United States Senate

Committee on Government Affairs

Testimony of George Omas

Chairman, Postal Rate Commission

April 7, 2004

Chairman Collins, members of the Committee, thank you for providing me with

the opportunity to testify on ways to achieve meaningful postal reform. The Committee

has already heard from a number of thoughtful witnesses about the need to modernize

the structure of the Postal Service to foster best management practices and more

efficient and economical operations.

I agree that postal reform is necessary. Furthermore, I think that the five

principles for postal reform outlined by the Administration, following receipt of the Report

of the President's Commission on the Postal Service, provide a sound policy foundation

for effective reform.

I believe that the two pieces of postal reform legislation drafted in the last

Congress, S. 1285 and H.R. 4970, were for the most part consistent with those five

principles. I suggest that they provide a good basis for developing an effective vehicle

for achieving real reform.

My testimony today will focus on how those earlier efforts can be clarified and

improved to be even more consistent with the Administration's five principles. I will also

mention several ways to improve on suggestions made by the President's Commission

on the Postal Service where they vary from the model developed in those earlier bills

and are unlikely to foster results consistent with the Administration's principles. I will

restrict my testimony to areas where, as Chairman of the Postal Rate Commission, I

have developed first-hand expertise.
– 2 –

First, I will address the need for, and best ways to achieve, reliable and timely

public information on Postal Service costs and operational performance. Next I will

address the ability of a modern system of ratemaking to provide adequate public

protection while affording management the flexibility to easily and quickly adjust rates as

circumstances and customers needs require. I will touch briefly on areas where the

authority of the regulator should be clarified, and conclude with some thoughts about

how the regulator should be structured to facilitate collegial decision-making.

THE NEED FOR RELIABLE, PUBLIC INFORMATION ON POSTAL SERVICE

COSTS AND OPERATIONS

As many in the postal community well know, the Postal Service’s longstanding

preference for limiting the circumstances in which data and information will be disclosed

has been a perennial source of frustration in regulatory proceedings. At the very least,

this stance has been problematic. At worst, it has been extremely detrimental to the

public interest. I therefore applaud the fact that the Administration has unequivocally

identified enhanced transparency as one of five fundamental postal reform principles.

Legislation that incorporates this principle holds out the promise of an end to the tug-ofwar over disclosure that has marked much of the reorganization era. More importantly,

it provides the primary means to unlock the door to greater accountability. In fact,

without a strong policy in favor of transparency, meaningful accountability cannot exist.

Transparency’s elevated role under a revised business model has met with nearuniversal support among stakeholders. My tenure at the Commission convinces me

that formal recognition of this policy is necessary, so I also support the proposal to

make this a cornerstone of the revised business model. Much of the commentary on

transparency tends to identify certain types of important financial or operational

information that should be more available, but does not articulate an overarching

standard or unifying principle. Fortunately, Treasury Secretary Snow’s recent testimony

provides a succinct standard for transparency that should be accepted as the basis for

postal policies in this area.
– 3 –

Developing a working understanding of what transparency should mean in the

postal context — and incorporating this understanding into legislative policies and

directives — must be a priority if the spirit of the current reform effort is to survive after

operations commence under the revised business model. The Postal Service has a

long history of attempting to shield information on its activities from the public, and

reform legislation must clearly enunciate that open access to Postal Service information

is public policy. I believe Treasury Secretary Snow’s recent testimony captures the

essence of what public policy should be. Specifically, he asserts that the scope of

postal reform that is now envisioned requires transparency that is “true and exacting”

and that dispenses with the claim that private sector confidentiality concerns apply to

the Postal Service.

Openness, access. and disclosure should be the standard, and it should be

made clear that these are the principles the Postal Service and the regulator are to

follow. Because of the importance of these principles, I propose that language be

added to the basic policy provision of title 39 to make it absolutely clear that

transparency and accountability are essential aspects of postal activities. I propose that

the following subsection be added to current section 101:

‘”(d) as a publicly-owned commercial enterprise that provides both

market-dominant and competitive services, the Postal Service

shall be subject to a high degree of transparency to ensure fair

treatment of customers of the Postal Service's market-dominant

products and companies competing with the Postal Service's

competitive products."

The Critical Relationship between Transparency and Accountability

Recently the Postal Service has responded to calls for improved transparency by

undertaking to release some types of financial information that publicly traded private

companies routinely publish. While I agree that SEC-style reporting is an improvement,

other important factors also deserve more consideration. Reform proposals must

ensure that the current level of disclosure of postal costs and operations data is
– 4 –

enhanced. To do so, legislation must provide a means to obtain additional disclosure in

areas other than financial performance.

The President’s Commission recommends several responsibilities for the

regulator to ensure accountability, including detailed periodic reports, an expanded

complaint jurisdiction, and certain important policy determinations. To successfully

accomplish these functions, the regulator must have broad access to information in a

variety of significant areas, including for example, data to measure product cost

development and service performance. The regulator also must have clear authority to

determine the frequency of reports, the depth of reporting, and related matters. This is

not only in keeping with the spirit of postal reform, it is an essential part of meaningful

reform.

Previous efforts to develop reform legislation recognized the need to provide the

regulator with authority to obtain needed information from the Postal Service. In

particular, S. 1285 provides the regulator with the responsibility to evaluate postal

performance and the means to obtain the data and information necessary to carry out

that duty.

An equally important part of transparency is public access to information.

Secretary Snow focuses on this when he emphasizes that private sector confidentiality

claims should be inapplicable to a government monopoly.

The reform model under consideration expects to assure fair treatment and

achieve accountability in large measure by allowing public complaints to be filed with

the regulator. For example, it should be self-evident that mailers will be unable to file

complaints that allege rates involve cross-subsidy if they do not have access to detailed

cost data. Similarly, they will be unable to claim service degradation without periodic

information on performance. 
– 5 –

It should be acknowledged that the Postal Service already discloses

considerable data and information at the Commission under the current business

model. This occurs via several avenues, such as routine reporting requirements and

through discovery in the course of various proceedings. It is undeniably important to

add SEC-style reporting requirements; however, it may be more important to

affirmatively ensure that other material continues to be provided and remains available

to the public under the revised business model.

I have heard nothing in reform discussions so far indicating that the Congress,

most stakeholders, or the general public want less information than is now available. In

fact, they expect — and deserve — more accountability under a new business model.

Indeed, if the regimen of omnibus rate cases is eliminated in favor of quick reviews by

the regulator, prompt access to more detailed information will be essential.

This is the most important area where the language of S.1285 is deficient.

S. 1285 considerably strengthens the regulator’s authority to obtain information from the

Postal Service, but it appears to considerably reduce the regulator’s authority to share

that information with the public.

Section 502 of S. 1285 authorizes the Postal Service to force the regulator to

withhold from the public matter that it provides the Commission “at the request of the

Commission in connection with any proceeding or other purpose under [title 5]" if that

matter "contains information which is described in section 410(c) of [title 5] or exempt

from public disclosure under [the Freedom of Information Act].” The Postal Service’s

authority to tie the regulator’s hands in this regard is set forth in paragraphs (1) and (2)

of section 502.

Information that the Postal Service can require be withheld from the public

includes matter identified in section 410(c) of title 39. As recently interpreted by the

Federal courts, section 410(c) encompasses all commercial information that other
– 6 –

providers of similar services normally withhold. Of course private providers of services

do not normally publish detailed information about their costs or operations.

Under S. 1285, the only way to override the Postal Service’s decisions that

information must be publicly suppressed is found in paragraph (3) of section 502.

There, the regulator is authorized to override the Postal Service designations of

commercial information as privileged from disclosure, but only if the information was

elicited by “discovery” undertaken “in connection with a proceeding” under title 5. If

information was elicited from the Postal Service in this manner, the regulator is

authorized to follow the procedures that Federal civil courts follow in deciding whether to

disclose commercially sensitive information. That procedure is found in rule 26(c) of the

Federal Rules of Civil Procedure. It authorizes the judicial authority (the regulator in this

context) to balance the potential harm to the Postal Service from disclosure against the

discovering party’s need for the information to make its case.

If commercial information identified by the Postal Service as confidential was not

elicited by discovery in connection with a “proceeding,” the provisions of S. 1285, read

literally, do not allow the regulator to ever disclose such information to the public, no

matter how important it might be to evaluating the Postal Service’s compliance with the

statute.

The model for postal reform suggested by the President's Commission

emphasizes the elimination of legalistic proceedings in which discovery plays an

important role. Instead, it contemplates ready public access to timely, detailed cost and

operations reports. Assuming reform legislation continues to call for transparency to

substitute for time-consuming and expensive litigation, the language of S.1285, section

502 will have to be changed. 

I propose a more straightforward disclosure provision that gives the regulator the

same responsibility as judges in Federal civil litigation. The Postal Service could still

request that particular information not be publicly disclosed. The regulator would then
– 7 –

balance the likelihood and amount of commercial harm that public disclosure would

cause the Postal Service, against the need of the public to analyze and understand the

Postal Service’s financial condition and its operational performance. Like a judge

applying Federal Rule 26(c), if the regulator concludes that particular information is

commercially sensitive, it would have the discretion to fashion methods and degrees of

protection of information that are appropriate to the circumstance, subject to review only

by appropriate judicial authority.

This approach should be applied to all information requested by the regulator that

the Postal Service identifies as commercially sensitive, whether the regulator requests it

in connection with a “proceeding,” the preparation of regulations, the preparation of

reports, or performing any other of its statutory duties. I think this would serve well as a

means for assuring the type of transparency needed for postal reform. It would also

make clear that the regulator has primary responsibility for evaluating any claims of

confidentiality.

Reform legislation should include as a basic postal policy a transparency

standard that will inform and protect the public under the revised business model.

Secretary Snow’s phrasing — that transparency should be “true and exacting,” with no

application of private sector confidentiality concerns — provides a unifying principle.

The Postal Service remains a government entity under proposed postal reform, and this

status should carry with it a far greater responsibility for openness and disclosure than

that imposed on private corporations.

ATTRIBUTION OF COSTS

Attributing costs to individual postal products is one of the most important

responsibilities under both existing law and recently proposed legislation. It has also

become a primary issue of concern in postal reform discussions. For example, it is one

of the three issues Treasury Secretary Snow focused on in his testimony before the

“Joint Senate-House Hearing on Principles for Meaningful Reform”. Also, the
– 8 –

President’s Commission report “strongly encourages the (proposed Regulatory) Board

to make this issue a top priority in order to ensure the system is fair, adequately protects

the postal market from the distorting effects of cross-subsidization, and ensures the

Postal Service has real insight into the success and failure of its various products and

services.”

I agree wholeheartedly with the importance correctly attributing costs to postal

products. It is appropriately the most heavily researched and litigated topic in postal

ratemaking. Rates are the sum of attributable cost plus a percentage markup. Get

attribution wrong and rates will be wrong.

Underestimating attributable costs will mean that Postal Service competitive

products will compete unfairly, while overestimating them will mean that Postal Service

competitive products may not be able to compete. Finally, if attributable costs are

wrong, inter-class rate relationships within the monopoly will not properly reflect relative

demand and other ratemaking factors that should be considered.

The importance of attributable costs flows directly from the current statutory

requirement that rates for each product must cover attributable costs and provide a

reasonable contribution to non-attributable (institutional or general overhead) costs. At

present, what constitutes a reasonable contribution is driven by the numerous public

policy factors of the Act. What determines attributable costs is the existence of a causal

relationship between products and costs. The Supreme Court confirmed in 1982 that

attributable costs "were all costs that could be identified, in the view of the expert Rate

Commission, as causally linked to a class of Postal Service."

While extensive Commission time has been expended in developing current

estimates of attributable costs, I agree with Secretary Snow and the President’s

Commission that greater effort must be expended to ensure that all the costs that can

be attributed are attributed. Current analysis can and should be expanded, but this will

require additional cost data and functional analysis from the Postal Service.
– 9 –

Past Postal Rate Commission decisions have frequently contained requests for

additional data and analysis in specific areas. Sometimes these requests were honored

but all too often they have been ignored. Under the existing statute the Commission

does not have the authority to compel the Service to collect specific data or perform

needed studies.

As previously discussed, I support the legislative language in S. 1285 that gives

the regulator authority to direct the Postal Service to collect data and to conduct studies

of its costs. This authority will result in the prompt exploration of areas where there may

be opportunities to identify additional attributable costs.

I must caution however, that it would be inappropriate to set a target percentage

for attributable costs. In questions following Secretary Snow’s testimony,

Undersecretary Roseboro stated his belief that non-attributable costs should be “south

of ten percent.” In other words, attributable costs should be more than 90 percent of

total costs. In response to questioning by Congressman McHugh, Undersecretary

Roseboro acknowledged that no study exists to support that assertion. He stated that it

was just a belief based on experience with other businesses. To my knowledge, no

participant in our rate proceedings, even those in direct competition with the Postal

Service, has ever suggested that such a large percentage of postal costs could

reasonably be attributed. A causal relationship needs to be established in fact before

costs should be attributed. Experience transferred from other businesses is not an

adequate basis for attribution.

What Are Attributable Costs?

The Postal Rate Commission separates accrued Postal Service costs into

attributable and institutional. The attributable costs are those causally linked to a

subclass or type of service based on analyses of Postal Service costs and operations.

If a cost can be determined to be caused by a product it is attributed to that product; if
– 10 –

not, then it is considered a general overhead or institutional cost that will be covered by

the “reasonable contribution” assigned to each product.

In the Opinion and Recommended Decision in Docket R2000-1, the Commission

found 63 percent of Postal Service costs attributable to specific products. The

percentage has decreased somewhat over the last several rate cases due to the impact

of worksharing discounts. Worksharing discounts are based on avoided attributable

costs. If all of the currently workshared mail was not handled by the private sector, then

the Postal Service would incur approximately $14.5 billion dollars in additional

attributable costs. As worksharing continues to grow it will reduce Postal Service

attributable costs and thus the percentage of total costs that are attributed. The costs

that would be attributable without worksharing is not the concern, however. What is

important is that the regulator have the means to examine all of the costs currently

treated as institutional to assure Congress, the Postal Service, and the public that all

costs that can be attributed, are attributed. I believe that there is room for improvement

and would welcome the responsibility and authority to achieve it.

How Attributable Costs are Calculated

In fulfilling its responsibilities the Commission has relied principally on two indicia

of causation, volume variability and exclusivity. Volume variable costs are those that

would vary (all other things held equal) if the volume of mail varies. Volume variable

costs constitute over 97 percent of attributable costs identified by the Commission.

Exclusive costs are incurred solely for the benefit of one class or service, and would not

be incurred but for the provision of that class or service. In those instances the causal

link is self-evident. Thus, exclusive costs, or in postal parlance, product specific costs,

are attributed to the relevant service regardless of whether they are volume variable.

For example, the costs of advertisements for Priority Mail are attributed to Priority Mail.

Volume variable attributable costs are calculated through an examination of

postal volumes, operations and costs for separate postal activities. Examples of
– 11 –

separately examined activities are different types of mail processing such as manually

sorting letters, bar code sorting machines, cancellation operations, and package sorting.

If the costs of an operation vary in response to changes in the volume of mail

going through that operation, the costs are said to be volume variable. To the extent

that costs of an activity are volume variable they are attributed to the volumes of mail

going through that operation. Once the exclusive and the volume variable attributable

costs have been calculated for each of the distinct activities of the Postal Service, the

results are summed to obtain total attributable costs.

For some activities, it is necessary to engage in highly refined analysis to

calculate separate volume variable costs for each of the cost-driving characteristics of

the mail being handled. For example, the attribution analysis for loading mail into a

mailbox has to take into consideration that parcels take longer than flats to handle, and

that flats take longer than letters. Special services, such as certified mail, use even

more resources. Consequently, special studies must be conducted to capture the

amount of time that the carrier spends loading mail composed of different shapes.

Failure to do so would result in under-pricing parcel post products, and over-pricing

letter shaped mail. It is also necessary to take into consideration the type of mail

receptacle used. The point I wish to make is that the analysis becomes quite complex

in an attempt to identify what product characteristics are driving costs.

In a multi-product firm such as the Postal Service, it can be extremely difficult to

differentiate the cost of one product from another. Finding the volume variable costs of

an activity is not sufficient. A necessary second step is to associate the volume variable

costs with the appropriate category of mail. Parties in our rate cases argue to have as

little as possible of an activity’s attributable costs associated with their mail. Since

overall attributable percentages are the focus of the current debate, I will not discuss the

methods used to distribute attributable costs in a causally related manner except to

mention that distribution must also be based on sound analyses and good data.
– 12 –

Product specific costs are much easier to distribute in that they come directly out

of the accounting system when so booked. For example, if a contract is issued for

advertising only Priority Mail, then the Commission considers it attributable.

It has been argued that expenses for some additional activities could be recorded

in the accounting system by product. An often-cited example is the time expended by

marketing personnel. If such an employee works with a Parcel Select customer for a

discrete period of time, then the accounting system could be improved to capture that

time so that its cost could be attributed. These are costs that an effective regulator

should be able to direct an operator to capture.

Where Are the Non-Attributed Costs?

The largest percentage of non-attributed costs involve mail delivery activities.

Out of the 37% of non-attributed costs in R2000-1, approximately one-half involve

carrier delivery functions. These non-attributable costs include nearly all of the time a

carrier spends on the route going from delivery point to delivery point. Even if no mail is

delivered, the carrier will traverse the route without taking time to load mail in a

customer’s box or making special deviations to access the box. It is a fixed cost

independent of volume, so these costs can not be attributed on the basis of volume

variability studies. Likewise, nearly all carriers carry a variety of mail products so no

product specific costs exist for route time. An arbitrary assignment could be conjured

up, but it would not provide a reliable measure of causality.

I believe that the regulator should regularly revisit each activity to make sure that

misestimation is not occurring as postal operations change. Recently the Postal

Service performed a new study of city-carrier-street-time costs and reported that it led

them to believe those costs were more variable than the previous set of supporting

studies, conducted in the 1980s, indicated. Commission decisions over the last ten

years have urged updating that data and analysis.
– 13 –

The Postal Service has been unwilling to make the data underlying its analysis

publicly available on the Commission website; however, its analysis will be formerly

introduced in the next rate case and will undoubtedly be examined closely. Such

careful review of changes in attributable costs reduces the chance of errors in

calculation that could be harmful to mailers and competitors of the Service.

The attribution of costs is a careful, technical search for accuracy. This benefits

the nation’s consumers by accurately identifying cost relationships among the monopoly

products and the cost effect of monopoly and competitive products efficiently benefiting

from the economies scale and scope inherent in the Postal Service’s national delivery

system.

It is understandable that businesses that compete with the Postal Service are

concerned that competitive products cover their attributable costs and make adequate

contributions to Postal Service overhead. The best way to assure that proper

contributions to overhead are collected from each product is to directly address the size

of the contribution that competitive products should make in the legislation. Arbitrarily

legislating that a set proportion of total costs are “attributable” will only undermine

captive mailers’ faith that their rates are fairly cost-based.

A MODERN SYSTEM OF POSTAL RATEMAKING

The most recent versions of postal reform legislation, S. 1285 and H.R. 4970,

provide for the regulator to develop a modern ratemaking system in an open process

after eliciting the views of all interested parties. I believe that is the most effective way

to assure that postal management has sufficient flexibility to quickly and effectively meet

the needs of the nation in general and postal patrons in particular. I will not today

prejudge what attributes should be included in such a system.

I do have some thoughts about specific procedures for assuring protection of the

mailing public suggested by the President's Commission on the Postal Service. The
– 14 –

President's Commission recommended that postal rates be subject to a price cap

mechanism, a concept that is widely supported and is not objectionable. However, I

think it is important to comment on the need to assure that any price cap is meaningful

and that mailers have sufficient advance notice of new rates to confirm that they do not

violate the cap.

Price Caps

Some stakeholders have endorsed the concept of price cap regulation,

suggesting that specific rate caps be memorialized by statute. This suggestion is at

odds with both the previous Senate and House bills and, in my view, is inimical to sound

postal regulatory reform.

Both the previous Senate and House bills suggest various pricing mechanisms

for regulating the rates and classes of market dominant products, including, for

example, price caps, revenue targets, and cost of service regulation. (S.1285 § 3622(d)

and H.R. 4970 § 3622(d)). Neither bill mandates specific pricing caps or otherwise

requires that a specific pricing regime be used. Flexibility is the hallmark of each of

these pricing provisions and it should be preserved in any legislation on postal reform.

In his recent testimony, Postmaster General Potter outlined the Postal Service’s

view of an appropriately constructed price cap. It would consist of at least four

components, comprised of cost indices to measure fuel, network expansion, and wages,

plus accounting for the actual growth in statutory benefits. I must suggest that this

formulation should not be enshrined as a permanent price cap.

First, the cap described by the Postmaster General would be essentially the

Postal Service’s costs, and thus it would fail to impose any meaningful fiscal discipline

on the Service’s operations. Second, while such a pricing scheme might satisfy the

Postal Service’s desire for pricing flexibility, it comes at too high a cost. It strips mailers

of their current ability to offer input concerning pricing proposals and changes in cost

methodology, while, at the same time, handcuffing the regulator’s ability to address the
– 15 –

bills’ mandate to establish a modern system for regulating rates and classes for marketdominant products. Finally, the inflexibility of such a system is inconsistent with the

objectives of the proposed legislation, elevating pricing predictability at the expense of

incentives to reduce costs.

The existing statute offers a telling comparison. Currently, the Postal Service

operates under a break-even requirement, i.e., that postal rates and fees yield sufficient

revenues to equal as nearly as practicable the Postal Service’s total estimated costs.

By default, the Postal Service’s cost projections have become a proxy for the breakeven requirement. While Postmaster General Potter deserves praise for aggressively

cutting the Postal Service’s costs, it is undeniable that the current statute does not

provide an effective incentive to motivate the Postal Service to reduce costs or improve

efficiency. Any proposed pricing regime establishing such a generous permanent price

cap would, I believe, do little more than perpetuate this system, one devoid of any

consequential means to impose fiscal discipline on the Postal Service concerning its

market-dominant products and services.

Both bills previously under consideration require the Postal Regulatory

Commission to promulgate, within 24 months after enactment of reform legislation,

regulations establishing a modern system for regulating rates and classes for marketdominant products. Each bill outlines the objectives of such a system and enumerates

12 factors that the Commission is to take into account. The rulemaking establishing

these regulations will permit all interested stakeholders an opportunity for input. This is

an important consideration, as is the fact that the results will not be set in stone, as they

necessarily would be if price caps were legislated. Notably, each of the proposed bills

contemplates that it may be necessary from time-to-time to revise the regulations. The

flexibility inherent in this system is a crucial element in a modern system of rate

regulation that must keep pace with changing market dynamics.

On the one hand, the regulations can be designed to accommodate the Postal

Service’s desire for pricing latitude. On the other hand, the opportunity to revisit the
– 16 –

regulations, either by the Commission sua sponte, at the request of the Postal Service,

or upon complaint by an interested person, ensures that over time the regulations will

remain faithful to the legislative objectives despite changing market conditions,

incorporating enhancements in costing methodology and productivity. Furthermore, as

a policy matter, absent any intervening reviews of the regulations, it probably would be

appropriate that the regulations be subject to some periodic review, e.g., at least every

seven years.

Developing an appropriate price cap should be feasible. As I mentioned, it has

been suggested that because the Postal Service must accommodate an atypical mix of

cost-driving expenses, some of which are beyond its control, an appropriate price cap

regulatory regime must include multiple cost-index components, including fuel, network

expansion, statutory benefits, and ECI wages. While the premise for this functionalized

approach to price caps seems plausible, it is unjustified because it is unnecessary.

The Postal Service's Total Factor Productivity (TFP) report presents an index of

postal inflation. It consists of the total costs of the Postal Service divided by its

workload. Over the last two decades, postal inflation has almost exactly tracked

increases in the Consumer Price Index (CPI).

The graphs below show this relationship. The top graph depicts three common

indices of cost inflation, the Employment Cost Index, the CPI, and the Gross Domestic

Product Price Index. One important reason for Postal Service cost inflation is the fact

that it is a highly labor-intensive entity, and labor costs (as shown by the Employment

Cost Index) have increased faster than the CPI. Despite this fact, as shown on the

bottom graph, postal inflation has closely tracked the CPI through good times and bad.
– 17 –

Gross Domestic Product Price Index (GDPPI), Consumer Price Index (CPI),

and Employment Cost Index (ECI) Compared

1981-2003

1.00

1.20

1.40

1.60

1.80

2.00

2.20

2.40

2.60

2.80

19811982198319841985198619871988198919901991199219931994199519961997199819992000200120022003

Fiscal Year

Index (1980 = 1.00)

ECI

GDPPI

CPI

Consumer Price Index (CPI) and Postal Inflation (PI) Compared

1981-2003

1.00

1.20

1.40

1.60

1.80

2.00

2.20

2.40

2.60

2.80

19811982198319841985198619871988198919901991199219931994199519961997199819992000200120022003

Fiscal Year

Index (1980 = 1.00)

Postal Inflation

CPI
– 18 –

Thus, to introduce incentive ratemaking, it would appear reasonable to use CPI

minus X (where X is an efficiency adjustment goal) for price caps applicable to marketdominant products. In contrast, adoption of the suggested functionalized approach

likely would stimulate little if any additional management dedication to controlling costs

throughout the postal system.

Incentive rate regulation for market-dominant Postal Service products should

pose significant challenges to postal management that will serve both to enforce fiscal

discipline and to spur ingenuity in identifying and exploiting opportunities to improve

productivity and reduce costs. This mandate was made explicit in earlier stages of the

current postal reform initiative. Illustratively, in the 106th Congress, H.R. 22

incorporated a mechanism for limiting rate increases for market-dominant products to

increases in the Consumer Price Index, adjusted by a factor based on likely Postal

Service productivity and specific cost savings.1 The proposed legislation explicitly

required that the adjustment factor be a negative value or zero;2 i.e., that the maximum

permissible rate increase would be the increase in CPI or less. In my view, the keen

edge of incentive ratemaking should not be dulled by lax benchmarks of cost escalation

or by easily available escapes from price caps on the ground of “exigent

circumstances." 

Exigent Rate Cases

The modern system of rate regulation envisioned by the proposed legislation

would afford all stakeholders an opportunity to address what types of "exigent

circumstances" might justify allowing rates in excess of the price cap, both during

development of the initial regulations and in subsequent reviews. This is an important

consideration given the natural tension between permitting the Postal Service pricing

latitude and protecting the public from pricing mechanisms in which the Postal Service’s

costs become the de facto rate floor.

 1 H.R. 22, 106th Cong., 1st Sess. § 201, proposed 39 U.S.C. § 3732(c)(1) (1999).

2 H.R. 22, 106th Cong., 1st Sess. § 201, proposed 39 U.S.C. § 3733(c)(2) (1999).
– 19 –

Postal reform should provide a balanced and flexible approach for establishing

postal rates and fees. The flexibility inherent in the previously proposed provisions

should be retained, including a “safety valve” opportunity for the Postal Service to

recoup costs resulting from extraordinary, unforeseeable expenses that would otherwise

drive rates above the price caps. The mechanism for doing so would be an

extraordinary or “exigent” rate request by the Postal Service. For example, H.R. 4970

would allow the rates for a market-dominant product to increase beyond the comparable

rise in the Consumer Price Index if the regulator finds such increase “reasonable and

equitable and necessary to enable the Postal Service ... to maintain and continue the

development of postal services of the kind and quality adapted to the needs of the

United States.”

If an “exigent” rate request mechanism is likely to remain a feature of postal

ratemaking reform, several observations must be made.

The availability of any such mechanism represents an enormous exception to the

general thrust of postal ratemaking reform as it has been considered to date. Incentivebased ratemaking, and the management discipline it is intended to enforce, have been

central to the vision of a reformed Postal Service.3 A mechanism for regularly

exceeding the rate levels around which postal management is expected to make its

operational plans could completely undermine this central objective.

If ratemaking reform is to achieve the intended purposes of heightened

management vigilance over costs and enhanced operational efficiency, the “exigent”

request mechanism must not be allowed to erode or ultimately supersede the new

system of incentive rates. For this reason, final authority to establish the appropriate

 3 As one analyst has noted, “[Congressman McHugh’s] Subcommittee’s reform proposal

advocating price cap pricing regulation for the USPS became the central vision around which the reform

discussion turned.” Reisner, Robert A. F., Price Caps and the US Postal Service; Prospects, Perils and

the Public Interest, p. 3, presented to the President’s Commission on the United States Postal Service,

May 29, 2003.
– 20 –

level of revenues to be recovered through exigent rate increases should reside with the

regulator, not the Postal Service. Judicial review of such determinations should be

made available to ensure appropriate oversight and relief.

Further, there should be a shared understanding that “exigent” rate requests are

appropriate to accommodate only those unanticipated cost increases that are truly

extraordinary. Variances in volume levels and ordinary recurring costs should not

qualify as a source of “exigent” circumstances; these are contingencies for which postal

management can reasonably be expected to plan, and for which it must be expected to

adjust. Only those kinds of unexpected cost increases for which vigilant management

could not reasonably have planned should provide grounds for “exigent” rate requests.

In my opinion, in the last 25 years there has been only one circumstance that

would have justified an exigent rate increase, namely the combined effects of the 9/11

terrorist and anthrax attacks of late 2001. Because of the urgent nature of exigent

requests, I would expect them to be considered with extreme expedition, with the focus

exclusively on the nature of the emergency, and on quantification of the need for

emergency financial relief.

Prior Review of Market Dominant Rates

Although S. 1285 and H.R. 4970 would leave it to the regulator to determine what

substantive criteria to emphasize in setting market-dominant rates (price cap, cost of

service, etc.), it is not entirely clear what procedural latitude they would give the

regulator to implement the rate-setting system that it selects. Section 3653 requires the

regulator each year to prepare a report, with public input, determining whether the rates

that the Postal Service charged during the past year were in compliance with the statute

and implementing regulations. Section 3662 requires the Commission to review thirdparty complaints that current rates and services do not comply with the statute or its

implementing regulations. These forms of review of Postal Service rates and service

performance are the only ones mentioned. S. 1285 and H.R. 4970 do not, by their

terms, make these forms of review exclusive; however, one might argue that by not
– 21 –

mentioning any others, they imply that the regulator is not authorized to use other forms

of review.

I agree with many of the recommendations of the President’s Commission, but I

don’t agree with its recommendation that rates for market-dominant products should be

reviewed only after they have been implemented. I question the need for postponing

review until after implementation, and the practical value of such review. If rates have

already been implemented, and review by the regulator reveals defects in those rates,

there are powerful institutional incentives to ignore defects rather than to correct them,

such as to avoid confusion in the marketplace and the disruption of business plans. If

the regulator were to identify defects in rates prior to their implementation, rates could

be corrected before the marketplace came to rely on them. Because it is least

disruptive, a system of prior review will best achieve the objectives of the modern

ratemaking system called for by S. 1285 and H.R. 4970.

These bills identify the following objectives for a modern system for setting rates

for market-dominant products. The system should promote financial stability, economic

efficiency, flexible pricing, predictable rates, and minimize the administrative burden of

ratemaking. Economists remind us that those who use market-dominant postal

products are, in a sense, “captives” of the monopoly. Recognizing this, I would argue

that another objective belongs in section 3622. I believe that rates for market-dominant

products should, to the extent feasible, reflect the needs of these captive mailers.

I believe that each of the objectives identified in those bills can be better met by a

system where the regulator is left the option of conducting limited and expeditious prior

review rather than post-rate implementation review.

Perhaps the most obvious advantage of a system of prior review over after-thefact review is that it would make rates more predictable. Prior review increases the

odds that defects in rates will be identified before they take effect, thereby reducing the

need for disruptive short-term shifts of rates from old to new and back that would result
– 22 –

from relying on the post-implementation review. A major accomplishment of the current

system of before-the-fact review is that there have been almost no after-the-fact rate

complaints for 30 years.

In important respects, a system of prior review would reduce the administrative

burden of ratemaking. Bulk mailers generally prepare their mail according to intricate

make-up requirements in order to take advantage of bulk mail discounts. This is

especially true of mailers of bulk standard mail and Periodicals. Vendors of the

software that mailers buy to conform their mail to bulk mailing requirements assert that it

usually takes them several months to revise their software to reflect changes in rates

and associated make-up requirements. The Postal Service asserts that to

accommodate such concerns, a lag time of approximately three months is needed

between the notice of a general change in rates, and the implementation of those rates.

This provides a strong incentive for avoiding the short-term fluctuation in rates that are

associated with after-the-fact review.

Similarly, individuals may purchase fixed denomination stamps when new rates

take effect. If those rates have to be rolled back, patrons will be "stuck with" overpriced

stamps and may lose the benefits of lawfully capped rates.

Another advantage of prior review is that it avoids the huge administrative

headache of refunding postal revenues after they have been improperly collected. The

transaction costs of refunding postage are often much larger in relation to the value of

the service purchased than are observed in other regulated industries. After-the-fact

review of rates has been incorporated into the regulatory scheme in other regulated

industries, such as gas, electric power, and telecommunications because there are

practical ways to refund revenues to customers. In those industries, a regulated

provider of a wholesale service, such as a gas pipeline, typically has a limited number of

customers. To implement a refund, the regulator can simply order the pipeline to audit

the account of each customer and send it a check in the appropriate amount.
– 23 –

It is also usually feasible to make appropriate refunds to retail gas, electric, or

telecommunications customers. The retail provider normally has automated records

that track the kind, amount, and duration of the metered commodity that was purchased

by each customer under a schedule of improper rates. Because retail customers

typically make steady, rather than episodic purchases from the provider, it is usually

practical for the regulated utility to program its computers to calculate an appropriate

refund and credit it toward a customer’s future purchases of the regulated service.

Things are not nearly so tidy in postal markets where the administrative cost of

calculating and paying appropriate refunds would be daunting. Collectively, postal

customers make hundreds of thousands of mailing transactions with the Postal Service

each day, selecting from an array of over 200 distinct postal products, sold with a wide

variety of discounts and surcharges. Many of these mailings are submitted and paid for

by third-party letter shops that print, insert, and address the mail, pay postage under

their own imprint, and bill the client. Although there is a highly automated information

protocol called “mail.dat” that records the details of bulk transactions for the largest

mailers, most bulk mail transactions do not yet use this protocol. Most are not tracked

in the detail necessary to calculate precise refunds at a reasonable cost. The

impracticality of tracing single-piece transactions back to individual mailers in order to

calculate an appropriate refund is self-evident.

The Postal Service might object that prior review of rates would take away too

much pricing flexibility – a primary motive for postal reform. I don’t think this is true with

respect to market-dominant products. It is important to be able to adjust rates for

dominant products without unnecessary delay, but rapid implementation is far more

important for competitive products.

It should be borne in mind that pricing flexibility has a number of dimensions, only

one of which relates to the timing of new rates. If the option of prior review were added

to S. 1285, the bill would still give the Postal Service much greater freedom to price

market dominant products than it enjoys under the current system. Under the current
– 24 –

system, it is the Postal Rate Commission’s role to review Postal Service proposals, and

then determine for itself what an optimal set of rates would be, in terms of the objectives

of the statute. The Commission’s determinations can only be overruled under unusual

circumstances. In contrast, under S. 1285, the Postal Service would be free to

determine rate levels and rate relationships (for example, within a band defined by a

price cap, and attributable costs). The regulator could not change the rates chosen by

the Postal Service unless the regulator could show that they violate statutory

requirements, or regulations designed to implement those requirements.

 Because mailers must be given time to prepare to pay new rates, prior review

would be unlikely to delay implementation of new rates for market dominant products. I

believe that prior review can be done expeditiously and effectively if, (1) review is free of

the strict procedural requirements that encumber the current system, and (2) the

regulator and those impacted by the rates have ready access to the detailed financial

information that they need to evaluate whether the new rates conform to statutory

requirements. It cannot be overemphasized that for prior review to be quick and

effective, detailed cost, volume and revenue information must be current, complete, and

available to the public.

Much of the impetus for postal reform has been the Postal Service’s complaint

that under the current system it takes a year-and-a-half for the Postal Service to prepare

and litigate a general change in rates. The reasons that it takes this long require

examination.

There are two factors that account for the majority of this delay, and both are

avoidable. One is the formal hearing procedure for changing rates mandated by current

law. The other is the failure of the Postal Service to publicly document its routine

financial reports with the workpapers and data on which they are based.

Under current law, rate proposals must be presented in the context of formal “on

the record” hearings in compliance with sections 556 and 557 of the Administrative
– 25 –

Procedures Act (APA). This is the most rigid of all administrative hearing procedures,

and it is comparable procedurally to complex anti-trust litigation conducted in Federal

civil court.

Most of the four to six months that the Postal Service claims it typically takes to

prepare a general rate case is spent preparing the formal testimony of upwards of 40

Postal Service witnesses, with heavy involvement of its legal staff, and many rounds of

review and clearance by multiple layers of management.

Some of that period also may be spent documenting financial information to

withstand the independent scrutiny that it receives during litigation. This level of

documentation, however, should be routinely produced at regular intervals by a public

enterprise that participates simultaneously in monopoly and competitive markets to

ensure that no subsidies cross from the monopoly side to the competitive side. This

would be required under the system that S. 1285 and H.R. 4970 envision. Under that

system, the time it takes to produce documentation adequate to this task should not be

allotted to any specific rate review effort.

S. 1285 and H.R. 4970 would not require that the formal hearing procedures of

the APA, including sworn testimony, discovery, cross-examination, and rebuttal, be

followed. The preparation of technical written testimony in support of new rates would

not be necessary. The regulator would rely primarily on routinely produced financial

reports, fully documented by workpapers and underlying datasets. Under implementing

regulations, the regulator would already have obtained and reviewed written and oral

explanations of any new studies incorporated into these financial reports.

The rate-setting system envisioned by S. 1285 would essentially eliminate the

lead time that the Postal Service currently requires to prepare an across-the-board rate

increase. It would dispense with formal proceedings, substituting the use of detailed

routine financial reports for regulatory review. When management decides to raise
– 26 –

rates, it will need only to provide notice and a brief statement justifying the legality of the

increases.

Under the current system, once the Postal Service submits proposed rates the

Postal Rate Commission has 10 months to conduct what amounts to a formal trial of all

of the issues that a general rate increase presents. Normally, the Commission spends

only six to eight weeks deciding what rates to recommend and preparing its written

decision. The Commission usually spends the rest of the 10 months compiling an

evidentiary record under the rigid procedures followed in formal civil trials.

The time that the hearing phase usually consumes is unavoidable if the formal

procedures of civil trials are to be observed. Time and again the Commission has tried

to shrink the time that the hearing phase of its review period takes, but it inevitably

encounters vehement objections from either the Postal Service or the intervenors. Both

invariably contend that their rights to adequate time to discover evidence, crossexamine witnesses, or rebut the testimony of others is guaranteed by statute and may

not be cut short.

Under S. 1285 and H.R. 4970, a system of prior review would drastically reduce

the time allotted to the participants to present views. The focus would be on relatively

simple issues, such as whether increases exceed applicable price caps.

Under the current system, most of the hearing phase is consumed by what

lawyers call “discovery.” Discovery consists mostly of formal written requests to obtain

information from others, followed by formal written responses to those requests. These

often lead to multiple rounds of motion practice while the participants quarrel about what

must, or need not, be produced under intricate rules of evidence.

Most discovery requests ask for financial or operational information that the

Postal Service should regularly provide to the public apart from any specific rate review

cycle. I expect the regulator to require the Postal Service to regularly provide the public
– 27 –

with the essential financial information that is basic to reviewing rate changes. This

information will have to be made public to comply with the transparency and

accountability goals that are central to postal reform. Thus, most of the relevant

information would already be in the hands of the regulator and the affected public.

Because the information relevant to rate review would be available in advance, and

streamlined procedures would be available to supplement that information in the

unusual circumstance where some additional explanation was necessary, I believe that

S. 1285 would allow the regulator to conduct effective prior review in a fraction of the

time that is required under the current system.

This conclusion is further buttressed by the fact that far fewer issues would be

relevant. The regulator would not be responsible for evaluating the Postal Service

revenue requirements, except in rare “exigent” rate cases. The proper methods for

measuring the attributable cost of products also would be settled outside of rate cases.

Other contentious issues such as rate design and specific rate levels would be left to

the discretion of the Postal Service, so long as statutory requirements are met.

Prior review will allow impacted mailers to present their concerns in a public

forum. Assuring input from those affected by market dominant rates before the fact

would vastly improve the likelihood that these views might be acted upon. Nonetheless,

consistent with the modern ratemaking system, the Commission would rarely have

cause to alter the rates proposed by the Postal Service.

Finally, the year-and-a-half that it currently takes to complete an omnibus rate

case includes two months the Board of Governors takes to review the comprehensive

set of rates recommended by the Postal Rate Commission. Under S. 1285 and H.R.

4970, these two months would be dispensed with entirely.

I recognize that the issues before the regulator during prior review of changes in

rates for market dominant products will vary depending on the system of rate setting

that the regulator selects. For example, the rules adopted by the regulator might
– 28 –

restrain rates for market dominant products by a price cap. This system of regulation

would require the Postal Service to apply a set formula to its rates. Reviewing this

aspect of new rates should be straightforward, and should be essentially self-executing.

Prior review would involve examining the Postal Service’s spreadsheets to see if they

contained any technical errors.

The regulator might also require that rates for each market dominant product

cover its attributable costs. To evaluate this requirement, it would be relevant whether

the Postal Service applied a cost estimating technique not approved by the regulator, or

used an approved technique incorrectly. Similarly, there might be room for argument as

to what constitutes a distinct “product” for cost attribution purposes. Prior review would

correct, in advance, rates that were influenced by flawed cost estimating methods or

erroneous data. It could also resolve, in advance, ambiguities about how rates should

be applied.

I would expect review to be focused, with most attention on rates that display

anomalous jumps in overall levels or attributable costs. Scrutinizing proposed rates for

such anomalies and correcting them in advance could be done relatively quickly,

probably in the time currently allotted for mailers to prepare to implement new rates.

Reducing a complex 18-month process to a limited review that adds no

appreciable time to the period mailers need to prepare to implement new rates will

vastly simplify ratemaking. It will provide the Postal Service with substantial ratemaking

flexibility and allow it to avoid the costs of litigation. At the same time, attention should

be given to assuring that the Postal Service gives due attention to the requirements of

the law, and the needs of its customers. Before the fact review will provide that

assurance.

Although I expect that evaluating simplified rate requests will soon become a

relatively routine matter, I suggest that Congress allow the regulator to design this

process in consultation with the stakeholders as a part of establishing the system of
– 29 –

modern rate regulation. It is clear that all concerned want this process to be as

expeditious and inexpensive as possible, but until comprehensive data reporting rules

are in place, and price cap formulas have been designed and tested, rate reviews may

take longer than desirable. The regulator, as well as postal management, should be

given sufficient flexibility to successfully perform its assigned duties.

THE EXTENT OF THE REGULATOR’S AUTHORITY

Some advocates of postal reform have suggested that the legislation should

address two central features of the current postal system in the United States: the

postal monopolies over letter carriage and mailbox access, and the obligation to provide

universal service throughout the nation. Legislative initiatives to date have shared the

objective of preserving the Postal Service’s capability to perform the universal service

obligation under future circumstances. However, some previous bills have also featured

dollar-amount and other limits on applicability of the private carriage prohibition,4

 and

authorization of a demonstration project to determine the feasibility and desirability of

private access to delivery mailboxes.5

More recently, the President’s Commission on the Postal Service has recognized

that universal postal service remains vital to the nation and its economy, but

recommends against “building rigidities into the system.”6

 To permit some degree of

flexibility over the scope of the universal service obligation in the future, it recommends

authorizing an independent regulator to “periodically review the universal service

obligation as the nation’s reliance on its mail system continues to evolve.”7

 More

generally, the Commission recommends that the regulator’s roles include “defining the

 4 H.R. 3717, 104th Cong., 2d Sess. Sec. 703 (1996); H.R. 22, 105th Cong., 1st Sess. Sec. 703

(1997); H. R. 22, 106th Cong., 1st Sess. Sec. 503 (1999).

5 H.R. 3717, 104th Cong., 2d Sess. Sec. 704 (1996); H.R. 22, 105th Cong., 1st Sess. Sec. 704

(1997).

6 “Embracing the Future—Making the Tough Choices to Preserve Universal Mail Service,” July

31, 2003, at xi.

7 Ibid.
– 30 –

scope of the postal monopoly, refining the appropriate components of the universal

service obligation, and establishing the bright-line boundaries between the postal

monopoly and competitive markets.”8

As the Postal Rate Commission commented last November,9 these proposals

involve issues of national postal policy at the highest level. Delegation of the plenary

congressional authority over the universal service obligation and the postal monopoly to

a regulatory body would constitute a major departure from the current legal framework.

I recognize that Congress, in establishing the contours of postal reform, may or may not

decide to reserve its current authority over these matters. However, even if Congress

decides to retain such authority, I believe that it would make postal reform more

effective if the regulator is given responsibility for interpreting these requirements.

The Universal Service Obligation

Current law requires the Postal Service to “provide prompt, reliable, and efficient

services to patrons in all areas and ... render postal services to all communities.”10 It

also prohibits closing small post offices “solely for operating at a deficit,”11 and

establishes an appeal process for reviewing decisions to close or consolidate post

offices.12 When the Postal Service decides to make “a change in the nature of postal

services which will generally affect service on a nationwide or substantially nationwide

basis,”13 it is required to submit a proposal to the Postal Rate Commission. Following

an opportunity for a hearing, the Commission issues an advisory opinion on the

change.14 In all other respects, the Postal Service determines the manner in which it

performs the universal service obligation autonomously.

 8 Id. at 62.

9 Comments of the Postal Rate Commission Concerning the President’s Commission on the

Postal Service Submitted to the Committee on Governmental Affairs, November 19, 2003.

10 39 U.S.C. § 101(a).

11 39 U.S.C. § 101(b).

12 39 U.S.C. § 404(b).

13 39 U.S.C. § 3661(b). The Postal Service has submitted only four such proposals in 34 years.

14 39 U.S.C. § 3661(c).
– 31 –

Some of the systemic changes proposed in connection with postal reform have

the potential for influencing how the Postal Service approaches the universal service

obligation and the postal monopoly. The President’s Commission recommends that

even if Congress reserves to itself the ability to define these concepts, the interpretation

of Congress’ will should be assigned to a neutral regulator with authority to take

corrective action, if necessary.

This might be necessary because the new ratemaking system could influence the

Service’s performance of its universal service obligation. Because the strongest form of

rate regulation would apply to non-competitive services (including First-Class Mail),

there may be an inclination to control costs in a manner that might compromise the level

of service provided to users. This response would be particularly likely in the event

adverse financial circumstances confront the Postal Service.

On the basis of these and other considerations, the President’s Commission

recommends that the regulator be assigned jurisdiction over proposed changes in

service standards that may have a substantial negative national impact. I endorse this

recommendation.

The President’s Commission does not explicitly address potential erosion in

service levels that might result from cost-cutting programs. In my view, the regulator

should also have authority to ensure that appropriate levels of service are maintained

throughout the nation. It can do so through regular audits of service performance, and

by considering complaints of aggrieved postal patrons. S. 1285 and H.R. 4970

contemplate assigning the Postal Regulatory Commission to perform these tasks.

The Postal Monopoly

Much the same considerations apply to the Postal Service’s implementation of

the postal monopoly. Under current law, the Postal Service is authorized to enforce,
– 32 –

interpret, and suspend application of the Private Express Statutes.15 As Congress

rarely addresses this issue, in effect the Postal Service has been free to define its own

monopoly.

Historically, an unstated premise of postal policy has been that the purpose of

the monopoly is to assure the preservation of a satisfactory level of universal service.

S. 1285 and H.R. 4970 assign the regulator the task of dividing products between

competitive and noncompetitive status. I suggest that any legislation effecting postal

reform should explicitly direct the regulatory body to consider preservation of an

adequate level of universal service as the principal criterion in exercising oversight of

the postal monopoly’s operation. This oversight should include authority to review all

Postal Service proposals to alter its interpretation of what is subject to the private

express statutes, and to resolve complaints arising from Postal Service rulings and

enforcement actions related to the Private Express Statutes.

As with the preservation of universal service, monitoring the interpretation and

enforcement of the postal monopoly can be accomplished through the availability of an

effective complaint process. For this reason, the regulator should have authority to

impose corrective steps in service complaint cases, as well as in rate complaint cases.

Enforcement

Under current law, there are many instances where the Postal Service does not

have a material incentive to comply with the requests and decisions of the Postal Rate

Commission, nor is there any material penalty for its choosing not to comply. This

hinders the Postal Rate Commission’s ability to gather necessary information, and it has

occasionally prevented the Commission from performing its statutory functions. The

legislation creating the new Postal Regulatory Commission should provide a

mechanism for enforcing Postal Service compliance with Postal Regulatory Commission

requests and decisions.

 15 39 U.S.C. §§ 601-606; 39 C.F.R. Part 310.
– 33 –

For example, the Commission issued a final rule in November updating the

Commission’s Periodic Reporting Rule. This rule directs the Postal Service to provide

certain financial conditions and operating results, most of which the Postal Service has

already developed for internal use. The goal is to improve transparency, and by

allowing parties to better understand what is occurring at the Postal Service, to expedite

omnibus rate cases. In response, the Postal Service stated it was “considering”

whether or not to comply with this rule.

This type of periodic reporting provides exactly the type of timely information that

the new Postal Regulatory Commission will require on an ongoing basis in order to

carry out its new and expanded mission. An enforcement mechanism is needed to

assure that there is no question that the Postal Regulatory Board and the public have

access to all pertinent information.

Another example is the Postal Service’s recent refusal to comply with a series of

Commission rulings and orders related to the Collection Box Management System

(CBMS) in a complaint case concerning the arbitrary cancellation of holiday and

weekend mail collection. In part, the CBMS catalogs the public data displayed on the

blue collection box labels throughout the nation. The Commission entertained multiple

pleadings and issued several rulings and orders giving the Postal Service the

opportunity to provide information under protective conditions, to provide a limited

response free of protective conditions, or to provide authoritative support to justify noncompliance. The Postal Service refused to cooperate. Its actions delayed the

proceeding by at least seven months and hindered the Commission’s ability to

informatively report on whether the Postal Service was providing an appropriate level of

service.

The current complaint system is further flawed in that the Postal Service is under

no obligation to react to the findings in Commission reports. This severely undermines

the incentive to file a complaint. There is no mechanism to make the Postal Service

consider the findings in the report, nor is there an enforcement mechanism to persuade
– 34 –

the Postal Service to take any action. The legislation creating the Postal Regulatory

Board also must remedy this situation.

The Postal Service’s status as a government entity adds complexity to designing

an appropriate enforcement mechanism. There are no principals or shareholders to feel

the effects of an enforcement mechanism. Without principals or shareholders, there is

no one to influence compliance by transferring the effects of an enforcement action to

those within management responsible for compliance.

The Postal Service participates in competitive markets and in a government

created monopoly market. The design of an enforcement mechanism should consider

that an enforcement mechanism appropriate in one area might not be appropriate in the

other area.

In many fields, fines are used as enforcement mechanisms. Fines may not be

appropriate in the non-competitive sector of the postal arena as it would not be

equitable for the enforcement mechanism to penalize captive ratepayers for the actions

of Postal Service management. Ratepayers in non-competitive markets have little

recourse but to continue patronizing the Postal Service. Ratepayers in the competitive

markets may switch to other service providers, but for most mailers this option may not

be viable. Thus, fines might serve only to increase the financial burden on captive

customers.

In these circumstances, it is essential that any legislation clearly indicate

congressional intent as to the respective areas of authority of the Postal Service and the

regulator, and that the postal regulator have all necessary authority to enforce decisions

in its areas of responsibility. 
– 35 –

THE SIZE AND STRUCTURE OF THE POSTAL REGULATOR

The Postal Regulatory Commission, as proposed, is tasked with broad oversight

over Postal Service regulatory and public policy matters. The successful operation of a

modern Postal Service makes it imperative that the Postal Regulatory Commission

carry out this oversight responsibility in an appropriate, efficient, and timely manner.

The proposed scope of responsibilities delegated to the Postal Regulatory Commission

exceeds those currently undertaken by the Postal Rate Commission.

The Commissioners will be required to understand and make decisions involving

complex technical issues involving the Postal Service and the mailing community.

These issues will frequently require analysis involving the disciplines of economics,

accounting, business, law, and public policy. The seats at the Commission should be

filled with highly qualified and highly motivated Commissioners that have proven

qualifications in the above areas. A statement of qualifications appearing within the

legislation, such as selecting individuals solely on the basis of their technical

qualifications, professional standing, and demonstrated expertise in economics,

accounting, law, or public administration, will help guide the selection process to the

most qualified individuals.

There are advantages to a five-member Commission as opposed to the threemember body suggested by the President’s Commission on the Postal Service. The

issues that the Commission grapples with often will be complex and difficult to resolve.

Five Commissioners will bring a greater diversity of knowledge and differing

perspectives to bear on the issues at hand. With the expanded scope of responsibilities

and shortened time frames envisioned for resolving issues, five Commissioners will

more efficiently handle the expanded workload, and effectively carry out the assigned

tasks of the Commission in a timely manner.
– 36 –

A Commission composed of five Commissioners also mitigates the effect of

transitional periods where there is a vacancy at the Commission. The vacancy of one

Commissioner out of five is not as likely to result in the absence of a quorum on the

Commission than the loss of one Commissioner out of three. It will also reduce the

effect of the loss of institutional knowledge caused by the departure of one

Commissioner, and assures the continuity of the decision making process of the

Commission. This is an important consideration since vacancies have lasted for a

number of months while new appointments are made.

The Postal Regulatory Commission decisions should not be politically partisan,

and the Commission should operate seamlessly through the normal transitions of

parties into and out of office. The presence of five Commissioners will help assure a

balanced Commission. A Commission composed of only three Commissioners could

reflect too narrow a viewpoint when there is a vacancy and the two sitting

Commissioners are of the same party affiliation.

There also are practical considerations that argue in favor of five Commissioners

as opposed to three. These matters are exacerbated when vacancies exist. A quorum

will be required for the Commission to carry out its official duties. Assuming a

Commission composed of three Commissioners, the absence or illness of one

Commissioner would effectively provide each of the other two with the ability to bring

the functioning of the Commission to a halt by refusing to attend meetings. This

prospect could easily undermine the model of a responsive collegial body in which

majority rule prevails. For these reasons I urge retention of a five-member Commission.

Resources Needed by the New Regulator

Postal reform is likely to give the Postal Service unprecedented pricing and

operational freedom. At the same time, it may establish a new Postal Regulatory

Commission with the responsibility to design and implement a system of rules and

standards that will govern the Postal Service’s exercise of its new commercial freedom. 
– 37 –

The new regulator will be expected to apply the new system of rules and standards with

unprecedented speed and dexterity.

S. 1285 and H.R. 4970 contemplate what might be called a system of regulation

by information. This model depends on the Postal Service to promptly share all relevant

information with the new regulator, so that the new regulator can analyze, report, and, if

necessary take swift action on the information shared. The new regulator will be

expected to develop a modern system of ratemaking while simultaneously preparing

and implementing multiple systems for collecting and applying data. It will be expected

to develop standards and rules applicable to 19 sets of new regulations, reports, or

studies. Many of these may require the regulator to make fundamental policy decisions

in areas largely without precedent.

While this work is in progress, the regulator will be expected to expeditiously

process the largest and most controversial omnibus rate case ever. This rate case will

effect approximately $70 billion in revenue, and will involve scores of participants and

an evidentiary record of tens of thousands of pages. It is expected that the next

omnibus rate case will exceed all previous rate cases in its complexity, since it will set

controlling precedents in cost methods and rate design that are likely to shape the

Postal Service for the foreseeable future.

These obligations will require the Commission to develop revised staffing plans.

Because a certain amount of these new obligations will be non-recurring, it may not be

appropriate to attempt to employ permanent staff to perform all of these tasks.

Therefore consideration will be given to supplementing regular employees by retaining

consultants and part-time employees to handle parts of the expanded workload. If

Commission resources are inadequate to fund these requirements, it will be necessary

to obtain supplemental funds.

Previous reform legislation has contemplated changing the system for funding

the regulatory commission to better assure its independence from the Postal Service. I
– 38 –

support that concept. However, I think that the transition to a new system for obtaining

funds could seriously impede the Commission's ability to quickly and efficiently meet its

new responsibilities. Therefore I urge that a separate provision of law direct that

payments from the Postal Service fund be authorized for expenses related to the

performance of Commission duties during the first 24 months of its operations following

the enactment of reform legislation. The new system for obtaining funds would become

effective after that time.