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WILL INCREASED POSTAL RATES PUT MAILERS

OUT OF BUSINESS?

HEARING

BEFORE THE

SUBCOMMITTEE ON FEDERAL WORKFORCE,

POSTAL SERVICE, AND THE DISTRICT

OF COLUMBIA

OF THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

OCTOBER 30, 2007

Serial No. 110–202

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

(

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

http://www.house.gov/reform

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

HENRY A. WAXMAN, California, Chairman

TOM LANTOS, California

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

BRIAN HIGGINS, New York

JOHN A. YARMUTH, Kentucky

BRUCE L. BRALEY, Iowa

ELEANOR HOLMES NORTON, District of

Columbia

BETTY MCCOLLUM, Minnesota

JIM COOPER, Tennessee

CHRIS VAN HOLLEN, Maryland

PAUL W. HODES, New Hampshire

CHRISTOPHER S. MURPHY, Connecticut

JOHN P. SARBANES, Maryland

PETER WELCH, Vermont

TOM DAVIS, Virginia

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

VIRGINIA FOXX, North Carolina

BRIAN P. BILBRAY, California

BILL SALI, Idaho

JIM JORDAN, Ohio

PHIL SCHILIRO, Chief of Staff

PHIL BARNETT, Staff Director

EARLEY GREEN, Chief Clerk

DAVID MARIN, Minority Staff Director

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

COLUMBIA

DANNY K. DAVIS, Illinois

ELEANOR HOLMES NORTON, District of

Columbia

JOHN P. SARBANES, Maryland

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio, Chairman

WM. LACY CLAY, Missouri

STEPHEN F. LYNCH, Massachusetts

KENNY MARCHANT, Texas

JOHN M. MCHUGH, NEW YORK

JOHN L. MICA, Florida

DARRELL E. ISSA, California

JIM JORDAN, Ohio

TANIA SHAND, Staff Director

(III)

C O N T E N T S

Page

Hearing held on October 30, 2007 .......................................................................... 1

Statement of:

Miller, James C., III, chairman, Board of Governors, U.S. Postal Service;

John Potter, Postmaster General, U.S. Postal Service; and Dan G.

Blair, chairman, Postal Regulatory Commission ....................................... 4

Blair, Dan G. ............................................................................................. 23

Miller, James C., III .................................................................................. 4

Potter, John ............................................................................................... 14

O’Brien, James R., vice president, distribution and postal affairs, Time,

Inc., Time Warner; Mark W. White, vice president, manufacturing,

U.S. News & World Report; Joseph Schick, director, postal affairs,

Quad/Graphics Inc.; Anita Pursley, vice president, postal affairs,

Quebecor World Logistics; and Jerry Cerasale, senior vice president,

government affairs, Direct Marketing Association .................................... 143

Cerasale, Jerry .......................................................................................... 178

O’Brien, James R. ...................................................................................... 143

Pursley, Anita ............................................................................................ 173

Schick, Joseph ........................................................................................... 164

White, Mark W. ......................................................................................... 157

Zipser, Andy, former president, International Labor Communications Association; Victor Navasky, publisher emeritus, the Nation, and chairman, the Columbia Journalism Review; Jeff Hollingsworth, vice president, Eagle Publishing; Max Heath, vice president of postal/acquisitions, Landmark Community Newspapers; Hamilton Davison, executive

director, American Catalog Mailers Association; and David R. Straus,

counsel, American Business Media ............................................................. 52

Davison, Hamilton ..................................................................................... 117

Heath, Max ................................................................................................ 97

Hollingsworth, Jeff .................................................................................... 90

Navasky, Victor ......................................................................................... 54

Straus, David R. ........................................................................................ 126

Zipser, Andy ............................................................................................... 52

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

Blair, Dan G., chairman, Postal Regulatory Commission, prepared statement of ........................................................................................................... 25

Cerasale, Jerry, senior vice president, government affairs, Direct Marketing Association, prepared statement of ....................................................... 180

Davison, Hamilton, executive director, American Catalog Mailers Association, prepared statement of .......................................................................... 119

Heath, Max, vice president of postal/acquisitions, Landmark Community

Newspapers, prepared statement of ............................................................ 100

Hollingsworth, Jeff, vice president, Eagle Publishing, prepared statement

of ..................................................................................................................... 92

Miller, James C., III, chairman, Board of Governors, U.S. Postal Service,

prepared statement of ................................................................................... 7

Navasky, Victor, publisher emeritus, the Nation, and chairman, the Columbia Journalism Review, prepared statement of ................................... 57

O’Brien, James R., vice president, distribution and postal affairs, Time,

Inc., Time Warner, prepared statement of ................................................. 146

Potter, John, Postmaster General, U.S. Postal Service, prepared statement of ........................................................................................................... 17

Pursley, Anita, vice president, postal affairs, Quebecor World Logistics,

prepared statement of ................................................................................... 175

Page

IV

Letters, statements, etc., submitted for the record by—Continued

Schick, Joseph, director, postal affairs, Quad/Graphics Inc., prepared

statement of ................................................................................................... 167

Straus, David R., counsel, American Business Media, prepared statement

of ..................................................................................................................... 129

White, Mark W., vice president, manufacturing, U.S. News & World

Report, prepared statement of ..................................................................... 159

(1)

WILL INCREASED POSTAL RATES PUT

MAILERS OUT OF BUSINESS?

TUESDAY, OCTOBER 30, 2007

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON FEDERAL WORKFORCE, POSTAL

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

The subcommittee met, pursuant to notice, at 10:01 a.m. in room

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

Present: Representatives Davis of Illinois, Norton, Sarbanes,

Cummings, Marchant, McHugh, and Jordan.

Staff present: Tania Shand, staff director; Lori Hayman, counsel;

Cecelia Morton, clerk; Eleanor Hudson, intern; Ed Puccerella, minority professional staff member; and Benjamin Chance, minority

clerk.

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

Welcome Ranking Member Marchant, members of the subcommittee, hearing witnesses, and all of those in attendance. Welcome to the Federal Workforce, Postal Service, and the District of

Columbia Subcommittee hearing, ‘‘Will Increased Postal Rates Put

Mailers Out of Business?’’

The hearing will examine the process for rate increases, the recent decision by the U.S. Postal Service Board of Governors to increase postal rates, and the impact of the new postal regulation on

future rate increases.

The hearing will also examine the impact the new rate increase

will have on mailers.

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

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

We are going to do our opening statements and then I am going

to introduce the first panel.

Ranking Member Marchant, members of the subcommittee, and

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

2005 postal rate increase, ‘‘Will Increased Postal Rates Put Mailers

Out of Business?’’ Today’s hearing will examine the Postal Governor’s decision to increase postal rates, the process for rate increases, and the impact of new postal regulations on future rate increases.

The hearing will also review the impact the rate increases had

on various small and large mailers.

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The U.S. Postal Service submitted a request for a rate increase

through the Postal Regulatory Commission in February 2007. The

PRC, an independent agency, issued its decision on this request

after a lengthy process that involved an open administrative proceeding involving mailers, employee organizations, consumer representatives, competitors of the Postal Service, as well as the public, on the recorded hearings broadcast over the Internet.

On March 19, 2007, the PRC submitted its rate recommendations, which was endorsed by the Board of Governors. As part of

this endorsement, it was decided that the new rates for periodicals

would be delayed to allow for adjustments to mailers’ software.

The cost inefficiencies inherent with the handling of periodicals

have long plagued the Postal Service. I know that the PRC has

sought to keep periodical postage rates as low as possible in the

face of declining magazine mail volume and increasing postal handling costs. The notion of implementing a rate structure based on

paying for what you use was established to encourage better operational practices and eliminate unnecessary costs. This is the basis

for the new rate structure.

But the question is: is it working? In 1995, Time Warner, Inc.,

proposed that the periodical class be split into two segments and

that rates be redistributed. This proposal would have effectively

eliminated the historic policy of cross-subsidization of low-volume

periodicals by high-volume periodicals. Small magazines state that

the new rates, which they feel were based on the proposal submitted by Time Warner, Inc., transferred the burden of postal costs

from magazines with large circulation and heavy advertising to

smaller publications with heavy editorial content.

In 2004, Time Warner once again submitted a rate proposal that

many mailers believe shifted the burden of mailing cost on to small

publications.

As a result of this controversy, the PRC recommended and ultimately endorsed a proposal where small publications with circulations of 15,000 or less received lower increases than the rates recommended in the proposals submitted by the large magazine publications, Time Warner, or the Postal Service. Small magazine publishers are not consoled by the lesser-endorsed amount because

they feel they bear the brunt of the proposed postal rate increase.

Today we will hear from the rate setters and the small and large

mailers a the need for the increase and its impact on mailers.

A number of constituents have contacted the subcommittee and

voiced their concerns regarding the Postal Service’s elimination of

an entire class of international surface mail. For decades this service has been the means by which thousands of Americans economically shipped books, professional and medical journals, and other

materials overseas to support humanitarian projects. Today the

only way to ship these reprimands overseas is by airmail, which

has tripled and even quadrupled in shipping costs. The elimination

of international surface mail has severely curtailed or in some

cases shut down charitable programs which have demonstrated

America’s goodwill to people and nations around the world.

I would like the Postal Service to address these concerns during

its testimony.

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I want to thank all of our witnesses today, and look forward to

your testimony on this important issue.

I would now yield to the ranking member, Mr. Marchant, for his

opening statement.

Mr. MARCHANT. Good morning, Mr. Chairman. Thank you for

holding this hearing today on the U.S. Postal Service’s recent rate

increase. As we continue our role on the subcommittee in providing

oversight of the Postal Service, I am reminded that, as it has been

said in the past, the Postal Service is not a perfect system, but one

which is ever-changing and expanding.

With recent enactment of postal reform legislation, I am sure we

can expect many more changes as both the Postal Service as well

as the mailing community adjust to a hopefully more robust and

financially stable USPS.

I look forward to hearing from all the witnesses today and hearing from all parties affected by the recent rate increase and what

impact the new rate has had on cost and profits.

Thank you.

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

Ms. Norton.

Ms. NORTON. Just a brief statement.

Mr. Chairman, I appreciate that you have called this hearing. In

a real sense, the mailers and the Postal Service suffer the same

problem: the world is changing from underneath them, with technology, and somehow both entities have to find a way through it

if they are to exist with efficiencies and, in the case of the Postal

Service, with the burden, and the very important burden of understanding that a mail system is still a public service and an indispensable one in this country.

Thank you again for this hearing, Mr. Chairman.

Mr. DAVIS OF ILLINOIS. Mr. McHugh, do you have any opening

remarks?

Mr. MCHUGH. Nothing formal for the record, Mr. Chairman. Just

let me thank you for your continued leadership in these critical

areas and to add my words of welcome to this and the following

panels. We look forward to their comments. Obviously, we wish to

ensure that, from our oversight perspective, as the rate-setting

process transitions from the old 1970’s system into a new one, it

is done in a way that is equitable and is fair and inflicts as little

pain and as much benefit as possible. I think this hearing can add

to that effort.

Thank you. I would yield back.

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

We will now hear from our first panel. I will introduce the witnesses.

Panel One, Mr. James C. Miller III, was elected chairman of the

Board of Governors of the U.S. Postal Service in 2005. In addition

to serving on the Board, he is senior advisor to the international

law firm of Blackwell, Sanders, Pepper and Martin.

Chairman Miller, we welcome you and thank you very much.

Our next witness is Mr. John Potter. Mr. Potter was named 72nd

Postmaster General of the United States of America on June 1,

2001. He has served as chief operating officer, vice president of

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labor relations, and in a number of other senior operational positions, both at Postal Headquarters and in the field.

Mr. Dan Blair, our third witness, serves as the first chairman of

the Independent Postal Regulatory Commission, the successor

agency to the formal Postal Rate Commission. He was unanimously

confirmed as a Commissioner of the formal Postal Rate Commission on December 9, 2006, and designated chairman by President

George W. Bush on December 15, 2006.

Gentlemen, it is the policy of this committee that all witnesses

be sworn in, so if you will rise and raise your right hands.

[Witnesses sworn.]

Mr. DAVIS OF ILLINOIS. The record will show that each witness

answered in the affirmative.

Your entire statement is in the record. Of course, the green light

indicates that you have 5 minutes to summarize your statement.

The yellow light means that your time is running down and you

have 1 minute remaining to complete your statement, and the red

light means that your time is expired.

We will begin with Chairman Miller.

STATEMENTS OF JAMES C. MILLER III, CHAIRMAN, BOARD OF

GOVERNORS, U.S. POSTAL SERVICE; JOHN POTTER, POSTMASTER GENERAL, U.S. POSTAL SERVICE; AND DAN G.

BLAIR, CHAIRMAN, POSTAL REGULATORY COMMISSION

STATEMENT OF JAMES C. MILLER III

Mr. MILLER. Thank you, Mr. Chairman.

I note I have some of my family here.

I would like to thank the Board of Governors of the Postal Service, whose testimony I represent today. Thank you, Jack Potter, the

CEO and Postmaster General, and Chairman Dan Blair and his

fellow commissioners at the Postal Rate Commission for all their

work.

I have a short statement with tables, which I ask to be submitted

and included in the record.

I would like to summarize this statement and extend it just a bit.

The first point I want to make is that we Governors take very,

very seriously our work in rate setting. We note that we are required by law to charge at least attributable cost for commercial

services, but we note that if everyone paid simply attributable

costs, our annual revenues would be only $44 billion. Since our

total cost is about $75 billion per year, we would be some $31 billion in the red, contrary to law. So the question is the amount of

markup to apply to each class of service.

Conventional approaches economists use in trying to figure out

the best approaches often yields prices that are inversely related to

the price elasticity of demand. Now, we believe that this policy

should be tempered by business judgment.

The second point I would like to make is with respect to the old

versus the new law. Under the old law, the Postal Reorganization

Act of 1970, the ratemaking process was long and tortured. Under

the new law, the Postal Enforcement Accountability Act of 2006,

ratemaking process is shorter and more streamlined. It is divided

into two parts: competitive products of a 30 day wait period for

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published rates, or 15 day wait period for contract rates. And the

PRC can establish minimum rates.

In the market dominate products area, which is 90 percent of our

business, we have a 45 day notice, and the PRC—the Postal Regulatory Commission—has a look-back provision. Under the new law,

we have until December 19th of this year to decide whether to propose a new rate package under the old law or under the new law,

either one. After that we, of course, would be under the new law.

The third one is with respect to the ratemaking case that is so

controversial here, that is R–2006–1. I would like to make several

points.

First, the Board of Governors engaged in a lengthy process in determining the rate package that we proposed in responding to the

Postal Rate Commission’s recommended decision. We began to look

at this issue back in December 6, 2005. We had board meetings on

January 10, 2006, February 7th, March 22nd, and May 2nd, all addressing in part the question of a rate case, and that we initiated

the rate case on May 3, 2006. Then we had Board meetings, a

Board meeting on June 6th, we had a teleconference on July 12th,

we met on September 11th, November 14th, and December 5th, all

addressing this issue in part. And on January 9th we had a Board

meeting.

On February 26th the Postal Regulatory Commission issued its

opinion and recommended decision. On February 27th we had a

Board teleconference, another one on March 6th, another one on

March 14th, another one on March 16th, another one on March

19th. And we had Board meetings on March 28th, on May 1st. We

are dealing with a second opinion, etc. And then we had a teleconference on June 19th and a teleconference on June 10th. All

told, we had 12 Board meetings and 8 teleconferences, for a total

of 20 such meetings addressing in part this issue.

I point this out simply to note that we laid a lot of attention to

this matter and spent a lot of time on it.

The second point is that our overall objectives in putting this

package together was to meet the requirements of the old law, the

revenue need, and to cover attributable costs, to apply the principles I just described and laid out in my prepared statement, including the inverse elasticity and business judgment, to differentiate by shape as well as weight, because the differences are substantial, and encourage mailers to use less-costly means of mailing.

The result was mostly increases, some minor decreases, and

some restructuring of rates, as described in table one of my submission. On the whole, our package and the Postal Rate Commission’s

recommended opinion are very similar, as you will see in table one.

Now, last, with respect to publications, I would just like to make

two points. First, they are the only class of mail that pays nothing

toward overhead cost. Under the new system, the new set of rates,

they pay just barely cover attributable costs, and before that they

did not cover attributable costs, and the law requires everyone to

cover attributable costs.

The second point is that I have heard it said that somehow by

raising the price or raising the rates on publications we are trampling on their first amendment rights. I have a copy of the ConVerDate 11-MAY-2000 15:09 Dec 14, 2009 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 U:\DOCS\53573.TXT KATIE PsN: KATIE
6

stitution. I read it very differently. I think that charge is really

bogus.

Thank you, Mr. Chairman. I would be glad to respond to questions.

[The prepared statement of Mr. Miller follows:]

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

Mr. Potter.

STATEMENT OF JOHN POTTER

Mr. POTTER. Good morning, Mr. Chairman and Ranking Member

Marchant and other members of the subcommittee. I appreciate the

opportunity to discuss the Postal Service’s approach to setting rates

for periodicals, both under the Postal Reorganization Act of 1970

and the Postal Act of 2006.

Because of the length and complexity of the price change process

under the Postal Reorganization Act, prices have changed every

few years. As a result, periodical mailers budgets and business

models have been negatively impacted by some sharp increases in

those years when rates were changed. Our most recent price adjustment is a good example of the weaknesses inherent in the old

system. For a number of important reasons, before our 2006 rate

filing, it had been 6 years since the mailing community had the opportunity for a full examination of the relationship between the

price of our services and the cost of providing them. Despite the

fact that we improved network efficiencies and introduced more

productive technologies to manage cost growth, our costs continued

to rise over that period.

Unlike other classes of mail and consistent with the long-term

pricing strategies that recognize the important role of magazines

and newspapers in the intellectual, social, and political life of our

Nation, periodical rates have been designed to just cover their

costs. By 2006, relative cost coverage for some classes of mail had

become markedly skewed. in the periodicals category, the revenue

was less than our cost, a situation that did not meet the requirements of the law.

There were many individual magazines that were significantly

below their cost. Even for periodicals that did cover their cost, it

was not significant enough to make up for those titles that were

below our cost.

In preparing our 2006 rate filing, we worked to make the cost

coverage comply with the law, while doing our best to be sensitive

to the pricing needs of smaller periodicals. Our proposal accommodated both of these needs, bringing cost coverage for that class to

more appropriate levels, with price adjustments for publishers of

all sizes held to a relatively narrow variance around the mean of

about 12 percent.

Our proposal encouraged more efficient mail preparation, with

an $0.85 charge for each container, large or small. Our intention

was to move as much mail as possible from expensive-to-handle

sacks to more efficient containers such as pallets, which hold about

40 times more mail than sacks and are more efficient to manage.

Following the hearing process, our proposal for the single, simple

charge had been expanded by the Postal Regulatory Commission to

55 different rates for different types of containers and different levels of preparation, leading to wider variations in overall prices.

During the course of the rate case, we communicated frequently

with mailers. We wanted to help them understand our proposal

and have time to prepare for the changes. However, the outcome

was unexpected. It was historically unusual, in my opinion, for the

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Commission’s recommendation to differ so greatly from our original

proposal. After careful consideration, taking into account the complexity of the Commission’s recommendation, our Board voted to

defer implementation for 4 months, twice the time period allotted

for other mailers.

Keeping the needs of periodical mailers in mind, we are focused

on minimizing magazine and newspaper processing costs, and with

the implementation of our state-of-the-art flat sequencing system,

we expect to reduce costs by automating the sorting of this mail

into delivery sequence.

Mail rates are a product of the mailing industry and the U.S.

Postal Service working together, committed to achieving the least

possible combined cost.

We are working with the periodical mailers to lower their rates

by eliminating sacks and shifting their mail to pallets. Copalletization, where you allow multiple titles on the same pallet,

can be an effective strategy for smaller publishers, and co-mailing,

which means you put two titles in the same bundle, for small mailers can increase the opportunity for them to take advantage of

work share discounts.

Ultimately, the new price-setting process contained in the Postal

Act of 2006 can prevent the difficult and contentious rate situations

we experienced this year. It will also address their underlying

causes and offer a welcome degree of predictability and simplicity

long sought by the mailing community as we transform from a

break-even financial model to one that encourages retained earnings. The new law will eliminate the irregular and sometimes

sharp price increase of the old system for our market-dominant

products, primarily first-class mail, standard mail, and periodicals.

That is because the new law anticipates annual price adjustments

that are capped at the class level by the rate of inflation.

This will allow incremental changes which will minimize the

business impact of dramatic price adjustments in a single year.

While the Postal Regulatory Commission has a far broader role

than that of the formal Postal Rate Commissions, its role in pricing

has changed considerably. Prior to a price change, the Commission

reviews the new prices for compliance with the rate cap. The Commission also has the authority to adjudicate and direct the Postal

Service to resolve any issues raised by customers after the new

rates have been implemented.

Without the inordinately lengthy review and hearing process, the

Postal Service will have the flexibility to adjust prices and product

offerings promptly in response to the dynamic market conditions

and changing customer needs.

This is important to our long-term success in providing everyone

in America with affordable, universal mail service. The Postal Regulatory Commission, under the leadership of Chairman Dan Blair,

has just taken an important step in helping us do that. Yesterday’s

publication of new rate regulations for our market-dominant and

competitive products takes us a giant step closer to moving from

an infrequent, primarily cost-based pricing model, to an annual one

that is market based. We are grateful for the Commission’s quick

action in this area, many months ahead of their statutory deadline,

and we look forward to moving toward this new pricing model soon.

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In closing, I would like to thank the subcommittee for the opportunity to discuss these issues with you today, and I would be

pleased to answer any questions that you might have.

[The prepared statement of Mr. Potter follows:]

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

Chairman Blair.

STATEMENT OF DAN G. BLAIR

Mr. BLAIR. Chairman Davis, Ranking Member Marchant, members of the subcommittee, last April I had the opportunity to appear before you in an oversight hearing with the two gentlemen to

my side to take questions on the operations of the new Postal Regulatory Commission. At that time, the rate case was still fresh, and

I had announced an ambitious schedule for the PRC to have in

place by October new rules for a new price cap system, as envisioned by the enactment of the Postal Accountability and Enhancement Act.

Mr. Chairman and members of the committee, I am pleased to

report that the Commission has accomplished that goal. The rules

were posted on our Web site yesterday. I am extremely proud the

Commission has completed its task 8 months ahead of the statutory deadline. I want to thank my fellow Commissioners, two of

whom are in the audience today—Commissioner Mark Acton and

Commissioner Don Tisdale—and the staff of the Commission for

their hard work and dedication to accomplish this substantial goal.

I know many Members still have questions regarding the previous rate case under the old system. I am happy to answer them

from the Commission perspective. In my opinion, that case highlighted many of the problems of the old system: lengthy in time,

litigious in format, and a zero sum gain. The ratemaking structure

provided little incentive for the Postal Service to contain costs.

This subcommittee led the 10-year fight for postal reform because you believed that the system needed reforming. Some fought

hard against that reform, but the leadership of Representative

McHugh, Chairman Davis, full committee Chairman Waxman, and

then-Chairman Tom Davis paid off. Together with the Senate and

the administration, a bill came forward that the President signed

last December.

This last omnibus rate case was the first fully litigated case since

2000. It was preceded by two subtle rate cases which, because they

are a negotiated nature, prevented the Commission, the Postal

Service, and mailers from addressing the growing cost imbalances,

operational concerns, or the Postal Service’s desire to move to

shape-based pricing.

While lengthy and litigious, the last case presented ample opportunity for public participation and comment. Sixty parties participated in the hearings, which were open to the public and broadcast

live by way of the Internet. Thirty-nine witnesses filed 139 submissions of testimony, all of which remain available for public review.

In fact, most of the witnesses appearing today participated in our

proceedings, either individually or through their business or professional associations.

Our recommended decision in this case had the unanimous backing of all five of the Commissioners.

The contrasts between the old and new systems are quite stark.

Under the old system, the Postal Service set forth its revenue requirement. The Commission then had to apportion the required

24

revenue among the classes of mail. That system produced winners

and losers.

The new, modern system of ratemaking is designed with an eye

toward predictability and stability and doesn’t play the zero sum

gain. For most postal products, rate increases will be tied to consumer inflation, thereby giving incentive to the Postal Service to

keep its costs at or below increases in inflation.

The Postal Service has the flexibility to increase rates for its

market-dominant products, subject to the price cap; however, its

actions will be monitored and regulated by newly empowered Postal Regulatory Commission. The Commission and the Postal Service

have a full agenda ahead in implementing the requirements of the

act. Having the new system in place sooner rather than later allows us the opportunity to focus on the task ahead and hopefully

avoid an old cost of service rate case.

We are now in the 9th month following our recommended decision. While some are still battling the old case, I am very pleased

that we can present you with a new system that will avoid the pitfalls of the past and provide a stable and predictable rate environment for mailers. I suspect that, had the Commission done things

different in the last case, a different set of witnesses would be here

today airing their concerns over how the Commission had done its

work.

My written statement fully addresses our actions in this hopefully last rate case under the old regime.

I look forward to working with Members of Congress, Chairman

Miller, Postmaster General Potter, and the mailing community to

ensure that this new law and the new structure which it produced

benefits our entire postal system.

I look forward to responding to your questions.

[The prepared statement of Mr. Blair follows:]

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

We will now proceed with questions for the witnesses.

I would like to begin with you, Chairman Miller. The Postal

Service has a program in place to automate the carrier sequencing

of flat mail. That is the flat sequence and sorting called FSS system. Do you anticipate that this will significantly decrease the cost

of handling periodicals? What is the timeframe for the deployment

and full implementation of the FSS system?

Mr. MILLER. Thank you, Mr. Chairman.

A couple of years ago the Board visited a plant in Indianapolis

where they were beta testing the system. We have approved major

acquisitions of flat sequencing systems, and we anticipate those

coming on-board in sequence over the next several years.

We think it has the potential of lowering the cost, as well as improving the service offered to publications. In that event, of course,

it at least holds out potential of giving some rate relief to publications, but we will just have to see how that system works.

We have confidence that it will pay off handsomely, but how

handsomely we are not sure, and we are not sure how differentially

it will affect each of the various classes of mail. But there is a great

deal of potential there for publications.

Mr. DAVIS OF ILLINOIS. The subcommittee has had a tremendous

amount of inquiry relative to international charitable mail. What

is the Board’s position on international charitable mail?

Mr. MILLER. Well, as a business proposition, we think that all

mail, whether it is charitable or not, should cover the relevant attributable cost plus some contribution to overhead. We have addressed the question of international mail. I suspect what you have

heard is about the so-called M-bags that is of great controversy. I

think that would be best addressed by the Postmaster General.

Mr. DAVIS OF ILLINOIS. In a recent case involving review of a negotiated service agreement, the Bank of America, NSA, the Postal

Service gave the Postal Regulatory Commission data that was 8

years old. Of course, the PRC rejected that data as not being data

that they could effectively use.

Mr. MILLER. Right.

Mr. DAVIS OF ILLINOIS. As chairman of the Board, would you

agree with me that the PRC must get the best possible data to

make use of when they are trying to evaluate and make a determination?

Mr. MILLER. I absolutely agree, and I think that was a serious

oversight, and the Board of Governors is not happy about that. We

are addressing that issue in a serious manner.

Mr. DAVIS OF ILLINOIS. You indicate that you are addressing it.

Would you amplify a little bit?

Mr. MILLER. I have asked the Inspector General to look into the

matter and to give us a report, and he anticipates giving us a report in the next several weeks.

Mr. DAVIS OF ILLINOIS. Thank you very much.

Mr. Potter, does the Postal Service intend to introduce a new

rate case before the end of this year?

Mr. POTTER. The Board of Governors decides whether or not we

are going to implement a new rate case or introduce one this year.

Just yesterday, late yesterday afternoon, we received a final rules

32

and regulations for the rates process under the new law. We are

in the process of evaluating that and giving a summary of that information to the Board so they can render a decision, hopefully at

their Board meeting in November, as to what path we will choose.

But it is not my decision; it is the decision of the Board of Governors, and we will, after evaluation of the rules that have been

published, make a recommendation to them, but it would be premature for me to say right now.

Mr. DAVIS OF ILLINOIS. Let me ask you, regarding the elimination of international surface mail and its negative impact on

some of the humanitarian issues and causes, how can the Postal

Service address these concerns?

Mr. POTTER. Mr. Chairman, if I could just describe, international

mail is probably our most complex rate area. M-bag service is a

service that was designed to move on ships around the world. Over

the last few years, the volume of mail that was sent on the M-bags

has been declining. In addition to that, our ability to get service to

many of the countries where the charitable organizations sent their

books has been eliminated or limited severely. So in many cases we

found ourselves flying mail just to make sure that it got there.

So as we looked at the international rates, we decided to recommend to the Governors that we eliminate those surface movements because of a lack of market interest, as well as the fact that

we had, in many cases, been forced to fly the mail and were losing

money on it.

That is not to say that we are not insensitive to the needs of the

charitable organizations, and we are looking at ways under the

new rate structure that we might be able to accommodate them.

But suffice it to say it is a very difficult market, a declining market, and one where service simply is not available to us.

Mr. DAVIS OF ILLINOIS. We are going to have a second round, and

so I am going to shift and go to Mr. Marchant.

Mr. MARCHANT. Thank you, Mr. Chairman.

This will be a question for all panel members. With the continuing pressure on postal mail being lost to electronic means, what

measures is the Postal Service taking to attempt to minimize these

losses?

Mr. POTTER. Well, first of all, the Postal Service is doing everything it can to increase the level of service that we provide to

America, because if we provide a good level of service we are obviously providing value, and that will help us keep the mailers that

we have and grow new mailers.

In addition to that, we are looking to take cost out of our system

wherever it is practical, so efficiency is a paramount issue for us.

Third, we are looking to grow and take advantage of the inherent

value of the network that we are very proud and honored to be able

to work for.

So over the course of time you have seen people who traditionally

have not used mail, such as folks who rent DVDs. It is now a market advantage to use us to deliver DVDs. We are looking at other

places where we can do that.

The key going forward for us, though, is to ultimately improve

the quality of the product we have, the efficiency of the product we

have. One of the big steps we are going to take is to introduce an

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intelligent mail bar code that will allow us to track and trace every

piece of mail. Once we are able to do that, I think it is going to

open up a world of opportunities for new products and will increase

the use of mail.

The threat from the Internet is very real. It is not something

that we can compete with head-on because of costs. But I think we

can complement the Internet and find places in the market where

we fit and where people will value the service that we provide.

Mr. MARCHANT. Mr. Blair.

Mr. BLAIR. I think a good way to answer that question is how

it turns on to ensuring the viability of the postal system in the

United States. From the regulator’s perspective, we are moving in

the right direction in that area. First we introduced the new rate

structure for market-dominant, competitive products yesterday. I

think that will help us lead toward an environment that will see

more predictable and stable rates, and that way the customers can

better plan their business cycles according to how those rates are

going to be increased. Generally speaking, they will be capped at

inflation.

We are also looking at how you bring value to the mail. From

the regulator’s perspective, we have been joined with the Postal

Service over the course of this past summer in consultations over

the development of service standards and how to measure those

service standards. If you have a product, you need to know how it

is going to perform and you need to be able to measure it, so the

Commission has been bringing value to that respect by working

with the Service to ensure that these standards are, in fact, realistic, don’t impose new costs on the system, but are viable and allow

customers a realistic idea of how well their mail is going to be received into the system.

Also, from the regulator’s viewpoint, we are going to bring transparency and openness to the system. We will be looking at financial

data. We will be looking at the competitive playing field. And we

will be looking at the ways the Postal Service is offering its new

products and a whole host of other things down the line. We are

charged with doing numerous new studies, as well.

I think that from that perspective I don’t know if it will stem the

loss so much as you may bring value to the mail and bring value

to the system, ensuring the viability of that system as an integral

part of our economic sector.

Mr. MILLER. Mr. Marchant, first I want to assure you the Board

of Governors is committed to growth as well as cost cutting.

Growth means new innovations, service improvements, just the

kind of thing that the Postmaster General was speaking about.

The second thing is there is an empirical question, and that is

to what extent has the e-mail phenomenon or the electronic billpaying and all sort of run its course. Is it going to accelerate or is

it going to bend over in terms of the rate of its growth. That is

something that, frankly, I am frustrated because I don’t have good

numbers on. I am asking some of the people at the Postal Service

to do some more research about.

Keep in mind that electronic communications both create new

messages as well as divert messages. And, as Jack I think referred

to, there are ways in which electronic mail and electronic commuVerDate 11-MAY-2000 15:09 Dec 14, 2009 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 U:\DOCS\53573.TXT KATIE PsN: KATIE
34

nications can be complementary to Postal Service, and vice versa.

I mean, a lot of people order things electronically and get them delivered by us. A lot of mail comes and suggests people to order

things electronically. So there is a symbiosis here that we need to

explore, as well.

Mr. MARCHANT. Well, I will tel you, from my personal observation, that there are at least three different ways now that I use the

mail that I didn’t use even a year ago. The movies is one of them.

I am now finding that a lot of the stuff that I am ordering on the

Internet is coming by the Postal Service instead of UPS or one of

the other dreaded three or four. And I am finding that—maybe it

is because I am getting older or I don’t know what it is—I am getting about twice the amount of print mail, the catalog mail, than

I was a year ago.

In my household, the growth of our mail is actually growing. Our

kids are out of the house now, but our mail is now actually growing

and we are getting more mail now than we did a year ago and are

using the Postal Service more heavily.

Mr. MILLER. The loss is really in the first-class mail. That is really where it is limited.

Mr. MARCHANT. Yes. The first-class mail is fairly non-existent,

except for those constituents that feel like it is the most effective

way to get to me. And it is.

Mr. MILLER. Yes.

Mr. DAVIS OF ILLINOIS. Well, I’m glad that you get time to watch

a movie every once in a while.

Mr. MARCHANT. Yes, between 2 and 4 a.m.

Mr. DAVIS OF ILLINOIS. Right on for you.

Ms. Norton.

Ms. NORTON. Well, we, of course, have to accept and indeed have

pressed the business model that is being used now and obviously

will have differential effects. I am concerned about the difference

between mass periodicals that have advertisers and small periodicals that thrive simply on what they have to say and for whom,

therefore, the postal rates are a large cost of doing business.

Rates have reflected this difference before, and you now have

some saying that essentially you are raising rates at such a rate

some allege that they expected rate hikes, for example, for catalogers and small periodicals, in the range of 9 to 12 percent, and

that it could be as much as 20 to 40 percent.

It seems to me very important to encourage efficiencies of these

periodicals, as well as everybody else, including the Postal Service,

but I wonder if you truly believe that the special circumstance of

small publications with little or no advertising has been taken fully

into account, and that these rates are bearable by such publications

with efficiencies. Or do you envision that perhaps they are going

to go out of business and so be it?

Mr. MILLER. Ms. Norton, let me reply by saying first of all we

delayed the implementation of the increases to give the publications a time to gear their software to the new rate system.

Second——

Ms. NORTON. To do what?

Mr. MILLER. To give the publications time to change their software to reflect the new rates.

35

Ms. NORTON. Does that respond to my question? Will any kind

of adjustments of software make up for the difference between

what very small periodicals who have no advertising can do with

large increases that come at one time, and mass mailers or periodicals like Time Warner, for example, who depend on advertising as

much as or far more, and who have, of course, a great deal of advertising.

Mr. MILLER. I am trying to be responsive, Ms. Norton. I am saying that our delay in implementing the new rates helped the small

as well as the large.

In terms of the small, we have recently changed our rules to

make small publications eligible for the lower rates, depending on

editorial content versus advertising, and so forth. We have bent

over backward to accommodate them in that fashion.

But we are required by law to charge attributable costs, and so

we did raise the rates.

You settle on an important point here, or you focus on an important point, and that is that under this new rate package—and I am

sure that Chairman Blair wants to explain this, as well—some of

our rate packages to which larger publications can more easily be

accommodated or could pool their publications, they weren’t hit as

hard as some of the smaller ones. But the prices do reflect. I mean,

we might have some differences here and there, but, I mean, by

and large the prices do reflect the cost, the higher cost that the

Postmaster General was alluding to earlier that palletized costs are

lower than individual cost handling bags, and so forth. We had to

make them reflect those differences in cost.

Mr. POTTER. Ms. Norton, if I could?

Ms. NORTON. Yes, Mr. Potter.

Mr. POTTER. I am concerned about periodicals, in general, and

moving forward. We are very concerned about our ability to live

within the rate cap for periodical mail.

There are a number of ways that I think we have to go about

the business of addressing them. First, we have to help periodical

mail grow, because overall in the industry there is a debate about

editorial versus advertising content—and don’t get me wrong, it is

a laudable debate and it is one that you could easily get into. From

the person who is trying to, again, run it as a business, I prefer

to have very thick periodicals that pay a higher rate.

Ms. NORTON. But how do you get periodicals to grow in the Internet and technological climate we have today? That is an interesting

notion.

Mr. POTTER. Well, it is, but there have been things that would

preclude you from putting a periodical into the mail, and what

prices they could charge. For example, there used to be a nominal

rate that said that you had to charge somebody for a subscription

if you used the mail at least 50 percent of what the newsstand

price was, the basic rate was. So whatever the basic subscription

rate is, you had to charge at least 50 percent of that for the folks

that bought the publication. We have lowered that to 30 percent to

give them pricing flexibility so they can help grow the number of

magazines they had.

As the chairman was just saying, we ended up, and we have

worked with them to try and improve those magazines that are

36

starting a new launch to enable them to take advantage of using

the periodical mail stream long before they have sufficient publications to qualify. So it is a way of easing their way into new hardcopy magazines.

In addition to that, we want to make the system as efficient as

we possibly can, and so the notion is that everybody is going to

have to change. The Postal Service will change by trying to make

its operations more efficient. As the chairman alluded to, we have

a flat sequencer, and I said earlier to try and make that more efficient.

In addition to that, we have a committee that we work with,

Postal Service one-on-one, a periodicals advisory group that has

newspapers and magazines of all sizes to come together and to look

at the issues from an industry standpoint, and it involves not only

the Postal Service and the periodicals as well as the suppliers, because there are printers out there, logistics companies. The notion

if we could bring the mail together and process it in bulk, more of

the work could be done during the printing process.

Change is tough. I am not trying to negate the fact that this

change will be difficult.

We also have a broader group called the Periodical Operation Advisory Group that is part of the Mailers Technical Advisory Committee, where we have people from outside of periodicals who are

helping us trying to address this problem. But the notion that the

business challenge is we have a declining mail base because, as you

alluded to, magazines are going online now, as well as in the mail.

We have a declining mail base, and that mail is being delivered to

a growing delivery base. It is a very challenging issue.

Ms. NORTON. As I said in my own opening statement, I think you

and most of these periodicals are in the same boat.

Mr. MILLER. Right.

Ms. NORTON. Indeed, the very small opinion periodicals I am

talking about who don’t rely on any advertising do seem to me to

be an alternative, particularly since they often cater to fairly high

income and educated people, and that is go online. It seems to me

that one of the challenges you face, just as they face the challenge

of meeting the postal rates—and I am the first to understand the

challenge you face. You, in fact, serve the public, and that has to

be my first concern. But, just as you face those challenges, it seems

to me that for these periodicals the technology is a much more viable alternative than for many of your customers.

Mr. Blair.

Mr. POTTER. I would agree with that.

Mr. BLAIR. I think two points I would like to bring out. One fundamental question is why are these costs so high in the first place.

We have seen in first class and standard class over the last 10

years the cost remain fairly constant. In periodicals they have shot

up by about 50 percent.

Over the last 10 years, periodicals as a class has lost about $3

billion. They failed to cover $3 billion of their direct costs, and they

have made virtually zero contribution to the institutional costs of

the Postal Service.

37

So it is not that it was a robust class of increasing volumes and

increasing revenues; it is just the opposite. So with that you need

to ask the second fundamental question of: then who pays?

Ms. NORTON. Who pays? And how much do each pay?

Mr. BLAIR. Exactly. And do you ask the smaller periodical? It is

really not a question of size so much, although size does have a

bearing on it, but it is efficient versus inefficient, or lack of efficiencies. Let’s put it that way. And the question is who pays.

If you can’t engage——

Ms. NORTON. You can talk efficiencies when you are talking

about large periodicals. It is very hard to talk efficiencies when you

are talking about these small opinion periodicals and

magazines——

Mr. BLAIR. You are correct.

Ms. NORTON [continuing]. For whom efficiencies of scale are simply unavailable, sir.

Mr. BLAIR. You are correct, and so the question then still becomes fundamentally who pays. Do you ask other mailers to pick

up those costs?

Ms. NORTON. Well you ask them to pay. As I say, the question

is I don’t think they expected not to pay any of the institutional

costs; I think the question is how much can we reasonably expect

them to pay without driving them either out of business or into another mold which would not be available to the Postal Service at

all.

Mr. BLAIR. But who picks up the deficit? That is the question.

Do you ask other mailers? Do you ask the postal system to absorb

it? Do you ask rate-payers? Do you ask taxpayers? That is the

question.

The rates that we recommended in the last case were cost-based,

and those were consistent with the Postal Reorganization Act in

1970. We now have a new system. Hopefully you won’t see the rate

spikes, the rate shocks under the new system because it is capped

at the class. But the fundamental question is: who pays when you

have these high costs?

Mr. DAVIS OF ILLINOIS. Thank you, Ms. Norton. We are going to

have another round, and I am going to go to Mr. McHugh.

Mr. MCHUGH. Thank you, Mr. Chairman.

Let’s talk about costs. How much costs are we talking about here

if this Congress decided, because I think there is a lot of sympathy

that there is a political content value of these mailers, and we

wanted to hold them harmless, how much money would have to be

found either from the taxpayers or from within the system? I suspect about $500 million, but is that about right?

Mr. POTTER. Well, under the recently adjusted rates, there is

nothing. I mean, they are going to cover their cost. The question

is how much relief do you want to give. I think at that point you

can decide what the number is.

Mr. MCHUGH. But the rate increase for this group that was put

into place, as we have been told ranging from 5 to 45 percent, depending on where they fell on the efficiency spectrum, all told, the

information I had was around $500 million, ball park.

Mr. POTTER. I think it is probably half that.

Mr. MCHUGH. Half that?

38

Mr. POTTER. Yes.

Mr. MCHUGH. So $250 million?

Mr. POTTER. And if you talk about the difference between that

and the average price increase, it would be half that again, so it

would be about $125 million.

Mr. MCHUGH. So what we would be reassessing and what Mr.

Blair and his Commission would have to do is reassess that $100

million if the law provided you the flexibility to do that, assess that

$100 million across others, yes? That is a question, Dan.

Mr. BLAIR. I would have to go back and look at the figures on

that. Mr. Potter is correct that the class, as a whole, now covers

all its cost, how you apportion it within that class. if you capped

it for some mailers and not for other mailers, I would have to go

back and check the record to see exactly how much that would be.

Mr. MCHUGH. Well, it seems to me as a Congress, if we are going

to consider the totality of this challenge, we need to understand

how much money we are talking about, so maybe we ought to do

that. It would be of interest.

As to these mailers, I know you have heard, as we have heard,

that, while suggestions like co-mailing and co-palletization and

other efficiency measures sound nice, that when it comes to these

particular publications it is really efficiencies beyond their ability—

in fact, beyond their printers’ ability.

Dan Blair, I would ask you, sir, to what extent did you look at

the reality of the accessibility of true efficiencies as a way for these

mailers to address their concerns? Is that something you looked at?

Mr. BLAIR. Well, when we assessed these rates we did it based

on a data base that was provided to us by the Postal Service and

accepted by the parties in the litigation. We saw that there were

small mailers who were very efficient. We saw that there were

large mailers who were inefficient. So there is ability among some

to do that.

We are also seeing that there are changes, in fact, going on in

the system. You are going to be hearing from two panelists after

us who represent printers who are talking about responding to the

market realities and making themselves available.

But besides making it a cold, hard determination based on efficiencies, the Commission tried to ameliorate that by saying when

we upped the editorial discount available for these small magazines

of opinion or for magazines, in general.

Second of all, according to our study, the smallest circulation

magazines, those under 15,000, saw the smallest percentage increase overall, as well.

Third, even though it is not making an institutional contribution

as a class, that does relieve mailers across the class from additional

burdens in terms of rates.

Mr. MCHUGH. Help me understand, if, as Chairman Miller has

said a number of times this morning, and if, as the law has stated

at least since 1970 that these publications, as other classes of mail,

have to cover costs, I am assuming they have through the various

rate-setting procedures; is that correct? I am curious why 45 percent fell upon some of these mailers and not others if they were,

indeed, covering cost under previous rate cases.

39

Mr. BLAIR. I don’t know if the individual mailer was covering

those costs. The recommends were tied to what are called rate elements, which are tied to particular mailing practices.

We looked at how a mailer prepares his or her mail, how they

present it, what kind of container it is in. Is it in a bundle? Is it

in a sack? Is it in a lightweight sack? Can it be palletized? Where

is it entered into the mail stream? Where is it going? Is it going

to a business? Is it going to a household? Is it going to a classroom?

The editorial percentage discount, a whole host of factors go into

that. So each mailer’s rate will differ depending on his or her practices. In fact, the number of pieces they mail at the time will also

determine.

The old structure was premised on pieces and pounds. Now what

we have done is we have introduced other cost elements, including

pieces, pounds, sacks, bundles, and pallets. Those we identified as

different cost drivers, and, depending on how they are utilizing

them will determine how much an individual mailer pays.

Mr. MCHUGH. One final question, if I may, Mr. Chairman.

Under the bill that this Congress passed and you published your

ratemaking regulations on yesterday, there is a requirement, because I think we all understood in the Congress that, as has been

said, periodicals has been a troubled class for some time, that the

Postal Service and the Postal Rate Commission shall study and

submit to the President and Congress a full report on the accuracy,

the quality, the completeness of information that you used in assessing rates against periodicals and other requirements of that

study.

I am assuming that you will follow that part of the law, but I

am wondering, have you had a chance yet, either individually as

the Postal Service or the Rate Commission, to talk about how and

when you might go forward on that study?

Mr. BLAIR. Your assumption is correct. That is something that

we would hope to start working on with the Postal Service soon.

We have been working with them on the establishment of the rate

system, as we have with other members of the community. We

have been working on the service standards and focusing on those

aspects of the bill that had a time deadline. But this is something,

given your concerns or the committee’s concerns or something, that

we will look forward to working with Mr. Potter and Mr. Miller on.

Mr. MCHUGH. Mr. Miller.

Mr. MILLER. Yes, sir. Could I just make three quick points? One,

when we are talking about Dan or Jack or I talking about covering

costs, I want to make sure we understand that we are talking

about covering attributable cost, which is only 59 percent total cost.

The rest is overhead. We have said that the publications are not,

under the new regime, publications as a whole would not cover

anything, would not contribute anything to overhead.

Second, in the past, because we did not break out the cost differences, not for the larger publications but the kind of service that

we have, by kind of service, palletized and otherwise, those that

were using the bags and otherwise were being subsidized by other

publications and other users of mail. So we made this reality check,

and that is a reason that the rate structure for a publication is a

little more complicated today.

40

Finally, I read some of the testimony from some of the publishers

and also the letters that we received—we received hundreds of letters in response to our rate proposal. I don’t recall anybody talking

about, well, we could raise rates. It is always, We will suffer this

loss, that loss, and so forth. But, I mean, if these publications—and

I subscribe to some of these very small publications—I think that

the consumers could bear higher costs, as well. So I don’t see that

they would go out of business. Maybe some cutbacks or whatever,

but I think that the allegations that the sky is falling are simply

that.

Mr. MCHUGH. Thank you.

Thank you, Mr. Chairman.

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

Mr. Sarbanes.

Mr. SARBANES. Thank you, Mr. Chairman.

I am going to follow the same line of questioning for a couple of

minutes in terms of the impact on the small mailers.

Mr. Blair, you said that there are small mailers that you have

discovered are quite efficient, and there are large mailers that are

inefficient. The theme of your remarks and the answers to your

questions seem to be that the same expectations of efficiency ought

to be brought to the large mailers as to the smaller mailers. I think

what you are hearing up here is that I am not sure we agree with

that; that there shouldn’t necessarily be the same expectation, the

same standard applying, because, as a class or group or category,

the smaller mailers are going to be inherently less efficient and, as

has been said by others, can’t expect to achieve the kinds of efficiencies across the board that the larger mailers can.

I don’t claim to be an expert on the PRA, but a number of you

referred to the fact that the law requires you to recover these costs

and so forth, but the law doesn’t say that you can’t group people

together in a way that some cross-subsidization is occurring, does

it?

Mr. BLAIR. Well, the law basically directs that mail cover its cost,

and the Commission has certainly followed, over the course of the

37 years, that when cost drivers have been identified, they have

applied it to those mailers. That seems to be the question of who

pays. If you do have inherently inefficient—and I don’t want to

make that a value judgment—inherently inefficient, small mailers

who just can’t avail themselves of this, then the question is: who

pays the difference between what would have been an affordable

rate and what the real rate is?

Mr. SARBANES. Right.

Mr. BLAIR. And you can ask the big mailers to do that, and you

are going to be hearing from some big mailers after us. I think that

they are going to certainly have an opinion.

Mr. SARBANES. Well, you are always going to hear from someone.

Mr. BLAIR. Exactly.

Mr. SARBANES. I guess the concern is we are hearing from small

mailers who have high levels or high amounts or high volume of

political content in them, editorial comment, and we are particularly concerned that gets crowded out over time. So maybe we

would choose to hear more from the large mailers and the small

mailers. I think that is kind of what the discussion is.

41

But I don’t buy the idea that a situation where you draw the line

at a place that still allows for reasonable cross-subsidy is something that can’t continue to be part of the approach and thinking

of the regulatory commissions.

Mr. BLAIR. I think that some would say there is still a reasonable

cross-subsidy. The full efficiencies weren’t completely passed

through on to the small mailers in this case.

Mr. SARBANES. And we talked about overhead versus attributable

cost.

Mr. BLAIR. Right.

Mr. SARBANES. And I am talking about within the attributable

cost we really——

Mr. BLAIR. Even within that class, so you are talking of who is

going to pay those attributable costs, not all the efficiencies were

completely passed through to the more efficient mailers. More-efficient mailers are still paying for the cost of the less-efficient mailers, to some degree. Not as much as they were before the old structure.

Mr. SARBANES. OK.

Mr. BLAIR. And I am sympathetic to where you are coming from,

but I would ask you to understand that if this was a robust class

where you had growing revenues, I think that you could say let’s

level the playing field a little bit more. But it is not. I mean, having not attributed $3 billion over the last 10 years, plus made no

contribution to the overhead cost of the Postal Service says something has to be done.

The old rate structure sent out the wrong messages. It is my understanding that under the old rate structure incentives were given

to mailers to use what are called lightweight sacks. Oftentimes

those sacks would spill or break, causing more hand processing,

which added to cost. Why were incentives given to using those

sacks?

Those things had to be re-adjusted. So you are right that there

is more of a burden placed on these smaller publications who can’t

reach these efficiencies, but then the question then comes down to

who pays for those. At this point, I think it is consistent with the

PRA that once those cost drivers are identified, that you go forward

and you ask those mailers to pay for those costs.

Mr. SARBANES. Well, the fact that you are describing a group of

mailers, generally periodicals, that you seem to say may be going

ultimately the way of the dinosaur in terms of their declining base

and all the rest of it, I guess whether that is true or not, as they

head in whatever direction they are heading in, we are just saying

that the burden ought to be spread a little bit more.

Can I ask one more question, Mr. Chairman? I am going to completely switch gears and get back to this issue of other sources of

revenue and so forth and other uses of the Postal Service.

I have been intrigued for a long time, ever since I read about the

response after Katrina, where you had U.S. Postal Service in places

where no one else dared to go, and understanding and knowing everybody in a community and being able to reach out to them, and

in some instances were the first responders on the scene. Could you

just talk briefly about the extent to which the Postal Service is

thinking about how it becomes part of a first responder network

42

and whether—I mean, there wouldn’t be commercial sources of revenue from that, presumably, but you might be able to convince

other agencies that are keen on being prepared in a disaster scenario to contribute toward that kind of effort. If you could just

speak to that.

Mr. BLAIR. I will defer to the Postmaster General on that one.

Mr. POTTER. Well, first of all, we are very proud of our people

and the way they respond to any emergency situation that occurs

anywhere in the country. We are very proud of the fact that we

have service back up and running in California, and, for those people that have lost their homes, we have managed to provide temporary delivery as convenient as we possibly can to them.

I personally was in Florida after Hurricane Charlie, and then

was down in New Orleans and Mississippi after Katrina. I have to

tell you that I think we can bring a level of coordination to something that is extremely important after a disaster, and that is to

help find others get connected with each other when it comes to

family members.

I was a little surprised when I walked the streets in Florida with

a letter carrier to see people from other agencies, Federal agencies

and private concerns, out doing reconnaissance when it came to

what homes were occupied, where the residents might be. Those

folks didn’t even know what street they were on. Our letter carriers

had the day before not only gone out to determine which homes

were occupied, but had forwarding information, knew where they

were located.

Likewise, in the Katrina situation people came and registered

with us, gave us change of address, and we were able to again help

people get connected.

We are very proud of the work we are doing right now with

Health and Human Services and Homeland Security around what

might happen if there was a biological attack in different parts of

the country, and we have done tests in major cities around the

country, most recently in Boston, where the Postal Service, working

with our unions, volunteered to help with the delivery of medications to people who would be recommended to stay homebound.

We would like to even go farther than we did. We showed that

we could deliver in a matter of a couple of hours medications to

every address in a geographic area because our people have assigned routes, they have assigned routes, they know who is behind

the door.

The one thing I would like to do is allow the carriers the flexibility to determine how much medication is left on a door because

they are more knowledgeable about how many folks reside in a residence than a data base might give you.

So I think there are numerous ways that we can do this. First

and primarily is to help locate people after a disaster, but I think

it would require some change in the law to allow us to share information.

Today there are all sorts of restrictions about our ability amongst

agencies and private sector folks to share information about what

they know about the whereabouts of folks after a disaster, and that

could be very helpful. And then, working with the Federal Government, we can be an active participant in the logistics around movVerDate 11-MAY-2000 15:09 Dec 14, 2009 Jkt 000000 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 U:\DOCS\53573.TXT KATIE PsN: KATIE
43

ing supplies to needed areas, as well as to provide contact, whether

that is the hand delivery of information in written form if other

communications are down, or the delivery of medications.

Basically, if it is hard copy or physical, I think you have a ready

resource. The Federal Government has a ready resource in the

Postal Service to provide service.

If I could go and burden you a little bit to go beyond that, I view

the Postal Service as the presence of the Federal Government in

every community. When you think about the Federal Government,

we are the piece of the Federal Government that touches everybody

at their door every day. I would love to engage in a conversation

about how the Postal Service could help the Federal Government

interface with its constituents, whether that is today we work with

the Secretary of State with the issuance of passports. We would invite all thought on how we could better serve the American public

as the arm of the Federal Government in every community and

every door.

Mr. SARBANES. And I think you should be paid for that service.

Thank you, Mr. Chairman.

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

Mr. Jordan.

Mr. JORDAN. Thank you, Mr. Chairman.

I want to thank the gentlemen for joining us this morning. I am

just beginning to get my arms around this issue, but, with respect

to the periodical issue, how long were we functioning under the old

structure, the kind of two-tiered or cross-subsidization, whatever

you want to call it? How long did that go on?

Mr. BLAIR. That old structure was in place since 1970.

Mr. JORDAN. And then someone mentioned earlier the lead time

you were giving periodicals and companies today. How much lead

time was given to those individuals?

Mr. POTTER. Well, the Postal Service would consult with mailers

as we were formulating a rate proposal. We would file a rate proposal with the Postal Regulatory Commission, and they had 10

months under that law to preside over a rate case with an evidentiary procedure. At the end of 10 months they made a recommendation to the Board of Governors regarding the rate proposal that was put forth in front of them.

Basically, the Board of Governors could make a decision to go

along with the recommendation. At the end of the day, the Board

of Governors has, I guess, the ability to overrule the Commission

when it comes to the revenue requirement; however, when it comes

to rate structure, the rate structure is pretty much under the domain of the Postal Regulatory Commission.

Generally, after that recommendation is made and the Board of

Governors has made their decision, there was a 2 month to 3

month period of time to allow for mailer implementation. Whether

it was 2 months or 3 months was largely determined by the financial position of the Postal Service. If there was an ability to allow

them to go 3 months, it would. In the case of this past rate case,

we chose to implement within 2 months because the new law basically had us lose $5 billion last year, so it was not a good year to

give anybody charity.

44

Mr. JORDAN. Are the numbers thirty-seven years under the old

structure, 2 months lead time? Is that accurate?

Mr. BLAIR. No, 37 years under the old law. From time to time

the Postal Service would come in with a new rate case. Last year—

was it January or February?

Mr. POTTER. No, it was May. May 2006. Let me just describe it

to you a little bit. In effect, when we file our rates we are putting

people on notice that a year from that date they can expect a rate

change.

Now, historically what we file is in the ballpark of what the outcome is. By in the ballpark, I am talking a couple of percent high

or low.

In this case what happened was we filed a rate case. The Postal

Service was working with mailers saying here is what we filed,

here’s the new rules and regulations around that filing, and we

published them and had regular meetings with them on that so

that they could begin to anticipate their software requirements and

build those costs into their budgets.

What happened was we had an outcome that varied rather dramatically for some mailers from what the Postal Service had filed.

Mr. JORDAN. Is it fair to say in that 37 year timeframe that there

have been several occasions like what we are discussing here today,

so several times this thing has happened, but this particular time

it is to a larger degree than in previous occasions? Is that accurate?

Mr. POTTER. My experience was there wasn’t as dramatic a difference in the rate structure. It generally followed along the lines

of what the Postal Service had proposed. In this case there was a

big difference for some mailers.

Mr. JORDAN. OK.

Mr. POTTER. So we might have proposed an increase of 20 percent and it went to 40 percent. In other cases, mailers’ rates

dropped versus our proposal. It is that change and the width or the

breadth of that change that has a lot of mailers concerned. That

is one of the reasons they are concerned. They are also concerned

because the nature of just you raise any rates they are going to be

concerned.

Mr. JORDAN. I understand. And in that 37 years, there has always been some degree of what has been called cross-subsidization

or different tiers. In fact, I forget which one of you gentlemen said

it earlier, you said something about with new periodicals you have

some kind of different structure that is in place.

Mr. POTTER. Well, if I could respond, first of all, there always has

been cross-subsidization within every class, because there is a different cost to the Postal Service for handling different mailings.

Let’s take periodicals. If you take a periodical mailer and you

produce a magazine that stays within your local area, if it is a

Washington, DC, magazine and 95 percent of the recipients are

right here in Washington, it is a lot easier to handle that mail than

it would be if you had that magazine and it went to a dispersion

of people around the country. So there is always going to be a variance on cost. And there has always been cross-subsidization.

The Board of Governors has exercised their judgment in terms

of how much of that cross-subsidization they would allow, and their

filing last May in 2006 reflected their judgment regarding that

45

cross-subsidization that they would allow to happen. They knew

that some mailers weren’t covering their costs, while others were

more than covering their costs. So there was a balance there that

led to what would be an average price increase for periodicals.

In the case of what just happened, the Board of Governors’ judgment was overridden by the Rate Commission’s or Regulatory Commission’s view of the prices that were proposed in light of their interpretation of the law and how they should apply those economic

principles.

Mr. JORDAN. Thank you, Mr. Chairman.

Mr. DAVIS OF ILLINOIS. Thank you, Mr. Jordan.

Mr. Cummings.

Mr. CUMMINGS. Good morning.

Let me see if I can get a handle on some of this.

This basically is a done deal, isn’t it? I am just trying to figure

out whether we are here wasting our time, because time is short.

I am just curious. It sounds like you are basically saying this is a

done deal. Somebody answer me, please.

Mr. POTTER. Well, by law the case that was proposed last year

is a done deal, but I think the value of this discussion will help

shape us and our thinking for future rate cases.

Mr. CUMMINGS. Well, I am glad you said that, Mr. Potter, because the new law basically gives mailers even less input, is that

right?

Mr. POTTER. Not in my opinion.

Mr. CUMMINGS. No? I see you shaking your head, Mr. Miller.

Why are you shaking your head?

Mr. MILLER. Well, they can have a lot of input, and my understanding is the new law—and I may be incorrect in this. I am not

a lawyer, but I am advised by lawyers that the new law gives the

Board in its rate changes the discretion to include other things,

things in addition to attributable cost.

Mr. CUMMINGS. Mr. Potter, did you have something that you

wanted to say?

Mr. POTTER. I just wanted to agree with them.

Mr. CUMMINGS. I guess where I am going with this is I am trying

to figure out, we have, say, for example, in my District the African

American newspaper. This is a newspaper that basically has been

around for over 100 years. A lot of the people that they mail to

don’t have the Internet, and so I am sitting here and I am thinking

I would hate to see a business like that go out of business. I understand this balance thing you are all talking about, making sure

that folks carry their weight, smaller mailers. But we also have another issue here, and that is, I guess, I wonder about Government

and what part Government should play in making sure that free

speech is out there, that speech is out there.

I am just wondering, when you talk about this transition and the

effects it is going to have on the smaller folks. I understand you

have given a 4-month window to try to work some things out. What

is it that you plan to work out in that 4 months?

Mr. MILLER. Well, Mr. Chairman, we gave a delay of several

months before the rates went into effect.

Mr. CUMMINGS. Right.

46

Mr. MILLER. We want to have continual discussions with all of

our customers and to work ways of making it a win/win proposition

for them as well as us. I do not anticipate a rollback in the rates

that the Postal Regulatory Commission has approved but——

Mr. CUMMINGS. So if these folks go out of business is that a win/

win?

Mr. MILLER. Well, it would be——

Mr. CUMMINGS. If these small publications go out of business, is

it a win/win?

Mr. MILLER. But that is a hypothetical.

Mr. CUMMINGS. No, no. No, no. I am asking you a question. Is

it a win/win if they go out of business?

Let me tell you why I am asking you that. I think that is pretty

much largely why we are here today. You have a lot of businesses

that put out publications that are saying that this is going to affect

them in a negative way. I am not going to ask the people out there

in the audience to stand up who feel that way. I am not going to

do that. But I can tell you that we get the complaints in our office

about people who have been in business going out of business. I am

just asking you a simple question: if they go out of business, is it

a win/win situation? That is all.

Mr. MILLER. I would say if they cannot cover their cost it is a

win/win situation. Let me tell you why I think that: because other

classes of mail would be covering their cost. Talking about first

amendment, if you write a letter right now to your Congressman

expressing your opinion about something, or you write a letter to

your local paper to have it published, or you write your friend and

encourage them to work with you in achieving certain policy goals,

you are paying 200 percent of attributable cost.

Again, under the package that the Postal Rate Commission approved—and it was more complicated, and that part was different

than what the Postal Governors had recommended—under that

proposal, under that new system, though, publications are covering

0 percent of overhead. The markup for them is zero. So if they were

given some preferential treatment, it would mean that others, such

as people who write letters expressing their first amendment

rights, or using their first amendment rights, would have to pay

the difference.

Mr. CUMMINGS. And so your answer is it is a win/win for everybody but the people who go out of business?

Mr. MILLER. Yes, but it is an empirical question, Mr. Cummings,

of whether they would go out of business. Again, in the testimony

that I have read and the things that have been printed, editorials,

etc., they don’t talk about raising their prices or being more efficient to comply with the opportunities this new rate system gives

them to commingle and to co-palletize and so forth. It is not that

I am heartless. it is not that we are heartless.

Mr. CUMMINGS. I didn’t say you were. I just asked the question.

Mr. MILLER. Yes. But, I mean, we have to consider all sides, and

I think the fairest thing is for each class of mail to at least cover

the cost directly attributable to carrying their mail.

Mr. CUMMINGS. Let me ask you this: you all do projections, right?

You project we are going to go through this again fairly soon, this

rate increase situation, this rate adjustment? And just one thing,

47

because I want to interject this into your answer. I want you to

consider this. I noticed that with all businesses when we are talking about retiree payments and things like that go to benefits, we

have the Baby Boomers retiring and all that kind of thing. How do

you see that affecting what will happen in the future with regard

to any kind of rate adjustments?

Mr. MILLER. That is an excellent question, sir.

Mr. CUMMINGS. Thank you.

Mr. MILLER. I am sure that maybe Jack, as well, but some of the

analysts at the USPS have probably looked into that. Let me answer your first question. We do anticipate having another rate

case. Whether we file under the old rules or the new rules, I assure

you that it will not be more than the CPI; that is, for every class

of service the increase would not be more than the increase in the

CPI. That is the law now. That would be the case into the future,

so you wouldn’t have another situation like the one that we have

just gone through, just to answer your question.

The other thing, though, is how would readership change with

the Baby Boomers and their retiring and so forth. How would that

mix of things change? I mean, on the one hand people have more

time to read things; on the other hand, maybe they would have

other interests. I don’t know. But that is a very good question.

Jack maybe has a thought.

Mr. POTTER. First let me address the issue of benefits. Postal

Service pension programs are fully funded. We are fully funded. As

far as health benefits for retirees——

Mr. CUMMINGS. That is what I was aiming at, the health benefits.

Mr. POTTER. We have been on a pay-as-you-go basis, but the new

law requires us to build a health benefit fund for retirees. As a result of the new law, we already have some $20 billion in that fund.

We are on track within 10 years to have a nearly fully funded retiree health benefit program. I think we will probably be the only

agency in the Federal Government that can make that claim, that

the moneys are there now.

In having us pay that almost fully funded within 10 years, which

the new law did, it has put a burden on all mailers because, in effect, we are paying into a fund the equivalent of what we would

have overpaid our pension program for, and so we could have been

provided some relief by, rather than having that paid off in 10

years if we would amortize it over 40.

But, be that as it may, we built a plan and we are working hard

to build a plan that will go beyond the next couple of years that

will allow us to live within the law which says basically that we

will keep our rates below the rate of inflation for each class of mail.

It is going to require us to work with the mailers to make sure that

we are moving mail as efficiently as we possibly can, work with our

unions to help us deal with the challenges of the law.

So going forward I wouldn’t consider it a win if we lost mailers

because of price, because I think there are alternatives for small

publications that we need to do a better job of working with to help

them make their product more efficient. The industry I think is

ready to help, as well. I am talking about the printers.

48

And it is going to require change. People are going to be hurt at

the end of the day, but if they want to stay in the mail we want

to try and work and help them to do that.

Mr. CUMMINGS. I will finish, Mr. Chairman. You have to wonder

whether, as a society, Congress needed to do more to subsidize

some of this more than what we need to do. The reason why I say

that is because I think that, just like with NPR and the kinds of

things that we do as a society to provide people with information,

it seems to me that this is the kind of thing with these small periodicals that we need to find ways to try to help them. That is on

us. I got that.

But it certainly concerns me, and I do not consider it a win/win

when a business has to go out of business. I have been in business

before, and it is not a good feeling for people—and I have represented people who have gone out of business—when they have

given their blood, their sweat, their tears, and then next thing you

know they have to close their doors. It is a very, very, very, very

painful thing.

Thank you all for your testimony.

Mr. DAVIS OF ILLINOIS. Gentlemen, thank you very much. We

have a vote on. We have only got two votes, so if you could stay

until we return I would appreciate that.

[Recess.]

Mr. DAVIS OF ILLINOIS. The subcommittee will resume.

Let me thank you gentlemen so much for waiting for us and

being available.

Let me go right to you, Mr. Blair. We have talked a great deal

about rate increases and how much it is and who is paying and

why, but let me just ask why are the costs so high for periodicals

in the first place?

Mr. BLAIR. That is a real good question. I think that, to the extent that you have to have any kind of hand processing that is not

machinable or automatable, that drives up the process. I think the

Postmaster General’s statement reference the fact of the flat sequencing sorter, the new machine that will be coming online the

end of this year or next year, and that holds promise to keeping

costs down, if not driving some costs down.

But one of the questions is: to whom will those cost savings and

benefits be available? If you don’t have machinable mail, will that

work in something like that?

But I think that you did hit the nail on the head on this: why

are the costs so high in the first place? That is the fundamental

question, and what can be done to drive down these costs.

Mr. DAVIS OF ILLINOIS. You know, I was just remembering when

I used to work in the Post Office and we used to have fun throwing

the flats. We would pretend that we were playing basketball, and

we would have the racks, and we would kind of toss them over and

it was a lot of fun. It was good, clean, hard work.

Let me ask you also, What is the difference between the percent

increase for big mailers as opposed to those that we would call

small mailers?

Mr. BLAIR. I don’t know if we have a percent increase. I would

be happy to try to supply that for you for the record. I will tell you

that for the group called small periodicals, those at 15,000 or

49

under, they received overall the smallest percentage increase due

to the fact that pass-through discounts were, in fact, tempered; the

low institutional cost contribution for the class overall; and the fact

that the editorial discount was increased, and that benefited those

smallest of periodicals, as well.

Mr. DAVIS OF ILLINOIS. Thank you.

I know that we are going to hear testimony from the National

Newspaper Association that in the most recent rate case the PRC

essentially gave the Postal Service a pass on providing data within

respectable ranges of reliability for their in-county mail cost, yet

the PRC had, in the past, gone so far as to point out the

unreliability of this data to the GAO. Can you explain to us why

the PRC did not zero in on this problem in this past case?

Mr. BLAIR. I don’t remember that being highlighted as a problem

in this past case. I can tell you for within county the PRC’s recommended decision substantially cut the proposed increased by the

Postal Service. As I recall, that was in the 24 percent range and

we knocked it down to 18 or 19 percent, and so the within counties

benefited by the Commission’s recommendations.

Mr. DAVIS OF ILLINOIS. Let me ask, Is it a continuing concern to

your economic experts that the Postal Service seemed to see large

cost increases in small mailing classes, where perhaps what there

really are are wide margins of error that, in terms of what is being

assessed and determined? Are you comfortable that the data that

you are using is not error-free but does not contain enough error

to maybe skew the decision in a way that is obviously not favorable

toward the small mailers?

Mr. BLAIR. Data has always been a fundamental question. We

worked consistently with the Postal Service over the years to improve the quality of the data. I remember in 1995, then PRC Chairman Ed Glassman complaining about the quality of the Postal

Service’s data in that rate case. In response, the subcommittee at

that time authorized a study. It was a joint study of the Postal

Service and Rate Commission study with the help of GAO in looking into that.

Improvements in the data have been forthcoming over the years;

however, it is a continuing problem. But I think that the new tools

that you provided to the Regulatory Commission will help us in

that area, as well.

It is important that we get the good data. We want to work closely with the Postal Service to improve that quality, and that is

something we will be doing over the course of my tenure at the

Commission.

Mr. DAVIS OF ILLINOIS. Thank you very much.

Let me ask you what perhaps will be my last question. Mr. Potter, of course we get continuous complaints from our fellow colleagues relative to a continuous flow of complaints that they receive relative to time-sensitive mail like newspapers and weekly

magazines and, of course, sometimes their newsletters where they

expect to convey certain information to their constituents, and it is

sometimes not in a timely enough manner.

Why is the slow processing of periodicals such a problem?

Mr. POTTER. Well, let me address periodicals, in general. Earlier

you asked about the cost of periodicals. Well, periodicals as a class,

50

in data that I have reviewed over the years, have the worst addresses of any class of mail. You start with a bad address, you are

going to get a bad delivery. You also have with periodicals a situation where we have tried to move them from preparing mail in the

old-fashioned way, I will call it, in sacks, to getting it on pallets.

In fact, we have upped the amount of flats that you had to put, or

periodicals you had to put into a sack, from 6 to 24, just to bring

them in line with the way other mails are being processed.

So there is a whole host of reasons to why periodicals cost more

than what would be catalogs in terms of comparability, so we have

to address that going forward.

From a service standpoint, this is a situation that needs to be addressed long-term. It starts with understanding the whole supply

chain. From the time that mail is printed, the logistics companies

that bring it to the Postal Service just to take advantage of discounts I periodicals, you have to use them, and then our handling

of the mail. We are preparing and moving ahead on a plan that

would have every piece of mail have a bar code on it such that we

can get at some of the costing issues that you asked Chairman

Blair about, because we would be able to measure each piece of

mail and where it was processed and how much it cost us to process that mail.

It would also enable us to track, from a service standpoint,

where, first of all, the mail was deposited, when it was printed,

when it was deposited with us, and then how we handled it

through the system. That will give greater transparency to where

problems lie. And I would be the first to tell you that we are going

to have problems in our system, but our goal is to fix those problems and to improve service going forward.

I welcome what Chairman Blair talked about earlier, the fact

that we are going to publish and we have right now in the Federal

Register standards for all the market-dominant products, as required by law. We are going to seek the input of the public to determine whether or not those are appropriate, and we look forward

to their input. And then we are going to establish goals and track

ourselves against that.

The key, in my mind, is the big step, which is to put intelligent

mail barcodes on each and every piece of mail that comes into the

system, enabling us to track mail and, in the long run, deal with

the issue that you have just described so we can deal with it from

a point of data, as opposed to, at times, what turns out to be some

rhetoric. So we would like to pinpoint the problems and fix them,

and our goal is to do that.

Mr. DAVIS OF ILLINOIS. Well, I do have one additional question

that comes to mind for you and Chairman Miller. During the exchange between yourself and Mr. Sarbanes, both of you talked

about the tremendous infrastructure that the Postal Service provides for certain kinds of services that could be provided to the

Federal Government, especially in the area of disaster relief or disaster assessment. He ended by suggesting that the Service could

also get paid or could get paid or should get paid for those services.

How would you respond to that as a kind of possibility?

Mr. POTTER. Well, let me just speak to some of the services that

we provide. When it comes to passport services, the Postal Service

51

charges those who use us for passports the same fees that the

State Department would allow others to charge for that service, so

there is a mechanism for us to get compensated.

When it comes to disaster relief, we do get some funds transferred from HHS, the Health and Human Services Department,

when we conduct these tests.

What I am saying is I would like to look beyond those to determine where are other opportunities for us to generate revenue on

behalf of the Federal Government by representing the Federal Government.

In addition to that, again, the reconnaissance, if there is money

to be had that is great. I do want the revenue, but when I spoke

I was talking about just using the system to better the well-being

of the American public in those places that might be hit by a hurricane or other natural disaster. Certainly, I think there could be a

value placed on the information that we could provide to others

and to generate a source of additional revenue for the Postal Service.

Mr. DAVIS OF ILLINOIS. Mr. Chairman, let me ask if you have any

comments that you want to make.

Mr. MILLER. Well, Mr. Chairman, I agree with what Jack just

said. We already asked Congress to appropriate moneys for the

foregone opportunities, the services that we already provide for

free, and Congress, the appropriators, don’t ante up fully on that.

I would be hopeful, but not real optimistic on something like that.

Mr. DAVIS OF ILLINOIS. Well, let me just say I raise it because

I think that revenue generation and enhancement is going to be an

ongoing discussion that we will be having relative to postal matters

for some time to come.

Mr. MILLER. Right.

Mr. DAVIS OF ILLINOIS. And, like you, I share the recognition of

need, understanding that you can’t get blood out of a turnip, as we

discussed earlier as we talked about efficiencies and improving systems and all of those things. Eventually you get down to the point

where the only thing that supplies the need is some resources. You

can be as efficient, as effective, and we want to make sure that all

of that happens, but I don’t think that there is anything that takes

the place of money.

So let me thank you gentlemen very much. We appreciate your

being here, and you are excused.

Mr. MILLER. Thank you, Mr. Chairman.

Mr. POTTER. Thank you, Mr. Chairman.

Mr. BLAIR. Thank you.

Mr. DAVIS OF ILLINOIS. Let me go ahead and introduce the witnesses for panel two as they are being seated.

We have Mr. Andy Zipser. He is the Editor of the Guild Reporter

and is a Past President of the International Labor Communications

Association [ILCA]. The ILCA works to strengthen and expand

labor publications, Web sites, and radio, television, and film productions by providing resources, expertise, and networking opportunities for labor communicators.

We have Mr. Victor Navasky, who is Publisher Emeritus of the

Nation, and the Columbia Journalism Review. The Nation is AmerVerDate 11-MAY-2000 15:09 Dec 14, 2009 Jkt 000000 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 U:\DOCS\53573.TXT KATIE PsN: KATIE
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ica’s oldest and most widely read weekly journal of progressive political and cultural news, opinion, and analysis.

We have Mr. Jeff Hollingsworth, who is vice president of Eagle

Publishing and Assistant Secretary of the Phillips Foundation. He

has monitored legislative and regulatory activities at the local,

State, and national levels.

Mr. Max Heath is vice president of Postal Acquisitions for Landmark Community Newspapers, Inc., in Shelbyville, KY, where he

is responsible for postal issues.

Mr. Hamilton Davison has been the executive director of the

American Catalog Mailers Association [ACMA], since its founding

in April 2007. Mr. Davison’s involvement in postal affairs started

in 1992 with his service as part of the Greeting Card Association’s

Postal Affairs Committee, which has been an intervener in virtually every rate case since the PRC was committed.

Gentlemen, we thank you very much for being here. It is our custom of this committee, we always swear in our witnesses. If you

would stand and raise your right hands.

[Witnesses sworn.]

Mr. DAVIS OF ILLINOIS. The record will show that each witness

answered in the affirmative.

Of course, your entire statement is in the record. The green light

indicates that you have 5 minutes to summarize your statement.

The yellow light means that your time is running down and you

have 1 minute remaining to complete your statement, and the red

light means that your time is expired.

Thank you all again for appearing, and we will begin with Mr.

Zipser.

STATEMENTS OF ANDY ZIPSER, FORMER PRESIDENT, INTERNATIONAL LABOR COMMUNICATIONS ASSOCIATION; VICTOR

NAVASKY, PUBLISHER EMERITUS, THE NATION, AND CHAIRMAN, THE COLUMBIA JOURNALISM REVIEW; JEFF HOLLINGSWORTH, VICE PRESIDENT, EAGLE PUBLISHING; MAX

HEATH, VICE PRESIDENT OF POSTAL/ACQUISITIONS, LANDMARK COMMUNITY NEWSPAPERS; HAMILTON DAVISON, EXECUTIVE DIRECTOR, AMERICAN CATALOG MAILERS ASSOCIATION; AND DAVID R. STRAUS, COUNSEL, AMERICAN BUSINESS MEDIA

STATEMENT OF ANDY ZIPSER

Mr. ZIPSER. Thank you, Mr. Chairman. Good morning. My name

is Andy Zipser, and I am the editor of the Guild Reporter, but you

have given me a promotion. I was a past vice president of the

ILCA, not a past president. I appreciate it.

Founded in 1955, the ILCA is an AFL–CIO and Change to Win

affiliated professional organization of labor journalists and communicators in North America. Our several hundred members produce

newspapers, magazines, newsletters, and other media with a total

circulation in the tens of millions.

Robert McChesney, the journalist and media critic, has said, ‘‘It

was Postal policy that converted the free press clause in the first

amendment from an abstract principle into a living, breathing reality for Americans.’’ Although he wasn’t thinking specifically of us

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when he made that statement, Mr. McChesney may as well have

been describing what we do. We are the communications lifeblood

of the union movement.

The Postal Service that delivers our publications from one end of

the country to the other is the primary medium through which our

union leaders speak to their members and the members to them.

If this link is broken, that exchange is silenced.

The recent postal increase, an increase that has hit our publications with disproportionate harshness, is threatening to do just

that. While benefiting large publishers who can exploit economies

of scale to take advantage of various discounts, the new rate structure is slamming smaller publications with increases of up to 30

percent. These crippling increases are even more onerous when one

recognizes that relatively few union publications carry paid advertising.

Moreover, as in-house organs that are published specifically for

our members, union publications do not have subscriber bases.

That means any postal increases come directly from dues-sustained

union treasuries, without the possibility of offsetting increases in

advertising or subscription rates.

Mr. Chairman, let me give you some examples of how the increased mailing costs affect us.

The paper I edit, the Guild Reporter, was slapped with a 27 percent hike. It now costs more to mail the Guild Reporter than it

does to print it. The Communicator, a glossy magazine of about

70,000 circulation produced by a New York based affiliate of the

American Federation of Teachers, estimates its increased cost at

about 21 percent. For the Labor Paper, a tabloid with 80 percent

of its circulation within just two counties in southern Wisconsin,

the increase was approximately 15 percent.

As a result, many of our publications are being forced to reduce

page counts or publication frequency, and there is a very real possibility that some may cease publishing altogether.

The International Musician, a 36 to 40 page magazine with circulation of about 100,000 produced by the American Federation of

Musicians, saw its mailing costs jump approximately 25 percent

and is looking at changing its publication frequency from once a

month to once every 2 months.

The American Federation of Government Employees has chopped

its publication size in half in order to qualify for cheaper non-profit

mailing permit.

Some defenders of the new postal rates point to the Internet as

a cheap distribution alternative for publishers. While the Internet

holds great promise for democratizing media, union surveys consistently show members still prefer paper publications delivered to

their mailboxes. Moreover, not all union members have personal

computers, nor do they all have Internet access. Many who do are

still using dial-up modems, which are less than optimum for distributing publications.

Mr. Chairman, in the labor movement, as with all of the advocacy press, the consequences of this dramatic run-up in postal rates

are predictable: fewer voices, less discourse, withering democracy.

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committee to do whatever is in your power to restore the more progressive postal rate structures of the past.

Thank you for giving me the opportunity to testify today on behalf of the ILCA and small labor publications across the Nation. I

will be happy to answer any questions you may have.

Mr. DAVIS OF ILLINOIS. Thank you very much.

Mr. Navasky.

STATEMENT OF VICTOR NAVASKY

Mr. NAVASKY. Thank you. I am grateful for the opportunity to

testify before this subcommittee, but let me make it clear that I

hope to speak today not only on behalf of the Columbia Journalism

Review, which I chair, and the Nation, but also on behalf of independent, small-circulation, political journals, in particular, and on

behalf of the readers of these journals, and all of those engaged in

and informed by the public discourse that these magazines exemplify.

Before I present my formal testimony, I want to make a confession about my personal bafflement and bias. Of all the services

Government provides, only the mails are required to break even or

make a profit. The founders, who saw the mails as a circulatory

system of our democracy, made no such presumption. George

Washington, himself, was in favor of the free delivery of newspapers—which, by the way, in those days were often weekly, usually partisan, and as such the equivalent of today’s journals and

political opinion.

These journals, whose core franchise is public discourse about

public affairs, are a public good, like education and defense. Yet,

as a result of the new periodical postal rates in place as of July

15th of this year, precisely those magazines that can least afford

it and devote the most space to public affairs bear the heaviest burden.

In the case of the Nation, the cost of mailing the magazine is already more than three times the cost of the paper on which it is

printed. Its new rate increase will be 20 percent and will cost the

magazine an additional $500,000 a year. The Nation, by the way,

which has the highest circulation among the opinion weeklies and

bi-weeklies, is in better shape than many small-circulation periodicals, some of which will undoubtedly expire in the months ahead.

The bi-monthly Columbia Journalism Review estimates that its

postal rate increase could be as high as 30 percent. The American

Journalism Review, the only other impartial media monitoring

journal in this country, has announced that it may have to go out

of business by year’s end.

We hear stories on a weekly basis of magazines contemplating

cuts to their frequency of publication or going out of business entirely.

On the other hand, under the new rate structure, more opulent

mass-market magazines with heavy advertising content enjoy a

lower rate increase or, as we understand it, some magazines are

seeing actual rate decreases.

How did this happen? From the outside, it appears as if Time

Warner lobbyists carried the day. We can’t say for sure, because

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ers have spent millions of dollars over the years arguing for a reversal of public interest postal policy that supports a diversity of

voices in the periodical class. It is important to point out that the

Postal Rate Commission has repeatedly rejected this kind of argument for many years, supporting instead the postal policies of the

founding fathers.

It is for Congress to decide if the PRC was correct in finally acceding to Time Warner and abandoning this public service principle. This begs the question, did the Commission know precisely

what would happen in the marketplace, not to mention the marketplace of ideas, if this decision was implemented?

According to the rate case, the data base that the PRC used to

make its recommendation turned out to be deeply flawed. In fact,

the Commission had no real data to project how the rate changes

would impact the periodical industry. The result, not matter how

well intentioned—and I am sure it was well intentioned—was a

disaster.

The Commission’s hope was to increase efficiency, as we heard

this morning, by creating a set of rewards and penalties for different mailing practices. In practice, this resulted in giving largevolume periodicals big discounts for what they already do, and it

hit huge rate penalties. It hit on weekly periodicals that cannot

take advantage of efficient mailing practices which are dependent

on economies of scale and have no sensitivity to timely delivery. My

definition of small, by the way, is anything under 250,000.

Further, there was no attempt at all to weigh the public interest

in the circulation of information and opinion against this so-called

efficiency standard. Had they done so, they might have considered

the option of re-allocating costs within the periodicals class, itself,

to benefit the public interest, as has been postal policy for over 200

years.

In my written testimony I suggest 10 ideas on what is to be

done. Here let me mention only four. Congress should: One, instruct the USPS that the rate-setting system should be based on

a public interest standard first and foremost, favoring diversity

over so-called efficiency in the periodical class.

Two, Congress should change the law so that in the future either

the requirement that each class pay its own way be struck and/or

that social mission be emphasized in the allocation of charges within each class. For example. charge dramatically less to publications

with a higher percentage of editorial content and more to periodicals with a higher percentage of advertising content.

Three, the Congress should issue its own fact-finding report, including a history of postal policy on small-circulation magazines,

but also impact studies using an enlarged and open data base.

Four, why not revive the proposal put forward by Congressman

Morris Mo Udall and supported by Barry Goldwater and others

many years ago, that the first 250,000 copies of all publications be

mailed at reduced rates? Or the legislation proposed as recently as

2002 by Bernie Saunders that would place a moratorium on postal

increases for magazines with a low percentage of advertising content, low circulation, or non-profit status?

Alternative, if you and we do nothing, the impact of the new

postal rate increase on the flow of ideas and opinions in America

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is likely to be significant and devastating. The periodicals that

have been hurt the worst by this rate increase are the seed bed of

American journalism, the life blood of democracy in our society. I

urge you to take immediate action to reverse course.

Thanks for your time. I look forward to your questions.

[The prepared statement of Mr. Navasky follows:]

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

Mr. NAVASKY. Thank you.

Mr. DAVIS OF ILLINOIS. We will go to Mr. Hollingsworth.

STATEMENT OF JEFF HOLLINGSWORTH

Mr. HOLLINGSWORTH. Thank you, Mr. Chairman.

I am Jeff Hollingsworth, vice president of Eagle Publishing. We

are the leading publisher of materials on public policy that appeal

to a politically conservative readership. Our products include

Human Events, the national conservative weekly, which has been

published continuously since 1944 and which will be the focus of

my comments today; Regnery Books; the Conservative Book Club;

the Evans-Novak political Report; a stable of highly regarded financial and investment newsletters; and RedState.com, one of the

country’s top conservative blogs.

Today the survival of Eagle’s products is in jeopardy. Human

Events, in particular. This isn’t due to a lack of demand or declining interest in what we market; rather, it is because of the caprice

of Government. Regrettably, it seems that when you are dealing

with Government it is not what it can do for you, it is what it can

do to you. Such is the case with the latest in a dizzying round of

postal rate increases.

The July increase has had the effect of punishing publishers of

periodicals high in editorial content, such as scholarly publications,

newsletters, non-profit organization bulletins, and journals of culture and opinion, such as Human Events. More precisely, the July

rate increase socked Human Events with a staggering 17 percent

increase in postal costs.

While we are paying more, we are getting less. This is because

the USPS expects mailers to do more preparatory work than ever

before. Chronic slow delivery of Human Events ultimately forced us

to go to a split print with facilities on both coasts. Unfortunately,

while this arrangement has improved the timeliness of delivery, it

is not amenable to co-mailing or other efficiencies the PRC incorporated in the rate case.

Maintaining profitability in the publishing industry has always

been challenging. For small- and medium-sized publishers, the

postal rate increase is making an already difficult job even more

so.

When established more than 200 years ago, the Postal Service

was intended to be the means to bind the Nation together. Its purpose was to improve communication; aid commerce; allow news,

ideas, opinion, learning, and culture to reach all Americans. It was

and has been a key facilitator in the exercise of our first amendment rights to free expression. For generations, small journals of

opinion and culture mailed to subscribers have enriched the lives

of countless Americans and contributed substantially to our national identity and the body politic.

But this hallowed legacy is on the verge of being crippled, not by

virtue of the ebb and flow of market forces, nor by consumers deciding for themselves what they wish to read or not read, but by

the actions of a single Government agency. By imposing unreasonable rate increases without analyzing adequately and thoroughly

the potential consequences to small- and medium-sized publishers,

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the Postal Regulatory Commission may be responsible for wiping

out Americans’ access to various journals of opinion and culture. It

may be responsible for diminishing the marketplace of ideas. It

may be responsible for making the exercise and enjoyment of our

first amendment rights to free speech and expression more difficult.

If Congress fails to take notice of what is happening and what

is at stake and fails to act, it, too, will deserve its fair share of responsibility for the deleterious impact of this rate increase.

Since the Postal Service is a monopoly protected by statute, publishers in financial distress, thanks to the rate hikes, have almost

nowhere else to go. Many have turned to the Internet, and Internet

content by newspapers, magazines, journals, and other periodicals

is growing at light speed.

In another example of the law of unintended consequences, the

more the Postal Service balloons its rates, the more customers it

either puts out of business or drives away to the electronic media.

Ultimately, in my opinion, the answers to these problems are

two-fold. No. 1, the Postal Service must be privatized. As Former

Postmaster General William Henderson wrote in a Washington

Post essay shortly after stepping down, ‘‘The time is now for privatization.’’ Suggestions on how to do this include selling it to its employees, making it a public stock company, or breaking it up into

regional companies.

No. 2, modify or repeal the private express statutes. Users of

most classes of mail services currently have nowhere else to turn.

They deserve alternatives. And because the Postal Service has no

competition in those areas, it has no incentive to be customer

friendly, efficient, or truly business-like in its operations.

With competition, when our mailboxes are finally liberated, the

results will be good for the Postal Service, entrepreneurs, and postal stakeholders.

As for the here and now, we urge the Congress to act promptly

in order to make it crystal clear to the PRC and the Board of Governors that it never intended any of its statutes on postal policies

to be construed such that rate hikes can be imposed with the effect

of stifling free expression, driving publishers out of business, and

unfairly imposing onerous financial burdens on entities least able

to afford them.

We urge Congress to work with the Postal Service to revisit the

July rate increase before even more damage is done to the publishing industry.

Thank you, Mr. Chairman.

[The prepared statement of Mr. Hollingsworth follows:]

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Mr. DAVIS OF ILLINOIS. Thank you very much.

We will go to Mr. Heath.

STATEMENT OF MAX HEATH

Mr. HEATH. Thank you, Mr. Chairman and members of the subcommittee. I am Max Heath, Chairman of the National Newspaper

Association’s Postal Committee since 1984, and am a senior rep on

the Mailers Technical Advisory Committee at the Postal Service

since 1989.

I would like to reassure the subcommittee that rumors of small

papers’ demise from Internet news is vastly exaggerate. Though

our industry faces many challenges, the Internet thus far has

shown little ability to provide truly local news and information,

which are the trademarks of community newspapers. That is not

to say that the 2,500 community newspapers which are mostly family owned and serving smaller communities across America have

smooth sailing ahead. Our postal problems are real and troubling,

and that is why your work here today is so important.

I will be speaking both about the in-county periodical subclass,

which is highly pre-sorted and locally entered, and the outside

county regular rate subclass which we use to mail to readers farther away.

You asked us, are newspapers being put out of business by the

2007 rate cases? The short answer is, not yet. But the rates hit us

very hard and will affect our ability to cover the news because the

only way to survive increases in the 20 to 30 percent range and

more for lightweight titles is to cut costs or sharply increase subscription prices, which will cause a drop in subscribers for us and

the U.S. Postal Service.

But the deeper answer is more complex than that. I have provided in our written testimony a sad farewell column by one of our

most loyal members, half of a husband and wife team in Vandalia,

MO. Gary Sosniecki lays out in poignant detail how hard it is to

do this work in the 21st century. He lays a portion of his terminal

exhaustion at the door of the Postal Service. It isn’t just about

steep rate hikes, it is worrisome service problems that cost us subscribers and cut the artery that keeps us alive.

I am going to quickly summarize the points that I made in our

testimony.

First, NNA believes that the root of the recent steep increase in

our in-county postage rates was flawed data, trouble capturing accurate data. The Postal Service has had trouble capturing accurate

data on in-county mail, since it is such a small segment of the volume. In the past, the PRC applied pressure to improve the data or

the Postal Service smoothed out bumps created by small data samples. That did not happen last year.

The Postal Service asked for a 20 to 30 percent increase, and the

PRC gave the Postal Service a pass on the poor data. We are now

stuck with the rate base that we believe is inaccurate.

Second, our regular rate periodicals mail was hit hard by the

new container and bundle prices that were suggested by Time Warner and put into place by the Commission. NNA has fought since

1996 to keep the larger magazine publishers from de-averaging the

periodicals class. We understand their goals. It enables them to

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take advantage of the privileges that periodicals receive without

bearing the cost of smaller mailers.

Regardless of the costing data that swayed the Commission, we

believe it is bad policy to allow this degree of de-averaging in a

mail class whose very purpose is to disseminate a wide range of information.

While most newspaper mail is local and extremely efficient, our

longer-distance mail comes in small, diffuse volumes. The so-called

price signals that were intended to force mailers into co-mailing

and palletizing and other efficiencies are signals to which most

small-volume newspapers are unable, by their very nature, to respond. So the signal to us is: go away, you are bothering us.

Finally, we are troubled by misunderstandings of the in-county

prices community newspapers pay. We have heard more than once

that our 20 to 30 percent increase has amounted to only a few

cents, and that our mail price is about $0.10 a piece. Our mail is

highly pre-sorted, more than three quarters of it carrier route mail,

and almost all entered at the delivery office, and most of that walk

sequence.

I would like to point out that our in-county mail is probably the

first or second most efficient subclass within the Postal Service, the

other one being enhanced carrier route standard mail, which our

papers also heavily use to serve non-subscribers with advertising

information.

We have many worries ahead. First, the new postal reform law

has made our in-county subclass vulnerable to steep increases, despite the price cap. That is because the cap was set at the class

level. We hope the Postal Service will observe the spirit of the law

and keep our increases within the CPI levels.

Second, our service problems are agonizing. Delays to mail that

must go through processing plants have increased. Even local mail

has new service problems with the advent of the 24 piece container

minimums in May 2006. But generally, since postal reclassification

in 1996, and flats automation in 1998, outside county delivery has

worsened both in time and consistency.

Finally, with the new flat sequencing system [FSS], coming next

year, we have fears for our primary mail entered at delivery offices,

and now given timely service. If we cannot keep local delivery unit

entry for our periodicals and standard mail products, I fear it will

really be the end of us. It has been heavily involved in consultation

on the mailing standards for this new machine, but we must have

the ability to drop our mail at the local office and keep the dropship and carrier route walk signals discount for doing so.

FSS is simply not going to be able to provide us workable deadlines with the assurance of same day or next day delivery of the

mail often dropped from the press to the dock at midnight to be

in the mail the following day. Without that assurance, Mr. Chairman, we are toast.

We have been trying for nearly 3 years to get the Postal Service

to provide that we will keep our privileges, and we cannot get that

assurance. We hope the committee might inquire on behalf of community newspapers on this topic.

To summarize then, the newspaper mail was hit hard. We are

surviving it so far, but we fear it is the first of many such blows.

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We think the increase was unfair and wrong headed and we vigorously oppose the de-averaging of periodicals and mail.

We need stable rates, better service, and we need to keep our

local delivery unit entry in the FSS environment.

We appreciate your interest in our problems and would be happy

to supply any other information that you need. Thank you.

[The prepared statement of Mr. Heath follows:]

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

We will go to Mr. Davison.

STATEMENT OF HAMILTON DAVISON

Mr. DAVISON. Mr. Chairman and distinguished members of the

subcommittee, I am Hamilton Davison, the executive director of

ACMA, the American Catalog Mailers Association.

Thank you for having me. I would like to address three topics,

and I go into greater detail in my written testimony.

First, catalog mail is valuable. Second, the rate increase had a

serious impact on our industry. Third, we have some concrete suggestions that we feel the Postal Service can work with us on this

crisis to their own financial self-interest.

Catalogs play a critical role in both the economy and in the U.S.

mail. Half of all consumers buy through catalogs. There are some

20,000 catalog companies nationwide. In recent years, our industry

has been vibrant and growing.

Rather than be pushed out by Internet commerce, we have

thrived online. Studies show that some 80 percent of all online orders have a catalog somewhere along involved in the process.

Whether through the mail or online, we deliver revenues of $270

billion a year, or roughly $1 million every 2 minutes.

All of that catalog-driven commerce benefits the U.S. mail. In addition to invoices and letters to customers and shipment advisories

and tons of parcels, catalog mailers send between 20 and 30 billion

catalogs a year. I would note that we have always covered our attributable costs and we paid billions of dollars in institutional

costs.

Catalog companies are not occasional mailers. They mail every

day of every year and spend billions in postage annually.

And catalogs have a strong multiplier effect that provides recurring revenue to the Postal Service. Each time a catalog prospect becomes an ordering customer, it generates 30 to 40 new pieces of

mail in the form of future catalogs, invoices, and packages. But

more importantly, catalogs help keep the mail relevant, because

people like catalogs.

Postal Service surveys show that, unlike some kinds of mail, people look forward to receiving catalogs. They read, save, and order

from them. They like catalogs for the same reason they like magazines: they offer products and ideas and information about their

specific interests.

How has the rate increase affected our industry? It has been brutal. We expected 9 to 12 percent increases; we got 20 to 40 percent

increases. Postage represents one of the largest cost centers for our

members. This put enormous pressure on the entire catalog industry. Nor can we turn on a dime, given our carefully calibrated and

integrated marketing plans.

So, as a result, nearly all of our members have been forced to

make some hard decisions. Some are looking at layoffs. Some are

limiting future hires. Others are actively reducing their reliance on

mail. And, of course, some, in fact, many, are cutting circulation.

But the response that should alarm the Postal Service most is that

catalogers are cutting prospect mailings. Prospect mailings are a

vital source of new business and a key to the industry’s future

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growth. When a potential customer responds to a prospect catalog,

the Postal Service gets dozens of new pieces of mail as a result, so

cutting prospect mailing today limits the Postal Service’s revenues

tomorrow.

Let me offer some ways that the Postal Service, using its new authority to set rates, can work with us to grow both of our businesses and ensure that the mail remains a vibrant channel of communication.

First, the Postal Service should price catalogs separately. Catalog

mail represents a unique product different from other forms of

standard mail. We have a different business model, and we make

different mailing decisions. In addition, we add value to the mail

stream.

Second, the Postal Service should work with our industry to

adopt creative pricing arrangements, including pricing to encourage

prospect mailing.

Third, the Postal Service should ensure that negotiated service

agreements are accessible not only to the largest mailers, but also

to smaller and medium-sized mailers or catalogers that were particularly hard hit in this last increase.

Fourth, we would like, as an association collectively and individually as companies, to work directly with the Postal Service on the

operational and pricing details of its new FSS equipment and how

declining flats volumes might affect the FSS roll-out.

I believe we can make a strong business case that growing catalog volume is in the short- and long-term best interest of the entire

mail stream and the Postal Service.

That concludes my testimony. Thank you.

[The prepared statement of Mr. Davison follows:]

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

We will go to Mr. Straus.

STATEMENT OF DAVID R. STRAUS

Mr. STRAUS. Thank you. As a 37 year veteran of postal wars, I

am here representing American Business Media, whose members

produce about 2,000 high-quality business-to-business publications

a year and spend about $400 million a year on periodicals postage.

I am going to have to divert from what I was proposing to say

today because there is so much confusion that was left, I believe,

on the record this morning about the relationship between the requirement that the periodicals class cover its attributable costs and

the 20 and 30 and even 40 percent rate increases that some of our

members have experienced.

The problem has nothing to do with attributable cost coverage for

the class. The Postal Service proposed rates in this case would

have had an average increase of about 12 percent on periodicals,

and periodicals would have covered attributable costs. The Postal

Regulatory Commission’s recommendation produced exactly the

same dollars, the same cost coverage, but it chose to broaden the

band of increases and decreases such that, instead of having no increases very much smaller than or larger than the average, there

were some decreases and some increases in 30 to 40 percent.

Again, it has nothing to do with the requirement that the class

cover attributable cost; it has only to do with how the Postal Regulatory Commission decided it would be best to accumulate those

dollars.

American Business Media, in fact, supported the Postal Service’s

proposal in R2006–1. The Postal Service opposed the Postal Regulatory Commission’s approach because it opposed the Time Warner

proposal. American Business Media urged the Governors of the

Postal Service to ask the Regulatory Commission to reconsider its

decision that was opposed by most parties in the case, and it didn’t

do so, so our grip was with the Regulatory Commission for recommending those rates, and with the Postal Service for accepting

that recommendation without question.

Now, American Business Media member publications average

about 65,000 circulation. Some of them are a lot smaller, some of

them are somewhat bigger, but rarely do they exceed 100,000 copies. Compare that with the mass consumer publications like Time,

Newsweek, Sports Illustrated, and the like, with multi-million circulations.

Because of this difference, American Business Media, for its 100

year existence, has basically taken to position that it is there to

represent the little guy, but I recognize, as Mr. Sarbanes suggested

this morning, that this case is over. The rates have been implemented. There is no more judicial review. As he said, this sounds

like a done deal, and I feel a little bit like Vice Admiral Stockdale

at the 1992 Vice Presidential Debates where he famously asked,

‘‘What am I doing here?’’

I ask myself that. What am I doing here? Why am I testifying

in this hearing? I guess the reason that I am is that if the 11.4

percent increase for periodicals had been spread relatively equally

across the class, I wouldn’t be here and you wouldn’t be here. The

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problem was that it wasn’t spread equally across the class, and

somebody has to let the Postal Service and the Postal Regulatory

Commission know and let Congress know that it has an oversight

obligation not to let this happen again, certainly not to let it happen again, but also to take a look at the rates the next time they

are changed to see whether something could be done.

The rates that are in effect now are not going to be in effect as

of June of next year, it looks like, so there is really nothing that

can be done about these rates. It is the next rates we are concerned

with.

Where the Postal Regulatory Commission went wrong in this

case is it looked at periodicals as a test tube for experimenting with

price signals, with efficient component pricing, with matching precisely cost with rates. Interesting, periodicals are a content-based

class, yet the Regulatory Commission decided it should be the most

cost-based rate. Catalogs did get hit hard, but catalogs don’t have

bundle charges and pallet charges and sack charges. Only periodicals, the content-based class, has to pay rates that are strictly

based on cost. That wasn’t necessary. It didn’t have to happen that

way.

We heard today that periodicals haven’t even covered attributable costs. From the perspective of periodical mailers I guess that

is a good thing, but it is not going to continue indefinitely.

The point is that periodicals as a class get a subsidy. They pay

no institutional cost. All other mailers pay the institutional costs

that periodicals might otherwise be responsible for. That is, in a

sense, a subsidy paid by other mailers into the periodicals class.

The problem that Time Warner identified and that the Commission bought was that Time Warner’s subsidy isn’t as big as it ought

to be because small circulation publications, journals of opinion, get

a little bit bigger subsidy to keep them in existence. So it is not

that the big guys are subsidizing the little guys; it is that the subsidy provided by the first class mailers and the standard mailers

goes more to some periodicals and less to other periodicals. That

is the issue, and that is what the Postal Rate Commission decided

it would not allow to continue.

If you don’t believe that, ask Time Warner what its periodicals

would pay if they paid catalog rates, and you will see that if they

paid catalog rates those rates would be much higher than they pay

today, than they paid last year under the old rates, because they

were enjoying a subsidy. They just wanted more of that subsidy.

This desire of the Regulatory Commission to closely match cost

and revenues is something that even Time Warner has admitted

can be very harmful.

In the rulemaking that was just concluded by the Regulatory

Commission, Time Warner was in opposition to a proposal to bring

together costs and revenues, not when the big subsidy for all periodicals was put in jeopardy. This is its word. It called totalitarian

any proposal that ‘‘subordinates every other possible consideration

to a single, narrow principle.’’ That dastardly principle was that

cost and revenues must converge. In fact, in Time Warner’s own

words, the rate increases that would result from that principle

might result in ‘‘driving some thousands of magazines out of the

mails and out of business.’’ To that we can say, exactly.

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The PRC guessed that this wouldn’t happen because people

would co-mail. I won’t go into the detail, but in our written statement we explain why co-mailing simply isn’t available for most of

the small circulation publications, for weeklies, for tabloids, and for

others.

In conclusion, I would like to say that ABM has not opposed

changes in rate design. We have been accused of being the Ludites

of the periodicals class. It isn’t true. We have supported pallet discounts, bar code discounts, pre-sort discounts, drop ship discounts.

What we don’t support is discounts that are not imposed in an incremental fashion but are imposed all at once to the detriment of

small circulation periodicals.

We have already seen publications closing their doors or trying

to survive by going digital, and more will soon follow.

Thank you.

[The prepared statement of Mr. Straus follows:]

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Mr. DAVIS OF ILLINOIS. Thank you very much. I want to thank

each one of you gentlemen for your testimony.

I believe I heard you, Mr. Navasky, suggest that each class

maybe ought not have to pay its own attributable way. Is that

right?

Mr. NAVASKY. I said two things, Mr. Chairman. No. 1, yes,

maybe the law ought to be changed, because to speak only of journals of political opinion, but across the political board they are a

public good. This country was founded on the idea that free speech

and robust public discourse is a good thing.

Like education and defense and the environment, the Government, in my view, ought to subsidize that. But short of that, within

the existing system, if you are going to keep the class and require

each class to pay its own way, then it seems to me the way to make

it work and to make democracy work is to reallocate the cost within the class.

The panel this morning recognized that, but they seemed unwilling to take the next step. It seems to me that there is nothing

wrong with saying that the huge mega-corporate magazines that

are crammed full of advertising ought to pay a little more, and

these marginal publications that are dealing in ideas and that

didn’t go into business in the first place to make money ought to

make a little less.

This is where they are technically non-profit or not. One of the

reasons that political journals like National Review and the Nation

and the New Republic are not non-profit is that, under the law, if

you are non-profit you can’t endorse candidates for political office

and you can’t devote more than a certain percentage of what you

do to try and influence legislation. That is what we are in business

to do, but we are not in business particularly to make money, and

we just want to survive.

Mr. DAVIS OF ILLINOIS. Let me ask you, Mr. Straus, how would

you respond to Mr. Navasky’s comments?

Mr. STRAUS. I think it is exactly right. It is a little bit artificial

to divide mail into classes and say each class has to cover attributable cost, but within each class some mail has to and some mail

doesn’t.

You in Congress were faced with a real dilemma with the price

cap system, whether applied at the class level, the subclass level,

or the rate element level.

I am very troubled by something that Chairman Dan Blair said

this morning, which is exactly the same thing they said in their

rulemaking order issued yesterday, which is the price cap will prevent future rate shock. Well, no, it won’t. If there were an 11.4 percent price cap in effect in 2006, the periodicals rate would have

gone up 11.4 percent, but they still could have raised some 40 percent and reduced some, but the price cap will not prevent rate

shock. Only the Postal Service reviewed by a Postal Regulatory

Commission that cares about avoiding rate shock will avoid rate

shock.

The notion that every piece of mail has to cover its attributable

cost is wrong for two reasons. First of all, there is no logical foundation for that. Second, how do you know what the costs are of

each individual piece of mail? Do you want to charge me more if

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I hand-write a greeting card to my brother, charge me even more

than that if my handwriting is messy and hard to read? I don’t

think so. What you have to do is set fair rates that in large groups

are cost effective.

Mr. DAVIS OF ILLINOIS. Mr. Zipser, let me ask you, How was your

organization notified of the July rate increase?

Mr. ZIPSER. I’m not sure our organization was notified. Our individual publications were through our mailing houses. But when I

talked to our mailing house back in May trying to get a handle on

what to expect in terms of an increase, just for the Guild Reporter

now I am speaking, I was told, I don’t know yet. It looks like

maybe 10 percent. So when it was 27 percent, that came as a bit

of a shock.

Mr. DAVIS OF ILLINOIS. So you did experience some shock?

Mr. ZIPSER. Yes, enormous shock, and we are in the process right

now of discussing whether or not to go entirely online, whether we

should cut our publication schedule in half and have alternating

issues online and in print. We are looking at changing the physical

size of our publication so it can be folded down to a size that qualifies for a non-profit rate. Then that brings up other considerations

the they have heard regarding political advocacy.

There are all kinds of things we are looking at because we can’t

continue going on the way we are right now.

Mr. NAVASKY. Can I add to that, Mr. Chairman?

Mr. DAVIS OF ILLINOIS. Yes.

Mr. NAVASKY. You know, this morning we were told that there

was a year in which to comment on these rate increases. Aside

from the fact that we were led to believe it was only going to be

an 11 percent increase, the only way you can take advantage of

that year is to have yourself a representative technically known or

popularly known as a lobbyist. We went and asked what it would

cost us to have someone to monitor this process and got rates that

ranged from a quarter of a million dollars to a million dollars. We

as a class cannot afford that. So effectively we are denied the opportunity to participate in the rate-setting process.

Mr. DAVIS OF ILLINOIS. Let me ask this question, and perhaps

each of you do agree that mail delivery should be a function of the

Federal Government, with the exception of Mr. Hollingsworth.

Mr. ZIPSER. Yes. I view it as a public utility.

Mr. DAVIS OF ILLINOIS. Mr. Heath.

Mr. HEATH. Yes. I think I do.

Mr. DAVIS OF ILLINOIS. Mr. Davison.

Mr. DAVISON. I’m sorry, Mr. Chairman. I missed the question.

Mr. DAVIS OF ILLINOIS. You do believe that mail delivery should

be a function of the Federal Government?

Mr. DAVISON. Mail delivery should be a function of the Federal

Government? Yes, I think I do.

Mr. STRAUS. I absolutely agree. I think people would be shocked

at what periodicals rates would look like if all of the first class mail

were skimmed off by private industry.

Mr. DAVIS OF ILLINOIS. Mr. Hollingsworth, let me ask you, How

would privatization perhaps balance more equitably the notion that

there is fairness in the process of determining the rates?

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Mr. HOLLINGSWORTH. Normally I would caution against international comparisons, such as comparing the United States to some

other country in terms of it being an equivalent comparison, and

I would subscribe to that in what I am about to say to an extent.

However, I do believe that we can learn from what is being done

in some other countries, such as Japan, maybe particularly Japan,

certain parts of Europe, New Zealand, and elsewhere where their

postal services are on an inevitable and no-looking-back pathway

to privatization and it is working.

What privatization offers is competition and choice. We see that

with the one aspect of mail that is not as tightly regulated by the

monopoly statutes, and that is with regard to parcel post, where we

have thriving competition amongst the Postal Service, United Parcel Service, DHL, FedEx, and others.

It is also a question of whether or not we will ever see the liberation of our mailboxes. It is also against the law to put anything

that you might want other than regulated mail into a mailbox.

So I think with competition you have better options, better

choices, better pricing, and I think in the long run it is going to

be beneficial for the stakeholders, for the mailers, and for the customers.

This is not a process, I would add, that is going to happen overnight, but I think we can look at what is going on elsewhere in the

world and take those necessary steps that former Postmaster General Henderson said we need to do.

Mr. DAVIS OF ILLINOIS. Do you believe that small mailers or

smaller mailers would be at a serious disadvantage under such a

system?

Mr. HOLLINGSWORTH. Not necessarily, because they will have

wider choices and better prices from which to choose. As of now

they are captive. They have nowhere else to turn. So who is to say

that a monopoly system is going to treat them any better?

Mr. DAVIS OF ILLINOIS. Thank you.

Mr. HEATH. Mr. Chairman, in regard to our feeling about that,

we would just like to say that the community newspaper industry

is primarily more rural oriented, and our concern with privatization would be that it would kill rural delivery and, in fact, kill the

small newspapers.

Mr. STRAUS. I think we can look to the electric utility industry

for an example of where theorists suggested that competition would

lead to lower prices when, in fact, competition, in those States that

have opened up their systems to competition, electric utility prices

have soared because there is no real competition. The same thing

would happen with the Postal Service. There will be no competition

to carry a 30,000 or 40,000 circulation publication to 30,000 or

40,000 addresses dispersed across the entire country.

It was suggested to look at the parcel industry. OK. If I want to

mail one parcel from my house, I have to drive. There are two

United Parcel Service deposit points, I think, in the Washington

metropolitan area. Now, a big company with thousands of parcels,

they come and pick them up. They will come to pick it up for me

if I pay an extra charge. But competition in parcel service is great

for the mass parcel mailer, not so good for the individual parcel

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mailer who has to go stand in line at a post office or drive 30 miles

to Springfield to put it into their system.

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

I am going to go to Mr. McHugh.

Mr. MCHUGH. Mr. Chairman, thank you very much.

I don’t have a lot of questions. I wanted most of all to be here

because of the enormous respect I have for people on the panel who

are known to me personally and, where I don’t know them personally, I know of the work that they do. I don’t always agree with

it, but I always admire it. I thought their comments were important, and I would hope instructive.

I would say to Mr. Navasky, because I don’t think you heard Mr.

Straus when you were quoting the quotes you received on lobbying.

He said you should have come to him. Apparently he is willing to

save you money next time. I am just trying to create a business

deal here. But your point was taken in the broader context.

I was going to pursue the issue of the privatization question, Mr.

Chairman. I appreciated your doing that. I think there is always

some fundamental questions as to how we best provide the mail in

this country. I happen to believe with the majority of this panel

that, for all its flaws, that the Government is certainly in the

main—not always, but in the main—the appropriate source of that

service. As we have seen here, it is a very difficult challenge to

make sure we balance all of the various interests.

I would note with the upcoming regime the change from the task

that, as I commented to the first panel, we do have a mechanism

in place in this bill that will provide the opportunity for periodicals

to be re-examined, and I would hope provide the opportunity for individuals and organizations such as these good folks to have a

more direct influence and, in their minds, I am sure, more appropriate outcome as to rate determinations under the new regime as

ahead in the future.

I am curious, though, there was the opportunity under this rate

case to take the grievance to the Federal courts that have certainly

been an avenue of relief that has been accessed by many in the

past under past rate cases. Did any of you consider that? If so, why

didn’t you pursue it? And if not, why was it not considered?

Mr. STRAUS. We probably thought about it for all of about 3 seconds and rejected the notion. A couple of reasons why it would not

be a good idea to do it. First of all, there has to be legal error.

Merely a different judgment is not going to get a court of appeals

to reverse a Federal agency. They give a lot of discretion to the

judgment, and here the judgment of the Postal Regulatory Commission was different from that of American Business Media, different

from that of magazine publishers of America, different from that of

the Postal Service, pretty much in line with that of Time Warner,

but not so unreasonable that we thought that a court would reverse

it.

But, more importantly, a court of appeals cannot enjoin rates; it

can only find them unlawful. By the time a court would have acted,

this rate would have been long since over and the law under which

it was devised would have been long since over, and so we could

have spent $50,000 or $100,000 on an appeal. Even if we won, we

would have won absolutely nothing because if the court found that

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those rates were unlawful they would no longer have been in existence. That just would have been a silly thing to do.

Mr. NAVASKY. Mr. McHugh, I would add that it would never

occur to us to do that because lawyers are, for most small journals—again, that may publish 20,000 or 25,000—if they are weekly, they don’t have time to do anything except get their magazine

out, no less money to pay a lawyer, so it is way outside of what

the reality of the business of putting out one of these journals is.

One of the problems with the suggestions of the postal authorities that we heard this morning, co-mailing, is we did try that, and

we found that one of the consequences of it was it delayed delivery

to the District, for example, for up to 11 days late. This is for a

weekly magazine. It is from another planet to make that suggestion to this class of magazine.

So the idea of going to court to stop it, the idea of co-mailing to

overcome it, they really are off the point of what is the equation

that Congress ought to consider when it deals with this mailing

question, and what our big suggestion is that you ought to go beyond efficiency, go beyond the market, and consider the public interest and the social mission of these publications when you set the

rules.

Mr. MCHUGH. Mr. Heath.

Mr. HEATH. Mr. McHugh, we considered that primarily on the

grounds of the tub charge, flat trays or tubs. The container charge,

which is the most harmful thing to small newspapers in this rate

case, was applied, we believe, illegally to flats trays. We are trying

to move toward those. We have worked with the Postal Service

very favorably to move toward those. The PRC did give the opinion

that charge for containers should not apply to the flats tubs because there was no cost basis, no cost studies that would indicate

that they should apply.

They were applied anyway. However, our association, small as it

is, and made up of rural members like the community newspapers

that you are very familiar with in your rural District, and the

chairman I believe is originally from Arkansas where there are

many small, rural papers where he grew up. Those papers don’t

have the revenue base to support the dues to file the kind of lawsuits that would require to be successful, so we are not able to do

so.

Mr. MCHUGH. I thank you all for saying that. I think it is important to get that on the record, because I have already heard, and

I am sure as this process goes forward we will continue to hear,

from those who don’t share your positions, as I am sure you might

gather, that was an avenue and somehow you are not pursuing it

would suggest you understood you were in the wrong.

I thought it was important to get your side of that on to the

record.

With that, Mr. Chairman, again, as I opened up 5 minutes ago

saying I had nothing to say, no questions to ask, I shall now be

happy to yield back with my thanks to this panel for being here.

Mr. DAVIS OF ILLINOIS. Thank you very much, Mr. McHugh. I

have no further questions. Gentlemen, I want to thank you very

much. We appreciate your being here.

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While the third panel is being seated, I will go ahead with the

introduction of the panelists.

We will have first Mr. James O’Brien for Time Warner. He is

vice president of Distribution and Postal Affairs. Mr. O’Brien has

been involved with the printing, publishing, and distribution of

magazines for more than 35 years.

Then we will have Mr. Mark White, who is vice president of

manufacturing at U.S. News and World Report LP. In that role he

has responsibility for production and distribution of the company’s

weekly news magazine, U.S. News and World Report, which last

year mailed more than 95 million copies using periodicals class

postage.

Mr. Joseph Schick is director of postal affairs for Quad/Graphics.

He is the primary liaison with the U.S. Postal Service on all matters affecting Quad/Graphics and their customers. Mr. Schick

joined Quad/Graphics in 1981 and was named to his current position in 1990.

Ms. Anita Pursley is vice president, postal affairs, for Quebecor

World Logistics, a division of Quebecor World, Inc. In her capacity,

she is responsible for establishing corporate postal policy and is the

primary liaison with the Postal Service on all matters affecting

Quebecor World and its customers.

And last but certainly not least, Mr. Jerry Cerasale joined the

Direct Marketing Association [DMA], in January 1995 as senior

vice president, Government Affairs. His primary functions are

working with Congress, Federal agencies, and State and local governments.

Thank you all very much.

It is the custom of this committee to swear in all witnesses, so

if you would stand and raise your right hands.

[Witnesses sworn.]

Mr. DAVIS OF ILLINOIS. The record will show that each of the witnesses answered in the affirmative.

We will then proceed. Of course, the green light means that you

have 5 minutes. The yellow light means that you have 1 minute

left. And the red light means that your time is up.

We will begin with Mr. O’Brien. Thank you very much.

STATEMENTS OF JAMES R. O’BRIEN, VICE PRESIDENT, DISTRIBUTION AND POSTAL AFFAIRS, TIME, INC., TIME WARNER; MARK W. WHITE, VICE PRESIDENT, MANUFACTURING,

U.S. NEWS & WORLD REPORT; JOSEPH SCHICK, DIRECTOR,

POSTAL AFFAIRS, QUAD/GRAPHICS INC.; ANITA PURSLEY,

VICE PRESIDENT, POSTAL AFFAIRS, QUEBECOR WORLD LOGISTICS; AND JERRY CERASALE, SENIOR VICE PRESIDENT,

GOVERNMENT AFFAIRS, DIRECT MARKETING ASSOCIATION

STATEMENT OF JAMES R. O’BRIEN

Mr. O’BRIEN. Thank you. I would like to begin by thanking

Chairman Davis and the committee for inviting me to testify at

this hearing.

My testimony will focus on how the current periodicals rate

structure was adopted and why that structure is critically needed.

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The issues involved are not new. They have been discussed widely in the postal community for at least a decade. This chart shows

the rise in what it costs the Postal Service to process a periodical

from 1986 through 2006. The red line is periodicals cost, the black

line is CPI.

As you can see, these costs have outpaced inflation by over 60

percent. In 1998, the magazine publishing industry and the Postal

Service formed the Mail Processing Task Force in order to determine why periodicals’ costs were rising so rapidly. I was a member

of that task force, as were representatives from the Magazine Publishers of America, American Business Media, other publishing

companies, and printers. We visited 17 postal facilities and identified a number of contributing factors.

One of the most prominent was the fact that the periodicals’

rates were misaligned with Postal Service’s cost. I can best explain

this by giving an example.

This is a periodicals mail sack. Depending upon where it is entered into the mail stream, it costs the Postal Service between

$1.58 to $6.23 to process this sack, not counting the cost of transporting, sorting, or delivering the magazines inside. Until last year,

this sack could be placed in the mail containing as few as six copies

of a magazine, which might collectively pay postage as low as

$1.50. In short, the total postage would be less than the handling

costs for the sack, alone. In other words, the rates were not aligned

with the costs.

Because of this, the unanimous report of the task force that included large and small periodicals mailers issued 9 years ago concluded that ‘‘periodicals rate structure should be reviewed to ensure that it is consistent with the overall periodicals processing

strategy and induces appropriate mailer behavior.’’

Because the postal rates for periodicals did not reflect the Postal

Service’s cost and gave mailers little reasons to choose more efficient mailing practices, periodicals’ costs continued to escalate.

Something had to be done to break this pattern. For this reason,

in January 2004 Time Warner, Conde Nast, Newsweek, Reader’s

Digest, and TV Guide filed a complaint with the Postal Rate Commission requesting that it recommend to the Postal Service a rate

structure that reflected the cost of processing periodicals mail. In

other words, pay for what you use.

We proposed that if the Postal Service incurred $1 in cost to

process a sack, the mailer would pay a sack charge of $1.

The Commission conducted a 22 month proceeding in the full

regulatory limelight, including hearings on the record, with the opportunity for all interested parties to present testimony, conduct

discovery on other parties, and cross examine their witnesses, and

file briefs. In its 235 page final order, the Commission expressed

concern over the potential impact upon some smaller mailers and

declined to act at that time. But it also stated, ‘‘Progress toward

a more cost-based rate structure is both possible and necessary.’’

In 2006, the Postal Service filed for a general rate increase, and

once again Time Warner submitted a cost based rates proposal.

However, at this time we substantially modified our previous proposal to reduce the impact upon smaller or less efficiently prepared

publications. The key adjustment was that we proposed passing

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through on rates only 60 percent of the cost associated with bundles and containers. In other words, if a sack costs the Postal Service $5 to process, the rates would only reflect $3.

After 10 months of on-the-record hearings, testimony, and crossexamination, the Commission recommended to the Postal Service a

rate structure that was more cost-based than the existing structure, but that reduced the potential impact on smaller mailers even

further by passing through only 40 percent of the actual bundle

and container costs.

As a result of this decision, 60 percent of those costs continue to

be covered by the periodicals class as a whole, rather than the

mailers who cause them.

I would also like to say a word about subsidies. Many people are

unaware of the fact that, other than free mail for the blind and

overseas voting, the Postal Service receives no taxpayer subsidies

from Congress. As a result, periodicals rates must cover their cost,

and each mailer should pay for the services that they consume.

The rate structure proposed by Time Warner is based upon the

premise of paying for what you use. If mailers are given the proper

price signals by being held responsible for the costs they impose on

the system, they will find ways to become more efficient.

In the absence of cost-based rates, periodicals class costs will continue to out-pace inflation, and that is something that our industry

cannot afford.

Thank you.

[The prepared statement of Mr. O’Brien follows:]

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Mr. DAVIS OF ILLINOIS. Thank you very much.

We will go to Mr. White.

STATEMENT OF MARK W. WHITE

Mr. WHITE. Thank you for providing me this opportunity to clear

up several misconceptions regarding periodicals’ postal rates. There

is no question, as you have already heard, that many publications

have large increases in their postage this year, but it is not a small

versus large issue. Many large circulation publications, including

our own, had higher increases than average. We mail nearly 2 million copies of every issue, mailed extremely efficiently, yet our postage rates went up about 15 percent, much higher than average.

The issue comes down to lightweight publications, light, nationally distributed publications. Virtually all of us had large increases,

whether large circulation or small circulation.

Another misconception is that the new rates are cost based. They

are a move in the right direction, but they are not truly cost based.

One problem or one flaw is that they still undercharge for bundles

and containers. That means for the periodicals class to break even

there must be overcharges in other areas. For U.S. News, that

means that, though we are an efficient mailer, we still are overcharged. We are still subsidizing other magazines, including those

published by much larger publicly traded corporations, because

they are mailing their magazines less efficiently.

I would also like to point out that, contrary to some of what you

have heard, time-sensitive publications can take advantage of incentives in the new rates. Weekly publications can join freight

pools to gain drop-ship discounts in a way that is efficient. We have

been doing it for more than a decade, despite the fact that many

people told us it couldn’t be done.

Weeklies can engage in co-mail and similar activities to reduce

postage. We mail nearly all of our copies with another weekly,

binding on the same binding line, despite our high volume which

makes the incentives not as attractive for us as it is for smaller

mailers to join such co-mail pools.

Many people claim that these programs will delay delivery. Our

experience is that drop-shipping or pool-shipping, co-binding, comail actually improve delivery. We are able to create more-efficient

bundles, more finely sorted pallets, drop-shipped further into the

postal system.

Let me also point out that true cost-based rates would not automatically hurt small circulation publications. Many local newspapers and regional magazines are inherently efficient mailers.

Many small publications have joined co-mail pools and have taken

other tactics to become efficient mailers. As an aside, I will point

out that I worked with two other publications the last couple of

years, one a small publication typically mailing about 20,000 copies, did it very efficiently. Another one, when I started working

with them, was mailing 500,000 to 600,000 copies, doing it very inefficiently. It is not a strictly small or large issue; it is efficient versus inefficient.

The problem we had is the old rate structure that we inherited.

Mailers were subsidized for mailing inefficiently because periodicals rates did not send the right signals to mailers. The disconnect

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between what we publishers paid and the Postal Service’s cost

caused inefficient mailing behavior. That led to rapid rate increases

for all of us.

The new rate structure is the beginning of a cure, though admittedly one with bitter medicine that treats some symptoms while

largely ignoring others. But this partial cure is already having the

intended effect, causing publishers to mail more efficiently, which

is minimizing costs for the entire periodicals class. Such moves toward greater efficiency are our best hope for reigning in future increases in periodicals rates.

Thank you.

[The prepared statement of Mr. White follows:]

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Mr. DAVIS OF ILLINOIS. Thank you very much.

We will go to Mr. Schick.

STATEMENT OF JOSEPH SCHICK

Mr. SCHICK. Mr. Chairman and members of the subcommittee,

thank you for providing me with this opportunity to testify on behalf of Quad/Graphics. Quad is the largest privately held printer

and third largest commercial printer, public or private, in the

United States. Last year we distributed more than 9 billion magazines, catalogs, and direct mail pieces through the Postal Service,

equating to about $2 billion in postage paid by our clients. We are

headquartered in Sussex, WI, and have other printing plants

across the Nation.

While it is true we don’t pay postage for the books that we print,

postal rates do have a major impact on the printing industry.

Every time the Postal Service increases rates, our clients react in

a way that is detrimental to printers. They reduce circulation. In

worst-case scenarios, they may discontinue a publication. They cut

back on the number of pages. They reduce their frequency. In some

cases, they may move to the Web. The result is a reduction in total

print volume, and therefore our business.

Because of the volume of mail we and our colleagues in the printing industry produce, it is a necessity that we work very closely

with the Postal Service to create an end-to-end process that results

in the lowest combined cost for our mutual clients. It is a term we

have coined over the years with the Postal Service, basically stating that we don’t want costs pushed to one side or the other, because at the end of the day our customers still end up paying for

it.

We are business partners with the Postal Service. Think of the

Postal Service as the next department in a printing operation. We

hand off the product to the Postal Service for final delivery, and

our clients expect that to be a seamless process. That requires us

to continue to find ways to be able to prepare mail in its most efficient way so that the Postal Service will incur the least amount of

cost in carrying out their part of the process.

As a large mailer, it is obvious that the long-term viability of the

Postal Service is critical to our success and that of our clients. Over

the last 25 years, through technological advances and process

changes resulting in productivity gains of more than 4 percent annually, the printing industry has been able to actually reduce the

price for printing adjusted for inflation. On the other hand, the

Postal Service has seen their overall cost continue to rise, which

has resulted in higher postage rates for mailers. So it becomes even

more imperative that we try to do as much as possible in preparing

and distributing the mail before we present it to the Postal Service.

Over the years the printing industry has worked with the Postal

Service and others to develop drop-shipping for transportation efficiencies, bar coding for automation, mail dock for distribution planning, Postal One for postage payment, and numerous other products and services. And many years ago carrier-out pre-sort was established as the finest level of pre-sort, which eliminated a great

deal of work in postal processing and delivery, and therefore costs

for the Postal Service.

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There was a time when only large circulation or local city regional publications could realize carrier route savings. Thankfully,

that changed with the advent of co-mailing. I am proud to say that

Quad/Graphics pioneered co-mailing in 1986 when we were a much

smaller printer. In fact, we were about a $260 million printing company with 2,100 employees. We knew it was the right thing to do

at the time to help our clients reduce the heir postal costs, but at

the end of the day we also have a business to run, and we knew

that we needed to provide a unique service that would help us grow

our business, as well. Thankfully, that happened.

Today we offer four different co-mail processes, both in-line and

off-line, with options for virtually every one of our clients, regardless of circulation or trim size.

Over the years, many other companies, printers large and small,

and third-party logistics providers have made investments in comail equipment and technology. One size does not fit all, and that

is apparent by the different co-mail processes that have been developed.

As with any other investments, there has to be a return on that

investment. We are in this to make money. In this case, that would

equate to work share discounts provided because of a savings realized by the Postal Service. Over time, we have to drive behavior

through those work share incentives for the continual process improvement of the technologies that prove successful, as well as

using them to help Postal Service reduce their cost. Co-mailing is

that successful technology. The new rate structure is the driver

that will provide the incentives to continue to grow co-mail and

make it even more viable for a larger audience of users.

We don’t like to see postal increases any more than the next guy.

We suffer, as do our clients who have to deal directly with the postage increases. We are sympathetic to all mailers, big and small.

Our clients run the gamut from niche publications with print orders of 60,000 copies, of which only 10,000 are distributed through

the mail, to some of the largest general interest publications and

catalogs with circulation in the millions.

Regardless of the quantities mailed, each publication is challenged to find ways to reduce the impact of a rate increase. If our

clients are challenged, that means we are challenged to provide

them with the opportunity to reduce those costs. That is our business.

There is no debating the fact that we have just experienced the

most challenging rate increase in recent history. Many mailers experienced higher increases than had been originally proposed. Periodicals question the rationale of the complexity of the new rate

structure.

As a printer, we were faced with having to explain to our clients

what happened and what we were going to do for them to help

them survive. While this was a challenge, it was not unlike what

has happened after every rate case that I have ever been involved

with over the last 20 years. A main reason for that is the ratemaking process under the old law. Everything about it created a

situation where we all had to react to something that was usually

unexpected. In this case, that was taken to the nth degree.

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We are encouraged by the signing of PAEA in 2006 because it

limits rate increases to CPI, takes a 10-month rate-setting process

out of play, and gives the Postal Service an opportunity to use market pressures on different classes of mail as a guide for setting

rates. It should allow us the opportunity to better plan and manage

our businesses.

I fully expect that going forward we will continue to work with

the Postal Service as business partners to do whatever it takes to

maintain the concept of lowest combined cost. Because of PAEA,

there should be more opportunities than ever to accomplish that

goal. The viability of the printing industry and the Postal Service

is at stake.

Thank you for allowing me to make those views known.

[The prepared statement of Mr. Schick follows:]

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Mr. DAVIS OF ILLINOIS. Thank you very much.

We will go to Ms. Pursley.

STATEMENT OF ANITA PURSLEY

Ms. PURSLEY. Good afternoon, Chairman Davis, Congressman

McHugh. Thank you very much for this opportunity to testify

today.

Quebecor World is the second-largest commercial printing company. We offer products and services to numerous market segments, magazines, catalogs, retail mailings, and within those market segments to small, medium, and large customers. Quebecor

World strives continuously to bring high value and lower cost solution sets to the customers we serve in these markets. With that

said, I am pleased to present to the subcommittee information

about Quebecor World’s logistics express collation mailing system

[ECMS].

The ECMS system is our version of what is commonly referred

to in the mailing industry as a co-mailing system. As you have

heard today, co-mailing is one of the few options that short-run

publications have that provide them the opportunity to qualify for

the same types of postage discounts as larger circulation publications.

As with all successful work sharing programs, we recognize that

co-mailing will help many but not all, at least in the short term,

publishers mitigate the impact of the most recent postage rate increase.

Additionally, due to the reduction in postal handlings, co-mailing

allows magazines to arrive to their subscribers in better condition

and in a narrow, more predictable time window.

Although we have been co-mailing longer-run publications since

1998, our ECMS, we began that system program in May 2005 in

the Chicago area. In that year, we co-mailed a total of 30 million

magazines. The program grew to slightly over 100 million comailed magazines in 2006, and we expect to exceed 150 million this

year. Today, almost 900 titles participate in our program.

As a result of the new rate structure and increased demand, we

recently opened the program to publications that are printed elsewhere, and already 50 publications printed by other companies participate in our program. We expect to see this number grow significantly.

The core of this program, as I said, is the short-run publication

market, because these type of publications have the most to gain.

For example, co-mailing gets mail out of sacks and onto pallets,

while larger publications generally can palletize on their own.

Given this focus, the average size of publications in our program

is approximately 30,000 copies, and has actually dropped each year

as our program has expanded.

In response to this demand, and in order to meet the needs of

even smaller publishers, we recently reduced the minimum to as

few as 5,000 copies per issue, and we have also tailored the program to be extremely user friendly.

Two key aspects of the program are timeliness and flexibility. To

ensure timely delivery, we typically run four co-mail pools for magazines each week, with one always beginning on a Monday. This

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ensures that magazines do not sit at the plant waiting for the next

pool.

Our experience has shown that for most publications the time required to co-mail a publication is more than offset by the delivery

improvements that result from entry of co-mail publications deeper

into the postal network.

To allow publishers scheduling flexibility, we allow them to move

publications in and out of the program from one issue to the next

without penalty and with only 72 hours of notice. Similarly, they

can move from one pool to another with only 36 hours notice.

Publishers simply need to provide us with their mailing lists 3

days prior to the start of a co-mail pool, and the actual magazines

1 day prior to the startup.

Quebecor World Logistics recently announced plans to significantly expand our co-mail operations to meet this increased demand. To better service the non-Quebecor World print marketplace,

we are moving into a new and larger consolidation facility in the

northeast in 2008. This expansion will allow us to serve a broader

spectrum of publications. And, unlike some previous co-mailers, the

new generation of equipment that we would begin deploying in

2008 can process poly wrapped and tabloid-sized publications.

The first two machines will be deployed into this facility, and we

have agreements in place to purchase an additional four machines.

This added capacity in the northeast will allow us to serve additional customers and plants in this region.

In closing, I would like to add that Quebecor World does not support rate increases of this overall magnitude for any class of mail,

but supports a rate structure that promotes efficiently prepared

mail and reduces overall USPS processing costs.

Moving forward, we fully expect that PAEA’s rate indexing system will prevent such large rate increases in the future, while allowing the Postal Service to encourage efficient preparation. We

also recognize that no single solution will satisfy all market segments or customer sizes. But we are committed to invest as appropriate to allow our customers to take advantage of whatever rate

structure is in place.

Thank you very much. I would be happy to answer any questions.

[The prepared statement of Ms. Pursley follows:]

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Mr. DAVIS OF ILLINOIS. Thank you very much.

We will go to Mr. Cerasale.

STATEMENT OF JERRY CERASALE

Mr. CERASALE. Mr. Chairman, Mr. McHugh, it is a pleasure to

have the opportunity to testify before you on this important subject.

I want to first take a minute to personally from the DMA thank

the chairman for taking time out of his busy schedule to attend our

conference and meet DMA members in the beautiful facility in the

wonderful city of Chicago located in your District, Mr. Chairman.

Thank you.

The DMA is a premier association of direct marketers using all

channels of communications, but the mail is still a very, very important channel to our members.

I want to look at just four categories of mail today, not a periodicals—that has already been taken—but looking at standard mail

flats, first class mail flats, standard mail parcels, and standard

mail not flat machinables.

All of them received rate increases, which will have affect on volumes and affect decisions of those mailers who mail in those classes and subclasses of mail.

Looking at standard mail, since 1990 the Postal Service began

moving rates in standard mail to reflect the cost differences between handling letter-shaped mail and flat-shaped mail. They

started to do that gradually, little step at a time, to avoid rate

shock, to eventually reach that goal.

In this last rate decision, the Postal Regulatory Commission

[PRC]—and I really have to thank all of you for changing the name

from the Postal Rate Commission to the Postal Regulatory Commission, keeping the abbreviation PRC the same for old guys like

me. But the PRC jumped immediately to full recognition of the cost

differential between handling letters and flat-shaped mail.

It is too early to tell right now what the full impact is of that

on volume to the Postal Service. We do not know the impact of how

much more volume there will be in letter-shaped mail than that

proposed by the Postal Service, nor are we fully aware of the full

impact of a 20 to 40 percent increase in flat-shaped mail, including

most of the catalogs.

The DMA believes that the PRC over-estimated the conversion of

flat-shaped mail to letter-shaped mail to try and avoid that huge

rate increase. As in my written testimony, for catalogers it takes

a great deal of lead time to produce a catalog. You have to determine what you will order. You have to order those products. The

products have to be created, delivered to the cataloger, put in the

warehouse, and then sold through the catalog. So by the time the

rate increases went into effect in May, the holiday season ordering

was already in effect, and the size of the catalogs was likely already locked into place, since they had the products that they were

going to try to sell already on order.

So what is happening? What is this causing these flat-shaped

mailers to do? They are looking at co-mailing, commingling, and,

more importantly, they are looking to a more rapid change to the

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Internet. I attended a conference of catalogers, and over half of the

programming was on Internet marketing.

That is what is happening a little bit in standard mail.

Looking at first class mail flats, we see a greater conversion of

first class mail. First class mailers are able to fold their flat-shaped

mail and put it in letter-shaped pieces, so we are seeing less of an

impact of the 20 percent increase on first class flats because they

can convert more easily.

Looking at standard parcels, a very small part of the standard

mail stream, we see the 40 percent increase, far below the increase

that was requested by the Postal Service. I think that the fear

going forward is for standard parcels, Will the Postal Service go

forward and really raise the rates here? We want to work hard

with them to try and not have that happen to destroy standard

parcels.

Finally, not flat machinables. What are those? A good example

are non-profits sending out premiums such as pens or pins. They

had a rate increase of 200 plus percent, some of them. They have

virtually been priced out of existence, to the detriment of some of

our non-profit mailers who have those pins and pens on inventory.

They are just no longer there. This is a type of mail that is gone

due to the rate increases.

So what do you do? What is the solution here to try and take a

look at these disparate things? I think you created that solution

with the postal reform. We have to let it work. We have to give the

Postal Service the opportunity to look at the market impact of rate

increases and take into account volume changes caused by the PRC

recommendation, take into account the cost of paper that is dramatically rising, especially coated paper. Take a look at the new

machines, the new equipment for sorting letters and flats. And, finally, hopefully, some changes allowing mailers to commingle and

co-mail different classes of mail, so periodicals and catalogs can go

together.

Fortunately, yesterday the PRC promulgated rules to implement

the reform, and we hope with that act that the old rate system is

now gone forever.

Thank you.

[The prepared statement of Mr. Cerasale follows:]

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Mr. DAVIS OF ILLINOIS. Thank you all very much. We have just

two votes. We are about 5 minutes away from the first one, and

the next one is a 5-minute vote. That means that we have to be

gone about 10 minutes, 12 at the most. I do have some questions

I would like to ask, so if you could remain I would really appreciate

it.

Thank you very much.

[Recess.]

Mr. DAVIS OF ILLINOIS. Thank you all so much. We will resume.

Why don’t I begin, Mr. O’Brien, what would you say to those

mailers who blamed Time Warner for the rate increase? I mean,

they say Time Warner gave us this rate increase.

Mr. O’BRIEN. Well, I think, Mr. Chairman, they should first take

a look at that graph. It is not Time Warner, it is the industry that

for many, many years we as an industry allowed inefficiency to

come into the process and we drove up the costs. That example

that I gave you earlier about a sack costing $5 or $6 and only containing $1.50 worth of revenue really happens.

So we were driving up the cost. It costs the Postal Service a lot

of money to process these things, and we turned a blind eye to it.

I think the other thing that has happened is, to be honest, we

magazine publishers are junkies and we got hooked on a number

of bad practices, one of which was a discount for bar-coded copies

at the five-digit level. The discount was 899 percent above what the

Postal Service’s cost savings were. So you are giving away much

more money than you are actually saving by the value of that discount.

So what is wrong with this picture? We are all junkies. We all

got hooked on that discount. It was reduced in this case back to

only giving away 100 percent of what the Postal Service saves instead of 899 percent. That is one thing that was out there.

Time Warner had nothing to do with that discount getting put

back to where it should have been all along.

Another thing that happened in this case was that the Postal

Service recommended a shift from pounds to pieces, moving cost

away from pounds to pieces, so, as you heard some of the earlier

witnesses say, I have a lightweight publication and we got hit

harder. That wasn’t Time Warner’s doing; that was a result of a

proposal by the Postal Service to shift from pounds to pieces. All

lightweight pieces got hit, including our publications.

The whole idea behind these rates, Mr. Chairman, was not to put

publishers out of business. We are as strong a proponent of the

first amendment rights as anyone. We own CNN. We own Time

Magazine. We want news. We want information to get put out to

the public. But I think at the same time we want mailers to change

their behavior to try and become more efficient.

I thought it was kind of interesting earlier that Mr. Zipser said

we are doing all kinds of things to try and offset this increase. That

is exactly what was supposed to happen as a result of this proposal. Mailers were supposed to change their mailing behavior, not

go out of business.

So for everyone that comes up and tells you I am getting hit with

a 20 percent or 30 percent or 40 percent increase, you have to take

that with a little bit of a grain of salt because they haven’t tried

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to do what Mr. White is doing with his weekly publication or what

Mr. Schick and Ms. Pursley are doing for their customers in trying

to make them become more efficient.

See what their rate increases are after they change their behavior, and I think you will get a completely different picture.

Mr. DAVIS OF ILLINOIS. So you are saying that it is a matter that

the industry took a good look and decided, in a sense, to propose

what you consider to be in the best interest of the industry, as well

as the best interest of the Postal Service?

Mr. O’BRIEN. Yes, Mr. Chairman. You know, this task force that

we were on took place in 1998, 9 years ago. Big mailers, small

mailers. Mr. Straus, one of your earlier witnesses, was on that task

force right alongside me at every one of those postal facilities. We

all looked at everything that was out there, and we came to the

conclusion that there were 15 things that the Postal Service needed

to change, and one of them was to have the rate structure get more

closely aligned with the costs.

We as an industry said that 9 years ago. The Postal Service

didn’t take action. It was incumbent upon the industry to take action. And yes, we had the courage to step forward and take that

fight on on behalf of the industry, but I think it is for the long-term

survival of the industry. Yes, there is short-term pain until people

change their mailing behavior, but once that is done I think in the

long term you are going to see an effect on that curve, on that red

curve, because if we don’t change that, the Postal Service will

never be able to meet the requirements of the new law to keep

periodicals class cost below the rate of inflation. It won’t happen.

Mr. DAVIS OF ILLINOIS. Thank you very much.

Mr. O’BRIEN. Thank you.

Mr. DAVIS OF ILLINOIS. At this point let me ask you, have you

noticed any changes, new trends with your publication, since the

new rates have gone into effect?

Mr. WHITE. You mean in our own mailing behavior?

Mr. DAVIS OF ILLINOIS. Yes.

Mr. WHITE. Yes. We are doing many of the things, but I think

it helped us to be able to co-bind all of our magazines. Before we

were only co-binding most of them. It clearly increased the incentives for potential co-binding partners. We have changed some of

the rules that we used for pre-sorting to try to avoid sacks and to

create more efficient pallets.

I think more broadly, industry-wide, certainly there are a lot of

people looking at things like co-mail again, and our message to

printers has been co-mail or no mail. Either figure out how to help

your customers minimize their postal cost or get out of the business

of printing stuff that is mailed. That is a necessary part of the

business, as these folks have pointed out.

Mr. DAVIS OF ILLINOIS. Ms. Pursley, let me ask you, have you noticed any change, trends, since the new rates were implemented?

Ms. PURSLEY. Well, it is very, very obvious in our operation. Our

co-mail facility has just exploded, the demand. The customers are

knocking down the doors. We are, as I mentioned in my testimony,

expanding the program to not only offer our northeast customers

co-mail operations or co-mail offerings, but also to non-Quebecor

World print customers. Many of our customers now are other printVerDate 11-MAY-2000 15:09 Dec 14, 2009 Jkt 000000 PO 00000 Frm 00192 Fmt 6633 Sfmt 6633 U:\DOCS\53573.TXT KATIE PsN: KATIE
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ing companies that may not be able to invest in co-mail equipment

and make the return on the investment necessary in order to make

it successful as a small printing company. So we are working in

tandem.

It is very, very impressive how our program has grown significantly just in the last 2 to 3 years.

Mr. DAVIS OF ILLINOIS. Would you suggest that efforts to educate

the members has had that kind of impact to be more efficient or

to find more efficient ways of mailing?

Ms. PURSLEY. Educating those customers? Definitely. I mean, it

is an education process, because co-mailing doesn’t work for everybody and a customer may have to make a few changes in their existing practices, but you can make it work. I mean, there are a lot

of options. As with every rate case, we have customers who come

to us and say, What is it that we can do to lower our postage costs?

Many times it is suggestions such as lowering paper weights or reducing trim size. It is no different in a co-mail environment where

we may be suggesting slight operational changes for them to be

able to participate. But overall it is working very successfully.

Mr. DAVIS OF ILLINOIS. Thank you.

Mr. Schick, what efforts have you made to help your customers

take advantage of more of the discounts in standard mail?

Mr. SCHICK. Well, Mr. Chairman, I think I will concur with

Anita’s comments on trying to get more of our catalog customers

to look at co-mailing. I can tell you that this year over last we have

already seen about a 75 percent increase in the volume just in

standard mail catalogs that are currently taking the opportunities

to do some kind of co-mailing.

But we actually went back to our customers when we saw what

the rates were going to be and said, Let’s start from the beginning.

Let’s focus first of all on your mailing list. Let’s ensure that you

are mailing to the right people. Let’s ensure that you have good addresses, because there are opportunities to save some money on

that side of the business, and then that savings just kind of compounds going forward because you are able to do so many more

things without adding some cost.

Likewise, if you don’t do those things up front to ensure that you

are mailing good addresses, you are just adding cost as it gets piled

on through the process.

So we took that approach, then we also said let’s look at our

transportation planning and distribution to see where we can take

better advantage of some of the transportation efficiencies and opportunities for additional drop shipping.

Then, while we were doing that, we were also focusing on helping

them with their response rates, and looking at the technology that

we have available to them to help them target their customers better so that they can raise the rate of response. By the time you

raise the response rates and get more sales and reduce your costs

a little bit, at the end of the day you are able to manage those overall costs pretty well. I think we have seen a lot more customers

with open eyes taking advantage of all those different processes.

Mr. DAVIS OF ILLINOIS. Thank you.

Mr. Cerasale, as you know, the PAE makes it considerably easier

for the Postal Service to engage in pricing experiments. Can you

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describe for the committee one or two experiments that you would

like to see the Postal Service try?

Mr. CERASALE. I think the first one is the one I mentioned, could

happen relatively quickly, is to allow commingling of more than

one class of mail. As Mr. Schick talked about, catalog mailers going

in and commingling, we can take the smaller publications and put

them on those pallets as well and kind of reduce those costs. So I

think that is one that can go fairly quickly and one that would

have a great impact on helping especially the smaller mailers and

the lighter weight mailers, the ones who were hit most hard in this

past rate case, both in periodical class and in standard mail.

I think the push toward having mail, it started with the NSA

from Bank of America, which is still a question as to whether or

not that will be approved, but the idea of moving forward to try

and get what the Postmaster General explained, the intelligent bar

code forward, to try and really cut costs out of the system.

One of the things that has been delayed is when everyone will

be required to use the intelligent bar code. It may be time to,

through the NSA, through maybe experiments, to try and push

more and more mailers to start using the intelligent bar code and

see what savings we can have here, what other offerings can come

off of it, including potential of being able to help mailers target

mail better and get a better rate of return. So I think that is an

area where the Postal Service should probably look at quickly, as

well.

Mr. DAVIS OF ILLINOIS. Well, thank you very much. Let me ask

one last question that any of you might answer. In our last panel

we had some discussion of privatization. Would any of you characterize privatization as perhaps a better way to deal with the issues

and problems that we have discussed?

Mr. O’BRIEN. Mr. Chairman, I have some experience in this area.

I used to be CEO of a company called Publishers Express that competed with the U.S. Postal Service for delivery of magazines and

catalogs, and we were in business from 1989 until 1996. During

that period of time, we took the business from two zip codes in Atlanta to 1,000 zip codes in 36 cities throughout the United States.

The way that we did the business was we licensed our business

to local newspapers, and when they were delivering their saturation products that would go to every household in a zip code, those

carriers would deliver magazines and catalogs along with them.

What we found, we were in business for that period of time. We

made money exactly 1 month. We were in business 6 years and

made money 1 month, so it is a tough business. The quality of delivery is suspect. I know it was kind of funny because I was running this company and yet Time, Inc.’s magazines were some of the

customers. What we found was that our level of quality for the private delivery was 10 times worse. We received 10 times more complaints in the zip codes where Publishers Express existed.

So it was very, very difficult because we were using part-timers.

We were not allowed mailbox access, so we had to hang magazines

and catalogs in a little plastic bag on a door knob. Because people

were part time, sometimes they delivered, sometimes they didn’t.

We had problems with consumers saying I don’t want this, I want

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the product in my mailbox, put me back the other way, put me

back in the Postal Service. We had to honor those requests.

So privatization may be held out as a panacea here. I can tell

you from personal experience it is a very, very difficult business.

Mr. DAVIS OF ILLINOIS. Thank you very much.

Anyone else care to comment?

Mr. CERASALE. Yes. The mail represents $900 billion a year in

economic impact. Unlike some of the experiments that are going on

in Europe where privacy laws really diminish the amount of advertising mail that can be put into the system, the United States, with

its economic model, mail volume, mail advertising is thriving. It is

growing faster than the growth of the economy, as a whole, so it

is continually growing in that kind of a view, even in the face of

the Internet.

I think it is a little bit premature to take a look at privatization

now. You really have to look at the postal reform legislation and

see how this works. We have to give it an opportunity to work, and

if it fails for some reason then we might start to look at it.

Also, I think we are seeing in Europe just there still is a vestige

of part of a monopoly in the European systems, and they are moving now to get rid of that. It is probably time to take a look and

see. If you want to look at Europe, you have to wait and see what

happens when it is really, truly privatized, understanding that

they are not as mail centric as the United States is, with the type

of the economy that we have.

Mr. O’BRIEN. Mr. Chairman, just one followup to that. I second

what Jerry says. The thing that killed Publishers Express was

mailbox access, that we could not deliver to the mailbox. The other

thing that you ought to think about is the fact that the new law

just went into effect in 2006, and I think we need to let that play

out.

But I do say that if you ever elect to look at this, private delivery

will not survive without mailbox access. There is a tradeoff there

with the American public. A lot of people say, I get my retirement

checks in the mail. I don’t want anyone else’s hands going into that

mailbox. There are very, very difficult issues that need to be wrestled with.

So I would say let the new law play out, and if it doesn’t play

out in a number of years down the road, then maybe we would consider that, but it has to go hand-in-hand with the mailbox.

Mr. DAVIS OF ILLINOIS. All right.

Mr. SCHICK. I would just make one other comment, and that is,

from a business perspective, when you look at the environment the

Postal Service works in today where they deliver to every address

6 days a week, with diminishing revenues in each of those delivery

points, there isn’t a business out there that would ever want to do

that. So without changes to the requirements of how many days

you deliver and how many times you have to go to each household,

or without the opportunity to surcharge, as the competitors of the

Postal Service do, I really don’t see that being a viable thing at this

time.

I also believe that the Postal Service’s last mile delivery is their

bread and butter, and it is what is really of value. As long as we

as an industry can continue to work with the Postal Service to deVerDate 11-MAY-2000 15:09 Dec 14, 2009 Jkt 000000 PO 00000 Frm 00195 Fmt 6633 Sfmt 6633 U:\DOCS\53573.TXT KATIE PsN: KATIE
192

velop work sharing opportunities so that we can cut some of the

costs out of the Postal Service’s processing network, their delivery

still is the best delivery and I wouldn’t want to see that go away

any time soon.

Mr. DAVIS OF ILLINOIS. Well, thank you all so very much. It has

been a pleasure. We certainly appreciate your patience and endurance.

Jerry, let me just say it was good to see you and other members

of the Direct Marketing Association in Chicago. If you ever want

to come back, the city is yours.

Mr. CERASALE. Thank you.

[Whereupon, at 2:30 p.m., the subcommittee was adjourned.]

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