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43–748 CC 1997

H.R. 22, THE POSTAL REFORM ACT OF 1997

HEARING

BEFORE THE

SUBCOMMITTEE ON THE POSTAL SERVICE

OF THE

COMMITTEE ON GOVERNMENT

REFORM AND OVERSIGHT

HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS

FIRST SESSION

ON

H.R. 22

TO REFORM THE POSTAL LAWS OF THE UNITED STATES

APRIL 16, 1997

Serial No. 105–40

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

(

(II)

COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

J. DENNIS HASTERT, Illinois

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

STEVEN SCHIFF, New Mexico

CHRISTOPHER COX, California

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS, Virginia

DAVID M. MCINTOSH, Indiana

MARK E. SOUDER, Indiana

JOE SCARBOROUGH, Florida

JOHN B. SHADEGG, Arizona

STEVEN C. LATOURETTE, Ohio

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

JOHN E. SUNUNU, New Hampshire

PETE SESSIONS, Texas

MICHAEL PAPPAS, New Jersey

VINCE SNOWBARGER, Kansas

BOB BARR, Georgia

ROB PORTMAN, Ohio

HENRY A. WAXMAN, California

TOM LANTOS, California

ROBERT E. WISE, JR., West Virginia

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

GARY A. CONDIT, California

CAROLYN B. MALONEY, New York

THOMAS M. BARRETT, Wisconsin

ELEANOR HOLMES NORTON, Washington,

DC

CHAKA FATTAH, Pennsylvania

TIM HOLDEN, Pennsylvania

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

THOMAS H. ALLEN, Maine

———

BERNARD SANDERS, Vermont

(Independent)

KEVIN BINGER, Staff Director

DANIEL R. MOLL, Deputy Staff Director

JUDITH MCCOY, Chief Clerk

PHIL SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON THE POSTAL SERVICE

JOHN M. MCHUGH, New York, Chairman

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

BENJAMIN A. GILMAN, New York

STEVEN C. LATOURETTE, Ohio

PETE SESSIONS, Texas

CHAKA FATTAH, Pennsylvania

MAJOR R. OWENS, New York

DANNY K. DAVIS, Illinois

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California

DAN BLAIR, Staff Director

HEEA VAZIRANI-FALES, Professional Staff Member

ROBERT TAUB, Professional Staff Member

STEVE WILLIAMS, Professional Staff Member

JANE HATCHERSON, Professional Staff Member

JENNIFER TRACEY, Clerk

CEDRIC HENDRICKS, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on April 16, 1997 .............................................................................. 1

Text of H.R. 22 .................................................................................................. 3

Statement of:

Crew, Michael, economics professor, Rutgers University ............................. 101

Kleindorfer, Paul, economics professor, University of Pennsylvania ........... 102

Kwoka, John, economics professor, George Washington University ............ 30

Popkin, Joel, president, Joel Popkin and Co .................................................. 69

Rose, Kenneth, senior economist, the National Regulatory Research Institute ................................................................................................................. 52

Sidak, Gregory, resident scholar, American Enterprise Institute for Public

Policy Research ............................................................................................. 88

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

Kleindorfer, Paul, economics professor, University of Pennsylvania, and

Michael Crew, economics professor, Rutgers University:

Followup questions and responses ........................................................... 214

Prepared statement of ............................................................................... 105

Kwoka, John, economics professor, George Washington University:

Followup questions and responses ........................................................... 148

Prepared statement of ............................................................................... 33

Popkin, Joel, president, Joel Popkin and Co.:

Followup questions and responses ........................................................... 136

Prepared statement of ............................................................................... 72

Rose, Kenneth, senior economist, the National Regulatory Research Institute:

Followup questions and responses ........................................................... 173

Prepared statement of ............................................................................... 55

Sidak, Gregory, resident scholar, American Enterprise Institute for Public

Policy Research:

Followup questions and responses ........................................................... 207

Prepared statement of ............................................................................... 91

(1)

H.R. 22, THE POSTAL REFORM ACT OF 1997

WEDNESDAY, APRIL 16, 1997

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON THE POSTAL SERVICE,

COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT,

Washington, DC.

The subcommittee met, pursuant to notice, at 10:04 a.m., in room

2203, Rayburn House Office Building, Hon. John M. McHugh

(chairman of the subcommittee) presiding.

Present: Representatives McHugh, Gilman, LaTourette, Sessions,

Fattah, Owens, and Davis.

Staff present: Dan Blair, staff director; Heea Vazirani-Fales, Robert Taub, Steve Williams, and Jane Hatcherson, professional staff

members; Jennifer Tracey, clerk; and Cedric Hendricks, minority

professional staff member.

Mr. MCHUGH. To make it official, let me hit the gavel and call

the subcommittee to order.

Welcome to all of you today. The subcommittee this morning is

turning its attention to postal reform as we focus on the provisions

contained in H.R. 22, the Postal Reform Act of 1997. As I am sure

most of you are aware, this was introduced last year and was the

subject of four extensive hearings where we heard from a broad

range of postal stakeholders regarding their views and recommendations on reform measures that many, certainly that I felt

were necessary to improve the Postal Service.

This morning’s session will specifically focus on reforms of the

current ratemaking process as envisioned in that particular bill.

The current structure, as we know, was enacted 27 years ago and

removed the Congress from the ratemaking process by implementing a cost basis ratemaking system, whereby rates are based on the

cost of providing the specific services. H.R. 22 proposes to update

this process through the initiation of a rate cap pricing regime.

I want to begin by welcoming our witnesses here today and express both my and the subcommittee’s appreciation for taking the

time out of your busy schedules to not just appear today but to prepare your very insightful and thoughtful testimony. I have had the

opportunity to read them all. I was reminded of many things, not

the least of which is why I didn’t become an economics major, not

because it isn’t interesting, not because it isn’t tremendously useful, but because I didn’t have the intelligence to grasp it. I hope

you gentlemen will bear that shortcoming of mine in mind as we

proceed today. But again, thank you so much for joining us.

The dialog that I hope to initiate this morning, is intended to

highlight any modifications that we may need to consider in evaluVerDate 11-MAY-2000 08:55 Jul 19, 2002 Jkt 099010 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 W:\DISC\43748 pfrm09 PsN: 43748
2

ating ratemaking reforms. H.R. 22 proposes dividing postal products into competitive and noncompetitive categories, with the later

subject to rate cap regulation. I anticipate that our witnesses will

comment on this proposed structure with their detailed analysis,

and, I am sure, constructive recommendations.

This forum gives us the opportunity to explore in what appropriate ways a price cap should be determined, including what, if

any, inflation index to use as the benchmark, and whether a factor

representing productivity gains in the economy should be applied

against this inflation marker. I expect that we will examine what

postal products best fit in which baskets.

H.R. 22 also proposes what I feel are important new authorities

on the Rate Commission, including responsibility for ensuring

against service and delivery degradation. This dialog is critical in

further refining our efforts to achieve a rational rate-setting process which protects captive customers from undue discrimination in

rates while recognizing demand factors in pricing postal products.

I hope the conversations I anticipate today will play a constructive

role in our efforts to improve mail delivery and service.

In designating H.R. 22, we conspicuously attempted to draft a

bill that would reflect the times conflicting demands placed on our

expectations of the Postal Service. To that extent we welcome suggestions on how to best improve our efforts, and criticisms as well.

I only ask that such comments be accompanied by a constructive

engagement with the subcommittee.

I want to commend highly those in the profession who have chosen to offer honest dialog regarding their legitimate concerns over

the potential impact postal reform could have on their respective

interests. Sadly, I feel some have feigned interests to be constructive and have actually undertaken steps aimed at undermining any

and all reform initiatives. I can only speculate that such behavior

is grounded in one’s attempts to protect pecuniary special interests

or that those parties are so vested in the current process that they

lack objectivity in evaluating needed reform measures.

Whatever the case, I hope all postal stakeholders can put aside

past squabbles and petty rivalries and honestly assess their interest in preserving the one institution charged with providing mail

service in our country. The Postal Service has a long history of fulfilling this role and our failure, in my opinion, to enact timely reforms jeopardizes both the institution and the desire to provide

timely, efficient, and affordable universal mail service.

I first entered this debate with the stated intention to improve

mail service to all postal customers. This goal remains paramount

to me, and I know it does to the subcommittee members as well.

I hope I can rely on all postal stakeholders in support of this effort.

I would like to now yield to the ranking member of the subcommittee, Mr. Fattah, for any comments he may wish to make at

this time.

[The text of H.R. 22 follows:]

3

105TH CONGRESS

1ST SESSION

H.R. 22

TO REFORM THE POSTAL LAWS OF THE UNITED STATES.

IN THE HOUSE OF REPRESENTATIVES

JANUARY 7, 1997

MR. MCHUGH introduced the following bill; which was referred to the Committee

on Government Reform and Oversight

A BILL

TO REFORM THE POSTAL LAWS OF THE UNITED STATES.

Be it enacted by the Senate and House of Representatives of the United States

of America in Congress assembled,

SECTION 1. SHORT TITLE; TABLE OF CONTENTS.

(a) SHORT TITLE.—This Act may be cited as the ‘‘Postal Reform Act of 1997’’.

(b) TABLE OF CONTENTS.—The table of contents for this Act is as follows:

Sec. 1. Short title; table of contents.

TITLE I—ORGANIZATION

Sec. 101. Redesignations relating to the Governors and the Board of Governors.

Sec. 102. Redesignations relating to the Postmaster General and the Deputy Postmaster General.

Sec. 103. Clarification relating to execution of amendments.

TITLE II—GENERAL AUTHORITY

Sec. 201. Employment of postal police officers.

Sec. 202. Date of postmark to be treated as date of appeal in connection with the

closing or consolidation of post offices.

TITLE III—PRESIDENTIAL POSTAL EMPLOYEE-MANAGEMENT

COMMISSION

Sec. 301. Presidential Postal Employee-Management Commission.

TITLE IV—FINANCE

Sec. 401. End of Treasury control of Postal Service banking.

Sec. 402. Postal Service investments.

Sec. 403. Exclusion from Federal Financing Bank.

Sec. 404. Elimination of Treasury preemption of borrowing by the Postal Service.

Sec. 405. Elimination of Postal Service ‘‘put’’ on Treasury.

TITLE V—BUDGET AND APPROPRIATIONS PROCESS

Sec. 501. Repeal of provision relating to transitional appropriations.

Sec. 502. Provisions relating to benefits under chapter 81 of title 5, United States

Code, for officers and employees of the former Post Office Department.

Sec. 503. Repeal of authorizations of appropriations for public service costs, revenue forgone, and certain compensatory appropriations.

Sec. 504. Congressional oversight preserved.

TITLE VI—MISCELLANEOUS PROVISIONS RELATING TO POSTAL RATES,

CLASSES, AND SERVICES

Sec. 601. Change-of-address order involving a commercial mail receiving agency.

Sec. 602. Rates for mail under former section 4358.

4

Sec. 603. Powers of the Postal Rate Commission.

Sec. 604. Volume discounts.

TITLE VII—PROVISIONS RELATING TO THE TRANSPORTATION, CARRIAGE,

OR DELIVERY OF MAIL

Sec. 701. Obsolete provisions.

Sec. 702. Expanded contracting authority.

Sec. 703. Private carriage of letters.

Sec. 704. Mailbox demonstration project.

TITLE VIII—DIRECT APPEAL OF DECISIONS OF THE MERIT SYSTEMS

PROTECTION BOARD

Sec. 801. Direct appeal of decisions of the Merit Systems Protection Board.

TITLE IX—LAW ENFORCEMENT

Subtitle A—Amendments to Title 39, United States Code

Sec. 901. Make Federal assault statutes applicable to postal contract employees.

Sec. 902. Sexually oriented advertising.

Sec. 903. Allow Postal Service to retain asset forfeiture recoveries.

Sec. 904. Hazardous matter.

Subtitle B—Other Provisions

Sec. 911. Stalking Federal officers and employees.

Sec. 912. Nonmailability of controlled substances.

Sec. 913. Enhanced penalties.

Sec. 914. Postal burglary provisions.

Sec. 915. Mail, money, or other property of the United States.

TITLE X—NEW SYSTEM RELATING TO POSTAL RATES, CLASSES, AND

SERVICES

Sec. 1001. Establishment.

Sec. 1002. Termination of ratemaking authority under chapter 36 and related matters.

TITLE I—ORGANIZATION

SEC. 101. REDESIGNATIONS RELATING TO THE GOVERNORS AND THE BOARD OF GOVERNORS.

(a) REFERENCES IN TITLE 39.—Title 39, United States Code, is amended—

(1) by striking ‘‘Board of Governors’’ each place it appears and inserting

‘‘Board of Directors’’;

(2) by striking ‘‘Governors’’ each place it appears (except wherever it appears in ‘‘Board of Governors’’) and inserting ‘‘Directors’’; and

(3) by striking ‘‘Governor’’ each place it appears and inserting ‘‘Director’’.

(b) REFERENCES OUTSIDE TITLE 39.—Any reference in any provision of law outside title 39, United States Code, enacted before the date of the enactment of this

Act—

(1) to the Board of Governors, within the meaning of section 102(2) of title

39, United States Code, as in effect before the date of the enactment of this Act,

shall be treated as referring to the Board of Directors, within the meaning of

such section 102(2), as amended by subsection (a); or

(2) to any of the Governors, within the meaning of section 102(3) of title

39, United States Code, as in effect before the date of the enactment of this Act,

shall be treated as referring to the corresponding Director or Directors, within

the meaning of such section 102(3), as amended by subsection (a).

SEC. 102. REDESIGNATIONS RELATING TO THE POSTMASTER GENERAL AND THE DEPUTY

POSTMASTER GENERAL.

(a) IN GENERAL.—(1) Section 202(c) of title 39, United States Code, is amended

by striking ‘‘Postmaster General’’ and inserting ‘‘Chief Executive Officer of the

United States Postal Service’’.

(2) Section 202(d) of such title 39 is amended by striking ‘‘Deputy Postmaster

General’’ and inserting ‘‘Deputy Chief Executive Officer of the United States Postal

Service’’.

5

(3) Section 102 of such title 39 is amended by striking ‘‘and’’ at the end of paragraph (2), by striking the period at the end of paragraph (3) and inserting a semicolon, and by adding after paragraph (3) the following:

‘‘(4) ‘Chief Executive Officer’, unless the context otherwise requires, means

the Chief Executive Officer of the United States Postal Service appointed under

section 202(c); and

‘‘(5) ‘Deputy Chief Executive Officer’, unless the context otherwise requires,

means the Deputy Chief Executive Officer of the United States Postal Service

appointed under section 202(d).’’.

(b) OTHER REFERENCES IN TITLE 39.—Title 39, United States Code, is further

amended—

(1) by striking ‘‘Postmaster General’’ each place it appears (except wherever

it appears in ‘‘Deputy Postmaster General’’) and inserting ‘‘Chief Executive Officer’’; and

(2) by striking ‘‘Deputy Postmaster General’’ each place it appears and inserting ‘‘Deputy Chief Executive Officer’’.

(c) REFERENCES OUTSIDE TITLE 39.—Any reference in any provision of law outside title 39, United States Code, enacted before the date of the enactment of this

Act—

(1) to the Postmaster General shall be treated as referring to the Chief Executive Officer of the United States Postal Service; and

(2) to the Deputy Postmaster General shall be treated as referring to the

Deputy Chief Executive Officer of the United States Postal Service.

SEC. 103. CLARIFICATION RELATING TO EXECUTION OF AMENDMENTS.

Any amendment made in this title to a term ‘‘each place it appears’’ (or other

words to the same effect) shall be considered to include such term when it appears

in a table of contents or a section heading.

TITLE II—GENERAL AUTHORITY

SEC. 201. EMPLOYMENT OF POSTAL POLICE OFFICERS.

Section 404 of title 39, United States Code, is amended by adding at the end

the following:

‘‘(c)(1) The Postal Service may employ guards for all buildings and areas owned

or occupied by the Postal Service or under the charge and control of the Postal Service, and such guards shall have, with respect to such property, the powers of special

policemen provided by the first section of the Act cited in paragraph (2), and, as

to such property, the Chief Executive Officer (or his designee) may take any action

that the Administrator of General Services (or his designee) may take under section

2 or 3 of such Act, attaching thereto penalties under the authority and within the

limits provided in section 4 of such Act.

‘‘(2) The Act cited in this paragraph is the Act of June 1, 1948 (62 Stat. 281),

commonly known as the Protection of Public Property Act.’’.

SEC. 202. DATE OF POSTMARK TO BE TREATED AS DATE OF APPEAL IN CONNECTION WITH

THE CLOSING OR CONSOLIDATION OF POST OFFICES.

(a) IN GENERAL.—Section 404(b) of title 39, United States Code, is amended by

adding at the end the following:

‘‘(6) For purposes of paragraph (5), any appeal received by the Commission

shall—

‘‘(A) if sent to the Commission through the mails, be considered to have

been received on the date of the Postal Service postmark on the envelope or

other cover in which such appeal is mailed; or

‘‘(B) if lawfully delivered to the Commission by an enterprise in the private

sector of the economy engaged in the delivery of mail, be considered to have

been received on the date determined based on any appropriate documentation

or other indicia (as determined under regulations of the Commission).’’.

(b) EFFECTIVE DATE.—This section and the amendments made by this section

shall apply with respect to any determination to close or consolidate a post office

which is first made available, in accordance with paragraph (3) of section 404(b) of

title 39, United States Code, after the end of the 3-month period beginning on the

date of the enactment of this Act.

6

TITLE III—PRESIDENTIAL POSTAL EMPLOYEE-MANAGEMENT

COMMISSION

SEC. 301. PRESIDENTIAL POSTAL EMPLOYEE-MANAGEMENT COMMISSION.

(a) IN GENERAL.—Section 206 of title 39, United States Code, is amended to

read as follows:

‘‘§ 206. Presidential Postal Employee-Management Commission

‘‘(a) There shall be established a Presidential Postal Employee-Management

Commission (hereinafter in this section referred to as the ‘Commission’). ‘‘(b)(1) The Commission shall study and make recommendations, in accordance

with this section, on how employee-management relations within the Postal Service

might be improved. ‘‘(2) The Commission shall submit its recommendations— ‘‘(A) to the President and the Congress, to the extent that they involve any

legislation; and ‘‘(B) to the Postal Service, to the extent that no legislation would be involved.

‘‘(3) All recommendations shall be submitted in the form of a written report,

with the first set of reports due within 18 months after the Commission is first constituted, and the second and third sets of reports in 12-month intervals thereafter. ‘‘(4) The Commission shall terminate after submitting its third set of reports.

‘‘(c)(1) The Commission shall be composed of 7 members, all of whom shall be

appointed by the President. Of the members—

‘‘(A) 2 shall be appointed from among persons who will represent the views

of nonpostal labor organizations familiar with issues common to postal employees;

‘‘(B) 2 shall be appointed from among persons who will represent the views

of the management of private corporations similar in size to the Postal Service;

‘‘(C) 2 shall be appointed from among persons well known in the fields of

employee-management relations, labor mediation, and collective bargaining; and

‘‘(D) 1 shall be appointed from among persons well known in the fields described in subparagraph (C), who are also generally viewed as not being predisposed to the interests of employees or management.

‘‘(2) All members shall be appointed for the life of the Commission.

‘‘(3) Not more than 4 members may be of the same political party.

‘‘(4) Members shall serve without compensation, but shall be reimbursed for

necessary travel and reasonable expenses incurred in attending meetings of the

Commission.

‘‘(5) The member appointed under paragraph (1)(D) shall serve as chairman of

the Commission.

‘‘(d)(1) The Commission shall have a Director who shall be appointed by the

Commission and paid at a rate not to exceed the rate of basic pay payable for level

IV of the Executive Schedule under section 5315 of title 5.

‘‘(2) Upon request of the Commission, the Federal Mediation and Conciliation

Service may detail, on a reimbursable basis, any of the personnel of that agency to

the Commission to assist it in carrying out its duties under this Act.

‘‘(3) The Commission may not appoint or retain any staff, except as provided

in paragraph (1) or (2).’’.

(b) CLERICAL AMENDMENT.—The table of sections at the beginning of chapter 2

of title 39, United States Code, is amended by striking the item relating to section

206 and inserting the following:

‘‘206. Presidential Postal Employee-Management Commission.’’.

TITLE IV—FINANCE

SEC. 401. END OF TREASURY CONTROL OF POSTAL SERVICE BANKING.

(a) IN GENERAL.—Subsection (d) of section 2003 of title 39, United States Code,

is amended to read as follows:

‘‘(d)(1) The Postal Service, in its sole discretion—

‘‘(A) may provide that amounts which would otherwise be deposited in the

revolving fund referred to in subsection (a) shall instead, to the extent considered appropriate by the Postal Service, be directly deposited in a Federal Reserve bank or a depository for public funds selected by the Postal Service; and

‘‘(B) may provide for transfers of amounts under this subsection between or

among—

‘‘(i) Federal Reserve banks;

7

‘‘(ii) depositories for public funds; and

‘‘(iii) the revolving fund referred to in subsection (a). ‘‘(2) The Postal Service, after consultation with the Secretary of the Treasury,

shall prepare and may from time to time revise a master plan for the exercise of

any authority under this subsection. Such plan shall address— ‘‘(A) the criteria that shall be applied by the Postal Service in deciding

when and how any such authority shall be exercised; ‘‘(B) matters such as risk limitations, reserve balances, allocation or distribution of monies, liquidity requirements, and measures to safeguard against

losses; ‘‘(C) the types of notification or consultation requirements the Postal Service shall follow in connection with any exercise or proposed exercise of authority

under this subsection; and ‘‘(D) procedures under which the Postal Service shall, at least annually,

render a full accounting as to how any authority under this subsection has been

exercised during the period involved.

‘‘(3)(A) Authority under this subsection may not be exercised except in accordance with applicable provisions of the master plan under paragraph (2). ‘‘(B) The Postal Service shall submit its master plan (and any revision thereof)

to the President, the Secretary of the Treasury, and each House of Congress at least

30 days before the date of its proposed implementation.’’. (b) SAVINGS PROVISION.—Until the authority under section 2003(d) of title 39,

United States Code, as amended by subsection (a), becomes available, the provisions

of such section 2003(d), as last in effect before being so amended, shall be treated

as if still in effect.

(c) STATUS OF MONIES UNCHANGED.—(1) Any amounts invested under section

2003(c) of title 39, United States Code, as amended by this title, shall be considered

to be part of the Postal Service Fund, to the same extent as if they had been invested under section 2003(c) of such title 39, as last in effect before the date of the

enactment of this Act.

(2) Any amounts deposited or transferred under section 2003(d) of title 39,

United States Code, as amended by this title, shall be considered to be part of the

Postal Service Fund, to the same extent as if they had been transferred under section 2003(d) of such title 39, as last in effect before the date of the enactment of

this Act.

SEC. 402. POSTAL SERVICE INVESTMENTS.

Section 2003(c) of title 39, United States Code, is amended by striking all after ‘‘it may’’ and inserting the following: ‘‘invest such amounts as it considers appropriate in obligations of, or obligations guaranteed by, the Government of the United

States.’’.

SEC. 403. EXCLUSION FROM FEDERAL FINANCING BANK.

Section 2005(d) of title 39, United States Code, is amended— (1) in paragraph (4) by striking ‘‘and’’ after the semicolon;

(2) in paragraph (5) by striking the period and inserting ‘‘; and’’; and

(3) by adding at the end the following:

‘‘(6) notwithstanding the provisions of the Federal Financing Bank Act of

1973 or any other provision of law (except as may be specifically provided by

reference to this paragraph in any Act enacted after this paragraph takes effect), not be eligible for purchase by, or commitment to purchase by, or sale or

issuance to, the Federal Financing Bank.’’.

SEC. 404. ELIMINATION OF TREASURY PREEMPTION OF BORROWING BY THE POSTAL SERVICE.

Section 2006(a) of title 39, United States Code, is amended by striking all after

the first sentence.

SEC. 405. ELIMINATION OF POSTAL SERVICE ‘‘PUT’’ ON TREASURY.

Section 2006(b) of title 39, United States Code, is amended to read as follows:

‘‘(b) The Secretary of the Treasury may purchase obligations of the Postal Service in such amounts as the Secretary of the Treasury and the Postal Service, in their

discretion, may agree.’’.

TITLE V—BUDGET AND APPROPRIATIONS PROCESS

SEC. 501. REPEAL OF PROVISION RELATING TO TRANSITIONAL APPROPRIATIONS.

(a) REPEAL.—(1) Section 2004 of title 39, United States Code, is repealed.

(2) The item relating to section 2004 in the table of sections at the beginning

of chapter 20 of such title 39 is repealed.

8

(3) Section 2003(e)(2) of such title 39 is amended by striking ‘‘sections 2401 and

2004’’ each place it appears and inserting ‘‘section 2401’’.

(b) CLARIFICATION THAT LIABILITIES FORMERLY PAID PURSUANT TO SECTION

2004 REMAIN LIABILITIES PAYABLE BY THE POSTAL SERVICE.—Section 2003 of title

39, United States Code, is amended by adding at the end the following:

‘‘(h) Liabilities of the former Post Office Department to the Employees’ Compensation Fund (appropriations for which were authorized by former section 2004,

as in effect before the effective date of this subsection) shall be liabilities of the Postal Service payable out of the Fund.’’.

(c) EFFECTIVE DATE.—This section and the amendments made by this section

shall take effect on October 1, 1998.

SEC. 502. PROVISIONS RELATING TO BENEFITS UNDER CHAPTER 81 OF TITLE 5, UNITED

STATES CODE, FOR OFFICERS AND EMPLOYEES OF THE FORMER POST OFFICE DEPARTMENT.

(a) IN GENERAL.—Section 8 of the Postal Reorganization Act (39 U.S.C. 1001

note) is amended by inserting ‘‘(a)’’ after ‘‘8.’’ and by adding at the end the following:

‘‘(b) For purposes of chapter 81 of title 5, United States Code, the Postal Service

shall, with respect to any individual receiving benefits under such chapter as an officer or employee of the former Post Office Department, have the same authorities

and responsibilities as it has with respect to an officer or employee of the Postal

Service receiving such benefits.’’.

(b) EFFECTIVE DATE.—This section and the amendments made by this section

shall take effect on October 1, 1998.

SEC. 503. REPEAL OF AUTHORIZATIONS OF APPROPRIATIONS FOR PUBLIC SERVICE COSTS,

REVENUE FORGONE, AND CERTAIN COMPENSATORY APPROPRIATIONS.

(a) IN GENERAL.—Section 2401 of title 39, United States Code, is amended by

striking subsections (b), (c), (d), (f), and (g), and by redesignating subsection (e) as

subsection (b).

(b) CONFORMING AMENDMENTS.—(1) Section 2003 of title 39, United States

Code, is amended—

(A) in subsection (e) by striking paragraph (2) and by redesignating subsection (e)(1) as subsection (e); and

(B) by striking subsection (f) and by redesignating subsection (g) as subsection (f).

(2) Section 2009 of such title 39 is amended by striking the last two sentences.

(3) Sections 2803(a) and 2804(a) of such title 39 are amended by striking

‘‘2401(g)’’ and inserting ‘‘2401(b)’’.

(4) Section 3626(a)(2)(B) of such title 39 is amended by striking ‘‘paragraph

(3)(A) or section 2401(c);’’ and inserting ‘‘paragraph (3)(A), section 3217, or sections

3403–3406;’’.

(5)(A) Section 3627 of such title 39 is repealed.

(B) The item relating to section 3627 in the table of sections at the beginning

of chapter 36 of such title 39 is repealed.

(C) Section 3684 of such title 39 is amended by striking ‘‘Except as provided

in section 3627 of this title, no’’ and inserting ‘‘No’’.

(c) EFFECTIVE DATE.—This section and the amendments made by this section

shall take effect on October 1, 1998.

SEC. 504. CONGRESSIONAL OVERSIGHT PRESERVED.

Subsection (b) of section 2401 of title 39, United States Code, as so redesignated

by section 503(a), is amended—

(1) by striking ‘‘Committee on Post Office and Civil Service’’ each place it

appears and inserting ‘‘Committee on Government Reform and Oversight’’;

(2) by striking ‘‘and the Committees on Appropriations of the Senate and

the House of Representatives’’;

(3) in the matter before paragraph (1)—

(A) by striking ‘‘2009 of this title,’’ and inserting ‘‘2009 for a fiscal

year,’’; and

(B) by striking ‘‘for the fiscal year for which funds are requested to be

appropriated,’’ and inserting ‘‘for such fiscal year,’’;

(4) in paragraph (3) by striking ‘‘during the fiscal year for which funds are

requested to be appropriated,’’ and inserting ‘‘during the fiscal year referred to

in the matter before paragraph (1),’’;

(5) by striking ‘‘Not later than March 15 of each year,’’ and inserting ‘‘Each

year,’’; and

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(6) by striking ‘‘any such committee considers necessary to determine the

amount of funds to be appropriated for the operation of the Postal Service,’’ and

inserting ‘‘either such committee considers necessary,’’.

TITLE VI—MISCELLANEOUS PROVISIONS RELATING TO POSTAL

RATES, CLASSES, AND SERVICES

SEC. 601. CHANGE-OF-ADDRESS ORDER INVOLVING A COMMERCIAL MAIL RECEIVING AGENCY.

(a) IN GENERAL.—Subchapter V of chapter 36 of title 39, United States Code,

is amended by adding at the end the following:

‘‘§ 3686. Change-of-address order involving a commercial mail receiving

agency

‘‘(a) For the purpose of this section, the term ‘commercial mail receiving agency’

or ‘CMRA’ means a private business that acts as the mail receiving agent for specific clients.

‘‘(b) Upon termination of an agency relationship between an addressee and a

commercial mail receiving agency—

‘‘(1) the addressee or, if authorized to do so, the CMRA may file a changeof-address order with the Postal Service with respect to such addressee;

‘‘(2) a change-of-address order so filed shall, to the extent practicable, be

given full force and effect; and

‘‘(3) any mail for the addressee that is delivered to the CMRA after the filing of an appropriate order under this subsection shall be subject to subsection

(c).

‘‘(c) Mail described in subsection (b)(3) shall, if marked for forwarding and remailed by the CMRA, be forwarded by the Postal Service in the same manner as,

and subject to the same terms and conditions (including limitations on the period

of time for which a change-of-address order shall be given effect) as apply to, mail

forwarded directly by the Postal Service to the addressee.’’.

(b) CLERICAL AMENDMENT.—The table of sections at the beginning of chapter 36

of title 39, United States Code, is amended by adding after the item relating to section 3685 the following:

‘‘3686. Change-of-address order involving a commercial mail receiving agency.’’.

SEC. 602. RATES FOR MAIL UNDER FORMER SECTION 4358.

Section 3626 of title 39, United States Code, is amended by adding at the end

the following:

‘‘(n) In the administration of this section, matter shall not be excluded from

being mailed at the rates for mail under former section 4358 solely because such

matter does not meet the requirements of former section 4354(a)(5).’’.

SEC. 603. POWERS OF THE POSTAL RATE COMMISSION.

Section 3604 of title 39, United States Code, is amended by adding at the end

the following:

‘‘(f)(1) Any Commissioner of the Commission, any administrative law judge appointed by the Commission under section 3105 of title 5, and any employee of the

Commission designated by the Commission may administer oaths, examine witnesses, take depositions, and receive evidence.

‘‘(2) The Chairman of the Commission, any Commissioner designated by the

Chairman, and any administrative law judge appointed by the Commission under

section 3105 of title 5 may, with respect to any proceeding under section 3624 or

3661 or chapter 37—

‘‘(A) issue subpenas requiring the attendance and presentation of testimony

of any individual, and the production of documentary or other evidence, from

any place in the United States, any territory or possession of the United States,

the Commonwealth of Puerto Rico, or the District of Columbia; and

‘‘(B) order the taking of depositions and responses to written interrogatories.

The written concurrence of a majority of the Commissioners then holding office

shall, with respect to each subpena under subparagraph (A), be required in advance

of its issuance.

‘‘(3) In the case of contumacy or failure to obey a subpena issued under this subsection, upon application by the Commission, the district court of the United States

for the district in which the person to whom the subpena is addressed resides or

is served may issue an order requiring such person to appear at any designated

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place to testify or produce documentary or other evidence. Any failure to obey the

order of the court may be punished by the court as a contempt thereof.

‘‘(g)(1) If the Postal Service determines that any document or other matter it

provides to the Commission pursuant to a subpena issued under subsection (f), or

otherwise at the request of the Commission in connection with any proceeding or

other purpose under this chapter or chapter 37, contains information which is described in section 410(c) of this title, or exempt from public disclosure under section

552(b) of title 5, the Postal Service shall, at the time of providing such matter to

the Commission, notify the Commission, in writing, of its determination (and the

reasons therefor).

‘‘(2) No officer or employee of the Commission may, with respect to any information as to which the Commission has been notified under paragraph (1)—

‘‘(A) use such information for purposes other than the purposes for which

it is supplied; or

‘‘(B) permit anyone who is not an officer or employee of the Commission to

have access to any such information.

‘‘(3) Paragraph (2) shall not prevent information from being furnished under

any process of discovery established under this title in connection with a proceeding

under this chapter or chapter 37 which is conducted in accordance with sections 556

and 557 of title 5. The Commission shall, by regulations based on rule 26(c) of the

Federal Rules of Civil Procedure, establish appropriate administrative and other

safeguards to ensure the security and confidentiality of any information furnished

under the preceding sentence.’’.

SEC. 604. VOLUME DISCOUNTS.

(a) IN GENERAL.—Subsection (c) of section 403 of title 39, United States Code,

is amended by striking ‘‘(c)’’ and inserting ‘‘(c)(1)’’ and by adding at the end the following:

‘‘(2) Nothing in this title shall be considered to preclude the Postal Service from

offering any discount in a rate or fee, on the basis of volume, so long as—

‘‘(A) all persons are, with respect to the class of mail or postal service involved, eligible for the same volume discount; and

‘‘(B) the discounted rate—

‘‘(i) if a product in the noncompetitive category of mail is involved, does

not exceed the maximum rate then allowable for such product under subchapter II of chapter 37; or

‘‘(ii) if a product in the competitive category of mail is involved, satisfies

the requirement under section 3742(b) that each such product bear the direct and indirect postal costs attributable to such product plus a reasonable

contribution to all other costs of the Postal Service.’’.

(b) DEMONSTRATION PROJECT.—

(1) IN GENERAL.—

(A) PURPOSE.—As soon as practicable after the date of the enactment

of this Act, the United States Postal Service shall conduct a demonstration

project, the purpose of which shall be to determine the feasibility and desirability of affording volume discounts to mailers on a negotiated basis.

(B) LIMITATION.—The demonstration project shall be limited to products in the competitive category of mail (within the meaning of section

3741(2) of title 39, United States Code, as amended by section 1001).

(C) DISCOUNTS.—Under the demonstration project, any discounts shall

be on such terms and conditions as may be mutually agreed to by the Postal Service and the mailer, subject to section 403(c)(2)(B)(ii) of title 39,

United States Code (as amended by subsection (a)).

(2) OTHER REQUIREMENTS.—Subsections (c)(1)(A), (d)(1) (excluding subparagraphs (A)(i), (B)(ii), and (C)(ii) thereof), and (e) of section 704 shall apply with

respect to the demonstration project under this subsection.

(c) EFFECTIVE DATE.—This section and the amendments made by this section

shall take effect on the date on which section 1002 (relating to termination of ratemaking authority under chapter 36 and related matters) takes effect.

TITLE VII—PROVISIONS RELATING TO TRANSPORTATION, CARRIAGE,

OR DELIVERY OF MAIL

SEC. 701. OBSOLETE PROVISIONS.

(a) REPEAL.—Chapter 52 of title 39, United States Code, is repealed.

(b) CONFORMING AMENDMENTS.—(1) Section 5005(a) of title 39, United States

Code, is amended—

(A) by repealing paragraph (1); and

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(B) in paragraph (4) by striking ‘‘(as defined in section 5201(6) of this title)’’. (2) Section 10721(b)(1) of title 49, United States Code, is amended by striking ‘‘chapters 50 and 52’’ and inserting ‘‘chapter 50’’. (c) ELIMINATING RESTRICTION ON LENGTH OF CONTRACTS.—(1) Section 5005(b)(1)

of title 39, United States Code, is amended by striking ‘‘shall be for periods not in

excess of 4 years (or where the Postal Service determines that special conditions or

the use of special equipment warrants, not in excess of 6 years) and’’. (2) Section 5402(c) of such title 39 is amended by striking ‘‘for a period of not

more than 4 years’’. (3) Section 5605 of such title 39 is amended by striking ‘‘for periods of not in

excess of 4 years’’.

SEC. 702. EXPANDED CONTRACTING AUTHORITY.

Subsection (d) of section 5402 of title 39, United States Code, is amended to

read as follows: ‘‘(d) Notwithstanding the provisions of subsections (a) through (c), the Postal

Service may contract for the transportation of mail by aircraft, except as provided

in subsections (f) and (g).’’.

SEC. 703. PRIVATE CARRIAGE OF LETTERS.

Section 601(a) of title 39, United States Code, is amended by inserting ‘‘when

the amount paid for private carriage of the letter is at least $2, or’’ before ‘‘when’’.

SEC. 704. MAILBOX DEMONSTRATION PROJECT.

(a) PURPOSE.—The purpose of this section is to determine the feasibility and desirability of allowing non-postage bearing matter to be deposited in private

letterboxes.

(b) PROJECT.—As soon as practicable after the date of the enactment of this Act,

the United States Postal Service shall— (1) develop a plan for the conducting of a demonstration project under this

section; and

(2) within 18 months after the date of the enactment of this Act, commence

implementation of such plan.

(c) SPECIFICATIONS.—

(1) IN GENERAL.—The demonstration project—

(A) shall be conducted over a 3-year period;

(B) shall include such areas as the Postal Service considers appropriate, except that such project shall include at least 1 urban area, 1 rural

area, and 1 suburban area, each of which shall involve a sufficient level of

participation so as to ensure meaningful results; and

(C) shall include provisions under which any person may elect not to

participate, or to cease to participate, in the project.

(2) TEMPORARY SUSPENSION OF SECTION 1725 OF TITLE 18.—Section 1725 of

title 18, United States Code, shall not apply with respect to conduct occurring—

(A) within an area included in the demonstration project; and

(B) while the demonstration project is ongoing.

(d) PROCEDURES.—

(1) IN GENERAL.—The Postal Service shall—

(A) develop a plan for the demonstration project which identifies—

(i) the specific areas to be included in the project;

(ii) the commencement and termination dates of the project;

(iii) the legal authority for the project; and

(iv) specific details as to what the project will entail;

(B) at least 90 days before commencing implementation of the project—

(i) publish the proposed plan in the Federal Register, including notice as to the time and manner in which interested persons may submit

written comments; and

(ii) provide notification of the proposed plan to persons served within the areas to be included in the project, including the relevant information as to the time, form, and manner in which any such person

shall have the opportunity to present their views, in writing or by oral

presentation, as they may elect; and

(C) after considering the comments and views and any other information received under subparagraph (B), prepare the final version of the plan

for such project and, not later than 30 days before commencing implementation of the project—

(i) publish the final plan in the Federal Register; and

(ii) provide notification of the final plan to persons served within

the areas to be included in the project.

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(2) FACTORS TO BE TAKEN INTO ACCOUNT IN SELECTING AREAS FOR INCLU- SION.—In identifying areas for inclusion in the demonstration project, the Postal

Service shall take into account— (A) what types of data are needed in order to permit a meaningful evaluation under subsection (e); and

(B) such other factors as the Postal Service considers appropriate.

(3) WRITTEN DETERMINATIONS.—Any determination of the Postal Service to

commence implementation of the demonstration project shall be in writing and

shall include the findings of the Postal Service with respect to the factors required to be taken into account under paragraph (2). Such determination and

findings shall be made available to the persons served by the Postal Service

within each area included in the project.

(e) EVALUATION.—Not later than 1 year after the demonstration project ends,

the Comptroller General of the United States shall submit to each House of Congress a written evaluation of such project, including recommendations as to whether

or not the authority tested by the project should be broadened in scope and made

permanent and, if so, with what modifications (if any).

TITLE VIII—DIRECT APPEAL OF DECISIONS OF THE MERIT SYSTEMS

PROTECTION BOARD

SEC. 801. DIRECT APPEAL OF DECISIONS OF THE MERIT SYSTEMS PROTECTION BOARD.

Section 7703 of title 5, United States Code, is amended by adding at the end

the following: ‘‘(e)(1) The Chief Executive Officer may, with respect to any employee of the

Postal Service or applicant for employment with the Postal Service, and subject to

the provisions of sections 409(b)–(e) and 411 of title 39, obtain review of any final

order or decision of the Board by filing a petition for judicial review in the United

States Court of Appeals for the Federal Circuit if the Chief Executive Officer determines, in his or her discretion, that the Board erred in interpreting a civil service

law, rule, or regulation affecting personnel management and that the Board’s decision will have a substantial impact on a civil service law, rule, regulation, or policy

directive, as applied with respect to the Postal Service. If the Chief Executive Officer did not intervene in a matter before the Board, the Chief Executive Officer may

not petition for review of a Board decision under this section unless the Chief Executive Officer first petitions the Board for a reconsideration of its decision, and such

petition is denied. In addition to the named respondent, the Board and all other parties to the proceedings before the Board shall have the right to appear in the proceeding before the Court of Appeals. The granting of the petition for judicial review

shall be at the discretion of the Court of Appeals. ‘‘(2) For purposes of applying the provisions of section 7701(e) in the case of a

decision that relates to an employee of the Postal Service or applicant for employment with the Postal Service, such provisions shall be applied by substituting ‘Director or Chief Executive Officer of the United States Postal Service’ for ‘Director’. ‘‘(3) For purposes of this subsection— ‘‘(A) the term ‘Chief Executive Officer’ means the Chief Executive Officer

of the United States Postal Service; and ‘‘(B) the term ‘Postal Service’ means the United States Postal Service.’’.

TITLE IX—LAW ENFORCEMENT

Subtitle A—Amendments to Title 39, United States Code

SEC. 901. MAKE FEDERAL ASSAULT STATUTES APPLICABLE TO POSTAL CONTRACT EMPLOYEES.

Section 1008 of title 39, United States Code, is amended— (1) in subsection (a) by inserting ‘‘or entrusted with mail under contract

with the Postal Service’’ after ‘‘mail’’; and

(2) in subsection (b) by inserting ‘‘an employee of the Postal Service for the

purposes of sections 111 and 1114 of title 18, and’’ after ‘‘deemed’’.

SEC. 902. SEXUALLY ORIENTED ADVERTISING.

(a) CIVIL PENALTY.—Section 3011 of title 39, United States Code, is amended— (1) by redesignating subsections (b) through (e) as subsections (c) through

(f), respectively; and

(2) by inserting after subsection (a) the following: ‘‘(b)(1) Upon a finding by the court that a sexually oriented advertisement has

been mailed in violation of section 3010(b), the court may assess, on whoever made

the mailing or caused it to be made, a civil penalty of not less than $500 and not

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more than $1,500 for each violation. Each piece of mail sent in violation of section

3010(b) shall constitute a separate violation. ‘‘(2) For purposes of this subsection— ‘‘(A) receipt of a sexually oriented advertisement after the recipient’s name and address have been listed (as described in section 3010(b)) for at least 60

days shall create a rebuttable presumption that such advertisement was mailed

more than 30 days after that individual’s name and address became so listed;

and ‘‘(B) receipt in the mail of a sexually oriented advertisement addressed to ‘Occupant’ or ‘Resident’ (or any other term permitted by Postal Service standards on simplified addressing) at the recipient’s address, or which is specifically

addressed to the recipient, but with an inconsequential error or variation in the

recipient’s name or address, shall, for purposes of applying the mailing prohibition of section 3010(b), create a rebuttable presumption that such advertisement

was mailed to such recipient.

‘‘(3) Any penalty assessed under paragraph (1) shall be paid to the Postal Service for deposit in the Postal Service Fund established by section 2003.’’. (b) REPEAL.— (1) IN GENERAL.—Section 3008 of title 39, United States Code, and the item

relating to such section in the table of sections at the beginning of chapter 30

of such title, are repealed.

(2) CONFORMING AMENDMENTS.—(A) Subsection (f) of section 3011 of such

title 39 (as so redesignated by subsection (a)) is amended by striking ‘‘section

3006, 3007, or 3008’’ and inserting ‘‘section 3006 or 3007’’. (B) Section 1737 of title 18, United States Code, is amended— (i) in subsection (a) by striking ‘‘3008 or’’; and

(ii) in subsection (b) by striking ‘‘3008(a) or’’. (c) EFFECTIVE DATE.—This section and the amendments made by this section

shall take effect 90 days after the date of the enactment of this Act. The amendments made by this section shall be treated as if they had never been enacted for

purposes of any mailing made or caused to be made before this section takes effect.

SEC. 903. ALLOW POSTAL SERVICE TO RETAIN ASSET FORFEITURE RECOVERIES.

Paragraph (7) of section 2003(b) of title 39, United States Code, is amended to

read as follows: ‘‘(7) amounts (including proceeds from the sale of forfeited items) from any

civil forfeiture conducted by the Postal Service and from any forfeiture resulting

from an investigation in which the Postal Service has primary responsibility,

except that nothing in this paragraph shall preclude the Postal Service, on such

terms as it may determine, from sharing such amounts with any Federal, State,

or local law enforcement agency which participated in any of the acts which led

to the seizure or forfeiture of the property; and’’.

SEC. 904. HAZARDOUS MATTER.

(a) CIVIL PENALTY.—Chapter 30 of title 39, United States Code, is amended by

adding at the end the following:

‘‘§ 3016. Civil penalty for prohibited mailing and deficient packaging of hazardous matter

‘‘(a) For the purposes of this section—

‘‘(1) the term ‘parcel’ includes any kind of package, envelope, container, or

other piece of mail;

‘‘(2) the term ‘manner’ includes the preparation and packaging of a piece

of mail;

‘‘(3) a person shall be considered to have acted knowingly if—

‘‘(A) such person had actual knowledge of the facts giving rise to the

violation; or

‘‘(B) a reasonable person acting in the same circumstances and exercising due care would have had such knowledge; and

‘‘(4) the term ‘hazardous matter’ has the meaning given such term by section 1716 of title 18.

‘‘(b) Any person—

‘‘(1) who knowingly mails or causes to be mailed any parcel, the contents

of which constitute or include any hazardous matter which has been declared

by statute or Postal Service regulation to be nonmailable under any circumstances;

‘‘(2) who knowingly mails or causes to be mailed a parcel in violation of any

statute or Postal Service regulation restricting the time, place, or manner in

which hazardous matter may be mailed; or

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‘‘(3) who knowingly manufactures, distributes, or sells any container, packaging kit, or similar device that—

‘‘(A) is represented, marked, certified, or sold by such person for use in

the mailing of any hazardous matter; and

‘‘(B) fails to conform with any statute or Postal Service regulation setting forth standards for containers, packaging kits, or similar devices used

for the mailing of hazardous matter;

shall be liable to the Postal Service for a civil penalty in an amount not to exceed

$25,000 per violation.

‘‘(c) The Postal Service may enforce this section by commencing a civil action

in accordance with section 409(d). The action may be brought in the district court

of the United States for the district in which the defendant resides or any district

in which the defendant conducts business or in which a violation of this section was

discovered.

‘‘(d) In determining the amount of any civil penalty to be assessed under this

section, the district court—

‘‘(1) shall treat as a separate violation—

‘‘(A) each parcel mailed or caused to be mailed as described in paragraph (1) or (2) of subsection (b); and

‘‘(B) each container, packaging kit, or similar device manufactured, distributed, or sold as described in subsection (b)(3); and

‘‘(2) shall take into account—

‘‘(A) the nature, circumstances, extent, and gravity of each violation

committed; and

‘‘(B) with respect to the person found to have committed such violation,

the degree of culpability, any history of prior offenses, ability to pay, effect

on ability to continue to do business, and such other matters as justice may

require.

‘‘(e) All penalties collected under authority of this section shall be paid into the

Postal Service Fund established by section 2003.’’.

(b) CLERICAL AMENDMENT.—The table of sections at the beginning of chapter 30

of title 39, United States Code, is amended by adding at the end the following:

‘‘3016. Civil penalty for prohibited mailing and deficient packaging of hazardous

matter.’’.

Subtitle B—Other Provisions

SEC. 911. STALKING FEDERAL OFFICERS AND EMPLOYEES.

(a) IN GENERAL.—Chapter 41 of title 18, United States Code, is amended by

adding at the end the following:

‘‘§ 881. Stalking Federal and postal officers and employees

‘‘(a) Whoever—

‘‘(1) repeatedly engages in a pattern of conduct (including maintaining a

visual or physical proximity or verbal or written threat) directed at another person who is or was an officer or employee—

‘‘(A) in the executive, legislative, or judicial branch of the Federal Government; or

‘‘(B) in the United States Postal Service;

while such other person is engaged in official duties or on account of such duties;

‘‘(2) knows that such conduct is likely to place that other person in reasonable fear of sexual battery, bodily injury, or death; and

‘‘(3) thereby induces such fear in that other person;

shall be punished as provided in subsection (b) of this section.

‘‘(b)(1) The punishment for an offense under subsection (a) of this section is the

greatest of the following:

‘‘(A) In the case of a first conviction under such subsection, a fine under

this title or imprisonment for not more than 3 years, or both.

‘‘(B) In the case of a second or subsequent conviction under such subsection,

a fine under this title or imprisonment for not more than 15 years, or both.

‘‘(C) If, during the commission of the offense, the offender uses a deadly or

dangerous weapon, a fine under this title or imprisonment for not more than

10 years, or both.

‘‘(D) If the offense violates a protective order, a fine under this title or imprisonment for not more than 5 years, or both.

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‘‘(2) If a sentence of probation is imposed for an offense under subsection (a) of

this section, the court shall require the defendant to undergo appropriate psychiatric, psychological, or social counselling.

‘‘(c) As used in this section, the term ‘protective order’ means any court order

that requires an individual—

‘‘(1) to refrain from behavior prohibited by subsection (a) of this section; or

‘‘(2) to refrain from contact with the person who subsequently is a victim

of the offense under such subsection that is committed by that individual.

‘‘(d)(1) Whoever is or is about to be aggrieved by a violation of subsection (a)

of this section may, in a civil action, obtain from the person engaging or about to

engage in that violation, appropriate relief, including punitive damages in the case

of a completed violation and reasonable attorney’s fees.

‘‘(2) If—

‘‘(A) the court issues an injunction against the person engaging or about to

engage in a violation of subsection (a) of this section;

‘‘(B) such person is an officer or employee in the executive branch of the

Federal Government or in the United States Postal Service; and

‘‘(C) there is a nexus between the enjoined conduct and such person’s office

or employment;

the court may order that the person be suspended or summarily discharged from

such office or employment.’’.

(b) CLERICAL AMENDMENT.—The table of sections at the beginning of chapter 41

of title 18, United States Code, is amended by adding at the end the following:

‘‘881. Stalking Federal and postal officers and employees.’’.

SEC. 912. NONMAILABILITY OF CONTROLLED SUBSTANCES.

Section 1716 of title 18, United States Code, is amended by adding at the end

the following:

‘‘Whoever knowingly deposits for mailing or delivery, or knowingly causes to be

delivered by mail, according to the direction thereon, or at any place at which it

is directed to be delivered by the person to whom it is addressed, unless in accordance with the rules and regulations authorized to be prescribed by the Postal Service, any controlled substance, as that term is defined for the purposes of the Controlled Substances Act, shall, if the distribution of a like amount of such substance

is a felony under such Act, be fined under this title or imprisoned not more than

5 years, or both.’’.

SEC. 913. ENHANCED PENALTIES.

Pursuant to its authority under section 994 of title 28, United States Code, the

United States Sentencing Commission shall amend its sentencing guidelines to—

(1) appropriately enhance penalties in cases in which a defendant is convicted of stealing or destroying a quantity of undelivered United States mail,

in violation of sections 1702, 1703, 1708, 1709, 2114, or 2115 of title 18, United

States Code; and

(2) establish that the intended loss in a theft of an access device as defined

in section 1029(e)(1) of title 18, United States Code, shall be based on the credit

line of the access device or the actual unauthorized charges, whichever amount

is greater.

SEC. 914. POSTAL BURGLARY PROVISIONS.

(a) LARCENY INVOLVING POST OFFICE BOXES AND POSTAL STAMP VENDING MACHINES.—Section 2115 of title 18, United States Code, is amended—

(1) by striking ‘‘or’’ before ‘‘any building’’;

(2) by inserting ‘‘or any post office box or postal products vending machine,’’

after ‘‘used in whole or in part as a post office,’’;

(3) by inserting ‘‘or in such box or machine,’’ after ‘‘so used’’; and

(4) by striking ‘‘not more than $1,000’’ and inserting ‘‘under this title’’.

(b) RECEIPT, POSSESSION, CONCEALMENT, OR DISPOSITION OF PROPERTY.—Section 2115 of title 18, United States Code, is amended—

(1) by inserting ‘‘(a)’’ before ‘‘Whoever’’; and

(2) by adding at the end the following:

‘‘(b) Whoever receives, possesses, conceals, or disposes of any mail matter,

money, or other property of the United States, that has been obtained in violation

of this section, knowing the same to have been unlawfully obtained, shall be fined

under this title or imprisoned not more than 5 years, or both.’’.

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SEC. 915. MAIL, MONEY, OR OTHER PROPERTY OF THE UNITED STATES.

(a) ENHANCED PENALTY FOR ROBBERY.—Subsection (a) of section 2114 of title

18, United States Code, is amended to read as follows: ‘‘(a) ASSAULT.—Whoever assaults any person having lawful charge, control, or

custody of any mail matter or of any money or other property of the United States,

with intent to rob, steal, or purloin such mail matter, money, or other property of

the United States, or robs or attempts to rob any such person of mail matter, or

of any money, or other property of the United States, shall, for the first offense, be

imprisoned not more than 10 years or fined under this title, or both. If, in effecting

or attempting to effect such robbery the defendant wounds the person having custody of such mail, money, or other property of the United States, or puts that person’s life in jeopardy by the use of a dangerous weapon, or the offense is a subsequent offense under this subsection, the defendant shall be imprisoned not more

than 25 years or fined under this title, or both. If the death of any person results

from the offense under this subsection, the defendant shall be punished by death

or life imprisonment.’’. (b) ATTEMPT OFFENSES.— (1) The second paragraph of section 501 of title 18, United States Code, is

amended by striking ‘‘uses or sells,’’ and inserting ‘‘uses or sells or attempts to

use or sell,’’. (2) Section 1711 of title 18, United States Code, is amended by inserting ‘‘attempts to loan, use, pledge, hypothecate, or convert to this own use,’’ after ‘‘converts to his own use,’’.

TITLE X—NEW SYSTEM RELATING TO POSTAL RATES, CLASSES, AND

SERVICES

SEC. 1001. ESTABLISHMENT.

(a) IN GENERAL.—Title 39, United States Code, is amended by adding after

chapter 36 the following:

‘‘CHAPTER 37—NEW SYSTEM FOR ESTABLISHING POSTAL RATES,

CLASSES, AND SERVICES

‘‘SUBCHAPTER I—BASELINE RATES AND FEES

‘‘Sec.

‘‘3701. Establishment of baseline rates and fees.

‘‘SUBCHAPTER II—RATES AND FEES FOR PRODUCTS IN THE

NONCOMPETITIVE CATEGORY OF MAIL

‘‘3721. Definitions.

‘‘3722. Maximum rates.

‘‘3723. Adjustment factor.

‘‘3724. Action of the Directors.

‘‘SUBCHAPTER III—RATES AND FEES FOR PRODUCTS IN THE

COMPETITIVE CATEGORY OF MAIL

‘‘3741. Definitions.

‘‘3742. Action of the Directors.

‘‘3743. Transfers of products from the noncompetitive category of mail.

‘‘3744. Application of antitrust laws.

‘‘SUBCHAPTER IV—MARKET TESTS OF EXPERIMENTAL PRODUCTS

‘‘3761. Market tests.

‘‘SUBCHAPTER V—REPORTING REQUIREMENTS AND RELATED

PROVISIONS

‘‘3781. Definition.

‘‘3782. Reporting requirements.

‘‘3783. Use of profits.

‘‘SUBCHAPTER I—BASELINE RATES AND FEES

‘‘§ 3701. Establishment of baseline rates and fees

‘‘(a) REQUIREMENT THAT A RATEMAKING REQUEST BE MADE.—

17

‘‘(1) IN GENERAL.—Except as provided in paragraph (2), the Postal Service

shall, within 18 months after the effective date of this chapter, request the Postal Rate Commission to submit a recommended decision on appropriate changes

in rates of postage and in fees for postal services, in accordance with section

3622(a).

‘‘(2) EXCEPTION.—A request under this subsection may not be made if, on

the effective date of this chapter—

‘‘(A) a new schedule of rates and fees takes effect under subchapter II

of chapter 36 pursuant to a previous request under section 3622(a); or

‘‘(B) a recommended decision or further recommended decision pursuant to a previous request under section 3622(a), or judicial review of any

such decision or recommended decision, is pending.

‘‘(b) BASELINE RATES AND FEES ESTABLISHED PURSUANT TO THIS SECTION.—

‘‘(1) IN GENERAL.—For purposes of this title, the baseline rates and fees established pursuant to this section shall be—

‘‘(A) the rates and fees taking effect pursuant to a request made under

subsection (a)(1), subject to subparagraph (C)(i) or paragraph (2)(A) (as applicable);

‘‘(B) the rates and fees—

‘‘(i) that, by virtue of subsection (a)(2)(A), preclude the making of

a request under subsection (a)(1); or

‘‘(ii) that take effect upon completion of all proceedings referred to

in subsection (a)(2)(B), subject to subparagraph (C)(ii) or paragraph

(2)(B) (as applicable); or

‘‘(C)(i) if a request under subsection (a)(1) is made, but proceedings pursuant to such request have not been completed by the end of the 18-month

period beginning on the date on which such request is made, the rates and

fees in effect at the end of such period (including any temporary rate or fee

then in effect under subchapter III of chapter 36); or

‘‘(ii) if a request under subsection (a)(1) is precluded by virtue of the

provisions of subsection (a)(2)(B), but the proceedings referred to in such

provisions have not been completed by the end of the 18-month period referred to in subsection (a)(1), the rates and fees in effect at the end of such

period (including any temporary rate or fee then in effect under subchapter

III of chapter 36).

‘‘(2) APPLICABLE STATUTORY DEADLINE NOT CHANGEABLE BY ADMINISTRATIVE

OR OTHER ACTION.—Rates and fees established under chapter 36 pursuant to—

‘‘(A) a request made under subsection (a)(1) shall take effect as of the

date determined in accordance with section 3625(f) or otherwise applicable

provisions of such chapter, except that in no event may the date so determined be later than the last day of the 18-month period referred to in paragraph (1)(C)(i); or

‘‘(B) a previous request, as referred to in subsection (a)(2)(B), shall take

effect as of the date determined in accordance with section 3625(f) or otherwise applicable provisions of such chapter, except that in no event may the

date so determined be later than the last day of the 18-month period referred to in subsection (a)(1).

‘‘(c) PRIORITY OF RATEMAKING FACTORS IF PURSUANT TO A REQUEST UNDER THIS

SECTION.—If a request under subsection (a)(1) is made, then, for purposes of all proceedings under chapter 36 relating to such request, subsection (b) of section 3622

shall be considered to be amended to read as follows:

‘‘ ‘(b) Upon receiving a request, the Commission shall make a recommended decision on the request for changes in rates or fees in each class of mail or type of service in accordance with the policies of this title and the following factors, set forth

in descending order of priority:

‘‘ ‘(1) The requirement that each class of mail or type of mail service bear

the direct and indirect postal costs attributable to such class or type plus that

portion of all other costs of the Postal Service reasonably assignable to such

class or type.

‘‘ ‘(2) The value of the mail service to senders, as reflected by the volume

response of classes of mail and types of service to changes in postal rates and

fees, and, as appropriate, the price and quality of alternative means of sending

mail.

‘‘ ‘(3) The quality of mail service actually provided each class or type of mail

service, including the collection, mode of transportation, priority of delivery, and

timeliness of delivery (as measured by reference to standards established by the

Postal Service).

18

‘‘ ‘(4) The available alternative means of sending and receiving letters and

other mail matter at reasonable costs.

‘‘ ‘(5) The degree of preparation of mail for delivery into the postal system

performed by the mailer and its effect upon reducing costs to the Postal Service.

‘‘ ‘(6) The effect of rate increases upon users of the mail and the general

public.

‘‘ ‘(7) Simplicity of structure for the entire schedule and simple, identifiable

relationships between the rates or fees charged the various classes of mail for

postal services.

‘‘ ‘(8) The educational, cultural, scientific, and informational value to the recipient of mail matter.

‘‘ ‘(9) The establishment and maintenance of a fair and equitable schedule.

‘‘ ‘(10) Such other factors as the Commission deems appropriate.’.

‘‘SUBCHAPTER II—RATES AND FEES FOR PRODUCTS IN THE

NONCOMPETITIVE CATEGORY OF MAIL

‘‘§ 3721. Definitions

‘‘For purposes of this subchapter—

‘‘(1) YEAR.—The term ‘year’ means a calendar year.

‘‘(2) GDPPI.—The term ‘GDPPI’ means the Gross Domestic Product ChainType Price Index (published quarterly by the Bureau of Economic Analysis of

the Department of Commerce).

‘‘(3) PRODUCT.—The term ‘product’ means a class of mail or type of postal

service, including—

‘‘(A) a subclass or other similar subordinate unit thereof; and

‘‘(B) any further subordinate unit thereof (below the first level of subordinate units referred to in subparagraph (A)).

‘‘(4) PRODUCTS IN THE NONCOMPETITIVE CATEGORY OF MAIL.—The term

‘products in the noncompetitive category of mail’ means the respective products

in the first, second, third, and fourth baskets of products (within the meaning

of section 3723(a)).

‘‘(5) RATE.—The term ‘rate’, used with respect to a product, means—

‘‘(A) for a class of mail, the rate for such class of mail; and

‘‘(B) for a type of postal service, the fee for such service.

‘‘(6) NONCOMPETITIVE PRODUCT.—The term ‘noncompetitive product’ means

a product in the noncompetitive category of mail.

‘‘§ 3722. Maximum rates

‘‘(a) IN GENERAL.—Except as otherwise provided in this subchapter, the rate for

a noncompetitive product may not, in any year, exceed the maximum rate allowable

for such product in such year under this section.

‘‘(b) COMPUTATION OF MAXIMUM RATE ALLOWABLE.—

‘‘(1) IN GENERAL.—The maximum rate allowable for a noncompetitive product in any year shall be computed by multiplying—

‘‘(A) the change in the GDPPI for such year, adjusted by the adjustment factor for such year, times

‘‘(B) the maximum rate allowable for such product in the preceding

year (determined disregarding paragraph (4), any exercise of authority

under section 3724(d), and any alternative limitation under section 1002(e)

of the Postal Reform Act of 1997).

‘‘(2) DEFINITIONS.—For purposes of this subsection—

‘‘(A) CHANGE IN THE GDPPI.—The change in the GDPPI for any year

shall be equal to the percentage (if any) by which—

‘‘(i) the GDPPI for the preceding year, exceeds

‘‘(ii) the GDPPI for the second preceding year.

‘‘(B) GDPPI FOR ANY YEAR.—The GDPPI for any year is the average of

the GDPPI for the 4 consecutive calendar quarters ending on September

30th of such year.

‘‘(C) ADJUSTMENT FACTOR.—The adjustment factor for any year shall be

determined in accordance with section 3723.

‘‘(3) SPECIAL RULE FOR FIRST COMPUTATION.—For purposes of the first computation of a maximum rate allowable under this section for any product, the

rate applied under paragraph (1)(B) shall be the baseline rate established for

such product under section 3701.

‘‘(4) ROUNDING.—Any maximum rate computed under this section shall be

rounded to the nearest cent (rounding 1⁄2 of a cent to the next higher cent).

19

‘‘§ 3723. Adjustment factor

‘‘(a) DEFINITIONS.—For purposes of this section—

‘‘(1) RATEMAKING CYCLE.—

‘‘(A) IN GENERAL.—The term ‘ratemaking cycle’ means—

‘‘(i) the 5-year period beginning on the first day of the second year

beginning after the effective date of the baseline rates and fees established pursuant to section 3701; and

‘‘(ii) each 5-year period beginning on the day after the last day of

the immediately preceding 5-year period under this paragraph.

‘‘(B) EARLIER INITIAL DATE.—The Postal Rate Commission may, by written determination, advance the date applicable under subparagraph (A)(i)

to the date which occurs 1 year earlier, but only if that earlier date does

not precede the date on which all requirements of this section have been

completed with respect to the ratemaking cycle involved.

‘‘(2) BASKET OF PRODUCTS TO WHICH THIS SECTION APPLIES.—The term ‘basket of products to which this section applies’ means the first, second, third, and

fourth baskets of products.

‘‘(3) FIRST BASKET OF PRODUCTS.—The term ‘first basket of products’

means—

‘‘(A) single-piece first-class letters (both domestic and international);

‘‘(B) single-piece first-class cards (both domestic and international); and

‘‘(C) single-piece first-class parcels (both domestic and international).

‘‘(4) SECOND BASKET OF PRODUCTS.—The term ‘second basket of products’

means all first-class mail not in the first basket of products.

‘‘(5) THIRD BASKET OF PRODUCTS.—The term ‘third basket of products’

means periodicals.

‘‘(6) FOURTH BASKET OF PRODUCTS.—The term ‘fourth basket of products’

means standard mail (except for parcel post).

‘‘(7) RULE OF CONSTRUCTION.—

‘‘(A) IN GENERAL.—Mail matter referred to in paragraphs (3) through

(6) shall, for purposes of such paragraphs, be considered to have the meaning given them under the mail classification schedule (within the meaning

of section 3623) as of the effective date of this chapter.

‘‘(B) UPDATES.—The Board of Directors shall, whenever any relevant

change occurs (pursuant to a reclassification under chapter 36, a transfer

of a product from the noncompetitive category of mail under section 3743,

or the conversion of an experimental product under subchapter IV to a permanent one), prescribe new lists of products within the baskets under paragraphs (3) through (6), respectively. The revised lists shall indicate how and

when any previous lists are superseded.

‘‘(b) PROCEDURES RELATING TO DETERMINING ADJUSTMENT FACTORS.—

‘‘(1) COMMENCEMENT.—

‘‘(A) IN GENERAL.—Except as provided in subparagraph (B), the Postal

Rate Commission shall, beginning in December of the second year before

the start of each ratemaking cycle, provide the opportunity for a hearing

on the record under sections 556 and 557 of title 5 to the Postal Service,

users of the mails, and an officer of the Commission who shall be required

to represent the interests of the general public, with respect to the adjustment factors to be established for the upcoming ratemaking cycle.

‘‘(B) EXCEPTION.—For purposes of the first hearing under this subsection, proceedings shall be commenced during the second month beginning on or after the effective date of the baseline rates and fees established

pursuant to section 3701.

‘‘(2) RULES OF PROCEEDINGS.—In order to conduct its proceedings with utmost expedition consistent with procedural fairness to the parties, the Commission may (without limitation) adopt rules which provide for—

‘‘(A) the advance submission of written direct testimony;

‘‘(B) the conduct of prehearing conferences to define issues, and for

other purposes to insure orderly and expeditious proceedings;

‘‘(C) discovery both from the Postal Service and the parties to the proceedings;

‘‘(D) limitation of testimony; and

‘‘(E) the conduct of the entire proceedings off the record with the consent of the parties.

‘‘(3) PRINTING AND NOTICE REQUIREMENTS.—

‘‘(A) IN GENERAL.—The Commission’s decision and the record of the

Commission’s hearings shall be made generally available at the time the

20

decision is issued and shall be printed and made available for sale by the

Public Printer within 10 days following the day the decision is issued.

‘‘(B) TIMING.—All actions required of the Commission under this section, including those under subparagraph (A), shall be completed as expeditiously as possible, but in no event later than the end of the year before

the commencement of the ratemaking cycle to which the decision relates.

‘‘(c) FACTORS.—Adjustment factors shall be established in accordance with the

policies of this title and the following:

‘‘(1) The value of the product to senders, as reflected by the volume response of classes of mail and types of service to changes in postal rates and fees,

and, as appropriate, the price and quality of alternative means of sending mail.

‘‘(2) Cost to the Postal Service of providing the product.

‘‘(3) Productivity of the Postal Service in providing postal services.

‘‘(4) The level of postal revenues attributable to the product.

‘‘(5) The actual level of service (described in terms of speed of delivery and

reliability) provided with respect to the product.

‘‘(6) Such other considerations as the Postal Service and the Commission

mutually agree to be appropriate.

‘‘(d) SEPARATE ADJUSTMENT FACTOR REQUIRED FOR EACH BASKET OF PRODUCTS.—A separate adjustment factor shall be established for each basket of products

to which this section applies, and, except as provided in section 3724(d), the adjustment factor applicable to any basket shall be uniformly applied to all products within such basket.

‘‘(e) HOW EACH ADJUSTMENT FACTOR IS TO BE EXPRESSED AND APPLIED.—

‘‘(1) EXPRESSION.—Each adjustment factor established under this section

shall be expressed as a percentage.

‘‘(2) APPLICATION.—For purposes of section 3722(b)(1)(A), to adjust a change

in the GDPPI by an adjustment factor, the adjustment factor shall be added to

or subtracted from such change in the GDPPI, as the case may be.

‘‘(f) EXIGENT CIRCUMSTANCES.—

‘‘(1) IN GENERAL.—Upon a majority vote of the Directors then holding office,

the Postal Service may request the Postal Rate Commission to render a decision

on changing the adjustment factors to be applied during the then current ratemaking cycle (after having previously been established under this section for

such cycle).

‘‘(2) CONDITIONS.—A request made under paragraph (1) may be considered

only upon written certification by the Directors that—

‘‘(A) the Postal Service faces severe financial exigencies; and

‘‘(B) the change is warranted to restore the Postal Service to fiscal

soundness.

‘‘(3) EFFECT; DURATION.—A change granted under this subsection—

‘‘(A) shall supersede the adjustment factors which would otherwise

apply under this section; and

‘‘(B) shall remain effective for the remainder of the ratemaking cycle involved, subject to paragraph (5).

‘‘(4) EXPEDITED CONSIDERATION.—A request made under paragraph (1) shall

be acted on in the same manner as if initiated under subsection (b)(1), except

that a decision on such request shall be rendered not later than 6 months after

the date on which such request is made.

‘‘(5) FREQUENCY.—Nothing in this section shall be considered to limit the

number of times that authority under this subsection may be invoked or exercised during any particular ratemaking cycle.

‘‘(6) FINALITY.—A decision of the Postal Rate Commission under this subsection shall be final and shall not be subject to administrative or judicial review.

‘‘(g) APPELLATE REVIEW.—Except as provided in subsection (f)(6), a decision of

the Postal Rate Commission under this section may be appealed to any court of appeals of the United States, within 15 days after its publication by the Public Printer,

by an aggrieved party who appeared in the proceedings under subsection (b). The

court shall review the decision, in accordance with section 706 of title 5, and chapter

158 and section 2112 of title 28, except as otherwise provided in this subsection, on

the basis of the record before the Commission. The court may affirm the decision

or order that the entire matter be returned for further consideration, but the court

may not modify the decision. The court may not suspend the effectiveness of the adjustment factors, or otherwise prevent them from taking effect until final disposition

of the suit by the court. No court shall have jurisdiction to review a decision made

by the Commission under this section except as provided in this subsection.

21

‘‘§ 3724. Action of the Directors

‘‘(a) IN GENERAL.—The Directors, with the written concurrence of a majority of

all of the Directors then holding office, shall establish rates for products in the noncompetitive category of mail in accordance with the requirements of this subchapter

and the policies of this title.

‘‘(b) PROCEDURES.—

‘‘(1) IN GENERAL.—Rates under this section shall be established in writing,

complete with a statement of explanation and justification.

‘‘(2) PUBLICATION.—The Directors shall cause each such decision and statement to be published in the Federal Register at least 45 days before the rate

or rates to which they pertain take effect.

‘‘(c) LIMITATIONS ON AUTHORITY.—

‘‘(1) IN GENERAL.—Except as provided in paragraph (2)—

‘‘(A) FREQUENCY.—Ratemaking authority under this section may not be

exercised more than once for purposes of any year.

‘‘(B) UNIFORM EFFECTIVE DATE.—All changes in rates pursuant to this

section shall take effect beginning on the same date.

‘‘(2) EXCEPTION FOR CHANGE DUE TO EXIGENT CIRCUMSTANCES.—

‘‘(A) IN GENERAL.—If the maximum rate allowable for a product in a

year changes pursuant to a request granted under section 3723(f), then, in

the event that ratemaking authority under this section was previously exercised with respect to such product for such year, such rate may be modified,

not more than once more in such year, based on the change in the maximum rate allowable.

‘‘(B) UNIFORM EFFECTIVE DATE.—All changes in rates pursuant to this

paragraph shall, to the extent based on the same change in the maximum

rate allowable, take effect beginning on the same date.

‘‘(d) EXCEPTION TO REQUIREMENT RELATING TO UNIFORM APPLICABILITY OF

EACH MAXIMUM.—

‘‘(1) DEFINITIONS.—For purposes of this subsection—

‘‘(A) SUBORDINATE UNIT.—The term ‘subordinate unit’, with respect to

a product, means a subclass or other similar subordinate unit of such product, as described in subparagraph (A) of section 3721(3).

‘‘(B) FURTHER SUBORDINATE UNIT.—The term ‘further subordinate unit’,

with respect to a subordinate unit, means a further subordinate unit thereof, as described in subparagraph (B) of section 3721(3).

‘‘(2) APPLICABILITY.—This subsection applies with respect to the second,

third, and fourth baskets of products.

‘‘(3) RULE.—

‘‘(A) IN GENERAL.—Notwithstanding the uniformity requirement in section 3723(d), for purposes of establishing rates for further subordinate units

of any particular subordinate unit of a product, rates may be established

at such levels as the Directors consider appropriate, subject to subparagraph (B).

‘‘(B) REQUIREMENT.—The rates so established may not exceed the maximum rates established for such further subordinate units in accordance

with subparagraph (C).

‘‘(C) ALTERNATIVE MAXIMUM RATES.—Alternative maximum rates may

be established under this subparagraph by using adjustment factors (other

than those that would otherwise apply absent this subsection) fixed at levels which the Directors consider appropriate, so long as the resulting average maximum rate, for the further subordinate units comprising such subordinate unit (determined separately for each successive level, if there are

2 or more levels of further subordinate units), remains equal to the maximum rate that would otherwise apply with respect to those further subordinate units.

‘‘(e) FINALITY OF DECISIONS.—Decisions of the Postal Service under this section

shall be final and shall not be subject to administrative or judicial review.

‘‘SUBCHAPTER III—RATES AND FEES FOR PRODUCTS IN THE

COMPETITIVE CATEGORY OF MAIL

‘‘§ 3741. Definitions

‘‘For purposes of this subchapter—

‘‘(1) YEAR, PRODUCT, RATE, ETC.—The terms ‘year’, ‘product’, ‘rate’, and

‘product in the noncompetitive category of mail’ each has the meaning given

such term by section 3721, unless the context otherwise requires.

22

‘‘(2) PRODUCTS IN THE COMPETITIVE CATEGORY OF MAIL.—The term ‘products

in the competitive category of mail’ means—

‘‘(A) priority mail;

‘‘(B) expedited mail;

‘‘(C) mailgrams;

‘‘(D) international mail;

‘‘(E) parcel post;

‘‘(F) special services; and

‘‘(G) any product transferred to the competitive category of mail under

section 3743;

except that such term does not include any product then currently in the noncompetitive category of mail.

‘‘(3) RULE OF CONSTRUCTION.—

‘‘(A) IN GENERAL.—Mail matter referred to in paragraph (2) shall, for

purposes of such paragraph, be considered to have the meaning given them

under the mail classification schedule (within the meaning of section 3623)

as of the effective date of this chapter.

‘‘(B) UPDATES.—The Board of Directors shall, whenever any relevant

change occurs (pursuant to a reclassification under chapter 36, a transfer

of a product from the noncompetitive category of mail under section 3743,

or the conversion of an experimental product under subchapter IV to a permanent one), prescribe a new list of products under subparagraphs (A)

through (G) of paragraph (2). The revised list shall indicate how and when

any previous list is superseded.

‘‘§ 3742. Action of the Directors

‘‘(a) IN GENERAL.—The Directors, with the written concurrence of a majority of

all of the Directors then holding office, shall establish rates for products in the competitive category of mail.

‘‘(b) REQUIREMENTS.—Rates under this section shall be established in accordance with the policies of this title and the requirement that each product in the

competitive category of mail bear the direct and indirect postal costs attributable

to such product plus a reasonable contribution to all other costs of the Postal Service.

‘‘(c) PROCEDURES.—Subsections (b), (c)(1), and (e) of section 3724 shall apply

with respect to rates and decisions under this section.

‘‘§ 3743. Transfers of products from the noncompetitive category of mail

‘‘(a) IN GENERAL.—The Postal Service or users of the mails may from time to

time request the Postal Rate Commission to submit, or the Commission may submit

to the Directors on its own initiative, a recommended decision on transferring one

or more products in the noncompetitive category of mail to the competitive category

of mail.

‘‘(b) CRITERIA.—A recommended decision under this section shall be made in accordance with the policies of this title and taking into consideration the availability

and nature of enterprises in the private sector engaged in the delivery of the product involved.

‘‘(c) PROCEDURES.—If the Commission receives a request under subsection (a) or

decides to act on its own initiative, the Commission shall, after proceedings in conformity with section 3624, issue a recommended decision which shall be acted upon

in accordance with the provisions of section 3625 and subject to review in accordance with the provisions of section 3628.

‘‘§ 3744. Application of antitrust laws

‘‘(a) APPLICABILITY OF THE ANTITRUST LAWS.—The antitrust laws shall apply

with respect to the Postal Service to the extent that the Postal Service engages in

conduct with respect to—

‘‘(1) any product in the competitive category of mail; and

‘‘(2) any product offered pursuant to a market test under subchapter IV.

‘‘(b) DEFINITION.—For purposes of subsection (a), the term ‘antitrust laws’ has

the meaning given such term in subsection (a) of the first section of the Clayton Act

(15 U.S.C. 12(a)), but includes section 5 of the Federal Trade Commission Act (15

U.S.C. 45) to the extent that such section 5 applies to unfair methods of competition.

‘‘(c) EFFECTIVE DATE.—This section shall not apply with respect to conduct occurring before the effective date of this chapter.

23

‘‘SUBCHAPTER IV—MARKET TESTS OF EXPERIMENTAL PRODUCTS

‘‘§ 3761. Market tests

‘‘(a) IN GENERAL.—The Postal Service may conduct market tests of experimental

products. Subject to the provisions of this section, the conducting of any such market test by the Postal Service shall not be limited by any lack of specific authority

under this title to take the action contemplated, or by any provision of this title or

any rule or regulation prescribed under this title which is inconsistent with the action.‘‘(b) PROCEDURAL REQUIREMENTS.—Before conducting a market test, the Postal

Service shall— ‘‘(1) develop a plan for such test which identifies— ‘‘(A) the purposes of the test (and how they comport with the provisions

of section 101); ‘‘(B) the duration;

‘‘(C) the anticipated costs for each year;

‘‘(D) the anticipated revenues for each year;

‘‘(E) a specific description of any aspect of the test for which there is

a lack of specific authority; and ‘‘(F) a specific citation to any provision of law, rule, or regulation which,

if not waived under this section, would prohibit the conducting of the test,

or any part of the test as proposed;

‘‘(2) at least 60 days in advance of the date any test proposed under this

section is to take effect— ‘‘(A) publish the plan in the Federal Register;

‘‘(B) submit such plan to each House of Congress; and

‘‘(C) provide notification of the proposed test to officers and employees

likely to be affected by the test. ‘‘(c) RESTRICTIONS.—No market test under this section may provide for a waiver

of— ‘‘(1) any provision of section 410(b)–(d) (or any law applicable to the Postal

Service by virtue of any such provision);

‘‘(2) section 412 or any other provision of law (not otherwise covered by

paragraph (1)) providing for the nondisclosure of names or addresses or any

other information or matter by the Postal Service;

‘‘(3) the limitation on compensation under the last sentence of section

1003(a);

‘‘(4) any provision of chapter 10 (relating to employment within the Postal

Service);

‘‘(5) any provision of chapter 12 or of any collective-bargaining agreement

under such chapter;

‘‘(6) any provision of section 3623(d) (relating to maintaining one or more

classes of mail for the transmission of letters sealed against inspection);

‘‘(7) any provision of law—

‘‘(A) providing for equal employment opportunity through affirmative

action; or

‘‘(B) providing any right or remedy available to any officer or employee

or applicant for employment in the Postal Service; or

‘‘(8) any rule or regulation prescribed under any provision of law referred

to in any of the preceding paragraphs of this subsection.

‘‘(d) LIMITATIONS.—

‘‘(1) DURATION.—Each market test under this section shall terminate not

later than 3 years after such project takes effect, except that the project may

continue beyond the date on which it would otherwise terminate, if proceedings

under subsection (g) are then pending with respect to the product involved.

‘‘(2) DOLLAR LIMITATION.—A market test under this section may not be conducted if the anticipated revenues attributable to such test would, for any calendar year, exceed $100,000,000.

‘‘(e) EMPLOYEES WITHIN BARGAINING UNITS.—Employees within a unit with respect to which a labor organization is accorded exclusive recognition under chapter

12 shall not be included within any market test under this section—

‘‘(1) if the test would violate a collective-bargaining agreement under such

chapter between the Postal Service and the labor organization, unless there is

another written agreement with respect to the test between the Postal Service

and the organization permitting the inclusion; or

‘‘(2) if the test is not covered by such a collective-bargaining agreement,

until there has been consultation or negotiation, as appropriate, by the Postal

Service with the labor organization.

24

‘‘(f) OTHER EMPLOYEES.—Employees within any unit with respect to which a

labor organization has not been accorded exclusive recognition under chapter 12

shall not be included within any market test under this section unless there has

been consultation by the Postal Service regarding the test with the employees in the

unit.‘‘(g) CONVERSION TO PERMANENCE.—A request to make an experimental product

(as referred to in subsection (a)) permanent— ‘‘(1) shall be made in accordance with the same requirements as set forth

in section 3743(b); ‘‘(2) shall be subject to the same procedures (including review) as set forth

in section 3743(c), except as provided in subsection (h); and

‘‘(3) may not be considered unless it is made by the Postal Service.

‘‘(h) TIME LIMITATION ON COMMISSION DELIBERATIONS.—For purposes of applying section 3624 (pursuant to subsection (g)(2)) with respect to a request to make

an experimental product permanent—

‘‘(1) section 3624(c) (as deemed to have remained in effect under paragraph

(2)) shall be applied with respect to such request in the same manner as would

have applied in the case of a request made under section 3622 (as last in effect

before being repealed by section 1002); and

‘‘(2) section 3624 (as last in effect before being repealed by section 1002)

shall be deemed to have remained in effect, except that subsection (c) of such

section (as then in effect) shall be applied by substituting—

‘‘(A) ‘6 months’ for ‘10 months’ in paragraph (1) thereof; and

‘‘(B) ‘6-month period’ for ‘10-month period’ in paragraph (2) thereof.

‘‘SUBCHAPTER V—REPORTING REQUIREMENTS AND RELATED

PROVISIONS

‘‘§ 3781. Definition

‘‘For purposes of this subchapter, the term ‘product’ has the meaning given such

term by section 3721(3).

‘‘§ 3782. Reporting requirements

‘‘(a) IN GENERAL.—No later than 3 months after the last day of each fiscal year,

the Postal Service shall submit sufficient information to the Postal Rate Commission to demonstrate that the then current rates for products are in compliance with

all applicable requirements of this title.

‘‘(b) AUDITS.—

‘‘(1) IN GENERAL.—Before submitting any information under subsection (a),

the Postal Service shall have such information audited by an independent professional accounting organization (from outside of government), and such audit

shall be submitted along with the information to which it relates.

‘‘(2) ACCESS TO PAPERS AND SUPPORTING MATERIALS.—

‘‘(A) IN GENERAL.—The Commission shall have access to the working

papers and supporting materials of an auditor in connection with any audit

conducted by such auditor under this subsection.

‘‘(B) CONFIDENTIALITY.—Any information described in paragraph (3) to

which the Commission gains access under subparagraph (A) shall be subject to section 3604(g)(2) in the same way as if the Commission had received notification with respect to such information under section

3604(g)(1).

‘‘(3) IDENTIFICATION OF PROTECTED INFORMATION.—

‘‘(A) IN GENERAL.—The Postal Service shall, in accordance with regulations which it shall prescribe, ensure that—

‘‘(i) any protected information shall, before being furnished to an

auditor under this section, be appropriately identified (including, to the

extent practicable, by being appropriately stamped, labelled, tagged, or

otherwise physically marked); and

‘‘(ii) appropriate measures are taken (such as the inclusion of appropriate terms in any contract or other agreement with the auditor)

to safeguard the security and confidentiality of protected information.

‘‘(B) PROTECTED INFORMATION DEFINED.—For purposes of this paragraph, the term ‘protected information’ means any information which, in

the judgment of the Postal Service, is information of a type which is described in section 410(c) of this title, or exempt from public disclosure under

section 552(b) of title 5.

‘‘(c) ADDITIONAL REQUIREMENTS.—The Postal Service shall submit to the Commission, at the time of making its submissions under subsections (a) and (b)—

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‘‘(1) a copy of the then most recent comprehensive statement under section

2401(b);

‘‘(2) a copy of the then most recent performance plan and program performance reports required under sections 2803 and 2804, respectively; and

‘‘(3) for the most recently completed fiscal year, with respect to each product

in the competitive category of mail, each product in the noncompetitive category

of mail, and each product under subchapter IV—

‘‘(A) market information, including mail volumes;

‘‘(B) postal financial information, including costs to the Postal Service

and revenues;

‘‘(C) measures of the speed and reliability of postal service, including—

‘‘(i) the service standard applicable to each product;

‘‘(ii) the actual level of service (described in terms of speed of delivery and reliability) provided; and

‘‘(iii) the degree of customer satisfaction with the service provided;

and

‘‘(D) any other information that the Commission and the Postal Service

mutually agree upon.

‘‘(d) REGULATIONS.—The Commission shall prescribe regulations specifying the

form and detail of the information required under this section, consistent with otherwise applicable provisions of this title. Such regulations shall give due consideration to avoiding unnecessary or unwarranted administrative effort and expense on

the part of the Postal Service.

‘‘§ 3783. Use of profits

‘‘(a) DEFINITION OF PROFITS.—For purposes of this section, the term ‘profits’,

with respect to any fiscal year, means the amount by which total income of the Postal Service attributable to such year, exceeds total costs of the Postal Service attributable to such year, as determined by the Directors, in writing, in accordance with

generally accepted accounting principles.

‘‘(b) DETERMINATION OF NONCOMPLIANCE.—Not later than 90 days after receiving all the submissions required under section 3782 with respect to a fiscal year,

the Postal Rate Commission shall make a written determination as to—

‘‘(1) whether any rates or fees were placed in effect during such fiscal year

which were not in compliance with applicable provisions of this title;

‘‘(2) whether any performance goals, established under section 2803 or 2804

for such fiscal year, were not met; and

‘‘(3) whether any service standards for such fiscal year were not met, based

on the information under section 3782(c)(3)(C).

‘‘(c) IF NO NONCOMPLIANCE IS FOUND.—If the Commission does not make a

timely determination of noncompliance under subsection (b), or if a timely determination is made under subsection (b) to the effect that no instances of noncompliance occurred, up to 100 percent of the profits (if any) from the preceding fiscal year

may be used by the Postal Service for the purposes described in subsection (e).

‘‘(d) IF ANY NONCOMPLIANCE IS FOUND.—If the Commission makes a timely determination of noncompliance under subsection (b)—

‘‘(1) the Commission may order, based on the seriousness of the noncompliance, that a specific percentage of the previous fiscal year’s profits (if any), not

to exceed 50 percent, be set aside for the purposes described in subsection (f);

and

‘‘(2) up to 100 percent of the remainder of the previous fiscal year’s profits

(if any) may be used by the Postal Service for the purposes described in subsection (e).

‘‘(e) BONUSES.—

‘‘(1) IN GENERAL.—The Postal Service shall establish a program under

which cash bonuses may be paid to officers and employees of the Postal Service

out of any profits which are available for that purpose.

‘‘(2) REQUIREMENTS.—Under the program—

‘‘(A) bonuses may be paid to officers and employees of the Postal Service under criteria which shall be fair and equitable;

‘‘(B) the sole source of funding shall be any profits from any fiscal year,

subject to the application of subsection (d)(1) with respect to such fiscal

year; and

‘‘(C) subject to subsection (h), bonuses shall not be precluded by the

limitation on compensation under the last sentence of section 1003(a).

‘‘(3) DISCRETIONARY NATURE OF PROGRAM.—Nothing in this section shall be

considered to create any entitlement to receive bonuses or to require that any

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portion of the profits from any fiscal year be used for bonuses in excess of whatever amount the Postal Service considers appropriate (if any).

‘‘(4) CONSIDERATIONS RELATING TO THE PORTION OF PROFITS TO BE AVAILABLE FOR BONUSES.—In any decision relating to what portion of the available

profits from any fiscal year shall be available or used for purposes of the payment of bonuses under this subsection, there shall be taken into consideration—

‘‘(A) the duty on the part of the Postal Service to provide efficient and

economical postal services in accordance with the requirements of section

101, section 403, and this chapter; and

‘‘(B) what portion of those profits (if any) should be used—

‘‘(i) to retire debts or other obligations of the Postal Service;

‘‘(ii) to limit future increases in postal rates or fees for products in

the noncompetitive category of mail; or

‘‘(iii) to carry out any other purpose.

‘‘(f) DEDICATION OF FUNDS TOWARD REDUCING RATES AND FEES.—

‘‘(1) IN GENERAL.—Any amounts ordered to be set aside under subsection

(d)(1) may not be used for any purpose other than to defray increases in future

rates and fees for products in the noncompetitive category of mail or to reduce

the rates and fees already in effect for such products.

‘‘(2) COMPLIANCE.—Whenever an order under subsection (d)(1) is issued, the

Postal Service shall include in its next comprehensive statement under section

2401(b) (and each subsequent statement thereunder until the order has been

fully complied with)—

‘‘(A) a statement of the measures which have been or will be implemented in order to comply with the order;

‘‘(B) the amount of savings actually passed on to mailers during the reporting period, as compared to the estimated savings for such period; and

‘‘(C) what measures, if any, have been or will be implemented in order

to reconcile any difference identified under subparagraph (B).

‘‘(3) NONREDUNDANT INFORMATION.—Nothing in paragraph (2) shall be considered to require that the same information be reported if included in a previous report under this subsection.

‘‘(g) PROCEDURES.—The provisions of sections 556 and 557 of title 5 shall not

apply to any review carried out by the Commission under this section.

‘‘(h) REPORTING REQUIREMENT.—Included in its comprehensive statement under

section 2401(b) for any period shall be—

‘‘(1) the name of each person receiving a bonus during such period which

would not have been allowable but for the provisions of subsection (e)(2)(C);

‘‘(2) the amount of the bonus; and

‘‘(3) the amount by which the limitation referred to in subsection (e)(2)(C)

was exceeded.’’.

(b) REPRESENTATION IN AN ANTITRUST ACTION.—Section 409(d) of title 39,

United States Code, is amended by striking ‘‘(d) The’’ and inserting ‘‘(d)(1) Except

in any instance in which the Postal Service elects to employ attorneys under paragraph (2), the’’ and by adding at the end the following:

‘‘(2)(A) As used in this paragraph, the term ‘antitrust laws’ has the meaning

given to it by section 3744(b).

‘‘(B) The Postal Service may, in connection with any litigation brought against

the Postal Service under any of the antitrust laws, employ attorneys by contract or

otherwise to conduct litigation on its behalf without regard to any provision of paragraph (1).’’.

(c) TECHNICAL AND CONFORMING AMENDMENTS.—

(1) Section 410(c)(4) of title 39, United States Code, is amended by inserting

‘‘or 37’’ after ‘‘36’’.

(2) Section 409(a) of title 39, United States Code, is amended by striking

‘‘section 3628’’ and inserting ‘‘section 3628 (or any provision of this title incorporating such section by reference) or section 3723(g)’’.

SEC. 1002. TERMINATION OF RATEMAKING AUTHORITY UNDER CHAPTER 36 AND RELATED

MATTERS.

(a) AUTHORITY TO FIX RATES AND CLASSES.—Section 3621 of title 39, United

States Code, is amended—

(1) in the first sentence by striking ‘‘this chapter’’ and inserting ‘‘this chapter and chapter 37’’;

(2) by repealing the last 2 sentences.

(b) RATES AND FEES.—

(1) IN GENERAL.—Section 3622 of title 39, United States Code, is repealed.

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(2) CLERICAL AMENDMENT.—The item relating to section 3622 in the table

of sections at the beginning of chapter 36 of such title 39 is repealed.

(c) RECOMMENDED DECISIONS OF COMMISSION.—Section 3624 of title 39, United

States Code, is amended— (1) in subsection (a) by striking ‘‘section 3622 or 3623’’ and inserting ‘‘sec- tion 3623’’;

(2) by repealing subsection (c); and

(3) in subsection (d)— (A) by striking ‘‘rate, fee, or’’; and

(B) by striking ‘‘section 3622 or 3623, as the case may be.’’ and inserting ‘‘section 3623.’’. (d) ACTION OF THE GOVERNORS.—Section 3625 of title 39, United States Code,

is amended— (1) in the third sentence of subsection (d)— (A) by striking ‘‘(1)’’; and

(B) by striking ‘‘chapter, and (2)’’ and all that follows through the period and inserting ‘‘chapter and chapter 37, respectively.’’; and

(2) by amending subsection (f) to read as follows: ‘‘(f) Except as otherwise provided in this title, the Board shall determine— ‘‘(1) the date on which any changes in the mail classification schedule

(whether made under this chapter or chapter 37) shall become effective; and ‘‘(2) the date on which new rates and fees under chapter 37 shall become

effective.’’. (e) REDUCED-RATE CATEGORIES OF MAIL.— (1) CONTINUED APPLICABILITY OF RELEVANT PROVISIONS OF CHAPTER 36 FOR

THE LIMITED PURPOSE OF COMPUTING ALTERNATIVE RATE LIMITATIONS FOR NON- COMPETITIVE PRODUCTS.—Notwithstanding any other provision of this Act (or

any amendment made by this Act), the rate of postage established under subchapter II of chapter 37 of title 39, United States Code, as amended by this Act,

for a class of mail or kind of mailer referred to in section 3626(a)(1) of such title

may not, at any time, exceed the lesser of— (A) the maximum rate then otherwise allowable under chapter 37 (determined as if this subsection had not been enacted) for such class of mail

or kind of mailer; or

(B) the rate determined under paragraph (2) for such class of mail or

kind of mailer.

(2) DETERMINATION OF RATES WHICH WOULD THEN OTHERWISE APPLY UNDER

CHAPTER 36.— (A) IN GENERAL.—For purposes of paragraph (1)(B), the United States

Postal Service shall determine, and subsequently revise whenever necessary in order to keep determinations under this paragraph current, the

rate of postage which would then otherwise apply with respect to each class

of mail or kind of mailer referred to in section 3626(a)(1) of such title 39.

(B) METHODOLOGY.—Subparagraph (A) shall be carried out—

(i) by applying the provisions of paragraphs (2) through (5) of section 3626(a) and of section 3642 of such title 39; and

(ii) by using the then most recent information available to the Postal Service relating to costs attributable and institutional costs (within

the meaning of the provisions referred to in clause (i)).

(3) LIMITATION UNDER THIS SUBSECTION TO BE USED INSTEAD OF (AND TO BE

TREATED AS) THE LIMITATION UNDER SECTION 3722.—The maximum rate determined for a product under this subsection shall, for all purposes (except paragraph (1)(A)), be used instead of (and shall be treated as) the maximum rate

allowable for such product under section 3722 of such title 39.

(4) STATEMENT OF LIMITED PURPOSE.—Section 3626(a) of such title 39 is

amended by adding at the end the following:

‘‘(6) Neither this subsection nor section 3642 shall have any force or effect, except for purposes of section 1002(e) of the Postal Reform Act of 1997. Nothing in

the preceding sentence shall be considered to affect any baseline rate established

pursuant to section 3701.’’.

(5) REGULATIONS.—The United States Postal Service shall prescribe such

regulations as may be necessary to carry out the provisions of sections 3626 (including subsections (b) through (n) thereof) and 3642 of such title 39 (as amended by this Act) in a manner consistent with chapter 37 of such title 39 (as

amended by this Act) and with the purposes of this Act.

(f) OTHER TEMPORARY RATES.—

(1) IN GENERAL.—Section 3641 of title 39, United States Code, is amended—

(A) by repealing subsections (a) through (d); and

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(B) in subsection (f) by striking ‘‘in rates of postage, and fees for postal

services, or’’.

(2) CLERICAL AMENDMENTS.—

(A)(i) The heading for section 3641 of such title 39 is amended to read

as follows:

‘‘§ 3641. Temporary changes in classes’’.

(ii) The item relating to section 3641 in the table of sections at the beginning of chapter 36 of such title 39 is amended to read as follows:

‘‘3641. Temporary changes in classes.’’.

(B)(i) The heading for subchapter III of chapter 36 of such title 39 is

amended to read as follows:

‘‘SUBCHAPTER II—TEMPORARY CLASSES’’.

(ii) The analysis for chapter 36 of such title 39 is amended by striking

the item relating to subchapter II and inserting the following:

‘‘SUBCHAPTER II—TEMPORARY CLASSES’’.

(g) RATE AND SERVICE COMPLAINTS.—Section 3662 of title 39, United States

Code, is amended to read as follows:

‘‘§ 3662. Rate and service complaints

‘‘(a) Interested parties who believe the Postal Service is charging rates which

do not conform to the policies set out in this title or who believe that they are not

receiving postal service in accordance with the policies of this title may lodge a complaint with the Postal Rate Commission in such form and in such manner as it may

prescribe. The Commission may in its discretion hold hearings on such complaint.

‘‘(b)(1) If the Commission, in a classification matter covered by subchapter II,

determines the complaint to be justified, it shall, after proceedings in conformity

with section 3624, issue a recommended decision which shall be acted upon in accordance with the provisions of section 3625 and subject to review in accordance

with the provisions of section 3628.

‘‘(2) If a violation of a limitation under section 3722 or 3724(d) (relating to the

maximum rate allowable for products in the noncompetitive category of mail) or section 3742(b) (relating to requirements applicable with respect to rates established

for products in the competitive category of mail) is involved, it may issue an appropriate order under section 3783.

‘‘(3) If a matter other than a matter covered by paragraph (1) or (2) is involved,

and the Commission after a hearing finds the complaint to be justified, it shall

render a public report thereon to the Postal Service which shall take such action

as it deems appropriate.’’.

(h) LIMITATIONS.—Section 3684 of title 39, United States Code, is amended by

striking ‘‘or 34’’ and inserting ‘‘34, or 37’’.

(i) MAIL CLASSIFICATION.—Section 3623 of title 39, United States Code, is

amended—

(1) by repealing subsection (a);

(2) in subsection (b) by striking ‘‘Following the establishment of the mail

classification schedule requested under subsection (a) of this section, the’’ and

inserting ‘‘The’’;

(3) in subsection (c) (in the matter before paragraph (1)) by striking ‘‘this

title’’ and inserting ‘‘this title, subsection (e),’’; and

(4) by adding at the end the following:

‘‘(e)(1) Any change under this subchapter in the mail classification system shall

be in accordance with the requirements of paragraph (2).

‘‘(2) The requirements of this paragraph are as follows:

‘‘(A) A product may not be reclassified from the competitive to the noncompetitive category of mail.

‘‘(B) The reclassification of a product from one basket to another basket of

the noncompetitive category of mail shall not be effective during a ratemaking

cycle unless notice of the final decision on the reclassification is given to the

Postal Rate Commission before the start of proceedings under section 3723(b)

in connection with such cycle.

‘‘(C)(i) A new product may not be made available to the public before it has

been placed in—

‘‘(I) either the competitive or the noncompetitive category of mail; and

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‘‘(II) if placed in the noncompetitive category of mail, the appropriate

basket thereof.

‘‘(ii) Any decision as to whether a new product should be placed in the competitive or the noncompetitive category of mail shall be made in accordance with

the requirements set forth in section 3743(b). Such requirements shall be specifically addressed in any statement required under section 3624(d) with respect

to such decision.

‘‘(3) For purposes of this subsection—

‘‘(A) the term ‘product’ has the meaning given such term by section 3721(3);

‘‘(B) the term ‘noncompetitive category of mail’ refers to the category of mail

under subchapter II of chapter 37;

‘‘(C) the term ‘competitive category of mail’ refers to the category of mail

under subchapter III of chapter 37;

‘‘(D) the term ‘basket’ refers to a basket under paragraph (3), (4), (5), or (6)

of section 3723(a);

‘‘(E) the term ‘ratemaking cycle’ has the meaning given such term by section 3723(a)(1); and

‘‘(F) the term ‘new product’ means a product which, as of the effective date

of this subsection, is not available to the public through the Postal Service.’’.

(j) EFFECTIVE DATE.—This section and the amendments made by this section

shall become effective on the effective date of the baseline rates and fees established

pursuant to section 3701 of title 39, United States Code, as amended by section

1001.

Mr. FATTAH. Thank you, Mr. Chairman.

I will ask that my opening statement be entered for the record,

and also an opportunity for all subcommittee members to extend

and revise their remarks for the record.

There is a lot to get through this morning so I want to be as expeditious as possible, but I do want to welcome the guests, and

given the present ratemaking structure involving the Postal Service, I guess there is a question about which basket all of us belong

in, because it is a procedure that does cry out for reform.

We talk, we use that term a lot around here, but I think that

the chairman is sincere in his efforts to actually have this be a reform that actually improves the provision of universal service and

delivery, and it is fair for all involved. Obviously, we need to balance the Postal Service’s needs for an expedited process for pricing

purposes, but we have to balance that in terms of the public’s concern for fairness and accountability, and I look forward to the testimony, and I want to welcome my own constituent from the Wharton School who is here today, and look forward to hearing from all

of you and any stock market tips you want to impart.

Thank you very much.

Mr. MCHUGH. I appreciate the gentleman’s comments and his interest in expediting the process.

As he noted, both his and all other Members’ statements will be

entered into the record in their entirety, without objection.

Before we go through the required exercise of swearing in the

members of the panel today, let me take a moment to introduce

them in the order in which they are printed on this sheet, which

has no relation to anything other than that is how they are printed

on the sheet.

The first is John Kwoka, who is economics professor at George

Washington University; Mr. Kenneth Rose, senior economist at the

National Regulatory Research Institute; Joel Popkin, who is president of the Joel Popkin and Co.; Gregory Sidak, who is resident

scholar at the American Enterprise Institute for Public Policy Research; Mr. Paul Kleindorfer, who is a professor of economics at the

30

University of Pennsylvania, as you just heard; and he is joined by

Mike Crew, economics professor at Rutgers University.

Before we do the swearing in, I note that the gentleman from

New York, Mr. Gilman, has joined us, and I would be happy to

yield to him for any comment he would like to make at this time.

Mr. GILMAN. I know that you are anxious to get on with the testimony.

Mr. MCHUGH. Thank you very much. I appreciate the gentleman’s understanding.

With that, I would like to ask the panel members to please rise,

and I will tell you this is committee practice. It has nothing to do

with our doubt of your veracity, but if you will, raise your right

hand and repeat after me.

[Witnesses sworn.].

Mr. MCHUGH. Thank you. The record will show that all of the

panel members responded to the oath in the affirmative.

With that, let me begin on my right, your left, with John Kwoka.

We have all of your testimony in its entirety and made it a part

of the record, and that is a very important part of the process. It

will be considered in its entirety, I guarantee you, if for no other

reason than I don’t read something as in-depth as that and then

don’t use it. It would be helpful.

But we do not have time here today for each of you to present

your testimony so we would ask you to limit your remarks to 10

minutes or so, and highlight it as you feel is appropriate. So with

that, Mr. John Kwoka, welcome, sir, and our attention is yours.

STATEMENT OF JOHN KWOKA, ECONOMICS PROFESSOR,

GEORGE WASHINGTON UNIVERSITY

Mr. KWOKA. Thank you, Mr. Chairman and members of the subcommittee. I appreciate your invitation to appear here today to talk

about price caps for the Postal Service. I will try to summarize in

just a few minutes the major points of the testimony that, as you

said, I have submitted for the record.

A decade ago, price caps seemed like a novel experiment. Some

even said it was a radical idea. I remember this well since 10 years

ago, exactly at that time, I was on leave from George Washington

University working at the Federal Communications Commission on

price caps for the telecommunications industry. The price cap plan

that I worked on at the time went into effect for AT&T in 1989,

and for the major local exchange carriers in 1991.

Since that time, most State public utility commissions have

adopted price caps or similar earnings sharing plans for local telephone service. Price caps and other forms of incentive regulation

are also now widely used in our electric power industry. On last

count, over 40 States have either price caps or other forms of performance-based ratemaking in place for their electric utilities.

In the U.K., British Telecom has been subject to price caps since

1984. So too has been their National Grid Co., the 12 regional electric companies, British Gas, water distribution, water supply companies, and parts of the British Airports Authority.

So price caps, in short, over the past 10 or 15 years, have quite

rapidly replaced cost-based ratemaking, rate of return regulation,

as the mechanism of choice for overseeing franchise monopolies and

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dominant companies generally, and the reasons are well-known to

everyone here. Rate of return regulation creates effectively a zero

sum gain, where any cost savings achieved by the company are

quickly recaptured.

Price caps offers companies a deal. Prices are fixed so that consumers may be made better off than under conventional regulation,

but the company gets to keep at least a portion of the further cost

savings that it achieves.

The record compiled under price caps, particularly for the companies that I have mentioned, shows that price cap plans can, in fact,

work very well. Consider AT&T. At the first review of the price cap

performance for AT&T in 1993, the first review 4 years after the

inauguration of the plan, the Federal Communications Commission

concluded that the added productivity gains that were passed on to

consumers in the preceding 4 years totaled $900 million. At the

very same time, through that same 4-year period, AT&T’s rate of

return had risen by a full percentage point, to 13.2 percent, a full

percentage point above that last prescribed under rate of return

regulation. Taken at face value, this illustrates perfectly the positive sum nature of the gain that price caps create in place of rate

of return.

It may in fact be a measure of the success of the AT&T plan that

there has never been a second performance review. In fact, beginning in 1991, and concluding last year in 1996, the FCC determined in a series of actions that groups of services previously subject to price caps could be altogether deregulated. Now essentially

all of AT&T’s prices are set in an unregulated market so that in

fact that very important chapter of the history of price caps is now

closed.

Most but not all economic studies of the effectiveness of price

caps corroborate the favorable assessment of price caps for AT&T.

There have been a number of economic studies of which I am

aware and which are cited in my written statement. Several of

these find that in States with incentive regulation and price caps,

telephone service prices are from 4 to 18 percent lower than in

States that do not have any incentive regulation in place.

But it’s important to point out that at least one study finds some

contrary evidence, and all studies find considerable variation in the

kind of outcomes that are achieved. The reason is that not all price

cap plans work equally well, and in fact some may not work well

at all. The reasons are several and are worth enumerating.

Some plans are adopted for companies in particularly difficult

business circumstances. Those sorts of contexts are not likely to result in particularly favorable outcomes after an interval of time

where the price cap plan is, even after some interval of time that

the price cap plan may have been in place not, however, through

any fault, necessarily, of the plan itself.

Another difficulty in identifying or being certain of the effects of

price cap plans is that many are experimental in nature. This may

induce companies to front load benefits in order to ensure continuation of the plan, and not all of the initial benefits may persist in

the longer term. Most fundamentally the degree of success of these

plans depends on the provisions—the particular provisions—of the

plans themselves.

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Let me offer some observations about the aspects of the plans

that I think are most decisive in influencing their prospects for success, with some reference to their applicability to the Postal Service.

First and foremost, a good price cap plan must work to the advantage of both consumers and the companies. If it does not, it will

be seen as serving one party’s interests and it will soon be discredited. For a price cap plan to have consumer benefit, price must, on

average, be lower than under alternative regulation. This requires

a pricing formula that demonstrably brings price down, at least for

critical consumer services. That requires in turn a choice of a price

index and productivity offset, as I discuss in my written testimony,

together perhaps with baskets and pricing bands, that reflect important policy interests.

Plans with poorly chosen price formulas, and there have been

some in this country and elsewhere, have not succeeded. For a

price cap plan to benefit the company, there must be strong incentives for true cost savings. This requires a commitment on the part

of those who initiate regulation to allow the enterprise, in fact, to

retain the added earnings from truly superior efficiencies that may

be achieved. In the case of the Postal Service, this task is made

more difficult, as we recognize, by the fact that there are no private

shareholders to insist that the enterprise minimize cost or maximize profit.

The alternative would appear to be an incentive structure to motivate and reward officers and employees in a fashion that adequately compensates for the added productivity gains that are

being sought. Plans where efficiency benefits are not clear, not adequately rewarded, or subject to manipulation have not succeeded,

and there have been examples of that both here and abroad.

In addition, there may be legitimate concerns about service quality since quality erosion lowers cost, and for that reason may

produce earnings to the company. There’s no systematic evidence

of which I am aware that price cap plans suffer from this problem

as a general rule, but there are any number of anecdotal experiences that underscore the fact that service quality requires continued vigilance.

Finally, nothing helps a successful adoption and launch of a price

cap plan quite so much as keeping the task simple. To the extent

that additional issues can be postponed and added complexity

avoided, to the extent that other objectives need not be considered

at the same time, then the cut-over to rate of return or cost-based

regulation will be facilitated.

So issues such as entry into new markets, universal service, and

rate initialization may all deserve consideration. Indeed they do,

but since none is distinctive to price caps, it may be advisable to

separate those issues from the simple choice between a superior

versus are inferior mechanism of regulation and allow those other

issues to be revisited separately at an appropriate time.

Thank you very much, Mr. Chairman, and members of the committee. I will be happy to answer questions at any time.

Mr. MCHUGH. Thank you, Mr. Kwoka.

[The prepared statement of Mr. Kwoka follows:]

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Mr. MCHUGH. I think in order to keep some continuity here, we

should hear from all the panelists and engage in whatever followup

discussion is appropriate. So Dr. Rose, if you would please give us

your presentation now, and we appreciate you being here.

STATEMENT OF KENNETH ROSE, SENIOR ECONOMIST, THE

NATIONAL REGULATORY RESEARCH INSTITUTE

Mr. ROSE. Thank you, Mr. Chairman, and thank you to the other

members of the subcommittee and staff.

What I primarily do is work with utility regulation, and actually

primarily electric regulation, so looking at price caps being applied

to something that I haven’t previously done any work in before was

quite interesting, and I enjoyed the opportunity to do that and I

thank you for asking me to participate in this.

I am going to try to bottom line it as best I can for how I think

price caps would work for Postal Service regulation. I will first

paint a little picture of the issue that’s probably not much different

than what Professor Kwoka outlined.

There’s a survey in my written testimony that outlines some of

the details of the specifics of the plans that the States are doing,

and I won’t go into detail, but just say right now in telecommunications at the State level, price caps is really the norm now, it’s not

really the exception anymore. It’s not—could hardly be called an alternative form of regulation, although it is more rare for gas and

electric utilities. In fact, it was just starting to get off the ground

a little bit for electric when the restructuring of the industry hit,

it seems to have stalled in that industry at the moment.

In general, I would say that price caps have obtained the initial

objective of holding down costs and prices and increase productivity. While there is some contradiction in the literature on that,

it seems to be pointing in that direction.

There does appear to be a problem with quality of service, and

as Professor Kwoka pointed out, the academic literature and some

of the studies are contradictory on that, but the States, if you talk

to people in several States that have actually implemented price

caps, they are quite convinced that there is a problem with service

quality degradation. They have instituted plans to make sure that

that doesn’t get to an alarming level. In the survey, as I mentioned,

we found that there were 16 States that have a quality of service

mandate of some kind and I think it’s safe to say that the number

appears to be rising over time.

One fortunate thing about quality of service, though, is that it

can be mitigated; this isn’t an insurmountable problem. It’s something that has to be looked at, and I would recommend some kind

of provision be put into the law.

My reading of H.R. 22 has quality of service provisions in two

different places, one for the establishment of the initial rate, it appears to be mentioned also when determining the adjustment factor, quality of service is also mentioned again, which seems to give

the PRC some latitude in adjusting the prices of the Postal Service

to account for any decrease in the quality of service. However, it

wasn’t clear to me if the PRC would be able to impose some kind

of financial penalty after the initial rate has been set and in between the adjustments being made. States have done it in several

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ways to implement these penalties. One way is to add something

to the productivity factor, they decrease the amount of the potential increase, or increase the amount of the decrease, depending on

the relative size of the price index and the productivity index.

I think what it comes down to is if a regulator is thinking about

whether to have cost of service regulation or price cap regulation,

one way of looking at it is to ask which is easier to monitor. Is it

easier to monitor the cost, which is very costly, of course, we have

learned from the utility experience, prudence reviews, very intensive rate cases that last a long time, sometimes up to 2 years or

more and often are litigated past that, or is it easier to monitor

quality of service? I would argue it’s easier to monitor quality of

service, and my read on Postal Service regulation is I think it’s

true there as well.

My largest concern that I have, though, in applying price caps

at the Postal Service was one significant difference, I think there

is between with the Postal Service with utilities. This is primarily

what it is that motivates them. Price caps are really effective, I

think it was just obvious, because it picks up on the drive for profits as really the motivating factor, or to avoid the imposition of

some kind of penalty. And while the Postal Service I understand

is financially independent and is regulated by the PRC, and in that

sense it’s very similar to a utility, in many other ways it’s very different. I think that’s one striking difference.

In the case of a price caps, the harder a firm works, the more

potential the firm can gain. There are some limits in H.R. 22 that

seem to diminish perhaps any kind of an incentive proposal, although there were bonus provisions in there. Perhaps to get around

this limitation, one way would be to enhance or strengthen the

bonus provisions that are already in H.R. 22 or allow the PRC to

decide how to do that.

I think it comes down to a matter of what’s the objective. If the

objective is to make Postal Service regulation easier, then the price

caps may be a viable alternative because it will probably be easier

to monitor things like quality than things like cost. If the objective

is to really lower cost and get the prices down and increase productivity of the Postal Service, then I am somewhat in doubt whether

or not you will get that response from the Postal Service, given the

kind of incentive structure that they have and the possibility of a

dampening effect because they don’t have a profit motive.

Let me summarize by saying that price caps have been successful

in lowering prices and increasing productivity. There’s little doubt

in my mind that it has reached that objective. Quality of service

may be a problem, and at the very least it ought to be monitored.

The evidence that we have, even though it may be anecdotal, suggests to me it’s not something that should be overlooked.

There is an opportunity I think to use price caps here for the

Postal Service, but with the caveat that perhaps some kind of

strengthening of incentives or penalties that might be imposed for

any possible future decrease in quality of service, those provisions

may be strengthened to get the desired effect your subcommittee

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is after.

Thank you very much, Mr. Chairman.

Mr. MCHUGH. Thank you, Dr. Rose, for your comments and your

prepared testimony.

[The prepared statement of Mr. Rose follows:]

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Mr. MCHUGH. Next we have Dr. Joel Popkin. Sir, welcome.

STATEMENT OF JOEL POPKIN, PRESIDENT, JOEL POPKIN AND

CO.

Mr. POPKIN. Thank you, Mr. Chairman, and I appreciate the invitation to appear before you and the members of the committee

today.

My testimony has essentially two parts. The first part is presentation of the background against which this legislation is being considered, the economics of the Postal Service at present, so to speak.

And the second part has to do with specific details of H.R. 22. I

would say, on average, looking at the data available from the Government and other sources, the performance of the Postal Service

since its reorganization in 1971 has been a little bit better than

that of the average U.S. private business. And that’s even more remarkable, I think, when account is taken of the fact that the Postal

Service has the obligation to provide universal service at uniform

rates. So I think the Postal Service, as these charts will demonstrate, has been functioning quite well.

The first chart shows the price performance of the Postal Service.

You can see the price of all postal services, the BLS number, shows

it at all times below the Consumer Price Index. The thing that always strikes me about that is I am not sure that should be the

standard. The Postal Service is a service industry, and I think the

standard ought to be the CPI for consumer services, and as you can

see, that’s gone up quite a bit faster than the price of postage.

The next chart takes a look at the wage performance of the Postal Service. The top line is the employment cost index for private

nonfarm workers. The lower line is the rate of pay for a level 5,

step 0 postal worker. Your typical postal worker is in level 5, step

0, and you can see that postal wages, looks like since about 1981,

have lagged behind private sector wages in general.

Can we have the next chart, please?

Now, here is another measure of wage performance. This takes

a look at the pay structure of the Postal Service; it takes account

of step promotions and changes in the number of steps in each

grade and takes a look at the average amount of straight time

hourly pay the Postal Service pays its employees. And you can see

that that lags even further behind the employment cost index for

private sector workers. On average, the pay of postal—the real pay,

inflation-adjusted pay of postal workers has declined at an average

annual rate of five-tenths of 1 percent over the period of time we

are looking at.

The next thing is the productivity of the postal workers. Here we

have private nonfarm unit labor costs. That’s wages minus productivity. And for the private sector, you have the blue line, for the

APWU bargaining unit using BLS measure of output, a pink line.

You can see that those unit labor costs have gone up less than the

private economy, and in fact, if you just use pieces of mail, a cruder

measure, not as sophisticated as the BLS measure, you can see

that the average unit labor costs have fallen even further behind

those of the private nonfarm sector.

Now, if all these things are true, some good things must be happening to the Postal Service, and in fact I think the next charts

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show that. This is the—these are the major industries that comprise the U.S. communication and transportation sectors. I have

the revenue growth rate, their volume growth rate, and their price

rate over the last 10 years. And you can see that the Postal Service’s revenue has grown at an average annual rate of 6.5 percent.

Now, all of these sectors’ growth rates have grown at an average

annual rate of 5.5 percent, so in fact the Postal Service has grown

faster in terms of market share than the average, which means and

the next chart will demonstrate—you can see the Postal Service,

which is the sort of purple one—just below the white one, I think

that the—I can’t read those increases, but there certainly is an increase of at least a percentage point in market share among communication and transportation sectors of the economy.

Now, a lot of the success of the Postal Service comes from the

fact that its business is—an important part of its business is advertising driven, and the next table shows advertising driven revenues. As you can see cable TV is the leader, 17.1 percent average

annual rate of increase, and I guess that will jump up even more

given the most recent increases that cable TV have announced that

they are going to charge the consumer.

The Postal Service revenues in the advertising field have really

grown second, more than magazines, more than TV, more than

radio, well above the 5.1 percent average annual rate of all advertising driven communications business. This is not a bad performance, and if you go to the next chart, you will see how that looks

on a pie chart.

As I recall, that’s a 3 percentage point increase in market share

in the advertising business. So I want to—I feel comfortable drawing the conclusion that the Postal Service is really doing quite well,

and with that I want to turn to some of the aspects of H.R. 22 that

I think are appropriate for discussion today.

The first thing, and since that table is on the easel, let me call

to your attention the difference in the labor intensity of the different industries that have, some of which have been mentioned

and will be mentioned in subsequent testimony by other panelists.

We have the telephone industry, for example, an industry where

price caps are being used more extensively. The labor costs in the

telephone industry are 24 percent of total costs. That means other

costs make up 76 percent. Radio broadcasting, 42 percent labor

costs. The health services, 51 percent of revenues in health services

go to labor. In the Postal Service, 80 percent of total revenue goes

to labor.

And the conclusion I draw from this is that price caps in an industry that’s as labor intensive as the Postal Service is tantamount

to wage caps. There’s no other way, there’s no more flex in the system. It’s either jobs or wages. There’s no give. In telephone, there’s

give. There are changes in capital investment strategies and that

sort of thing. In the Postal Service, there’s no give.

The other point I want to make has to do with some of the tradeoffs that the bill proposes would be made in order to let the Postal

Service have more flexibility in what’s called the competitive part

of H.R. 22. The point I want to make here is that I am not so sure

that the pro competitive parts of this bill are necessarily worth

some of the things that the Postal Service and the consumer have

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to give up to achieve them. And in particular, as a homeowner, I

can tell you that I really don’t want to invite more traffic up to the

mailbox that’s in the carport in my home. I don’t want ununiformed people accessing my property.

Now, different people may feel differently about that, but it’s

hard enough to keep track of all the people that come onto your

property, and I for one am concerned about the proliferation of people who have access to the front doors and mailboxes of homes.

So I think there are two aspects here of the provisions of H.R.

22 that I want to, that I have tried to draw attention to. I think

that I have demonstrated today using official Government and advertising trade data that the USPS is a quite healthy business, despite having to cope with more than its share of market impacts

from technological impacts.

Postal market shares are growing, particularly in advertising;

postal wages have risen less than other private sector wages;

APWU labor productivity has risen faster than the total private

economy for; and postal rates have risen about as fast as the CPI

and less than the CPI for services. There is really no need to alter

the regulatory environment of the USPS. In fact, the proposed alterations may do both business mailers and consumers more harm

than good.

Thank you, Mr. Chairman.

Mr. MCHUGH. Thank you, Dr. Popkin.

[The prepared statement of Mr. Popkin follows:]

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Mr. MCHUGH. Next, Mr. Gregory Sidak, who as I mentioned is

resident scholar at the American Enterprise Institute. Sir, thank

you for being here. We look forward to your comments.

STATEMENT OF GREGORY SIDAK, RESIDENT SCHOLAR, AMERICAN ENTERPRISE INSTITUTE FOR PUBLIC POLICY RESEARCH

Mr. SIDAK. Thank you, Mr. Chairman.

I would like to say a few words about price caps and relate those

remarks to the scope of the Postal Service’s statutory monopoly and

also the application of the antitrust laws to the Postal Service.

I have three main points to make with respect to price caps.

First is one that came up earlier this morning, and that is that the

Postal Service is a not-for-profit enterprise. So we have to be very

careful about making inferences about how price caps would work

in that nonprofit context, because all of our experience with price

caps really relates to for-profit, private companies that have a

shareholder constituency. The Postal Service is not currently a

profit maximizer. That’s partly by statute because of the regulatory

constraint that is currently in the law; the Postal Service, as a consequence, is not subject to the same forces that a private shareholder-owned company is for its management to try to minimize

costs and maximize profit.

Section 3783(e) of the bill would attempt to create the opportunity for bonuses to be paid to Postal Service employees and officers to try to replicate some of the incentives that exist inside a

private firm. But I don’t think those provisions will go far enough

to replicating what private enterprise is able to do in terms of creating incentives for profit-maximizing, cost-minimizing behavior.

The provisions also invite the question that if Congress believes

that replicating the incentives that exist within private enterprise

would be a good thing for the Postal Service, why not go the whole

way and privatize the enterprise? I don’t believe that’s on the table

right now, so that leaves us to ask how well will the current proposal work in terms of increasing the efficiency of the Postal Service.

The second point about the price caps, is that it’s important not

to lose the forest for the trees here. We should not dive into a technical debate on how best to measure productivity or how best adjust for exogenous changes in cost, and lose sight of the fact that

price caps may not work very well for the reasons I just described

because we are trying to apply them to a nonprofit-maximizing enterprise.

A related point concerns the capital-labor ratios of the Postal

Service. If 80 percent of its total current costs are labor, that does

not necessarily tell us that that is the cost-minimizing capital-labor

ratio. We would want to compare that ratio to private firms that

are providing comparable kinds of services.

A final point relating to price caps is benchmarking. Currently,

one of the advantages of price-cap regulation on a State-by-State

basis is that one State can look to what’s going on in another State.

If a local exchange carrier in Ohio has substantially higher costs

than in Pennsylvania, the regulatory commissions in those two

States can compare notes. The National Association of Regulatory

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Commissions [NARVC] is capable of exchanging that information

on behalf of its commissions.

Now, if price caps are, in effect, an alternative to competition a

way to come up with better regulation and if they are not likely

to work as well in the not-for-profit sector as in the for-profit sector, why don’t we consider the real thing? Why don’t we consider

instilling more competition in the marketplace here?

So that leads to the question of the statutory monopoly that the

Postal Service currently enjoys.

There are two kinds of monopolies. One is the Private Express

Statutes, and the other is the monopoly over the customer’s mailbox. Let me say a few words about the Private Express Statutes

and why I think that more could be done in H.R. 22 to address the

monopoly.

The monopoly covers the term ‘‘letter.’’ It also covers ‘‘packets,’’ which is now an archaic term. The Postal Service in turn has

power to define the scope of that key term of art, ‘‘letter.’’ So in

that sense, the Postal Service has the ability to define the scope of

its own monopoly. This is unlike any kind of regulation of monopoly that we see in other industries where public utility commissions

regulate privately owned firms that are providing utility services.

In addition, the Private Express Statutes appear in the U.S.

Criminal Code. They are criminal prohibitions. The doctrine of

vagueness in constitutional law says that, as a matter of due process, a statute is void and unenforceable if persons ‘‘of common intelligence must necessarily guess at its meaning and differ as to its

application.’’ If we are coming up with extremely complicated definitions of what a letter is, definitions that may be counterintuitive

to many people of common intelligence, that strongly counsels Congress to provide definition try to come up with and to give the authority for flushing out that definition to some neutral body other

than the Postal Service, the recipient of the monopoly privilege.

Let me say a word now about the mailbox monopoly. This provision also is in the criminal code, 18 U.S.C., Section 1725.

I think there are three significant economic consequences of the

mailbox monopoly. First, it enables the Postal Service to raise the

cost of its rivals of making a delivery to its customers. In antitrust

law there’s a theory called ‘‘raising rivals cost,’’ and this is an example of that.

Second, it deters integration by businesses such as banks or utilities, which would have large numbers of mailings going to virtually

every postal customer on a given route. It’s telling that the mailbox

monopoly was not enacted at the same time that the Private Express Statutes were enacted in the 1840’s. It was enacted in 1934,

specifically to counteract vertical integration by these kinds of businesses into the delivery of monthly bills.

The third point about the mailbox monopoly is that it imposes a

cost on the customer as well, in terms of substituting alternative

delivery services for the Postal Service because the customer would

have to build a new receptacle to house the deliveries of a private

delivery service.

I think that the demonstration projects that are proposed in section 704 of H.R. 22 are a good idea, but I think Congress can go

much farther. I think where we should go is down the road of open

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access, much as has taken place in natural gas transmission, wheel

of power, and open access in local telephony. The mailbox can be

thought of as the customer premise equipment of the postal network. In the early 1980’s, the FCC deregulated customer premise

equipment. The result was a proliferation of new kinds of telephones and answering machines and the like, lower prices, and

higher product variety.

The security question that came up a minute ago is a valid consideration. One way to deal with that is to require that any private

carrier that would have access to a customer’s mailbox be licensed

and bonded. We could require be uniformed to facilitate their identification by the customer.

Let me say a word about the antitrust laws. H.R. 22 would extend the antitrust laws explicitly to the Postal Service in section

3744, with respect to the competitive categories of mail and the experimental products that are described in the bill. It’s important to

work through the statutory analysis, though, because that may not

result in extending the antitrust laws quite as far as it might seem

at first examination.

A second point is, why not extend antitrust scrutiny to all services of the Postal Service, including letter mail? In this respect it’s

useful to compare the closest communications industry, the telephony industry. The Bell System was opened up to competition not

through regulatory action but through an antitrust case in which

the former AT&T monopoly vigorously attempted to defend itself on

the grounds that it was regulated by State and Federal commissions and should be exempt from the antitrust laws. Judge Harold

Greene rejected that argument, and I think rightly so. The antitrust laws were applied even to a statutory monopoly. Were that

not the case, we probably would not have had the divestiture of the

Bell System in the way that occurred.

Let me just conclude by saying that my preferred approach is

what I call ‘‘commercialization’’ of the Postal Service. It’s something

that I describe at length in the book that Professor Spulber and I

have written. Basically, it would entail repealing the Private Express Statutes, the mailbox monopoly, and other statutory privileges, but it would also relieve the Postal Service of what we call

‘‘incumbent burdens,’’ including its unique responsibilities for providing universal service. That’s not to say universal service would

end. But it would be funded through a different mechanism than

embedding it in the structure of the mail. All services of the Postal

Service would then be subject to antitrust oversight.

Now, if we couldn’t do the commercialization option, I think that

what we are left with is really stricter public oversight of the Postal Service, which would mean a more vigorous, invasive role for the

Postal Rate Commission. We would have to consider seriously the

option that the mandate review in Canada has proposed, which

would be to require the Postal Service to exit markets that are demonstrably competitive. We would have to explicitly subject the

Postal Service to the antitrust laws. Thank you.

Mr. MCHUGH. Thank you. Well, it’s good to know we all agree.

[The prepared statement of Mr. Sidak follows:]

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Mr. MCHUGH. Our last two presenters, as I understand it, have

decided to really split their time. This is not an unusual position

for they have written any number of books and articles together,

so we are very pleased that they are able to appear here together

this morning. According to the high sign I got, we will begin with

Professor Michael Crew first.

Thank you both for being here, and professors, we are awaiting

your comments.

STATEMENT OF MICHAEL CREW, ECONOMICS PROFESSOR,

RUTGERS UNIVERSITY

Mr. CREW. Thank you, Mr. Chairman, for inviting us to testify.

We do intend to stick to our time, and we have powerful incentives

to do so, because as professors we are doing something rather unusual today, we are teaching, and we have to get back.

This is indeed a crucial issue that faces the U.S. Postal Service

and the Congress, the question of legislation and reform right now.

What I am going to do is begin by emphasizing the contexts in

which our proposal should be understood, and then Dr. Kleindorfer

is going to highlight some of the principal changes that really

should be considered in revising H.R. 22.

The current state of postal and delivery services presents Congress and the Postal Service with some difficult choices. The situation has arisen primarily because of exogenous changes, chiefly including the technological change in microelectronics, optical fiber,

and computer-based alternatives, such as the Internet, which are

revolutionizing traditional communications and advertising.

In our experience with international conferences with postal delivery services since the early 1990’s, we have noticed there’s been

a strong interest worldwide in reforming the postal service, so this

remains an important sector in the communications marketplace

and not an albatross around the neck of National Government.

In order to remain viable, postal administrations have been moving to a more businesslike approach to postal service and to the incorporation of regulatory innovations such as incentive regulation.

H.R. 22 recognizes this mandate and the dangers of not heeding it.

The problem is that H.R. 22 does not fully recognize the seriousness of the current situation, and incorporate the major changes required.

For the good intentions of H.R. 22 to bear fruit, two major

changes must be incorporated in any postal reform legislation. One,

the Postal Service should cease to be a public enterprise. The new

law should call for its privatization. Two, the labor relations framework for a privatized Postal Service should be that of a private

company with the right to strike and lock out, and not subject to

binding arbitration as presently.

H.R. 22 proposes incentive regulation, specifically price cap regulation. It comes as no surprise that the U.K.’s adoption of price

caps regulation for its newly privatized industries are generally

cited as a major success story. Price cap in the U.K. was successful

because the industries concerned were privatized. For price cap

regulation to succeed, there must be residual requirements and the

dissolution of the capital markets, including bankruptcy. By being

more efficient, the private company under a price cap can make adVerDate 11-MAY-2000 08:55 Jul 19, 2002 Jkt 099010 PO 00000 Frm 00105 Fmt 6633 Sfmt 6602 W:\DISC\43748 pfrm09 PsN: 43748
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ditional profits just like any unregulated private company and use

these to motivate management to make further profits and increase

the value of the shareholders’ investment. It is the existence of residual claimants that drives the efficiency promised by price cap

regulation. Absent residual claimants, these potential efficiency

benefits will not be achieved.

If all that is added to the current mix of public ownership and

binding arbitration is price cap regulation, it’s not clear what benefits, if any, will ensue. Indeed, it may make matters worse. Additional profits might be arguably counterproductive under the

present system and might simply send a signal to arbitrators that

the Postal Service could pay more.

Without privatization and changed labor relations, reforms envisioned in H.R. 22, or almost any other adoption of price cap regulation would do little or nothing to improve the status quo. Indeed,

the result may be much worse than the current situation in that

it would create false hopes and further delay the implementation

of needed reforms.

For all these reasons, the specifics of price cap regulation now to

be identified by my colleague, Dr. Kleindorfer, should be conditional on concurrent privatization and reform of labor relations.

Thank you again, Mr. Chairman, and committee members. I’d

like to now hand over the baton to my colleague.

Mr. MCHUGH. Dr. Kleindorfer, our attention is yours. Thank you

for being here.

STATEMENT OF PAUL KLEINDORFER, ECONOMICS

PROFESSOR, UNIVERSITY OF PENNSYLVANIA

Mr. KLEINDORFER. Thank you, Mr. Chairman, committee members, ladies and gentlemen. I’d like to address a few comments to

the details of H.R. 22 and specifically to its approach to the implementation of price caps.

In the spirit of Dr. Crew’s comments, my remarks are not meant

to provide a detailed prescription, but rather only an outline of key

points, all of which are intended to reinforce two central ingredients of reform and we believe also are the intent of H.R. 22.

First, the Postal Service should be given the opportunity and

flexibility to compete and to evolve, and second, the Postal Service

should be given the incentive to do so. In this regard, H.R. 22 has

a number of problems in the structure of the price cap which it proposes. It also has a number of good points, but I am going to try

to be constructive here and I will focus on only the problems, Mr.

Chairman.

Our concerns are with the structure of baskets and with the uniform applicability of adjustment factors within a basket. Both of

these directly affect the issue of flexibility of the Postal Service to

compete and to innovate.

Except as specified in subsection 3724, no individual price within

any basket is allowed to increase by more than the price index

which is specified in H.R. 22 as the GDP price index less X. This

contrasts with the more common arrangement where the prices in

the basket are aggregated into an index which is allowed to increase—the index, that is—by GDP minus X.

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Under H.R. 22, since price reductions wouldn’t count, there

would be very little incentive not to increase the price by less than

the maximum allowed. Thus, the potential for adjustments within

the baskets over time would be minimal, which would fail to provide flexibility and opportunities for change normally allowed in

price gap regulation.

The solution? Use the standard price gap index approach to ensure pricing flexibility within baskets.

Another concern is the actual structure of the baskets. H.R. 22

provides for four baskets which comprise the vast majority of the

revenue of the Postal Service, including some products which

should be considered competitive.

Too many mail products are considered monopoly type products

when they are subject increasingly to competition. The result of

this is to fail to provide the flexibility that the Postal Service needs

to compete and evolve.

The solution? Our approach to the definition of ‘‘baskets’’ concentrates on those parts of the market where the Postal Service

has monopoly power. Thus, we propose price regulation should

apply only to monopoly services and not to a wide class of products.

Services provided would be, in our proposal, divided into two

groups, regulated and nonregulated. The regulated basket would,

however, consist of only those services where there is monopoly

power. Price gap regulation would apply only to the regulated basket. All other services would be in its unregulated basket.

The price cap index that we would envisage would also be rather

simple. The regulator would set the price of the basic, single piece,

First Class postage, both domestic and international, the price of

access to the local delivery network and the price of special services

and services mandated by Congress, such as material for the blind

and Certified Mail.

The Postal Service would be free to raise rates by the rate of

index minus X formula over the period of the price gap. The Postal

Service would be allowed to set all other prices, the unregulated

basket, without regulation.

It is important to note that the Postal Service, when subject to

price gap regulation, would not have the incentive to cross-subsidize its unregulated operations as it might under cost-of-service

regulation.

Although the Postal Service would have considerable latitude

under this proposal in pricing, for example, its bar code and other

bulk mail operation, it would still be subject to certain constraints.

For example, its regulated access price would represent a floor

below which it would not be able to set its price for its other services, so the rate for both Bar-Coded Mail could not be set below the

rate for access.

Similarly, the ceiling price that it would be allowed to charge

would be the price gap on single piece, First Class Mail. Between

the floor and the ceiling, for work sharing and discounts and other

issues of this sort, the Postal Service would be free to set its prices

for its unregulated products. In addition, a privatized Postal Service would, of course, be subject to the full force of the antitrust

laws, just like any other private company.

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Other aspects of our proposal are spelled out in more detail in

our testimony, including quality issues, initialization, and so forth.

I won’t go into these here.

While our proposals represent a significant change in postal regulation, they are consistent with current practice in other industries. Our proposals are also consistent with H.R. 22 in providing

protection against monopoly exploitation in any regulatory Government structure through the PRC for resolving disputes.

A central issue which our proposal attempts to address is to provide a framework which encourages the Postal Service to innovate

and to evolve in the face of market changes. Things may be good

now, ladies and gentlemen, but in all places and all parts of the

world we are seeing, based on sophisticated econometric modeling,

real challenges that are going to erode this rosy picture soon unless

we also have a competitive, evolving, and adaptable Postal Service.

The more flexible basket definitions we have proposed and the

use of indexing within the regulated basket provide significant increases in opportunities and incentives for product innovation relative to the current version of H.R. 22, which essentially maintains

rigid line of business restrictions as currently embodied in reclassification procedures.

Conclusions: Absent major changes, the Postal Service will not be

able to survive in its present form. There will be major reductions

in employment levels and large reductions in mail volume, not perhaps in the next year or two, but soon.

H.R. 22 is important in recognizing the need for change and proposing incentive regulation, but it doesn’t address the problem adequately. In our view, what is needed is a two-pronged approach,

spearheaded by privatization of the Postal Service, or at least a

time line for privatization of the Postal Service, and reform of labor

relations practices, together with an approach to incentive regulation, such as envisioned here, which focuses on those aspects of

postal delivery service which need to be regulated, leaving others

to be regulated by the force of competition.

[The prepared statement of Mr. Kleindorfer and Mr. Crew follows:]

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Mr. MCHUGH. Thank you, Professor.

Are you sure you don’t want to take a few minutes and talk

about the good things? We appreciate your comments.

I would like to start out on a kind of general basis, and before

I do that, let me first of all recognize the presence of the gentleman

from Illinois, Mr. Danny Davis, who has joined us. He has been a

real stalwart since appointment to this subcommittee, and we appreciate his presence.

The gentleman from Ohio, Mr. Steve LaTourette, had to leave to

preside over the session which began a few moments ago. We appreciate his being here as well.

Professor Kleindorfer made some comments about what the future looks like. I can tell you that we didn’t get involved in this

procession just for the exercise. We felt that there was a need to

prepare for the future, and we felt as well, at least strategically,

it is better to act absent an immediate crisis atmosphere, where

you can think about things in a more reasoned and reasonable

manner.

Listening to Dr. Popkin, I am not certain he would agree with

the need to make what he might consider overly dramatic changes.

I am always reminded of the old saying: Before the Little Big Horn,

George Custer was undefeated. I think we do have to worry about

tomorrow.

But if there is no need, if the Postal Service of tomorrow is going

to be fine, then there is no need to do this at all. So I would like— and Professor Kleindorfer mentioned some of the things that he felt

would happen—I would like to have each of you just respond to

what you think the future of the Postal Service will be under status quo, be it good, bad or indifferent.

I know that a number of you have not been involved in postal

issues, but you did take a lot of time—and I appreciate that—in

looking at the Postal Service vis-a-vis the rate structure we are

talking about. If you formed an opinion, I think it would be interesting. Maybe we ought to turn out the lights and go home.

Mr. KWOKA. I am not an expert on the Postal Service, but I have

spent a bit of time looking at the issues here, and I would offer the

following opinion based both on what I am familiar with in the

Postal Service and other industries.

Advocacy of price gap regulation stems from the belief that the

cost of service regulation in any context where we have seen it does

not work well, does not encourage efficiencies, and, almost without

exception, except for badly flawed plans, will produce a superior degree of efficiency and benefits to both consumers and the companies.

So I would offer the view, based on a wide range of other companies and industries both in this country and others, that taking exactly the same enterprise, subjecting it to the incentives of rate of

return regulation, and then, in the alternative to the incentives

under price caps, there should be little doubt which of those will

produce a superior set of performance records in the future.

I have no crystal ball, particularly with regard to how the Postal

Service might perform in the absence of some cut over to price

gaps, but the straightforward comparison that I think is embodied

in H.R. 22 and is before this subcommittee is one that I think ofVerDate 11-MAY-2000 08:55 Jul 19, 2002 Jkt 099010 PO 00000 Frm 00122 Fmt 6633 Sfmt 6602 W:\DISC\43748 pfrm09 PsN: 43748
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fers a great deal of credence to the view that price gaps, at a minimum, ought to be able to improve on whatever it is in the alternative that might happen to the service.

Mr. MCHUGH. Thank you.

Dr. Rose, you noted particularly that you had not worked on

postal issues before but you enjoyed this.

Mr. ROSE. Right.

Mr. MCHUGH. I want to hear you say that when you walk out

of the room, but we believe you for now.

Mr. ROSE. It is actually getting better. It is more interesting.

Well, most of my remarks and what I wrote was focused on price

caps and what you are proposing in H.R. 22.

There is an aspect in H.R. 22, that I warmed up to that I recognized in the utility debate, and that is Aunt Minnie. I think Aunt

Minnie is in there. And that is the idea of preserving some basic

service in the form that most people have become accustomed to.

My general impression is, the Postal Service does a very good job

on that.

In the utility field, even in the talk of restructuring, there is always, we are going to have to take care of—there is no Aunt Minnie, we usually talk about little old ladies freezing in the dark as

the problem, and where little old ladies in sneakers is what they

say in telecom, it is the same equivalent argument. You have to

have some kind of basic service, some kind of fallback.

That is what I perceived, and I could be wrong on this, but that

is what I perceived was going on in H.R. 22, to set those aside.

Clearly, if in the extreme, if there was competition for First-Class

letters and First-Class cards, I don’t think Aunt Minnie would be

able to mail a Christmas card to her nieces and nephews across the

country for 32 cents. That is a heck of a bargain, and we have to

recognize that. I think I recognize the need to want to preserve

that, and I recognize that same thing in the utilities.

So that is what I think is going on, not so much as trying to open

up everything to competition, even though, as an economist, I am

genetically predisposed to think competition is better for everything, but I recognize the limitations.

Mr. MCHUGH. Thank you, sir.

Before we proceed to Dr. Popkin, I want to recognize Pete Sessions, Congressman Sessions, the gentleman from Texas.

Thank you for joining us, sir.

Mr. SESSIONS. Thank you. I appreciate that.

Mr. MCHUGH. Before we ask for your comments, Dr. Popkin, let

me just say, I couldn’t agree with you more with respect to the

very, very admirable job that the Postal Service, and particularly

the postal workers, have done.

I have said many times to similar meetings such as this and in

various forums, I live in a very small community that relies very

heavily on a universal delivery standard that is delivered and

brought to us by those postal workers, and they have my utmost

admiration.

What I am concerned about is what happens tomorrow or the

day after tomorrow without these kinds of changes. You feel, I suspect, that this procedure is not necessary. But I don’t want to put

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words in your mouth. What do you think the Postal Service of tomorrow would look like under status quo?

Mr. POPKIN. I think that in the context of the way you have

framed this: What is the future for the Postal Service? as I hear

Mr. Kleindorfer describe it, I think the only way the Postal Service

could resolve the future he has in store is to become a Microsoft

or an IBM.

The problem is electronic communication. There is no wage and

price at which the Postal Service can compete with electronic communication. That is going to happen. That is technological

progress. We can’t turn that back.

Rather, the way I view it is that there is a delicate balance that

you have in this institution, that the institution called the Postal

Service creates. In jargon my colleagues on the panel would recognize, the various forms of alternative communication, such as electronic communication, create what are called contestable markets.

The Postal Service really isn’t a monopoly. Some of its markets

are contested. By the same token, it does a very helpful thing for

the U.S. economy. It resolves a very difficult cross-subsidization

issue that Mr. Rose was talking about. In other words, how do you

get mail to Aunt Minnie at 32 cents out in farmland in the United

States?

When I look at the problems that we are having in resolving

cross-subsidization issues, I think there is an ongoing debate—you

read about it almost every day in the paper—between the long-distance and local telephone companies, about this access charge,

which really is a cross-subsidization. These are very difficult matters to handle.

Mr. Sidak mentioned maybe there are some alternative ways to

deal with cross-subsidization. I think that is what they are struggling with in terms of Internet access, some kind of pools where

companies put some money into something and that can be used

to hook lines up to all the schools in the hinterland.

But I think that the biggest competitive threat is a technological

one that you can’t do anything about, and meanwhile the Postal

Service faces contestable markets and yet it makes this very delicate transfer by providing universal service at uniform rates.

So I am upbeat. I am a fan of the Postal Service.

Mr. MCHUGH. I am as well. Believe me, one of the primary objectives I have personally is to keep that universal service into what

you call the farmland. I would like to keep it into the inner-cities

as well. I think all of that is important. But I appreciate your comments.

Mr. Sidak.

Mr. SIDAK. Thank you.

Universal service is an issue that comes up in every one of the

regulated industries. It is useful to look at what Congress did last

year in the Telecommunications Act. It said universal service is important, we are going to preserve it. We are even going to expand

the definition to take into account new technologies. But we are not

going to tolerate monopolies. State-sanctioned local exchange monopolies are preempted.

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Of course, there wasn’t anywhere on the table a proposal to resort to public ownership of telecommunications networks in the

name of providing universal service.

Now, what has happened since the act passed? A Federal-State

joint board has met, and it, in accordance with the instructions

that Congress gave, has attempted to identify ways of making subsidies transparent and explicit, rather than hidden in the rate

structure, and to make them competitively neutral so that they

don’t favor any one competitor in the market.

That is a process that follows efforts by many of the State commissions for several years now to address universal service in

telecom and in other industries. In New York, for example, there

is a case that has been going on since 1994, to address the funding

of universal service in a competitively neutral way in local telephony.

I think part of what we are seeing is that the Postal Service is

a giant army that has been assembled to win the war of delivering

universal service. We have won that war and now have a large

standing army. We have to figure out what to do with that army

now that the mission is accomplished. Particularly if electronic

means of communication make letter mail less important to consumers in the future, there will be a large labor force that is not

as necessary to a public mission as it once was.

That, in turn, I think, raises a question of what is the future objective of the Postal Service and its management. I am concerned

that the Postal Service not stray farther and farther away from the

original mission of this public enterprise, which was to provide universal service and bind the country together. I think that the Postal Service has accomplished that goal admirably.

Mr. MCHUGH. Gentlemen, I will defer to you. Who prefers to go

first?

Mr. KLEINDORFER. I would like to comment briefly directly to the

question you raised, Mr. Chairman, about whether the future is

rosy or not.

Our view is that one doesn’t have to know exactly what the future is in order to know that flexibility and the opportunity to fit

well are important attributes.

I personally view, having reviewed over the past 7 or 8 years the

issues of the technological threat and erosion of mail volumes, especially in the advertising area—I have some views about what is

happening there. I think my views are perhaps best put in terms

of saying that there is a real threat from electronic competition.

The vast majority of mail, First-Class and bulk mail, either originates or destinates with business. Those businesses are looking for

opportunities to more effectively communicate. They are going to

find them. With the growth from a mere 1 million Internet users

in 1996 to 100 million projected by the turn of the millennium, we

can expect them to find success in this respect.

So business as usual? I would expect a bureaucratic enterprise,

certainly one that is very devoted, and I would take nothing away

from the intent of the people that work there.

But the opportunity to compete and evolve will not be there.

They will be forced to go through lengthy procedures, just as they

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nificant line of business restrictions, inflexibility will naturally obtain, and I do not see that as providing the necessary confluence

with an adaptive communications marketplace.

If they change, then I see actually a fairly—I believe what we

have heard and what we know about the competence of the postal

employees here and the management, I think we can anticipate

those folks can compete just like Microsoft or IBM, but they have

to have the framework within which they can do it.

To try to reinvent all of corporate law, everything else that actually surrounds the private firm through a piece of legislation, that

is not going to work. We have got huge legal precedents and procedures that define exactly what it is to be a corporate entity.

It seems to me that that is our hope for not just a so-so future

for the Postal Service but for a future that, in fact, emulates that

which our private sector has gone through in the last 10 years

through its own restructuring activities, giving us a tremendous

boon in employment, a tremendous boon in satisfaction for those

who even have been outsourced and started new businesses. Those

are the kinds of activities that arise naturally from trusting in the

market.

If we trust in bureaucracy, I am afraid we will get further and

further entangled into it, just as my colleague, Dr. Sidak, has explained as the other alternative. So business as usual, means bureaucracy, change with I think we have got some hope of evolving,

of seeing an adaptive Postal Service as a part of the next millennium.

Mr. MCHUGH. Thank you.

Dr. Crew, would you like to add something?

Mr. CREW. I would add little to that, except to say we have been

thinking about this and working on this problem for a few years,

and in fact this particular issue that we proposed in our testimony

for reorganization of the Postal Service was first unveiled 2 or 3

years ago at a conference at the American Enterprise Institute organized by Mr. Sidak. At that particular conference, we actually

came short of recommending privatization.

But I think my colleague put it very well when he said that we

don’t want to reinvent the whole of corporate law and things like

that to make this work. We have got an institution, the private corporation, which could do the job, and that would be the way to go

in the present situation.

In terms of why do we see the picture as somewhat bleak, in the

international conferences that we have been participating in, most

of the Europeans are much more concerned about market erosion

than people seem to be here. The papers have been written, econometric papers on this, that show significant competitive effects

from electronic media, and much, much more important, growing

potential.

Mr. MCHUGH. I am probably getting close to the 5-minute limit.

I would like to yield to the ranking member and thank him for his

patience.

Mr. FATTAH. Any time the chairman is talking, I don’t even look

at the clock. I do understand the role of the minority here in the

Congress.

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Let me say that the future is now in many respects, because I

am going to have to depart from this hearing very soon, but I do

want to make a number of comments. One is that I do appreciate

all of your testimony today and the various levels of inspection you

bring to this matter.

I am concerned that perhaps some of us are working at cross

purposes inasmuch as I am not sure that we are talking about the

same thing. I want to work with the chairman, and I know that

he is interested in reforming the Postal Service.

But I am interested in reforming it as a public good and a public

enterprise dedicated to public service, which I think is the basic

mandate under which it is operating now. And the notion of privatization, and even some of what has been talked about in terms of

commercializing the Postal Service, concerns me, because I think

that, as economists, obviously you are looking at a different set of

dynamics than perhaps those of us as public officials may be looking at.

I am much more interested in Aunt Minnie, I think was the term

of art Mr. Rose used, and whether she can have a reliable vehicle.

She may not be surfing the net, not today, not tomorrow, and not

any time in the near-term future.

And I note that there is a lot of interest in thinking about what

the future may bring, and the Government itself is taking certain

steps. We are moving all of our payments to electronic form. That

is going to cost the Postal Service $100 million. This is a real issue.

But I am not sure price caps, in and of themselves, address any

of the issues relative to the competition brought on through electronic devices, issues of communications. The reality is that we

need, I think, to ensure, first and foremost, universal service to

Americans across the board.

We can talk about our European neighbors if you want. I would

not benchmark any of their systems of mail delivery as a focus to

begin the discussion of how do we reform ours. We have the best

in the world, from all that I know, and I have spent some time

looking at this, and I think the chairman is correct that we must

be concerned about what steps we take. Even in our haste to do

good, the Congress has been known in the past to make things that

are going well disappear, in our haste to show our importance to

the process.

The Postal Service, as has been pointed out, for 32 cents, does

a hell of a job today. The question is really, how do we improve

that without destroying it? Which is where I am in this process.

So the ratemaking process, as best as I can discern, is a process

that is overly cumbersome. It takes 10 months, at best. It allows

a lot of interested parties to participate in that process in ways

that are interesting, to say the least, and the question is, can we

expedite that? Can we have a service in the contestable markets,

if you will? There could be some flexibility in price to important

customers. There are other ways we can look at this. And can we

also protect the marketability of those private sector enterprises

that have joined and are, in fact, an important part of our way

business is done now in this country?

I think there are some issues to work through, but I don’t want

us to use a sledgehammer to approach this. I think we ought to be

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very, very careful that we don’t take what is the best Postal Service

in the world and, through some notion of economic purity—and I

have spent some time at the Wharton School with my friend; there

are a lot of interesting theories about how things should work, but

this is also the practice.

In practice, the reason why we created public monopolies for a

whole range of services in this country was where there was an essential need to make sure the service was provided, and that the

profit motive, in and of itself, may not take care of Aunt Minnie’s

mail. In fact, it may work against her getting her mail in some

cases. We created public monopolies to ensure those services.

Whether we are talking about police or fire, I would rank right

up there mail delivery, that it is an important public commodity

and service that needs to be protected through this reform process.

We need to find ways to improve the prospects of a future that is

brighter than the one that has been predicted by some. I look forward to working with the chairman in that regard.

Mr. MCHUGH. I thank the gentleman.

I know Professors Kleindorfer and Crew have to leave very shortly.

Mr. KLEINDORFER. Excuse me, sir.

Mr. MCHUGH. As of right now. That is shortly. Thank you for

coming.

Mr. FATTAH. They are leaving on Amtrak, another Government

supported——

Mr. MCHUGH. I thank the gentleman for his comments. I can assure him our objectives are identical. We will work together, and

we are looking forward to that.

In fairness, would anyone like to respond, at least for the record?

Mr. KWOKA. In listening to Congressman Fattah say that those

here are speaking to different points, that, of course, I think, is

characteristic of, any time you get five or six economists together,

you will get at least an equal number of opinions on most any

issue; that is right.

But in keeping with his admonishment to focus on the most important issues, I will simply hark back to the conclusion of my

statement where I said an important part of any reform is to keep

the task simple.

To the degree that this subcommittee wants to take on a range

of issues or append a series of other policy reforms at the same

time, that, obviously, is its prerogative. But the downside risk of

that is that there may be something lost in the process as well.

Universal service need not and should not be sacrificed. Privatization may be a desirable feature in some industries. This, the

Postal Service, may or may not be such an enterprise where privatization would work the wonders it has elsewhere.

But those decisions do not have to be made, I think, simultaneously with that which is proposed in H.R. 22. One can simply

look at a straightforward comparison between a public enterprise

with universal service where ratemaking is governed through cost

of service regulation, and compare that very same public enterprise

with universal service obligations, and compare its operation under

cost of service.

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If one can come to a conclusion as to the wisdom of price caps

and, in the alternative, to cost of service regulation, then the other

issues need not be addressed at the same time.

I, myself, have seen no reason why universal service has to be

compromised in any fashion whatsoever. I also share most of my

colleagues’ views that privatization is a good idea in most enterprises, though I have conducted economic research that shows that

in some other utility areas that it is not unambiguously always

preferable.

I think there are some reasons why public enterprise, as the

Congressman stated, may serve the public interest considerably

better under circumstances that many of us can identify. So I

would second the notion that focus on the narrower issue of which

regulatory regime is superior is one that can be done in isolation

from some other policy reforms that others may choose at a different time.

Mr. MCHUGH. Thank you.

Mr. Sidak.

Mr. SIDAK. Mr. Chairman, I would just add that when you are

looking at the different regulatory regimes, don’t forget competition. One option that certainly is available to Congress is to narrow

or repeal the statutory monopolies that currently exist and to facilitate competitive services in those areas that currently are limited

to the operation of the Postal Service.

I also agree that universal service is not something that has to

be sacrificed. Speaking for myself, I have never been elected to

public office; so it is not my place to say what the level of the universal service should be. But the role of an economist is to say,

once the policymakers make that call, how you can deliver that

level of public service in the most efficient way.

That is why it would be useful to consider, for example, putting

out to competitive bidding delivery to high-cost areas. Who can provide service to Montana with the least amount of subside. Do it the

same way that we put out all forms of Government contracts to private providers who, on the basis of price and quality, can deliver

the services.

Mr. MCHUGH. Just let me say a couple of things about the intent

of the bill. We are attempting to recognize, that while giving flexibilities, and allowing the Postal Service to compete, to, in fairness,

require them to compete, we do narrow the monopoly to some degree. I am sure it is not as deep and as extreme as you and perhaps others would like. I understand that. We could talk about

that further at another time.

But I think the point of your comment is not lost upon us. I understand that, and I think it is well founded.

Dr. Popkin.

Mr. POPKIN. I just wanted to make a comment on the competitive

model, and it is this: I can see the competitive model working very

well. In fact, in the example that Mr. Sidak used, it was a model

where somebody came in and did the work or competes or delivers

with the Postal Service. I can see that. That is not hard to envision

in your mind.

What I find hard to envision is what the Postal Service buys in

return, unless it can turn itself into a Microsoft or some Internet

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provider or something like that. I think as far as these competitive

products that we talk about, that the Postal Service in certain

areas would be competitive, but I don’t see at this point what those

areas are.

So it seems to me that the competitive model runs the risk of

taking more away from the Postal Service than it puts back.

Mr. MCHUGH. Again, and there is neither the time nor really the

need to get into debate about that, the theory of what you are buying is flexibility, the lack of which, as I think you heard Dr.

Kleindorfer say, has in his views—and I share those views—some

rather dire long-term consequences of the decrease in regulatory

burden that attends part of the PRC procedures.

You also have the flexibility to introduce new products that at

least the postal administration feels is important to be able to

change as the environment changes. You could argue this bill

doesn’t do that, that either that is not necessary, but that in theory

is what is being bought here. Whether it is fair purchase is the

issue; I understand that.

Dr. Rose.

Mr. ROSE. First of all, let me just chime in with what Mr. Sidak

and Dr. Kwoka said on the issue of universal service. I think Mr.

Sidak was saying earlier, on the point of utilities, that is not really

a conflicting goal. You can have lots of competition in those services

that are competitive and still meet your universal service standards. That has not been a problem. Once you have decided that is

what you wanted, then you should go ahead with that.

But I want to go back to a point I think Mr. Fattah was also saying. He was also saying something about making it simpler. This

kind of gets back to the price cap, which I thought was the original

intent of the hearing today.

Mr. MCHUGH. We sometimes lose our way.

Mr. ROSE. Obviously, universal service is very important. Making

it simple though, I think if that is the objective, as I made in my

opening remarks—if the objective is to make it simpler, something

simpler than cost of service, then price caps is probably your answer. If the objective is to lower costs, then that is what I am skeptical of. I don’t think you are going to get that.

Let me say that critics of price caps will often point out, it is just

as expensive or costly to do that as it is cost of service. I think that

is true in the beginning, when you first get them running. But once

it is running, the administrative costs do tend to be lower, and they

can function quite well.

I can’t make a prediction if that would be true in the Postal Service, but just from our experience in telecom in particular, once they

are up and running, they are a little bit simpler.

Mr. MCHUGH. Mr. Davis has been very patient, sir. Thank you.

I am happy to yield to however belated that yielding might be.

Mr. DAVIS. Thank you very much, Mr. Chairman. I certainly appreciate the opportunity.

I would like to make just a couple of comments based upon the

discussion. It seems to me that a great deal of the suppositions relative to the utilization of price caps have centered around the experiences of public utilities, and I am not absolutely certain of the

similarity or dissimilarity of the Postal Service System with that

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of some of the other entities that we have designated as being public utilities and the other aspect of that as well.

I am not sure where the role of the consumer really fits. Even

when we have used other public utilities as an example, there has

always been a need or a feeling on the part of consumers that in

some instances they were being shafted, left out, or there was a

need for some recourse. That aspect concerns me a bit.

Also, when we talk about further privatization—and I am one of

those individuals who don’t necessarily believe that privatization is

a panacea for everything that ails us, that all you have got to do

is privatize it and all of a sudden, whatever the problems, whatever

the needs, whatever the differences, whatever the difficulties are,

they go away, or that every time we talk about reform that it

means we are going to improve.

Sometimes reform simply means to change, but not necessarily

to improve. Sometimes actually it even will make matters worse

rather than better.

I guess the one question that I wanted to raise is, can we really

see the impact of further privatization as it relates to the Postal

Service? And I don’t think you can discuss one aspect without the

other. I come from a school of thought that says, unless it is broken, I am not sure that it really needs to be fixed, that certainly

you need to keep looking at it, you need to analyze it, you need to

try and project what the future will bring.

So my one question is, what are we trying to really fix? What?

What are we actually trying to fix? I know what we are trying to

change, but what are we trying to fix?

The other question would be, what impact would privatization

perhaps have on the ability to provide the universal service that I

think everybody has indicated is a key component of the system

and has to continue if the system is to work?

Mr. MCHUGH. Can we just establish for the record before they

respond that your question vis-a-vis privatization, I assume, is

based upon some of the comments here today, and not with respect

to H.R. 22, because that bill does not privatize?

Mr. DAVIS. That is correct.

Mr. MCHUGH. Thank you.

Gentlemen.

Mr. KWOKA. Let me address in particular your question, Congressman, with regard to what it is that ratemaking reform is

striving to fix, as you say.

In the industries where price caps and other forms of incentive

regulation have been put in place, in many instances what has motivated or prompted those changes has been precisely what I think

has prompted H.R. 22, looking ahead and envisioning greater difficulties with conventional ratemaking procedures and a future

that is subject to greater uncertainty, to more technological change,

to dramatic shifts in demographics and other features that put

ever-increasing pressures on traditional rate making procedures.

When price caps were put in place for AT&T and the local exchange carriers and for electric utilities at the State level, in many

instances there wasn’t necessarily a crisis that happened or any

particular issue that needed to be fixed at the time. Rather, what

was intended was to establish in advance of any such crisis a rate

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structure or rate-setting procedure which would be more flexible

and adaptable to changes that everyone could foresee.

At the same time, your concern about what is in it for the consumer has been very much at the forefront of the minds of most

regulatory commissions at both the Federal and State levels.

The intent in the case of the Postal Service could be stated—I

wouldn’t presume to state what it, in fact, is but could be stated

as follows: The chart that Dr. Popkin showed indicating what the

postal price rate of change was over the past 20 years or so. The

intent of price caps would be to decelerate that rate of increase.

Wherever that line lies relative to CPI or CPI for services, the intent would be to decelerate its further increase.

In particular, if there is concern over the 32-cent stamp, the

Aunt Minnie services, or services to rural or any inner-city areas

that are particularly vulnerable to cross pressures and other such

impediments, those can be separately capped or put in baskets, as

they were in the case of the telecommunications industry.

Local residential dial-up service was capped separately so as to

ensure that there was no rebalancing of higher rates to those consumers for the benefit of lower rates to others.

Price caps allow, in short, to maintain or improve on any structure of prices the rate of return regulation does and then to offer

price decreases on average and perhaps price decreases targeted to

particular consumers.

So the intent, in short, would be as it was in these other regimes,

to introduce pressures for cost efficiency and to moderate rates of

price increase and to offer perhaps particular protections for those

prices and those services that were seen as socially most important.

Mr. MCHUGH. Dr. Rose.

Mr. ROSE. Let me try to answer your first question, which I

think was, what is the difference?

There is a significant difference between utilities, electric utilities, telecom, gas, and postal customers. That is true, and I acknowledge that. But the electric utilities and gas and telephone

were all regulated by cost of service regulation historically, and for

a number of years now, 20-some years, the Postal Service has been

regulated in a similar way.

Now in the last 10 years, the telecom and the others a little lagging behind have been evolving into price cap regulation, and I

agree with all of the advantages that Dr. Kwoka mentioned as

there being with that. That is the reason for the change.

So the idea is to just try to form a similarly regulated industry

rather than trying to say these are exactly the same, and therefore

it is exactly transferable.

If you are going to adopt a price cap approach, as I tried to point

out, where some of those differences are, like, since it is a nonprofit

organization, the motivation is different, you will have to come up

with something, a means of adopting it to Postal Service regulation. You can’t take it wholesale from the utility side.

But there are lessons that we have learned in the utility side

that I think are transferable and probably shouldn’t be lost. That

is an advantage that I think you have now, that is to learn something from that.

Mr. MCHUGH. Gentlemen. Dr. Popkin.

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Mr. POPKIN. I think Professor Kwoka’s comments about having

an objective—that it is the objective to come out with a price increase that is lower than the one that is in that chart—demonstrates one of my major concerns about the bill, because that is

the way people kind of relate to it. It is less than, not more than.

And when you look at an industry that 80 percent of its costs are

labor, if anybody wants to bring the postal rate increases down to

a lower rate, there is only one way that is going to happen, and

that is to further depress the real wages of postal workers. They

have already been declining at an annual rate of about 0.5 tenths

of 1 percent. That is more than the average private sector worker.

So this is the way people jump once you get price caps in place.

They think that the X factor is a one-way factor.

Mr. MCHUGH. OK. In deference to my colleague who posed the

question, I want to go to Mr. Sidak, but then I would like to come

back to that at some point.

Mr. SIDAK. Thank you.

In terms of what are we trying to fix here, I think it is important

to focus on more than just price. There is another dimension to consumer welfare besides price, and that is service quality and innovation.

I am reminded of a remark that Judge Douglas Ginsberg made

at the AEI conference that Professor Kleindorfer mentioned earlier,

which we held several years ago. Judge Ginsberg analogized the

current monopoly provision of letter mail to the old black rotary

dial telephone that you used to get from the Bell monopoly in the

predivestiture days, before the deregulation of customer premise

equipment.

We don’t really know what postal services will look like in a

more competitive environment where there are higher levels of

product innovation. We could see something that is analogous to

what happened with the explosion of choices in the kinds of telephones that you could get once the market was open to that. The

current homogeneity of the services that are offered by the Postal

Service is one cost that consumers bear that could be changed in

the future.

Mr. Davis, you also mentioned the concern about trying to fix

things that are not broken. I want to reiterate that the monopoly

over the mailbox was something that was imposed in 1934. It

wasn’t the original state of affairs, and it wasn’t something that accompanied the Private Express Statutes in the 1840s. Maybe

things weren’t broken in 1934, when that fix was produced by Congress, and maybe that is a good place to go back and reconsider

whether it should be removed today.

Mr. DAVIS. Thank you very much, Mr. Chairman. That pretty

much concludes my comments and concerns. It is an issue that I

think we must take a real hard look at.

I have gotten more than 500 postcards from constituents of

mine——

Mr. MCHUGH. At least they mailed them.

Mr. DAVIS [continuing]. In the last 3 days, and it is an indication

that, certainly in this particular area, people are indeed very much

concerned about it and they are aware of it, they are watching it,

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and they want to make sure their voices are heard and that they

have input into the process.

I certainly thank the gentlemen for their testimony and thank

you.

Mr. MCHUGH. I thank you.

For those of us who have labored in empty subcommittee rooms,

it is nice to have the people’s attention. It took us a while to do

it, but, by God, we have, for better or worse.

Mr. Popkin, let me return to your comment, both in your opening

statement and your response to Mr. Davis, because I would like to

prove once and for all why I am not an economist. As I said, I probably don’t grasp this, but I am a little constrained to understand

how you equate the pricing structure in H.R. 22 to a wage cap.

Certainly there is nothing in there by statute that caps wages.

Wages are totally unaffected in the language of the bill, unlike certain pricings that are held to an index to be determined. Wages are

not in any way constrained to be at or below that index. So your

concern can’t be legal because there is no legal component of the

bill that does that.

Do you agree with that statement? Are we together so far?

Mr. POPKIN. Yes.

Mr. MCHUGH. OK. Second of all, the intent—and we can disagree

with the effect—but the intent in the bill has always been to allow

the Postal Service to enter more effectively into markets that will

provide them at least the opportunity in a competitive atmosphere

to increase their market share.

I thought I understood you to say in your opening comments,

particularly with respect to the Postal Service’s performance in recent years, that market share has been growing, and that is important. Market share means increased revenues, which means a

greater part of the pie.

I do know a little bit about wage negotiations. I was at that level

at city management for 5 years and have been at the bargaining

table, and I know how unions and employee groups are very effective in determining revenue pools. So the intent of the bill is to provide greater access to revenues and greater ability to compete,

which I assume would be good.

But the thing that I am most pressed to understand is, you spent

a lot of time very effectively on your chart showing how at least

APWU, one bargaining unit, has had their wages demonstrably

below the CPI index year after year, and then express concern that

somehow the CPI index would constrain your wages. How can you

argue that when you have not been at CPI to begin with?

Mr. POPKIN. Let me just clarify a point about the use of APWU

productivity. I think a paper of Laurits Christiansen’s was circulated today from the U.S. Postal Service, and that shows total

factor productivity, the whole post office, to have risen faster than

total factor productivity in the private sector.

So my choice of the APWU doesn’t bias that conclusion of postal

productivity. I wanted to clarify that for the record.

Mr. MCHUGH. I appreciate that. I used it because you did.

Mr. POPKIN. The concern that I have that the price cap, if there

are reasons such as mismanagement that lead the Postal Service

to have performance that isn’t as good as the private sector, and

131

therefore actually there would be a tendency for its prices to rise

faster than the CPI—which, incidentally, I don’t think is the right

standard, I think the service sector CPI is.

But if that happens, it is quite likely that the reaction to that

within the Postal Service would be to—and we have heard it before—cut out Saturday mail, do those kinds of things to cut into

jobs, or, alternatively, to take a different posture at the bargaining

table.

I am saying these are the economic consequences that could flow

from this. And the likelihood that they will flow from it is increased the minute you get a cap, because people are talking about

an X factor. The Postal Service calls it a stretch factor, but it all

points in the same direction.

It puts even more pressure on the Postal Service, and that’s really my concern, that a labor-intensive industry, 80 percent of costs

are labor, there’s no room. In the telephone industry, they have 76

percent of costs that they can also work with. In the Postal Service,

they only have 20 percent of costs that they can work with without

having to impinge on labor’s compensation or the number of jobs.

So I am not asserting this as a fact, that it’s going to—certainly

that this is going to obtain in the future, but I can see that all the

preconditions are there for that sort of thing. That could evolve.

That’s not an unlikely scenario, in my view.

Mr. MCHUGH. Well, listen, I am in politics. I accept a lot of scenarios, perhaps unwisely. Me personally, not yours.

I understand and recognize what you are stating. I don’t, frankly,

think it’s any more realistic than what is happening today, and as

I said, most importantly, and the reason you have contracts is that

those are binding. There’s nothing in this bill, that’s what I want

to make clear, there’s nothing in this bill that produces that de

facto.

But your comments bring up a point that was a theme that was

present amongst all the presenters, whether they felt price caps

were a 10, on a scale of 1 to 10, or whether they thought it was

a 1 or below, and that is the issue of residual claimants. How do

you ingrain into a price setting structure as proposed in H.R. 22

vested interests, to use perhaps a more common phrase to some of

us, that will drive the Postal Service toward increased efficiencies,

economies, to make sure standards of efficiency are maintained?

Because the Postal Service in its current structure is rather unique

versus where price caps have been tried in other industries. I think

we all agree on that.

Our intent was to have the role of what economists call residual

claimants be played by, No. 1, a strong regulator—we give, I think,

substantial new powers to the Rate Commission—and two, by the

institution of profit sharing at all levels and through the work force

from top to bottom, which is currently not the case.

The question I would have for you, gentlemen, and we will pose

it in writing to Messrs. Crew and Kleindorfer because I would be

very interested in their comments, since, while they endorsed price

caps, they particularly had this concern. I would like to have your

comments, forgetting for the moment whether price caps are the

right or wrong thing to do, how likely is our substitute residual

132

claimants’ entities to provide the traditional service or traditional

function?

Why don’t we begin with Mr. Sidak, just to change things.

Mr. SIDAK. Thank you. Let me talk about the profit-sharing component first. It’s true that a profit-sharing plan as envisioned in

section 3783(e) would create incentives on the upside. You could do

that even more extensively through share ownership, though. So

it’s in the right direction, but the magnitude is not as great as if

there were tradeable shares.

I am concerned about downside losses. It’s true that profit sharing allows management and employees to share in profits. But is

there a mechanism for penalizing substandard performance as

there is in a private corporation, where the board of directors

quickly feels heat from shareholders and, even in some very prestigious American corporations, replaces the CEO?

With respect to the strong regulator, I certainly endorse efforts

to give the Postal Rate Commission more of the kinds of powers

that you would find in a typical State public utility commission or

the Federal Communications Commission or FERC. I endorse that

100 percent.

Mr. MCHUGH. OK. Dr. Popkin.

Mr. POPKIN. Well, I think—I am also concerned about something

like profit-sharing arrangements, but from a different, for a different reason.

It’s my experience that there are a lot of people at work every

day who really don’t want to share risk. They would rather have

a certain salary rather than variable salaries. Because it could

work that you reduce salaries, I suppose. So I think there would

be that issue to consider, that not everybody wants to be an owner.

And so I think that that’s a disadvantage.

The other thing that concerns me is it now seems as though

some—while some powers in this bill would be taken away from

the PRC, I am concerned about the loss to the Postal Service of its

ability to set revenues, which gets back the cost of service and ultimately that gets you to a situation where I think perhaps you really end up relying more on the PRC, because they are going to be

the sole monitors of the quality of service. And I would assume that

if the quality of service is—if in their view the quality of service

is deteriorating, then they have got to make the X factor positive,

it has to be an add-on to the inflation rate.

Is that the logic to the bill, I guess is my sort of reaction to it?

So even though the PRC is being made less intrusive on a day-today rate-setting basis by a price cap, you are giving it a lot of

power in the area of determining the quality of service and what

kind of X factor is necessary to adjust for their perception of the

quality of service.

Mr. MCHUGH. You are right to the extent—you are right in a lot

of ways, but on this point you are right, the X factor could indeed

be a plus. Everyone assumes it will be a minus, and I think logically under most circumstances it will be, but it could technically

and legally be a plus.

However, the bill I think is pretty clear in its designation of the

authority of the Postal Rate Commission to suspend profits which

would result from a degradation specifically of service and presumVerDate 11-MAY-2000 08:55 Jul 19, 2002 Jkt 099010 PO 00000 Frm 00136 Fmt 6633 Sfmt 6602 W:\DISC\43748 pfrm09 PsN: 43748
133

ably productivity. A plus would be more exogenous to the extent

that things are going on in the economy that affect it outside the

Postal Service.

But you raise a point about expanded powers, and there are expanded powers. We give them an IG, we give them the right of subpoena. It goes back to our intent, to try to have the regulator serve

in some function as a residual claimant.

So I continue down the line for Dr. Rose. Profit sharing, is that

a good enough residual claimant?

Mr. ROSE. The idea that the PRC will act in a stronger manner

than they are now and given these expanded powers, the way you

say it is acting as a surrogate for the marketplace. That sounds

very familiar to me as the logic behind cost of service regulation,

not price cap regulation. In fact, the whole idea of price cap was

to get away from that and have less intrusiveness in looking at the

cost structures of the utility. The idea of the price cap was to have

a way to give better incentives for the utility to act on its own behalf that would be in a way that is consistent with the interests

of the public. That was the general logic. The whole cost of service

theory was that the regulator was the stand-in for the market.

So when you phrase it that way, it sounds more like cost of service than the price caps. And there may be reasons to expand it, it

may be too weak now, I can’t comment on that. I am only commenting on the idea of relating to the price cap, not what the PRC

does today.

On the profit sharing, it looked to me a little on the weak side.

There were certain provisions it had to go through and be divided,

and I suggested in my written testimony perhaps something like a

base salary and a bonus where the bonus amount is adjusted, that

kind of arrangement, or perhaps even a noncash option as well,

maybe a way to provide some kind of a bonus.

I guess I am with Greg Sidak on one point. There was a phrase

that really stood out in H.R. 22 for me that kind of got me started

along these lines, and I wrote it down. ‘‘To restore the Postal Service to financial soundness.’’ In other words I didn’t write down the

section, I think it’s in my testimony—that the PRC was allowed to

adjust the adjustment factor, change the adjustment factor to, ‘‘restore the Postal Service to fiscal soundness.’’ That’s limiting the

downside, a private firm of course can lose the whole enterprise,

they can simply go under. It’s not unusual for utilities to even go

into bankruptcy. Receivership is rare but bankruptcy is not uncommon.

So that idea that there’s a serious downside and a heavy price

to pay for the stockholders who don’t like that happening to their

company, they are protected from it. There’s an asymmetry in that

sense, there’s a little bit of upside and no real downside.

And as I pointed out in the paper, I am not suggesting you take

that phrase out because I don’t think anybody wants the Postal

Service to go under, but perhaps there’s a way of linking it to the

bonus. You never get below your base salary but you don’t get the

bonus if it turns out that quality of service was degraded, something along those lines.

Mr. MCHUGH. Interesting, thank you. Dr. Kwoka.

134

Mr. KWOKA. I think in asking this question about the residual

claimant you have really identified the key question before everybody in this process. The question after all is not whether price

caps can and do work, we know they can; the question is whether

they can be made to work in the context of the Postal Service

which has this distinctively different characteristic. That’s not to

say there aren’t bad price cap plans. Anybody can devise one that

doesn’t work.

But the truth of the matter is the determination of X factors and

proper baskets and all of the rest are technical issues. While there

wouldn’t be necessarily agreement, these are subject to routine economic and policy analysis, and the plan, the one in H.R. 22 or

modified in some way, will emerge from that process.

The question is really whether taking the trappings of all price

cap plans and applying them to the Postal Service will work at all,

and that’s a theme, of course, sounded by most of my colleagues

here.

I am unaware of any other context, certainly in this country nor

in others, that price caps have been applied to public enterprises.

I am not familiar with that experience. I have asked a number of

other people as well to see if my understanding was incomplete. I’m

not aware of any such experience. That may say something. It certainly raises a caution about its applicability and its prospects for

success. I am not nearly as pessimistic. In fact, I am not pessimistic at all, necessarily about the ability to adapt a plan for public

enterprise, for reasons I will mention in a moment.

But particularly with regard to your points—the regulator as residual claimant and the ability of profit sharing to serve its role— I would concur with Ken Rose that the role of the regulator in the

plan I would hope would not be construed as one of the residual

claimant. Indeed, the role of regulator is supposed to be one that

withdraws as much as possible from a system where private incentives or profit incentives are put in place of regulatory strictures.

That’s not to say that some regulatory oversight is not required.

We all agree on the quality side there may be no good substitute

for vigilance, perhaps greater vigilance.

That said, I think that one ought to see the, stylistically speaking, the magnitude of the regulator’s role and the magnitude of

profit incentives as moving in opposite directions.

The question here is whether profit incentives will work in this

context. Price caps will succeed or fail to the degree that profit incentives work, not to the degree that the regulator plays a more

substantial role. That again simply raises the question will profit

incentives work, will profit-sharing work in the fashion that’s described here. I think that they have good prospects for success if

carefully devised.

I am not an expert on pay incentive schemes, on profit-sharing

schemes, and I would not offer any detailed comments about the

type of plan that would be most suitable. Others know more about

that and others, perhaps not here, can and have talked with you

all about that. I would simply offer the following several observations.

First, even in private enterprise, even in ordinary garden variety

companies that we are all familiar with, the mere fact that it’s a

135

private company does not make the company minimize cost, maximize profit for its shareholders in any inexorable and automatic

way. It’s for that very reason that even in private enterprises, profit-sharing schemes are employed. If we believed that simply privatization were the key, that it was necessary and sufficient, then we

wouldn’t need profit-sharing schemes in private enterprise to move

management in ways that may be ultimately more consistent with

shareholders’ interests.

So I would offer the observation that even in private enterprise,

profit-sharing schemes have been used successfully to alter the behavior of management in ways that would be consistent with that

sought here. I also would offer the observation that, in the context

of the Postal Service, there are serious questions about the size of

the bonuses, about the symmetry, the upside versus the downside,

about who should get that, that is, all levels equally or in some

other unequal fashion.

I would say at a minimum that it would be useful to specify a

good deal of that in the act so that individuals know exactly the

consequences, not in terribly disaggregated detail, but with some

specificity, that categories of individuals know what their stake will

be in superior performance by the whole of the Postal Service.

I also raised in my written testimony concerns about the possibility, hopefully the reality, that profits will be very large in some

particular years: Would one want all of those profits to be distributed, or in the alternative, would some part of the profit go back

to the Treasury Department or some other residual claimant in

line. So issues of size, of symmetry, of identification of who would

be the recipient, all play quite an important role in the design of

profit-sharing schemes. And I would urge that that would be an

important ingredient in ensuring good prospects for success here.

Mr. MCHUGH. Thank you. Thank you all.

Mr. Davis, any further questions?

Mr. DAVIS. Nothing further.

Mr. MCHUGH. Well, we have been here now for over 2 hours.

That’s longer than most classes in economics, be it advanced or otherwise, and we do appreciate it. In all sincerity, we could continue

here all day and then some, if based on nothing more than the content of all of your statements. It reflected a great deal of work, a

great deal of thought and insight, and I deeply appreciate each and

every one of you joining us.

I would ask, however, for the opportunity to present you with

some written followup questions for the record. I know that’s a further imposition on your valuable time, but it would be very useful

to us. There are a number of comments made in your individual

statements that lead us to want to pursue some issues further. If

you would accommodate us, it would be very much appreciated.

[Note.—The book entitled, ‘‘Journal of Regulatory Economics,’’

can be found in subcommittee files.]

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