Key Actions Have Been Taken to Implement the Act

Several key actions have been taken to implement the law since it was  enacted over 14 months ago. Some of the actions taken to implement the  act had a direct impact on the Service’s 2007 financial condition, while  others facilitated the transition to a new financial, operating, and  regulatory environment. Specific actions in the act that have affected the  Service’s 2007 financial condition include:    prefunding the Service’s significant unfunded retiree health obligations.
While this change results in significant retiree health benefit cost increases  for a decade, over the long term this action improves the fairness and  balance of the cost burdens for current and future ratepayers. The  Service’s 2007 payment of $5.4 billion was the first of 10 annual payments  required under this change.   expensing almost $3 billion in funds previously set aside in escrow  (transferring them to the Treasury) and eliminating future escrow  payments, including an estimated $3.3 billion payment that had been  scheduled for 2007. transferring the estimated $27 billion funding obligation for selected  military service benefits back to the Treasury.    eliminating certain annual CSRS pension funding requirements, thereby  saving the Service approximately $1.6 billion in 2007.
The effects of these changes, however, must be put into context with other  actions and events during this time to gain a comprehensive understanding  of the Service’s financial and operating condition. For example,    Mail volumes and revenues: Total revenues of nearly $75 billion dollars in  2007 represented an increase of 3 percent from 2006. This revenue  increase, however, was largely attributable to the January 2006 and May  2007 rate increases—not mail volume increases. In particular, the Service  experienced an overall decline in mail volume from 2006 of over 900  million pieces (a 0.4 percent decline), largely due to a decrease of 1.7  billion pieces of First-Class Mail and the smallest increase in Standard Mail  volumes since 2001.
Operating costs: Total operating expenses of over $80 billion in 2007  represented an increase of nearly 12 percent from 2006. This increase was  largely due to a net increase of $6.8 billion in expenses that resulted from  requirements of the act described earlier. The Service was also affected  by increases in postal wage rates; rising fuel costs (its transportation costs  grew by almost 8 percent); and the extension of mail service to an  additional 1.8 million delivery points.
Productivity and cost control: The Service was able to partially mitigate  these cost pressures by improving productivity for an eighth consecutive  year. The Service reported a 1.7 percent increase in productivity, which is  equivalent to $1.2 billion in cost savings. The Service reduced over 36  million workhours, partly by downsizing its career workforce by over  11,000 employees.
Labor agreements: The Service negotiated agreements with 3 of its 4 major  unions on wages, many benefits, and conditions of employment in 2007.
Debt: The Service’s outstanding debt increased $2.1 billion in 2007,  doubling its 2006 debt balance to $4.2 billion. These increases were  primarily used to finance year-end worker compensation and retiree  health payments.
Capital: The Service reported a slight increase in capital cash outlays of  $2.6 billion in 2006 to $2.7 billion in 2007. These funds were used for such  projects as new facilities, automation equipment, and carrier vehicles.
Service performance: According to the Service, it reported record annual  on-time performance for First-Class Mail measured by the EXFC system.  The Service reported on-time performance for 2007 of 96 percent for its 1- day mail, 93 percent for its 2-day mail, and 90 percent for its 3-day mail.
The net income reported for 2007 was a $5.1 billion loss. Removing the  financial impact of the new law, the Postal Service’s net income would  have been $1.6 billion (which was $100 million less than the $1.7 billion  originally budgeted for the year). Because of the new law, however, the  Service required an additional $500 million in cash to cover the differences  between the net increase in retirement-related expenses of $3.8 billion  and the expected $3.3 billion escrow payment that was avoided.
Aside from its direct financial impact, the act required other actions to  facilitate the transition to a new financial, operating, and regulatory  environment. Table 1 summarizes key actions.
As indicated in table 1, multiple stakeholders have taken actions to  implement the requirements of the act. While each of these actions is  important, I would like to highlight the efforts of the Postal Service and  other stakeholders in modernizing service standards and of the PRC in  transitioning to its new regulatory responsibilities.
Service standards: The Service has made important progress in  implementing the act’s requirements to establish modern service standards  for market-dominant products. The Service’s approach to developing these  standards incorporated a high level of collaboration with mailers,  consultations with the PRC, and comprehensive review of its network  capabilities. A workgroup involving nearly 200 representatives from the  Service, mailing organizations and mailers, and other members of the  mailing industry was particularly noteworthy for its efforts to identify  issues and build consensus in this area. The result was the most sweeping  update in delivery performance standards in many years. In particular,  standards for Periodicals, Package Services, and Standard Mail that dated  back many years were realigned with current postal operations.
Regulation: A key tenet of the act was to provide the Postal Service with  more flexibility to set prices and introduce new products. The act,  however, balanced this flexibility by granting the PRC enhanced  regulatory authority to regulate these activities, and to, among other  things,  regulate rates for market-dominant products and services;   monitor financial and service performance;    ensure financial transparency and data quality; and    act on complaints against the Postal Service.
The PRC has made good progress in its transformation, particularly in  establishing a new ratemaking system. The PRC issued its first set of rate  regulations almost 8 months ahead of the statutory deadline, and the  Postal Service recognized this achievement and chose not to file another  rate case under the old system. The PRC set up its new organizational  structure, including the new PRC Inspector General, as well as revising  key rules and regulations to reflect implementation of the act. The PRC  has also taken an active role in consulting with the Service on its service  standards and performance measures, solicited public comments, and held  hearings and meetings to stimulate constructive dialogue among the  parties.

	Remaining Implementation Challenges Exacerbated by Economic Uncertainty

The financial, operational, human capital, and regulatory challenges facing  the Service and other stakeholders as they take actions to continue  implementing the act are exacerbated by the current uncertain economic  environment. The Service noted in its 2008 budget that it expected a net  increase in costs of $1 billion net for 2008 from changes in the law. In  addition, a slowing economy has negatively affected the Service’s financial  performance in the first quarter of 2008—its mail volumes and revenues  were both below planned amounts. The Service was able to mitigate these  challenges by managing cost growth while achieving record service  delivery performance for the segment of First-Class Mail that is currently  measured. To address concerns about its challenged financial outlook, the  Service filed a rate increase February 11, 2008, averaging about 2.9 percent  for the majority of its products. This increase is scheduled to take effect  on May 12, 2008, and is the first of its type under the new law. According  to Service officials, this increase is expected to contribute an additional  $700 million in revenues for 2008, but will need to be supplemented by  accelerated cost reduction strategies to achieve its year-end target of a  $600 million net loss. The Service has updated its strategies for addressing  challenges under the new law related to generating sufficient revenues,  achieving efficiencies through automation, and improving service. In  particular, to help address its revenue challenges, the Service has  indicated that it plans to fully use its pricing authority under the rate- setting cap to implement smaller, more frequent, predictable rate  increases, as well as work with its customers to develop new products and  services. It also plans for $2 billion in cost reduction efforts in 2008. Some  of the key areas for continued oversight include changes in mail volumes  in response to more frequent, predictable rate increases; efforts to control  costs by modernizing and optimizing the Postal Service’s infrastructure  and workforce; the transition to new automation and mail-tracking  systems; the level of transparency in measuring and reporting delivery  performance; and the implementation of the new rate-setting processes  and regulations.

		Generating Sufficient Revenues as Mail Volumes Decline and the Mail Mix Changes

The Service continues to face challenges in generating sufficient revenue  as mail volumes are declining and the mail mix is changing. This challenge  became more evident after the Service’s revenue and volume results for  the first quarter of 2008 were released. Volumes were down 1.7 billion  pieces (3 percent) compared with quarter 1 in 2007 (see table 2), with  notable declines in the two major mail classes: First-Class Mail and  Standard Mail. These results are of particular concern because they  occurred during a typically strong volume quarter that includes the holiday  mailing season.
Key declines during this time took place within the two largest categories,  First-Class Mail and Standard Mail. In particular, volumes declined for flat- sized Standard Mail (e.g., catalogs) by 13 percent; for flat-sized First-Class  Mail (e.g., large envelopes) by 15 percent; and single-piece First-Class Mail  by nearly 7 percent. As a result of the overall declines in mail volume,  revenues were $500 million less than planned. The Service attributed these  volume declines and revenue shortfalls to multiple factors, including the  effects of the May 2007 rate increase; a slowing economy with declines in  the financial and housing industries, business and consumer confidence,  and rising fuel and paper prices; increasing competition from other  advertising media; and the continued diversion of single-piece First-Class  Mail to electronic alternatives such as Internet bill payment and direct  deposit.
The declines in First-Class Mail volume in the first quarter of 2008 parallel  the ongoing trends of First-Class Mail in general. This class of mail, once  with the largest volumes and revenues, saw volumes decline by more than  7 percent between 2001 and 2007. The Service’s First-Class Mail volume  estimate of 95.4 billion pieces built into its 2008 budget would be a slight  decline from 2007 levels and would be the lowest volume level since 1994.  These declines in First-Class Mail were mitigated in past years by growth  in Standard Mail volumes and revenues. Standard Mail volumes exceeded  those for First-Class Mail for the first time in 2005. This change was  significant, in part because Standard Mail is more sensitive to prices and  economic conditions and it takes about two pieces of Standard Mail to  make the same contribution to the Service’s overhead costs as one piece  of First-Class Mail. The Service’s 2008 budget planned a modest 1.1  percent growth in Standard Mail volumes because of such factors as the  effects from the May 2007 rate increase and a projected slowness in the  economy. The Service stated in its first quarter report for 2008 that these  factors, among others, had an adverse impact on volumes as Standard Mail  volumes declining by 2.6 percent compared to the first quarter of 2007. For  the remainder of 2008, mail volumes and revenues will continue to face  many of the same challenges that affected its first quarter results,  particularly economic uncertainty and the impacts of rate increases.
The Service recognizes that the law provides opportunities to address the  revenue challenges it faces and that “cost cutting alone cannot sustain the  business.” The act specifically provides tools and mechanisms to help  promote revenue generation and retention of revenues. The act  established more timely, flexible pricing mechanisms for the Service’s  competitive and market-dominant products. For example, it allows the  Service to use a streamlined process for raising the rates for its market- dominant classes, such as First-Class Mail, Standard Mail, and  Periodicals, up to a defined price cap; to exceed the price cap should  extraordinary or exceptional circumstances arise; and to use any unused  rate authority within 5 years. For its competitive products, such as Priority  Mail or Expedited Mail, the Service may raise rates as it sees fit, as long as  each competitive product covers its costs and competitive products as a  whole cover their attributable costs and make a PRC-specified  contribution to overhead. The act also allows for new, customized  products and services, as well as for the Service to retain any earnings,  which may help finance capital investment and increase financial stability.  In its updated Strategic Transformation Plan, the Service states that it  plans on taking advantage of these new flexibilities through such actions  as  improving the value of its market-dominant products through such tools as  Intelligent Mail, tailoring competitive products to market requirements,   enhancing online postal services, and    streamlining acceptance of mail at postal facilities for commercial mailers.
The Postal Service applied its new rate-setting flexibilities when, on  February 11, 2008, it announced its first rate increases under the act for its  market-dominant products, including an increase in the cost of a First- Class stamp from 41 to 42 cents. The Service intends to raise the rates for  each class, on average, close to the maximum allowed by the price cap  (2.9 percent). Within each class, scheduled rate increases will vary for  specific mailing services. For example, the rates for Standard Mail Flats  are scheduled to increase 0.9 percent, compared with a 3.4 percent  increase for Standard Mail Letters. These variable increases reflect the  Service’s decision to moderate the increases for catalogs and other flats  because of the large rate increases they experienced in May 2007.  Furthermore, the Postal Service has recently notified the PRC of rate- setting initiatives for two of its competitive products. One notice pertained  to establishing a premium for guaranteed delivery of Express Mail on  Sunday and holidays, while the other notice pertained to establishing  prices for a Priority Mail large-sized Flat Rate Box.
Continued congressional oversight will be needed of the Service’s actions  under the act to address its volume and revenue challenges. Particular  attention should be paid to monitoring how the Service and mailers  respond to a slowing economy and the implementation of the new rate  process. Questions to address include the following:    How will mailers and volume respond to changes in rates in the short  term, as well as the Service’s intent to fully use its pricing authority under  the rate-setting cap? To what extent will these changes affect the mail mix,  including the type, size, and weight of mail?
What types of innovative pricing methods will the Service offer?
To what extent will customers’ desire for mail be affected by privacy  concerns, environmental concerns, preference for electronic alternatives,  or efforts at the state level to establish Do Not Mail lists?
How will the Service be able to enhance the value of the mail (e.g., by  providing more predictable and consistent service, tracking and tracing  capabilities)?
What will the Service do with any retained earnings (e.g., expand its  capital program, save to weather downturns in the economy)?

		Controlling Costs and Improving Operational Efficiency

The Service faces multiple pressures in the short and long term associated  with controlling costs and improving productivity while experiencing  above-inflation cost growth in certain categories, revenue challenges, and  an inflation-based price cap. In the first quarter of 2008, the Service  reported responding to revenue shortfalls by cutting more than $300  million in costs compared to plan, including reducing over 10.5 million  workhours compared to the first quarter of 2007. The Service indicated  that continued vigilance on cost will be needed for the rest of the year, and  it will prove increasingly difficult to reduce workhours at the same pace if  revenue challenges continue. The Postal Service budgeted for a $1 billion  reduction in expenses for 2008, to be achieved in part by reducing 28  million workhours and increasing productivity by 1 percent. Based on the  first quarter’s performance, the Postal Service recognizes that it needs to  more aggressively reduce expenses to mitigate the financial impact of the  economic slowdown, and it has identified an additional $1 billion in cost  reduction efforts, many of which are tied to reduced volumes. While  actions taken to implement the reform act put pressure on costs—the  Service expects a net increase of $1 billion in costs in 2008—the act also  eliminates other payments and provides opportunities to offset some of  these cost pressures through efficiency gains that could restrain future  rate increases. It will be crucial for the Service to take advantage of this  opportunity and achieve sustainable, realizable cost reductions and  productivity improvements throughout its networks.
Personnel expenses (which include wages, employee and retiree benefits,  and workers’ compensation) have consistently accounted for nearly 80  percent of annual operating expenses. Growth in such expenses has  exceeded inflation in each of the last 4 years, and the expenses are  budgeted to increase by almost $660 million in 2008. The major drivers of  the personnel expense increase include cost of living adjustments (COLA),  general wage increases, and health benefit expense increases. For  example, retirement health benefit costs have tracked well above the rate  of inflation, and will remain high because of the new multibillion dollar  payments required by the law.
Another cost pressure the Service faces is to modernize and maintain its  vast infrastructure and transportation system that supports its expanding  delivery network—projected to increase by 1.9 million delivery points in  2008. The Service’s transportation costs have grown faster than the rate of  inflation for the past 3 years and were budgeted to increase by 5.4 percent  ($350 million) in 2008. The Service attributes these increases in part to  contractual rate increases and rising fuel costs. We noted the Service’s  vulnerabilities to rising fuel prices in a report issued last year. We have  also reported on the challenges facing the Service in managing its 34,000  facilities nationwide, including the need to capture and maintain accurate  facility data, adequately maintain facilities, address deferred maintenance  issues, and align retail access with customer needs.
The act provides an opportunity for the Service to address its cost  challenges by establishing an inflation-based price cap for market-  dominant products, which provides an incentive for the Postal Service to  operate more efficiently. The act also requires the Service to develop a  plan by June 2008 that includes its strategy for rationalizing the postal  facilities network and removing excess processing capacity from the  network. As part of this plan, the Service is to identify cost savings and  other benefits associated with network rationalization alternatives. This  plan provides an opportunity for the Service to make its case that  realignment is needed to address infrastructure issues (e.g., excess  capacity, maintenance needs, and facility locations) and reduce costs. It  can also address concerns raised by Congress and the public about how  decisions related to planned network changes are made and  communicated to affected parties. We have reported our concerns that the  Service’s strategy for realigning its processing and distribution network  and workforce was not clear, and that its strategy lacked sufficient  transparency and accountability, adequate stakeholder input, and  performance measures for results and we have recommendations  outstanding related to these concerns.
The Service recognizes these cost challenges and plans to build on its  progress in this area. We have reported on the Service’s progress in  containing cost growth by reducing workhours, downsizing its workforce  and improving productivity, and the Service’s ability to control cost  growth during the first quarter was encouraging. Furthermore, the Service  should benefit from agreeing with its four major labor unions reducing its  future share of the contributions to the cost of health benefit premiums for  many of its employees. The Service is planning to continue its cost cutting  efforts as part of its Strategic Transformation Plan and is seeking  efficiency gains from a variety of sources including    more fully automating the sorting of flat mail—in 2008, the Service will  deploy 100 machines to automate flat sorting in 30 to 35 facilities as part of  its Phase One of the Flats Sequencing System (FSS);    outsourcing certain activities, such as expanding contract delivery    consolidating mail processing operations;    optimizing retail resources using two scheduling tools to help managers  align staffing to changes in customer demand; and   working with members of the mailing industry to optimize mailer  preparation requirements, including the use of Intelligent Mail Barcodes  on mailpieces, to facilitate achieving the lowest combined mailing cost for  all parties.
Making progress in addressing cost challenges will be important as the  Service is required to operate under the new price cap, particularly if the  economy continues to weaken. Progress will also be needed in areas  where it has been difficult to achieve. For example, we reported last  summer that progress in consolidating mail processing operations among  facilities has been slow due to several factors.  In some cases, the Service  was not ready to proceed with the consolidation, and other external  factors have slowed the process, including union and community  resistance. In addition, language in recent Senate Appropriations  Committee reports has directed the Service not to implement  consolidation decisions in certain locations until specific requirements  have been met. Furthermore, in its first quarter financial report, the  Service stated that if proposed legislation limiting its ability to contract out  mail delivery and other postal activities is enacted, it would place  significant restraints on its ability to achieve cost reductions. As actions  are carried out to control costs in the future, continued oversight will be  needed to ensure that the Service’s cost reduction strategies achieve their  goals, without negatively affecting service. Specific oversight questions  include the following:  If volume shortfalls persist, will the Service be able to implement  corresponding cost controls?
If the economy continues to worsen and/or certain key costs continue to  increase at levels above inflation (e.g., health benefit costs), how can the  Service still meet its service goals and manage its costs under the rate cap?
How will the new rate structure lead to efficiency improvements  throughout the mail system?
Will the Service’s implementation of its network realignment result in  greater cost savings and improved efficiency?
How do external constraints limit the Service’s ability to achieve cost  savings through network optimization and what can be done to alleviate  these constraints?
Would the Service achieve its expected return on investment and  improvements in operational performance in a second phase of automated  flat sorting equipment?

		Managing Its Workforce

The Service will be challenged to manage its workforce as it transitions to  operating in a new postal environment. The Service is one of the nation’s  largest employers, with almost 786,000 full- and part-time employees at the  end of 2007. As the Service continues to improve its operational  efficiencies (i.e., rationalize its facilities, expand service measurement,  increase automation, improve retail access, and streamline its  transportation network), it will be challenged to realign its workforce in  accordance with these changes. These challenges may be compounded by  such factors as (1) changes in mailers’ behavior in response to the new  rate structure and economic uncertainty that may reduce the level of  processing needed at Postal Service facilities and (2) the expected  retirement of a significant portion of its workforce, particularly at the  executive level, within the next 5 years. These actions will require a  different mix in the number, skills, and deployment of its employees, and  may involve repositioning, retraining, outsourcing, and further reducing its  workforce. The Service must describe, as part of the Facilities Plan  required by the act, its long-term vision for realigning its workforce and  how it intends to implement that vision. This plan is to include a  discussion of what impact any facility changes may have on the postal  workforce and whether the Postal Service has sufficient flexibility to make  needed workforce changes.
The Service recognizes the challenges in aligning its workforce with  changing customer needs, new technologies, and emerging markets. In its  updated Strategic Transformation Plan, the Service includes specific  actions aimed at improving workforce flexibility, succession planning, and  staffing efficiency. As it takes actions in this area, oversight will be  important in several areas including:    How will the Service’s workforce be affected by the implementation of  new automation equipment that supports such initiatives as FSS or  Intelligent Mail?
How will the Service balance the varying needs of diverse customers when  realigning its delivery and processing networks?
How will employees and employee organizations be affected and informed  of network changes and how will the Service monitor the workplace  environment?
How will the Service take advantage of flexibilities to deal with peak  operating periods?

		Maintaining, Measuring, and Reporting Service

The Service faces continued challenges in further updating its delivery  performance standards, implementing representative measures of delivery  performance, setting appropriate goals for delivery speed and reliability,  and reporting results in a transparent and accessible manner. This  information is critical for stakeholders to understand how the Service is  fulfilling its mission of providing affordable, high-quality universal service  on a self-financing basis—it would assist the Service and its customers in  identifying and addressing delivery problems, and help Congress, the PRC,  and others to hold management accountable for results and conduct  independent oversight.
In July 2006, we reported that the Service’s delivery performance  standards, measurement, and reporting needed improvement. Among  other things, we found that delivery standards for major types of mail had  not been updated in a number of years and did not reflect current  operations, including how mail is prepared and delivered. We also found  that the Service does not measure the delivery performance of most types  of mail, which limits transparency. Based on these and related findings, we  recommended the Service take actions to modernize its delivery service  standards, develop a complete set of delivery service measures, more  effectively collaborate with mailers, and improve transparency by publicly  disclosing delivery performance information.
The act provided an opportunity to address these issues by requiring the  establishment of modern delivery standards, the setting of goals for these  standards, and annual progress reports. The act also established other  requirements:    The Service must issue modern service standards by December 2007  (these standards were issued);   Within 6 months of issuing service standards the Service must, in  consultation with the PRC, develop and submit a plan, with performance  goals, to Congress for meeting those standards.
Within 90 days after the end of each fiscal year, the Service must report to  PRC on the quality of service for each market-dominant product in terms  of speed of delivery and reliability, as well as the degree of customer  satisfaction with the service provided.
The act also identified four objectives for modern service standards:    Enhance the value of postal services to both senders and recipients.
Preserve regular and effective access to postal services in all communities,  including those in rural areas or where post offices are not self-sustaining.
Reasonably assure Postal Service customers delivery reliability, speed, and  frequency consistent with reasonable rates and best business practices.
Provide a system of objective external performance measurements for  each market-dominant product as a basis for measurement of Postal  Service performance.
The Postal Service has taken an active role to address this challenge,  including collaborating with mailers and the PRC on issuing the new  service standards. The Service submitted to the PRC a proposal on service  measurement using Intelligent Mail and is planning to expand the  geographic coverage of its External First-Class Measurement System, and  the PRC has put this proposal out for comment. The Service is also  consulting with the PRC about other reporting issues.
We are encouraged by the Service’s progress to date as well as its  performance during the first quarter of 2008 for the segment of First-Class  Mail that it currently measures. The delivery performance for mail  measured by the Service’s EXFC system reported on-time deliveries for 96  percent of 1-day mail, 93 percent of 2-day mail, and 88 percent of 3-day  mail, all of which were improvements over the first quarter of 2007. We  continue to believe that the key principles of completeness, availability,  and usefulness should guide future actions related to updating service  standards and implementing performance measurement and reporting  systems. Continued collaboration and oversight will be critical to making  further progress as the system becomes more and more developed. In  particular, questions will need to be asked, including the following:    How should the standards and goals reflect different operational  capabilities that affect the speed and reliability of delivery, such as  presorting and separate processing streams?
Given the different information needs of the various stakeholder groups— e.g., the Service, PRC, Congress, mailers, the American public—what are  appropriate levels of transparency for each of the key groups?
What level of detail should be available to each group? For example,  some mailers have said they need detailed, real-time information to  help identify and address delivery problems.
In what format should information be available, and how should  privacy be protected?
How frequently should information be reported and/or accessible (e.g.,  quarterly, annually, or in real-time)?
Should mailers pay for some of the information?
How should mailer issues regarding the implementation of Intelligent Mail  be addressed?
What exclusions, if any, should be allowed under the Service’s reporting of  annual results (e.g., exclusions for the holiday mailing period and  incorrectly addressed and/or prepared mail)?

		Implementing New Regulatory Frameworks

The Postal Service and PRC will continue to be challenged to successfully  implement the extensive regulatory changes required by the act. Currently,  the PRC is reviewing the May 2008 rate increases filed by the Service and  has asked for public comment on this filing. In addition to the PRC’s  regulatory responsibilities for rate setting and monitoring service  performance discussed earlier, these parties will be challenged to  implement other requirements related to postal costing, accounting, and  financial reporting. We have reported on specific challenges the Postal  Service has faced in these areas. With respect to its financial reporting, the  Service has made significant improvements in the frequency, content, and  availability to address our earlier recommendations. Furthermore, in  2005 we reported on the long-standing issues of ratemaking data quality,  many of which persist today.
The act establishes new reporting and accounting requirements that  should help to address these challenges. The major change is the  establishment of, and authority provided to the new PRC to help enhance  the collection and reporting of information on the Service’s postal rates  and financial performance. The PRC has oversight responsibilities in such  areas as:    Market-dominant products: The PRC must prescribe by regulation the  form and content of annual Service reports that analyze costs, revenues,  and rates, using methods that PRC must also prescribe; specify which  reported information shall be made public; initiate proceedings as  necessary to improve the quality, completeness, or accuracy of this  information; and assess compliance and complaints.
Competitive products: The PRC must establish regulations that ensure that  each competitive product covers its attributable costs, prohibit the cross- subsidization of competitive products by market-dominant products, and  ensure that competitive products collectively cover what PRC determines  to be an appropriate share of the Service’s institutional costs (overhead  costs), as well as to assess complaints.
Financial reporting: The PRC must (1) review annual, quarterly, and other  periodic reports from the Service that contains information required by  the Securities and Exchange Commission (SEC) for registrants, (2)  review reports, due in 2010, on the Service’s compliance with rules  prescribed by the SEC for registrants in implementing section 404 of the  Sarbanes-Oxley Act of 2002, and (3) by December 2008, establish the  accounting principles and practices that the Service must follow related to  its competitive products, and in doing so, consider Treasury  recommendations.
The Service recognizes these challenges and the potential costs associated  with meeting the new requirements. In its updated Strategic  Transformation Plan, it laid out a timeline for implementing the Sarbanes- Oxley section 404 requirements and noted that it must manage the  uncertainties related to the implementation of the new ratemaking  process, the extent to which the PRC incorporates recommendations from  the Treasury report, and any developments from the FTC report. The  Service has not yet estimated the additional costs associated with these  new regulatory requirements. We have reported that other federal agencies  and smaller public companies have incurred significant costs associated  with complying with SEC’s implementing regulations for section 404 of the  Sarbanes-Oxley Act, but have also reported that costs are expected to  decline in subsequent years given the first-year investment in documenting  internal controls.
In sum, these changes can help provide accurate and timely data on the  Service’s costs, revenues, and mail volumes. This information can be used  to enhance transparency and accountability for all postal stakeholders so  that they have a comprehensive understanding of the Service’s financial  condition and outlook and of how postal rates are aligned with costs. As  the new regulatory framework is implemented, continued oversight may  be required in several areas:    How will the PRC use its discretion to continue defining and implementing  the new regulatory structure?
How effectively is the PRC carrying out its regulatory responsibilities  regarding rate setting and monitoring service performance?
Given the complexity of regulatory changes, how can the PRC balance the  interests of all stakeholders, particularly those with less expertise and  resources?
What criteria will the PRC use for evaluating the quality, completeness,  and accuracy of ratemaking data, including the underlying accounting data  and additional data used to attribute costs and revenues to specific types  of mail? Looking forward, how will the PRC, the Service, and other  stakeholders consider and implement improvements to data quality over  time?
How will the PRC balance the need for high-quality ratemaking data with  the time and expense involved in obtaining the data?
How will PRC structure any proceedings to improve the quality of  ratemaking data and enable the Service and others to participate in such  proceedings? What proceedings might PRC initiate to address data quality  deficiencies and issues that PRC has raised in its recent decision on the  rate case?
How will the Service be affected by the costs associated with complying  with the SEC rules for implementing section 404 of the Sarbanes-Oxley  Act, as well as the need for separate information on competitive and  market-dominant products?

	Required Information Can Guide Future Postal Reform Discussions

Information required under the act can be used to facilitate constructive  dialogue and debate about postal reform issues related to universal  service, the postal monopoly, fair competition, consumer protection, and  transparency and accountability. Specifically, the act included provisions  for reports required over the next 5 to 10 years related to key postal  reform issues aimed at continually examining and reporting on the Postal  Service’s mission, role, and oversight structure in an increasingly  competitive environment. The act required multiple stakeholders,  including the Postal Service, PRC, Postal Service OIG, OPM, Treasury, and  GAO, to issue these reports, and established a wide range of deadlines for  this work. The information can be useful to Congress when it is  considering key postal reform issues including:    What universal postal service will be needed in the future and how should  it be defined, given past changes and future challenges?
To what extent should certain monopoly provisions be maintained or  narrowed?
What role should the Service play in providing universal postal services  vis-à-vis its competitors?
What are appropriate legal standards for fair competition in areas where  the Service competes with private-sector providers?
What transparency, oversight, and accountability are needed for the  Service, particularly as long as it remains a federal entity with a monopoly  to deliver letter mail?
How appropriate are the new regulatory structure and rate-setting system?
What barriers, if any, have prevented progress under the act (e.g., in  optimizing the Service’s infrastructure network), and how can they be  addressed?
As outlined earlier, information related to some of these issues has already  been published from the Treasury and FTC. Treasury issued a report on  the accounting principles and practices that should be followed by the  Service, and the FTC issued a report that analyzed laws that apply  differently to the Service’s competitive products and similar products  provided by private competitors, and estimated the economic burdens on,  and advantages to, the Service due to these legal differences. This  information provides a good starting point for discussions on broader  reform topics such as the following:    Universal postal service and the postal monopoly: The mission of the  Postal Service revolves around providing affordable, high-quality universal  postal services on a self-financing basis. While the act requires the PRC to  provide annual reviews of service quality and the estimated costs of  providing universal service, the act requires a more comprehensive study  from the PRC on the scope and standards of universal postal service and  the postal monopoly. This report, due by December 2008, is to describe  any deficiencies in universal service and can include recommendations on  future changes. The PRC is required to obtain public comments and  consult with the Service in preparing this report.
Accounting, financial transparency, and oversight: The PRC solicited  public comments on Treasury’s report. In addition, the PRC raised  questions about what financial transparency and oversight are appropriate  for the Service’s competitive products fund and whether a public or  private entity should conduct such oversight. These comments will assist  the PRC in fulfilling the act’s requirement to establish accounting practices  and principles for the Service to follow, and issue regulations for the  Service’s reporting of its costs, revenue, rates, and volumes.
Regulation of postal rates: The act requires the PRC to annually report to  the President and Congress on the extent to which postal regulations,  including those related to postal rates, achieve statutory objectives.  Looking forward, the PRC is required to assess ratemaking and other  provisions of the act every 5 years (with the first report due by December  2011), and review the system for regulating the rates and classes for  market-dominant products by December 2016. At that point, the act  empowers PRC to make changes to the system for regulating market- dominant rates.
Future business model: GAO is required to issue a report by December  2011 that evaluates various options and strategies for the long-term  structural and operational reforms of the Service. The requirement states  that we may include, among other things, recommendations on how the  Service’s business model can be maintained or transformed to assure  continued availability of affordable universal postal service.
We are encouraged by the early implementation steps that the Service, the  PRC, the Department of the Treasury, FTC, and other stakeholders have  taken. The Service, the PRC, mailers, and other stakeholders have found  new ways to engage in constructive dialogue and debate and in some  cases, reach consensus on how best to proceed. These actions—which  contrast sharply with the adversarial ratemaking process abolished by the  act—hold promise for future progress across a broad range of postal  reform issues. Such progress will remain necessary as the Service, the  mailing industry, and competitors transform themselves in response to the  rapidly changing communications and delivery marketplace.
Mr. Chairman, this concludes my prepared statement. I would be pleased  to respond to any questions that you or the Members of the Subcommittee  may have.

	Contact and Acknowledgment

For further information regarding this statement, please contact Katherine  Siggerud, Director, Physical Infrastructure Issues, at (202) 512-2834 or at  siggerudk@gao.gov. Individuals making key contributions to this  statement included Teresa Anderson, Joshua Bartzen, Kenneth John,  Summer Lingard, Jeanette Franzel, Shirley Abel, Scott McNulty, Brandon   Haller, David Hooper and Kathy Gilhooly.
This  is  a  work  of  the  U.S.  government  and  is  not  subject  to  copyright  protection  in  the  United  States.  The  published  product  may  be  reproduced  and  distributed  in  its  entirety  without  further  permission  from  GAO.  However,  because  this  work  may  contain  copyrighted  images  or  other  material,  permission  from  the  copyright  holder  may  be  necessary if you wish to reproduce this material separately.

Summary:
Why GAO Did This Study

In December 2006, Congress passed the first comprehensive postal reform legislation in over 30 years. The Postal Accountability and Enhancement Act (the act) provided opportunities to address many of the financial, operational, and human capital challenges facing the Postal Service (the Service), which contributed to GAO's decision to remove the Service's transformation efforts from its High-Risk List last year. Specifically, the act provides tools and mechanisms that can be used to establish an efficient, flexible, fair, transparent, and financially sound Postal Service--one that can more effectively operate in an increasingly competitive environment not anticipated under the Postal Reorganization Act of 1970. This testimony focuses on (1) the actions to date resulting from implementing the act and how it affected the Service's 2007 financial condition, (2) the implementation challenges and areas for continued oversight, and (3) how information required under the law can contribute to future postal reform decisions. The testimony is based on GAO's past work; a review of the implementation of the postal reform law, including actions already taken; and updated information on the Service's financial and operational condition. The Postal Service had no comments on this testimony.

What GAO Found

Over the last 14 months, key actions have been taken to implement the act. For example, a new rate-setting system and regulatory agency were established, the Service began prefunding its retiree health benefit obligations, service standards were updated, and key reports were issued. These actions have required the collective efforts of many postal stakeholders including the Service and the Postal Regulatory Commission. The Service reported a $5.1 billion net loss for fiscal year 2007. Some of the actions taken to implement the act, such as funding changes to its retiree health benefit obligations and pension requirements, directly impacted these results, as did other events such as the January 2006 and May 2007 rate increases. The uncertain economic environment serves to exacerbate the challenges facing the Service and contributed to lower than expected mail volumes and revenues in the first quarter of fiscal year 2008. The Service projects a $600 million net loss for 2008 as it faces challenges such as generating volumes as rates increase again in May; managing its costs and improving operational efficiencies through accelerated cost reduction strategies; maintaining, measuring, and reporting service; and managing its workforce. Some key areas for continued oversight include changes to mail volumes and revenues, efforts to control costs by optimizing the Service's infrastructure and workforce, transition to new automation and technology to enhance mail sorting and tracking, transparency in measuring and reporting delivery performance, and implementation of the new rate-setting regulations. Information required under the act can be used to facilitate constructive dialogue about complex postal reform issues that may eventually need to be revisited by Congress. The act requires multiple reports and studies over the next 5 to 10 years that can be used to continually examine and assess the Postal Service's position in an environment of increasing competition and technological advances. Specifically, these reports and studies will provide key information on the Service's mission and role, monopoly protections, universal service requirements, rate-setting and other regulatory issues, oversight structure, competition issues, and consumer protection.