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IMPLEMENTATION OF THE POSTAL

ACCOUNTABILITY ENHANCEMENT ACT OF 2006

HEARING

BEFORE THE

SUBCOMMITTEE ON FEDERAL WORKFORCE,

POSTAL SERVICE, AND THE DISTRICT

OF COLUMBIA

OF THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

FEBRUARY 28, 2008

Serial No. 110–135

Printed for the use of the Committee on Oversight and Government Reform

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

http://www.house.gov/reform

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

HENRY A. WAXMAN, California, Chairman

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

BRIAN HIGGINS, New York

JOHN A. YARMUTH, Kentucky

BRUCE L. BRALEY, Iowa

ELEANOR HOLMES NORTON, District of

Columbia

BETTY MCCOLLUM, Minnesota

JIM COOPER, Tennessee

CHRIS VAN HOLLEN, Maryland

PAUL W. HODES, New Hampshire

CHRISTOPHER S. MURPHY, Connecticut

JOHN P. SARBANES, Maryland

PETER WELCH, Vermont

——— ———

TOM DAVIS, Virginia

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

VIRGINIA FOXX, North Carolina

BRIAN P. BILBRAY, California

BILL SALI, Idaho

JIM JORDAN, Ohio

PHIL SCHILIRO, Chief of Staff

PHIL BARNETT, Staff Director

EARLEY GREEN, Chief Clerk

LAWRENCE HALLORAN, Minority Staff Director

SUBCOMMITTEE ON FEDERAL WORKFORCE, POSTAL SERVICE, AND THE DISTRICT OF

COLUMBIA

DANNY K. DAVIS, Illinois

ELEANOR HOLMES NORTON, District of

Columbia

JOHN P. SARBANES, Maryland

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio, Chairman

WM. LACY CLAY, Missouri

STEPHEN F. LYNCH, Massachusetts

KENNY MARCHANT, Texas

JOHN M. MCHUGH, NEW YORK

JOHN L. MICA, Florida

DARRELL E. ISSA, California

JIM JORDAN, Ohio

TANIA SHAND, Staff Director

(III)

C O N T E N T S

Page

Hearing held on February 28, 2008 ....................................................................... 1

Statement of:

Potter, John E., Postmaster General/CEO, U.S. Postal Service; James

H. Bilbray, member, Board of Governors, U.S. Postal Service; and

Dan G. Blair, chairman, Postal Regulatory Commission .......................... 58

Bilbray, James H. ...................................................................................... 74

Blair, Dan G. ............................................................................................. 81

Potter, John E. ........................................................................................... 58

Siggerud, Katherine, Director, Physical Infrastructure Issues, U.S. Government ACcountability Office .................................................................... 23

Wolak, Frank, professor, Department of Economics, Stanford University .. 2

Letters, statements, etc., submitted for the record by:

Bilbray, James H., member, Board of Governors, U.S. Postal Service,

prepared statement of ................................................................................... 76

Blair, Dan G., chairman, Postal Regulatory Commission, prepared statement of ........................................................................................................... 83

Potter, John E., Postmaster General/CEO, U.S. Postal Service, prepared

statement of ................................................................................................... 61

Siggerud, Katherine, Director, Physical Infrastructure Issues, U.S. Government ACcountability Office, prepared statement of ............................. 26

Wolak, Frank, professor, Department of Economics, Stanford University,

prepared statement of ................................................................................... 5

(1)

IMPLEMENTATION OF THE POSTAL ACCOUNTABILITY ENHANCEMENT ACT OF 2006

THURSDAY, FEBRUARY 28, 2008

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON FEDERAL WORKFORCE, POSTAL

SERVICE, AND THE DISTRICT OF COLUMBIA, COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM, Washington, DC.

The subcommittee met, pursuant to notice, at 4:21 p.m., in room

2154, Rayburn House Office Building, Hon. Danny K. Davis (chairman of the subcommittee) presiding.

Present: Representatives Davis of Illinois and Norton.

Also present: Representative Waxman.

Staff present: Lori Hayman, counsel; William Miles, professional

staff member; LaKeshia Myers, clerk; Ed Puccerella, Alex Cooper,

and Chris Espinoza, minority professional staff members.

Mr. DAVIS OF ILLINOIS. The subcommittee will come to order.

Welcome members of the subcommittee, witnesses and all of those

in attendance.

Welcome to the Federal Workforce, Postal Service, and the District of Columbia Subcommittee hearing on the Implementation of

the Postal Accountability Enhancement Act of 2006. The purpose

of this hearing is to examine how the U.S. Postal Service, the Postal Board of Governors and the Postal Regulatory Commission are

implementing the act and its impact on the postal community.

Hearing no objection, the chairman, ranking member and subcommittee members will each have 5 minutes to make opening

statements, and all Members will have 3 days to submit statements for the record.

Ranking Member Marchant, members of the subcommittee and

hearing witnesses, welcome to the subcommittee’s hearing on the

Implementation of the Postal Accountability Enhancement Act of

2006. Today’s hearing will examine the progress of the U.S. Postal

Service and the Postal Regulatory Commission and the implementation of the Postal Accountability Enhancement Act of 2006.

The Postal Service performs a valuable national service. In 2007,

it delivered over 212 billion pieces of mail to nearly 148 million delivery points. Over $80 billion was spent in providing these and

other Postal Services required as part of meeting the Postal Service’s universal mandate. To ensure the financial soundness of the

service and its primary function of mail delivery, the Congress

passed the Postal Accountability and Enhancement Act of 2006.

The act, making it the first major piece of postal reform legislation

since the one that created the Postal Service in 1970.

2

The act was a direct result of the postal community coming together and reaching agreement on work sharing, rate setting, price

and flexibility, diversity and a number of other provisions to ensure

that the Postal Service can compete in today’s marketplace. It is

only through an economically vibrant Postal Service, one that can

respond rapidly and effectively to changing markets and conditions,

that we can preserve the important American ideal of universal

service. To ensure compliance with the act, the subcommittee has

conducted and will continue to conduct aggressive postal oversight

and in particular, monitor the implementation of the Postal Accountability and Enhancement Act of 2006.

Today, I look forward to hearing about the progress the Postal

Service and the Postal Regulatory Commission have made in implementing the changes mandated in the act. We have already seen

evidence of progress. For example, the Postal Regulatory Commission developed and issued final regulations for a new ratemaking

system on October 29, 2007, nearly 8 months before the statutory

deadline of June 20, 2008, set forth by the act. On February 11,

2008, the Postal Regulatory Commission filed for its first-ever rate

adjustment for market dominant products under the new regulations when they announced that the price of a first-class stamp will

increase by 1 cent effective May 12, 2008.

I thank you and look forward to hearing testimony from today’s

witnesses. We will now hear testimony from the witnesses before

us.

Our witness for panel one is Professor Frank A. Wolak, he is a

professor of economics at Stanford University. His fields of research

are industrial organization and empirical economic analysis. Dr.

Wolak specialized in the study of privatization, competition and

regulation and network industries such as electricity, telecommunications, water supply, natural gas and postal delivery services. He

assisted the Postal Rate Commission with numerous rate cases and

regulatory issues for more than 10 years and has written numerous

academic articles on postal economics. Thank you very much, Professor Wolak. And as customary, witnesses before this committee

are sworn in.

[Witness sworn.]

Mr. DAVIS. The record will show that the witness answered in

the affirmative. Again, let me thank you so much. And we will proceed. Your entire statement will be included in the record. We

would like for you to take 5 minutes and summarize that. Of

course we have a timer. And when things get yellow, it means that

you are down to 4 minutes. And then as they turn red, we would

like for you to kind of wrap up. And thank you so much.

STATEMENT OF FRANK WOLAK, PROFESSOR, DEPARTMENT

OF ECONOMICS, STANFORD UNIVERSITY

Mr. WOLAK. Thank you, Mr. Chairman, and thank you for the

opportunity to contribute to this hearing. I will focus my results on

what I believe to be the crucial aspect of the successful implementation of the modern system of regulation, which is a goal of the

Postal Accountability Enhancement Act and that is the data collection analysis and dissemination of data by the Postal Regulatory

Commission. So a modern system of regulation that attempts to

3

balance two competing goals, strong incentives for the firm to

produce in a least-cost manner and to protect consumers from

prices for market-dominant products that reflect the market power

of the monopoly provider.

And the price cap mechanism is one such approach that is attempting to cheat both these goals. And this is certainly a—one of

the things, and it is a part of the process, but I believe that a major

role that can really make this process work even better is if the

Postal Regulatory Commission fully exploits its information gathering powers under the act to attain the best possible data from the

Postal Service that is appropriate for its needs and uses this data

to analyze postal operations, compute accurate product level cost

estimates, construct service quality entities and all of these can significantly increase the likelihood that the act will actually achieve

the goals of maintaining higher service quality levels and setting

economically efficient pricing.

Another role for the Commission under the act is to quantify the

cost of the universal service obligation. And this is a conceptually

challenging task that requires intimate knowledge of Postal Service

operations. And once again, the ability of the Postal Rate Commission to—Regulatory Commission—excuse me—to gather data, to

analyze cost is an important aspect of determining the universal

service obligation.

And to make sure that informed decisions can be made about

what it should look like and how it should adapt to the changing

competitive conditions that the Postal Service faces. I would now

like to discuss just a bit in terms of the role of the information provision. What information provision can really do in a regulatory

process is provide what I would like to call smart sunshine regulations. And by this I mean the collection of data and analysis in a

manner and release to the public in a manner that really helps

parties on an ongoing basis monitor the performance of the Postal

Service over time as well as across processing locations to improve

the effectiveness of the postal regulatory process and the effectiveness of Postal Service operations.

Another area where this ability to gather data can be particularly important is that in previous rate cases, the Postal Rate Commission in its previous inter carnation has identified significant errors in data used by the Postal Service in a number of their mail

processing studies. And if the Postal Regulatory Commission is

able to request data that it needs and ensure that it is suitable for

the task, it can therefore improve the process of cost studies as well

as improve the accuracy of pricing and other sorts of things.

A final but important benefit of the Commission’s regulatory authority is just simply monitoring—the overall monitoring of the

health of the Postal Service, similar to a doctor taking a patient’s

temperature, pulse and blood pressure and other measures of

health status. And in the same way that a patient’s vital signs are

used by a doctor to diagnose an illness and recommend a remedy,

changes in these performance—a consistent set of performance

measures collected over time can be used by the Postal Regulatory

Commission in the same way that the doctor uses these vital signs

to diagnose problems, to be proactive and in recommending any

4

sort of cures for problems discovered before they develop into significant problems.

The final point that I would like to discuss is the question of the

need for a proactive data collection and analysis rather than a retroactive. And in particular, the act calls for the Postal Service to

notify the Commission of any intention to raise rates. And allows

for a retrospective review of these rates if the Postal Regulatory

Commission receives comments from the party on these rates. The

difficulty is is that the timing of this process is such that by the

time the process actually occurs and the rates are reviewed, it

would be extremely difficult to actually implement the rates that

are finally reviewed in time for the next submission by the Postal

Service for a rate increase in a future period.

So this really emphasizes the importance of a proactive process

of collecting data, analyzing data, being ready and immediately

available to act in response to a Postal Service rate proposal with

the state-of-the-art cost estimates.

So in conclusion, I just would like to say that I think the Postal

Accountability Act can really achieve the goals that is intended but

an important part of achieving those goals is the authority of the

Postal Regulatory Commission to obtain the best possible information and use this in a proactive manner to inform both its process

as well as the public debate over the future of the Postal Service.

So thank you very much for the opportunity to speak. And I look

forward to your questions.

[The prepared statement of Mr. Wolak follows:]

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Mr. DAVIS OF ILLINOIS. Thank you very much, Dr. Wolak. Again,

let me thank you for coming and for being here.

As you know, total mail volume is declining. That is both first

class and standard mail. My question is this: Do you think that

these trends are going to continue? And if they are, is there anything that the Postal Service can do? Or can you think of the Postal Service doing anything that might turn these trends around?

Mr. WOLAK. Well, I think it’s—there are certainly in my own research, I’ve identified trends in the—certainly the decline in the

household for postal delivery services. And it certainly seems that

on the business side with people receiving their bills online as well

as paying online, this is certainly going to lead to a business decline. But I think the opportunity that the act really allows is the

ability of the Postal Service to, if you like, use its pricing flexibility

to maximize the amount of revenue it can receive from a given

class of mail by the flexibility that it has to alter the prices.

So this would call—say that it gets back to again the issue of

data collection, of it would be useful for the Postal Service to really

get a much better idea of what the structure of its demand looks

like as well as what the structure of the cost it looks like because

typically firms in the, you know, private sector competitive sector,

the way that you maximize their contribution to fixed cost that you

achieve is by knowing the variable cost of each product that you

sell and understanding the structure of demand for your product.

So I think that there is a role for much greater data collection

and value of data collection analysis also by the Postal Service as

a way to if you’ll like, make the most for the volume that it actually serves. You know, sort of the decline in volume is, in some

ways, I think, is a function of the changing nature of the way that

we communicate. And it’s sort of not something we can do a whole

lot about.

Mr. DAVIS OF ILLINOIS. Well, let me ask you, as an expert in regulating the energy and telecommunications industries, what lessons have been learned there that might be applicable or applied

to trying to regulate as effectively as possible the postal industry?

Mr. WOLAK. Well, I think that was the major theme of my testimony is to really try to bring those lessons and the important lesson that I’ve learned from certainly my experience with electricity

is you know get the data out there, allow people to analyze it, to

understand it. You know, many eyes looking at information, looking at how things are working can provide far better regulatory

oversight than a very insular and closed process. The other is, I

think, getting the information out there can help to make some

pretty politically difficult decisions to move forward, to make the,

you know, Postal Service financially viable into the future by informing the process with good analysis. I guess the way that I

would characterize it is is having the data and performing analysis

constrains the amount that people can theorize without any basis.

And therefore, reduces the amount of, if you like, you know, idle

talk and focuses in on what really is the sort of the tradeoffs that

must be faced in moving forward because you can say, this bit of

analysis rules out that as a possible explanation. Let’s really get

down to what is consistent with the work that we’ve done. So I

think it’s really the quantitative—gathering the data, analyzing the

18

data and, you know, putting it into the public discussion is, I think,

very useful.

Mr. DAVIS OF ILLINOIS. Accurately forecasting or trying to know

and project what the volume of mail is going to be is obviously essential to the Postal Service in order for it to plan well. How well

do you think the Postal Service is doing in both its short-term planning as well as long term?

Mr. WOLAK. I think it’s an extremely difficult task. I guess the

thing that I would emphasize is that it may be worth spending

some money to engage in what most businesses do, which is essentially marketing research in the sense of, who are my customers,

how much they spend, why do they spend what they spend, and

analyzing you know that kind of information. I know that the Postal Service collects what’s called consumer diary survey, which is a

diary of essentially households. But there’s not a similar survey for

the business sector, which is certainly, I think, a very rapidly

changing sector in terms of the types of postal products that its

using.

So having say an ongoing probability sample of those sorts of

customers, to understand why they’re moving where they’re moving

I think can really help the Postal Service get a much better handle

on where their volume is going. I think—you know, currently, I

guess what I’d say is given the data that they do collect, I’d say

they do a very good job. But I think getting a bit more into you

know customer level surveys that are representative of the class of

customers that you face in truly trying to understand the trends

for specific customers and drivers for specific customers I think can

really help to improve those sorts of forecasts.

Mr. DAVIS OF ILLINOIS. Almost every month it appears as though

there’s some additional electronic diversion of possibility relative to

technology just simply burgeoning, and it seems unlimited. Do you

have any forecast or projections as to whether or not we’re going

to continue to see an increase in electronic communication? Or is

there going to be any leveling off so that we might continue to have

the same level of need that exists for the mail delivery that we see

coming from the Postal Service?

Mr. WOLAK. Well, certainly in the work that I’ve done at least

for the household sector, which is all I’ve managed to have the data

for. I’m hoping the Postal Service will collect from the business sector to analyze that. But for the household sector, it certainly seems

that the good news is is everybody has high speed Internet access

and essentially there therefore is sort of a leveling off in terms of

the impact of the growing penetration of electronic communication.

So in that sense I think there is evidence at least for that it’s

leveling off. If you like sort of the major—it seems electronic diversion from the household sector occurred probably about when the

Internet was really ramping up. But now almost everyone who is

using the Internet is using the Internet. And, but the unfortunate

thing is that the sort of intensive users of the Postal Service and

probably the most in-elastic demanders at the Postal Service at the

household level are certainly—unfortunately the older people. And

they’re sort of—they’re going away. And the less intensive users

and more flexible users are growing. So you know, that’s another

factor that I think is unfortunately contributing.

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Mr. DAVIS OF ILLINOIS. Thank you very much. Representative

Norton.

Ms. NORTON. Mr. Chairman, as you may remember, I’m fascinated by this model that at least in this country, that I see is

unique. And I appreciate very much Mr. Wolak’s testimony and

particularly when it began by looking at how private sector firms

would operate, and then moving on to what tools might help the

Postal Service. I’m really—particularly after sitting through hearings and being struck by conundrum after conundrum in what is

being required of the Postal Service. I begin to wonder about this

model itself.

I notice you talked about vital signs. Well, you know, vital signs

assumed the organs that are in this body belong in this body and

are supposed to work together. So you know, you get sick and you

put some medicine in it and they begin to work like they’re supposed to work. But what you’ve got here is a model with caps on

it and that’s appropriate because the Postal Service still performs

a public function, it has to deliver and deal with mail in the far

corners where you wouldn’t expect the private sector to earn a profit. On the other hand, we have said, but you’re supposed to act like

a private sector company, you know, make some money, take care

of yourself.

And you indicate that they’re certainly going to have a hard time

doing that if they don’t have something close to perfect data and

that they’d have to get that data in a fairly refined way, using

technology and almost a quick response or proactive way.

Well, my question is given the coexistence of a private sector and

a public sector model in the same body, suppose you did have perfect data and you were dealing only with where—I think you call

them noncap issues. Noncap issues, you know, like express mail. I

guess priority mail. There are not a lot of those. And there’s heavy

competition from the private sector, which consists often wholly of

that kind of mail.

And I am very pleased that the post office has been able to break

into it at all. But of course, part of it is by the same way anybody

would operate in the private sector, underpricing them, trying to

improve on it. You know, even for commercial magazines, they are

capped in terms of what you can charge. I mean, the magazines

themselves earn a lot of money, leave aside nonprofits. I’m talking

about the Time Magazines and whoever it is that uses the mail.

But of course, you have to do that because otherwise they’ll move

someplace else in order to send their magazines out.

I just have to ask you, and you know, let’s assume that we get

some perfect data. How close will that come to solving this conundrum so that perfect data—I mean, that’s my model, I’m assuming

it. I recognize how difficult it is—will somehow make it easier for

them to set—to do pricing according to their market; of course,

pricing according to the market brings other problems with it, like

competing in the market. And whether you know of any model in

the world where the public and private components are combined

that we might look more closely at.

Finally, just let me give the model—push private sector pricing

into models that any fool would know they won’t work. For example, and the post office has done better than Amtrak. The private

20

sector turns over Amtrak to the Federal Government in 1970 and

said, we surely can’t deal with this. This doesn’t fit our pricing

model. We go out of business. Here, government, you take it. And

this administration has trying to treat Amtrak as if, once again,

like any private railroad, except if you look at the world at large,

there is no such thing as a railroad which is not subsidized heavily

by its government. And so you have all kinds of extraordinary rail

travel throughout Europe and Asia. And we’re sitting here with

Amtrak not having enough money even to take care of its security

problems.

So my question goes you know, do we have any model to work

from if we have perfect data? How much or do you think this would

solve the problem given the noncap, small, maybe 10 percent of the

business is noncap that has to compete with highly competitive,

highly efficient international corporations that do that business all

over the world. I would just like to hear you just opine on this issue

or whether we’re about to drive the post office into the ground the

way we have Amtrak.

Mr. WOLAK. Well, I think what you’re really referring to, at least

I’ll recast it as is that it’s really the USO—universal service obligation, I would classify that as sort of the government aspect and in

the private. And I think that is really a major issue going forward

for the Postal Service and the Postal Regulatory Commission. And

even in a world with perfect data, there are, as I note in my testimony, some really difficult and conceptual issues in terms of thinking about is, you know, I think your point exactly.

Many of the rail lines that exist in Europe exist purely I think

for USO reasons, in the sense that there is a desire of the government to say, we should provide transportation even if its uneconomic to these areas because we think, you know, there is a public

benefit aspect to it. And that’s the essential feature of the universal

service obligation. We define an obligation that really doesn’t make

economic sense but it makes, you know, greater sense in the greater good sense. And that really is the issue. And that exists, I think,

to a lesser extent in other network industries. And at least to my

mind makes them very interesting.

In the telecom sector, we have the universal service obligation

that we want to provide everyone with access to telephone service.

But the trouble is telephone service has become so cheap that it’s

not nearly as hard to do that, and similarly with electricity. But

we have a, you know, to provide universal access to people. The

Postal Service presents a more challenging, you know, universal

service obligation just because of how it’s been defined. As I put a

stamp on that letter and that stamp delivers it to anywhere in the

United States. And you know, regardless if its across the street or

in the Grand Canyon, and you know, that’s a very challenging

process that makes the determination of that. But if you like, you

give me the ideal data, I will give you the ideal outcome. The ideal

outcome is we take the ideal data and we figure out what that cost

is and we recover that cost to make sure that the universal service

obligation is met and then we say OK, Postal Service subject just

to the fact that you have to make some contribution to fixed cost

from the competitive products, we give you complete flexibility in,

21

you know, how you price those to compete against the vigorous

competition that you face.

But it is a—I definitely think a very major challenge to figure

out first just what is that universal service obligation and the second is, what is the cost of it? And I think that’s a very important

discussion that needs to take place, given that, you know, the discussion I had with the chairman of the changing role of interpersonal communications that results from the fact that we have

the Internet and these sorts of things so we may want to revisit

what the USO obligation really is. But that’s something for——

Ms. NORTON. I just don’t think there’s any chance we’re going to

revisit that obligation. The one thing that happens in this place

when you talk about revisiting that obligation is you get—there’s

one issue that gets you a universal vote with no dissents. So that’s

the conundrum of which I speak. And I just think we have to reinvent the model. I must say this whole notion of flexibility price,

there is no such thing as price flexibility. Private sector has no

flexibility. You know, it is more discipline. You might not call it a

cap. But if it wants to stay in business, it’s got to compete with

other people who want to do the business more efficiently and at

less cost. They have very little flexibility.

And so they do it—in all manner of ways. So we gave them the

quote same flexibility. You know, here’s your flexibility. Go and

compete with, you know, express mail or go and compete with the

people who invented this whole new way of doing what you do.

On management, the Postal Service itself, of course, is unionized.

We approve of that. Management in the Postal Service is—I’m not

sure what the nature of the regulation there is. But these are people who operate as managers. There might be some problems with

pay-for performance, although I do understand they do some of

that. But in terms of efficiency or good managers, is there any reason to believe that the Postal Service couldn’t attract the same

kind of managers that Federal Express or some of those people attract? We keep them from getting those managers where there may

be more flexibility than in a unionized work force.

Mr. WOLAK. Well, there certainly is far greater flexibility to payfor performance in the private sector than in the Postal Service.

And that certainly I think has, you know, both positive and negatives.

Ms. NORTON. Yeah, well we’ve seen the negatives. And that’s not

what this committee—but again, is that what—is the kind of management we have in the Postal Service that much different from

the management of similar noncapped services provided in the private sector?

Mr. WOLAK. Well, I certainly think your point of the—certainly

one way that a number of the other firms perhaps are less encumbered is the degree of the unionization. And I don’t want to, you

know, I don’t want to comment to anything on that, so that can

make it more difficult for the managers to——

Ms. NORTON. I don’t really think that’s our problem. What happened was Federal Express invented a whole new way of rapidly

dealing with the mail. Yes, they’re not unionized. But in order to

remain competitive with the Postal Service, for that matter, they’ve

got to pay very well. The way in which you—the challenge for the

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Postal Service is a challenge not unlike the challenge that American Express had. OK, invent a model, a new model that fits this

universe. The universe they found was a universe in which there

was not express mail and which you couldn’t do things overnight,

in which you couldn’t shift things that were perishable quickly, so

they invented a model that fit them. What I’m suggesting, this

model is a jerry-built model that——

Mr. WOLAK. Oh, no, no, no.

Ms. NORTON [continuing]. Seemed to satisfy neither side but the

moment we want to change the universal model, people scream and

obviously doesn’t satisfy the competitive side because they’re competing with people for who they must underprice or become vastly

more efficient than in order to even stay in the game. So I don’t

even see those two coexisting in the same universe.

Mr. WOLAK. I guess I would say that as someone who has visited

a number of postal sorting facilities, I mean, they’re very modernization operations, they have state-of-the-art equipment, I think

the are using modern management practices as much as possible.

But I guess the—you know, what I would say is that there’s—you

know, the simple way to describe it I think would be is there’s looking at things in terms of how much labor do I put in and how many

pieces do I get sorted? But when you are operating in a market

context, it’s more of how many dollars of labor—or how many dollars do I spend on this? How much, therefore, sales do I get at the

other end? And how much contribution am I getting to pay for my

fixed costs? And it’s sort of a—in the market environment, that’s

really what you are interested in.

So even if suppose it’s very costly for you to do something, if

what you are able to sell it for is something very high, that’s something that in a market environment you are going to do, and I

think that’s the transition that is taking place under the act and

is hopefully being, you know, taking place, is a recognition of you

are competing in the marketplace, that it really is how are you getting contribution to fixed cost rather than just simply improving

the efficiency of postal operations in the sense of, you know,

amount of labor hours, amount of pieces sorted. And if the pieces

you are sorting aren’t the ones and doing a good job of sorting

aren’t the ones that are really high value to you and you are probably not as good as sorting the ones that are extremely high valuable to you, then you would probably want to get more of those.

And that’s, I think, the new model. And I think that’s where you

know understanding how you’re making your money is really the

change in the world. And that’s just not something in a monopoly

environment that you really need to be concerned with because the

monopoly environment guarantees you essentially cost recovery

whereas the competitive environment doesn’t.

And so you really have to be much more cognizant of that and

the price gap mechanism in some sense is trying to say, look, you

really have no ability to move your prices. They will simply increase at this CPI. So, you know, try your best to figure out the

best place to try to sell your products to you know scale down your

operations to do that.

Ms. NORTON. Thank you, Mr. Chairman. I thank you, Mr. Wolak.

Mr. Chairman, I believe that this perfect data might well tell the

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Postal Service to raise prices in the noncap areas. If you want to

deal with their revenue problems which are immense, and look

what that would mean in competing with Federal Express and the

rest of them. That’s why I think this is a—we need a whole new

model. And I accept the private sector model and I accept the universal service model and I don’t know what to do about it. Thank

you very much.

Mr. WOLAK. Thank you.

Mr. DAVIS OF ILLINOIS. Thank you very much, Representative

Norton. Thank you, Mr. Wolak. We appreciate you coming.

Mr. WOLAK. Thanks.

Mr. DAVIS OF ILLINOIS. We will now move to panel 2. Ms. Katherine Siggerud is a Director in the Physical Infrastructure Issues

team at the Government Accountability Office [GAO]. She has directed GAO’s work on postal issues for several years, including recent reports on delivery standards and performance, process and

network realignment, contract and policies, semipostal stamps and

biological threats. Thank you very much, Ms. Siggerud. It is our

custom to swear in all the witnesses.

[Witness sworn.]

Mr. DAVIS OF ILLINOIS. The record will indicate that the witness

answered in the affirmative. We thank you very much for coming

and for being here. Your full statement is in the record. If you

would take 5 minutes and summarize for us, we’d appreciate that.

Thank you very much.

STATEMENT OF KATHERINE SIGGERUD, DIRECTOR, PHYSICAL

INFRASTRUCTURE ISSUES, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

Ms. SIGGERUD. Chairman Davis, Ms. Norton, members of the

subcommittee, thank you for your invitation to testify at today’s

hearing concerning the implementation of the Postal Accountability

and Enhancement Act. When I testified about a year ago before

this subcommittee, I said that the Congress’s efforts to pass comprehensive wholesome reform provided opportunities to address

many of the Postal Service’s challenges. We are now at the point

where we can begin to assess the act’s implementation. Today I

will focus on first, actions to date resulting from the act including

how they affected the service’s 2007 financial condition, and second, continuing challenges in areas for oversight. My full statement

also covers how studies required under the law can contribute to

future postal reform decisions. My statement today is often a positive one, as we are encouraged by the early steps that the service,

the PRC, mailers and the stakeholders have taken. They have

found new ways to engage in constructive dialog and in several

cases reach consensus on how best to proceed. These actions, which

contrast sharply with the former adversarial ratemaking process

hold promise for a future progress across a broad range of postal

reform issues. Such collaboration and progress will remain necessary as the service and the mailing industry transform themselves in response to the rapidly changing marketplace and continue to implement these reforms.

Turning now to implementation of the act. The service, the PRC

and other postal stakeholders have worked cooperatively to date to

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meet their responsibilities in fulfilling its requirements. Key actions include establishing first, early regulations for a new rate-setting system which influence the service’s decision to pursue its proposed rate increase under the new system. Second, a mechanism

that requires prefunding of retiree health insurance premiums,

thus distributing this burden between current and future rate payers. And third, modern service standards for the service’s products

covered by the postal monopoly.

These were the result of a collaborative effort and were the most

sweeping update in years. In addition, several reports required

under the act have been issued and the PRC has solicited comments and held meetings to simulate dialog on the complex issues

related to the new regulatory framework. In terms of impact, the

service reported a $5.1 billion net loss for 2007. Other aspects of

the act, such as retiree health obligations directly affected these results. Costs such as wages, fuel and adding 1.8 million new delivery points. This left the service with a total debt of $4.2 billion.

With regard to challenges and areas for oversight, we have in the

past called attention to basic challenges facing the services, such

as changing mail volumes and increasing delivery points. And

these remain relevant today. They are exacerbated by our current

economic environment. A slowing economy, recent rate increases

and other factors negatively affected the postal service’s financial

performance in the first quarter of 2008. Its mail volumes and revenues, particularly the key products of first class and standard

mail, were lower than planned.

The service was able to respond by cutting costs. Although the

service anticipates additional revenues from its proposed rate increase, additional cost reductions beyond those that had been

planned will be needed to meet its financial projections for 2008.

We have also followed the service’s challenges and improving its efficiency. This includes realigning its processing and other infrastructure.

The act requires the service to develop a plan by June for

rationalizing its spent work and removing excess processing capacity. This provides the service the opportunity to make its case for

continued action and address concerns and recommendations raised

by the PRC, the postal IG and GAO. The service also plans several

new technology investments that have the potential to increase efficiency such as a system to sort flat shaped mail in the transition

to the intelligent mail bar code. There is also the significant challenge of measuring the reporting on the quality of service for most

postal products. The Postal Service must, in consultation with the

PRC, submit a plan to Congress by June for how it will meet its

newly established standards including performance goals and must

then begin to report on performance. The service and its stakeholders have made good progress to date and our work suggests that.

With regard to reporting, key principles of completeness, availability and usefulness should guide future actions and that this should

continue to be a collaborative effort.

In conclusion, Mr. Chairman, given these challenges, key areas

for continued oversight include how mailers and mail volume have

and will respond to rate changes, the effects of changes in mail volume and revenue on the service’s financial condition, efforts to conVerDate 11-MAY-2000 12:27 Apr 20, 2009 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 U:\DOCS1\48066.TXT KATIE PsN: KATIE
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trol cost by modernizing and optimizing the Postal Service’s infrastructure and work force, the transition to new automation and

mail tracking systems and the level of transparency and measuring

and reporting on delivery performance. This completes my statement. I’m happy to answer any questions you may have.

[The prepared statement of Ms. Siggerud follows:]

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Mr. DAVIS OF ILLINOIS. Thank you very much, Ms. Siggerud.

Let me ask you how well would you say or what is your impression of how well the Postal Service and the Postal Regulatory Commission have been implementing the Postal Accountability and Enhancement Act?

Ms. SIGGERUD. Mr. Chairman, as I think you can tell from my

statement, we have a generally good outlook on those issues. Just

a couple examples, developing these new regulations was very complex, particularly with regard to rate setting and the efforts that

were done to modernize the standards. Both of those were carried

out in the collaborative and open fashion. And in the case of the

rate setting framework, the deadline was met ahead of time, allowing the Postal Service to have a new rate proposal under the new

system.

The key deadlines have been met not only by the Postal Service

and the PRC but by several other key stakeholders that were also

required to report to the Congress in the last year. I think there

are a couple of areas for oversight that I mentioned in my statement, including with regard to looking at mail volumes and revenues and clearing this economic situation that we are in will be a

concern over the coming year.

Mr. DAVIS OF ILLINOIS. We continue to hear rumbles of economic

slowdown, recession, some places depression, shaky outlook for the

economic future. How well would you say that the Postal Service

is positioned to handle a slowdown or a downturn in terms of the

movement of communication devices.

Ms. SIGGERUD. That’s an excellent question. I think it is worth

thinking about that question in a long and a short-term point of

view. From the short-term point of view, clearly the Postal Service

is suffering from lower than expected volumes. This is a direct result of problems in the financial services sector and other sectors

as related to housing and credit. It is really impossible to know

how long this will last.

Volumes are also affected by two other longer term issues, one

being the electronic diversion issue. There are also the effects of

last summer’s rate increase in which the Postal Service gave incentives to mailers to prepare mail in a way that is cost effective for

the Postal Service. Mailers are responding by changing the nature

and the volume of their mailings.

The Postal Service also faces some significant cost issues. Fuel

prices come to mind based on recent news and the data from last

year for the Postal Service. There are also a core list of employees

that must be made under the collective bargaining agreements.

Short-term the Postal Service will be able to reduce its work hours

since they are partly driven by volume, but that is not going to be

a successful long-term strategy in terms of responding to volume

decreases.

The good news is that in the first quarter of this year we began

to see these issues happen. The Postal Service was able to cut

costs, reduce work hours and also provide record service in the portion of the first class mail that it measures and reports. So there

are both short-term solutions, long-term solutions. Short-term solutions involve work hours, looking at overtime, looking at transporVerDate 11-MAY-2000 12:27 Apr 20, 2009 Jkt 000000 PO 00000 Frm 00059 Fmt 6633 Sfmt 6633 U:\DOCS1\48066.TXT KATIE PsN: KATIE
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tation costs, as well as the fact that there will be new revenue in

May.

Long term what the Postal Service needs to do is use the flexibility given to it in the act to develop and refine its products and services to attract increased volume and revenue. It also needs to improve productivity and efficiency. The flat sorting machines that

are coming into place have some promise in that area. The data

that will come out of the implementation of the intelligent mail bar

code should also help the Postal Service to improve its management.

And finally, it does have the opportunity to try to remove some

excess capacity from its networks in the long run.

Mr. DAVIS OF ILLINOIS. And so you think that there is room for

increased proficiency?

Ms. SIGGERUD. Absolutely, I’m sure the Postmaster General

would agree with me on that issue. And that is part of the reason

the Postal Service is going with investments in automation.

Mr. DAVIS OF ILLINOIS. Thank you very much.

Representative Norton.

Ms. NORTON. Thank you very much for your testimony. Could I

ask you how you think—you say in your testimony that the ongoing economic problems of the Postal Service are exacerbated by,

you say, a projected $600 million net loss for 2008. How do you expect the Postal Service to meet the problems caused by this loss or

to carry this loss?

Ms. SIGGERUD. Well, the Postal Service did project a loss. It is

not a surprise to anyone. The economic situation may make the situation worse. The Postal Service does have a variety of short-term

cost cutting efforts that may help to deal with that. The Postal

Service is also allowed to borrow money, and in fact it will be increasing its debt at the end of the year as well. But going back to

my response to the chairman, I think using the flexibility——

Ms. NORTON. Increase its debt?

Ms. SIGGERUD. Yes.

Ms. NORTON. In order to—what kind of bond rating does it have?

Ms. SIGGERUD. I do not know the bond rating on that, Ms. Norton. The Postal Service does have a cap on the total amount of debt

that it can carry as well as the amount it can accrue each year.

Ms. NORTON. But you are saying increase debt in order to deal

with loss?

Ms. SIGGERUD. It also was using debt to make capital investments.

Ms. NORTON. Yeah. It carries a loss over from year to year. How

much—are these losses annual, have they been of this magnitude

for some years now?

Ms. SIGGERUD. The losses actually are largely due at this point

to the fact that the Postal Service is complying with the Postal Accountability and Enhancement Act’s requirement to pay into retiree benefit funds. That will continue to be true for 9 years, 8 or

9 years following this year. That will continue to be a heavy lift for

the Postal Service. It does have plans, however, to try to continue

to grow revenue and reduce cost in order to deal with that situation.

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Ms. NORTON. You mentioned an obvious terrible problem that

any business like the Postal Service has, and that is dealing with

fuel costs.

Ms. SIGGERUD. Right.

Ms. NORTON. Is the Postal Service as it purchases new vehicles,

which it must have to do very often, converting to hybrid vehicles

or the like?

Ms. SIGGERUD. This is an interesting question. We did some work

on this very question last year and reported out in February the

Postal Service has a number of different approaches to try to save

fuel. But with regard to the vehicles, under the previous Energy

Act, it was required to primarily purchase alternative fuel or flex

fuel vehicles.

My understanding is under newer legislation the Postal Service

is able to go in the direction of purchasing hybrids, which it expects

to have better payoff in terms of fuel efficiency.

Ms. NORTON. What alternative fuel, what kinds of—biofuel?

Ms. SIGGERUD. The flex fuel vehicles of course typically run on

ethanol when they are not running on gasoline.

Ms. NORTON. So you’re saying that—I guess you’re saying the

new Energy Act we passed just a few months ago enables them to

use any kind of alternative fuel or alternative——

Ms. SIGGERUD. Ms. Norton, I would like to provide the details for

the record, but as I understand it, all the entire Federal fleet, including the Postal Service, has more flexibility under that act to

look for the most fuel efficient vehicles that it can use rather than

being required to purchase flex fuel vehicles.

Ms. NORTON. Well, the obvious thing you can do, without having

to do a whole lot, certainly would be to—I have great problems

with ethanol, when you consider what’s happening to the price of

grain. I understand where that comes from because there are parts

of the country for which that is important.

Ms. SIGGERUD. Yes.

Ms. NORTON. But I think I would appreciate your providing us,

and if you would provide me as well, with this information.

Ms. SIGGERUD. Absolutely.

Ms. NORTON. As an obvious way to cut costs. We are sure it will

continue to rise. Thank you, Mr. Chairman.

Mr. DAVIS OF ILLINOIS. Thank you very much.

While we are setting up for our third panel, which will consist

of Mr. John Potter, the postmaster general; the Honorable James

Bilbray, member of the Board of Governors of the U.S. Postal Service; and of course Mr. Dan Blair, chairman, Postal Regulatory Commission, confirmed on December 9, 2006 by the U.S. Senate and

designated chairman by President George W. Bush on December

15, 2006.

Gentleman, as you know, it is the custom and tradition to swear

witnesses in so if you would stand and raise your right hands.

[Witnesses sworn.]

Mr. DAVIS OF ILLINOIS. The record will show that the witnesses

answered in the affirmative.

Gentlemen, we thank you all so much for being here. And of

course it is indeed a pleasure to see you, Mr. Bilbray, again and

welcome. All of your statements are included in the record. If you

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would take 5 minutes and summarize your statements, we would

appreciate that. We begin with you, Mr. Postmaster General, Mr.

Potter.

STATEMENTS OF JOHN E. POTTER, POSTMASTER GENERAL/

CEO, U.S. POSTAL SERVICE; JAMES H. BILBRAY, MEMBER,

BOARD OF GOVERNORS, U.S. POSTAL SERVICE; AND DAN G.

BLAIR, CHAIRMAN, POSTAL REGULATORY COMMISSION

STATEMENT OF JOHN E. POTTER

Mr. POTTER. Thank you, Chairman Davis, and good afternoon. I

am pleased to report to you today on the Postal Service’s first year

of operation under the Postal Act of 2006. The new law creates welcome pricing flexibilities that can and will benefit the Nation by

keeping now a welcome, efficient and effective method to link every

household and every business in America.

A financially healthy mailing industry based on a financially

sound Postal Service supports local, regional and national economies. But with a growing network that reaches 148 million homes

and businesses every day, the mail business is extremely sensitive

to fluctuations in the economy, and to changes in the consumer

preference of hard copy or electronic communication. The new law,

for all its benefits, does not exempt the Postal Service from these

facts.

Compounding the diversion of some mail to the Internet, we have

been hard hit by today’s underperforming economy. The financial

credit and housing sectors are key drivers of the mail business. The

recessionary trend in these industries was quickly reflected in declines in mail volumes and revenues. By the end of the first quarter mail volume was down 3 percent from a year earlier. First class

mail fell by almost 1 billion pieces, or 4 percent. Standard mail fell

by some 750 million pieces, 2.6 percent. Less mail volume means

higher costs per piece of mail handled. Revenue was $525 million

below plan and net income fell short by $83 million. We see no improvements this quarter.

Facing this extremely difficult situation, the men and women of

the U.S. Postal Service have stepped up. They brought down spending, narrowing the huge revenue gap created by the sudden steep

volume decline. Faced with a possible $2 billion shortfall this year,

we are cutting $1 billion in costs on top of the 1 billion that was

already built into our plan, but not at the cost of service. Despite

quarter one’s challenges, our people delivered the strongest service

in our history. On-time delivery of next day first class mail reached

96 percent, our 2-day mail rose to 93 percent, an all-time high. Our

3-day matched our all-time high of 88 percent. We saw similar

gains with remittance mail, payments to payments and credit card

companies. Performance here is measured in hours, not days. And

we cut 2 hours from payment processing and delivery between

April and October, an all-time best.

We have a lot going for us the third straight time. We have been

rated the most trusted government agency and one of the 10 most

trusted organizations in the Nation. Customer satisfaction remains

high at 92 percent. Americans view the Postal Service more favorably than any other government agency and have done so for the

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past 10 years. Our brand is sound and our business is well positioned to rebound with the economy, but we cannot simply wait for

a recovery, we must also pursue aggressive revenue growth.

On May 12th, we are addressing prices for our market dominant

products, first class mail, standard mail, periodicals and package

services. Under the law’s new simplified pricing regulations and

conforming to the CPI price cap, this can produce $735 million in

additional revenue this year. To close the remaining gap, we are

pursuing growth opportunities to a new and innovative price structure for competitive products. We will make these products more

attractive through incentives and enhanced features. We will be

announcing the prices shortly for a May 12th implementation.

Our people are ready. They understand the challenge and are

ready to take up every new tool the law provided us. I am particularly gratified by the support of our unions in this area. With their

help our employees are aggressively talking up and selling our

products. They are making sure customers know how the mail can

work for them. Every employee in the Postal Service understands

that growth is necessary to produce the revenue and to support our

mission of serving America, and every employee is part of that effort.

Over the past year other agencies in the mailing community have

also been a part of the focused efforts to implement the requirements of the new law. Together our progress has been significant.

We have adjusted workers’ compensation procedures. We reported

on the issue of commercial best practices in our purchasing regulations. We revised our policies on handling data in connection with

legal and judicial activities. The Office of the Inspector General reported on the progress of our employee safety program. We created

a plan for implementation of international customs requirements

throughout our system. We developed and submitted our initial

mail classification schedule to the Postal Regulatory Commission.

A report by the Office of Inspector General examined our assessment and appeals process for nonprofit mailings. The Treasury Department submitted its recommendations on separate accounting

for our market dominant and competitive products. The Government Accountability Office published an internal report on the

Postal Service and mailing industry recycling. We submitted the

initial version of our annual compliance report to the PRC. We

have made steady progress in compliance with the Sarbanes-Oxley

Act requirements in the law, including the first quarterly filing of

our 10-Q report.

A study by the Federal Trade Commission found that the Postal

Service’s status as a government agency provides us with a net

competitive disadvantage versus private carriers. With the cooperation feedback and creative ideas of every part of the mailing industry, we created modern service standards for our market dominant

products. I appreciate their help. With their input and consultation

with the Postal Regulatory Commission, we have also begun work

on new service measurement systems. Perhaps, most importantly,

PRC issued its new price regulations well ahead of schedule.

I want to thank Chairman Dan Blair, his fellow commissioners

and their staff for moving so quickly on this very, very important

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issue. All of these important tasks required community-wide cooperation. I’m grateful for everyone’s assistance.

Beyond the specific requirements of the law, we are also changing how we speak about our business so it is clear to our customers. We no longer talk about rates, we talk about prices. We no

longer talk about negotiated service agreements, we are talking

about contract pricing, and referring to market dominant products

as mailing services and to competitive products as shipping services. We are entering a period of profound change. Through the

new postal law you have provided us with a new ability to navigate

that change.

As we begin this journey, I am grateful for your continual support of a sound and financially independent Postal Service that can

serve our Nation long into the future.

I will be pleased to answer any questions. Thank you, Mr. Chairman.

[The prepared statement of Mr. Potter follows:]

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Mr. DAVIS OF ILLINOIS. Thank you very much, Mr. Potter. We

will proceed to Mr. Bilbray.

STATEMENT OF JAMES H. BILBRAY

Mr. BILBRAY. Thank you, Mr. Chairman. Please don’t confuse me

with my crazy cousin Brian, too. He went bad somewhere along the

line and became a Republican.

Anyway, Chairman Davis, Ranking Member Marchant, not here,

but members of the committee, thank you for inviting me here

today. This is my first opportunity to testify before you as member

of the Board. I have only been on—this is the beginning of my second year.

I want you to know that I am honored and pleased that my fellow Governors have asked me to represent the Board today, and I

take this responsibility very seriously. I am fortunate to serve on

a strong board with committed members who have a wide range of

experience in business and public service. I am fortunate that we

have an excellent leadership team.

The record speaks for itself, postal employees are providing

record levels of service to the American public. Our employees and

leadership team have risen to the occasion during particularly a

challenging time. As we know, mail volumes have gone down and

fluctuated, consumer habits and pricing is changing, and weather

conditions have plagued much of the country, affecting mail service. Each of our labor contracts had to be renegotiated and worked

on successfully.

Against this backdrop the most significant change in our 35-year

plus history is the passage of the Postal Accountability and Enhancement Act of 2006.

Last year the Postal Service, the Postal Regulatory Commission,

and a myriad of other stakeholders and mailers immediately went

to work to implement the new laws provisions. Under the guidance

of PRC Chairman Dan Blair and Postmaster General Jack Potter,

we have tackled these challenges aggressively. As a result, and in

some cases ahead of schedule, timetables in the law have been met.

Today some 14 months later we can collectively be proud of our

progress. We are pleased to report to Congress to date we have detected no need for changes in the new law. And so far parties have

the tools necessary to implement the law as Congress intended.

I would like to recognize the PRC for its hard work in enabling

this to happen. The Postal Act in 2006 changed 35 years of history

by creating a new pricing model. The Governors had an option to

file one last rate case under the regulations used since 1971. However, under Dan Blair’s leadership, the PRC accelerated the finalizing of their pricing rules which allowed the Governors to choose to

move forward under the new pricing rules. This was an important

vote of confidence in the new system.

Across the spectrum the Postal Service is working to deliver for

the future. We are engaged in a broad effort to implement the wide

range of requirements in the new law and have spent much of the

first year meeting with the PRC, our Federal agency unions and

mailers.

Congress requested two updates from the Board on different aspects of diversity within the postal system. The first dealt with the

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extent that women and minorities are represented in supervisory

and management positions. The second centered upon the number

and value of contracts and some contracts the Postal Service has

with women, minorities and small businesses.

The Postal Service remains one of the leading employers of

women and minorities. Representation of both groups has continued to increase. Consider that last year minorities represented 38

percent of the work force in the USPS. The Board is equally proud

of the Postal Service’s commitment to building strong relationships

with small minority owned and women owned businesses.

The Board recognizes the Postal Service work is never done in

this area. We are a dynamic, changing society with changing demographics. The Postal Service is competing with both Federal agencies and private workplaces for the best and brightest talent. But

we have strategies in place to counter this. We have formed a talent and acquisition group, and they are recruiting on our college

campuses and military bases.

Last year the Postal Service issued a new supplier diversity corporate plan. The plan focused on continuous improvement of our

business relationships with small minority-owned and womenowned businesses. We remain committed to a competitive supplier

base. The Post office mission to provide universal service was reaffirmed by the new postal law. Our mission is still to provide

every American with real world access and affordable, dependable

mail service, even though we have nearly 2 million new addresses

per year.

To help support the universal service, the Postal Act allowed

greater price flexibility for shipping services. We recognize the significant challenges posed by some of the fiercest competitive global

companies in the realm. We are forging ahead to provide options

to the American public. The Postal Service has set up a new express mail division and ground package unit to focus efforts on this

market.

As Governors set the strategic direction of the Postal Service, we

are continuing to seek improvement and providing value to the

American public, organizing, communicating that 685,000 employees in a new way of thinking. A new way of doing business is no

small task. Congress understood the challenges brought about by

the changes in the marketplace and technology and now Postal

Service employees are delivering.

Much of the new law’s first year was devoted to setting up our

future systems and processes. We have begun the next phase, implementation. Much more critical deadlines are fast upon us for

this year, but 2007 and 2008 thus far have been good, productive

years. We have learned much, forged new partnerships, and had

interesting debates and discussions.

On behalf of the Board, I would again like to thank you and acknowledge Postmaster General Potter and PRC Chairman Dan

Blair and our stakeholders who have worked tirelessly to ensure

the groundwork was laid to position the Postal Service well into

the years to come. Thank you, Mr. Chairman and members of the

committee and Mr. Waxman.

[The prepared statement of Mr. Bilbray follows:]

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Mr. DAVIS OF ILLINOIS. Thank you very much, Mr. Bilbray. And

Mr. Blair, with your indulgence we are going to alter the procedure

just a bit. Chairman Waxman is under tremendous time constraint,

but has questions that he would like to ask, and I would like to

yield to him for the questions and then we’ll return it our normal

procedure.

Mr. BILBRAY. I love that title, Chairman Waxman.

Mr. WAXMAN. Thank you very much.

Thank you very much. And than you very much, Mr. Chairman,

for letting me ask my questions, and forgive me for interrupting

the testimony of the panel.

We had some hearings in our committee about charities that are

supposedly helping the veterans and these groups raise money to

assist U.S. military personnel and veterans, but a number of these

veteran groups spend far more on executive salaries and fundraising than they do on delivering goods and services to the veterans.

For example, we had testimony from one of the fathers of a veteran

who was wounded in the Iraq war, and he was struggling. The father ended up giving up his job just to try to take care of the followup medical services for his son. And when he heard about these

so-called veterans charities that raise money and pocket most of it

and used a little bit for the helping of the veterans, he said, my

son as well as the other thousand of injured soldiers from this war

or any other war are not commodities. I don’t think it is right that

you can use these soldiers as commodities to raise funds and then

turn around and give a small percentage of that to what you’re saying you are going to do with the contributions.

Since that hearing, my staff has been talking to charity experts

and regulators to understand how these groups can get away with

this sort of thing. We had heard that one important factor is the

lack of disclosure and awareness by donors about how charities are

spending their money.

There is man by the name of Roger Chapin. He is the head of

Help Hospitalized Veterans and Coalition to Salute America’s Heroes, two of the veterans charities that appear to be abusing their

nonprofit status. His testimony at our hearing was quite revealing.

He said, if we disclose, which I’m more than happy to do, we’ll all

be out of business and the charities will be out of business and nobody would donate and it would all dry up. This is his words to justify the very small amount of money that actually got to the veterans. And he, by the way, was making a very nice income on all of

this.

The disclosure is one of the problems, but another appears to be

an exception to the cooperative mail rule. Under this rule, which

Mr. Potter instituted in 2003, for-profit fundraisers are able to use

the nonprofit mailing rate so long as they share a small part of the

proceeds with a nonprofit organization. My concern is that this rule

allows unscrupulous fundraisers to negotiate contracts that enrich

the for-profit companies and take away funds from the intended

beneficiaries.

Mr. Potter, we’ve been talking to the National Association of

State Charity Officials and other charity experts, and they are telling us that this cooperative mail rule is being abused. They describe situations where the for-profit direct mailers keep both 80

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percent of the proceeds and the list of donors. They told us that

these arrangements are abusive because the nonprofit gets so little

of the money and yet at the same time becomes dependent on the

mailer because of the mailer’s control of the donor list.

I have two questions for you, Mr. Potter, are you concerned about

the abuse that appears to be occurring? And two, what steps are

you going to take to address these issues?

Mr. POTTER. Thank you, Mr. Chairman. Yes, I am concerned

about the abuses. When we instituted that rule in 2003, the motivation was to try and help charities because there were many charities who did not have the funds to put up for the mailing campaigns that they had. And so it was a matter of having others take

risk, and that was the motivation, was to help. Obviously it has

backfired in some cases, so we are exploring and we have been

monitoring the hearings that you’ve had.

Mr. WAXMAN. Good.

Mr. POTTER. We are very concerned about some of the abuses

that you through your hearings have identified and we are exploring ways of changing that rule such that we can make the American public more aware of, you know, the actual—through our regulations, through the actual charity, the actual amount of funds that

ends up in those who they were intended for. And we’re continuing

to try to figure out how to do that. At the same time——

Mr. WAXMAN. I want to address the same question to Mr. Blair

because he is the head of the Postal Regulatory Commission. In the

2006 legislation I insisted on a provision that gave the PRC the authority to examine the abuses of the nonprofit rate, make recommendations to the Postal Service, and act on its own initiative

if the Postal Service didn’t respond.

We want the Postal Service to thrive. We know they are facing

difficult challenges, but it is not acceptable for the Postal Service

to encourage these deceptive mailings simply because they may

generate more volume for the Postal Service. And this is a problem

that I think ought to be addressed.

I’d like to ask you the same two questions. Are you concerned

about the abuse that appears to be occurring? And what steps

would you be willing to take to address these issues?

Mr. BLAIR. I appreciate you, Mr. Chairman.

I appreciate you raising this with us. This is an issue at first impression with us. I’m not aware of the former rate commission or

the regulator at this point undertaking these types of investigations. We’d like to certainly learn more about this. You reference

a section in the new law. That’s something that we certainly would

look at and we’ll be happy to work with you.

On first impression I look at this and I see this as the Inspector

General’s primary role as well. We work quite closely with the IG’s

office at the Postal Service. While we look at the data and we look

at the rates, any revenue protection and law enforcement seem to

be their primary purview, but we’re happy to work with you and

your staff to see what we can do in this regard.

Mr. WAXMAN. I thank you very much. I think it is an important

issue. I want to bring it to both of your attentions, and perhaps the

IG ought be involved as well, but I would like you to review it because I think it is being abused.

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Thank you for your courtesy, Mr. Chairman, I appreciate it. I regret that I have to leave to go to California, not that I regret going

to California, it is always a wonderful place to go, but I have to

leave. Thank you very much.

Mr. DAVIS OF ILLINOIS. If it was anyplace else we wouldn’t—

thank you very much, Mr. Chairman, and thank you, Mr. Blair.

And we can now proceed to your opening statement.

Mr. BLAIR. You saved the best for last, right, Mr. Chairman?

Mr. DAVIS OF ILLINOIS. That’s right.

STATEMENT OF DAN G. BLAIR

Mr. BLAIR. Mr. Waxman, Mr. Davis, thank you. I appreciate this

opportunity to present you with an update of the activities of the

Postal Regulatory Commission. I am pleased to be here with Postmaster General Potter and Governor Bilbray, and I appreciate

their kind words about the Commission as well. My written testimony gives a complete agenda of our activities, but I am pleased

to summarize my statement.

It has been a very busy year for us at the Commission. Standing

up the regulatory framework 8 months ahead of schedule, consulting with the Postal Service on the development of modern service

standards, completing one last final rate case under the old regulatory regime tops the list of those activities. It was a fulfilling

year, but we can’t rest on our accomplishments since the upcoming

year presents equal, if not greater challenges.

Our agenda includes further consultation on service standard

goals and performance measurement systems. I want to compliment the Postmaster General and his team at the USPS, headed

up by Deputy PMG Pat Donahue, for their work with us on the development of the service standards and our continuing consultation.

The PRC’s efforts in this area added value, and I’m pleased that

many of our suggestions over the past few months were incorporated in the final performance standards. Our monthly meetings

have proved to be a good conduit for consultations and communication into other issues which rise from time to time. This open and

ongoing dialog helps make our system work better, and I look forward to continuing this practice.

Currently we are undertaking two new Postal Accountability Enhancement Act reviews. First, we are reviewing the data provided

by the Postal Service as part of its annual compliance report, annual review in the rate adjustment filing under the new regulatory

framework submitted by the Postal Service on February 11th. With

the experience gained in the review of the first annual data submission by the Service we will shortly propose rules to tighten the

process. The review of the first annual report has identified areas

for data collection, special studies and cost models can be updated.

We are also beginning work on the universal service obligation

study which was mandated by the PAEA. We plan to seek the

views from the Postal Service, other Federal agencies, the postal

community and general public on their expectations of universal

postal service.

Given the scope of this study, we are supporting our commission

of work through a competitively awarded contract with George

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Mason University School of Public Policy. Your first witness today,

Professor Wolak, will be among those providing assistance to the

Commission as part of GMU’s work for us.

We expect to engage in broad public outreach as well as conduct

several field hearings to gauge the mailing public’s needs and perceptions in this area. We plan a very comprehensive and well-documented report.

As I mentioned in my statement, we believe our congressionally

mandated report will have the benefit of the findings and recommendations of a separate report being prepared by the Postal

Service through the National Academy of Science. I want to thank

Postmaster General Potter for his assistance in this effort.

To conclude, Mr. Chairman, those are several of our front burner

issues. An additional priority is to see the successful nomination of

the new commissioner to fill our one vacant seat. I am pleased to

report that yesterday President Bush nominated Nancy Langley to

fill that seat. Many of you may know Nancy from her longtime

work for Senator Akaka on the Homeland Security and Governmental Affairs Committee. She’s currently the Commission’s Director of Public Affairs and Government Relations. I’m sure you will

join my fellow commissioners and me in wishing her a speedy confirmation.

My written testament goes into further detail. I am pleased to

answer any of your questions.

[The prepared statement of Mr. Blair follows:]

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Mr. DAVIS OF ILLINOIS. Thank you very much, Mr. Blair. I want

to thank all three of our witnesses for your indulgence and for

being here with us this afternoon.

Mr. Potter, let me discuss, can you give us a status report on the

financial reports in the second quarter to date and indicate whether or not the economic downturn that we’ve heard so much about

has continued to affect postal revenues.

Mr. POTTER. Mr. Chairman, as I said in my opening statement, our revenues after the first quarter went down some $525 million.

After the first 2 months of the second quarter they are down another 400 million. So the economy continues to hurt the Postal

Service’s revenues.

Mr. DAVIS OF ILLINOIS. Also, last year the Postal Service issued

a request of information related to outsourcing the mail processing

activities conducted in its bulk mail centers. Could you tell us the

status of this proposal and whether or not it involves outsourcing

a core postal function?

Mr. POTTER. We received that—got the information through that

request for information. We’ve analyzed that information, we’ve

shared it with our unions, we are working with the American Postal Worker Union and the Mail Handler Union. We intend to go out

with a request for proposal. Again we are doing it in consultation

with them, very close consultation with them. That’s where we are

at right now.

Mr. DAVIS OF ILLINOIS. I also know that the Postal Service, and

we were pleased to see the Postal Service and the National Association of Letter Carriers reached some agreement and the agreement ended up being a 6-month moratorium, only in the efforts to

contract out the delivery of city or suburban routes. The moratorium ends next month. What do we see happening at this point?

Mr. POTTER. Well, part of that agreement was we would enter

into a period of dialog with the NALC. We got off to a slow start.

It has become productive and we have extended that moratorium

through the end of July.

Mr. DAVIS OF ILLINOIS. And so there will be continuous discussions I would——

Mr. POTTER. We are doing it because the discussions have been

productive. As I said, we got off to a late start so we didn’t want

to curtail them, and we’re hoping that we’re able to work that issue

through and reach an amicable agreement on it.

Mr. DAVIS OF ILLINOIS. Let me be just a little bit self-serving.

You did mention in your testimony record service performances for

first class mail. What has been the experience in the Chicago area?

Mr. POTTER. Mr. Chairman, as you know all too well, we had

service problems in Chicago for the last couple of years. I’m very

proud of all the folks in Chicago who have really stepped up their

efforts to improve service. We have seen a great improvement in

overall service in the city of Chicago. It is through the efforts, as

I said, everyone who works there. They’ve worked hard to improve

the quality of addresses that we have in Chicago in our address

data base. We have upgraded all of our machines. We are in the

process of upgrading our facilities, and we’ve realigned our staffing.

And so I think you can count on the fact that service will continue

to get better there.

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Mr. DAVIS OF ILLINOIS. Would the activities that took place be

perceived perhaps as a model or an approach that might be used

in other areas that might be experiencing and are having the same

problems?

Mr. POTTER. I think the approach is one that could be replicated

in other places where similar problems hopefully don’t exist today,

but if they were to happen we could replicate that effort in Chicago

in other locations.

Mr. DAVIS OF ILLINOIS. Thank you very much.

Mr. Bilbray, let me ask you, has the Board of Governors’ role

changed in your perception since the postal reform law was enacted?

Mr. BILBRAY. Mr. Chairman, it has in the sense that again I was

only a member of the Board for a short period before the change

took place. But in talking to other members that were there before

and also the few months that I was there before, our load has really increased. I think it is because we have the Sarbanes-Oxley provisions going forward. The Audit Committee is meeting all the

time. I mean they meet, where they used to meet maybe 3 or 4

hours about every fourth week. When they do meet 2 or 3 days

it’s—we’re on the phone constantly, not only with the meetings that

we personally come to, but telephonic meetings. Virtually everything that is done is with the goal of transparency. I know we

have—they don’t have to call us on levels that are spending below

certain amounts. The fact is it seems like with the cost of everything going up and even the cost of construction, I mean we’ve had

to pull back on construction, because construction costs are shooting out of sight and our bids are coming in at 25, 30 percent higher

than we estimated. So the board is really active.

When I was asked to serve by Senator Reid on this board and

went through the process, nobody told me that it would be a fulltime position but a part-time position. But it virtually is. I spend

2 to 3 hours a day going through documents sent to me from the

Postmaster General and his office. It is quite a job and just remember something I would like to point out, the $300 we get paid per

meeting was set in 1970. Hint, hint.

Mr. DAVIS OF ILLINOIS. Maybe Senator Reid just didn’t want you

to get too comfortable.

Mr. BILBRAY. I can tell that.

Mr. DAVIS OF ILLINOIS. In your testimony you also put emphasis

on the role of minorities and women, especially as it relates to

small business and small business development and activity. The

Board was required under the Postal Accountability and Enhancement Act to conduct a study on the representation of women and

minority members in supervisory and management positions.

Would you reemphasize for us the findings to date of that study?

Mr. BILBRAY. Mr. Chairman, the findings are out, the recommendations are not. And what I was told by staff before I came

here is that they were finalizing that and that would be made

available to the committee and to yourself as soon as we—but we

have increased, they say, the numbers—we’re not—in fact I asked

for it. I said can you give me the total percent, just like they did

with 38 percent of our postal employees are minorities or women.

I asked for the number, the total number, and they said it is not

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broken down that way, it is broken down into a percent here, a percent there, something here. And I said, well, that’s not satisfactory.

So they said they would get that information for me as soon as possible and they would forward it to you and the committee to see.

But there has been a drastic improvement and we are moving forward on that. So we’ll have those numbers to you in a very short

time.

Mr. DAVIS OF ILLINOIS. Well, thank you very much.

Let me ask you, Mr. Blair, what criteria will the Regulatory

Commission use for evaluating the quality, completeness, and accuracy of ratemaking data?

Mr. BLAIR. We have approximately 36 years of ratemaking experience in this regard. And we’ll use sampling techniques, we look

at the statistics. We will also apply special studies of operations

using calculations, certain discounts that are recommended by the

Postal Service.

Many of the problem areas identified through the annual data

submissions by the Postal Service. We are currently in the annual

compliance review process. We’ve asked the Postal Service for certain information, clarifications and updates of certain information,

and we are receiving that as we speak. We are also in a—not annual, but a rate review period as well in which we have asked for

additional data.

As time goes on we’ll develop more and better ways of getting

this, but there are certainly areas where studies need to be updated. For instance, city carriers’ street time studies can be updated. The region acceptance rates can be updated. And also as the

Postal Service implements the new flat sequencing system and employs those sorters, we will need new sortation cost studies. So this

is going to be an ongoing area.

I can’t emphasize enough, though, how important it is that we

have good quality data, and that’s something that the Commission

has long held, that the quality of the data that we get from the

Postal Service is extremely important because it goes into the costing methodologies that were employed in the old ratemaking process. Now it goes into the methodologies that are employed in the

compliance process. So we will remain vigilant and constantly monitor the quality of the data that comes out.

Mr. DAVIS OF ILLINOIS. Now let me ask you, as part of its reorganization we understand that the PRC has abolished the Office of

Consumer Advocate. Can you tell us how you expect now to make

sure that consumer interests and concerns, you know, remain

prominent in the process of the ratemaking that will take place?

Mr. BLAIR. We’re talking a two-pronged approach on this. We

have reorganized to reflect the new reform environment brought

about by the enactment of the Postal Accountability Enhancement

Act. First, we’re mindful that the new law requires the appointment of a public representative in proceedings before the Commission. That’s a very important public role.

What we are doing with that is under the old structure, under

the Postal Reform Act, that the Commission developed, we had a

standing office and that was designed to litigate omnibus cases

over a 10-month long case period. The PAEA changed that paradigm. We expect now shorter, more limited, more focused dockets

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and significantly pure of major litigated cases. In order to best utilize the resources before the Commission, what we will do is appoint a public representative from among our commission staff offices. That allows us to better pinpoint and target the type of expertise we need to engage in that public representation. We think

this will be a better and more effective way than the old structure

would have allowed in this new environment.

We’ve also developed a—we have also implemented an Office of

Public Affairs and Government Relations. One of the primary responsibilities of this new office is to interact with the public, field

questions, and help resolve informal inquiries regarding the Postal

Service. In addition, the Commission will be coming forward over

the next few months with new complaint procedures to supplement

the current ones that we have in place, and those will be subject

to public notice and comment.

Mr. DAVIS OF ILLINOIS. Not that you would have any kind of

crystal ball, but given all of the discussions relative to the economic

downturns, new ways of doing business, e-commerce, what would

you sort of see as a super major challenge of the Postal Service in

order to try and keep rates at a level that consumers will be most

appreciative of?

Mr. BLAIR. I think there are several fronts that they will be

needing to focus on. One will be to keep their labor costs in line.

Two, better rationalize their networks. I was listening to the GAO

testimony in the anteroom and the GAO provided a good outlook

saying that there are some plants that are at over capacity and

some are at under capacity. And a better rationalization of that

network is important. Good data is needed to rationalize that network. But I think that the Postal Service needs and I know that

the Postmaster General is committed to doing more in order to cut

costs and better utilize that network.

I think more innovative ways need to be developed in which we

keep mailers in the system, be it first class mailers or the ones—

the business mailers, the banks, the insurance companies, those

major mailers who utilize first class, the flagship product of the

Postal Service, keeping them in the system. What can be done to

give added value to that mail, to standard mail and also the Postal

Service General referenced some new competitive products. The

regulator wants to create an environment which is flexible, yet

transparent. It will be a balancing act. It is not an easy balancing

act either. We want to make sure that there is flexibility there, yet

there is the requisite accountability and transparency to the postal

pricing and operations that the public demands and deserves.

Mr. DAVIS OF ILLINOIS. Thank you very much.

Let me go to Delegate Norton.

Ms. NORTON. Thank you, Mr. Chairman.

Mr. Potter, you say at page 5, I believe it is, of your testimony

that you’ve identified savings of an additional $1 billion over the

$1 billion already built into your savings budget. Where would

those savings come from?

Mr. POTTER. They will come from a number of things. First,

there will be—there is less mail anticipated.

Ms. NORTON. How is that saving? It sounds to me like loss of

business.

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Mr. POTTER. It was lost business, but in terms of the budgets

that we give, work hours, if there is less mail, then there is less

work hours needed. So in terms of a reduction off of the plan, the

plan will be reduced to reflect the lighter workload. In addition to

that, we’re——

Ms. NORTON. I’m not sure private business calls those savings,

but I’ll take it, Mr. Potter.

Mr. POTTER. OK. In addition to that we’re reducing and streamlining our transportation network because we’re looking at all of

the network and revising the number of trips and the size of the

trucks which are all contracted to determine whether or not they

are actually needed and whether or not we can streamline the

number of trucks. We’re about to—this week we’ve been counting

our rural carrier routes as part of our contract. It is going to reflect

the fact that there’s been a decline in volume on each of those

routes since they have been last counted 2 years ago, and so that

will result in a reduction in terms of the amount of compensation

that those folks are given.

In addition to that, we’re looking at the productivity of each and

every operation and we’re working to improve our efficiency in

those operations. So its basically very hard work to try and——

Ms. NORTON. It is very hard work, it is very hard work. You are

very fuel and car and truck oriented. You may have heard me asking the previous witness about conversion to alternative vehicles.

Are you still using vehicles that largely rely on traditional fuel?

Mr. POTTER. Yes, we are.

Ms. NORTON. Are you doing that even as you have to replace vehicles, as you must have to do quite often?

Mr. POTTER. No, we’re not. We have the largest alternate fuel

fleet of vehicles in America.

Ms. NORTON. Are those biofuels and ethanol?

Mr. POTTER. Yes. In addition to that we have gas powered vehicles, we have hydrogen vehicles. We’re looking at everything that

we possibly can and we’re testing them all.

Ms. NORTON. There was some feeling that you were constrained

in what kind of alternative vehicle you could use. Are you constrained at all in that way any longer after the new energy bill was

passed last year?

Mr. POTTER. No. No, we’re not. In fact now we are looking—we

delayed the replacement of engines and other vehicles of some

150,000 vehicles in anticipation that we would have greater flexibility should that law pass. That law has passed. We now have the

greater flexibility. So we’re once again looking at what we do with

the existing fleet. And we know we have an opportunity to

improve——

Ms. NORTON. What’s the turnover? How many vehicles do you

buy a year?

Mr. POTTER. Well, the last several years we’ve only bought about

10,000.

Ms. NORTON. You just don’t have the money, so you just kept

rolling over?

Mr. POTTER. No. About 14 years ago to 17 years ago we bought

a fleet of aluminum body vehicles, we call it our long life vehicle,

and that vehicle is probably overdue for replacement. About the

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last 4 years we should have replaced them. Again we had this energy issue that we wanted to work our way through.

Ms. NORTON. So would you buy any traditional fuel vehicles at

this point? If you had to buy one tomorrow, would you be looking

exclusively at some kind of alternative fuel vehicle?

Mr. POTTER. Not necessarily exclusive. We buy a myriad of vehicles, from very large trucks to——

Ms. NORTON. So sometimes with very large vehicles you must

use——

Mr. POTTER. We would use traditional diesel, we don’t have alternatives.

Ms. NORTON. Where are there alternatives?

Mr. POTTER. Where there are alternatives we attempt to buy alternative fuel vehicles.

Ms. NORTON. Do you feel you are under pressure to buy biofuel

as opposed to, for example, some of the other——

Mr. POTTER. Not now.

Ms. NORTON. That’s very important.

Mr. POTTER. It is. I thank the Congress for helping us with that

law. It is extremely important. You have really increased our flexibility, and I’m very appreciative of it. And as I said, we delayed a

decision until we determined whether or not we would be able to

and we are very grateful for the flexibility.

Ms. NORTON. Very small. There are not many things you can do

but to continue to spend money in the good old days or whatever

we now want to call them.

I was interested in page 7 of your testimony, where you talk

about express mail and priority mail. I just have to congratulate

what you report that you have penetrated, gone beyond express

mail and priority mail in some respects. You say express mail offers Saturday delivery at regular weekday delivery price. That

must match the competition, I take it, because you go on to say and

the Postal Service alone is offering Sunday and holiday delivery at

this guaranteed overnight delivery price.

Mr. POTTER. If I could explain. With the new law we’ve gone

back and we now have pricing flexibility, so we are looking at ourselves in the marketplace to determine what prices we could

charge. And we’re looking to try to charge market based prices for

the competitive products. We found out we’re the only ones who

sell Sunday delivery. And so we want to make it clear to all Americans that if you want express mail on Sunday or you want to be

able to walk into a lobby and buy it, the place to do it is with us.

Ms. NORTON. Let me ask you, how long have you been doing the

Sunday mail?

Mr. POTTER. We’ve been doing it a long time, but the profit on

Sunday mail has been low.

Ms. NORTON. Is that why your competitors are not rushing to get

into the Sunday mail competition?

Mr. POTTER. Well, they are not open 24 hours a day like we are

with all of our plants from around the country. They have much

different operation, much more defined operations.

Ms. NORTON. They are not retail basis, they are not open?

Mr. POTTER. They are not open on a Saturday on a retail basis

in a lot of cases, but they don’t have 24-hour operations, 365 days

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a year necessarily, particularly with express mail. In our case we

do and so since we have that infrastructure we try to maximize our

opportunity for revenue off that infrastructure. So what we are

doing with the new law is we are going to put a surcharge on Sunday delivery, because we have people come in and buy a product

on Saturday and they’ll request Sunday delivery because it is free.

We are the only ones that don’t surcharge Saturday delivery. And

so since that’s a normal day of operation, we are not looking to surcharge Saturday. But since Sunday is an unusual day for us, our

carriers aren’t out there anyway. We are going to surcharge that

and we are going to do it in any market that places or private competitors would do. You charge what the market will bear, and we

believe that if the competition puts a surcharge or premium on Saturday delivery, the least we should do as a start is put it on Sunday.

So we are looking forward to additional revenues from those

pieces we deliver on Sunday. For those people that don’t require

Sunday delivery, they’ll get their mail delivered on Monday, which

they would have done, you know, with others. We are the only

ones, as I said, who really have an operation on Saturday.

Ms. NORTON. And since you got it, so you got a volume here that

nobody had before, a volume of business that nobody had before?

Mr. POTTER. We had an opportunity to increase the revenue on

the business that we have.

Ms. NORTON. Do you lose my money on this?

Mr. POTTER. No, we weren’t losing money, but we were not making it. It costs 5.50 cents more to deliver a piece of mail, an express

mail piece on Sunday than it does on the rest of the week, and that

cuts into our profits on Sunday. And so I think just by raising the

price we’re going to increase the awareness of the fact that we are

doing it. The fact that we didn’t have a high profit on Sunday was

a motivation not to really be aggressive about selling it. Now that

we can sell it and make a profit, a sizable profit, we will be out

there in the marketplace and sell it. So we are taking an advantage

of the new law that you provided.

Ms. NORTON. Now that you’ve got the infrastructure and the

overhead anyway, maximizing that is—I don’t know if you can

think of anything else to do with it, but that’s terrific.

Mr. POTTER. Thank you.

Ms. NORTON. Finally, let me ask you about the flat rate boxes.

You seem to imply, by the way, because you talk about scratching

the surface. We just scratched the surface. I’m going to ask, I’m

going to have a question. What other kinds of terrific things can

you do to keep scratching? But you talk about the new larger priority mail flat rate box. That was a response to that competition that

is already doing that?

Mr. POTTER. No. We were the first to have a flat rate box for priority mail, and it was a smaller box. It was extremely popular.

We’ve had a lot of growth in terms of that product. And the competition—one of our competitors matched that and put out a box

that’s a comparable size and so we recognize that flat rate box is

attractive to customers because you pay one price, whatever fits, it

works. And so we wanted to give the American public another option. And that’s why we went to the larger flat rate box and we apVerDate 11-MAY-2000 12:27 Apr 20, 2009 Jkt 000000 PO 00000 Frm 00098 Fmt 6633 Sfmt 6633 U:\DOCS1\48066.TXT KATIE PsN: KATIE
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preciate the fact that the Postal Regulatory Commission has approved that, that option. And it begins on March 3rd.

Ms. NORTON. They invited it into their market because they felt

the competition. So you upped them because you now are doing a

bigger box?

Mr. POTTER. Well, we have a bigger box and that bigger box also

has—we tried to respond to a concern of those folks and the families of the folks that we have serving overseas in our military. And

we have a discount on that box for military addresses. And so——

Ms. NORTON. Does the competition do that, too?

Mr. POTTER. No. No. And we’re very happy and pleased that

we’re able to do that.

Ms. NORTON. Are you going to do flat boxes on Saturday and

Sunday since they can’t work at all, since they don’t do anything

on Saturday and Sunday?

Mr. POTTER. I’ll be honest with you. With the downturn in revenue and the concern about diversion to the Internet, we’re working

very closely with all of our employees, our unions and others to try

and generate revenue to support this very vital system that serves

each and every American 6 days a week. And I’m really happy with

the level of support that everyone has shown the Postal Regulatory

Commission. But in particular our employees who are out there

and who are going to help spread the word about the fact that they

now have the ability to compete and they’re anxious to compete

and they’re anxious to grow revenue.

Ms. NORTON. My final question really is related to this question

because I can guarantee you now, they’re sitting down right now

thinking of a way to take away your Saturday and Sunday business with no—which depends on your infrastructure, depends on

your 24-hour service, with no extra cost to them. Depend on it. But

if they find a way, they’re going to find a way through investment

in some kind of equipment. Most of the advances in productivity we

see around the world come that way.

What about your capacity? Leave aside the investment that is

taking away mail from you or communication vehicles from you.

What about your capacity to invest in the kind of equipment needed to move forward to keep up with whatever the competition is

doing, especially in these sectors like express mail and the rest?

Mr. POTTER. Well, fortunately for us we have existing capacity,

particularly in the delivery area because we are at every door every

day. When it comes to plan capacity, the law provides that we have

the opportunity to borrow and invest. So it’s up to the Board of

Governors and postal management to use that authority to invest

wisely in the capacity that you describe.

Ms. NORTON. Are you keeping up with the kinds of investments—the delayed gratitude of the private sector is very interesting when it comes to these kinds of investments because they know

the payout—they call it all kinds of flexibility to put it on different

lines and stuff that you can’t do. Do you feel that you are keeping

up with this modern technological equipment that the private sector is using and you are able to do so through the authority you

have to borrow?

Mr. POTTER. Well, let me speak of it in two ways. When it comes

to mail, whether that is solicitation of letter mail or flat mail or

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first class mail and advertising mail, the Postal Service, the U.S.

Postal Service has the best equipment in world. We are world-class

bar none because we’ve had the scale and the scope of our delivery.

Ms. NORTON. Well, you are losing money.

Mr. POTTER. And unfortunately that’s where mail will be diverted or potentially diverted.

Ms. NORTON. Yeah.

Mr. POTTER. On the other hand, when it comes to package service, I will be very honest with you, we are not and have not been

investing as aggressively on the mail side, only because of the fact

that we didn’t have the ability to compete. So if you don’t have the

ability to compete, you know, you aren’t going to make investments. Now that the new law is in place and now that we have the

ability to set a plan and know where we’re going to be longer term,

we’re re-evaluating that. And we do have the funds available to us

within our borrowing limits. We’ve borrowed from the Treasury, we

have capital program. I’m convinced that we have sufficient funds

to make the type of investment that will be needed to compete.

Are we where they are? No. We’re behind. But through proper

investment, we can catch up and catch up rather quickly.

Ms. NORTON. Borrowing from the Treasury is a great advantage.

Mr. POTTER. Exactly.

Ms. NORTON. Thank you very much, Mr. Chairman. Thank you,

Mr. Potter.

Mr. DAVIS OF ILLINOIS. Thank you very much, Delegate Norton.

Mr. Potter, you’ve mentioned cost cutting, increased efficiency. In

the way of cost cutting ideas, what can we expect to hear about?

Mr. POTTER. Well, I’ll give you examples of some of the things

that we’re doing on the competitive side of the aisle. One of the

things that we’re doing there is just beginning to put the data

bases in so that we’re tracking productivities by different operations. There’s still some areas where we don’t have good information systems and simply by tracking them we’ll give people—and

I’m talking about craft employees as well as managers, you know,

information about how well they’re doing. And that often is a big

motivation. In addition to that, we do have some redundancies in

the system and we’re looking at minimizing the number of

handlings that we have in the system. We’re looking at error rates

on machines. And we’ve made some good strides in improving error

rates on our machines. We’re also looking at the quality of mail

that’s produced by the mailing community to try and improve the

quality of the mail, either through the address and/or the physical

piece itself. And by improving that quality, we reduce the number

of rehandlings that occur in the system. It’s a matter of just tightening up on our processes, making sure that people have the data

that they need to manage and understand how well they’re performing. In my opinion, it will continue to drive the efficiency of

the Postal Service.

Mr. DAVIS OF ILLINOIS. Are we likely to continue to hear much

about outsourcing, contracting out?

Mr. POTTER. Well, you won’t hear about it from me, but there are

others who might comment about it here. But in all candor, we do

have ongoing dialog with the NALC and rurals are participating on

that panel. As I said, we’ve extended the moratorium to July 31st.

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In addition to that, you referenced earlier the discussion about the

request for information that we put out about our network. And

we’re engaged with the Mail Handlers and the American Postal

Workers Union on discussing what options we have. You know,

there are some very real business decisions that have to be made.

When we look at our end-to-end network on the ground nationwide,

we don’t have a big demand for that service. In fact, the volume

of mail that moves end to end, parcel post on the ground is in a

state of decline. That’s a product that has a rate cap on it. If the

volume declines and we’re forced to maintain the current network,

we don’t see how we’re going to be able to stay under a rate cut.

If that system’s inefficient, it won’t be very long before it will be

cheaper to fly the mail, which means it will be a high-cost product

and no one will use it. There’s some very serious business issues

and we’re sharing those in a very candid way with our employees

to try and figure out how we’re going to be successful under the

new law and meet the requirements of the new law to stay under

the rate of inflation and at the same time have a viable product.

We are a challenged business in the sense that every one of our

products are being completed. In some cases, there are cheaper alternatives than the Postal Service. People believe services like the

Internet are more effective. So I think this is part of the overall

kind of evolution of the Postal Service. In the last 200 years there

have been a lot of changes. We’re at a period of time and again I

think we have to have the debate about what are we going to

evolve into next.

Mr. DAVIS OF ILLINOIS. Well, let me thank all of you. And let me

thank you for the information that you have shared with us. Obviously I was very pleased to hear you talk about the improvements

that we have experienced across the board and especially in some

particular areas. I just remind you of a story my mother used to

tell me, ‘‘Good, better and best. Never let it rest until your good becomes better and your better becomes best.’’ And so I guess we

keep striving to make sure that we get there.

Finally, as you talked about the cost cutting and savings and figure out how to do it, you reminded me of my father who was a very

frugal man. But then he would even get to the point where he

would say, ‘‘you know, you can’t get blood out of a turnip. You can

slice it, you can dice it, you can do everything with it. And you still

end up with turnip juice.’’ So I recognize the difficulties which our

system face.

Thank you, gentlemen, so much for being with us. Thank you all

for coming. And this meeting is adjourned.

[Whereupon, at 4:18 p.m., the subcommittee was adjourned.]

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