position of the Postal Service or enhance the performance of operational functions. In
addition, NSAs may not harm others in the marketplace and must be available to
similarly situated mailers. Competitive product NSAs must cover attributable costs.

I wish to assure the Subcommittee that we will review NSA filings from the
Postal Service in this light. Moreover, reviewing the data behind these filings will be a
critical component of the Commission’s Annual Compliance Report to Congress. I
understand many stakeholders may have questions about the Commission’s review of
NSAs under the new rules and the guidelines and criteria the Postal Service uses in
evaluating a potential agreement. To address these questions, the Commission looks
forward to working with the Postal Service in an effort to explore ways of resolving
stakeholder questions and issues on how to best utilize NSAs.

In closing, I wish to thank the Subcommittee Members for their continued support
of the Commission and our activities. I also wish to thank the Members for their work in
bringing about postal reform. Moving from the lengthy, highly litigious rate cases in
favor of annual rate increases capped at the CPI allows businesses to foresee their mailing
costs. The predictability of rate increases and the transparency of the data behind cost
adjustments will bring more value to the mail.

Thank you, and I will be more than happy to answer any questions the
Subcommittee may have.


We are currently working on our report to Congress on the universal service
obligation (USO) and the postal monopoly, due by December 20, 2008. Commission
staff, assisted by a contractor, will review the history of the postal monopoly, including
the Mail Box rule, universal service in the United States and other countries, and the
varied needs of individuals and businesses. To ensure active public participation, we
plan to hold field hearings early this summer as well as solicit public comments. We are
also asking the Postal Service, which is conducting its own review of the USO, to provide
the Commission with the benefit of its recommendations and observations prior to
releasing our final report to Congress. Further, we look forward to consulting with the
Service, as required by the PAEA.

Another activity of interest to Members of the Subcommittee is the initiation of
discussions with the Postal Service on a joint Commission-Postal Service review of
Periodicals costs required by the PAEA. Although the Act did not specify a completion
date for this report to the President and the Congress, we believe that comments made
during the October 30, 2007 hearing before the Subcommittee justify the undertaking of
the review now.

Mr. Chairman, I have laid out how the Commission moved quickly over the past
14 months to meet its responsibilities under the new law. We have shaped the new postal
regulatory environment, and we are meeting our newly mandated responsibilities well.
As part of this new environment, we are mindful that the Commission’s strengthened
regulatory authority includes our ability to issue subpoenas, order remedial actions, and j
levy fines in instances of noncompliance with applicable postal laws. We are formulating |
a new formal complaint system to strengthen the Commission’s existing process to
ensure even greater transparency and accountability. Work has begun on drafting new
regulations, and we are instituting a system to process and track informal consumer
concerns. Because so many consumer inquiries to the Commission are outside of our
scope of responsibilities and relate to postal delivery service issues and operational
matters, our Office of Public Affairs and Government Relations works closely with the |
Postal Service’s Office of Consumer Advocate to ensure more timely and responsive
actions.

I would like to address one final issue before I conclude my written remarks. I
wish to discuss the future of agreements between the Postal Service and individual
mailers, commonly referred to as Negotiated Service Agreements (NSAs). Up until very
recently, the Postal Service operated as a tariff industry — offering products on the same |
terms to all its customers. However, in 2002, the Postal Service began negotiating
contracts with specific mailers.

The PAEA codifies the use of the NSAs as one of the factors of the Act, and
contemplates an expedited review process that we interpreted through our ratemaking
regulations. The law is very specific, and our regulations directly reference section
3622(c)(10), among other provisions, as the basis for the Commission’s review of NSAs. |
This section requires that market dominant NSAs must either improve the net financial


POSTAL
REGULATORY

COMMISSION

Testimony of

On Behalf of the

Postal Regulatory Commission

The Honorable Dan G. Blair, Chairman |
|
Before the
U.S. House of Representatives |
Committee on Oversight
And Government Reform
Subcommittee on Federal Workforce,

Postal Service, and the District of Columbia |

February 28, 2008 |

|



Thank you Chairman Davis, Ranking Member Marchant, and members of the
Subcommittee. I appreciate this opportunity to review with you the activities of the
Postal Regulatory Commission since the enactment of the Postal Accountability and
Enhancement Act (PAEA) on December 20, 2006.

It has been an exciting and challenging fourteen months as the Commission
transitioned into its role as the strengthened regulator from the former rate maker. Just a
year ago, on February 26, 2007, we issued our recommended decision on the last
omnibus rate case to be considered under the old Postal Reorganization Act of 1970.
Less than a month later, at a joint Commission-Postal Service forum on the PAEA, I
asked the attendees if they would like to see new ratemaking systems in place before the
June 2008 statutory deadline. Fueled by an enthusiastic response favoring regulations
“sooner, rather than later,” the Commission beat the deadline by eight months. Our hard
work set the stage for the first rate increase under the PAEA and resulted in the Postal
Service foregoing one final rate case under the old law.

Completing the ratemaking regulations ahead of schedule is just one of the many
tasks we undertook last year. In addition to establishing a new ratemaking process, the
Act requires the Postal Service — in consultation with the Commission ~ to develop
modern service standards for all market dominant products by the end of 2007. To
guarantee public participation in the process, we solicited written comments from mailers
and consumers and held three field hearings outside of Washington, DC, where witnesses
shared their expectations for service standards and ratemaking regulations. We are now
in the second phase of our consultation — establishing goals for performance measures
and network reorganization which is due to Congress in June.

To further our commitment to a primary cornerstone of the new law —
accountability and transparency — we reorganized the Commission. A comprehensive
management review aided in the identification of key strategic goals, which allowed us to
align our goals and office functions with the Commission’s multiple mandates of the
PAEA. We also began a complete redesign of our agency’s website to ensure greater
public accessibility and ease of use that will be completed this spring. A complementary
activity is the upgrading of our Information Technology systems. We also appointed an
Inspector General, as required by the law, who has provided the first semi-annual report
to Congress.

In addition, the PAEA directs a new funding process for the Commission. Prior
to enactment of the new law, the Commission submitted its annual funding requests
directly to the Governors of the Postal Service, which in turn, directed the Postal Service
to fund the Commission’s budget from the Postal Service Fund. The Act sought to
ensure the Commission’s independence through the appropriations process by having
Congress instruct the Postal Service to fund the Commission’s budget from the Fund. I
wish to thank the Chairman for his support of the Commission’s appropriations
submission for Fiscal Year 2009.


Tam extremely proud of our accomplishments last year. However, the
Commission will be even busier this year. As you know, the Postal Service filed rate
increases for market dominant products with us on February 11, 2008. This filing puts
into motion the regulations we finalized last October. Interested parties have until March
3, 2008, to submit comments to the Commission regarding the rate increases that will
become effective on May 12, 2008. Once the public comment period ends, the
Commission will have 14 days to review the comments, decide if the rate changes meet
the requirements of the PABA, with particular focus on satisfying the CPI based cap, and
issue an order. Although the PAEA ensures a minimum of 45 days advance notice, the
Postal Service is providing 90 days notice.

At the same time that the Commission is reviewing the first market dominant rate
increase, we are also completing our first Annual Compliance Report. Work is underway
to analyze the Postal Service’s costs, revenues, and service data from fiscal year 2007.
We have held two technical conferences regarding changes proposed by the Postal
Service for Periodicals cost models, and we have asked for public comments on all
aspects of the Service’s Compliance Report filed with us at the end of 2007. This annual
review, required by the PAEA, is due by March 27, 2008. Successfully managing these
two responsibilities simultaneously, and within a compressed timeframe, demonstrates
the Commission’s ability to balance its resources and staff effectively. I would like to
note that this year’s compliance analysis will report on rate increases under the old cost-
of-service system, which did not separate postal products. Future reports will analyze
data for the two categories of mail established by the PAEA — market dominant and
competitive products.

It is our obligation to develop, with input from the Postal Service and the mailing
community, rules to ensure that the Postal Service provides sufficient reliable data to
enable the Commission to prepare accurate and informative reports and studies as
required by the PAEA. Good data is the foundation that supports meaningful
transparency and allows for careful and conscientious analysis, and reports that provide
real accountability.

We are engaging in other critical activities related to PAEA mandates, including
the development of accounting principles and methods to calculate the “assumed”
Federal income tax on competitive products. Our final rules will be issued no later than
December 20, 2008, and will have the benefit of recommendations made to the
Commission by the Department of Treasury at the end of 2007, in addition to public
comments, which are being solicited now.

I wish to note that applying an assumed Federal income tax on competitive
products is a unique requirement of the PAEA. Approximately 10 percent of the Postal
Service’s revenues are generated by products, such as Priority Mail and Express Mail,
which are offered in competition with private firms. By law, the Postal Service must
compute an approximation of the Federal income tax it would pay on its competitive
products to ensure fair competition with the private sector. We will have final rules by
the end of 2008.