Written Statement

of

Michael J. Critelli

Chairman of the Board and Chief Executive Officer

Pitney Bowes Inc.

Stamford, Connecticut

February 12, 2003

Submitted to the President's Commission

on the

United States Postal Service

[Executive Summary]{.smallcaps}

[Pitney Bowes Inc.]{.smallcaps}

Pitney Bowes welcomes the work of the Commission to ensure a viable
21^st^ century mail system. The stakes could not be higher.

**Mail is critical to commerce, serving as a vital channel for
business**. More than 90% of the mail stream today is business related.
The U.S. Postal Service processes more than 200 billion pieces of mail a
year (nearly eight times that of any other post office in the world and
40% of the world's card and letter volume) and is at the center of an
American mailing industry that generates about \$900 billion annually
and employs more than 9 million people. It represents more than 8% of
GDP. Moreover, mail is a vital communications tool that, on its own and
together with other marketing and other forms of communication is an
engine of growth for most businesses within and outside the mailing
industry.

**The mission of the Postal Service should be to revitalize mail as a
vital communications tool by maximizing the value of the mail to senders
and recipients**. The USPS needs to revitalize mail as a vital
communications medium. For example, by using "intelligent mail"
technology, which allows each mail piece to be uniquely identified,
tracked and traced, value and security can be added to the mail.

**The Postal Service should continue to be structured as a publicly
operated and owned entity operating under a simplified regulatory
framework**. The success of market liberalization is unproven and would
be premature in the U.S. The interests of a privatized post would be
counter to the interests of mail users, and to the private sector
innovation in the mailing industry that has added great value to the
mailing process. The regulatory regime should be reformed. The
ratemaking process should be simplified. Regulatory and law enforcement
functions that do not directly support the USPS core mission should be
transferred elsewhere, or funded by taxpayers rather than ratepayers.

**The Postal Service must remain focused on its core postal business and
be given commercial freedoms, pricing flexibility and expediency in its
core business**.

-   The Universal Service Obligation should be market-based, including
    delivery to all points, but with a level of service that can be
    varied to optimize the value of mail for senders and recipients with
    differing needs.

-   Commercial freedoms should allow the USPS to thrive in the future,
    but not to the detriment of existing or potential private players in
    non-core markets. The Postal Service should not enter markets that
    can be served by the private sector. There is little evidence that
    revenue diversification initiatives of foreign posts have been
    beneficial, and good evidence that they have stifled innovation.

-   The Postal Service should be able to offer flexible pricing that
    depends on volume, mail mix, time of entry, desired time of
    delivery, or other mail preparation and service characteristics. The
    USPS should be allowed to offer incentives in all cases where work
    is transferred to customers or private intermediaries.

**Postal operational efficiency and effectiveness will be optimized by
greater reliance on private sector participation**. The U.S. has taken
the lead in utilizing the private sector to help the national post
fulfill its functions. These efforts should be continued and expanded.
Total mail system costs can be reduced, system efficiency improved, and
mail made more affordable through the aggressive use of worksharing,
outsourcing, and partnerships with the private sector. The goal is to
reduce the total combined cost of mail preparation, processing,
transportation and delivery. Our postal system must continue to enable a
vibrant mailing industry. The system should continue to stimulate
private sector entrepreneurship and innovation rather than encourage
USPS expansion into new, non-core areas.

**[[Ensuring a Viable 21^st^ Century Mail
System]{.underline}]{.smallcaps}**

Pitney Bowes welcomes the work of the President's Commission on the U.S.
Postal Service in examining what needs to be done to ensure the
long-term viability of postal service in the United States. We are
pleased to submit our comments and recommendations about ways to improve
the postal system in the United States so that it not only survives but
also thrives in the 21^st^ century.

The U.S. Postal Services operates the largest and most complex postal
system in the world. It faces a unique set of logistical and operational
challenges. Each year, it delivers over 200 billion pieces of mail,
nearly eight times that of the next largest post and more than 40% of
the world's cards and letters. It covers a large and dispersed
geography, is more flexible on what it accepts for processing than
virtually any other post, and has a higher volume of diverse, complex
mail than any other country in the world. Its needs have been a huge
stimulus for private sector innovation.

Many companies have invented technologies and business processes to
solve the unique needs of the Postal Service and, in so doing, have
provided benefits to stakeholders well beyond the Postal Service,
including over 9 million jobs today and \$900 billion in annual revenues
for the mailing industry alone.

Equipment manufacturers working for the USPS have led the world in
developing mail sorters to improve USPS productivity. Software companies
have developed address quality services that improve mail
deliverability, lower USPS costs, and enable better targeting of direct
mail, all of which make mail more valuable. Electronics companies have
developed scanners to enable track and trace and improve mail
reliability. Presort companies have developed schemes to combine
mailings to improve USPS productivity and offer the best value to
mailers.

Pitney Bowes invented the postage meter in 1920, which enabled the post
office to offer more convenient and secure postage payment at lower cost
for business mailers. Over time, our innovations created high-speed
automated mail processing for large volume business mailers, and
provided both convenience for mailers who did not have easy access to a
retail post office and further reductions in retail costs for the post
office. Our Postage-by-Phone system today provides 24 hour a day, 7 day
a week remote access for postage purchases, and for completion of
transactions for more complex postal products such as Priority Mail.
Today, metered mail is 46% of the First Class Mail stream and accounts
for more than \$24.8 billion in Postal Service revenues or about 37.5%
of total revenue.

We also manage 1300 corporate and government mailrooms, and share our
expertise every day with many thousands of additional businesses through
our professional consulting services, postal management seminars, and
distance learning tools for mail center managers and professionals. None
of this would have been possible had the postal system not been designed
to encourage private sector innovation. Moreover, no other country has
had even a fraction of the innovation in the mailing industry as the
United States.

## THE MISSION OF THE POSTAL SERVICE 

A.  **[Mail Is Critical to Commerce]{.underline}**

The U.S. mail is absolutely critical to commerce, serving as a vital
channel for business. According to the Mailing Industry Task Force, the
mailing industry generates about \$900 billion annually and employs more
than 9 million people. It represents more than 8% of our country's Gross
Domestic Product.

The way in which the United States Postal Service ("USPS" or "Postal
Service") conducts its function has a dramatic impact on American
business. More than 90% of the mail stream today is business related --
business to business, business to consumer, consumer to business. Much
of this is what the Postal Service refers to as "commercial mail," or
"bulk mail," that originates with known mailers. These mailers use
meters or permits for postage, do much of the work preparing the mail by
sorting it and applying automation bar codes, and present the mail at
designated postal facilities.

Mail benefits most other industries as well, whether it facilitates the
collection of trillions of dollars of payments, enables lower cost, more
targeted marketing of products and services, or is the engine of remote
web-enabled commerce for many businesses and individuals.

But today the USPS, the mailing industry, and the nation's economy that
it supports are threatened by a convergence of problematic trends --
increased costs, increasing prices, competition in the form of
electronic diversion of "traditional" transactional mail, and an
outdated and burdensome regulatory framework. These factors have
resulted in an unprecedented decline in mail volume and financial
uncertainty for the USPS.

We believe that the best way for the Postal Service to confront these
challenges is to focus on "growing the mail" -- taking actions that
enhance the value of mail, reduce costs, increase productivity, and
price the product attractively, thereby driving increases in mail volume
and USPS revenues.

B.  **[The Mission Should Be To Maximize the Value of
    Mail]{.underline}**

Research and everyday experience confirms that paper messaging will
remain an integral part of American life for decades to come. The key to
revitalizing mail as a vital communications tool is the constant,
vigorous improvement (not just maintenance) of customer value. Indeed,
we believe this should be [the]{.underline} mission of the Postal
Service. Postal policies, programs, and operations should be judged by
the [value]{.underline} they bring to those using the mail system -- the
senders and recipients.

Fortunately, the Postal Service is already trying to enhance the value
of the mail, whether by adopting "Intelligent-mail" or improving address
accuracy to enable people to communicate more readily with one another.

For example, the concept of Intelligent Mail ("I-mail") -- the use of
data-rich machine readable bar codes -- is that each mail piece is
uniquely identified and can be traced from creation to final delivery
and, when appropriate, upon return. The information "lives" with the
mail piece or package. This opportunity is made possible by digital
technologies that allow networked interfaces with postal, document, and
factory information systems. These technologies exist today.

Intelligent Mail increases the value of mail to the sender by allowing
coordination of other services based on when a piece of mail is
received. As the Mailing Industry Task Force noted: "Technology
integration into the mail system via intelligent mail could greatly
expand the mailing industry's business. In comparison with other
mediums, mail can be a more targeted and cost effective means to
advertise." Knowing when the mail will arrive enables companies to time
follow-up e-mail or phone calls accordingly. Intelligent mail can also
maximize value-added features such as delivery and signature
confirmation. For companies that receive a large number of payments
through the mail, intelligent mail can provide crucial information on
when customers have truly put the check into the mail. Customers can
track goods being returned to the manufacturer.

Importantly, in addition to providing significant benefits to both
senders and receivers of mail, intelligent mail also provides advantages
to the Postal Service. I-mail, with its capability to make each piece of
mail unique, is an important means to address mail system security
requirements in the most cost-effective manner. The Postal Service, and
the House and Senate Appropriations Committees, have agreed that Sender
Identified Mail ("SIM") -- "mail that contains a unique identifier
applied by the originator of the mail piece" -- can be a valuable tool
in detecting and deterring attacks through the mails. Those who seek to
commit terrorist attacks generally seek to do so anonymously in order to
evade detection.

## DESIRED REGULATORY STRUCTURE AND GOVERNANCE OF THE POSTAL SERVICE 

####### Pitney Bowes believes that the USPS continues to provide a fundamental service to the American people -- the ability for literally everyone to send mail from anywhere to anyone, any place in the country at affordable rates. The mail system touches literally every household and business across this nation. For the foreseeable future a publicly operated and owned system continues to be required to meet the needs of the American public and American business. Postal "liberalization" or postal "privatization" should be delayed and then only undertaken cautiously and very gradually. {#pitney-bowes-believes-that-the-usps-continues-to-provide-a-fundamental-service-to-the-american-people-the-ability-for-literally-everyone-to-send-mail-from-anywhere-to-anyone-any-place-in-the-country-at-affordable-rates.-the-mail-system-touches-literally-every-household-and-business-across-this-nation.-for-the-foreseeable-future-a-publicly-operated-and-owned-system-continues-to-be-required-to-meet-the-needs-of-the-american-public-and-american-business.-postal-liberalization-or-postal-privatization-should-be-delayed-and-then-only-undertaken-cautiously-and-very-gradually. .unnumbered}

## [Market Liberalization]{.underline} 

Postal "liberalization" is the process of opening a market previously
reserved exclusively to a public operator for entry by private
competitors. Pitney Bowes believes that the needs of U.S. citizens and
businesses can best be served in the years ahead by a strong public
post. Postal liberalization has a very mixed record in other countries
and the United States presents an even tougher challenge.

First, there are no foreign examples of postal market liberalization
that can be remotely compared in their scale to the U.S. system.
Full-scale postal liberalization has not been tried on even a medium
scale anywhere in the world. The frontrunners of liberalization are
Finland (1991), Sweden (1993), and New Zealand (1998). Each of these
markets represents less than 3% the U.S. volume, and each government
post still maintains over 94% share of their postal market.

The European Union has been trying since 1992 to fully liberalize all
postal markets in line with creating a common marketplace and increasing
competition. The reality is one of repeated delays. Under the latest
timetable (assuming no further slippage), European posts are required to
reduce their market monopolies to:

-   150 grams (\~5 ounces) by January 2003;

-   50 grams (\~1¾ ounce) by January 2006; and

-   full opening by January 2009, but only after evaluation of the
    impact on service and labor.

Second, although postal market liberalization was intended to lighten
the regulation of the sector, it seems to have achieved quite the
opposite effect. Powerful new regulatory bodies are emerging. They
respond often to a perceived need to protect private entrants from
predatory practices from the incumbent post or from abuse of its market
power. The new regulator is independent from the governing Ministry, and
develops rules to monitor prices, cross-subsidization and fair
competition. Some public posts have claimed that the regulator appears
more concerned with *redistributing market share* away from the
incumbent rather than with *regulating fair access to the market.*

Third, experience has shown that liberalized markets have worked best
where the government post was strong and financially sound *before*
liberalization took place. A strong incumbent is able to yield market
share gradually to viable, more efficient competitors.

Fourth, the United States has virtually no experience in liberalizing a
market in a way such that a service transitions from a government
provider to the private sector. Experience in deregulation has been
focused on allowing access by more private participants to utility-type
markets already in the private sector (e.g., airline and
telecommunications).

Fifth, it should be kept in mind that the U.S. postal market in fact has
been already partially "liberalized." Reliance on private sector
participation along the mail stream value chain is often described by
experts in postal deregulation as the "downstream access" model of
liberalization.

Any move toward market liberalization in the U.S. should be directed to
lowering prices and increasing service levels to benefit citizens,
mailers and their enterprises. New entrants would need to be:
financially strong; committed to serve mailers for the long-term;
willing to fulfill a share of the Universal Service Obligation and not
just cream-skim; and committed to improving today's level of service.
Careful regulations would need to be drafted and phased-in, and the
operating rules for new entrants would need to be clearly spelled out.
This process has taken over a decade in Europe and continues still.
During the long time it would take to prepare for liberalization, the
USPS must restructure itself as a more nimble corporation that can shed
costs as its infrastructure requirements are reduced.

The monopoly areas that the USPS enjoys today need not provide the post
with any unfair advantages over private carriers if proper regulations
are in place. Rather, the Commission's priority should be to guarantee
the continuation of one of the most efficient postal services in the
world and, through reform, enhance its value to U.S. businesses and
citizens.

A.  **[Postal Privatization]{.underline}**

"Privatization" is the process of opening the [ownership]{.underline} of
a government entity to private capital -- the sale to private investors
of the assets previously held by the government entity. Various groups
have argued from time to time for USPS "privatization" as the answer to
achieving higher operating efficiencies, greater market orientation, and
increased agility to meet customer needs (although they seldom agree on
just what constitutes privatization).

Pitney Bowes believes that it will be far more productive to look at the
individual areas where the postal system needs improvement, rather than
endorse wholesale the concept of "privatization," which we see as an
oversimplified answer to a host of more complex issues.

First, postal privatization, by itself, would not provide the USPS with
the tools to operate better in the 21^st^ century. Many of the reforms
that need to take place to improve the USPS can be achieved by giving
the Postal Service and its management greater flexibility and commercial
freedoms, without altering its current ownership structure.

Second, the limited foreign experiences hardly represent a model for the
role that mailers and citizens expect of the USPS. Today, only two posts
of some significance are partially privatized. Through initial public
offerings, both the Dutch (TPG) and German (DPWN) postal services were
privatized in 1994 and 2000, respectively. The public currently holds
57% of TPG and 31% of DPWN, but these investments have lost considerable
value since the IPOs.

Third, privatization leads to pressure from shareholders to grow
revenues and to maximize financial returns while doing so, even if this
means the post getting into areas outside of its core functions. The
commercial "success" of both TPG and DPWN (they have generated positive
net income in the past two years) has led to challenges that they are
expanding by using profit and cash from their monopoly-protected markets
for new ventures. Both face claims that they have unfairly entered into
areas already well served by private companies.

The American public and the American mailing industry do not want to see
an expansionist USPS, diverted from its core business, subsidizing new
and uncertain ventures through higher prices for its monopoly services,
making incursions into foreign markets, and moving up and down the mail
stream value chain where the U.S. private sector already operates.
Conversely, a "privatized company" which would be subject to various
constraints on its commercial freedoms to keep it from competing with
the private sector through avoidance of cross-subsidization from its
monopoly business would not be attractive to private investors.

Finally, postal privatization in the near to medium term would have a
disruptive and negative impact on the American public and the \$900
billion mailing industry. The theoretically favorable impact of
privatization would need to significantly outweigh the critically
immediate need that businesses and citizens have to continue to avail
themselves of current services at affordable prices. It is imperative
that there be no disruption to these services. America does not need to
experiment in this critical area.

B.  **[Regulatory Regime]{.underline}**

The USPS has a highly regulated ratemaking process that imposes a great
burden on many parties. Hearings, interventions by numerous
stakeholders, and cross-examination of witnesses aim to ensure "equity"
across groups of customers who lobby for rates more favorable to their
group (and less favorable to another). Ratepayers ultimately bear all
the costs of the current ratemaking process, which can take as long as
18 months. We support reform that provides the USPS with greater pricing
flexibility as discussed in section III. B. below. We believe this will
require a completely fresh look at the current rate making process.

There are additional aspects of the existing postal regulatory regime
that should be carefully examined and simplified with a view toward
eliminating or transferring to other agencies regulatory and law
enforcement authorities that do not directly support the USPS core
mission. The USPS should be empowered to act as a commercial operator,
and except where absolutely necessary to its core mission, it should not
be empowered to act as a government regulator.

The USPS should be granted the commercial freedoms that will allow it to
thrive and prosper in the future, but not at the detriment of existing
private players or any potential private players in other non-core
markets of the future. A continuing role for the postal regulators will
be to ensure a fair opportunity for all participants in the postal
sector. It is not the role of a commercial operator, such as the Postal
Service, to determine market share or favor particular competitors; nor
should it bear the costs of such enforcement activities. Other agencies,
including the Department of Justice and the Federal Trade Commission,
are charged with these responsibilities.

Other regulatory and law enforcement activities of the Postal Service,
such as those of the Postal Inspection Service should be examined to
determine whether the costs of those activities should continue to be
charged to the ratepayer, or whether they would more appropriately be
charged to the tax payer. Only those activities that support the primary
mission, the core business, of the Postal Service should be charged to
the ratepayer.

Of course a public post must have certain regulatory, licensing and
standard setting authorities. Such authorities may be necessary to
guarantee sources of supply and provide essential services. The Postal
Service, however, should be given clear guidelines as to its regulatory
role. For example, it is inappropriate for a commercial operator to be
empowered to compel the disclosure, transfer, or licensing of private
sector intellectual property such as patents, copyrights and other
proprietary information. It should not enter markets already served by
the private sector. Rather, its mission should include enhancing the
role of the private sector to ensure a robust mail system.

As a commercial entity dependent on its customers, postal ratepayers, it
should not be saddled with costs more appropriately paid by society as a
whole, as determined by our elected Government. It should not be
required to forego revenue from activities that have a social purpose,
but rather should be compensated accordingly, avoiding the de facto
subsidy today of these activities by ratepayers. It should not, as it
does today, have to wait decades for more than \$800 million in "revenue
foregone" owed to it by the Federal Government that is currently being
paid in annual installments of \$29 million. It should not in the future
be required to charge to its customers, the ratepayers, the costs of
reduced rates provided to some whom society has chosen to benefit. These
"regulatory" costs of pursing societal benefits should not be charged to
the Postal Service or the postal ratepayer.

## THE SCOPE OF USPS OPERATIONS

C.  **[The Universal Service Obligation (USO)]{.underline}**

We believe a strong public post and a Universal Service Obligation (USO)
go hand-in-hand. Further, without the USO, the value of mail is greatly
diminished. Pitney Bowes believes that USPS must continue to have "as
its basic function the obligation to provide postal services to bind the
Nation together through the personal, educational, literary, and
business correspondence of the people."

Broadly speaking, the Universal Service Obligation is understood to mean
universal access to the mail system and to frequent and uniform delivery
of letter mail. The USO is sometimes also defined to encompass the right
of senders to enjoy a uniform price. Since no universally-adopted
definition of the USO exists, the USO is often interpreted in each
country as "no changes to today's service patterns."

National postal services were not conceived to be businesses, but were
created instead as a social obligation to the public that was fulfilled
through a government-operated service. As a result, the level of service
was never set by market conditions. In a competitive market, some areas
might have been left unserved if unprofitable, or the level of service
offered would have varied according to customer demand. The USO of the
operator is the mechanism to subsidize high-cost areas and to guarantee
a uniform level of service at a uniform price to all destinations,
regardless of the circumstances of the recipient. As in many other
countries, studies of "unprofitable" delivery routes indicate that the
USO represents a net cost to the USPS, although there is not yet a
consensus on its magnitude.

Pitney Bowes believes that delivery service must continue to be provided
to every delivery point, whether "profitable" or not, but the USO must
no longer be interpreted strictly as no changes to today's service
patterns. In this instance, it would be advisable for the USPS to be
allowed and encouraged to adopt a "market-based" definition of the USO
driven by the needs of senders and recipients.

-   It must recognize that it is the senders, primarily businesses, who
    have the greatest interest in reaching their customers through the
    vital communications medium that the mail provides. Businesses
    should be surveyed to determine the various levels of service that
    are acceptable and at what prices. This is crucial, as USPS revenues
    are heavily dependent on business-originated volume, as discussed
    above.

-   The USPS should utilize mail redirection technologies and dynamic
    carrier-routing to allow recipients to select more flexible delivery
    patterns. Examples include: less-frequent delivery (perhaps for
    certain types of mail); alternative delivery to the workplace; or
    self-selected customer pick up at a PO box, postal facility or
    device.

-   The USPS should enjoy greater pricing flexibility in meeting its USO
    so it can offer incentives for recipients to select the lower-cost
    alternatives indicated above. Today, the USPS is prevented from
    offering incentives or case-by-case discounts to recipients or
    senders. Well-conceived incentive schemes will save total system
    costs, lower average prices for all parties, and provide services
    that are more attuned to the needs of senders and recipients.

-   The USPS should also be encouraged to accelerate the implementation
    of more intelligent delivery workstations. For example, secure
    parcel delivery stations are already available in some markets and
    concepts and prototypes for "intelligent" and secure mailboxes have
    already been developed.

    A.  **[Role of the USPS in Competitive Markets]{.underline}**

The Commission faces the task of defining the freedoms and restrictions
that the USPS should have in participating in "competitive" markets,
which include:

-   Non-monopoly mail segments and alternatives to mail that are served
    by the private sector. Examples are parcels, express documents, the
    distribution of printed matter, and forms of advertising beyond
    direct mail.

-   Businesses that are part of the broader mailstream value chain and
    are well served by the private sector. Examples are the manufacture
    of postal processing equipment, stamp printing, creative services to
    prepare advertising copy for direct mail, mail transportation,
    presort services and mailroom management.

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-   Electronic services that, in some countries, are seen by the posts
    as a natural extension of mail and messaging. An example would
    include electronic bill payment and presentment.

The USPS and many foreign posts are concerned that core business
revenues will decline due to accelerating use of electronic
alternatives, slowing or stagnant mail volume growth, and the entry of
new competitors due to market liberalization. At the same time, they
face increasing costs to service the Universal Service Obligation as
delivery points and labor costs increase. As a result, in the past few
years, some posts have seemed anxious to market and promote new products
and services whose "postal" character is doubtful.

There is little evidence that the revenue-enhancing initiatives of
foreign posts have yielded substantial benefits.

-   Some studies have shown that a well-managed core mail business
    enjoys an EBITDA of 15-20%, vs. 3-6% for express shipments and only
    2-6% for logistics. Therefore, public posts may best be able to
    serve their stakeholders by sticking to their core business.

-   Electronic services have not been demonstrably successful for the
    posts, nor remotely generated revenues and profits sufficient to
    make up for fundamental problems in their core business.

-   Several European posts have entered businesses such as lettershops,
    direct marketing services and outsourcing. In the U.S., these
    industry activities are already well developed and a government
    participant is not needed.

While the USPS has a challenge and an obligation to enhance its revenue,
Pitney Bowes believes this financial relief should not be sought through
distractions outside the core business area. The Postal Service should
focus its efforts on its core business area -- accepting, collecting,
sorting, transporting, and delivering physical mail -- letters, printed
matter and packages.

Pitney Bowes believes Postal Service policies and programs should be
directed toward improvements in its core service. Successful businesses
today all share a common philosophy -- the need to maintain management
focus on core products and competencies in order to deliver superior
customer value. The Postal Service must be given the incentives and the
regulatory and institutional framework to be successful in this mission.

The USPS should be granted the commercial freedoms that will allow it to
thrive and prosper in the future, but not to the detriment of existing
private players or any potential private players in other non-core
markets of the future. A continuing role for the postal regulators will
be to ensure a level-playing field for all participants in the postal
sector.

The need for the Postal Service to focus on the mail rather than various
non-postal services has been a cornerstone of postal reform legislative
proposals in the House for years. It should be a cornerstone of the
Commission's recommendations as well.

A.  [Pricing Flexibility and Expediency In The Core Postal
    Business]{.underline}

We support reform that provides the USPS with greater pricing
flexibility and expediency in its core business. We believe this will
require a completely fresh look at the current ratemaking process.
Today, the USPS finds itself unable to react to changing competitive
forces and customer needs with more flexible offerings for new products,
variations of current products, or changes in prices that reflect its
economics of production.

Other pricing models can guarantee "equitable" rates without a lengthy
and costly process. Ratepayers ultimately bear all the costs of the
current ratemaking process, which can take as much as 18 months. For
example, some posts use less burdensome pricing models and oversight
processes:

-   Price-cap models, whereby prices are indexed to agreed-upon
    indicators and adjusted within prescribed limits (e.g., not more
    than 100% of the rate of consumer price inflation.)

-   Widespread use of Negotiated Service Agreements (NSAs) for large
    volume mailers; such agreements are not publicly disclosed.

-   Performance Contracts with the government that allow posts to raise
    prices automatically according to prescribed formulas, provided they
    have met independently-audited service levels.

More flexible models could allow for greater management discretion and
speed of decision-making, subject to any necessary post-audit by an
appropriate regulatory body. The pricing model adopted should allow the
USPS to utilize its capacity more efficiently, thus lowering total
average prices and therefore stimulating mail volume.

As a general matter, we believe postal rates should not increase faster
than the rate of inflation, and improved productivity should enable
rates to increase even less. In addition, flexible prices should be
offered that depend on variables such as mailer volume, mail mix, time
of entry, desired time of delivery, or other mail preparation and
service characteristics. The USPS should be allowed to offer incentives
in [all cases]{.underline} where work is transferred to customers or
private intermediaries. In PO box service, for example, the recipient
incurs the cost of picking up mail and the USPS avoids the cost of
delivery. However, the recipient pays a price for an activity that saves
costs to the USPS.

I.  THE ROLE OF THE PRIVATE SECTOR

The American postal system has evolved in a climate of partnership and
innovation between the public and private sectors. The United States has
taken the lead in utilizing the private sector to help the national post
fulfill its functions. We believe these efforts should be continued and
expanded. Total mail system costs can be reduced, system efficiency
improved, and mail made more affordable through the aggressive use of
worksharing, outsourcing, and partnerships with the private sector.

A.  **[Operational Efficiency and Effectiveness Will Be Optimized By
    Greater Reliance on Private Sector Participation]{.underline}**

The Postal Service has an explicit strategy of encouraging worksharing
arrangements due to the excessive costs of its work force. Often, the
private sector can perform mail preparation, processing, or
transportation at a lower cost than can the Postal Service. Examples
include presorting, prebarcoding, and dropshipping mail. Worksharing
discounts reflect, in whole or in part, costs avoided by the Postal
Service as the result of the efforts of its customers.

Worksharing, outsourcing, and private sector partnering provide the
appropriate incentives to ensure that the marketplace works. They
promote economic efficiency by encouraging use of the lowest-cost
provider. Experience since 1976 demonstrates that through the
cooperative efforts of its customers, the postal system as a whole
benefits through more affordable product pricing that translates into
increased volume.

The USPS goal of 95% barcoded mail set in 1989 resulted in an increased
reliance on mailer preparation to apply barcodes, presort mail and enter
it further downstream. As a result, some \$15 billion of potential USPS
costs have been shifted through discounts to private industry mailers
and intermediaries. This reliance on private sector participation along
the mail stream value chain is often described by experts in postal
deregulation as the "downstream access" model of liberalization. This
model of public sector partnership is unique in the world, both in its
form and extent.

The USPS should continue along this path of shifting burden and costs to
private sector providers -- notably mailers and intermediaries who work
on behalf of mailers to reduce their costs. The overall goal should be
to reduce the total combined cost of mail preparation and processing for
all parties while considering the complete value chain from mail
creation to delivery.

Additional, profitable, worksharing activities are available and can be
pursued under the existing legislative and regulatory regimes. Possible
areas for outsourcing and efficiency gains that should be considered and
encouraged:

-   Dropshipping has enabled mailers to seek efficient transport
    arrangements, better suited to their local requirements than a
    national USPS network can offer, and has thus resulted in savings
    for mailers and the USPS. Dropshipping should be extended
    selectively, ensuring that the USPS can shed rapidly any costs
    transferred to the mailers and private sector intermediaries.

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-   Specialized private businesses operate business mailrooms, shipping
    centers and document management centers at lower wages than their
    customers. USPS processing facilities of various types could be
    operated by private sector providers through facility management
    contracts.

-   Back-office functions and other areas that are not core competencies
    required to sustain the postal business can also be outsourced. The
    business processing outsourcing industry offers services ranging
    from IT, to HR, to finance and other processes. There are many
    providers who may be able to help the USPS reduce its back-office
    costs.

-   Retail, mail collection and mail induction operations should
    facilitate full remote access by all customers. Incentives for use
    of remote access technologies will benefit mailers and save postal
    retail costs. The main consideration would be to ensure revenue
    security and protect the sanctity of the mail.

Of course, worksharing, outsourcing, and partnering will only work if
the USPS actually captures potential costs savings through reduction in
its cost structure. We understand that infrastructure, workforce, and
services changes have been difficult in the statutory, regulatory, and
political environment in which the USPS operates. But these challenges
must be overcome to ensure a viable 21^st^ century mail system.

A.  **[A Vibrant Mail System Should Encourage Private Sector
    Innovation]{.underline}**

The track record of partnership between the public and private sectors
already has enabled a vibrant industry with many participants, large and
small, whose entrepreneurship and innovation benefit all mailers and the
entire \$900 billion mailing industry. Indeed, the American mailing
industry is by far the largest in the world. It is also unique in its
development. We have succeeded in stimulating private sector innovation
in equipment, software and services. Pitney Bowes has a proud tradition
of contributing to this innovation for 80 years.

In contrast, countries where liberalization was imposed experienced
declining volumes when faced with new competition. In attempts to shore
up their revenues they began making incursions into areas already served
by the private sector. Their new offerings included: a broader range of
direct marketing services beyond the movement of mail, mailroom
management operations for customers, expanded logistics and financial
services, and expanded operations into each others' territories. Some of
these expansionist moves are now being cut back, as posts realize they
need to better manage their core businesses.

We must preserve the role of the Postal Service as a stimulator of
private sector innovation rather than encourage its expansion into new,
non-core areas.

**[[Conclusion]{.underline}]{.smallcaps}**

We applaud the efforts of the President's Commission on the United
States Postal Service in this vital public service to the nation. We
thank you for the opportunity to present our comments on the issues
facing the Commission. We are available to provide you with additional
data to help you in examining what needs to be done in ensuring the long
term viability of the Postal Service in the United States and welcome
the opportunity to participate in the upcoming hearings.

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