam has met  the performance requirements of the military specification, and the report  also stated that DOD-funded research efforts to develop a PFAS-free  foam that can meet performance requirements are still ongoing.

Chairman Paul, Ranking Member Peters, and Members of the  Subcommittee, this completes our prepared statement. We would be  pleased to respond to any questions that you may have at this time.

If you or your staff have any questions about this report, please contact  us at Brian J. Lepore, (202) 512-4523 or leporeb@gao.gov or J. Alfredo  Gómez, (202) 512-3841 or gomezj@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this statement. Other individuals who made key  contributions to this statement include Maria Storts (Assistant Director),  Diane B. Raynes (Assistant Director), Michele Fejfar, Karen Howard,  Richard P. Johnson, Mae Jones, Amie Lesser, Summer Lingard-Smith,  Felicia Lopez, and Geoffrey Peck.

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The firefighting foam DOD has used for decades contains chemicals that, at elevated exposure levels, can increase risks of cancer or other health issues. As a result, DOD:

spent about $200 million on investigations and response (as of December 2016)

identified 401 installations with known or potential releases of these chemicals

took actions, like providing alternative drinking water, at 32 locations (as of August 2017)

This testimony is largely based on our report on DOD's response to such contamination in drinking water, and is a part of our body of work on the federal government’s environmental liabilities, an issue on our High Risk list.