TESTIMONY OF GEORGE A. OMAS 

CHAIRMAN, POSTAL RATE COMMISSION 

BEFORE THE SPECIAL PANEL ON POSTAL REFORM 

OF THE COMMITTEE ON GOVERNMENT REFORM 

January 28, 2004 

Mr. Chairman, members of the Committee, thank you for providing me the 

opportunity to present testimony to the Committee on Government Reform’s 

Special Panel on Postal Reform and Oversight. This hearing is for the purpose of 

discussing the need and prospects for comprehensive postal reform, with a focus 

on the five principles suggested as guides by the Administration. 

The Postal Rate Commission (PRC) commends the Administration for 

bringing the issue of postal reform to the forefront of public debate by releasing its 

five principles for postal reform. We wholeheartedly endorse these principles and 

believe that the entire postal community owes the Administration a debt of 

gratitude for its timely effort. The Administration’s postal reform initiative is a 

direct product of the exemplary work done by the President’s Commission on the 

United States Postal Service (President’s Commission) last year. The PRC 

believes that the President’s Commission has done an extraordinary job of 

synthesizing a huge amount of information from diverse sources into a cogent and 

persuasive call for reform. 

 As I reviewed my materials on recent postal reform efforts, I came to see a 

distinct pattern. Starting with the efforts of Chairman McHugh almost eight years 

ago, there has been a gradual awakening to the potential benefits of modernizing 

the Postal Service. I think it is now evident that such modernization is essential. 

Furthermore, I think there is widespread agreement that legislation is necessary 

to facilitate modernization. 

 The Administration has called upon Congress to enact comprehensive 

postal reform legislation to ensure continuity in the effective operation of the 

nation’s universal postal system. It sets forth five policy guidelines for achieving 

that objective, beginning with the Postal Service’s implementation of corporate 
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January 28, 2004 

“best practices” to meet its responsibilities and objectives. I wholeheartedly 

endorse the Administration’s recommendation to introduce “best practices,” but 

will leave it to the Postal Service, the General Accounting Office (GAO) and other 

reviewers to comment on the specifics of that recommendation. 

 My testimony will begin by reviewing the report of the President’s 

Commission as it relates to the principles and basic policy choices it 

recommends. Following that, I will address each of the remaining four principles 

espoused by the Administration for guiding postal reform legislation. These are: 

♦ Enhanced Postal Service flexibility, and its responsible exercise; 

♦ Accountability, and the mechanisms for ensuring it; 

♦ Financial self-sufficiency, and guaranteeing fairness to stakeholders; 

and 

♦ Transparency, and its essential importance to effective postal 

reform. 

FACTUAL AND POLICY BASES OF PRESIDENT’S COMMISSION’S 

RECOMMENDATIONS 

In its report, the President’s Commission addresses the subject of 

reconfiguring a national postal system with a decidedly uncertain future. The 

President’s Commission finds that: “Universal postal service remains vital to the 

nation and its economy at the dawn of the 21st century.” Report at vii. Largely on 

this ground, the President’s Commission states its belief that the United States 

Postal Service “should remain an independent entity within the executive branch 

of the Federal government with a unique charter to operate as a self-sustaining 

commercial enterprise.” Id. at ix. At the same time, however, it identifies 

significant challenges to maintaining viable universal service in the future. The 

report states: 

Unfortunately, the institution that delivers it is in significant 

jeopardy. Buffeted by the mounting costs of an inefficient 
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January 28, 2004 

delivery network and the popularity of electronic mail, the 

Postal Service has more than $90 billion in debts and 

unfunded obligations and an unstable financial outlook. 

Absent fundamental reforms, the risk of a significant 

taxpayer bailout or dramatic postage rate increases looms 

large. 

Id. at vii. 

 The report identifies and discusses several practical obstacles to the 

continued successful operation of a universal mail service. These include: 

• A long-term decline in the rates of volume growth of First-Class Mail 

and Standard Mail, exacerbated by the threat of diversion to cheaper 

electronic alternatives; 

• Rising operating costs, resulting from an aging infrastructure and large 

employee base; and 

• Accumulated debts and liabilities reaching “destabilizing” levels, which 

may only increase as expenses outpace the growth of operating 

revenues. 

While the report notes that the Postal Service has made substantial progress in 

realizing cost savings through action under its Transformation Plan of April 2002, 

it anticipates that the Service may experience significant — and rapidly ballooning 

—deficits within a few years, even if stamp prices continue to rise with inflation. 

 In light of its findings on the current state and future prospects of the Postal 

Service, the President’s Commission concludes that the nation faces a 

fundamental policy choice: to prepare to pay — either through taxation or postal 

rate increases — for increasingly dated and costly mail service, or to “permit an 

ambitious modernization that embraces proven business strategies, private-sector 

partnerships and new technologies to rein in costs aggressively and improve 

service.” Id. at vii. 

The President’s Commission unequivocally recommends the latter course. 

In addition to adopting corporate “best practices,” the Commission recommends 
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January 28, 2004 

that the Postal Service introduce transparency to measure and report information 

on its product costs and performance; be afforded enhanced flexibility to reduce 

costs, set rates, and adapt to a dynamic marketplace; be made accountable 

through the exercise of strong independent oversight in order to protect consumer 

welfare and universal mail service; and exercise its newfound flexibility to become 

financially self-sufficient and cover all its obligations. 

 The Postal Rate Commission fully supports these recommended initiatives 

for improving the likelihood that the nation will continue to receive superior postal 

service in the coming decades. It also stands ready to fulfill whatever role may be 

found appropriate and necessary for achieving that goal. The remainder of my 

testimony today explores policy and practical considerations likely to arise in the 

process of implementing the recommendations made by the President’s 

Commission. 

ENHANCED POSTAL SERVICE FLEXIBILITY AND ITS RESPONSIBLE 

EXERCISE 

The President’s Commission recommends that the Postal Service’s Board 

of Directors and senior management be afforded greater flexibility to manage 

without limitations imposed by statutory constraints. Specifically, it recommends 

that: (1) Postal Service management should be given flexibility to implement 

corporate best practices; (2) the Service should be allowed to set rates within 

limits established by a new Postal Regulatory Board (Regulatory Board or PRB); 

(3) the Service should no longer be subject to the $3 billion sub-limits on annual 

borrowing for capital and operating needs; and (4) the Service should be able to 

retain earnings subject to limits established by the PRB. Id., Appendix C, 

Recommendation C-2. To counterbalance more independent management, the 

President’s Commission recommends that a Postal Regulatory Board be vested 

with “broad authority to set the public-policy parameters within which the Postal 

Service is allowed to operate.” The Commission emphasizes that its 
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January 28, 2004 

recommendations are contingent on a strong, independent Regulatory Board with 

a clear mandate to protect the public interest. 

I endorse the balanced approach to enhanced Postal Service flexibility 

recommended by the President’s Commission. However, I believe that it is 

appropriate for Congress to consider how the Service may appropriately exercise 

its newfound flexibility in the future, especially with regard to ratesetting. 

The President’s Commission contemplates that, following a PRC 

proceeding to establish “baseline” rates, the Postal Service would be afforded 

pricing freedom within broad constraints. Rates for non-competitive (monopoly 

and market-dominant) products could be set at whatever level management 

chooses so long as they meet two tests: rates for each product must cover its 

costs, and rates for a product may not increase faster than an inflation-related 

metric established by the regulator. Rates for competitive services would be 

required to recover all their allocable costs to assure that cross-subsidies from 

non-competitive products do not occur. 

 While the President’s Commission correctly anticipates that the Postal 

Service is likely to find this new pricing freedom useful, it does not offer specific 

public policy guidance on how its benefits should be distributed among 

ratepayers. Current postal law directs the PRC to consider a variety of pricing 

factors in recommending rate levels — for example, “the educational, scientific, 

and informational value to the recipient of mail matter[.]” [39 U.S.C. § 3622(b)(8).] 

If a flexible pricing regime is to be adopted, Congress may wish to consider 

articulating the public policy considerations that are appropriate for guiding the 

Postal Service’s discretionary pricing decisions. 

MECHANISMS OF ACCOUNTABILITY AND PUBLIC RESPONSIVENESS 

The President’s Commission’s report concludes that: “The Postal 

Service’s need for oversight today is as broad as the PRC’s authority is narrow.” 

(Report at 55.) On the basis of this assessment, the Commission recommends 
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January 28, 2004 

that a Postal Regulatory Board be vested with substantially expanded regulatory 

authority. The Regulatory Board’s authority would encompass not only 

ratemaking matters such as appropriate cost allocations, the prevention of crosssubsidies, and extraordinary (above inflation) rate increases for non-competitive 

products and services, but also oversight of the appropriate scope of the postal 

monopoly, proposed changes to service standards, and the scope of the universal 

service obligation. The PRB would also be tasked with ensuring the Postal 

Service’s financial transparency, the comparability of its employee compensation 

to private sector benchmarks, and the consistency of its level of accumulated 

retained earnings with the public interest. (Report at 56, Exhibit 4-1.) 

The PRC fully agrees with the President’s Commission’s premise in this 

area: that the enhanced level of autonomy it recommends for the Postal Service 

in its future operations should be matched by a correspondingly rigorous degree 

of public policy oversight. Particularly in light of the Postal Service’s retention of 

the letter and mailbox monopolies, strong regulatory oversight is a crucial element 

of comprehensive postal reform. Further, the successful operation of the 

recommended system of regulatory oversight will depend on vesting the regulator 

with sufficient discretion to achieve a balance between potentially competing 

interests and potentially competing objectives. 

A. New System of Rate Regulation 

The President’s Commission recommends that the Regulatory Board, 

among other functions, exercise broad public policy oversight to ensure that 

revenues from non-competitive products are not used to subsidize the provision of 

competitive services. This recommended duty appropriately recognizes the 

importance of preventing such cross-subsidies to both users of monopoly services 

such as First-Class Mail, and to private sector firms that should be protected from 

unfair competition from their government. 

 The Regulatory Board would also oversee Postal Service cost recovery, 

ensuring that its costs are appropriately distributed across its competitive and 
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January 28, 2004 

non-competitive products and services. The PRC’s institutional experience 

confirms the importance of this analytical function. Such analysis is necessary for 

verifying that cross-subsidies between services are not occurring. 

The President’s Commission contemplates that the rates for noncompetitive (monopoly and market-dominant) products also could be set at 

whatever level management chooses so long as they meet two tests: rates for 

each product must cover its costs, and rates for a product may not increase faster 

than an inflation-related metric established by the regulator. The first test exists 

today, and is well understood. The second test is new, and the President’s 

Commission views it as an important incentive to make the Postal Service 

manage itself more efficiently. 

After rates have been established in a baseline case, the President’s 

Commission suggests that no major rate litigation would be necessary. It 

proposes that all rate matters before the Postal Regulatory Board be limited to 

written submissions and be conducted in 60 days. The PRB would then direct the 

Postal Service to implement whatever rate changes are found appropriate. 

This system has several potential virtues. It would not be burdensome to 

either mail users or the Postal Service, and would rapidly resolve the potential 

uncertainty of “proposed” rate changes. However, because it would limit the 

opportunities of parties who might be affected by rate changes to participate in the 

process, and also severely curtail the amount of time available for evaluating the 

justifications for change, Congress should hear and carefully consider the views 

of mailers and other stakeholders on this recommended change. 

B. Postal Monopoly and Universal Service 

Another essential responsibility of the Regulatory Board involves the 

recommended oversight of both the scope of the Postal Service’s monopoly and 

that of its universal service obligation. The President’s Commission report 

recommends that the PRB’s roles include “defining the scope of the postal 

monopoly, refining the appropriate components of the universal service obligation, 
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January 28, 2004 

and establishing the bright-line boundaries between the postal monopoly and 

competitive markets.” (Report at 62.) The Commission provides sound public 

policy rationales for assigning these functions. (Report at 65.) However, the 

general criteria for defining the appropriate scope of Postal Service operations 

may merit further clarification before legislation is enacted. 

Historically, a premise of postal policy has been that the purpose of the 

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

The PRC suggests that any legislation implementing postal reform should 

explicitly direct the regulatory body to consider preservation of an adequate level 

of universal service as the principal criterion when reviewing the scope of the 

postal monopoly. 

 Under the President’s Commission’s recommendations, the Regulatory 

Board would also exercise two new forms of oversight regarding services the 

Postal Service provides. First, the PRB would monitor the types of products and 

services offered by the Service to ensure it does not exceed its core mission. 

Second, the Regulatory Board would review changes in service standards 

proposed by the Postal Service that might have a substantial negative national 

impact. 

 The first function presumes that new legislation will clarify national policy 

on the appropriate areas of Postal Service business. The Postal Service’s 

provision of “non-postal” services, and their relation to the Service’s core postal 

functions, have given rise to vexing policy questions — and several contentious 

PRC proceedings — in recent years. The second function would expand a 

jurisdictional duty currently performed by the PRC, and would affirmatively 

contribute to safeguarding the public interest in preservation of the quality of 

services provided by the Postal Service. 

 The President’s Commission further recommends that the Regulatory 

Board exercise public policy oversight over two fundamental features of the 

nation’s postal system: the appropriate scope of the Postal Service’s monopoly, 
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January 28, 2004 

and that of the universal service obligation. Currently, the Postal Service 

exercises broad responsibility for defining the nature of universal service and the 

scope of its monopoly. This recommendation of the President’s Commission 

would transfer this governmental responsibility from the operator of the postal 

system to the regulatory agency that would oversee the operator. Transferring 

these functions as recommended by the Commission involves issues of national 

postal policy worthy of congressional consideration. 

C. Expanded Authority to Hear Complaints 

The President’s Commission recommends that the Postal Regulatory 

Board hear and resolve a variety of complaints from the public. The PRB would 

consider complaints that rates are unlawful either because of alleged crosssubsidy, or because rates are inconsistent with applicable ceilings. Additionally, 

the Commission contemplates the Regulatory Board hearing complaints that the 

Postal Service is acting unlawfully, for example by entering a market outside the 

scope of its mission. (Report at 65, 68.) 

The Complaint process envisioned by the President’s Commission supplies 

a substantial amount of public protection not present in the current law. The 

Postal Regulatory Board would be expected to promptly hear, and resolve, 

complaints that the Postal Service was acting contrary to public policy. Providing 

the PRB with authority to order appropriate remedial action when a complaint is 

found justified (Recommendation C-4) should substantially eliminate current 

concerns that the Postal Service is not held accountable for its acts. 

Public protection would be strengthened even more if the complaint 

process suggested in the President’s Commission report were augmented by 

authorizing the Postal Regulatory Board to initiate proceedings whenever it has 

good cause to believe that existing rates are contrary to law. This might occur if 

rates for a product have fallen below properly allocated costs, or if Postal Service 

retained earnings grow to exceed applicable limits. Even with the expedited 

procedures recommended by the President’s Commission, many small and 
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January 28, 2004 

medium sized mailers might not wish to commit resources to pursuing an 

administrative complaint. Mailers’ confidence in the fairness of the system will be 

enhanced by the knowledge that an independent agency is authorized to initiate 

proceedings to assure that rates conform to statutory standards. 

The PRC suggests that it would be consistent with the goals of 

accountability and public policy oversight to allow the Regulatory Board to hear 

not only complaints concerning new discounts, but also complaints alleging that 

changes in processing procedures, or other events, have caused existing 

discounts to exceed savings to the Postal Service. Additionally, public confidence 

that rate discounts are fair would be enhanced by making the independent 

regulator, as well as the Postal Service, responsible for ensuring that worksharing 

discounts do not exceed actual savings. This responsibility could be exercised by 

initiating a complaint proceeding to evaluate questionable existing discounts. 

The same considerations are applicable in the area of negotiated service 

agreements (Recommendation P-5). The President’s Commission suggests that 

the Postal Regulatory Board should develop general criteria for such agreements 

and conduct after-the-fact reviews if a written complaint is filed. However, public 

confidence in the integrity of the system would be enhanced if the independent 

regulator was responsible for assuring that every negotiated service agreement 

between mailers and the Postal Service is consistent with applicable policies, 

whether or not a private party files a complaint.

FINANCIAL SELF-SUFFICIENCY AND FAIRNESS TO STAKEHOLDERS 

The President’s Commission recommends that the Postal Service, 

reconfigured to operate with enhanced management flexibility, become financially 

self-sufficient and thereby cover all its anticipated obligations. In this respect, the 

Commission recommends retention of a prominent policy feature of the 1970 

Postal Reorganization Act. 
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January 28, 2004 

Recognizing the challenges this goal presents for the future, the 

President’s Commission recommends measures it believes will contribute to 

ensuring future financial self-sufficiency. These include a more flexible pricing 

regime together with various strategies for improving the Postal Service’s “bottom 

line”— optimizing its mail processing and distribution infrastructure, improving its 

management of real estate assets and procurement, partnering with the private 

sector to realize additional operating savings, and developing a workforce 

appropriate to fulfilling its universal service obligation. 

Obviously, Congress must carefully consider and weigh all of these 

recommendations in developing postal reform legislation. In doing so, care 

should be taken to assure the preservation of the Postal Service’s honored 

tradition of binding the nation together by making affordable service readily 

available to all. Americans trust their Postal Service to meet their needs, 

regardless of geographic location or economic circumstances. This trust has 

been earned through decades of dedicated service, and it must not be 

squandered. 

At the same time, deliberations on the various measures recommended by 

the President’s Commission should anticipate and provide for the needs and 

interests of the many stakeholders in the postal system. Public acceptance of 

needed changes is likely to be strongest if all potentially affected interests are 

given a “seat at the table” to express their concerns and participate in fashioning 

an acceptable final product. In addition to considering proposals on their merits, I 

also believe care should be taken to provide against unintended and unforeseen 

adverse consequences of their operation.

The system of rate regulation recommended by the President’s 

Commission would appear to raise several such concerns. First, because the 

strongest form of rate regulation would apply to non-competitive services 

(including First-Class Mail), there would be a natural incentive to control costs by 

all means available — including measures that might compromise the level of 
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January 28, 2004 

service provided to users. While the President’s Commission recommends that 

the Postal Regulatory Board be assigned jurisdiction over proposed changes in 

service standards that may have a substantial negative national impact, it does 

not explicitly address potential erosion in service levels that might result from 

cost-cutting programs. For this reason, in the PRC’s view, the regulator should 

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

Furthermore, should the Postal Service seek to raise rates for noncompetitive mail above the applicable inflation-based cap, there may be sound 

policy reasons for allowing captive customers to do more than just submit written 

protests, as proposed. The President’s Commission evidently believes that there 

are so many cost cutting opportunities available to the Postal Service that years 

should pass before rates might have to increase above the rate of inflation. 

However, if this view turns out to be overly optimistic, captive mailers could be 

subject to repeated increases in excess of inflation with no opportunity to explore 

the causes of those increases. 

The President’s Commission seems to believe that as long as rate 

increases are moderate, even captive monopoly mailers have no grounds for 

complaint. When increases exceed the rate of inflation, however, the justification 

for allowing postal management to impose ever-increasing burdens with only 

minimal user participation largely disappears. 

This is not a purely theoretical problem. In a past general rate case (PRC 

Docket No. R94-1) the Postal Service proposed a rate increase of 34% for InCounty publications. These mailers had been in discussions with the Service 

about data discrepancies before that case was filed, but without satisfactory 

resolution. After the Postal Service filed its request, affected mailers intervened 

and directed discovery to the Postal Service that forced it to acknowledge data 

collection errors. The Postal Service eventually altered its proposal and 

requested a rate reduction for this mail — but this change took place more than 

60 days after the initial request was submitted. Thus, mailers may wish to 
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January 28, 2004 

comment on: (1) how much public participation should be permissible when large 

rate increases are involved; and (2) whether a 60-day written-submissions-only 

case will provide meaningful participation. 

GUARANTEEING POSTAL SERVICE TRANSPARENCY 

Lastly, I cannot overemphasize the importance of ensuring that a reformed 

Postal Service become financially transparent, as the President’s Commission 

recommends. In the PRC’s view, establishing a financially transparent Postal 

Service is essential to assuring that it will function as a successful, performancedriven public service in the future. 

The President’s Commission report envisions “a healthy and efficient 

Postal Service that consistently operates at a high standard of excellence and 

delivers service quality, productivity and performance on a par with the nation’s 

leading corporations.” (Report at 36.) As the Commission also recognizes, 

assurance of financial transparency provides the essential framework for public 

confidence in the empowered managers and strong Board of Directors charged 

with achieving this vision. This is because timely, detailed and verifiable financial 

data will serve as a principal resource for documenting the Postal Service’s 

business performance. 

Furthermore, financial transparency — in the form of immediately 

accessible basic data about Postal Service finances and operations — will be an 

indispensable tool for implementing effective oversight of a transformed Postal 

Service. 

The President’s Commission recommends strong regulatory oversight 

performed with extreme expedition; in the case of ratemaking for non-competitive 

postal products, it recommends that all final determinations be rendered within 60 

days. The availability of highly detailed, frequently-updated cost and other 

financial data are a practical imperative for conducting meaningful regulatory 
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January 28, 2004 

review of both proposed rate changes and complaints within the recommended 

timeframe. 

The regulator’s ability to perform the functions envisioned by the 

President’s Commission will depend critically on the availability of adequately 

detailed data to enable informed expeditious review. This could encompass both 

information the Postal Service has on hand for its own operational purposes and 

other specialized data necessary for regulatory review. For this reason, it is the 

PRC’s view that the regulator should be vested with authority not only to compel 

the production of information already prepared by the Postal Service (i.e., 

subpoena power), but also to compel the collection and reporting of additional 

data reasonably required to perform its regulatory functions.

On January 6, 2004 the Chairman of the Postal Service’s Board of 

Governors reported significant progress in ongoing efforts to enhance the Postal 

Service’s financial reporting, and announced an intention to voluntarily release 

additional information consistent with applicable Securities and Exchange 

Commission reporting requirements. I commend Chairman Fineman, and the 

Postal Service as an institution, for this initiative, and encourage them to continue 

their efforts to increase the Service’s financial transparency. Further, in 

deliberating on postal reform legislation, I urge Congress to consider adoption of 

provisions that would require the Postal Service to continue to make progress on 

implementing financial and operational transparency. 

Mr. Chairman, thank you for the opportunity to present my views on the 

Administration’s recommendations regarding the principles of postal reform. I 

would be pleased to answer any questions.