Chairman Davis, Ranking Member Marchant, and members of 

the Subcommittee on Federal Workforce, Postal Service, and the 

District of Columbia, thank you for the opportunity to be here today. 

My remarks focus primarily on information developed during the 

Postal Regulatory Commission’s (PRC) 2006 proceeding regarding 

the Postal Service’s “Evolutionary Network Development” (END) 

plans (Docket No. N2006-1). That proceeding concluded with a 

Commission Advisory Opinion on December 19, 2006, which is 

attached to my written statement. I respectfully request that my full 

statement and attachment be entered into the Record. 

a 

The PRC is an independent agency that has exercised 

regulatory oversight over the Postal Service since its creation by the 

Postal Reorganization Act of 1970. Primarily that oversight has 

consisted of conducting public, on-the-record hearings concerning 

proposed rate, mail classification, and major service changes, and 

recommending decisions for action by the Postal Service Governors. 

Under 39 USC s3661, the Postal Service requested an advisory 

opinion from the Commission on its planned nationwide realignment 

known as the END process. That provision requires the Postal 

Service to seek the Commission’s advice before implementing 

nationwide service changes. 

The Commission’s proceeding brought transparency to the 

Postal Service’s network development plans. When the proceeding 

started, very little was publicly known about the overall END process, 

and the Service’s vision of its future network was unclear. However, 

questioning by the Commissioners and participants in the case has 

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shed needed light on the END program. Additionally, expanded 

opportunities for public input have been provided. The public now 

has a more complete picture of what the END program entails. For 

example, there is now a publicly available list of facilities being 

considered for consolidation. This opening of the END program to 

outside scrutiny and the resulting public comment has led to 

improvements in the process. 

The Commission expects the transparency achieved through 

last year’s review of network realignment to continue under the new 

Postal Accountability and Enhancement Act. The new Act requires 

the Postal Service, in consultation with the PRC, to establish service 

standards for market-dominant products and assigns regulatory 

oversight to the Commission. It also directs the Postal Service and 

the PRC to consult on developing a plan for meeting these standards, 

including any necessary changes to the Service’s processing, 

transportation, delivery, and retail networks. Regulations establishing 

service standards are due in December 2007, and a report to 

Congress on their implementation is due by June of 2008. 

a 

In last year’s proceeding, the Commission endorsed the goals, 

if not the details, of the Evolutionary Network Development program. 

The Commission recognized both the value of using modern 

computerized optimization and simulation models to identify 

candidate mail processing facilities for consolidation, and the need to 

conduct site-specific reviews of consolidation plans as a reality check 

on the outputs of the computer models. However, the Commission’s 

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analysis identified significant problems that could result in a less 

efficient network with slower service. 

A basic problem with the END process for rationalizing the 

Postal Service’s network was the determination to consolidate 

operations, where possible, from smaller plants into larger plants, 

rather than from less productive plants into more productive plants. 

The latter approach holds greater promise for making the network 

more efficient. 

Another problem was that transportation was not adequately 

considered in the Network Development plans. It was not clear how 

transportation would be realigned since the backbone of the network, 

the Regional Distribution Centers, was shrouded in uncertainty. The 

Postal Service estimated there could be anywhere from 28 to 100 

such centers. To the Commission, it seemed risky to reconfigure the 

network without first having a better understanding of the nodes and 

transportation links that would form this backbone. 

Also the network development plans, as of last year, did not 

consider a significant change in mail processing that will be 

introduced next month, the Flats Sequence Sorting machines. These 

machines are huge, expensive, and were not incorporated in the 

planning models. Consolidations implemented without considering 

the addition of these machines may now require unanticipated facility 

expansions and use of annexes. 

The Postal Service recognized that its network redesign 

program could have a significant impact on service. However, it did 

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not provide a reliable estimate of the volume of mail that would 

experience a downgrade, or upgrade, in days to delivery. Nor was 

there an estimate of how often the Postal Service would need to 

move up collection times on boxes and business mail drop-offs in 

order to get the mail to processing and delivery units in a timely 

manner, or the impact consolidations would have on the deliverymost notably delivery later in the day. 

The Commission also found that many of the problems were 

due to assumptions built into the computer models that were driving 

the nationwide network realignment process. These include: 

1. A disconnect between the actual productivity and cost 

characteristics of processing plants in the current network 

and the plant characteristics that are assumed in the 

inputs to the models. As a result of this disconnect, there 

is a risk that the models will recommend shifting workload 

from more productive, lower-cost plants to less 

productive, higher-cost plants. 

2. The Postal Service’s models assume that existing 

productivity differences among current plants, which lead 

to wide variations in unit costs, will become irrelevant in 

the process of network realignment. There is no reason 

to expect this will be true. 

3. The method the Postal Service uses to develop plantlevel marginal costs as inputs for its models rests on 

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several basic assumptions that appear to be seriously 

flawed, including: 

i. The misassumption that plant size is a reliable 

indicator of plant marginal processing costs. 

ii. The use of cost functions that capture only shortrun marginal costs as appropriate guides for the 

long-term reconfiguration of the postal network. 

iii. Confusing the fact that “economies of scale” 

depend on plant size whereas “economies of fill” 

are available to any plant of any size. 

4. 

not provide, an estimate of the impact of reconfiguration on 

transportation costs. From the evidence provided in the 

proceeding, it is not clear that transportation costs will 

increase, potentially offsetting other savings. 

The models do not produce, and the Postal Service did 

not 

The site-specific development and evaluation plans are 

designed to provide a reality check on the outputs of the models and 

ensure local input before changes actually occur. Yet several 

problems were identified that include: 

1. A lack of consistency in how proposed consolidations are 

reviewed; 

2. No criteria for approval or disapproval of proposed 

consolidations; 

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3. A lack of public and mailer input; and 

4. Severe tardiness and errors in analysis in postconsolidation reviews. 

The Postal Service, in apparent recognition of certain criticisms 

identified in the Commission’s proceeding, revised its original plan for 

public involvement during the course of the proceeding. Among other 

things, public meetings have been added during the Area Mail 

Processing feasibility study phase, a communications plan (including 

public notice) has been introduced for Regional Distribution Center 

activations, and a formal plan has been developed to guide the PostImplementation Review process. 

During the Commission’s proceeding, it became clear that the 

public has an interest in being notified much earlier in the process 

when the Postal Service is proposing an Area Mail Processing 

consolidation. Communities sought disclosure of more information on 

a broader range of topics, more meaningful inclusion in town hall 

meetings, and the opportunity to develop alternatives as well as 

provide feedback on the results of consolidations. 

This public interest is not unreasonable in light of what the 

Evolutionary Network Development program puts into play for 

individual citizens, businesses and suppliers, and affected 

communities. The consequences, in fact, appear to have the potential 

- at least for some stakeholders - to be far-reaching. Accordingly, 

the Commission recommended that the realignment process be 

supplemented with additional procedures for public input. 

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In closing, let me reiterate that the Commission believes the 

Postal Service should have the flexibility and authority to adjust its 

operations and networks to meet its business needs and create cost 

savings and efficiencies. However, the Postal Service must be 

accountable and transparent to all postal customers, and be sensitive 

to the needs of the communities it serves. 

0 

Thank you. I will be pleased to answer any questions you may 

have. 

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