**MINUTES**

**Time**: 8:30 am

**Date**: February 20, 2003

**Location**: Hotel Washington

Washington, DC

**Members in Attendance**: Co-Chair James A. Johnson; Commissioners
Dionel Aviles, Don V. Cogman, Carolyn Gallagher, Richard Levin, Norman
Seabrook, Robert Walker, and Joseph Wright.

**Staff in Attendance**: Executive Director Dennis Shea; Randall Lewis,
Jana Sinclair White and Bridgette Kilkenny.

**Agency Employees in Attendance**: Designated Federal Official Roger
Kodat.

> **Members of the Public Providing Oral or Written Statements**: Gus
> Baffa, President, National Rural Letter Carriers Association; James I.
> Campbell, Jr.; Michael Crew, Professor, Rutgers University; Robert H.
> Cohen, Director, Office of Rates, Analysis and Planning, Postal Rate
> Commission; George A. Omas, Chairman, Postal Rate Commission; Richard
> J. Strasser, Jr., Chief Financial Officer and Executive Vice President
> of the United States Postal Service; John T. Estes, Executive
> Director, Main Street Coalition for Postal Fairness; Murray Comarow;
> H. Robert Weintzen, President and Chief Executive Officer, Direct
> Marketing Association; Hamilton Davison, Chief Executive Officer,
> Paramount Cards, and Chairman of Government Relations Task Force,
> Greeting Card Association; Bob McLean, Executive Director, Mailers
> Council; Mary Rouvelas, Vice President, Alliance of Nonprofit Mailers;
> James R. Cregan, Executive Vice President, Magazine Publishers of
> America; Ian D. Volner, General Counsel, Association for Postal
> Commerce; William Burrus, President, American Postal Workers Union;
> William H. Young, President, National Association of Letter Carriers;
> Michael Eskew, Chairman and Chief Executive Officer, United Parcel
> Service; David Sappington, Professor, University of Florida; S. David
> Fineman, Chairman, United States Postal Service Board of Governors;
> Charles M. Elson, Director, Center for Corporate Governance,
> University of Delaware.

**Matters Discussed**:

Co-Chair James A. Johnson called the meeting to order at 8:30 am. Mr.
Johnson expressed his appreciation for everyone who participated in the
public-comment process. He noted that the Commission had received
numerous comments from both individuals and organizations. He also
announced that, at the end of the meeting, the Commission will consider
a rebuttal process that will allow the public an opportunity to react to
comments filed by others. The meeting continued with remarks by
Commissioner Richard Levin, Chair of the Business Model Subcommittee.

[Remarks by Commissioner Richard Levin]{.underline}

Mr. Levin provided a brief description of the subcommittee's activities
to date, noting that it had convened twice by conference call, and had
reviewed "voluminous" materials. He made clear the fact that the
subcommittee had not reached any conclusions thus far -- that
subcommittee members are mapping out issues and possible approaches. Mr.
Levin stated that the subcommittee is considering the following issues:
organizational form; governance issues relating to the
inter-relationships among the Board of Governors, the Postal Rate
Commission (PRC), and Postal Service management; price-setting
processes, including the type and timing of the review of pricing
decisions and the factors considered by the Postal Rate Commission;
services provided by the Postal Service; the meaning of the Universal
Service Obligation (USO); financial requirements, including the
break-even mandate and the statutory debt ceiling; and physical assets
(real estate).

[Panel One: Unique Attributes of the USPS Business Model]{.underline}

Testifying on this panel were Gus Baffa, James I. Campbell, Jr., Michael
Crew, and Robert H. Cohen. Please see attachments A-D for the text of
their prepared written comments.

*Questions for Mr. Baffa*. In response to questions regarding how new
delivery routes are classified as rural or city routes, Mr. Baffa stated
that decisions generally are based on existing delivery patterns in the
area, but that the decisions are the prerogative of Postal Service
management. In response to questions regarding ways to improve
efficiency of the delivery network, he stated that the collective
bargaining agreement between management and rural carriers already has
built-in incentives because wages are based on evaluated routes, rather
than on hourly pay. Mr. Baffa noted that for years the rural carriers,
as a whole, have come in under budget for evaluated hours. In response
to questions relating to potential changes in rural delivery patterns,
Mr. Baffa agreed that continuing population shifts toward urban areas
will cause the costs of rural delivery routes to increase. He also
stated that some consolidation of post offices may be possible, but
noted that there would be additional costs incurred due to increased
mileage required for carriers to get to/from their post offices. He also
stated that cluster boxes save money. With regard to privatization, Mr.
Baffa asserted that private companies would likely "skim the cream" by
bidding only on profitable routes, and that unionized carriers would
likely lose jobs as private corporations would seek to avoid union
labor. He also thought that rural customers would end-up paying higher
rates. Mr. Baffa stated that the Commission should not change 6-day
delivery.

*Questions for Professor Crew*. Professor Crew was asked numerous
questions regarding the type of business model he would recommend for
the Postal Service. He responded that he favors a process of incremental
change, whereby the Postal Service would first move toward a more
commercialized model, then to privatization. Professor Crew stated that
privatization would be a way to remove the risk of losses from the
taxpayer, but noted in response to a comment by a Commissioner, that,
even if the Postal Service were privatized, the Government would likely
rescue it from any potential bankruptcy. Professor Crew did not agree
that privatization would necessarily lead to a loss of jobs for union
employees, especially if the USO is maintained, because the delivery
function would still need to be carried out. With regard to cost
containment, Professor Crew commented that the Postal Service currently
experiences no pressure from residual claimants, such as stockholders,
to encourage cost containment. He commented that price caps may provide
some incentive to contain costs. Professor Crew stated that
qualifications for serving on the Board of Governors should include
prior business experience and that the process of selecting Governors
should be similar to that of a corporation and should be de-politicized.
Professor Crew stated that the Commission should not recommend explicit
subsidies for rural delivery and should not recommend the postal
monopoly be open to competition. However, he elaborated that the postal
monopoly should be narrowly defined.

*Questions for Mr. Cohen*. In response to questions regarding cost
containment, Mr. Cohen commented that current law prevents management
from attempting to contain many costs. He suggested that management
should be provided with a bonus incentive to contain costs. When asked
about the reported "wage premium" received by postal workers, Mr. Cohen
did not know how much of the premium was attributable to wages, or how
much was attributable to benefits. With regard to risk, Mr. Cohen noted
that rate-payers bear the risk of loss on new products. In response to
questions regarding the attribution of costs used in his study, Mr.
Cohen stated that he attributed costs to rural and urban routes based on
the weight and volume of mail handled. Mr. Cohen stated that the
Commission should not recommend any subsidies.

*Questions for Mr. Campbell*. In response to questions regarding the
type of business model he would recommend for the Postal Service, Mr.
Campbell commented that he viewed the Postal Service as primarily a
transportation system. He also suggested that the model should provide
flexibility in defining the USO, in defining the monopoly, and in
price-setting (to allow management flexibility in responding to market
changes). With regard to the selection of members of the Board of
Governors, Mr. Campbell suggested that the Presidential appointment
process should not be used. Mr. Campbell was also asked how Postal
Service profits generated from the 1950s through the 1970s were used. He
responded that the Postal Service generated losses during that time, and
that the losses were subsidized by the Federal government. Mr. Campbell
stated that the Commission should not retain the rigidity of the current
system.

[Panel Two: Overview of the Price-Setting Process]{.underline}

Testifying on this panel were George A. Omas, Richard Strasser, John
Estes, and Murray Comarow. Please see attachments E-H for the text of
their prepared written comments.

*Questions for Mr. Omas*: In response to a question regarding the
difference between the PRC and other regulatory bodies such as the
Federal Communications Commission, Mr. Omas responded that the PRC has
no subpoena power or involvement between rate cases in the evaluation of
the day-to-day activities of the Postal Service. Mr. Omas also stated
that the PRC has to justify financial data received from the Postal
Service and that this process takes a couple of months for each rate
case. Mr. Omas stated that the Commission should not recommend the
elimination of the USO, but elaborated that this did not necessarily
require service six days a week.

*Questions for Mr. Strasser*: In response to a question concerning
whether the Postal Service is taking advantage of existing rate-setting
flexibilities, Mr. Strasser asserted that in the context of a \$70
billion annual business, the Postal Service is taking sufficient
advantage of opportunities. In response to a question concerning claims
that financial information provided by the Postal Service is inadequate,
Mr. Strasser stated that the Postal Service provides more financial
information than any publicly held business in the country. He said the
Postal Service provides un-audited financial statements every four weeks
on its web site. Mr. Strasser stated that with regard to the
rate-setting process, the Commission should identify an entity within
the Postal Service organization and hold it accountable rather then have
an external party start to get involved in setting productivity targets
or efficiency standards. Mr. Strasser also testified that if the USO is
maintained, the Postal Service must have the ability to generate revenue
so it can finance the USO and the flexibility to reduce costs.

*Questions for Mr. Estes*: In response to questions regarding the rate
setting process, Mr. Estes testified that all parties should take steps
to make the process as efficient as possible. He also stated that the
need for a fast track rate-setting process is not as dire as often
argued and that a fast track process would only apply to 21% of the mail
(mail other than first class or standard). With regard to structure, Mr.
Estes testified that the Postal Service should be viewed as a service,
not a business. He recommended strengthening the regulatory authority of
the PRC and increasing the accountability of the Postmaster General to
the public. He questioned the continued relevance of the Board of
Governors. Mr. Estes testified that the Commission should not weaken the
regulatory authority of the PRC.

*Questions for Mr. Comarow*: In response to questions regarding the
regulation of the Postal Service, Mr. Comarow suggested eliminating the
PRC and replacing it with three retired Administrative Law Judges. In
response to a question regarding Congressional oversight of the Postal
Service, Mr. Comarow asserted that Congress has been too active in the
Postal Service's efforts to close post offices and combine major
facilities. Mr. Comarow testified that the Commission should not
consider privatization of the Postal Service.

[Panel Three: The Price-Setting Process from the Customers'
Perspective]{.underline}

Testifying on this panel were H. Robert Weintzen, Hamilton Davison, Bob
McLean, Mary Rouvelas, and James R. Cregan. Please see attachments I-M
for the text of their prepared written comments.

*Questions for Mr. Weintzen*. In response to his remark that the
Commission was not dealing with international issues, Mr. Weintzen was
asked what dynamics of international change the Commission should
consider. He commented that borders between nations are dissolving, and
that international corporations are now offering services in the United
States. He noted that the Postal Service does not have the same
flexibility as international corporations. With regard to pricing data
used to attribute costs to classes of mail, he stated that the Postal
Service and intervenors are not always in agreement on the true costs of
particular products. When asked whether the Commission should define the
USO, Mr. Weintzen stated that the USO must be flexible and recommended a
definition that would require the Postal Service to "go everywhere on a
dependable basis." Mr. Weintzen stated that the Commission should not
limit incentives aimed at increasing mail volumes.

*Questions for Mr. Davison*. In response to his suggestion that explicit
subsidies be used, if necessary, to retain the USO, Mr. Davison was
asked why he would recommend subsidies. He responded that subsidies
should be the last option. With regard to a definition of the USO, Mr.
Davison suggested regular delivery (possibly even weekly). Mr. Davison
asked the Commission not to forget the "citizen mailer."

*Questions for Mr. McLean*. In response to a question asking how the
Postal Service can improve productivity, Mr. McLean suggested that it
invest more heavily in technology. He noted that the Postal Service
spends a great deal of money tracking first class letter mail, but not
other products. With regard to a definition of the USO, Mr. McLean
suggested that the Commission keep in mind the strong cultural
connection to the Postal Service. Mr. McLean suggested that the
Commission not overlook the tools necessary to attract top managers. He
noted that there currently is no incentive for "smart" craft employees
to move into management because the wage differential is too small.

*Questions for Ms. Rouvelas*. In response to questions regarding the
adequacy of Postal Service financial information, she commented that the
problem is with allocating costs to particular classes of mail. In
response to her suggestion that the PRC be given subpoena power over the
Postal Service, Ms. Rouvelas was asked whether the subpoena power should
extend to intervenors in the process. She responded that subpoena power
should not extend to intervenors because they are not the regulated
entity. With regard to the USO, she stated that the definition should be
delivery to everyone in a timely fashion. Ms. Rouvelas suggested that
the Commission not remove oversight of the Postal Service.

*Questions for Mr. Cregan*. In response to questions regarding the
accuracy of pricing data, Mr. Cregan commented that no one seems to know
the cost of the USO and asserted that a study on the topic should be
performed. With regard to a definition of the USO, Mr. Cregan commented
that the USO (e.g., the "last-mile") is what is best about the Postal
Service. He clarified that "last-mile" meant delivery to the mailbox,
whether that be a cluster box, a roadside mailbox or delivery to the
door.

[Panel Four: Pricing\--Discounts]{.underline}

Testifying on this panel were Ian D. Volner, William Burrus, and William
H. Young. Please see attachments N-P for the text of their prepared
written comments.

*Questions for Mr. Volner*: In response to questions regarding the cost
of worksharing discounts, Mr. Volner testified that the current costing
system does not allow the Postal Service to measure costs correctly. Mr.
Volner asserted that the Commission should not attempt to define the
USO. When questioned about this recommendation, Mr. Volner testified
that the USO can't be defined in legal terms so the Commission should
let it take care of itself. He also opined that the Commission should
not attempt to devise mechanisms for trying to determine the cost of the
USO. Finally, he said that the Commission should not open up the mail
box to outside users because this would present problems of security and
privacy.

*Questions for Mr. Burrus*: In response to questions regarding
flexibility, Mr. Burrus stated that the APWU supports flexible postal
rates, but that the concept was not in accordance with the universal
rate criteria established by the Postal Reorganization Act. However, he
also stated that everyone using the mail should pay a universal rate.
With regard to flexibility for workers, Mr. Burrus testified that
employees need more opportunity to act on their own initiative. He
asserted that the Postal Service is one of the most overly supervised
workforces in the country. In response to a question regarding how the
APWU would like to work with the Postal Service management to increase
productivity, Mr. Burrus asserted that there must first be a mutual
desire to cooperate. He elaborated that there is currently tension in
the workplace between union members and management at the work room
level. When questioned about how the collective bargaining process could
be improved, Mr. Burrus testified that the parties should start
negotiating earlier in the 90-day process and that there should be a
mechanism whereby the parties could negotiate after the 90-day period
ended. Mr. Burrus stated that the APWU would be opposed to a period of
mandatory mediation. Mr. Burrus testified that the Commission should not
touch the collective bargaining process.

*Questions for Mr. Young*: In response to questions regarding
flexibility, Mr. Young stated that the Postal Service should have
greater pricing flexibility to operate like a business. With regard to
flexibility for workers, Mr. Young stated that the NALC was exploring
self managed units where letter carriers are given more flexibility to
get the job done in the matter they think best. In response to a
question regarding how the NALC would like to work with the Postal
Service management to increase productivity, Mr. Young stated that the
layers of supervision should be eliminated and asserted that the Postal
Service has one supervisor for every six letter carriers. When
questioned about how the collective bargaining process could be
improved, Mr. Young stated that the process works well now. He
elaborated that both sides are often dissatisfied with the results of
collective bargaining and that this is a sign it works. Mr. Young
testified that the Commission should not change the collective
bargaining process and that the USO should be maintained. Mr. Young
encouraged the Commission to consider concepts other than cost, such as
the security and privacy of the mail, when thinking about the USO.

[Panel Five: Pricing from the Competitors' Perspective]{.underline}

Testifying on this panel was Michael Eskew. Please see attachment Q for
his prepared written remarks.

*Questions for Mr. Eskew*: In response to questions regarding the
business practices of the United Parcel Service (UPS), Mr. Eskew
testified that UPS delivers to the door of every house in the country.
With regard to its pricing policies, Mr. Eskew testified that for the
last 15 years, UPS had implemented a two to four percent rate increase,
depending on the product, around the first of the year. He stated that
the rate-setting process lasts a year and that UPS gave customers
approximately six weeks' notice of new rates. In response to questions
regarding technology, Mr. Eskew testified that UPS would like to use
technology to offer new products and to capture information about each
package it ships. In response to a question regarding what the
Commission should not do, Mr. Eskew asserted that the Commission should
not recommend the status quo, should not lose focus on cost and
productivity, and should not look for a silver bullet oversees. When
asked to elaborate on the overseas models, Mr. Eskew responded that UPS
operates across the world and that no country has a perfect system.

[Panel Six: Pricing in other Regulated Industries]{.underline}

Testifying on this panel was Professor David Sappington. Please see
attachment R for the text of his prepared written comments.

*Questions for Professor Sappington*: In response to a question of
whether there were any general points he would like to emphasize,
Professor Sappington noted the danger of trying to take experience in
one industry and apply it to another industry. However, he did note that
the focus of most regulatory policy in the telecommunications industry
is currently on trying to harness the powers of competition. He further
stated that where there is an opportunity for competition, it is usually
a better solution than regulation. In response to questions regarding
the regulatory oversight of the Postal Service and the possibility of
moving the authority for regulating the Postal Service over to the
Federal Communications Commission, Professor Sappington agreed that it
might make sense to do so. He also stated that it would be difficult to
have a different regulator for the Postal Service's competitive products
and the monopoly products. He thought it made more sense to have the
same regulatory entity for the competitive and monopoly products, but
different policies for the products.

[Panel Seven: Corporate Governance]{.underline}

Testifying on this panel were S. David Fineman and Charles M. Elson.
Please see attachments S and T for the text of their prepared written
comments.

*Questions for Mr. Fineman*: In response to questions regarding the
activities of the Board of Governors, Mr. Fineman testified that he does
not think the Board micromanages. However, he agreed that the Board
meets too often and that the frequency of meetings makes it harder to
find quality Governors. He asserted that the Board should meet on a
quarterly basis. Mr. Fineman also testified that the relationship
between the Board of Governors and Postal Service employees and
supervisors is a good one and that the Governors meet with employees and
supervisors on a regular basis. As for the structure of the Board of
Governors, Mr. Fineman testified that a review of the audit committee
was conducted last year and that he had instructed the audit committee
to review the structure of the Board of Governors as well. Mr. Fineman
also said that the regulatory process should be changed, but had
concerns about moving this regulatory authority to the Board of
Governors. In response to questions regarding the Postal Service's
finances, Mr. Fineman testified that the Postal Service should not be
burdened with a break-even requirement. He also said that he felt the
Board received good financial data from the Postal Service. He asserted
that the Postal Service releases financial statements every month and
that any information not known is miniscule in relation to total
revenue. In response to a question regarding labor costs, Mr. Fineman
made three observations. He suggested that the manner in which contracts
are negotiated be changed, that the collective bargaining process does
not work, and that the Commission should look to the Railway Labor Act
as a successful model. Mr. Fineman said the one thing the Commission
should not recommend is the retention of the status quo.

*Questions for Professor Elson*: In response to a question regarding the
criteria for selecting Board members, Professor Elson responded that the
criteria should be modeled on corporate Boards, that the Commission
should consider UPS and FedEx Boards as examples, and that the process
should be less political. With regard to Congressional oversight,
Professor Elson testified that too much Congressional oversight needs to
be prevented and that the Postal Service Inspector General should not be
appointed by Congress.

[Commission Business]{.underline}

The Commission considered and approved a recommendation regarding the
establishment of a "Rebuttal Process."

The Executive Director stated that the purpose of the Rebuttal Process
is to provide a mechanism for the public to respond to recommendations
submitted by others during the public-comment process. It was noted that
such rebuttal comments are due by March 13, 2003. A copy of the
recommendation, as approved, is attached (Attachment U).

The Executive Director also announced that the next public meeting will
take place in Austin, Texas, at the LBJ Library on March 18, 2003.
Commissioner Cogman announced that future public meetings will take
place in Los Angeles, California, on April 4, 2003, and in Chicago,
Illinois, on April 29, 2003.

The meeting adjourned at approximately 3:55 pm.