The Postal Service is an independent establishment in the executive branch. The Postmaster General, Deputy Postmaster General, and nine presidentially appointed members of the Postal Board of Governors direct the operations of the Postal Service. The Postal Service is to operate in a businesslike manner and is to break even in the long term. An independent Postal Rate Commission was established to, among other things, regulate the Postal Service’s adherence to ratemaking standards and to ensure that it does not take advantage of its monopoly on the delivery of letter mail. Since the creation of the General Post Office in 1775, the core business of the U.S. Postal Service has been the collection and delivery of letters and packages to the households and businesses of the nation. Today, however, the Service sees its core business threatened by the advent of the electronic age. The Service believes that its role as provider of universal postal service at uniform rates faces competition significantly more challenging than the competition from past eras—most notably the telegraph and the telephone. In 1997, former Postmaster General Marvin Runyon, in testimony before your Subcommittee, said the electronic rival the Postal Service currently faces goes far beyond anything faced before. He stated that computers, telephones, television, and electronic funds transfers are being brought together with a rapidly evolving communications network, and this network promises one day to link nearly every home and business in the nation with the capability to rapidly trade messages, money, and multimedia content. According to the Postal Service, this new communications network—e.g., the Internet and its World Wide Web, e-mail, electronic commerce, and electronic data exchange—is fundamentally altering consumers’ choices and expectations. More importantly, because of these new choices, the Service is concerned that future First-Class Mail revenues will decline due to the electronic diversion of mail. In fact, the former Postmaster General was so concerned about this prospect that he testified before the Subcommittee that if a significant amount of First-Class Mail gravitates to alternative sources of delivery, this could jeopardize the Service’s core business, which is the financial bedrock of universal service. It is against this backdrop that the Postal Service began, in the mid-1990s, focusing resources on the aggressive development and introduction of new products—primarily nonpostal products. This move, however, has created controversy. Some Members of Congress and some private sector companies have said that the Postal Service is unfairly expanding its product line to compete in nonpostal-related markets, and they have manifested their concerns in various forms. For example: Representative Hunter introduced a bill (H.R. 3690) on June 20, 1996, to prohibit the Service from making available to the public any commercial nonpostal service that it did not have available on January 1, 1994. H.R 3690 was not enacted and was reintroduced as H.R. 198 on January 7, 1997. H.R. 198 was referred to the Committee on Government Reform and Oversight with no further legislative action. Representative Northup sought to stop the Postal Service from expanding one of its international mail services—Global Package Link—through an amendment to the Fiscal Year 1998 Treasury, Postal Service, and General Government Appropriations bill. Although the proposed amendment did not become part of the Fiscal Year 1998 Appropriations Act, the conferees agreed to study the issue. Additionally, the Conference Report accompanying the act included a request that the Postal Service report on its nonpostal activities. New products originate from several different sources within the Postal Service organization, and various review and approval processes are used for the introduction of new products—the source and type of approval process used generally being related to the type of product. New products typically fall into one of the following major groups—capital, philatelic, postal, and nonpostal products. To identify the statutory and regulatory authorities and constraints covering all groups of new products, we researched and analyzed applicable sections of the U.S. Code, Postal Service regulations, PRC regulations, and relevant court and administrative opinions and decisions. Additionally, we reviewed H.R. 22 and the Postal Service’s proposed reform legislation to determine how existing statutory and regulatory authorities and constraints governing new products may be affected by enactment of either of these legislative proposals. To document the Marketing Department’s CustomerPerfect! new product development process, we interviewed marketing and finance managers responsible for the development and oversight of the process. To track the flow of three judgmentally selected products through the process, we worked primarily with the program managers responsible for those products. In all cases, we obtained, where possible, documentation to corroborate oral statements. This documentation included, for example, copies of draft and approved Business Proposition Statements, copies of draft and approved Business Plans, documents provided to top management and the Postal Service’s Board of Governors, financial information about the three new products, and summary information about contracts and contractors. We did not independently verify the accuracy of the financial data provided or validate the Service’s claim as to how much of its annual revenues were at risk to electronic diversion. We gathered pertinent information from the Service’s Finance Department to develop profiles, including financial data, on the remaining new products the Service marketed and/or had under development during fiscal years 1995, 1996, and 1997 and that had been publicly announced as of November 1997. Included in the information we gathered were Business Proposition Statements, Business Plans, documents provided top management and the Board of Governors, and financial information about each new product. We reviewed and analyzed the information gathered and summarized the results of that work in appendix III. Clarification questions were addressed either by Finance officials or the program manager responsible for a particular product. As with the three products we reviewed in detail, we did not independently verify the accuracy of the financial data provided on the remaining products in appendix III. The inventory of products in appendix III is limited to products marketed and products under development that have been publicly announced by the Service. It does not include products under development that have not been publicly announced because of the proprietary nature of the Service’s research and development effort. To help ensure that all new products were identified, we researched the Service’s electronic database of press releases, speeches, and testimonies to identify announcements concerning products under development. We conducted our review at Postal Service Headquarters in Washington, D.C., between November 1997 and July 1998 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Postal Service, and the Service’s comments are discussed at the end of this letter. The Postal Service has broad statutory authority to develop, test, approve, and market a variety of new products, including new capital, philatelic, domestic and international postal, and nonpostal products. However, our analysis shows that the Service is subject to at least three constraints. First, since it is the underlying statutory mission of the Postal Service to provide postal services to bind the nation together, the Service needs to be able to explain how any new product it develops will further that mission. Second, under its statutory authority, before marketing (including test marketing) a new domestic postal product, which necessarily involves classification of mail, the Service must request a recommended decision from PRC regarding the propriety of the Service’s proposed classification, rates, or fees for the new product. Prior to issuing its recommended decision, PRC is required to hold hearings on the Service’s proposal. The Governors of the Postal Service may approve, allow under protest, reject, or modify PRC decisions as provided for in statute. Finally, the Service’s ability to market new products can be constrained or influenced by congressional oversight, restrictions imposed during the appropriations process, or other legislative actions. Adoption of H.R. 22 or legislative changes offered by the Postal Service would amend the Service’s current statutory authority to develop, test, approve, and market new products. H.R. 22 would place new restrictions on the introduction of new, nonpostal products and international postal products. For example, the Service would be restricted to introducing new, nonpostal products through a for-profit corporation created and owned by the Postal Service. However, H.R. 22 would provide the Service with broader latitude to test market experimental postal products. For example, market tests of new postal products could be conducted for as long as 2 years and generate $10 million in revenues per year without prior PRC approval and could be extended to a third year with PRC’s approval. The Postal Service’s proposed legislative changes would also provide the Service with broader latitude to test market experimental postal products. Under the Service’s proposed changes, it would be able to test market experimental domestic postal products without having them reviewed by PRC first. The Postal Reorganization Act of 1970 provides the Postal Service with broad statutory authority to develop, test, approve, and market new products. With respect to the Postal Service’s general duties, the act directs the Service to plan, develop, promote, and provide adequate and efficient postal services at fair and reasonable rates and fees. In addition, it specifies that it is the Service’s general duty to “receive, transmit, and deliver . . . written and printed matter, parcels, and like materials and provide such other services incidental thereto as it finds appropriate to its functions and in the public interest.” In more specific terms, the act also provides the Postal Service authority to develop a variety of new products. With regard to new capital products, the Service has authority under the act to determine the need for post offices, postal and training facilities, and equipment and to provide such offices, facilities, and equipment as it determines are needed. The act also provides the Service with the specific power to provide philatelic services. With regard to new international products, the act has been interpreted by the courts as providing the Service, with the consent of the president, the authority to establish international products.