U.S. GOVERNMENT PRINTING OFFICE

67–998 cc WASHINGTON : 2001

S. Hrg. 106–762

E-COMMERCE ACTIVITIES OF THE U.S. POSTAL

SERVICE

HEARING

BEFORE THE

INTERNATIONAL SECURITY, PROLIFERATION, AND

FEDERAL SERVICES SUBCOMMITTEE

OF THE

COMMITTEE ON

GOVERNMENTAL AFFAIRS

UNITED STATES SENATE

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

SEPTEMBER 7, 2000

Printed for the use of the Committee on Governmental Affairs

(

For sale by the Superintendent of Documents, Congressional Sales Office

U.S. Government Printing Office, Washington, DC 20402

(II)

COMMITTEE ON GOVERNMENTAL AFFAIRS

FRED THOMPSON, Tennessee, Chairman

WILLIAM V. ROTH, Jr., Delaware

TED STEVENS, Alaska

SUSAN M. COLLINS, Maine

GEORGE V. VOINOVICH, Ohio

PETE V. DOMENICI, New Mexico

THAD COCHRAN, Mississippi

ARLEN SPECTER, Pennsylvania

JUDD GREGG, New Hampshire

JOSEPH I. LIEBERMAN, Connecticut

CARL LEVIN, Michigan

DANIEL K. AKAKA, Hawaii

RICHARD J. DURBIN, Illinois

ROBERT G. TORRICELLI, New Jersey

MAX CLELAND, Georgia

JOHN EDWARDS, North Carolina

HANNAH S. SISTARE, Staff Director and Counsel

JOYCE A. RECHTSCHAFFEN, Minority Staff Director and Counsel

DARLA D. CASSELL, Chief Clerk

INTERNATIONAL SECURITY, PROLIFERATION, AND FEDERAL SERVICES

SUBCOMMITTEE

THAD COCHRAN, Mississippi, Chairman

TED STEVENS, Alaska

SUSAN M. COLLINS, Maine

PETE V. DOMENICI, New Mexico

ARLEN SPECTER, Pennsylvania

JUDD GREGG, New Hampshire

DANIEL K. AKAKA, Hawaii

CARL LEVIN, Michigan

ROBERT G. TORRICELLI, New Jersey

MAX CLELAND, Georgia

JOHN EDWARDS, North Carolina

MITCHEL B. KUGLER, Staff Director

RICHARD J. KESSLER, Minority Staff Director

JULIE A. SANDER, Chief Clerk

(III)

C O N T E N T S

Opening statements: Page

Senator Cochran ............................................................................................... 1

Senator Edwards .............................................................................................. 25

Prepared Statement:

Senator Akaka .................................................................................................. 2

WITNESSES

THURSDAY, SEPTEMBER 7, 2000

Bernard L. Ungar, Director, Government Business Operations Issues, U.S.

General Accounting Office ................................................................................... 3

John Nolan, Deputy Postmaster General, U.S. Postal Service ............................ 10

Edward J. Gleiman, Chairman, Postal Rate Commission .................................... 12

Robert E. Rider, Vice Chairman, Board of Governors, U.S. Postal Service ........ 17

ALPHABETICAL LIST OF WITNESSES

Gleiman, Edward J.:

Testimony .......................................................................................................... 12

Prepared statement .......................................................................................... 56

Nolan, John:

Testimony .......................................................................................................... 10

Prepared statement .......................................................................................... 49

Rider, Robert F.:

Testimony .......................................................................................................... 17

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

Ungar, Bernard L.:

Testimony .......................................................................................................... 3

Prepared statement .......................................................................................... 35

APPENDIX

Karla W. Corcoran, Inspector General, U.S. Postal Service, prepared statement with attachments ........................................................................................ 76

GAO report entitled ‘‘U.S. Postal Service: Postal Activities and Laws Related

to Electronic Commerce,’’ dated September 2000 .............................................. 90

Copy of a study submitted by Mr. Gleiman entitled ‘‘Postal Enterprise: Post

Office Innovations with Congressional Constraints, 1789–1970,’’ by Richard

B. Kielbowicz, Associate Professor, School of Communications, University

of Washington, Seattle, WA, dated May 30, 2000 ............................................. 168

(1)

E-COMMERCE ACTIVITIES OF THE U.S.

POSTAL SERVICE

THURSDAY, SEPTEMBER 7, 2000

U.S. SENATE, SUBCOMMITTEE ON INTERNATIONAL SECURITY, PROLIFERATION, AND FEDERAL SERVICES, OF THE COMMITTEE ON GOVERNMENTAL AFFAIRS, Washington, DC.

The Subcommittee met, pursuant to notice, at 10:38 a.m. in room

SD–342, Senate Dirksen Building, Hon. Thad Cochran, Chairman of the Subcommittee, presiding. Present: Senators Cochran and Edwards.

OPENING STATEMENT OF SENATOR COCHRAN

Senator COCHRAN. The Subcommittee will please come to order.

I want to welcome everybody to our hearing that we have con- vened today. Our Subcommittee is here to review a report that has

been compiled by the General Accounting Office on the electronic

commerce activities of the U.S. Postal Service.

The Postal Service has been aware that the growing use of the Internet and electronic technologies is a new problem for it as it

tries to deal with challenges that are presented with these new alternatives to traditional services that have been performed and

provided by the Postal Service. At a hearing we had earlier this

year, the Postmaster General said that information showed that

these factors will cause a drop in mail volume and revenue for the

Postal Service.

For some time now we have been working to help ensure that the

Postal Service conducted its business so that it wouldn’t have to

rely upon the infusion of Federal tax dollars to subsidize its operation. The Postal Service has done a very good job in recent years

in achieving that result—operating without the benefit of direct

subsidies from the Federal treasury. And so this new development

is one that presents both problems and challenges for the Postal

Service, according to information that has come to the attention of

our Subcommittee in previous hearings.

So the Postal Service, in searching for ways to continue to react

to the demands of the American public and businesses, is trying to

decide how it can reduce costs, increase revenues, and develop a

range of e-commerce products and services that supplement its traditional mail services to the public. One question that has arisen

from competitors who are also embarking upon new business ventures in these areas is whether or not this is appropriate competiVerDate 11-MAY-2000 13:00 Feb 26, 2001 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 67998.TXT SAFFAIRS PsN: SAFFAIRS
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tion for the Postal Service to embark upon, and whether or not it

is consistent with existing laws and regulations on the subject. To try to answer these questions, our Subcommittee asked the General Accounting Office to look into these issues and give us a

report so that we could better understand the legal issues that

arise from these activities. So that’s why we are here today. We have an opportunity today to examine the results of the GAO’s review and its report, which I hope will serve as a foundation for continuing oversight of the Postal Service and its activities. On our first panel today is a witness who is representing the General Accounting Office. He is Bernard Ungar, Director of Government Business Operations Issues, who will present the GAO’s

report. Then we will hear from a panel of witnesses that includes

John Nolan, Deputy Postmaster General of the U.S. Postal Service;

Ed Gleiman, Chairman of the Postal Rate Commission; and Robert

Rider, Vice Chairman of the Board of Governors of the U.S. Postal

Service.

We welcome all of our witnesses and we appreciate very much

your providing us with prepared statements which we will include

in the record in full. And we encourage you to proceed.

Before proceeding, let me point out our distinguished Ranking

Member of the Subcommittee is not able to join us today. Senator

Akaka, from Hawaii, has just recently undergone replacement hip

surgery. He is doing well but the physicians suggested that he not

yet embark upon a long flight from Honolulu to Washington. So he

is not here. We do have a written statement from him which will

be placed in the record at this point.

[The opening statement of Senator Akaka follows:]

PREPARED STATEMENT OF SENATOR AKAKA

Thank you, Senator Cochran for your leadership and direction in holding today’s

hearing on a topic of great importance to the American public: The Postal Service’s

E-commerce Activities. As the Ranking Member of this Subcommittee, I am a strong

advocate of the U.S. Postal Service and understand why Headquarters is pursuing

electronic commerce initiatives. We are witnessing dramatic changes in government

and business because of the profound technological transformation of our society

and world. The ability of the Postal Service to meet these fast paced challenges in

a highly complex and competitive environment, while sustaining its commitment to

providing universal service, highlights the dedication and professionalism of the

more than 800,000 Postal Service employees. I hold them in the highest regard and

commend their exemplary service to our Nation.

Today’s hearing focuses upon the legality, propriety, and advisability of the Postal

Service’s development, implementation, and expansion of e-commerce initiatives.

There is no question that the Postal Service is a leader in utilizing the latest technology and the best logistical and marketing strategies to sustain and improve the

core services. The innovative range of e-commerce initiatives implemented and

planned by the Postal Service is impressive. There is great debate, however, about

whether these enterprises are consistent with the laws and regulations under which

the Postal Service operates and whether the Postal Service’s entry into the e-commerce arena best serves the public interest.

As the Postal Service becomes more involved in e-commerce activities, I want to

know how the Postal Service plans to safeguard its customers’ personal and financial information. This is a growing concern of the American public. In recent polls,

nine of ten Americans expressed concern about threats to their personal privacy and

eight of ten believe they have lost control over how companies use their personal

information. There are a number of privacy related bills pending in Congress to address this rising concern. It is my hope that the Postal Service is employing the

strongest safeguards available. Our citizens believe in the Postal Service and entrust the Postal Service with a wide range of personal information for safe and secure transmittal through the mails. I know the Postal Service wants this trust to

3

1The prepared statement of Mr. Ungar appears in the Appendix on page 35.

2The GAO report entitled ‘‘U.S. Postal Service: Postal Activities and Laws Related to Electronic Commerce,’’ dated September 2000 appears in the Appendix on page 90.

extend into its e-commerce activities, and I look forward to working with postal officials to guarantee the highest level of electronic privacy standards.

I am also interested to find out what steps the Postal Service is taking to remedy

the inconsistencies turned up by the Government Accounting Office’s audit of the

processes for review and approval of postal e-commerce initiatives. There appears

to be unreconciled accounting of how an e-commerce activity is approved, as well

as concerns that some e-commerce initiatives fall outside the realm of approved

postal services.

The exponential growth of the Internet, e-commerce, and electronic communications will impact the Postal Service’s ability to maintain universal service at reasonable rates. It is interesting to note that the two highest volume areas—bill presentment and payments and advertising mail, are also the most vulnerable to electronic

alternatives. Without adapting to change, and quickly adopting strategic solutions,

the Postal Service risks the possibility of loss of market share and erosion of its core

business. I believe the key question we need to answer is how the Postal Service

should implement change in the 21st century. I look forward to working with the

Postal Service and GAO in this endeavor.

Thank you, Mr. Chairman.

Senator COCHRAN. Now, Mr. Ungar, we welcome you specifically

and encourage you to proceed to present the report.

TESTIMONY OF BERNARD L. UNGAR,1 DIRECTOR, GOVERNMENT BUSINESS OPERATIONS ISSUES, U.S. GENERAL ACCOUNTING OFFICE

Mr. UNGAR. Thank you, Mr. Chairman. We are pleased to be

here today to help the Subcommittee in its oversight efforts with

respect to the Postal Service’s e-commerce initiatives.

With me are the staff who worked on our assignment. They assure me they are right behind me—I think they are way behind

me—Teresa Anderson, Ken John, Casey Brown, Angela Davis, and

Hazel Bailey, who I would like to thank very much.

Our report,2 which was done at your request and at the request

of the House Subcommittee on the Postal Service, was issued

today, as you know. What I would like to do is summarize briefly

four issues that we discuss in this report. Before I do that though,

I would like to provide some context for those issues to be discussed within.

The Postal Service, like many other organizations today, both

government and in the private sector, is in the early stages of actually formulating and developing its e-commerce program. A number

of initiatives have been undertaken by the Postal Service over a

several year period, in fact, going back even into the 1980’s, on an

individual case-by-case basis. But it has just been in the last several months that the Postal Service has been trying to put together

a program of initiatives.

It has been in the process, again in the early stages, of sorting

through that, trying to identify and define these initiatives, trying

to organize and get a strategy laid out. And it has made progress

in a number of respects. It has defined in the last several months

some very broad goals for this program. It has identified some

strategies that it wants to pursue. It has identified certain expected

results it would like to see from some of these initiatives. It has

set up an organizational structure to specifically review and apVerDate 11-MAY-2000 13:00 Feb 26, 2001 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6601 67998.TXT SAFFAIRS PsN: SAFFAIRS
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prove e-commerce initiatives, and it has set up a separate review

process for them.

At the same time, it is still in the process of making lots of decisions and trying to see which initiatives it wants to pursue and not

pursue. And it has still not yet developed an overall strategic plan

for this area, but it is in the process of doing that.

With that backdrop, the first issue that I would like to discuss

has to do with a number of e-commerce initiatives that the Postal

Service has underway currently.

According to the Postal Service, the number is seven, and we

have outlined those both in our statement and in our report. However, the Postal Service identifies these seven within a framework

of a broader category that it has labelled ‘‘eBusiness’’ which constitutes a whole variety of different initiatives or efforts, some of

which the Postal Service has talked about as infrastructure, meaning enablers, to provide the Postal Service with the technological

capability, for example, to do some of these, and some of these are

service enhancements.

The Postal Service has come up with a definition of e-commerce

which is basically the use of the Internet to generate revenue, in

a simplistic fashion. Unfortunately, what we found during the

course of our work was that the Postal Service had not consistently

applied this definition to the seven initiatives. For example, it has

identified Stamps Online as e-commerce, but an eBay auction of

stamps was not e-commerce. So we had a great deal of difficulty

trying to determine exactly what the number of e-commerce initiatives is, and we were not able to do that. I would point out again

that it is evolving and, hopefully, soon it will be a little clearer as

to which initiatives are e-commerce and which are not. And that

is important because it has a lot of implications in terms of tracking revenues and expenses and the ratepayers.

The second issue that I would like to talk about is the approval

process that the Postal Service has set up. It actually has two processes: One, a new products approval process that has been in place

for some time; and a separate process it set up for electronic commerce, which was recently implemented in May. Of the five initiatives, these are the five initiatives of the seven that were either

fully or partially implemented during the course of our review or

as of our review, the Postal Service could not provide documented

evidence that these five initiatives went through all the required

steps in its process. For example, the electronic postmark, according to the Postal Service, was implemented in April 2000, yet the

documentation provided showed it had not been approved by the

special panel it had set up for approving these types of initiatives

until July after the initiative had been implemented.

The third issue, and what I think is one of the most important

issues for a number of reasons, is the financial issue. This has to

do with the revenue/expense data that the Postal Service has

pulled together for its e-commerce initiatives. During the course of

our review, it has been a real challenge for both us and the Postal

Service to get a handle on this. The Postal Service did provide us

a number of sets of data during the course of the review, and, as

I indicated, of course their initiatives are evolving. But nonetheless,

for each set of data that we had been given we found a number of

5

inconsistencies associated with the data, some incomplete information, and a lot of problems, to the point where we really did not

feel comfortable that we could rely on that data.

Problems existed both in the revenue data and the expense data.

For example, almost all the revenue that the Postal Service identified associated with its e-commerce initiatives to date had been

generated from its Stamps Online and its MoversNet initiatives,

which basically get back to the traditional hard copy documents as

opposed to the more e-commerce type or electronic initiatives. On

the expense side, similarly, we also found a number of problems.

For example, the data that the Postal Service provided to us was

somewhat different from the data that was provided to the Postal

Rate Commission for the Mailing Online initiative. It also excluded

some of the expenses that had been incurred associated with some

of the discontinued initiatives.

The Postal Service has been quite receptive and quite open to the

recommendations that we have made to it with respect to these

issues I just mentioned. During the course of our review we did

have a few disagreements with the Postal Service, I guess largely

in the contextual or perspective area. But I think the Postal Service recognized that it has got some growing pains associated with

the e-commerce initiatives and, as I indicated, has been very willing to listen to our suggestions, and, in fact, has already begun to

implement them, actually before we completed our review.

The last item that I would like to talk about deals with legal

issues associated with the e-commerce initiatives. And as I am sure

everybody is aware, the information in the paper today about the

Federal Express proposed alliance I am sure falls into this area of

interesting legal issues. With respect to e-commerce, however, the

Postal Service believes that it has broad authority to introduce new

e-commerce products and services. We have not specifically assessed that due to the shortness of time available to us. But a couple of years ago we did look at its authority overall to introduce

new products and found that it did have fairly broad authority both

in the postal and non-postal area, although there are some constraints, of course. One of the key ones is how closely do these new

initiatives relate to its basic mission as it is set out in statute.

The Postal Service believes that some laws generally do not

apply, such as consumer protection laws or antitrust laws, and

some laws do apply to the Postal Service. And it gets to be a very

complex issue. There is certainly a lot of controversy over this and

certainly a lot of questions that are being raised over whether or

to what extent the Postal Service has authority to get into some

of these areas, and, if so, on what sort of specific framework it can

undertake some of these initiatives. We have not evaluated that.

But it is certainly an issue that is going to be debated for some

time.

One of the key issues I would just like to mention briefly has to

do with privacy. A lot of people are concerned about the privacy

issue associated with e-commerce. The Postal Service has told us

and told others that it believes that its mandate basically under

the Privacy Act and under the Postal Reorganization Act, as well

as some other legislation, enables it to provide more protection, and

will enable it to provide more protection in the privacy area to its

6

customers than some of its private sector competitors have. And

this was certainly a controversial area.

But one issue that I would like to raise is that we have had a

long-standing disagreement with the Postal Service with respect to

the privacy of information that customers provide for changing addresses. And it is a little difficult for us to reconcile this issue with

the Postal Service’s broad policy statement on protecting the privacy of the information. In a nutshell, the disagreement centers

around whether or not the information that postal customers give

the Postal Service for address changes can be used by its licensees

or their customers to create new movers lists, which is a marketing

area that involves sending solicitations and advertisements to people who just moved.

We feel very strongly, and have felt very strongly, that this is not

a purpose that would be authorized without the individual’s permission. The Postal Service seems to have a disagreement with

that. And the question that we raise is what implications does this

have for other initiatives that the Postal Service is going to venture

into with that kind of a position. It is something that the Subcommittee may want to pursue as it looks into a number of the

issues that surround electronic commerce.

With that, I would like to end my summary and be available for

any questions.

Senator COCHRAN. Thank you very much, Mr. Ungar. You mentioned at the outset of your statement that there were four issues

discussed in your report. I was trying to keep up with each one.

You mentioned e-commerce initiatives that have been started by

the Postal Service, and then I have the legal issues that are involved, the definition of the legal authority of the Postal Service to

engage in these, and then the privacy issue. Have I missed one?

What was the other one?

Mr. UNGAR. I sort of categorized them a little differently. I had

the first issue as how many e-commerce initiatives are there—identification. The second was the review and approval process that the

Postal Service has set up. The third is the reliability of the financial information associated with that. And the fourth one was the

whole umbrella of legal issues, I just happened to choose one.

Senator COCHRAN. All right. In the case of the seven new initiatives that have been undertaken by the Postal Service, you said

five have been fully or partially implemented. What are the other

two that are still under consideration?

Mr. UNGAR. There are two. They are in the report. They are

NetPost.Certified and MoversNet.Com enhancements.

Senator COCHRAN. OK. Well, in connection with the process that

has been established by the Postal Service for approving these initiatives, we will hear later from representatives of the Postal Service who are knowledgeable about that process, but as far as your

review that was undertaken, you said you discovered that some of

these initiatives have not really been approved by the process that

has been established. To what extent is this, in your view, a problem? If the Postal Service is trying to identify a procedure to review

to see that these are consistent with the legal authority and that

it is something that is appropriate for the Postal Service to do,

7

what is the risk to the public or what is the reason for highlighting

that as a matter of concern?

Mr. UNGAR. Mr. Chairman, I think it is important for a number

of reasons. One is that the Postal Service argues, and probably

rightfully so, that while it is not subject in its view to a number

of statutes that would apply to the operations of some of its private

sector competitors, there are a number of protections built in to the

Postal Reorganization Act and one of those is review and approval

by the Board of Governors of the general activities of the Postal

Service. So to the extent that there has not been an appropriate

review of some of the initiatives, it certainly would suggest that if

there are public interest concerns—possible competition or fairness

of competition issues, or pricing issues, to the extent that some of

these are real initiatives as opposed to enhancements to existing

services—the Board should weigh in.

I might add that there is some question—the Postal Service believes that it had approved the initiatives, although, again, it could

not provide us the documentation for that. Since our review has

started, though, the Postal Service now has a new procedure in

place we understand, which we think is good, whereby the Board

of Governors is going to review on a quarterly basis the e-commerce

initiatives that are being proposed and undertaken, and if things

apparently come up in between those quarters, I think they are

going to ask to have information on them. So I think they have recognized that this was something that they needed to address and

have taken action.

Senator COCHRAN. We know that there are legal parameters for

the Postal Service’s operations set out in the statute creating the

Independent Postal Service, Board of Governors, Rate Commission,

and the rest. What remedies are available, if any, under the Postal

Reorganization Act to those who feel aggrieved or harmed by extending activities beyond the legal authorities that the Postal Service has?

Mr. UNGAR. Sir, I believe one remedy would be to file a complaint with the Postal Rate Commission if a party believes that

there is some unreasonable initiative or unfair price. I think one

of the big issues that seems to exist here has to do with recovery

of cost and are some of the items or services going to be underpriced. In other words, the services will not cover their direct/indirect cost and make a contribution to overhead. Another question is

whether the Postal Service is using its position as a monopoly provider to its advantage or in an unreasonable way.

I presume that parties who feel that this might be a problem

could go to the Rate Commission. I presume they could go directly

to the Board of Governors if they feel there is a problem. They

could certainly come to Congress, as I am sure they often do, and

raise a concern.

Senator COCHRAN. One of the questions that occurred to me was

whether or not there have been any instances where there has

been litigation or an effort to actually test some of these authorities

in court. Do you know of any, or did your review involve looking

at whether or not there were cases that had been brought?

Mr. UNGAR. I don’t recall looking at any cases. I do not think we

did. There is a complaint pending with the Rate Commission on the

8

PosteCS initiative. But we did not do a search to see if there were

any cases. My recollection is that this is pretty uncharted territory

when it comes to testing in court. There may have been some cases.

Senator COCHRAN. One of the observations you made about the

data review that you undertook to try to determine what kind of

revenue was being generated by these new eBusiness activities and

what some of the expenses were that were being incurred in developing these initiatives, you said that these were difficult to isolate

and verify. Has that been cured in any way, or do you think there

have been changes in the accounting processes to permit you to

have a better degree of certainty about the expenses and the revenues that have been generated by these activities?

Mr. UNGAR. Mr. Chairman, not as of the time we completed our

work, in August. I think even the most recent set of data that we

got we found some problems with. I know the Postal Service is certainly concerned about this as well. And one of the problems it has

is that these initiatives are being done in different parts of the organization and different parts are not necessarily seeing things in

the same way. Based on the last set of data that we got, we still

think there is a lot of work to be done by the Postal Service to really get a good handle on these revenues and costs and make sure

that it is allocating these costs and assigning them in an appropriate manner.

Senator COCHRAN. Well one of the issues involved in connection

with that is that under the Postal Reorganization Act, the charges

that are made for services by the Postal Service cannot be subsidized by any other activity.

Mr. UNGAR. Right.

Senator COCHRAN. Is that the relevant issue that is involved— that they have to be able to allocate these costs to a particular kind

of service that is being provided?

Mr. UNGAR. Yes, sir. That is one of the major issues. Certainly,

this gets back to why it is important to define e-commerce initiatives consistently. Because if it is a true new product or service,

then it needs to be able to stand on its own and be able to recover

its costs. I know there are a lot of issues surrounding that. But it

certainly needs to be able to stand on its own over some period in

time. I think we would recognize that any new business is not necessarily going to make a profit when it first introduces a product;

so, there is going to be some period of time where it probably will

not. But on the other hand, the Postal Service certainly needs to

have good accounting of both the revenues and expenses so one can

determine whether direct and indirect costs are really being attributed, are they being recovered, and is some contribution being

made to overhead. So that is a very important issue.

The other relevance of that is that, to the extent that they are

not being properly accounted for, then there are a couple of issues

that arise. One is, is there cross-subsidization inappropriately taking place, and second, are these initiatives successful or not. No

one could ever tell. Right now, we would have to say we cannot tell

where the Postal Service is because of the problems with the accounting that exists.

Senator COCHRAN. Were there any guidelines that the GAO suggested to determine when an activity had to be considered profitVerDate 11-MAY-2000 13:00 Feb 26, 2001 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6601 67998.TXT SAFFAIRS PsN: SAFFAIRS
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able or not being successful enough to stand on its own two feet

and would have to be abandoned by the Postal Service? Were any

guidelines like this discussed?

Mr. UNGAR. No, Mr. Chairman. We did not get into a specific

timeframe. We have not really researched in terms of, for example,

the private sector, what is the common practice. I know that the

Postal Service has discontinued a number of the initiatives that it

had begun because they were not bearing fruit. So it is certainly

not a case where the Postal Service has just initiated these and let

them go on. But in terms of a precise timeframe, we are not in the

position to say at this point.

Senator COCHRAN. Were you able to draw any conclusions about

the overall question, sort of the big question, are these or are these

not compatible with the Postal Service’s authorities under existing

law?

Mr. UNGAR. That is the $64,000 question, or maybe million dollar

question in these times. But, no, Mr. Chairman, we really did not

look at any particular initiative in the context of is it appropriate

or not. We identified in the report a lot of the factors that would

be considered. But it is really going to boil down to, I think, a public policy question that perhaps in the end the Congress or maybe

the court is going to have to decide.

The Postal Service, as I mentioned, believes that it does have

quite broad authority, and in a lot of cases it does. Now where that

gets tricky is how close are some of these products and services to

the mission of the Postal Service. I think as an enhancement of an

existing service, for example, being able to track and trace priority

mail, I do not think a lot of people would argue that it is not connected with the mail or the Postal Service. But some of the other

things, eBillPay, for example, may be a little further away, and

some of the other initiatives could be, too. So I guess it is a question of how closely do these relate to the basic mission of the Postal

Service, and how comfortable from a public policy standpoint is the

Congress with the Postal Service venturing into areas that the private sector also is already into.

Senator COCHRAN. I think this is very helpful and a good starting

point for our discussion with the representatives of the Postal Service about their practices and about their views of what they are

doing and what safeguards have been put in place to make sure

that the things that are being undertaken are consistent with their

authorities, and that they have procedures in place to review these

and be sure that they are being conducted in a way that is consistent with the law.

So we appreciate this. We will look at the report in more detail

now that we have it. And we appreciate very much your being here

and starting off our hearing today, Mr. Ungar.

Mr. UNGAR. Thank you, Mr. Chairman, appreciate it.

Senator COCHRAN. Thank you.

We will now hear from our next panel. John Nolan, Ed Gleiman,

and Robert Rider, all of whom are here in their capacity as officials, one way or the other, of the Postal Service or the Rate Commission or the Board of Governors. We have each of these entities

represented by high ranking officials, and we appreciate their presence and cooperation. We have statements from these witnesses

10

1The prepared statement of Mr. Nolan appears in the Appendix on page 49.

which we will put in the record, and would encourage them to

make any summary comments or read excerpts from their statements as they choose.

Mr. Nolan, let’s start with you. Please proceed.

TESTIMONY OF JOHN NOLAN,1 DEPUTY POSTMASTER

GENERAL, U.S. POSTAL SERVICE

Mr. NOLAN. Thank you, Mr. Chairman. I had to chuckle a little

bit when Bernie said this was the $64,000 question and then corrected himself. If this was the $64,000 question, we would not be

here. Hopefully, it is a lot bigger than a $64,000 question.

The world is changing. That is no news flash. It has gone global,

and it has gone Internet. Change is not new, but the rate of change

continues to be new. And the acceleration of that change is a challenge for everybody.

Some things have not changed, though—the need for the Postal

Service and the importance of postal services to the American public. Also, the need for the Postal Service, and businesses in general,

to adapt to changing customer needs and technology opportunities.

The Internet is both a supportive and a disruptive technology. It

is supportive in the sense that it is going to enable us to offer our

products and services that we have historically offered in a more

seamless, easier, fuller, and richer manner. It is disruptive in the

sense that it is going to tear away significant portions of our current volume at some point in the future and we have to deal with

that. So our facts that we understand are that volume has been impacted somewhat by the Internet and will be impacted a lot more.

The question really is not will it impact, it is to what extent and

when.

Affordability is at risk. That is a fact. We know we have to

shrink our organization as mail volume goes away, regardless of

whether or not we get into the Internet. As volumes go away, we

cannot have a featherbedding environment where we continue to

keep people, guaranteeing full employment for all employees. We

have to shrink our organization as volume declines. But the problem is that if you have a letter carrier going up to the front door

of a house and yesterday it was with ten pieces of mail and today

it is with five, I still need that letter carrier and each piece of mail

is going to have to carry a higher cost burden. Likewise, we have

post offices throughout the country in every nook and cranny and

the cost of maintaining that has to be borne by a smaller number

of pieces of mail. And that is the question, can we remain affordable?

We have been delivering money, messages, and merchandise for

this country for over two centuries. We have accepted the challenge

of change over the years and have always been effective users of

technology. And that use has always been questioned. It is funny,

if we were sitting here in 1910 or 1911, the big debate at that point

was whether or not the Postal Service should be allowed to use air

transportation for the carriage of mail. And there are some interesting quotes from that time, because for three straight years the

use of air travel was disapproved, with statements such as: ‘‘A useVerDate 11-MAY-2000 13:00 Feb 26, 2001 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6601 67998.TXT SAFFAIRS PsN: SAFFAIRS
11

less expenditure of money.’’ ‘‘The Postal Service and Post Office

have been up in the air much too long and it is time to get back

on terra firma.’’ ‘‘There is no need or demand for this experiment.’’

And one of my favorites, ‘‘Along with the spineless cactus, the

motherless chicken, and the seedless raisin, do we really want

trackless travel now?’’

So we have always been controversial. We are very big, we understand that. But we have always used technology. We have been

a technology user and the country has benefited from that use.

Our Internet strategy is both simple and comprehensive. We

want to use the Internet for internal efficiencies, like any company

would. We need to add value to our core products and services

through the richer, more effective channels through which you can

reach us. And finally, we want to introduce e-commerce initiatives.

E-commerce initiatives, as Mr. Ungar indicated, are those products that require the Internet to do business and that generate revenue to the Postal Service through either user charges or licensing

fees. That is the definition that we have set and that is the way

we are approaching this. And while to many businesses the exact

definition would be an arbitrary and unnecessary thing to discuss,

we know it is important in this space because we know that there

are issues of cross-subsidization and other things that have to be

dealt with. So we are not trying to hide from that. We are trying

to very carefully define it. The audit that GAO did helped us to understand better how to package those things so that we will have

an ongoing ability for them to review what we are doing and to

keep an eye on us, so to speak, because we know that is important.

We are in e-commerce for several reasons. Customer demand, a

number of our customers have come to us and said we need you

in this space. And part of the reason for that is because people

trust us. When our partners in this space have gone out to the public to ask them who do you trust, like that old TV show, the Postal

Service comes up at or near the top. And finally, because we are

everywhere. We have the ability to offer services in a more effective

manner for several offerings, and an opportunity to bridge the digital divide to make sure that no one is left out of the opportunities

of the Internet because all of the competitors are not going everywhere. We think we can offer something that will make sure no

one is left out.

If you ask me for just a couple of words about how our services

would be categorized in e-commerce, its security, privacy, and customer choice. Nothing that we are doing here is going to force anyone to use us to the detriment of any competitors. We believe in

competition. Our competitors should believe in competition too.

Also in this space what you can expect to see is a lot of partnering on our part. While we are heavy technology users, we have

also proven over the years that we are effective partners with technology experts. We are not technology experts in this space. But we

are partnering with a lot of companies that are the best and the

brightest. They enable us to move quickly, they enable us to use

the best technology, and they are putting up a lot of their own

money to make sure that we do not have to put up a lot of money

to help begin to fund some of these things. We believe all of these

12

1The prepared statement of Mr. Gleiman appears in the Appendix on page 56.

initiatives in e-commerce will generate a positive contribution to

the bottom line or we would not be able to offer them.

We strongly support GAO’s recommendations. We have no problem not only supporting them but embracing them. This was not

an easy audit for them or anyone else. This is a whole new area.

Not many audits I am sure have been done in this country on ecommerce initiatives within companies. So they were charting new

ground and we were struggling along with them to try and figure

out how to categorize various things and allocate costs. So the fact

is it is a new and developing area.

We have control over project approval and project costs at this

point. The time of the audit was at the early stages of our growth

and showed some of our growth pains, as Mr. Ungar indicated. In

the first 30 days after I arrived, we instituted this e-Business Opportunity Board to set up a more rigorous structure. In my last 11

years of business I’ve had experience with profit and loss statements for individual entities and I believe in controlling costs, understanding costs, and being able to demonstrate those costs and

revenues. Our Board of Governors is being briefed on all initiatives.

One slight modification to what Mr. Ungar had said. When an initiative comes up that requires Board review, that does not have to

wait for a quarterly report. We will go right to the Board to notify

them of that. What the Board has requested, and we certainly support, is on a quarterly basis, for each initiative, however, we will

be providing status on where exactly each of these stands so that

there is a clear understanding of that.

Part of the confusion with the numbers and status dealt with

how to categorize the projects, in my opinion, and how to separate

out those costs. But we are very confident that we have set in process a new accounting system so that each initiative will have its

own finance number, own accounting so that we will be able to

tightly control it.

We will fully meet the GAO recommendations. And the use of the

Internet will enable us to be a better and more relevant Postal

Service in the future, we believe. We also believe we will not only

be better able to serve our customers through our involvement, but

also to ensure that the trust in and utilization of the Internet will

also be a beneficiary of this endeavor on our part. Thank you, Mr.

Chairman.

Senator COCHRAN. Thank you, Mr. Nolan. Let’s now turn to the

Postal Rate Commission and its representative here today, Ed

Gleiman.

TESTIMONY OF EDWARD J. GLEIMAN,1 CHAIRMAN, POSTAL

RATE COMMISSION

Mr. GLEIMAN. Thank you, Mr. Chairman, for the opportunity to

provide testimony today. I want to make clear at the outset that

the views I am expressing today are my own rather than those of

the Commission as an institution. While the majority of my colleagues on the Commission would probably agree with many of my

comments, they have not participated in developing this testimony.

13

As the GAO report demonstrates, there is a lot of uncertainty

about the direction, financing, oversight, and even the extent of

these initiatives. The report paints a seemingly accurate, albeit

somewhat surreal, picture of the state of current Postal Service activities in the current e-commerce area.

Mr. Chairman, your letter inviting me to appear as a witness

asked me to address ‘‘the application of major Federal laws and

regulations to the e-commerce initiatives of the Postal Service’’ in

my testimony. I will do so, but with some trepidation, because of

two concerns. First, I understand that the applicability of current

laws to such services is largely uncharted territory, and there are

few, if any, settled legal doctrines to be found in Federal court decisions or other authoritative sources. Second, as the General Accounting Office report notes, there is a pending complaint proceeding before the Commission that concerns the legal status of

PosteCS service. Because of the extent of the Commission’s jurisdiction over this initiative is a major issue to be resolved in this

case, I must refrain from offering comments that could be misconstrued as prejudging the issue. Nevertheless, I will try to address the question generally.

The Postal Service’s position is that several provisions in the

Postal Reorganization Act grant general authority broad enough to

encompass e-commerce activities, in addition to its specific power

to provide ‘‘special nonpostal or similar services.’’ However, the

Postal Reorganization Act’s statement of general duties of the Post- al Service found in section 403(a) must also be kept in mind. This

provision obliges the Postal Service to offer efficient, reasonably

priced postal services for the conveyance of ‘‘written and printed

matter, parcels, and like materials’’ and ‘‘such other services incidental thereto.’’ Likewise, section 101 declares that the Postal

Service’s basic function is the fulfillment of an obligation to provide

postal services ‘‘to bind the Nation together through the personal,

educational, literary, and business correspondence of the people.’’ It is really hard to see a telecommunications or Internet horizon

in this legal guidance. Now I agree that Title 39 does not contain

language specifically prohibiting the Postal Service from offering

nonpostal services, but I am not convinced that Congress intended

the absence of a prohibition to be interpreted as broad authority to

compete with private businesses.

The regulation of the Postal Service e-commerce initiatives is

also a question to which there is no clear answer. Chapter 36 of

Title 39 requires the Postal Service to file a request with the Postal

Rate Commission prior to establishing any new mail classification

for postal services. The Postal Service currently argues that as long

as the new service manipulates electrons and does not produce

hard copy, that service is not postal and therefore is none of the

business of the Postal Rate Commission. The Commission has not

yet explicitly accepted or rejected that argument. I will note, however, that if the Postal Service position is correct, there may be a

gap in regulatory oversight.

The Postal Service offers several rationales for its entry into ecommerce, and I will attempt to address each of these. Before doing

so, I would like to pose two basic questions: First, is there some

compelling need for the Postal Service to do that? If some current

14

or potential customer of the Postal Service has been clamoring for

new non-postal e-commerce services, I am not aware of it. The evidence I am aware of suggests that demand for electronic initiatives

is limited to those that would make improvements in or provide additional support for core Postal Service business.

Second, is there some compelling justification for any government

monopoly to compete with private enterprise in this arena? Put another way, if the Postal Service had not taken the initiative to develop e-commerce products, would Congress pass legislation directing the establishment of a government-owned start-up, funded by

users of the Postal Service, to compete with private Internet business firms?

Returning to the rationale set forth in the GAO report, the Postal

Service cites four bases for viewing e-commerce products as appropriate for serving its institutional purposes. One rationale is that

such services, in combination with its other functions and activities, should help to ‘‘bind the Nation together,’’ in keeping with the

basic function prescribed in Section 101 of Title 39.

This is a plausible rationale, but only if you overlook the fact

that the United States is already ‘‘bound together’’ electronically by

the private sector—initially by telegraph and telephone but now by

an ever-expanding variety of telecommunications media, including

the Internet.

A second but related rational is the Postal Service’s suggestion

that, since ‘‘binding the Nation together’’ is part of its basic function, initiatives such as e-commerce serve an appropriate objective

in their own right by fostering national communications. This justification provokes another question: At some point, would pursing

the objective of binding the Nation together through new media

change the Postal Service from a delivery company to a communications company? There is evidence that this may be what the

Postal Service has in mind.

Looking at the Postal Service’s website the other day, I came

across the Frequently Asked Questions section devoted to PosteCS

service. Here is a question and answer that I found particularly interesting. Question: ‘‘How does PosteCS fulfill Postal Service’s primary mission?’’ The first sentence of the answer: ‘‘PosteCS fulfills

the Postal Service’s mission to ‘bind the Nation together through

its communications’.’’ I do not know what or whom this answer intended to quote, but it certainly is not Section 101 of Title 39. In

any event, the diversification of the Postal Service from what has

been a nationwide delivery service into a communications company

would represent a major change in national policy.

A third rationale offered by the Postal Service identifies technological improvements such as the Internet as sources of ‘‘opportunities for improved interaction between the postal system and its customers.’’ The Postal Service says the particular electronic services

it has chosen to introduce ‘‘serve as logical, supporting, ancillary,

incidental enhancements of the postal system for the benefit of our

customers.’’

Evolution of the postal services through the adoption of new

technologies is well-established in historical precedent. As long ago

as 1877, the Supreme Court recognized the power of the national

postal service included employing ‘‘new agencies’’ or ‘‘instrumentalVerDate 11-MAY-2000 13:00 Feb 26, 2001 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6601 67998.TXT SAFFAIRS PsN: SAFFAIRS
15

ities of commerce’’ to ‘‘keep pace with the progress of the country,

and adapt themselves to the developments of time and circumstance.’’ However, one question posed for the Postal Service’s

future is the following: If entry into e-commerce and other electronic initiatives is an appropriate evolutionary development for

the national postal system, should current forms of oversight, governance, and regulation evolve as well?

The fourth rationale offered by the Postal Service notes that the

current services are ‘‘deeply rooted in the traditions of this country

and embedded in the current economic and social fabric,’’ and it

invokes the authority to take advantage of such technologies as ecommerce to meet challenges to ‘‘improve and build upon the services, capabilities, role, and customer relations that it already maintains.’’ I agree that some electronic initiatives can fairly be viewed as extensions and enhancements of Postal Service core business. For example, mentioned earlier, Delivery Confirmation that makes use of

the Internet to enhance priority mail and parcel post delivery. But

other current initiatives do not build on any pre-existing traditional

service offered by the Postal Service. Illustratively, eBillPay does

not improve nor build on any service currently offered. Instead, it

offers a potentially all-electronic substitute for the current bill paying transactions.

My point here is not that the Postal Service should be precluded

from offering services that are categorically different from anything

they have done before, although historically the Congress did preclude the pre-Reorganization Act Post Office Department from extending the scope of its core businesses by competing in the new

media such as telegraph and telephone services. The point to be

made here is that the Postal Service forays into services with no

clear connection to its core business raise important policy issues

that ought to be considered in a forum beyond Postal Service headquarters and beyond meetings of the Board of Governors.

And while I am on the subject of traditional postal services, let

me say a few words about the privacy traditionally and legally accorded to mailers and mail recipients. The GAO report noted my

comments earlier this year about the breadth of disclosure of customer information allowed by the Postal Service’s Privacy Act

statement for the eBillPay service. The Postal Service has since revised that Privacy Act statement. As a general matter, the Postal

Service is quoted as saying that it can protect the privacy of the

Postal Service e-commerce customers better than private sector

providers because of the Federal privacy laws.

Nevertheless, I remain concerned that personal information

about the users of e-commerce services might be disclosed pursuant

to permissible so-called ‘‘routine uses’’ under the Privacy Act of

1974. As evidenced by the Postal Service’s initial eBill Privacy Act

statement, Federal agencies have broad administrative discretion

when it comes to sharing personal information, more perhaps than

many of the proposals currently under consideration which would

impose restrictions on the private sector.

One practical reason that has been advanced for the Postal Service’s entry into e-commerce is reaction to the new competitive challenges that may lead to a substantial decline in first class mail volVerDate 11-MAY-2000 13:00 Feb 26, 2001 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6601 67998.TXT SAFFAIRS PsN: SAFFAIRS
16

ume and result in an erosion of the Postal Service’s ability to fulfill

its universal service obligation. Under this rationale, the Postal

Service must invest in developing e-commerce activities as a means

of cultivating new revenue streams.

The rationale of income replacement raises serious questions.

First, who would finance the Postal Service’s e-commerce initiatives? The Postal Service has no sources of risk capital except its

revenue from monopoly ratepayers. And if it fails to earn the expected return, there are few adverse consequences.

Because the Postal Service can easily obtain risk capital from

monopoly ratepayers, it may be tempted to make imprudent guarantees to other vendors when it enters the e-commerce market.

Frequently, partners and contractors require guaranteed revenues.

This happened in the market test for Mailing Online service. In exchange for low printing rates, the Postal Service guaranteed its

printing contractor a minimum revenue of $325,000. At the end of

the test, only about $23,000 had been spent on printing services.

The Postal Service reportedly has had to pay more than $250,000

to the contractor with no additional services being rendered, and

as of February of this year there was an outstanding remaining

payable balance. The potential size of guarantees in the e-commerce arena may be much, much larger and should be given some

attention.

And this raises a question. Who is going to manage and audit the

service, the cost and revenues of these initiatives? This is a significant consideration because of the potential financial impact on monopoly ratepayers and other users of conventional postal services.

GAO’s sense of confusion about the Postal Service’s division of its

e-commerce activities, which I share, highlights the importance

that the Postal Service not bury significant development costs of ecommerce products in product lines that fall outside of e-commerce.

Moreover, while the Postal Service states it intends to recover direct and indirect costs of its e-commerce products, I believe that

products should satisfy the more appropriate standard of covering

incremental costs.

Then there is the pragmatic, bottom-line issue of whether e-commerce products can reasonably be expected to produce significant

amounts of revenue to support the Postal Service. All things considered, I would have to say that the signs are not encouraging. As

someone close to the issue, and sitting close to me, said recently,

‘‘While the Postal Service may wish for a golden spike out there in

the realm of e-commerce to produce huge revenues, the immediate

prospects are much more modest.’’

To summarize, from my perspective, the issue of the Postal Service’s participation in e-commerce is a difficult one involving many

uncertainties. The sources and extent of the Postal Service’s authority to mount such initiatives unilaterally is not clear in the

Postal Reorganization Act. Further, the applicability of existing

regulations and requirements is likewise uncertain.

On the merits of embarking on e-commerce initiatives, some of

the rationales the Postal Service offers appear to rest on questionable legal or practical assumptions. There is no apparent legal

mandate, or compelling need, for broadening the mission of this

government enterprise to include telecommunications services genVerDate 11-MAY-2000 13:00 Feb 26, 2001 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6601 67998.TXT SAFFAIRS PsN: SAFFAIRS
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1The copy of a study by Professor Kielbowicz appears in the Appendix on page 168.

2The prepared statement of Mr. Rider appears in the Appendix on page 72.

erally. In addition to the effects on private competition, postal ratepayers would have to fund such initiatives, and the net financial

returns to the Postal Service may not justify the outlays.

Of course it makes sense for the Postal Service, like any good

business in the current era, to adopt available new technologies

into its operations to enhance productivity and to add value to its

core services. But pursuit of e-commerce for its own sake may only

serve to distract postal management and divert resources from the

critical demands of performing its public mission in a challenging

new century.

Mr. Chairman, I have a copy of a study that I would like to provide to the Subcommittee, by Professor Richard B. Kielbowicz, that

was prepared for the Commission, entitled: ‘‘Postal Enterprise: Post

Office Innovations with Congressional Constraints, 1789–1970.’’ 1

This study will also soon be posted on our web page.

I want to thank you for the opportunity to share my thoughts

with you on this important matter. And if there are questions, I

would be pleased to answer them.

Senator COCHRAN. Thank you very much. We appreciate your

statement and the study that you have provided the Subcommittee,

which we will carefully consider.

We will now turn to Mr. Rider, who represents the Board of Governors. We appreciate your presence. You may proceed.

TESTIMONY OF ROBERT F. RIDER,2 VICE CHAIRMAN, BOARD

OF GOVERNORS, U.S. POSTAL SERVICE

Mr. RIDER. Thank you, Mr. Chairman. I welcome this opportunity to discuss with you the electronic commerce activities of the

Postal Service. I appreciate your interest in the Postal Service and

your insights as we grapple with the unprecedented complexities of

the 21st century communications marketplace. I would also like to

recognize the hard work of the General Accounting Office and

thank them for their recommendations, which incidentally dovetail

with our own thinking.

The Governors of the Postal Service have broad oversight over

the expenditures, practices, and policies of the Postal Service. It is

our responsibility to ensure that the strategic direction of the organization is sound and to judge the overall implementation and performance of programs put in place to carry out that strategy. As

a practical matter, the Governors are not involved in day-to-day operations or the thousands of daily decisions that are required to

manage such an extensive operation. That responsibility rests with

a highly dedicated team of professional managers, represented here

today by Deputy Postmaster John Nolan. Therefore, I will address

the broader questions of our e-commerce strategy and my view of

management’s implementation and overall performance.

Our overall Internet and e-commerce strategy is based on the

fundamental principle that our actions must be consistent with our

historic traditions of public trust and fairness, and with our mandate to operate according to the highest standards of business and

of public service. Consequently, our e-commerce initiatives should

18

be supportive of our universal service mission and the need to

bring electronic commerce to those who cannot afford it. They

should foster economic growth by enabling greater public confidence and trust in Internet communications and commerce. The

new e-commerce services should respond to customer needs and be

managed with appropriate business discipline so as to become selfsupporting within a reasonable period of time.

The Governors are supportive of management’s efforts to embrace the Internet. For the most part, these efforts represent an

ongoing evolution to improve the management of the mail system

through the use of modern information technology. To the average

household customer, the Postal Service is represented by the individual clerk who sells them stamps or the neighborhood letter carrier that stops by their mailbox each day.

In reality, the Postal Service is a complex, interdependent network that each day coordinates the movement of nearly 700 million

pieces of mail, on more than 15,000 commercial air segments, between 38,000 post offices and 800,000 employees, who serve more

than 134 million delivery points. Our success in managing this network is directly related to infrastructure improvements that allow

us to rapidly transmit critical information to employees, to customers, and to suppliers in many platforms.

Today, the postal retail customers enjoy the convenience of credit

and debit card purchases. Major retailers schedule their shipments

and make payments electronically. Letter carriers track packages

and important documents with computerized hand scanners that

uplink into a national data network. And sophisticated logistical

systems keep the mail flowing economically by ground, rail, and air

between our plants and our post offices.

Over the past few years, as citizens and business have embraced

the Internet, the Postal Service has migrated some of these information systems onto the Internet. We expect this trend to continue.

Today, millions of household customers visit our web sites every

day. Large mailers use the Internet to coordinate their operations

with ours. And the postal intranet has become a primary tool to

manage operations and share ideas among functional units dispersed all across the country. The result has been a more efficient

and productive organization that provides better service and value

to our customers. Postal management has done a commendable job

in managing these extensive information programs, which have involved substantial expenditures and resulted in better productivity,

service, and value for our customers.

So, in many ways, the Internet has been a blessing. It has

enabled the Postal Service to perform its historic mission with

modern precision and efficiency. However, the Internet has also

demonstrated an ability to alter entire industries and offer new

business models. We have seen examples of this in the retail and

software sectors. We are aware that similar potential exists for the

mailing industry. E-mail, Internet banking and bill payment, and

electronic catalogs and merchandising are directly competitive with

the mail. The GAO has warned that the Postal Service may be

nearing the end of an era due to these and other competitive pressures. The truth is we do not know how fast or how much the

Internet will change the Postal Service’s business model. What is

19

clear is that the stakes are high and we cannot wait to be certain

before we act.

This year marks a turning point for the Postal Service’s e-commerce program. In the latter half of the 1990’s the Postal Service

began to explore the potential of e-commerce. The last couple of

years, however, were also occupied with updating our computer

system for the year 2000, Y2K. This year, we are bringing new

focus to our development efforts and formalizing our processes

based on what we have learned. We have also launched several

new products and are testing them in the marketplace.

The Board of Governors has encouraged and enthusiastically

supported these developments. The Governors have discussed or reviewed some aspect of e-commerce at virtually every board meeting

this year. On June 5, the Board established a quarterly review procedure by which management will provide regular reports on the

current status of existing e-commerce initiatives. The board also

has established the means by which significant new types of e-commerce initiatives will be presented to the Board before being

launched. These measures reinforce the framework created by

management for developing and managing e-commerce initiatives,

which are Mr. Nolan’s responsibility and which he has discussed in

some detail with you.

It is difficult to assess the effectiveness of the Postal Service’s ecommerce initiatives thus far. As the GAO has noted, the program

is in its very early stages. It is also hard to establish meaningful

benchmarks in an industry that is in its infancy. Nevertheless,

management has proven its ability in other challenging modernization efforts, and the Board expects no less in this difficult area.

Thank you, Mr. Chairman, that concludes my remarks.

Senator COCHRAN. Thank you, Mr. Rider. Thank you all for your

interesting statements and your cooperation with our Subcommittee’s effort to review this issue.

In connection with the GAO’s findings, there were several points

made in the testimony and in the submitted statement by GAO

about the process that is in place for reviewing and approving initiatives in this area by the Postal Service.

Mr. Nolan, is it your view that this procedure and process that

has been established now is one that will provide a clear impression of what e-businesses are being undertaken by the Postal Service and a certainty that these activities have been approved by the

Board of Governors?

Mr. NOLAN. Yes, sir, I do. I think the early initiatives and structure that the Postal Service used in fact was to try and set up competing groups within the Postal Service to see who could develop

some of these areas, and also to make use of existing talent. For

example, our treasurer was a natural to take a look at e-payments.

The time has come though, and in my discussions with Bill Henderson as I was coming on board, to try and put those into a more

logical structure and a more streamlined structure.

That is exactly what we have done. The creation of an e-Business

Opportunity Board gives the Postal Service the opportunity to

bring people together from different organizational functional

areas, everything from our consumer advocate, to finance, to operations, to take a look at new initiatives at their very inception to

20

determine whether or not it is worth pursuing those things and

then to regularly review them. Because on the Internet there are

a lot of good ideas or things that seem good on day-1 that by day31 do not seem quite as good. And yet, in a lot of organizations

those things would continue on because they got started and inertia is going to keep it moving. Well, we cannot afford to let that

happen.

So the review process that we have is a very rigorous one. And

at critical points it involves our communications with the Governors, reviewed by the Governors, so that we are sure we are on

solid ground. But as we move ahead, and this is where the GAO

study comes in, we can improve something, move forward on it, we

have got to have goals, we have got to articulate those goals, we

have got to track performance against those goals, and, as they

say, fish or cut bait down the line someplace if we are not achieving those goals, to either fix it and achieve the goals or to stop it.

And I am confident that the process we have set in place will do

that.

Senator COCHRAN. There was also a question raised about the

transparency of the revenue and expense data for those who were

reviewing these activities. Are you confident at this point that you

have a system in place that permits a review by an investigative

body like GAO or the Congress that will be able to determine what

the revenue and expense data really are for these new e-business

activities?

Mr. NOLAN. I think we are, Mr. Chairman. I am hesitating because we have just recently instituted some of these things. As I

mentioned before, we have a certain accounting process that we

have set up, very early on, to track each individual cost. To be able

to go back in time through some earlier initiatives that changed directions several years ago is obviously difficult. But I am confident

that costs that we have going forward are going to be tightly controlled.

To me, it is not just a matter of getting it right, getting the numbers accurate so that they are auditable, but the ease of the audit

is also what I am concerned about. I do not want it to be a torture

going forward, because we know we are going to have reviews like

this. Part of the way we should be measured is not only are the

data accurate, but how easy it was to get to. Because if we are not

reviewing that data regularly, then we are missing what we should

be doing. And so, if we are reviewing it regularly, it ought to be

very easy for a GAO audit or any other audit to find that. That is

the standard that we are trying to hold ourselves up to.

Mr. RIDER. Mr. Chairman, I just wanted to add that the Governors endorse having a profit center for each one of these initiatives, and we will have. Each one will stand on its own.

Senator COCHRAN. I see. There have been several references to

specific activities that are now being initiated or have been initiated by the Postal Service in this area. One was buying stamps

over the Internet.

Mr. NOLAN. Stamps Online, yes.

Senator COCHRAN. Stamps Online, you call it. Another one talked

about is being challenged now before the Postal Rate Commission.

I think that was referred to as the PosteCS case.

21

Mr. NOLAN. Electronic courier service, yes, sir.

Senator COCHRAN. Now what is that?

Mr. NOLAN. It is a service which enables people to send highly

confidential documents in a very secure manner over the Internet,

again, electronic to electronic, no hard copy involved. I should add

it is not only designed for domestic use, but also to enable us to

transmit those documents across borders. The interesting thing of

course is that if we did not get into this business, you could have

the Costa Rican Post coming in and offering the same thing within

this country, because it is a service that is very important we believe.

Senator COCHRAN. By across borders, you are talking about national borders?

Mr. NOLAN. Yes, to Europe, to the Far East.

Senator COCHRAN. International.

Mr. NOLAN. Yes.

Senator COCHRAN. What are some of the other business activities

that you are now undertaking that you think are going to be longterm and are classified by you as e-business?

Mr. NOLAN. E-commerce I think is—— Senator COCHRAN. E-commerce, yes.

Mr. NOLAN. E-commerce is a part of e-business. E-business includes things that we would do within our organization to streamline it as well as to add value to our existing core products and

services, like a return merchandise service on the Internet that enables you to bring packages back. That would be building on our

core products and services.

E-commerce would include, in addition to the Stamps Online and

the PosteCS that you have mentioned, our Mailing Online initiative, which is really a hybrid service. It starts off as an Internet

service and that people will send us files, and we will transmit

those files to a destination print site where it gets printed and inserted and mailed. So it is both hard copy and Internet. The reason

why we have included it as an Internet is because we get user fees

for the Internet portion of that, and that is why we have included

it. The other area that we have got that is moving from hard copy

to the Internet is our Movers Guide and the MoversNet.com where

people will be able to update their changes of address not only in

hard copy but via the Internet. Our Electronic Postmark enables

people to indicate when they have mailed something and then we

can certify when they have transmitted it via the Internet, and we

can also ensure that there was no tampering of that document

going forward to destination.

Senator COCHRAN. Is this like a return receipt requested that

you used to use?

Mr. NOLAN. In a sense it is in that it will indicate who shipped

it, when it was shipped, and when it was received. In addition, it

will indicate whether or not it was tampered with in process, both

to the shipper and the receiver.

Finally, the other area, that we have not made a formal announcement about, but that we are working very closely on with

HCFA and Social Security, is our NetPost.Certified. This is an interesting area where, for example with HCFA, you have got a lot

of doctors that have to communicate tons of paperwork to HCFA

22

in order to get reimbursements. That agency, along with Social Security and others, is trying desperately to streamline their operations to reduce the cost of doing business, make more efficient

what they are doing. And they have asked us, and we have readily

agreed, to get into the space, whereby we could authenticate the

shipper of that information and provide secure transmission of

that, to, again, take the cost out of that transaction and to speed

it along so that everyone benefits in the space. Again, the fact that

we are located everywhere certainly helps that authentication and

makes sure that everyone can avail themselves of that.

Those seven are—I don’t know if we should call them the Magnificent Seven right now—but there are seven initiatives that at

the present time are the ones that we are pursing aggressively and

we believe represent areas of opportunity to serve the public better.

Senator COCHRAN. There was a reference made earlier today

about a new initiative—it was in the paper and I have a copy, I

guess it is the Washington Post edition this morning—that the

Postal Service and Federal Express Corporation are negotiating a

strategic alliance and could complete a deal by next month under

which the Postal Service would deliver many FedEx packages to

homes across the Nation while using FedEx’s air transportation

network to move priority and express mail around the world. Is

this another example of e-commerce or e-business?

Mr. NOLAN. No, sir. This does not involve Internet. Obviously, in

the exchange of information on package status, etc., we, like Federal Express, like UPS, certainly use the Internet to be able to

track packages and provide information. But we are doing that separately. This represents an effort on our part to—we are one of the

largest users of contract transportation in the world and Federal

Express is one of the most efficient airlines in the world. Certainly,

the opportunity to make use of their airline capacity to augment

what has been increasingly non-available private carrier capacity

that we have been using should enable us to enhance service and

keep our costs down.

In the process of doing that examination for our air transportation, we obviously began to look at other areas where we could

use our ubiquity, our resources that are out there to the best possible use. And so, we are looking at contact points and where we

have some synergy where we can enhance the functions of both

companies to better provide services to the American public.

Senator COCHRAN. There is some question about the fact that if

you do not get into some areas such as you have described here you

are going to have to raise rates for the delivery of mail and the

other services that you have traditionally provided. To what extent

has that provided an incentive for the Postal Service to look for

new revenue sources, and are these going to provide the revenue

sources you need in order to keep from having to raise rates in the

future?

Mr. NOLAN. Yes, and I hope so. Certainly, this disruptive technology that is having an impact on our volume—our volume is not

declining yet, Mr. Chairman. But in a period of significant economic boom, to only have the kind of growth rates that we are having is unprecedented for us. Normally, you would see far greater

increases in volume during a period of economic strength that this

23

country is seeing. So we know that the Internet is going to have

dramatic impact, as has other technology had an impact, on our

revenues.

There has been a lot of discussion about the ratepayers here. If

we are not careful, we may significantly impact the ratepayers with

higher rates and the inability to provide universal service if we do

not find alternate sources of revenue to enable us to keep this infrastructure which has served the public so well for so many years.

Our concern is that in a declining revenue period, while we certainly have to cut costs, we are going to be faced with an infrastructure that the country and our ratepayers cannot afford. And

just as when Mary Smith or John Doe place a phone call, if you

ask them the question, would you like the phone company to be investing in new technologies? They might say, no, let’s keep our

rates low. But the fact is that without that investment, the opportunity to take advantage of new technologies, to offer new products

and services to enhance the lifestyles, the businesses in this country would be very limited.

Senator COCHRAN. Mr. Gleiman, during your comments I was interested in your assessment of these e-commerce activities as possibly outside the realm of authorized activity by the Postal Service.

What will a prohibition against e-commerce, if Congress decides to

legislate a prohibition against e-commerce activity by the Postal

Service, what impact will that have, in your opinion, on postal

rates?

Mr. GLEIMAN. Senator, postal rates are likely to go up whether

Congress enacts legislation prohibiting the Postal Service from

being involved in e-commerce or not. And postal rates are likely to

go up whether the Postal Service is involved in e-commerce or not.

You have heard a bunch of interesting words today. Augmentation is one that I especially like—we want to augment our revenue.

If you do not realize net profit from a new activity, then the augmentation is not worth very much. If I could give you a simple

mathematical example. It involves the Postal Service’s eBillPay, at

least as far as I understand it.

A first-class stamp that you and I put on a bill when we pay it

is 33 cents. Roughly 18 cents of that 33 cents goes toward covering

the cost of actually handling that piece of mail, and the other 15

cents goes towards contributing to institutional overhead of the

Postal Service. Now, if I do not send that envelope with a 33 cent

stamp on it and decide to use eBillPay instead—and I can be corrected, and would be delighted if I am wrong here to be corrected—

the Postal Service is going to get 10 cents from its eBillPay partner

CheckFree for each electronic bill payment. Now remember the

numbers I gave you. We started with a 33 cent stamp, there were

18 cents in costs, and 15 cents in institutional contribution. The 10

cents that the Postal Service is going to get from CheckFree is not

going to cover the institutional cost. They are still short 5 cents on

the institutional cost. And unless the Postal Service can figure out

how to shed the 18 cents of cost that it currently incurs for handling the piece of hard copy mail, they have got to cover that, too.

So when you talk about eBillPay or e-commerce being a savior

for the Postal Service, you really have to look hard at the numbers.

The bottom line is going to be the bottom line. And I am really

24

pleased to hear Mr. Nolan say that his attitude is you have got to

fish or cut bait. My concern is when you cut bait, who pays for the

bait you just lost? It is going to be the monopoly ratepayer and the

other captive users of the service. So I am not sure that it is going

to make all that much difference in the final analysis if the Postal

Service gets involved or not.

Mr. Nolan mentioned downsizing, cutting costs, and there has

been a lot of talk about the universal service obligation of the Postal Service. I am going to commit an act of heresy here that is likely

to get me in a little bit of hot water, but it will not be the first

time. Perhaps in addition to considering cost-cutting and downsizing, the Postal Service and the Congress ought to be looking at

the current universal service obligation. Maybe, if a lot of the hard

copy mail is going to find its way into electronic media, there will

not be the need to deliver to every place 6 days a week. If the mail

is not there, maybe we ought to have a different type of service

than we now have. And there are other aspects of universal service

that ought to be examined that also would come into play or should

come into play.

I want to make clear though there is a distinction: Activities that

are above and beyond what the Postal Service now does that are

more in the communications area, as they make them out to be, as

opposed to those that enhance their core products. And I think they

ought to charge out into the sunset and take care of enhancing

those core products. They are doing a good job in that area and

they ought to continue it.

Senator COCHRAN. I am going to ask you one other question, and

then I am going to yield to my friend from North Carolina who has

joined us at the hearing. You mentioned this PosteCS case, the fact

that it is pending before the Postal Rate Commission, and that you

would not be able to comment on it. Nor should you, on the merits

at all. But tell us what is the issue that has been raised by that

case exactly.

Mr. GLEIMAN. Well, the Postal Service’s position is that since

what is involved here is a point-to-point electronic transmission, it

is not postal in nature, it is nonpostal in nature. Another aspect

of the Postal Service’s initial defense against the complaint was

that this was an international service. I was interested to find out

just a moment ago that in fact it was designed for domestic use as

well. But the key issue here is whether the Postal Rate Commission has jurisdiction over something that is a point-to-point electronic transmission.

Senator COCHRAN. OK. Who brought the complaint?

Mr. GLEIMAN. The United Parcel Service filed the complaint.

Senator COCHRAN. OK. I am going to yield to my friend from

North Carolina.

Mr. GLEIMAN. If I could just add, because I think it is relevant

to a comment that was made by Mr. Nolan in response to a question a moment ago.

Senator COCHRAN. Yes. Go ahead.

Mr. GLEIMAN. If the Postal Service did not offer PosteCS or

eBillPay or Electronic Postmark, does anyone really believe that

there is no one else out there that would offer these services, or

perhaps people are not already offering these services? I see news

25

clips and read trades and it seems to me that every day there is

a new entity out there that is offering something akin to what the

Postal Service says if they do not put it out there it is just not

going to be available.

Senator COCHRAN. The Senator from North Carolina, Senator

Edwards.

OPENING STATEMENT OF SENATOR EDWARDS

Senator EDWARDS. Thank you very much, Mr. Chairman. Good

morning.

Mr. Nolan, I want to ask you a few questions about a subject

that is of interest and concern to me, which is privacy, specifically,

the approach the Postal Service takes with respect to its privacy

policy with respect to the eBillPay program. Let me ask you first

just generally, would you agree that the Postal Service’s approach

to privacy is to try to incorporate the fair information practices of

notice, choice, access, and security, is that something that you all

try to meet and comply with?

Mr. NOLAN. Yes, sir.

Senator EDWARDS. OK. We’ve got a copy, and I think you have

a copy in front of you and there is a copy up on the easel over here,

of the Privacy Act statement of the Postal Service. First, with respect to the notice consideration and giving people notice of what

your privacy policy is and what you do to protect people’s privacy,

let me just ask you a couple of questions about this Privacy Act

statement, if I can. It uses language, and I am referring now under

the Privacy Act statement to the second sentence, that says ‘‘The

information may be disclosed,’’ and then there are a number of

enumerated categories. Let me ask you, do you disclose information

that are not in one of those categories?

Mr. NOLAN. I am sorry, I am not sure I——

Senator EDWARDS. If you look under the Privacy Act statement,

second sentence. It says ‘‘The information may be disclosed’’ and

then you have got a list of several categories. I guess what I am

asking you is, are those the exclusive categories, circumstances

under which information can be disclosed, or are those just examples of categories where it can be disclosed?

Mr. NOLAN. It was designed to be all-encompassing.

Senator EDWARDS. OK. So what you intend to tell folks there is

that the only way in which their information will be disclosed is

if it falls within one of these categories. Is that correct?

Mr. NOLAN. Yes.

Senator EDWARDS. OK. Well, I am not sure that is clear when

you say ‘‘may be disclosed.’’ It might be a good idea to tell people

that these are the only ways it can be disclosed.

Mr. NOLAN. I think that is a very good comment. I think the

statement was designed to show that one or more of these may

apply in a given situation. But we should say that they are the

only situations under which circumstances may require us to issue

information.

Senator EDWARDS. OK. I think that is a good policy and I think

it is important for people to know that is what it means.

Mr. NOLAN. I agree.

26

Senator EDWARDS. Let me ask you a couple of follow-up questions about the specific categories that you have here. You say,

under subsection (a), ‘‘to an appropriate government law enforcement agency pursuant to a Federal warrant.’’ Do you have any policy or provision that allows the people whose information is being

provided to contest the warrant if it is something they think should

not be complied with?

Mr. NOLAN. To tell you the truth, I do not know the answer. I

will be glad to look it up and get back to you on that. I am not

sure. I think from the law enforcement standpoint, that notifying

someone that their information is being examined and having them

contest it may wind up being a problem. But I do not know the answer and I will get back to you on that.

[The information to be provided follows:]

INFORMATION PROVIDED

This is the manner in which the Postal Service intends to treat customer

information acquired in its eBillPay service offering.

Privacy Act Statement: The information you provide will be used to provide

you with electronic billing and payment services. The information may be disclosed (a) to an appropriate government law enforcement agency pursuant to a

Federal warrant; (b) in a legal proceeding to which the Postal Service is a party

or has an interest when such information is relevant to the subject matter of

the proceeding; (c) to a congressional office at your request; (d) to an independent certified public accountant during an official audit of Postal Service finances; (e) to the service provider under contract with the Postal Service to provide eBillPay service; (f) to a payee or financial institution for purposes of resolving payment-posting questions or discrepancies regarding status of electronic bill payment; (g) to a credit bureau for the purposes of verifying identity

and determining risk limits; and (h) pursuant to a Federal court order. The provision of information for eBillPay service is voluntary. However, if the information is not provided, we will be unable to provide you with our eBillPay service.

The collection of information required for this service is authorized by 39 U.S.C.

§§ 401 and 404.

Senator EDWARDS. Is that something that you think folks ought

to have a right to do? If you get a warrant from a law enforcement

agency saying they want this information, I assume you notify the

people who are involved that you are about to provide this information. Is that right?

Mr. NOLAN. That is what I am not sure about. I need to find out

that information. I am not sure of the implications, again from a

law enforcement standpoint, at what point people should be notified, be given the opportunity. So I would need to provide that information to you. I am just not aware of that.

Senator EDWARDS. OK. Would you find that out for me and let

me know that, please.

Mr. NOLAN. Absolutely.

[The information supplied follows:]

INFORMATION SUPPLIED FOR THE RECORD

1. Can the eBillPay’s Privacy Act statement be amended to clearly state that information will be disclosed exclusively for the specifically listed purposes?

So long as our Privacy Act statement is consistent with the current system

of records for eBP, the statement may be amended at any time. It would be consistent with the soon to be published revised eBillPay system of records to state

that ‘‘[a]s a routine use, the information may only be disclosed outside the Postal Service (a) ....’’

27

In publishing the Privacy Act statement, the Postal Service is meeting its obligation under the Privacy Act. Disclosures of the information within the agency

for the purpose of providing and monitoring the service should reasonably be

within the expectations of a customer of this service. Furthermore, the sentence

preceding the introduction of the routine uses states that ‘‘information you provide will be used to provide you with electronic billing and payment services.’’

As the Postal Service seeks to set a standard for electronic commerce notification and protection, we will consider whether this sentence might also be

amended to clarify internal releases as well.

2. Is there a mechanism that would allow an affected person to challenge the

issuance of a warrant before the Postal Service discloses information in response to

receiving a warrant?

No. The Privacy Act provides that the general prohibition against disclosure

of Privacy Act records does not apply to disclosures:

to another agency or to an instrumentality of any governmental jurisdiction

within or under the control of the United States for a civil or criminal law

enforcement activity if the activity is authorized by law, and if the head of the

agency or instrumentality has made a written request to the agency which

maintains the record specifying the particular portion desired and the law enforcement activity for which the record is sought;

5 U.S.C. § 552a(b)(7). A Federal search warrant would certainly fall within the

definition of a criminal law enforcement activity authorized by law.

The Privacy Act does provide that an agency maintaining such records shall

‘‘make reasonable efforts to serve notice on an individual when any record on

such individual is made available to any person under compulsory process when

such process becomes a matter of public record.’’ 5 U.S.C. § 522a(e)(8). This provision does not require advance notice, but rather only reasonable efforts to notify once a disclosure is made.

There has been little litigation concerning this ‘‘reasonable notice’’ provision.

Taking the language at face value, it would not be ‘‘reasonable’’ to tip the subject of a criminal investigation that he or she is such a target. The purpose of

search warrants, and the reason they are subject to specific judicial scrutiny

prior to execution, is that they are used to seize records and evidence of criminal activity before the subject of the investigation has the opportunity to

‘‘cleanse’’ those records. Where the element of surprise is not important, Section

522a(e)(8) makes provision for notification after release of the records.

Title 18, U.S.C. § 41 establishes the procedures for the issuance and execution

of a search and seizure warrant. Rule 41 requires that notice of the execution

of a warrant be left with the custodian of the items seized. Postal Service regulations interpreting this requirement provide that, when live mail is seized, the

Postmaster receives a copy of the warrant, not the addressee or sender of the

piece seized, unless the sender has requested a return receipt, in which case notice and a copy is sent to the sender after execution of the warrant. Administrative Support Manual (ASM) 274.62 and 274.63.

In the context of the seizure of personal information stored in electronic communications (it appears that eBillPay customer transactions would fall within

this definition) there are specific requirements, and exemptions, for prior notification in the Electronic Communications Privacy Act, 18 U.S.C. §§ 2701–2711.

The ECPA requires that law enforcement entities obtain a warrant for certain

stored electronic communications, and specifies notification requirements to the

subject of the request. However, 18 U.S.C. 2705 makes clear that a court shall

grant a request for the delay of notification to the subject of the warrant. Similarly, when records that are subject to the Right to Financial Privacy Act, 12

U.S.C. § 3401, et seq. are seized pursuant to warrant, the RFPA specifies notice

requirements within 90 days of execution of the warrant. Again, however, the

RFPA provides that, upon request, the notice requirement may be postponed

where such notice could interfere with an ongoing investigation. 13 U.S.C.

§ 3406.

There does not appear to be any mechanism that allows the subject of a

search and seizure warrant to challenge the release of information prior to the

execution of that warrant. Certainly, however, any attempt to use the evidence

seized as a result of a warrant is subject to potential challenge on a host of procedural and constitutional grounds.

28

Senator EDWARDS. And if you look under subcategory (d), it says

‘‘to an independent certified public accountant during an official

audit of Postal Service finances.’’ Do you have any provision or contractual obligation with the CPAs that may conduct an audit that

provides that they cannot provide the information to somebody

else? In other words, at that point does the customer who is involved, do they lose control over their private information?

Mr. NOLAN. Well, I should add two things. One is, there is a lot

of information that is collected about transactions, these kinds of

things that would have nothing to do with a person’s personal information. The need for an auditor to look at personal information—your Social Security number, or your address or what have

you—would be extremely remote, and I cannot even think of an instance at this point. It was designed more to indicate that looking

at reams of data that would be available about transactions, volumes, revenues might be required. But it probably would not touch

on an individual’s personal information. However, should for some

reason that come in contact with that auditor, they would absolutely be controlled by us from providing that information to anyone else.

I should add one thing. Again, given our concern about privacy,

and yet being in an area where privacy has been a concern, not because of the Postal Service but everyone in this space, what we are

doing is convening a panel of privacy experts, people interested in

the whole privacy field later this month to begin the process to

have them understand what it is that we are trying to accomplish,

how we are trying to accomplish it, to offer us the best possible information on ways to ensure that we are the best organization in

the world in protecting people’s privacy. That is an important part

of our brand. It is not something we are playing games with. And

we want to make sure we get the best information from experts in

the field, not one time but on a continuing basis, to make sure that

we are enhancing that space.

Senator EDWARDS. And when is this panel convening?

Mr. NOLAN. It is later this month. I am not sure of the exact

date, September 21 strikes me. I will let you know about that.

Senator EDWARDS. Good. I am glad to hear that. And I am glad

to hear your description of your attitude toward protecting people’s

privacy.

One of the concerns I had is, not that brevity is necessarily a bad

thing, but your privacy statement is relatively short and simple.

And when I compare it to privacy policies of organizations like

Bank of America, which I have in my hand here, which goes on for

several pages and are very specific about the things that they are

protecting, there obviously is a difference between the two. So I

think it is a good idea for you all to be examining——

Mr. NOLAN. There are other web pages as well that describe in

a lot more detail some aspects of our privacy and uses, etc. So there

is a lot more than just this. We are trying to make it understandable. And we probably need to do that better and will continue the

process to do that.

Mr. GLEIMAN. Senator, if I may.

Senator EDWARDS. Sure.

29

Mr. GLEIMAN. Since I cut my teeth working on the Federal privacy law way back in the 1970’s when I was an aide to Congressman Richardson Pryor—— Senator EDWARDS. From Greensboro, North Carolina.

Mr. GLEIMAN. Yes, sir. I thought I might add some insights.

First, an earlier statement that the Postal Service published was

far more onerous, and I think they are to be complemented for narrowing the routine uses that they will make of this data.

Senator EDWARDS. You mean it was broader in terms of who they

could disclose to?

Mr. GLEIMAN. Yes, sir. And I think they have done a nice job in

narrowing down and addressing this concern.

Second, with respect to your question about pre-notification. In

the Federal Privacy Act, in order to avoid the onerous requirement

that people be notified, and in some cases the counter-productive

notification, pre-notification before the release of information, as

might be the case when there was a criminal investigation, the law

has a provision that permits agencies to establish ‘‘routine uses,’’ which are what you were seeing up there. The law does not require

that individuals be notified before disclosure pursuant to published

routine uses, only that an accounting of the disclosures be kept.

I might add that while this statement is an improvement, there

is nothing that precludes the Postal Service, or any other Federal

agency, from coming up with additional routine uses that would

broaden out the availability of data. But I take Mr. Nolan and others at the Postal Service at their word in that they are concerned

and that this is an issue that they use as a selling point.

Senator EDWARDS. Also, I am not sure we want to be bound by

existing law, since it is to a large extent not existent. One of the

things I think Mr. Nolan was saying is you want to go far beyond

the existing law in protecting people’s privacy, is that right, Mr.

Nolan?

Mr. NOLAN. Yes, sir.

Senator EDWARDS. Let me ask you just a couple of follow-up

questions. You use a company called CheckFree to handle your

electronic bill payments. They have a privacy statement, CheckFree, that says ‘‘We do not share your personal information with

other companies, the government, or any third party. Your personal information is kept strictly confidential.’’ In other words, they

have no subset categories of circumstances under which they disclose the information. Which privacy policy controls, CheckFree’s

privacy policy or the Postal Service’s privacy policy, to the extent

there is a conflict between them? Because theirs seems very absolute, ‘‘We do not share your personal information with other companies, the government, or any third party.’’

Mr. NOLAN. Well, I have not seen theirs. But, obviously, if a warrant was issued for information there, they would be required by

law to give it up. So I am not sure that—there is no absolute there.

But one of the reasons why we chose CheckFree, frankly, was their

attitude about data and the sanctity of the data very much was in

line with ours. And this is a company that has been in business

for a long time and knows that if they are going to stay in business

they have got to respect privacy. So I would say that we are looking to make our privacy policies and actions as rigid as we possibly

30

can for the benefit of the consumer. Because that benefits our

brand, our activity in the space, and, frankly, benefits the Internet

in general. So we think it is just a sound business practice. So to

the extent that we can, we want to make it as rigid as possible,

recognizing that we, as private companies, have obligations under

law to release information if we are given a warrant or whatever.

Senator EDWARDS. One thing, when you convene your panel

later, you may want to look at making sure that your privacy policy

is consistent with organizations, like CheckFree, that you do business with. I think that would be important.

I am very pleased to hear your description and your attitude

about privacy and the fact that you are convening this panel. I

think those all say very good things. And I agree with you that the

Postal Service in fact should be the model of the kind of privacy

protection that people in this country should expect.

Mr. NOLAN. The way that people have come to us, a lot of customers have come to us is saying to us that people trust you. As

Mr. Gleiman indicated, there are other people who can offer these

services. This is not a monopoly. Why do people want to come to

us? Why do they want us in this space? Because they trust us.

Frankly, our hard copy business is our bread and butter, will continue to be our bread and butter. To do anything that would damage that bread and butter in an area that is a new initiative would

be ridiculous for us to do. So we take that very seriously.

Senator EDWARDS. Good. Thank you very much, Mr. Nolan.

Mr. Chairman, thank you.

Senator COCHRAN. Thank you, Senator.

Mr. Rider, there was some conversation with our GAO representative, Mr. Ungar, about the documents that were needed by GAO

to verify that the Board of Governors had actually approved some

of these e-commerce initiatives. According to the GAO report, the

Board of Governors did not have documentation showing that it

had approved but one of the seven e-commerce initiatives before

they were launched.

What is your response to that? Is that a problem? Has that been

corrected? Do you intend to ensure that there will be documentation of the actions of the Board in the future on these issues?

Mr. RIDER. Senator, there were seven endeavors there. The first

one we will discuss is ePayments. This was approved in the April

Board of Governors meeting.

NetPost Mailing Online was approved in our August meeting.

The Board of Governors approved the PRC decision authorizing the

pilot of this. That was done in August.

With respect to Internet change of address and move-related

products and Movers Guide, a proposal was presented to the members of eBob, which is our Business Opportunity Board, on April

13, 2000. The Governors were sent a letter on May 31 informing

them of all the proposed enhancements to this program.

The next one is NetPost.Certified. The eBob approved it in August and the Board of Governors were briefed on this at our September board meeting.

PosteCS—The Board of Governors were briefed on the launch of

PosteCS in April, and in August the eBob approved the business

plan.

31

Stamps Online—The Board of Governors’ approval was not necessary because of the minimal development expenditures and because it is an enhancement of our stamp selling process.

Electronic Postmark—The Board of Governors was notified of

that program in April 2000, and eBob approved the business plan

in August 2000.

Senator COCHRAN. Do you think it would be helpful in the future

for the Board of Governors to have some documentation about the

basis for its decisions on e-commerce initiatives on the record so

that people who are interested, stakeholders particularly, can understand why they are deemed appropriate and in the public interest?

Mr. RIDER. Yes, sir, I certainly do. And the eBob committee was

just formed, I think, in April and they will be reporting to the

Board every quarter on their progress, and in every board meeting

we expect to review any new initiatives.

As far as the public notification, Senator, the Board of Governors’ public notification complies with the provisions of the Sunshine Act

and all of the presentations to the Board of Governors are documented. The minutes of our meetings are open to the public for

their review. What I have told you on each one of these initiatives

and the dates I have told you are gleaned from our records.

Senator COCHRAN. Mr. Gleiman, there was a case recently entitled Mailing Online. Could you tell us how the Postal Rate Commission handled that and the issue, particularly of fair competition.

Mr. GLEIMAN. Yes, sir. First off, it is important for you to know

that the Commission is covered by the Administrative Procedures

Act when it has a case before it, and, in keeping with that Act, we

have hearings on the record where parties, both the Postal Service

and others, can come in and make their case before the Commission and rebut one another’s cases before the Commission. So we

had an evidentiary record that we looked at.

In examining the information that the Postal Service provided,

we concluded that some of their costs were not calculated correctly.

We made adjustments in the costs and also in the mark-up over

cost of that product. The result was, for example, that a two-page

black and white document, as proposed by the Postal Service would

have cost 38 cents, and under the recommendation of the Rate

Commission, which was accepted by the Governors, it would cost

41 cents. But that was one aspect of trying to protect competition,

by not allowing a rate that was unreasonably low that would put

the Postal Service at an unfair competitive advantage.

Another aspect of that case involved an agreement that was

reached, ostensibly through negotiations between the Postal Service and the parties who had intervened in the case, to ensure that

all parties who offered similar services, and there is some language

in the decision to describe the nature of similar services, would

have available to them the reduced rate for the hard copy portion

of mailing online that the Postal Service had requested from us

and that we had approved. So that also kept the field level and did

not give the Postal Service an advantage in the hard copy end.

Senator COCHRAN. Mr. Nolan, the Postal Service has said it has

identified an electronic mailbox, which is a concept in the development stage that could link electronic and physical addresses. Can

32

you explain how an electronic mailbox would work. Would every

American, for example, get one?

Mr. NOLAN. Again, Senator, as you indicated, we are in the conceptual development phase of the electronic mailbox. But every

American could get one if they wanted, if we wind up offering the

service. It is not something that we have secretly got a number for

everybody and it is there and you have to use it.

One of the things that becomes very obvious in the Internet is

the value of information that has existed forever but was not able

to be captured. So, for example, if you ordered something from a

catalog or an e-tailer and were to receive delivery, would it be of

value to you to know when that package was going to be delivered

by the Postal Service so that you could be sure to be home, or ask

the Postal Service not to deliver it that day, or to deliver it at a

certain time? If we had the ability to take that physical address as

we are scanning it through our normal process and be able to know

what your E-mail address is to trigger an information notice to you

that a package was coming, where would you like it, when would

you like it, we think that would have value.

We think there are other products and services in similar fashion

that could also have value for consumers and they may very well

appreciate receiving the information that way. We may find that

people involved in our bill payment service would like to receive

their bills in a special place, as opposed to their normal mailbox,

that is less open to the public, more restricted in who they provide

that information to. They might find a value in that particular

space. So we are examining all those possibilities. We have not

made any decisions yet. But it seems to us to be an area of opportunity that we are in fact investigating.

Senator COCHRAN. One concern that has been brought to my attention is that this could possibly be used to send out unsolicited

advertising. Is that expected or foreseen by you?

Mr. NOLAN. Absolutely not. To the contrary, it is because of concerns about spamming that this kind of thing would actually be of

benefit. In this model, the sender pays. And so, as is true in the

spamming environment when people are spamming individuals,

they do not pay an intermediate body like the Postal Service for delivery of that spam message. In this particular kind of situation,

if we offered the opportunity for customers to receive mail in their

mailbox, the payment through us to that mailbox would be by the

sender. That would tend to dissuade people from spamming.

In our current mailbox we act as an agent, in the hard copy mailbox, the box at the curb or your front door, we act as an agent of

the sender and the receiver. If you want to send mail, we are dutybound to deliver it to that box. So what goes into that box is not

your choice as the owner of the box, it is the choice of the sender.

In the space on the Internet, we view the electronic mailbox as

something that is controlled by the receiver. So only that which the

customer wants to get in that box gets there.

That is the model that we are using conceptually as we are developing that. It is designed specifically to ensure that the Postal

Service is not a party to any kind of spamming situation or loss

of privacy for the individual. So we are really turning that whole

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thing on its head in our conceptual phase as we are developing it

right now.

Senator COCHRAN. Some have suggested that the Postal Service,

since it has law enforcement responsibilities for e-commerce products and services, is positioned to compete unfairly just as a matter

of fact with other competitors. How do you respond to that concern?

Mr. NOLAN. We pay for our Inspection Service. It is borne by our

ratepayers. If individuals play games on the Internet, break the

law on the Internet, the FBI, the Justice Department, there are a

lot of law enforcement agencies which in fact can be brought to

bear to find and convict those people committing those crimes. We

have received a Memorandum of Understanding that enables our

Inspection Service to delegate that authority to get involved in

those kinds of activities where there is a postal nexus. But the fact

is that we are interested, as is the Inspection Service, in enhancing

the security on the Internet and so we work very closely with other

law enforcement agencies. But we pay for that postal service.

I appreciate the fact that people view it as a premier law enforcement agency. We are proud of that fact. It did not come as a result

of statute; it came as a result of the way we do business. And to

the extent that the way we do business gives people confidence in

our abilities to maintain privacy and security, we are pleased with

that. But our ads, everything we do does not tout the Inspection

Service as much as it touts the fact that you are doing business

with the Postal Service and the benefits from doing that.

Senator COCHRAN. Another concern that has been brought to my

attention is that because of the legal and regulatory framework

that is used to create the Postal Service, that you are positioned

to compete unfairly with others in these e-commerce areas. What

is your response to that? Is it unfair?

Mr. NOLAN. I would love to have the playing field that our competitors have. I think that the restrictions placed on the Postal

Service far outweigh any benefits that exist for us to be able to

compete. I think that what we are faced with here is an organization that is meeting a need within this country, and we think we

have done it fairly well, hoping to do it better all the time. But to

the extent that by doing the job we do everyday it enables us to

offer products and services that satisfy the needs of customers, I

think that is good news. But I think that in terms of restrictions

that we have, again, if I were a competitor choosing whether to

take my restrictions or their restrictions, I do not think anybody

in their right mind would choose mine.

Senator COCHRAN. I appreciate very much this panel’s participation in the hearing. We have votes occurring on the floor and I

have to go back over there and cast my vote. But I think we have

had an excellent overview of the situation here with the e-commerce strategy and initiatives of the Postal Service being reviewed

by the General Accounting Office and its report being presented to

the Subcommittee today.

We are going to undertake a careful review of all the information

that has been provided to us today and are hopeful that the work

of our Subcommittee will contribute to the overall understanding of

the legal situation. And if there are indications that changes should

34

be considered, we will be glad to hear from other Senators and

those who are interested in this issue as well.

The hearing is adjourned.

[Whereupon, at 12:30 p.m., the Subcommittee was adjourned, to

reconvene at the call of the Chair.]

(35)

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