**PRESIDENT'S COMMISSION ON THE**

**UNITED STATES POSTAL SERVICE**

**COMMENTS OF THE**

**ASSOCIATION FOR POSTAL COMMERCE**

**February 12, 2003**

Executive Summary

The Association for Postal Commerce's ("PostCom") basic position on the
complex and challenging issues confronting this Commission can be
encapsulated in a single phrase: preservation of the status quo is a
formula for failure, but successful transformation can be accomplished
through incremental reform.

We therefore urge the Commission to consider the following specific
recommendations, the bases for which are explained more fully in our
comments:

-   The system of regulation of prices and postal products is
    unworkable. The "break-even" constraint is incapable of meaningful
    application. The current cumbersome cost-of-service process should
    be completely overhauled to give the Postal Service the flexibility
    it needs to meet the market place and economic challenges it faces
    under a streamlined regulatory review process that enables mailers
    to take full advantage of worksharing opportunities and incentives
    while adequately protecting against monopoly exploitation and unfair
    competition and that holds the Postal Service accountable for
    failure to meet service standards.

-   The 1970 Act does not adequately define the "products" that the
    Postal Service should be permitted to offer. The Postal Service
    should be restricted to the delivery of letters and other forms of
    hard copy information and parcels to the intended addressees, to a
    few traditional "non-postal" activities, and to only those
    electronic information services that are directly related to and
    support the Postal Service's core business activities.

-   The Postal Service must remain a public enterprise charged with the
    provision of universal affordable service. The Postal Service should
    retain a statutory monopoly only over non-urgent mail that is
    required to be entered at First-Class Mail rates, and the current
    patchwork of unreviewable rules and exceptions to the monopoly
    statutes should otherwise be eliminated. Unrestricted access to the
    mail box by alternative service providers should not be permitted;
    but, the postal regulator should be given authority to consider
    relaxation of this constraint if and when circumstances warrant.

-   The business model under which the Postal Service operates needs to
    be changed in narrow but fundamentally important respects. The
    financial incentives provided to Postal Service management are
    grossly inadequate. There needs to be much greater clarity and rigor
    in the disclosure of financial and similar information upon which
    mailers depend to develop their own plans. The need for a Board that
    is composed of highly qualified individuals, some of whom are
    stakeholders, and that is organized to perform functions of the type
    performed by other large public corporations, is vital to successful
    transformation. It is also important that the Commission consider,
    as it intends to do, the Postal Service's labor and management
    system, a topic which involves extremely complex issues that may not
    be readily susceptible to a single hard and fast solution.

[COMMENTS OF THE ASSOCIATION FOR POSTAL COMMERCE]{.underline}

The Association for Postal Commerce ("PostCom") fully appreciates the
profound importance of the charter that this Commission has been given,
to consider and recommend changes in the laws governing the United
States Postal Service, to its structure and operations and, indeed, to
its culture. The Commission's task is critical to the economic and
social welfare of the American public, including more than nine million
Americans who are employed by businesses and organizations that depend
upon the Postal Service as a medium of commercial and personal
communication. We are grateful to the Administration for convening this
Commission and appreciate the opportunity you have provided us to submit
our views on the complex and challenging issues you are examining.

# INTRODUCTION

PostCom is well positioned to assist you in your undertakings. Our
membership consists of businesses and organizations \-- large and small
\-- that use the postal system to communicate with their customers,
donors and constituents and the printers, logistic companies,
fulfillment houses, software providers and others that make use of the
postal system possible. Collectively, our membership is estimated to
account for in excess of 70% of all revenues the Postal Service receives
from the Standard Mail subclasses, but our interest in the postal system
goes far beyond these subclasses. We account for about 50% or more of
the total volume of catalogs weighing over one pound, books, audio and
video materials, and parcels that the Postal Service handles each year.
Our membership also makes extensive use of First-Class Mail and of both
domestic and international shipments of alternative service providers
such as UPS, FedEx, DHL, etc. We thus have a vital interest in assuring
the existence of an efficient, responsive and financially stable Postal
Service which, consistent with its universal service obligations and
responsibilities, operates in a fair competitive environment.

In accepting its Charter from President Bush, this Commission was told
that preservation of the status quo is unacceptable. We absolutely
agree: **the status quo is a formula for failure.** At the same time,
the 1970 Postal Reorganization Act has, in many respects, shown itself
to be considerably more flexible than some have been willing to
recognize. The Postal Service's own Transformation Plan, and the Mailing
Industry Task Force report on which it is significantly based, recognize
this. These reports \-- and particularly the ongoing work of the Mailing
Industry Task Force \-- lay the foundation for incremental reform
necessary to enable the Postal Service to meet the challenges of the
21^st^ century. Nonetheless, there are statutory and regulatory barriers
that need to be removed if the vision of an efficient, responsive and
financially stable Postal Service is to be realized. In the comments
which follow, we have attempted to identify those central aspects of law
and policy where, in our view, change is not needed, as well as aspects
of the current postal laws and of practices and policies where change
is, in our view, imperative.

# I. The Public-Private Partnership: Prices, Worksharing and Regulation.

It is in the area of pricing and regulation of postal products that the
Postal Reorganization Act of 1970 is most critically in need of reform.

*A. Pricing Flexibility.*

The Postal Service is the very last public utility that is subject to
strict cost-of-service regulation. It is subject to a break-even
constraint that is incapable of meaningful application except through a
wholly artificial accounting device of estimating revenues and costs in
a forward "test year." More importantly, the break-even constraint has,
among other unintended consequences, the effect of restricting the full
deployment of worksharing: it forces the Postal Service and the Rate
Commission to emphasize the "revenue leakage" that results from
worksharing discounts while underestimating the costs that are avoided
in the longer run. The break-even constraint must be repealed. The
entire system of rate regulation must be restructured to give the Postal
Service greater flexibility to price its products in ways which are
business like and economically rational and to thereby promote the
lowest combined public-private sector cost.

*B. Rate Regulation.*

The continued existence of a statutory monopoly and the fact that the
Postal Service has and will have for the foreseeable future a de facto
monopoly over many of the products within its core mission requires that
some form of rate regulation be preserved as a check and balance against
monopoly exploitation and unfair competitive conduct. In our view,
however, the current regime should be abandoned. It should be replaced
by a streamlined system comparable to that used to regulate rates in
other industries operating what might be characterized as an "essential
facility." The constraints on pricing should be structured along the
following lines:

-   Direct regulation of prices should be confined to the one class or
    subclass of mail that is subject to the statutory monopoly and
    therefore has uniform (bundled) rates regardless of distance. The
    rates for other products provided by the Postal Service should be
    subject to review only upon complaint, either by mailers or
    alternate service providers, based upon a substantive demonstration
    that the rates yield excessive profits, entail impermissible cross
    subsidies, or fail to meet clear and objective costing and pricing
    standards.

-   All products should be grouped by common cost causative
    characteristics. This is necessary to assure appropriate incentives
    to maximize optimization of the combined Postal Service private
    sector infrastructure. One of the difficulties with the current
    worksharing incentives is that mail which bears indistinguishable
    cost causative characteristics are nonetheless provided with
    different incentives. In part, this is due to inadequacies in -- and
    the lack of transparency of -- the cost data on which the Postal
    Service and Postal Rate Commission rely; in part, however, it is due
    to the judgmental policies the Commission and Postal Service apply
    in determining how much, and in what circumstances, the costs
    avoided through worksharing should be "passed through" to mailers.
    The process tends to understate, if it does not entirely ignore, the
    enormous investments that mailers and their service providers must
    make in hardware, software, facilities and transportation systems in
    order to qualify for the discounts. Thus, the Postal Service should
    be required to develop costs and rates that are activity based and
    all rate structures (outside the "reserve area") should be required
    to fully reflect unbundled network elements.

-   Pricing should be market-based, reflecting differences in demand,
    not only of the products that are entered into the Postal System,
    but also of the functions the Postal Service performs. So-called
    "non-cost" considerations should be strictly confined to the
    distribution of informational materials which serve Constitutional
    values.

-   The attempt to develop fixed formula for defining reasonable rates
    -- such as price caps, rate indices and the like -- should be
    resisted. Experience has shown that a formulaic approach to
    ratemaking in the context of a multi-product enterprise such as the
    Postal Service simply cannot take account of the many cost causative
    variables, differences in demand, and other econometric
    considerations that may make such formulas viable in other contexts.
    Instead, the permissible bound of rates should be confined by a zone
    of reasonableness to be fleshed out by the regulatory body as
    experience, as well as changes in market and other economic
    conditions, dictate. This standard would permit -- indeed encourage
    -- testing and service innovation through such vehicles as
    customized service agreements and negotiated rates even though such
    innovations may fall at the lower end of an otherwise applicable
    zone of reasonableness.

*C. The Worksharing Partnership.*

It is impossible to consider questions of pricing and regulation without
also considering the question of whether and to what extent some core
functions -- especially upstream processing and transportation -- now
performed by the Postal Service are better performed by mailers and
their service providers through what is called "worksharing," but is
more accurately described as the lowest combined private sector-public
cost. Worksharing has been one of the great successes of the Postal
Service over the past decade and a half. For example, in Standard Mail,
over 50% of all volume is drop- entered as deep into the system as the
Postal Service's rate incentives and preparation rules will allow. The
savings that the Postal Service has realized from presortation,
automation and drop entry discounts across all classes run into the
billions of dollars annually. It is no exaggeration to say that
worksharing has literally saved the Postal Service from complete
collapse.

However, the worksharing structure and incentives can and should be
further expanded and reinforced. The barriers to full realization of the
lowest combined cost are only, in part, a result of the current pricing
and costing mechanisms. They are equally a function of the Postal
Service's operational practices and the rules and regulations the Postal
Service imposes on mailers, letter shops, printers and logistics
companies to qualify for these incentives.

Two examples may serve to illustrate this problem. For years, the Postal
Service simply refused to allow certain letter-shaped pieces above a
certain weight to qualify for automation discounts, even though all of
the available evidence showed that these pieces are not only capable of
being run on letter automation equipment, but, in fact, were being run
on that equipment. Without incentives, mailers had no reason to prepare
their mail in the manner most efficient to the Postal Service;
alternatively, they had to forego marketing opportunities by reducing
the weight of the mail piece. We were persistent in their efforts to get
the Postal Service to change its policies and they now have changed, at
least in part. It should not, however, have taken us a decade to
effectuate this change.

Similar problems arise with respect to drop-entry. Too often, the Postal
Service's mail preparation rules, and the manner in which it deploys
processing equipment, require mailers and logistics companies to divert
mail from postal facilities located close to destination addresses and
instead enter the mail at more distant postal facilities; this results
in increased postage bills and cost to mailers and added cost and
delivery delays to the Postal Service.

These and similar requirements and policies prevent full realization of
the obvious benefits that worksharing produces. The changes we have
proposed in pricing and rate regulation will help to address those
constraints. But the Postal Service must also help itself by recognizing
that its ability to properly carry out its core functions affirmatively
requires that it expand and enhance the private sector-postal
partnership to the fullest extent possible.

*D. The Role of the Regulator.*

Although the current structure gives the regulator -- the Postal Rate
Commission -- too much authority (through its power to examine in
exacting detail costs and to adjust rates based on "non-cost factors")
it also provides the regulator with inadequate authority in certain
respects. The postal regulator should be independent and its decisions
final, subject only to review by the courts or, of course, correction by
Congress. That is not the case now.

The statute also gives the Rate Commission only very limited authority
to review service standards and Postal Service performance in meeting
those standards. Under current law, service standards -- including the
standards the Postal Service establishes as conditions of eligibility to
access worksharing incentives -- are literally unreviewable. They are
neither measurable nor transparent. The regulator should have the
authority to insist that the Postal Service establish, subject to
regulatory review, clear, measurable and transparent service and mail
preparation standards. The regulator should have the authority to hold
the Postal Service accountable for its failure to meet those standards.
Changes in accounting practices should also be subject to review.

In sum, the regulatory system should be overhauled to give the Postal
Service the flexibility it needs to meet the market place and economic
challenges it faces, to enable mailers to take full advantage of
worksharing incentives, to assure that service is appropriate to the
price charged and to adequately protect against monopoly exploitation,
unfair competition and irrational pricing.

# II. Private Sector Partnership: Products

A further major problem with the 1970 Act is that it does not adequately
define the scope of the Postal Service's mission -- the "products" it
should be permitted to offer. The statute allows the Postal Service to
engage in activities which are either (or both) "postal" or "non-postal"
in character. The statute does not define either term. The result is, at
best, ambiguity which results in a dilution of Postal Service resources,
as well as conflict (and sometimes litigation) between the Postal
Service, mailers and mail service providers and alternative service
providers. In our judgment, the Postal Service must confine itself and
its activities to its "core functions" which are the delivery of letters
and other forms of hard copy information, and parcels to the intended
addressees.

For reasons of history, and because they do not significantly divert
Postal Service resources from the effective performance of its core
functions, certain traditional "non-postal" activities -- such as Postal
Service money orders and the philately program -- may be preserved. At
the same time, it must be recognized that there are certain public
service functions -- such as draft registration -- that are not revenue
producing, and are not related to the Postal Service's core functions.
These public service activities should be taxpayer, rather than rate
payer, supported.

However, we urge the Commission to make absolutely clear that the Postal
Service should not be involved in any form of "pure" electronic
information services except to the extent those services are directly
related to and support the Postal Service's core business activities.
For example, the Postal Service has recently initiated a service called
"Confirm." Although electronic in character, its purpose -- and its
primary utility -- is to enable mailers to track letter and non-letter
size pieces as they progress through the postal system down to the
delivery unit. This service is plainly valuable and intimately related
to the core functions of acceptance, processing and delivery. It should
be permitted. There are similar electronic services, such as those
relating to address correction and accuracy that support the efficient
and reliable delivery of mail; these, too, should be permitted. By
contrast, the Postal Service has, in the recent past, and continues to
be engaged in the provision of information services that are not in any
way ancillary to or supportive of its core business. In his appearance
before this Commission, the Postmaster General acknowledged that these
activities are not and never will be sufficiently profitable to offset
the erosion of hard copy mail volume that has occurred and continues to
occur.

We understand that the Postal Service is undertaking a comprehensive
review of these non-postal activities. We trust that the results of that
internal evaluation will be made known to the Commission. At all events,
entirely apart from the question of whether the Postal Service ought to
compete directly in the electronic services marketplace, experience has
shown that the Postal Service cannot successfully perform its core
functions when it diverts resources and manpower to communications
services and functions. It should confine itself to the delivery of
information in hard copy form and goods.

**III. The Business Model: Universal Service Obligations.**

Any discussion of the scope of the Postal Service's mission inevitably
raises the question of the Postal Service's universal service
obligation. In our view, the fundamental role of the Postal Service
remains as it has been for over 200 years: regardless of its formal
legal structure, it must be a public service enterprise charged with the
provision of affordable universal service.

We encourage this Commission not to enter into the thicket of attempting
to define precisely what the term "universal service" means. The statute
defines that term broadly to mean the obligation to "bind the nation
together" by providing access to the mailstream to all who wish to use
it and by obliging the Postal Service to provide service that meets
reasonable and feasible needs of commercial and individual users. That
definition has essentially endured for more than 200 years and remains
workable.

We also urge the Commission to refrain from attempting to devise
mechanisms, such as those which have been employed in the communications
field, to apportion the cost burdens associated with universal service.
The fact is those efforts have been highly controversial, the mechanism
for generating the funds necessary to support universal service in those
industries -- the Universal Service Fund -- has been of questionable
efficacy and the two industries may not, in any case, be comparable. In
particular, PostCom urges the Commission not to recommend anything
remotely analogous to a recipient access charge.

At the same time, it is unquestionably the fact that the universal
service obligation imposed on the Postal Service by considerations of
national policy carries with it a cost. That cost cannot, as a practical
matter, be readily quantified. The Postal Service has repeatedly stated,
as recently as its appearance before this Commission, that one of the
primary costs to the Postal Service is the cost of providing service to
the "ever expanding delivery network," the number of households and
business offices the Postal Service must provide with mail delivery
service. There is reason to wonder, however, whether the importance of
the endless expansion of the delivery network has been somewhat
exaggerated. According to the data the Postal Service submits to the
Rate Commission, the cost of the delivery function -- the last mile --
has not increased at the same rate as total costs in recent decades.

These considerations lead to two conclusions.

-   First, in order to maintain universal service, it will be necessary
    for the Postal Service to retain a statutory monopoly over one class
    or subclass of mail which should be sealed against inspection and
    priced at uniform national rates. However, because of the
    unresolvable questions as to the extent of the universal service
    cost burden, it is our conviction that the statutory monopoly should
    be confined to mail which is required under current law to be
    entered at First Class mail rates and does not meet the conditions
    to qualify it for urgent letter status. That is, except for First
    Class mail, the current patchwork quilt of rules and exceptions to
    the monopoly statutes should be eliminated. There is no rational
    reason why a catalog of 23 pages should be subject to a statutory
    monopoly, whereas the same catalog with 2 more pages is
    theoretically exempt.

-   Unrestricted access to the mail box by alternative service providers
    should not be permitted. Our position is based, in part, upon
    uncertainty whether the Postal Service would be able to sustain its
    universal service obligations at acceptable prices if the mail box
    were to be opened to competitors. It is also based on the fact that
    the mail box presents -- as the Supreme Court has recognized --
    unique privacy and security considerations. However, these
    considerations may change over time. We do not think it productive
    to permanently lock in a Postal Service monopoly over the mail box.
    We therefore propose that the postal regulator be given authority to
    consider -- after a period of years following legislative reform and
    pursuant to clear and reviewable standards -- whether and, if so,
    under what circumstances and subject to what conditions, the mail
    box can be opened to alternative service providers without
    impairment of universal service and the other policy considerations
    that support the current postal monopoly over this essential
    facility.

**IV. Business Model: The Structure of the Postal Service; Workforce
Issues.**

*A. Executive Compensation.*

The financial incentives provided to Postal Service management are
grossly inadequate. It is simply no answer to say that public service
has its own rewards. In large measure, the regulatory constraints that
the Postal Service has put on access to worksharing incentives, and the
myriad, complex, inconsistent and in some cases, irrational mail
preparation requirements are a function of the fact that Postal Service
management simply has no incentive to fully exploit the opportunities
that the partnership with the private sector creates. It is unclear
whether the compensation caps are linked to the break-even constraints.
At all events, both constraints must be removed. Postal Service
management is entitled to the same rewards that are accorded to other
public service enterprises, such as Fannie Mae or Freddie Mac, and
should suffer the same consequences for failure.

*B. Financial Transparency.*

The changes that we urge in the breakeven constraint and the management
compensation structure carry with them corresponding duties that are
inadequately spelled out, if they are addressed at all, in the current
statute. Specifically, there needs to be much greater clarity and rigor
in the disclosure of financial information. Although the Postal Service
has very recently made some strides in this area, more must be done.

It is certainly true that the Postal Service has certain sensitive
information that it needs to legitimately protect for competitive and
other reasons. The Postal Service should not be asked to operate in a
fishbowl, any more than a publicly traded corporation does. Nonetheless,
the financial information that the Postal Service discloses is too often
incomplete or cryptic or unintelligible. In some cases, its refusal to
provide post-decisional information is inexplicable. For example, in
connection with its capital equipment purchases -- including the
purchase of mail processing equipment -- the Postal Service regularly
prepares engineering specifications and Decisional Analysis Reports,
essentially estimates of return on investment. The refusal to make those
reports available during the internal deliberation processes is
understandable; the Postal Service's extreme resistance to make this
information available once a purchasing decision has been made is not.

In order to develop their own plans, and to make their own decisions on
capital investments and the like, mailers need reasonable and prompt
access to information that goes well beyond the retrospective reports
that the Postal Service now provides.

*C. The Board; Labor Relations.*

Two other issues relating to the legal structure of the Postal Service
should also be examined by the Commission. The first is the role and
composition of what is now called the Board of Governors.

The job of the Board of Governors is simply too important to be treated
as purely a political matter. The Governors have the responsibility for
setting the goals and strategies of a \$70 billion a year enterprise.
The job requires qualifications, breadth of experience and commitment
comparable to that of a director of a large publicly traded company or a
major state-owned enterprise.

Further, stakeholders should sit on the Board. It is not clear whether
it is law or policy which stipulates that stakeholders -- mailers, mail
service providers and union representatives -- may not sit on the Board.
It is also not clear what purpose this constraint, whatever its source,
serves. The result is that, on matters that are remitted to the
exclusive discretion of the Postal Service, stakeholders are essentially
disenfranchised. Certainly, for so long as the Postal Service remains a
governmentally-sponsored enterprise, the power to appoint at least a
majority of the Board should reside with the President of the United
States, subject to Senate confirmation; and, in all events, there will
always be need for independent directors. Nonetheless, the need for a
Board that is composed of highly qualified individuals, some of whom are
stakeholders, that is organized and that performs only functions of the
type that are performed by other large public corporations, is
important.

The second structural issue that we ask the Presidential Commission to
consider is the labor-management system. There is no question that the
Postal Service is labor intensive and will remain so even after
transformation and reformation has been completed. There is also no
question that labor relations, both in terms of compensation of the
unionized employees and in the formulation of work rules, are important.
These issues, however, are complex and do not lend themselves to a
clear-cut solution.

Some students of the labor management issue as it relates to the Postal
Service will contend that the core problem is the manner in which the
binding arbitration structure is set up and that some other dispute
resolution mechanism should be adopted. Others will assert that wage
comparability provisions of the statute are too ambiguous. Still, others
may suggest that the problem is not the mechanisms that govern the
Postal Service's relationship with unionized labor, but rather in the
Postal Service's inability to formulate and implement coherent
productivity standards and to reward employees for meeting or achieving
those standards. Whatever conclusions the Commission may reach, we urge
it to keep in mind that the labor-management issue is indeed complex and
may not be readily susceptible to single hard and fast solution.

# CONCLUSIONS

PostCom has attempted to identify those issues which are essential to
the goal of an efficient, responsive and financially sound postal
system. That goal is, we believe, shared by all interested parties from
whom the Commission will hear. We believe it is, more importantly, the
goal that President Bush set out to achieve by the creation of this
Commission. We would be happy to work with the Commission in whatever
fashion is considered appropriate in helping the Commission to fulfill
the profoundly important assignment it has been given.

Respectfully submitted,

Gene A. Del Polito

President of the Association for Postal Commerce

1901 North Ft. Myer Drive

> Suite #401
>
> Arlington, VA 22209
>
> \(703\) 524-0096
>
> [genedp@PostCom.org](mailto:genedp@postcom.org)

Ian D. Volner

Venable, Baetjer, Howard & Civiletti, LLP

1201 New York Avenue, N.W.

Suite 1000

Washington, DC 20005

\(202\) 962-4814

<idvolner@venable.com>

General Counsel to the Association

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