SPEAKERS CONTENTS INSERTS
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PLEASE NOTE: The following transcript is a portion of the official hearing record of the Committee on Government Reform. Additional material pertinent to this transcript may be found on the web site of the committee at [http://www.house.gov/reform]. Complete hearing records are available for review at the committee offices and also may be purchased at the U.S. Government Printing Office.
57–558
1999
H.R. 22, THE POSTAL MODERNIZATION ACT OF 1999
HEARINGS
before the
SUBCOMMITTEE ON THE POSTAL SERVICE
of the
COMMITTEE ON GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
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FIRST SESSION
ON
H.R. 22
TO MODERNIZE THE POSTAL LAWS OF THE UNITED STATES
FEBRUARY 11, AND MARCH 4, 1999
Serial No. 106–16
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.house.gov/reform
H.R. 22, THE POSTAL MODERNIZATION ACT OF 1999
H.R. 22, THE POSTAL MODERNIZATION ACT OF 1999
H.R. 22, THE POSTAL MODERNIZATION ACT OF 1999
H.R. 22, THE POSTAL MODERNIZATION ACT OF 1999
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H.R. 22, THE POSTAL MODERNIZATION ACT OF 1999
H.R. 22, THE POSTAL MODERNIZATION ACT OF 1999
57–558
1999
H.R. 22, THE POSTAL MODERNIZATION ACT OF 1999
HEARINGS
before the
SUBCOMMITTEE ON THE POSTAL SERVICE
of the
COMMITTEE ON GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
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ON
H.R. 22
TO MODERNIZE THE POSTAL LAWS OF THE UNITED STATES
FEBRUARY 11, AND MARCH 4, 1999
Serial No. 106–16
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.house.gov/reform
COMMITTEE ON GOVERNMENT REFORM
DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York
CONSTANCE A. MORELLA, Maryland
CHRISTOPHER SHAYS, Connecticut
ILEANA ROS-LEHTINEN, Florida
JOHN M. MCHUGH, New York
STEPHEN HORN, California
JOHN L. MICA, Florida
THOMAS M. DAVIS, Virginia
DAVID M. MCINTOSH, Indiana
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MARK E. SOUDER, Indiana
JOE SCARBOROUGH, Florida
STEVEN C. LATOURETTE, Ohio
MARSHALL ''MARK'' SANFORD, South Carolina
BOB BARR, Georgia
DAN MILLER, Florida
ASA HUTCHINSON, Arkansas
LEE TERRY, Nebraska
JUDY BIGGERT, Illinois
GREG WALDEN, Oregon
DOUG OSE, California
PAUL RYAN, Wisconsin
JOHN T. DOOLITTLE, California
HELEN CHENOWETH, Idaho
HENRY A. WAXMAN, California
TOM LANTOS, California
ROBERT E. WISE, Jr., West Virginia
MAJOR R. OWENS, New York
EDOLPHUS TOWNS, New York
PAUL E. KANJORSKI, Pennsylvania
GARY A. CONDIT, California
PATSY T. MINK, Hawaii
CAROLYN B. MALONEY, New York
ELEANOR HOLMES NORTON, Washington, DC
CHAKA FATTAH, Pennsylvania
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ELIJAH E. CUMMINGS, Maryland
DENNIS J. KUCINICH, Ohio
ROD R. BLAGOJEVICH, Illinois
DANNY K. DAVIS, Illinois
JOHN F. TIERNEY, Massachusetts
JIM TURNER, Texas
THOMAS H. ALLEN, Maine
HAROLD E. FORD, Jr., Tennessee
———
BERNARD SANDERS, Vermont (Independent)
KEVIN BINGER, Staff Director
DANIEL R. MOLL, Deputy Staff Director
DAVID A. KASS, Deputy Counsel and Parliamentarian
CARLA J. MARTIN, Chief Clerk
PHIL SCHILIRO, Minority Staff Director
Subcommittee on the Postal Service
JOHN M. MCHUGH, New York, Chairman
MARSHALL ''MARK'' SANFORD, South Carolina
BENJAMIN A. GILMAN, New York
STEVEN C. LATOURETTE, Ohio
DAN MILLER, Florida
CHAKA FATTAH, Pennsylvania
MAJOR R. OWENS, New York
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DANNY K. DAVIS, Illinois
Ex Officio
DAN BURTON, Indiana
HENRY A. WAXMAN, California
ROBERT TAUB, Staff Director
HEEA VAZIRANI-FALES, Counsel
ABIGAIL HUROWITZ, Clerk
DENISE WILSON, Minority Professional Staff Member
C O N T E N T S
Hearing held on:
February 11, 1999
March 4, 1999
Text of H.R. 22
Statement of:
Biller, Moe, president, American Postal Workers Union, AFL–CIO; Vince Sombrotto, president, National Association of Letter Carriers; William Quinn, president, National Postal Mail Handlers Union, AFL–CIO; and Steve Smith, president, National Rural Letter Carriers Association
Carrico, Ted, president, National Association of Postmasters of the United States; Joe Cinadr, president, National League of Postmasters of the United States; and Ted Keating, vice president, National Association of Postal Supervisors
Cerasale, Jerry, senior vice president, Government Affairs Direct Marketing Association, Inc., on behalf of the Mailers Coalition for Postal Reform; Neal Denton, executive director, Alliance of Nonprofit Mailers; and Robert ''Kam'' Kamerschen, on behalf of the Saturation Mailers Coalition
Estes, John T., executive director, Main Street Coalition for Postal Fairness, accompanied by John F. Sturm, Newspaper Association of America; Lee Cassidy, National Foundation; David Stover, the Greeting Card Association; Guy Wendler, American Business Press; Kenneth B. Allen, National Newspaper Association; and Charmaine Fennie, chairperson, Coalition Against Unfair USPS Competition
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Gleiman, Edward J., postal rate chairman, accompanied by W.H. ''Trey'' LeBlanc, vice chairman; George A. Omas, commissioner; Ruth Y. Goldway, commissioner; and Dana B. ''Danny'' Covington, commissioner
Henderson, William, Postmaster General, accompanied by Mary S. Elcano, senior vice president and general counsel, U.S. Postal Service
Patterson, Donna E., Deputy Assistant Attorney General of the Antitrust Division, Department of Justice
Smith, Fred, chairman and chief executive officer, FDX Corp.; and James Kelly, chairman and chief executive officer, United Parcel Service
Letters, statements, etc., submitted for the record by:
Allen, Kenneth B., National Newspaper Association, prepared statement of
Biller, Moe, president, American Postal Workers Union, AFL–CIO, prepared statement of
Burton, Hon. Dan, a Representative in Congress from the State of Illinois, prepared statements of
L 54, 327
Carrico, Ted, president, National Association of Postmasters of the United States:
Additional questions and responses
Prepared statement of
Cassidy, Lee, National Foundation, prepared statement of
Cerasale, Jerry, senior vice president, Government Affairs Direct Marketing Association, Inc., on behalf of the Mailers Coalition for Postal Reform, prepared statement of
Cinadr, Joe, president, National League of Postmasters of the United States:
Additional questions and responses
Prepared statement of
Davis, Hon. Danny K., a Representative in Congress from the State of Illinois, prepared statement of
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Denton, Neal, executive director, Alliance of Nonprofit Mailers, prepared statement of
Disbrow, William B., president and CEO, Cox Target Media, Inc., prepared statement of
Dzvonik, Michael, chairman, Mail Advertising Service Association International, prepared statement of
Estes, John T., executive director, Main Street Coalition for Postal Fairness:
Additional questions for the record
Prepared statement of
Fattah, Hon. Chaka, a Representative in Congress from the State of Pennsylvania, prepared statement of
Fennie, Charmaine, chairperson, Coalition Against Unfair USPS Competition, prepared statement of
Gilman, Hon. Benjamin A., a Representative in Congress from the State of New York, prepared statement of
Gleiman, Edward J., postal rate chairman:
Additional questions and responses
Prepared statement of
Goldway, Ruth Y., commissioner, prepared statement of
Henderson, William, Postmaster General:
Additional questions and responses
Information concerning advertising
Prepared statement of
Kamerschen, Robert ''Kam'', on behalf of the Saturation Mailers Coalition:
Additional questions for the record
Prepared statement of
Kelly, James, chairman and chief executive officer, United Parcel Service, prepared statement of
McFadden, Nancy E., U.S. Department of Transportation, prepared statement of
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McHugh, Hon. John M., a Representative in Congress from the State of New York:
Prepared statement of
L 47, 306
Prepared statement of Lewis Sachs
Palladino, Vince, president, National Association of Postal Supervisors, prepared statement of
Patterson, Donna E., Deputy Assistant Attorney General of the Antitrust Division, Department of Justice:
Additional questions for the record
Prepared statement of
Quinn, William, president, National Postal Mail Handlers Union, AFL–CIO, prepared statement of
Smith, Fred, chairman and chief executive officer, FDX Corp.:
Additional questions for the record
Prepared statement of
Smith, Steve, president, National Rural Letter Carriers Association:
Additional questions and responses
Prepared statement of
Sombrotto, Vince, president, National Association of Letter Carriers, prepared statement of
Stover, David, the Greeting Card Association, prepared statement of
Sturm, John F., Newspaper Association of America, prepared statement of
Wendler, Guy, American Business Press, prepared statement of
Williamson, Robert C., president, Willmar Associates International Inc., prepared statement of
H.R. 22, THE POSTAL MODERNIZATION ACT OF 1999
THURSDAY, FEBRUARY 11, 1999
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House of Representatives,
Subcommittee on the Postal Service,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m., in room 2154, Rayburn House Office Building, Hon. John M. McHugh (chairman of the subcommittee) presiding.
Present: Representatives McHugh, Gilman, LaTourette, Burton, Fattah, and Davis of Illinois.
Staff present: Robert Taub, staff director; Heea Vazirani-Fales, counsel; Abigail Hurowitz, clerk; Jane Hatcherson, legislative assistant; Denise Wilson, minority professional staff member; and Jean Gosa, minority administrative staff assistant.
Mr. MCHUGH. The Subcommittee on the Postal Service will come to order. I would tell you this is the answer of my dreams. Every night I wake up and dream I'm sitting here and Chairman Burton's down there. And it's finally come true.
Let me welcome you here this morning to the first hearing of this subcommittee for the 106th Congress. I am happy to note that, with one exception, virtually all of the members of last year's Congress have remained on this subcommittee. Some cynics amongst you might suggest that's the legislative equivalent of life without parole. I would suggest, however, that it is a tribute to the work of this subcommittee and a tribute as well to the cooperative effort that we, in my opinion, have enjoyed now for some time.
To say that the purpose of our meeting here this morning is well stated would be an overstatement. If nothing else, the bill we're considering this morning, H.R. 22, is mature. I will not bore all of you with a recitation once again of what I feel are its main provisions, if not its main attractions.
[The text of H.R. 22 follows:]
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"The Official Committee record contains additional material here."
[The official committee record contains additional material here.]
Mr. MCHUGH. We have four panels this morning and in all likelihood into this afternoon. Like all of you, we are here to listen to them and to review their comments. I would ask unanimous consent that my prepared statement be entered into the record in its entirety, as I would also ask unanimous consent that all Members have that opportunity to do so, as well.
[The prepared statement of Hon. John M. McHugh follows:]
"The Official Committee record contains additional material here."
[The official committee record contains additional material here.]
Mr. MCHUGH. We have today, as I said, four panels. Our lead panelist, of course, is the distinguished Postmaster General of the United States, William Henderson. This is the PMG's first appearance for this year and we're welcoming him once again. And, of course, our continued best wishes.
We also have, on our second panel, the Postal Rate Commission members led by its chairman, Edward Gleiman, and five of its members. I will extend to him the honor of introducing them at the appropriate time. Our third and fourth panels will be comprised of the Postal Service's three management associations and its four major unions.
I also wish to state that there is a need to clear the air in one regard with what appears to be some confusion about this bill, as we may hear from one of the witnesses on a later panel.
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As the Postmaster General will point out in his testimony, and I know this because I've read it as I've read all of the pre-prepared testimony, a price cap replaces cost of service regulation with an incentive-based regulatory system. However, because of a few provisions of H.R. 22 being adopted from the Federal Communications' experience with incentive regulations, some in the postal community have suggested that this bill, H.R. 22, is the same thing as telecom reform, or even the breakup of AT&T, or equivalent to deregulation of such sectors as the aviation industry.
Comparison has been made, in my opinion, to suggest, albeit subtly, that the negative effects of some of those efforts will somehow be felt again, if and when we modernize our Nation's postal laws. I want to state that I believe that analogy is certainly inaccurate and, I would argue, it's rather illogical as well.
H.R. 22 is not about breaking up the Postal Service as the courts required in the case of AT&T. Nor is it about trying to force competition into the postal and delivery sectors as Congress did indeed attempt to do when it deregulated both the airline industry and the telecom industry.
The Postal Service is already fiercely competitive. I think all of us understand that. H.R. 22 simply recognizes that we will doom the Postal Service to failure unless we act to update our Nation's laws so that the Service can adapt, compete, grow and survive in carrying out its universal service mission well into the 21st century.
And it will take some time for the Postal Service to adapt, even if H.R. 22 were enacted today, and I don't believe we're going to do that, are we? No, not today. But even if that were the case, it would set into motion a series of reforms that would probably not be fully implemented until some time in the year 2007, which would be the end of the first 5-year rate cycle.
Those who support amendments or alternatives to H.R. 22 must, I think, keep those kinds of timeframes in mind. Certainly reasoned and gradual change is the friend of all who wish to see a healthy and efficient Postal Service into the next century.
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So with that little editorialization aside, again, I welcome you all. Before I yield to my friend from the great State of Pennsylvania, the ranking minority member, I would like to yield to the chairman of the full committee, the gentleman from Indiana, Mr. Burton, for any comments he may wish to make, and certainly with our appreciation for his joining us here this morning. Mr. Chairman.
Mr. BURTON. Thank you, Chairman McHugh. First of all I want to congratulate you and thank you for all the hard work you and the ranking member have done over the past 4 years to bring this bill to this point. I don't know of anybody else in the Congress who would have liked to have done this job.
I'm not sure that you really wanted to do it but you've done an outstanding job, and it's a real testimony to you. And I hope your constituents are watching because they ought to know how hard you worked on this as well.
This bill is a very important bill. And it's one that I'm particularly interested in. That's why I decided to be a co-sponsor with Chairman McHugh. I'd like to first state that although a lot of the provisions in the bill are extremely good, nothing is in concrete. It's still a fairly fluid document although we're probably going to use 90 percent of it.
But I've met with Chairman McHugh and some other people from other areas of the postal community and private sector and they still have some differences of opinion. I understand that there may be as many as 75 to 100 or maybe more amendments. We hope to pare that down. But over the next few weeks, we're going to be meeting again and Chairman McHugh is going to bring me up to date, because I'm not as conversant with this subject as I want to be before we bring it to the full committee.
I'm going to try to make sure that we accommodate as many people as possible. There needs to be level playing field so that the private sector and the Postal Service can compete fairly with one another, and there is still some concern about that.
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Last year the then Postmaster came to see me about the postal rates and the rate increase that was about to take place. And just to let you know that our committee does not have the latitude that I would like for it to have, I told him that I thought the 1 cent increase in the price of postage was not necessary, because there had been over $1 billion in black ink in the previous financial statement by the Postal Service and last year was well over $500 million. And we didn't think a postal rate increase was necessary.
Nevertheless, the Postal Rate Commission didn't agree with us and they went ahead and increased that. Those are some of the concerns that we've had in the past and although this bill doesn't address them, it's one of the things that I'm concerned about in the future. That's why I'm particularly concerned about this one provision that you were talking about just a few moments ago.
Let me just make sure I cover all my notes. I don't think I want to go into all the details that may be of concern to me in the bill because I think most of you are familiar with those. But I think in the next 10 years or so we're going to see a radical change in the way we communicate with one another.
Faxes have become a way of life, e-mails have become a way of life. And unless we come out with something that realizes that fact, we're going to have rates going up in the Postal Service, because people will be shifting into these electronic means of communication and the Service may suffer as a result of that.
These are things that have to be addressed, so that while communication moves into the 21st century we're still providing the best service for the people of this country at the lowest possible cost.
I'd like to submit, Mr. Chairman, my entire statement for the record, but I want all of those interested parties to know that Chairman McHugh has asked me to sit down with him, and I've asked him to sit down with me and interested members of the various communities who are interested in this bill to talk about some final changes that might fine tune this bill to make it even better than it already is. And we're going to be working very hard to make sure that's accomplished in the next few weeks.
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But let me just say one more time that I don't know of anybody in the Congress that could have done as good a job as Chairman McHugh has over the past 4 years, with all the interested parties and all the diverse opinions on how this ought to be done, than he has. And so I want to congratulate him once again and tell him I'm very proud of him and I look forward to working with him to get the final product completed. Thank you.
[The prepared statement of Hon. Dan Burton follows:]
"The Official Committee record contains additional material here."
[The official committee record contains additional material here.]
Mr. MCHUGH. Well, thank you, Mr. Chairman. I deeply appreciate those kind comments. We've had a lot of great help, a lot of support on both sides on the aisle. And particularly, Mr. Chairman, with your leadership and your input and assistance, we've come a long way and I thank you for that. With that it's my pleasure now to yield to the gentleman from Pennsylvania, Philadelphia, PA, to be specific, the ranking minority member, Chaka Fattah.
Mr. FATTAH. Thank you, Mr. Chairman. And to the full committee chairman, it is, I think for all of us an important step as we approach the possibility of a mark-up on H.R. 22. Postal reform is something, as Chairman Burton has mentioned, and also the chairman of this subcommittee has made it very clear is important to a number of the stakeholders who are in this room and who we will be hearing from today, both the unions and the others who are involved in the implementation of postal service.
We have mailers and we have private sector competitors to the Postal Service. But there is, in the final analysis, another group of shareholders who won't be directly represented in the testimony today that we need to keep uppermost in our mind, and that is the citizenry of our country who depend every day on the U.S. Postal Service to provide a universal service to them. They, above and beyond the other stakeholders should be the focus of our efforts at reform.
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I know that for my good friend, the gentleman from New York, that this will be a central focus of our work as we go forward. And that we do want to ease any unfair burden on those who are private sector participants in this process. But we cannot assume something that is not the case, and that is that they somehow are in the same business as the U.S. Postal Service.
There is only one U.S. Postal Service, there is only one entity with the burden and the responsibility given to them by the Congress to deliver mail anywhere in this country, notwithstanding the economics of it, and to do that in an efficient and an effective manner. So I want to thank the Postmaster General, who we will hear from, for his leadership. He is doing an excellent job and also keeping us informed as it relates to his work.
I want to welcome, I understand we have a new committee member, Mr. Miller, from Florida, who is not with us yet today, but welcome him to the subcommittee. There is a lot going on today. I have Secretary Riley down the hall in another committee hearing. But there is always a lot going on in the Congress so we'll try to manage it as well as we can.
I'll offer some formal remarks for the record, as we go forward. And I look forward to being engaged in this activity. The postal reform is now fully on the front burner of the full committee. And I think we can tell by the chairman's presence here this morning that he intends to have some action in this regard. Thank you.
Mr. MCHUGH. I thank the gentleman. I particularly thank him for his very active leadership on this subcommittee and for his role in assisting the effort that we're all concentrating on and the purpose for our meeting here this morning. Let me yield now to the dean of the New York State delegation, a good friend and certainly a leader of longstanding on postal issues, a gentleman, as I said, from New York, Mr. Gilman, for any comments he may wish to make.
Mr. GILMAN. Thank you, Mr. Chairman, I'll be brief because I know we have some important participants this morning that we want to hear from. I want to commend you and the ranking minority member, Chaka Fattah, for the wonderful work you've been doing in taking what occurred over the last session, putting it into the new revised H.R. 22, the Postal Reform Act, which I'm sure with a lot of good work by all of us can help to make our Postal Service even better.
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It's still one of the best in the world, and we commend our Postmaster General, who is here, for making certain that we are right up there, up front, compared to other postal services around the world, and I've had an opportunity to visit a number of them.
But I want to thank you, Mr. Chairman, for your persistence and patience in the extensive work you've been doing to bring this about. We know the kind of hard work it's been in gathering all of the evidence, and listening to all of the testimony.
As the chairman is well aware, there is a great need to ensure that our Postal Service will be adequately prepared to meet the needs of our ever expanding competitive market in the 21st century and all of the technological improvements that are taking place in communication.
Since serving on the initial House Post Office and Civil Service Committee, and I see some folks who've been with us for a number of years out there, I've been a strong advocate of making certain that the Postal Service provide adequate service to its customers for years to come while simultaneously maintaining a good work environment that continues to honor its commitment to its employees. The biggest part of our Postal Service, of course, is over 700,000 postal workers who serve our Nation. And it's so important that they have input and that they be assured that there is input in this measure.
I think the bill before us accomplishes a number of major goals, and I'm certain we'll hear some other proposals that should be added. It's important to note that the public and all postal stakeholders have related opportunities to provide input and revisions under H.R. 22, and I'm sure today's testimony will give us some additional constructive ideas. In fact, we've heard nothing but praise for both the chairman and the open process from those who visited with me to discuss this measure.
In that regard, I was pleased to be able to seek approval of an amendment to this measure during our subcommittee's mark-up in the last Congress, which is included in the chairman's introduction of the bill to the Congress. That amendment protects the rights, the privileges and benefits of both employees of the Postal Service and the labor unions representing them, and stems from some of the concerns that arose from the Postal Union in regard to the postal regulatory portion of the bill.
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Accordingly, with H.R. 22's inclusion of that amendment, it's now the sense of the Congress that nothing in a Postal Rate Commission section should restrict, expand or otherwise affect any of the rights, privileges or benefits of either employees of the U.S. Postal Service or labor organizations representing those employees, as established under the National Labor Relations Act. And this measure may not be a perfect bill, but it's close to one. I think the postal community should support the shape and operation of our Postal Service.
Remaining concerns can and I'm certain will be discussed as this process continues in the subcommittee, in our full committee, and onto the floor. And I want to again commend you for moving it forward at this early stage in this session. And I encourage all parties who want to be part of the solution to come to the table or, as they say, ''If you don't come now the train will be leaving the station very shortly.'' Thank you, Mr. Chairman.
[The prepared statement of Hon. Chaka Fattah follows:]
"The Official Committee record contains additional material here."
[The official committee record contains additional material here.]
Mr. MCHUGH. I thank you for your comments here today, and more importantly, for your work not just now but over so many years on behalf of this very important organization.
Mr. GILMAN. Mr. Chairman.
Mr. MCHUGH. Yes.
Mr. GILMAN. If you'll forgive me.
Mr. MCHUGH. Certainly.
Mr. GILMAN. I'm chairing a mark-up in my own committee, but I will be coming back and forth and I will ask my staff to stand by. Thank you, Mr. Chairman.
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[The prepared statement of Hon. Benjamin Gilman follows:]
"The Official Committee record contains additional material here."
[The official committee record contains additional material here.]
Mr. MCHUGH. I understand. You have my proxy, Mr. Chairman. With that, I'd be happy to yield to one of the few Members that I'm aware of that actually lobbied to get on this subcommittee. I'll leave it to you what that says about him. I think it makes him pretty special, but that's one person's opinion. The gentleman from Ohio, Mr. LaTourette.
Mr. LATOURETTE. Thank you, Mr. Chairman. Under unanimous consent request, I'll submit my remarks for the record. I would like to say this is the only subcommittee that I requested and Chairman Burton was kind enough to give me additional responsibilities, as well, not requested, but I look forward to serving him.
The reason I picked this subcommittee is not only because of the important work that the Postal Service does and all of the industries and businesses that rely on the Postal Service, but also because of my admiration for you and the ranking member, Mr. Fattah, and the extraordinary work that I witnessed in the last two Congresses on H.R. 22, which is the only time that I've been here. And if you are going to stick it out and get postal reform through the House, the Senate, and signed by the President, I'm going to be here with both of you and we'll all do it together. So I thank you for that.
Mr. MCHUGH. I thank you very much. We're looking forward to your presence. You are an invaluable part of this effort. So with that, again, Mr. Postmaster General, welcome. It is always a pleasure to have you here with us. As I noted, this is our opening salvo for the 106th Congress, and, of course, your first appearance in this new session. So we're looking forward to your comments.
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The rules of the full committee, as those who have been to these hearings in the past recall, require that all witnesses be sworn in before they present oral testimony. So with that I'd ask you to rise and repeat after me.
[Witnesses sworn.]
Mr. MCHUGH. Let the record show that the witnesses have responded to the oath in the affirmative. And with that, Mr. Postmaster General, without further adieu let me turn our attention and the floor to you, sir, and welcome.
STATEMENT OF WILLIAM HENDERSON, POSTMASTER GENERAL, ACCOMPANIED BY MARY S. ELCANO, SENIOR VICE PRESIDENT AND GENERAL COUNSEL, U.S. POSTAL SERVICE
Mr. HENDERSON. Thank you, Mr. Chairman, and thank you for the opportunity to testify today. My written testimony I'll submit for the record, as I have in the past, rather than read back to you a speech you've read, which to me seems a bit boring. And I want to introduce Mary Elcano. Mary is our general counsel and she is head of the team that drafted the amendments that we make to H.R. 22.
Mr. MCHUGH. Yes. I welcome you, too, this morning, Ms. Elcano, and look forward to your legal interpretations as they may occur.
Ms. ELCANO. Thank you.
Mr. HENDERSON. For the record, I'm not a lawyer. I do want to make some general comments. I do want to go back about 5 years. We were sitting in a room at Postal Headquarters, and we were debating which of two schools of thought ought to be adopted by the Postal Service, and that was a debate that was occurring among our Governors too.
Our two schools of thought were, one, to just leave the Postal Service alone, allow it to atrophy, through electronic diversion of competitors, not change anything.
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The other one was to say that universal service should be preserved. Universal service is not defined that often, but I think at the core of universal service is regularly scheduled delivery and collection of mail throughout this country so that a mail carrier will go down your street, whether you have one piece of mail or no mail, to check on it. It's hardwired delivery throughout the United States. It's not maximized for profit, it's sitting there to provide service.
In discussing this, we, along with all the posts of the world having the same discussion, decided that the U.S. Postal Service is an American treasure. It's an institution that ought to be preserved. It's vital to this economy. It has a work force of over 700,000, and that stretches to millions of people in this country for employment, millions, along with the industries it supplements.
So out of that came the need to be more commercial, and that need was recognized at the same time around the world. And the Postal Service became more commercial at the same time. What was also happening with the U.S. Postal Service is that its quality was being upgraded. And its quality was becoming very, very competitive, and its quality improved in terms of timely delivery.
It started to affect private sector competitors who, heretofore, had not really focused on the Postal Service because it was not an alternative. Suddenly it became an alternative. So that creates some complexity to this discussion about universal service and about preservation of the Postal Service.
You very wisely introduced a bill for postal reform. In the meantime, posts around the world began to do their own reformation. Suddenly, what had in the past been bureaucratic, kind of slow moving entities, out of that reformation suddenly came highly competitive institutions in countries all over Europe and around the world.
A classic example of that is a reformed German post, Deutsche Post, whose postage is 66 cents, equivalent to our 33 cents, who recently bought a $1 billion business in England, a logistics company, at a time in which England couldn't invest money like Deutsche Post. I happen to have been with John Roberts, who is the head of Royal Mail, and Klaus Zumwinkel, who is the head of the German Post.
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As a result of that investment in England by the German Post, Parliament gave Royal Mail the right, almost immediately, to do similar kinds of investments. And they bought the third largest package delivery outfit, ''they'' being Royal Mail, in Germany. This commercialization of posts around the world is changing the entire environment.
The United States private sector package delivery outfits, who have been in Europe and around the world for a long time, are suddenly seeing, and rightfully so, these postal entities as being very strong competitors. Very strong competitors. Now, these postal entities around the world are now focused on each other. A little bit of chest beating is going on in Europe. But within 3 years, I predict they will be focused on the United States.
They are going to be focused because this is the mother lode of market opportunity. They will come over here, they will be private, they will be highly capitalized, and they will be in the marketplace competing. So as a consequence of this, our current U.S. competitors are leery of freeing a postal service commercially. They are leery because of the model they have seen. They have seen postal services around the world become very competitive.
But I say to you today that it's just as important for the Postal Service to be reformed to save universal service. That universal service, regularly scheduled delivery and collection throughout the United States, is just as important today, if not more important than it was 5 years ago. And the forces that you observed 4 years ago in the submission of this legislation, that is the electronic erosion of mail.
Five billion dollars are in the mail stream in the form of payments. Another $10 billion are associated with those payments. And there is no question that bill payment has some momentum to move electronically. That hardwired infrastructure of universal service would take a big hit from a pricing point of view, if that $15 billion were allowed to go away without some market improvement, some allowance for the Postal Service to be more competitive.
So when we view H.R. 22, we desperately think that to salvage the organization of the U.S. Postal Service, to keep it viable as an entity in America, that some commercialization of the Postal Service should occur. So we welcomed H.R. 22, and we submitted some 30 amendments, that Mary and her team drafted, to make H.R. 22 as useable as possible, as workable and as manageable as possible so that this entity would stay viable.
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It is very important, as it was 5 years ago, to have a healthy U.S. Postal Service. I thank you Mr. Chairman for inviting us, and that concludes my comments.
[The prepared statement of Mr. Henderson follows:]
"The Official Committee record contains additional material here."
[The official committee record contains additional material here.]
Mr. MCHUGH. I thank you for your comments. As those who have read your testimony understand, as I do, you have, I think, a very interesting and very studied perspective on this. But I do think it's important to place a couple of things onto the record and to clarify where possible, and where I certainly think it's necessary.
I've spent, as my grey hair will attest, quite a few years of my adult life in the business of politics in dealing with people writing down your words and reporting them at a later time. I always believe what I read, but I am always willing to learn more than what I've read. But there was a recent article that quoted the following:
Major mailers active in postal reform efforts are beginning to suspect that the Postal Service wants to kill H.R. 22. The mailers point to the latest batch of Postal Service proposed amendments. And when the Senior V.P. of Legislative Affairs told the MTAC meeting, These amendments are ''do or die'' for the USPS. Well, it had people thinking ''die,'' as in die on the vein—''vein'' a little Freudian slip there—''die on the vine.''
Some attendants who were confused by the comments followed up with phone calls to Legislative Affairs staffers. That's right, they were told, without the USPS proposed amendments, H.R. 22 is not helpful to the Postal Service, end quote. And it then goes on to point out that not all stakeholders are convinced of this line of reasoning, the debate about the amendments, et cetera.
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So I want to make it very clear here today, one way or another, is it your and the Postal Service's intent to kill this effort or are you supportive of this effort as we are currently under way? And, as a part of that, are we to understand that your position is that, without all of the amendments that you have submitted, H.R. 22 is not helpful?
Mr. HENDERSON. Well, let me make sure that there is no ambiguity. We are absolutely, positively not out to kill H.R. 22. And, second, as Chairman Burton said, this is work in progress. We understand that. And just as you wouldn't draw a line in the sand and say ''do or die,'' we absolutely are not going to do that. We've submitted amendments that we think makes the bill manageable from a Postal point of view. But absolutely it's not a do or die situation.
Mr. MCHUGH. Good. The record shall so state. You mentioned the amendments. The amendments, as you are aware, have caused a great deal of controversy. Without trying to read too much into the fact that the vast majority of controversy we have become aware of is in opposition to the amendments, that's not surprising. People rarely call you up and tell you you are doing a good job. They like to tell you just the opposite.
But I'd like to spend a few moments, before I begin to yield to the other members, and having you present, with an opportunity to go onto the record as to why you think some of these amendments are important and in what way they might work. For example, one of your amendments proposes to move just about all products outside the statutory monopoly to the competitive category.
The concern is, to many mailers and policymakers, that the Postal Service, for many of these products and services, is the only hard copy provider. If not in law, certainly in reality. So, in other words, even in the absence of a statutory monopoly, the Postal Service really does hold what they view to be dominant market power over those customers, newspapers, magazines, those kinds of deliveries, and such.
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The bill, as it currently stands, establishes a market dominance, a fact test for the regulatory criteria for assigning products to either non-competitive or competitive. But in your amendments you change that. The question that it presents, and the concerns we've heard, is simply why should the determination of whether the Postal Service product be competitive or non-competitive come from the Service's own regulatory definition of a letter rather than from some objective fact of the marketplace?
Mr. HENDERSON. Go ahead, Mary.
Ms. ELCANO. What our difference in the amendments versus H.R. 22 is that the products we move over from the non-competitive to the competitive are international, heavy First Class Mail, proxy statements, if you will, something like that, and some of the special services. And what's there already is priority mail, express mail, parcels, you know, et cetera. So our view is to move over those products which are positioned where there is competition emerging or constant competition, is consistent with having express mail, priority mail, parcels. The other rationale for that is in reference to the equivalent contribution test that comes into the competitive area, that there is some need to have a balance against that which we consider a very serious and a very strong condition for competition. To move those products over there make it more into a situation where we think the Postal Service can better survive and better compete, as well as meet the obligation for universal service.
Mr. MCHUGH. I understand. I don't have an objection with the intent. Clearly, the outcome of the provisions of H.R. 22 are to make those kinds of determinations. Where they exist, by a formula, a market test, rather, those move over. But concerns of some people are that, and you used international mail being placed in the competitive category, now there is no statutory protection, I'll grant you, of a monopoly for the Postal Service. But I think you'd agree, and if you don't, please say so, that on market dominance there is no alternative for international mail, single mail piece. I mean you're——
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Ms. ELCANO. Well, I would have agreed with you up until recently. We recently concluded—are in the process of some litigation with a particular mailer. As part of some discovery in that case, there was evidence that, in fact, they are doing some single piece mail in international. So I think it's not a non-competitive area. It is with competition, in other words, is what I'm saying.
Mr. MCHUGH. Well, you've got a court case trying to determine that, but a single court case. I don't want to argue this ad nauseam but the fact of the matter is, in spite of your recent single example where you've got a court case, the overwhelming evidence is you have a market dominance in that field. But the point being the concern that many have and that is, why should the Postal Service through its own discretion be the determinate factor here? Why not allow the current formula under H.R. 22 to prevail? And you've made your points. If you'd like to expand on them?
Ms. ELCANO. The last piece would be just the general policy overview on that. And that is, to the extent that something is not highly regulated today, we wanted to preserve that status quo and not move it into a more highly regulated area, so we conceptually left international into the competitive area. But I think you've expressed——
Mr. HENDERSON. I might add, Mr. Chairman, from a practical point of view, single piece international is a dying creature. There is a huge amount of erosion in that today electronically. And in a few years that will be a rarity, except for packages, which is highly competitive.
Mr. MCHUGH. So the amendment is a dying amendment, that's my interpretation. These are highly technical, and I want to submit a number of these for the record. I want to ask one more and then I will move to my colleagues. Then if we have some time, perhaps I can ask more questions.
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But one of the main objectives of H.R. 22, and one of the main justifications with respect to price capping and banding and dramatically altering the PRC's oversight role with respect to the setting of the price of postage, is to provide predictability to your customers and, also, I would argue, to provide more affordability. Not that you've been unaffordable, but to suggest to them that under this new system you'd be more insulated than you are today from the possibility of large, perhaps unaffordable rate increases. Would you agree with that?
Mr. HENDERSON. Well, the amendments that we propose, where we have bands and baskets, would allow us the kind of balance between flexibility and predictability. And we think that we can live with the amendments, the five baskets versus the four, the adding of the non-profits, and the protections of Aunt Minnie in basket one, we think that we can operate within those. And one of the important principles of that structure is being able to average the rates within the baskets so that you have some flexibility within those bands.
It's one of the difficulties of the bill and what we tried to think through when I discussed with Mary the philosophy of the amendments, is to make sure that we can manage the Postal Service. Make sure that we don't come out with a re-regulated entity that's simply ineffective. And that's a very important principle. And I think you have to use your own management experience in trying to interpret this. It's a difficult task.
It's a very complex bill and your staff has been very cooperative. But it is a very complex subject to try to figure out when it's said and done and the bill is in concrete. You know, will the car still roll?
Mr. MCHUGH. And I appreciate that. Again, we're trying to, ourselves, reach that balance where we provide the Postal Service with our stated objective of the kind of flexibility that you, in all likelihood, need to continue to compete but, as the chairman and others have suggested, at the same time ensuring that you compete fairly where that is possible. And that there are consumer benefits as well.
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One of the concerns we've heard with respect to another of the amendments, and you spoke to it, is that under your proposal that you have what you describe as flexibility, but they would describe as a considerable amount of leeway above the stated caps of 1 1/2 percent or more. That, coupled with the fact that you can bring in previously banked, unused cap allowances, takes away that predictability and, they would argue, perhaps that affordability as well.
So it's very troublesome to those people, and I want to be up front about it, it's troublesome to us as well. Because it does diminish, at least, and perhaps for a good reason, and you stated a reason, but nevertheless it does diminish two of the justifications for reconfiguring how you receive your rate increases presently. We're going to need to talk about that further.
Mr. HENDERSON. And I think, Mr. Chairman, pricing flexibility is one of the cornerstone elements that we started with, prices, products and labor. And our having pricing flexibility is very important to our remaining a viable organization. I think we've had a very satisfactory arrangement with the PRC. It has certainly been during my tenure as COO and CEO.
But the ability to negotiate prices with customers or to pass on the values and the NSAs that you provided in the bill, is very important to future Postal health. The foreign postal administrations that come on our soil are going to have commercial freedom, absolute freedom to do whatever they want to do. We at least have to be in the ring with them.
Ms. ELCANO. If I may, Mr. Chairman, the other points you are raising about the caps above the caps. You can imagine when we first started this approach, we had to get some outside consultants to assist us in understanding some of the principles, understand your bill, understand the principles, and craft a response to that. And how they advised us, in terms of telecoms and public utilities, other areas, was that in fact to manage within the baskets, you really needed some flexibility to de-average, and that could even include going above a cap in terms of some of the percentage.
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So what we did was to try to design it—and I think that we were advised that in some industries, telecoms, they go up as high as 3 or 4 percent above the cap on occasion. And so what we tried to do was to design a bill that reflected the Postal experience, if you will. So the Aunt Minnie basket, No. 1, has no ability to go above that cap. The more commercial baskets two, three and four have an ability of 1.5 percent. And the fifth basket is 0.5 percent which is the non-profits.
Our view in trying to design that was to pick very tight, tight bands if you will, a tight framework. And within that to try to have a weighted de-average, a weighted average of volume, of revenue weighted averaging within the activities, and take it down to the rate cell, to the rate average piece so that there can be as tight a band, as tight a control on that as possible.
But they convinced us. And it is somewhat of a leap of faith for us because our industry doesn't practice or perform in this area in that way. And so, given the expertise we had, that was also part of the basis for our amendments.
Mr. MCHUGH. I certainly understand how that kind of flexibility would be attractive to a management structure. I have no doubt about that. But I want you and I feel confident you understand that the kind of flexibility that you are speaking about, while sounding small in percentages is large in terms of the entire structure of the bill.
And it has to always be coupled with whatever bank of previous unused CPI cap you may have used. So, I mean, for mailers, particularly small mail-dependent businesses, this is a very troubling, uncertain part of the waters about which we've heard a great deal of concern.
I may not know much—I will state it differently—I do not know much about utility regulation or deregulation, but with 30 years in politics I know a little bit about PR. I respectfully suggest the last people you want to emanate in the customers' eyes are the utility industries. But do as you will. With that, I will be happy to yield to the ranking member, Mr. Fattah.
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Mr. FATTAH. Thank you, Mr. Chairman. I had a visit from the postal leaders from France. And they were here in our country examining the operations of the U.S. Postal Service, which they used as a bench mark from which to try to determine how they could provide better service to the people of their country. Somehow I wished that I had done better in my high school french class. But we had a facilitator that helped us communicate.
There was a recent AP poll that you didn't have to use a foreign language to interpret, and I know there is a lot of interest here in the Capitol these days in not paying attention to polls, but this one said that three-fourths of the American people thought that the Postal Service was doing a very good job.
I use those two comments to really kind of get into this a little bit. And I'm going to try to talk in english so that people can understand what's really going on here, because I think that the chairman is absolutely right that there is room and a reason for reform.
But sometimes the best efforts at reform lead to retarding processes rather than moving them forward. And we have to be careful here since we're dealing with an item, a public good that I think is essential to our economy and is also a responsibility that no one else in this business has, which is this notion of universal service. So I just want to walk through this. The U.S. Postal Service as it is presently constituted doesn't receive any public subsidy for its operation, is that correct?
Mr. HENDERSON. Yes. Except for the blind and frank mail there is no real public subsidy. We live off our revenues, that's absolutely accurate.
Mr. FATTAH. OK. So you've got 700,000-plus employees, you've got a service that you provide, you collect revenues from it that essentially pay for this operation?
Mr. HENDERSON. That's correct.
Mr. FATTAH. But unlike a private concern, you also have some responsibilities that are given to you by the Government, one of which is this notion of universal service?
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Mr. HENDERSON. That's correct.
Mr. FATTAH. To deliver mail to anywhere in the country, notwithstanding the economics of it, right?
Mr. HENDERSON. That's right.
Mr. FATTAH. I don't know if it was Ralph Waldo Emerson or someone else who said, ''If I make my home in the forest.'' You know, if somebody wants to live wherever they want to live, whether they have a better mouse trap or not, you have to deliver the mail to them?
Mr. HENDERSON. That's right. Everywhere, everyone, every day.
Mr. FATTAH. And now in addition to which the Congress has put other limitations on your operation, which is that you can't close a post office because it's not economical.
Mr. HENDERSON. That's in the law, that's right.
Mr. FATTAH. Is that right?
Mr. HENDERSON. That's accurate.
Mr. FATTAH. You can have a post office in one location in which the services that are being sold to the public there are not keeping pace with its cost, but you have to operate it?
Mr. HENDERSON. That's right. The 20,000 smallest post offices of America do not take in enough revenue to cover their expenses, that's accurate.
Mr. FATTAH. OK. So now on the other side of this, there are a few things that you do which there are people in the private sector that do it, and those are what are being discussed as competitive items in this basket, right?
Mr. HENDERSON. There are very few things that we do that don't have some form of competition, be it head to head competitors or alternatives.
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Mr. FATTAH. OK. So these services, you have to perform at a rate and at a price which is sensitive to your competition in the marketplace?
Mr. HENDERSON. That's right.
Mr. FATTAH. And this is like the overnight mail and special services that, particularly, business customers are interested in?
Mr. HENDERSON. That's correct. Priority mail is in that category.
Mr. FATTAH. So now when you provide these services to—well, let's start here. If you didn't provide these services and you didn't have the revenues that were generated from those services, the delivery of a First Class letter to an everyday American, would it cost more or less?
Mr. HENDERSON. It would cost more. And there would be no real pricing sensitivity in the marketplace. There would be no not-for-profit product, so all of the products would likely be higher priced than they are today.
Mr. FATTAH. Well, now, as we go forward in this reform, this H.R. 22, here are some things that the Postal Service, that you think are very good about H.R. 22, at least move us in the right direction. There are some amendments that you suggested for modifications. It would be helpful for me if you could outline where you see the major impact of H.R. 22, unamended, for the Postal Service and for its customers.
Mr. HENDERSON. I think that the biggest issue which precedes H.R. 22 is embedded in H.R. 22, and it's what we've submitted amendments for, it's pricing flexibility. If we need that pricing flexibility in order to stay competitive in the marketplace, and that's not a complex notion, and I understand——
Mr. FATTAH. It's not complex for those of us who are fortunately or unfortunately mired down in these issues. But for the general public, right now what happens when you want to change prices? This issue of flexibility in pricing, can you talk about it in English?
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Mr. HENDERSON. Well, today we have two models for setting prices, one in international, in which our Governors can approve a price increase, and the second one is the Postal Rate Commission. As I said earlier, the Postal Rate Commission, during my experience, has been a very responsible body.
What we're interested in, though, is more particular rates for individual mailers, the ability to pass on savings of their efficiency in the mail stream. Now we have one price fits all, or group pricing. And our competitors, direct competitors in the marketplace, have 100 percent pricing freedom. A product like overnight service loses ground primarily because we don't have the pricing flexibility to give volume discounts and things like that. So pricing flexibility is an important point to us.
Mr. FATTAH. Is there something else you'd like to add?
Mr. HENDERSON. No.
Mr. FATTAH. OK. Now, this issue of flexibility in pricing, you are saying it's for your best customers, in terms of volume, that you'd like to be able to negotiate some type of individual pricing mechanism?
Mr. HENDERSON. Right. Well, for all customers. I mean it would be the large volume customers whose efficiency we'd like to pass back to them in terms of pricing.
Mr. FATTAH. Now, at this moment you can't do that at all?
Mr. HENDERSON. We can do it for groups of people, if we go through the Postal Rate Commission. But we can't negotiate face to face, except in international where we do negotiate face to face with customers.
Mr. FATTAH. OK. Now the Postal Rate Commission, which we're going to hear from in a little while, they handle your pricing issues through a regulatory review process, they gather public response to it. How long does that process take?
Mr. HENDERSON. Approximately 10 months and about 6 months in preparation that we do internally to go to the hearing. And they conduct a full hearing with all constituencies. And then they provide a recommendation to our Governors who make a final decision.
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Mr. FATTAH. All right. Thank you very much. I'm going to yield.
Mr. MCHUGH. I thank the gentleman. I yield to the chairman of the full committee, Mr. Burton.
Mr. BURTON. Thank you very much, Mr. Chairman. I just have a couple of questions I'd like to ask. First of all, you were talking about the German Postal Service acquiring a private package delivery firm, and that triggered the English, the British, doing the same thing. What I was wondering is you said that you want to be competitive with them so that you don't lose market share because they are going to be coming into the United States, is that correct? I mean, that you want to have a mechanism to be competitive with them?
Mr. HENDERSON. Well, they are here today in the United States.
Mr. BURTON. But they are going to be getting more market share and you want to be able to make sure that you keep your percentage?
Mr. HENDERSON. Well, I think it's that this market in the United States is viewed as the most lucrative in the world.
Mr. BURTON. Right.
Mr. HENDERSON. And, therefore, they will focus on the United States both in shipping letter mail internationally. It is my belief also that eventually they will focus on the package business which not only competes with us but competes with UPS and Federal Express too.
Mr. BURTON. How would you envision the Postal Service being competitive with them, what steps would have to be taken to be competitive with them?
Mr. HENDERSON. I think, again, the real key is pricing freedom, to be able to negotiate with your customers, like an L.L. Bean or Spiegel, the ability to negotiate prices based on their efficiencies. Everybody else in the marketplace, but the U.S. Postal Service, today has complete pricing flexibility.
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Mr. BURTON. So in order to be competitive with them you'd like to have the flexibility, so that if you were bidding against them for a contract you could lower your bid and be competitive?
Mr. HENDERSON. That's right. It's like selling. I'll give you an analogy. If you were selling cars, as an example, and you didn't have any pricing flexibility, you would not be the alternative of choice unless you had the highest value and it was obvious to everyone. And that's what you get today with priority mail. I mean, it's a low priced, very high quality product. That's why it's growing.
Mr. BURTON. Well, the next question I'd like to ask then is, how do the private sector carriers, like UPS and Federal Express, and the others in the United States, if you are bidding against the Germans and the English and you are lowering your prices to be competitive, how do they survive? I mean, don't you have the ability as a government entity to be able to cut prices below what their pricing structure would allow?
Mr. HENDERSON. No. I don't believe that to be true. I think the question of the future of those two organizations is an important one. I think that there is a threat that foreign postal administrations, and I believe they believe this, will ultimately be a threat to their existence. When they come into this country as, for example, the Dutch have and bought MailCom, a major interest in MailCom, they come with very deep pockets. And it is an important question that you raised.
Mr. BURTON. I think that's something we really ought to take a look at because they're competitors with the private sector in this country, and then you are going to add to that through postal reform I think you hope, your ability to be competitive with those foreign entities, which puts additional pressure on the private carriers in this country.
A lot of us believe that free enterprise is the best way for an economy to flourish. And if the government sector comes in and is able to drive the private sector out of business, then you end up with government control over large segments of your economy, not just the Postal Service but others.
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So I'm just trying to figure out in my own mind how this is going to work in the long haul, and that's why I'm asking this question. Maybe you can flesh this out for me in the next few weeks by giving me more information. I'm not sure I'm going to get it all today.
Mr. HENDERSON. I can give you a twist on it today. The private sector is primarily focused on business-to-business packages, that's the dominance. If you look at residential, they surcharge residential by adding $1, and in some cases $2, in some cases delivery every 4 days. The Postal Service doesn't have any of that business, literally speaking. It's focused on residential package delivery. So, in a sense, they are not in the same arenas.
And if we're taken out of that business, if we're not in the business of package delivery, for example, then you have to take several billion dollars and amortize it across the rest of the classes of mail. And, to me, that doesn't seem to be in the interests of the American public to do something like that.
Mr. BURTON. I understand the example that you were using, Mr. Postmaster, just a few minutes ago, was one of the mail order delivery systems companies. I think you mentioned Lands' End?
Mr. HENDERSON. L.L. Bean, yes.
Mr. BURTON. Yes, L.L. Bean. And that is one that I think the private sector has been, for the most part, delivering for. And so that's a concern. And I think maybe you can have your staff and you illuminate that issue a little bit more for me in the next few weeks. I think it's something that we really need to take a look at.
The other thing I was interested in was how this new formula for postal rate increases works. And I was asking the staff up here, when the chairman yielded to me. I really would like to know how that works because I think maybe I'm wrong. I was trying to catch all of what you said there a minute ago. I thought you said that if you weren't able to deliver the packages, and do your package deliveries and the things that you've been doing, that the postal rates for other classes of mail, like First Class Mail, might go up?
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Mr. HENDERSON. That's accurate.
Mr. BURTON. That is accurate. OK. I just have a couple of questions and they may be very academic questions. The Postal Service for the last 2 or 3 years has had a fairly substantial profit. It was about $1 1/2 to $2 billion 3 years ago, and about $1 1/2 billion last year. I think it was about $580 million just this current past year. And yet they had a 1 cent per stamp delivery increase from 32 to 33 cents, and I could never figure that out.
If, in effect, the package delivery is helping make the First Class Mail rates less, then how do you account for that profit. I just don't understand that. Maybe you can explain that to me?
Mr. HENDERSON. Well, the Postal Service enjoys, unfortunately, a negative net equity, which means that we've lost more money than we've made since 1971. And, obviously, we have a break-even mandate. Additionally, we have some new capital expenditures, such as our new point-of-sale system. We also have a $700 million delivery confirmation effort that we are putting in place.
We are trying to upgrade the service of the Postal Service, and the 1 cent was the smallest increase in our history. In fact our popularity with our customers, for the first time in our history, actually went up. And so we don't think it's a burden on America to increase the price of postage.
Mr. BURTON. I know. I was just questioning the necessity for the rate increase since they've been in the black for 3 straight years. And I think you amortize the things that you are talking about over, what, about a 10 year period, or something like that?
Mr. HENDERSON. The $700 million is the outlay that we made to buy the scanners, so it's not depreciated over a period of time.
Mr. BURTON. OK. I guess that's about all I need to ask about right now, other than I'd still like to see that formula on how you are going to increase the rates for First Class Mail and, I guess, bulk mail and other mail. If the electronic mail takes a larger and larger part of your volume, let's say your volume goes down by 25 percent, does the formula include that being factored into the new rates?
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Mr. HENDERSON. Sure. If you lose revenue, and to some degree much of our infrastructure is hardwired because of our universal service obligation, and you have a break-even mandate, you have to generate those revenues from some other source.
Mr. BURTON. So that's why you think the package delivery is very instrumental because if you lose market share in, say, First Class Mail because of electronic transmissions then you're going to try to pick that up through the package deliveries and others?
Mr. HENDERSON. We think package delivery is important because we're the residential deliverer in America. We're the person that goes by your house every day, by your mailbox.
Mr. BURTON. I understand. But you are anticipating that if you lose market share in, say, First Class Mail that you are going to try to pick that up through the delivery of the packages?
Mr. HENDERSON. Well, we're going to try to grow, literally, all aspects of our business, but you are accurate in that statement.
Mr. BURTON. And one last question and then I'll thank the chairman. How much money did Postal Service pay in advertising for package deliveries last year? Because I see that on TV all the time, and I just wondered——
Mr. HENDERSON. I don't have that number off the top of my head but I'll be happy to provide it.
Mr. BURTON. Somebody told me it was around $230-some million.
Mr. HENDERSON. Not for packages alone, no. No.
Mr. BURTON. I'd really like to have that figure. If we could get that, Mr. Postmaster, I'd really appreciate it. Thank you very much. Thank you, Mr. Chairman.
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Mr. MCHUGH. Mi casa, su casa, Mr. Chairman. I think the chairman's original first question brings up a good point, it kind of goes to the issue of another of your amendments. As the chairman stated, certainly the Postal Service does enjoy the powers of a Government agency, along with the statutory monopoly that you have with respect to delivery mail.
One of the concerns that we've been trying to meet, and one of the objections we've persistently tried to overcome, is that you should not compete, as I think the chairman was suggesting very clearly, with private companies while you use, particularly, your non-competitive products to pay for the overhead costs, unfairly pay. So the issue of how do we end cross subsidies has been an integral part of the debate, as I know you are aware.
H.R. 22 attempts to do that through the cost coverage rule which, as you know, Mr. Postmaster General, is simply the requirement that the competitive products collectively must contribute as a group at least an equal percentage of overhead costs as all non-competitive and competitive products combined.
There is no way, it seems to me, we're going to be able to solve the chicken or the egg debate that apparently has been going on in this industry for years, where one side says you cross subsidize and the other side says, no we don't. So what we have been attempting to do is not solve the debate, but to settle the argument for the future through that cost coverage rule.
And yet, you, in one of your amendments, have suggested that cost coverage rule be sunsetted after 5 years. And I believe your contention—and if I'm misstating it, please correct me—but I believe your contention was that there are sufficient safeguards elsewhere in H.R. 22 to prevent cross subsidies so that the cost coverage rule is ''problematic,'' the word I believe your descriptive materials use.
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So I'd like to have you expand upon that, because, as you've heard from the chairman and I know you've heard, as we have, from others, the issue of the activity of cross subsidies is a very, very important one, and one that the cost coverage rule is intended solely to address. If you sunset that after 5 years, the resulting concern is that, well, there they go again. So could you comment on that amendment and on the issue in general?
Mr. HENDERSON. Sure. First, let me say we are sensitive to cross subsidies. Today in America, urban America subsidizes rural America because it's very inefficient to deliver in rural areas. So there is a built in kind of hand shake within the institution of the organization.
What we're sunsetting after 5 years is the equal contribution, not the issue of cross subsidy. The competitive and non-competitive have to have an equal contribution. What we're saying is that after 5 years we think that issue will go by the wayside. But we're not trying to hide some cross subsidy in the bill.
Mr. MCHUGH. I'm not sure why you think it will go by the wayside after 5 years.
Mr. HENDERSON. I think the organization will be fairly well defined. Once the process is put in place to define the costs, which we proposed in one of our amendments, because today we operate under a set of institutional attributable costs that go into determining a rate case, we assume that that whole assignment of a cost is going to be examined.
We will cooperate with the Postal Rate Commission in putting the process together to examine those costs. We will then hardwire what our costs are, and there won't be a question anymore of attributable institutional costs. We will design that system.
Ms. ELCANO. The other safeguard, if you will, is that there is currently in H.R. 22 a requirement that those products cover their attributable costs. And in our amendments we accept that and understand the rationale for that, and so those are covered. Those are reported to the Rate Commission. That's the other safeguard that exists in the bill.
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Mr. MCHUGH. Well, again, the amendment, it seems to me, becomes more problematic than the problem you are trying to solve, in that the cost coverage rule, as I've said repeatedly, is intended to forestall a debate that has raged here and that seems to me has no conclusion in terms of proving who is right and who is wrong.
So you institute a system that better defines the issue, No. 1 and then, No. 2, requires that certain accounting things occur without the assumption that the system will change or what you and the PRC may or may not agree to. There are, apparently, a lot of things that are embodied in a number of your amendments that are making assumptions as to what may or may not exist a few years down the road.
Now, I'm not saying you're wrong in those assumptions, but those who are relying upon the service and upon the system that we adapt to provide for them the kind of mail service they are accustomed to and need, those kinds of assumptions are very troubling.
Ms. ELCANO. There are a couple of other points and, again, it's in the eye of the beholder. As I behold it, it would look like this. There is an acceptance in the competitive area that they would be covered by anti-trust and anti-competitive statutes, and so there would begin to be some other analysis and other forums to address that.
The other thing we're concerned about, why that 5 year rule is in there, that 5 year sunset, is that some of the best information that we can get, and different conversations with different experts, is that maybe some of the bill payment activity that would go into e-commerce, the bill presentment might have a 3 to 5 year horizon.
So to the extent that that begins to crush down in the non-competitive side, there may well be changes in prices in the non-competitive side that then become an anchor on the competitive and drag it down in terms of pricing to the extent the equal contribution stays. And so, again, from our view of this, the equal contribution is not really fixing or defining cross subsidy at that point. It's a price definition, it's a control on pricing in the competitive area that's different from being market driven, market based.
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While we understand that there needs to be a transition, we thought a 5-year time period was reasonable for things to begin to settle out in terms of the e-commerce issue, in terms of setting up systems that extend better financial accounting, better evaluation of assets and liabilities, as well as some of the more specific product pricing that would go on in competitive being market driven. The other view is that as you define H.R. 22 the competitive products would need to be funded eventually, not by the Federal Financing Board, you know, not the Department of Treasury, but eventually from the private markets. The view of the world from the private, financial advisors tell us that you need to have a system in place where it's very clear who is funding what, who is borrowing what, and who is paying something back.
And so, again, from our vantage point, putting all those factors together, we thought a 5-year sunset lets the bill take its new shape, lets the Postal Service adapt, addresses the cross subsidy through the anti-trust, the attributable cost tests, which we would be reporting to the Postal Rate Commission, and begins to put the Postal Service in a position that if, in fact, there is a big drop off in that protected non-competitive area, that it doesn't drag down the other part of the competitive.
Mr. MCHUGH. Well, again, from a managerial perspective, I don't fault the Postal Service for wanting to have a bill here that provides them flexibility on the future as they may see it. But, as I know you understand, not everyone shares that same set of assumptions or sees that same vision.
Ms. ELCANO. That's right.
Mr. MCHUGH. So you are suggesting, I take it, that, if there was a cross subsidy, that would be a violation of an anti-trust law?
Ms. ELCANO. I'm not sure that that would be the violation of the anti-trust law. I think that what I'm saying is that we would be subject to anti-trust laws. We understand that products have to cover their attributable costs and that this is structured in a way—I have zero experience in anti-trust law so I'd like to either reserve an answer on that or just tell you that we understand we'll be covered by anti-trust law.
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Mr. MCHUGH. OK. Well, you used that as an example of preventing cross subsidies so I thought you were making a statement. But I'm no expert either, that's why I asked the question. Let me move onto a final point, a final concern.
As you may be aware, if you are not, and others in the room you probably will soon be, there have been a number of concerns raised with respect to so-called ''Title 39 provisions,'' the current postal laws that apply to the mailing of obscene and pornographic materials.
When we were first formulating this bill some 3 years ago, as we did in a number of law enforcement areas, we went to the Inspection Service and others and said, ''Is there anything, while we're at this activity of reform, that you might like to see enacted that would make the job easier or more effective, et cetera?''
One of the things that the Inspection Service gave us was language on how to redefine, in their opinion, more precisely the current Title 39 provisions with respect to pornographic materials through the mails, unsolicited. We were told that the language that they presented would enhance their ability to pursue those kinds of potential violators and ultimately to prosecute them. That language has stood virtually unchanged in every version of H.R. 22 for the last 3 years.
Recently a particular individual, but purportedly representing a wider universe of individuals, has raised an alarm, saying, amongst other things, that the purpose of this redesignation of Title 39 is to end effective enforcement over the mailing of pornographic materials—that the change would result in fewer, not more prosecutions, that it would subject recipients of mail to all kinds of unsolicited pornographic materials.
This is kind of off-the-beaten path with respect to Title 39, but clearly something I am concerned about. When we are given language by the Inspection Service, purportedly to toughen pornographic mailing penalties, and there is even the slightest suggestion that we are going in the opposite direction and that, as well, there may be some hidden agenda as to why we are doing it, is disturbing to me.
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This is not something I would expect you to respond to in detail today, although if you could, I would appreciate it. But, at a minimum, I would request on the record that you look at the language of Title 39, perhaps discuss it with the Inspection Service, to ensure that the language is as you and the Inspection Service wish it, and get back to us. And I'd certainly appreciate it, if you have any comments.
Ms. ELCANO. Just the main comment is you are absolutely right. There is no intention to weaken that statute or enforcement of that statute on behalf of the Postal Service. That we want to strengthen it, not weaken it.
Mr. HENDERSON. We will provide you with a response.
Mr. MCHUGH. I appreciate that. I yield to the ranking member, Mr. Fattah.
Mr. FATTAH. I think it's abundantly clear that there is significant and sincere interest in the economic circumstances of UPS and Federal Express. These are companies that I think you know complement the economic activity in our country in a very significant way.
They were established and conduct themselves in the business arena where they've made the decisions to get into this business with the full knowledge of the operations of the U.S. Postal Service. I mean, the U.S. Postal Service didn't show up yesterday nor did Federal Express or UPS.
I think it's very important, as we go forward here, that we not do permanent damage to the mandate given to the Postal Service and its opportunity to meet its mandate with some ill fated attempt to assist the private sector when the private sector is quite capable of assisting itself in many respects. And I won't bore you with the details of this, but I just think we need to be careful as we go forward.
It's very important here, given what you've said, and I think you're right, that there are going to be more significant activities from international competitors in this marketplace. And the whole issue of both attributable costs, and cost coverage, and the like, we need to, speaking in English, have people understand what it is that we're talking about.
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The first issue here is that we have taxpayers in this country who today receive First Class Mail for 33 cents and in most cases, 90 percent or better, 1 day after it's put in the mail box, it's delivered. And to the degree that we make any of these changes, it needs to be clear to people what impact it's going to have on that service, which is principally the service that most people are involved in in terms of the U.S. Postal Service. Is it going to cost them more, and is the letter that they receive going to be received in the same level of efficiency it is received now?
And then, as we move beyond that, you know, questions about how the Postal Service interacts in the marketplace both among your private sector competitors and now questions in terms of international competition. So I want to thank you for your comments today, but, obviously, we're going to have a lot of work to do as we go forward. It is of interest and of note that the U.S. Postal Service has these statutory burdens, that we talked about earlier, but also has, I think, a responsibility to try to within reason meet the terms of economic competition from those who decide to compete with you.
I think there is a difference between those that decide to compete with you and those you decide at some later date to then get in competition with in the private sector. And I think that is a distinction to be drawn there as we go forward in this work. So, thank you.
Mr. MCHUGH. I thank the gentleman. Before I call for the second panel, I had been handed a note that Chairman Burton had to go on to another meeting. We appreciate his spending such a significant amount of time with us.
But he wanted to clarify his request, Mr. Henderson, with respect to the advertising costs. He wanted to make it clear that he'd like the detail by product. In other words, I assume, as much a line item by item breakdown as you could, rather than just a lump sum advertising budget.
Mr. HENDERSON. We'll provide that.
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Mr. MCHUGH. Thank you. With that, we do have a substantial number of questions, as I'm sure you understand and as is the rule, to present to you for the record. As you have done in the past, we would appreciate your consideration of those and respond by providing us with that material as well.
Again, Postmaster General William Henderson, General Counsel Mary Elcano, we thank you for being here this morning and, based on your response to my very first question, I'm looking forward to working with you further on H.R. 22.
Mr. HENDERSON. Thank you, Chairman McHugh. And I'm going to be leaving, I have a commitment. It's not out of lack of interest in what the other witnesses say, but I do have a commitment out of the country this evening. So ''Adios'' is not being uninterested. Thank you.
Mr. MCHUGH. Well, we understand. Have a safe journey and come back to us soon. Thank you.
[Additional questions for Postmaster General William J. Henderson and responses follow:]
Offset folios 134 to 166, and 045–47 insert here.
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Mr. MCHUGH. Our next panel, as I mentioned earlier, is comprised of the five commissioners of the Postal Rate Commission. Chairman Edward Gleiman; Vice Chairman Trey LeBlanc; Commissioner George Omas, a face not unfamiliar to us who have plied the House Chamber, a good friend and former staff member at the committee; also, Commissioner Ruth Goldway; and Commissioner Dana, also known as ''Danny'' Covington. So we welcome you all here today. Before you are seated, while you are up standing, let me rise and we can administer the oath.
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[Witnesses sworn.]
Mr. MCHUGH. The record will show that all of the commissioners responded in the affirmative. So, again, welcome. We're glad you are here this morning. I will open with Chairman Gleiman, who is certainly no stranger to this committee room or certainly to this subcommittee. And I add, we welcome you back.
Having spent a good part of my last several days reading your extensive testimony, it was enthralling I assure you, page after page after page of it. I sound facetious and I should not. It was very thorough, very, very responsive and detailed. I do appreciate that because you gave us a great deal of not just food for thought but substance for thought, as well.
As I know you understand, time totally precludes us from your presenting that in its entirety. So we will, of course, submit that for the record in its entirety. We'd appreciate if you could point out those particular highlights that you think are most relevant here this morning. Although having read it, I can tell you that whatever you choose to focus upon will be relevant, because it was all very relevant and very helpful. So, welcome and thank you for being here.
STATEMENTS OF EDWARD J. GLEIMAN, POSTAL RATE CHAIRMAN, ACCOMPANIED BY W.H. ''TREY'' LeBLANC, VICE CHAIRMAN; GEORGE A. OMAS, COMMISSIONER; RUTH Y. GOLDWAY, COMMISSIONER; AND DANA B. ''DANNY'' COVINGTON, COMMISSIONER
Mr. GLEIMAN. I do feel at home with Jack Brooks staring down at me. I sat up there and had him do that occasionally during my 10 years as a staffer on the predecessor committee, the Government Operations Committee. I was somewhat relieved when I heard your opening, which indicated that this was not the impeachment hearing room. I was actually very relieved, because I know you read our testimony, and I was concerned that after reading it you might want to make it the impeachment hearing room.
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Mr. MCHUGH. Not at all.
Mr. GLEIMAN. We do have a lengthy submission for the committee today. Before I start, let me introduce my colleagues, if I may? Vice Chairman LeBlanc is with us today, as well as Commissioners Omas, Goldway, and our newest commissioner, Commissioner Covington.
I have a summary that I've attempted of the testimony. I also have the short version, the shorter version and the shortest version. I think inasmuch as you've read the testimony, and I hope others will read the testimony, I'm going to go to the shortest version. If you want more, you'll tell me.
H.R. 22 with some fine tuning, save the private law corporation where we have some serious concerns, would appear to be workable. It would appear to provide an opportunity for the goals that were established at the outset, concerns over unfair competition, non-postal products, and losses of revenue due to decline in volume—not market share but volume—that the Postal Service is facing. These problems can be adequately addressed, with some tinkering, by H.R. 22.
Having said that, it is our considered opinion, by and large, that the Postal Service amendments are directly contrary to many of the bedrock principles of H.R. 22. The Postal Service amendments seem to erase many of the checks and decalibrate almost all of the balances that have been carefully and thoughtfully incorporated into the bill in response to the concerns of interested parties.
I could discuss at length the private law corporation at this time, if you would prefer, but, if not, we can go right to your questions.
[The prepared statement of Mr. Gleiman follows:]
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Mr. MCHUGH. Let me ask about the private law corporation. Before we do that, Commissioner Goldway has presented testimony which we will submit its entirety in the record. Commissioner, we thank you for that extra effort and welcome you, all of you, of course, but I believe this is your first hearing? Welcome. Be careful what you pray for, Commissioner.
[The prepared statement of Ms. Goldway follows:]
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Ms. GOLDWAY. Thank you
Mr. MCHUGH. I am aware, Mr. Chairman, that you have concerns about the private law corporation and we do need to probe those and discuss them. But, first, let us spend a little time on the Postal Service amendments. A great deal of your prepared testimony was spent, I felt, in addressing those issues.
Now, you heard me discuss, for example, the cost coverage rule, the 5 year sunset of that, and the suggestion by the Postal Service that they be the determiners of what is non-competitive and competitive, versus the process defining H.R. 22, involving more market oriented procedures, and such.
Let's spend a little time, if you would, filling out the record in a counterpoint, for lack of a better description, of what the Postmaster General just said. Let's start with the cost coverage rule.
I know you heard my comments, the concerns about doing away with that provision after 5 years. You heard in response both the PMG and the General Counsel's view about a future of the Postal Service and a process by which, after 5 years, that cost coverage rule becomes moot, in their view, at best, and at worst becomes a negative thing in terms of a pricing burden on a product that in theory is supposed to be competitive. I'd like to hear your views on that.
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Mr. GLEIMAN. Well, first let me say that, as I recall, H.R. 22, as reported out of the committee last fall and as reintroduced this year, does contain a provision that allows the Postal Service to approach the Postal Regulatory Commission and ask for adjustments in the nature of the equal contribution provision. So, to the extent that something is going to happen over the next 5 years, or however many years, that could impact negatively, there is a mechanism built in now.
The big problem with the Postal Service's proposal to sunset the contribution requirements on the competitive side has to do with where the money to cover overhead is going to come from. There is an issue that we've all been wrestling with about when the first class monopoly volume is really going to decline. And one of the reasons that we're all involved in this and have been for a number of years is the fear that we need some way to cover overhead costs.
The Postal Service's proposal that in 5 years there doesn't have to be any contribution rule, or any contribution for that matter, would indicate that we're not going to be able to solve the problem associated with declining first class volume. Even assuming that the Postal Service is positioned to shed volume variable costs, it will still have substantial fixed, overhead costs that it will have to cover. I don't know where it expects that money to come from, if it doesn't expect, in year 6, for the competitive products to make some contribution. But doing away with the mark-up is exacerbated in a sense, as are several other provisions of the bill, by the Postal Service's proposal to define product at the subclass level. If all you have to do is cover costs at the subclass level, and you don't even have to make a contribution, just think about what happens with offerings or rate categories within a particular subclass. Where they think they've got something close to market dominance, which they can have under their proposal in the competitive area, they would be encouraged to go for higher rates and maybe below costs rates for subordinate units, as the bill calls them. And I think that there is potential for a great deal of hanky-panky.
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Ms. Elcano, as I understood her, said, ''Don't worry about it, there are provisions in here which apply the anti-trust laws.'' Well, you know, a lot of the Postal Service amendments would weaken the antitrust protections and the other playing field leveling provisions that you have included in H.R. 22. And even assuming that she's right, anti-trust suits take 1 1/2 years, 2 years, 3 years, I don't know. I have a law degree, but I haven't been to court in an anti-trust case.
I imagine that with the opportunity not to have to worry about marking up your products and only covering costs, and then having some sub-units where you could be below cost, that you could do some fair damage to the private sector.
Mr. MCHUGH. Also, let me say, when I address my questions to the chairman they are by inference addressed to any of the commissioners. If any of you at any time want to add or expand upon anything that the chairman is saying, please feel free to do so.
Mr. GLEIMAN. You'll be disappointed to know that Vice Chairman LeBlanc has laryngitis today and probably won't be able to offer additional comments.
Mr. MCHUGH. I'm heartbroken. Well, I wish you a speedy recovery sometime later this afternoon. You also heard the response to the concerns that we have heard that I conveyed to the PMG, with respect to their amendment that would propose that they define competitive versus non-competitive.
You may have also heard the general counsel's response with respect to single piece international mail and the fact that they have a court case going now. And that again in the future they envision a time when it would indeed be competitive. Do you view that amendment as a helpful one or as one that better balances the playing field, as we like to say, in this process?
Mr. GLEIMAN. I do not think it better balances the playing field. I also heard the Postmaster General comment at another point in his presentation, in response to a question that you asked, that almost every Postal Service product, or something to the effect of, has competition in one way, shape or form.
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As for the argument that there is something in a lawsuit somewhere that may imply that single piece international should be in competitive, I guess you could extend that argument and say that, well, letter mail, which is part of the monopoly, is in competition, we've all heard it time and time again, with evolving technologies.
Everybody is worried about electronic bill paying, so why don't we just move everything into the competitive basket or the competitive side of the ledger and get it over with now? That's how I would read the Postal Service's position. I just think it's not well taken.
Mr. MCHUGH. You have, and let me state for the record, in the body of your testimony a series of amendments that you suggested that, in your opinion, could make the bill more ''finely tuned,'' to use your phrase.
I will respond that, just at first blush, many of those amendments did indeed appear to be some things that we not only can, but should and will, take under consideration. I won't go into a list of those now, but we undoubtably will want to get back to you on ensuring that, as we go forward, we're formulating something that you indeed intended and envisioned, and I appreciate that.
Mr. GLEIMAN. Mr. Chairman, perhaps I should have said this at the front end, but Bill Henderson talked about the relationship between the Postal Service and the Postal Rate Commission in the past few years, and he was right. It's a much better relationship than it has been during many years since postal reorganization in the early 1970's. A lot of that has to do with Bill Henderson's attitude.
I think it's important for you to know that we talk with the Postal Service frequently about the bill. They initiate the conversations. We initiate discussions with them. We don't always agree with them, but they have a perspective that they need to present, and I understand that where one sits is where one stands on issues.
I think it's important for you and for everyone else who is involved in this to understand where the Rate Commission sits. It is an interesting place because we, and you can take me at my word, are not presenting views which are intended to perpetuate a bureaucracy.
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Our concern is that whatever comes out in the way of H.R. 22, if and when it's enacted into law, is good for the American public, the mailing public, the Postal Service. Our amendments and the proposals that we offered, as well as our critique of the Postal Service amendments, are all offered in that vein.
Mr. MCHUGH. I do take you at your word. I do take it not just as your word today, but, in some of your previous testimony, some of your frankest observations have been with respect to what you view as the possible inability of the PRC, under the current structure, to do a task that was being envisioned. That's a very frank assessment.
I took from that, as you just noted here today, that your overriding interest is that whatever we craft is, when taken together, better than what we have today and continues to provide the kind of postal service that Americans have come to expect and to enjoy. But I certainly understand and appreciate your comments.
I was speaking about some of the suggested amendments that you had made and how we felt there was some room to move on a number of those. One of the suggestions that you made is with respect to work sharing discounts. You spoke about how you felt there was the need to put in language that somehow stipulated that work sharing discounts should only be allowed when there is a cost savings realized.
Understanding right now that that is the motivator of work sharing, explain or expand, if you will, a bit on why it is your concern that the Postal Service may find itself in the future doing work sharing agreements that don't result in cost savings. I mean, it seems to me it's kind of a sine qua non of the process. How does it get turned around?
Mr. GLEIMAN. Well, if you are interested in retaining volume that you have and or competing with, whether it is Deutsche Post, the Royal British Post Office, UPS, or Federal Express, you might be moved to provide discounts which are in excess of what is appropriate under certain economic considerations.
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One of the principles, I think, that underlies this effort that you've undertaken is that we have an efficient system. I use the economic concept, efficient component pricing, in conjunction with the discussion of work sharing discount.
What we're talking about here is that the Postal Service, should offer discounts that reflect the costs that are avoided as a consequence of work sharing—not more and not less. That's what we strive for under the current ratemaking process, 100 percent pass through of cost avoidances. If the Postal Service sticks to that then mailers, users of the mail, are in a position to make decisions based on the economic dollars and cents.
If the Postal Service passes through 100 percent, and I can do it cheaper, then I'm not going to use the Postal Service. That's good for the overall economy. If I can't do it cheaper, then I am going to use the Postal Service, and that's good for the overall economy too, as well as for the Postal Service. So we think it's a very important concept that ought to be specifically included in the legislation.
Mr. MCHUGH. So you are simply concerned about, in the competitive area, volume and not losing volume at any cost to a potential competitor?
Mr. GLEIMAN. You could have work sharing discounts in the non-competitive area, both monopoly and non-monopoly non-competitive areas. I think that it's a concept that should be applied across the board. The Postal Service could, for example, introduce a drop ship discount for First Class Mail which does not now exist.
One would assume that the sensible thing would be to have a discount that reflects the costs that are avoided as a consequence of mailers drop shipping. I don't see any good reason for the Postal Service to offer larger discounts but, theoretically, they could under the price cap scheme. I don't think that they should. It would not be an efficient thing to do.
Mr. MCHUGH. In a similar vein, NSAs. Under H.R. 22, there is a prior notification requirement to the PRC, et cetera, another one of the amendments that the Postal Service has submitted. I did not raise this question directly to the PMG, but we will submit it in written form—that they would delete that prior PRC review.
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The question I would have for you is, what would the effects of that be in your judgment, good or bad or indifferent? Assuming you are concerned about the loss of that provision, could something like a public notice, even without PRC prior review, take care of some of those concerns? Or is there some other role that we could develop for the PRC that might make the Postal Service's amendment, in your view, more workable?
Mr. GLEIMAN. I think at the very least there has to be public notice. What the Postal Service is proposing is to have something akin to secret, non-tariff rates. The bill, H.R. 22, provides an opportunity currently for parties to raise questions about negotiated service agreements. If they are secret, how are you going to know whether to raise a question?
If they are secret and you are similarly situated to the party that the Postal Service is dealing with, and the bill provides that the NSA should be extended to similarly situated mailers, how are you going to know that there is something that, you want that somebody else is already getting?
So I think at the very least there needs to be public notice in advance. I mean a full public notice so that others can understand what it is that they might want to go after themselves.
Mr. MCHUGH. Well, is the ''very least'' good enough? I hear what you are saying and you feel that that's an absolute necessity, but where is your comfort zone?
Mr. GLEIMAN. Well, my comfort zone is with the bill. I suspect we could live with a little less, as long as everybody understood there was an after-the-fact review; and, that there were, indeed, liquidated damages provisions that could be enforced in the event that the Postal Service either noticed, or didn't notice, an agreement to the public that was a poor agreement and/or where the other party to the agreement did not live up to its end of the bargain. But I would much prefer the provision in the bill.
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Mr. MCHUGH. How long a period of review do you think is necessary by the PRC? In other words, if the bill were to mandate a certain review period, do you have an idea what that timeframe might be?
Mr. GLEIMAN. That's a tough one because we're getting into a new area and there are some underlying questions. The thinking at the Postal Rate Commission has evolved substantially on negotiated service agreements. Whereas we had some really serious reservations before, our reservations are somewhat limited now.
But there are issues involving how the negotiated service agreements would be costed out; whether the costing would be bottoms up, subclass costing, or whether it would be a tops down cost avoidance approach. This is what is used now in ratemaking. Those issues have to be discussed in order to determine how long it is that we need to review an agreement.
The other issue is, who knows how many agreements there are going to be? Just like the Postal Service wants flexibility, I guess we would like a little flexibility on this one, too.
Mr. MCHUGH. Fair enough. Going back to an original question, and just so I've got it on the record, and I think I could deduce it from the previous answer. But, is my assumption correct that you would not agree that, under the current system, international Aunt Minnie mail ought to be competitive?
Mr. GLEIMAN. I think the bill has it split up right on that one, as it stands. We do have some questions, though, about some aspects of priority mail. If you use the market dominance test as a determinant, what goes into the competitive arena? It appears to us, although we don't know for sure, and we would have to have some information to look at to make a better determination, it looks to us as if in some areas the Postal Service may have what's tantamount to market dominance.
So while I like most of what is in the bill, in terms of how it has split up competitive and non-competitive, I think that we all, the committee, the Postal Service and the Postal Rate Commission have to look a little bit more carefully at these fairly large service offerings like priority mail.
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Mr. MCHUGH. Well, that's what you like about the bill. Let's go to something that you may not find, you do not find as attractive, and that's the provisions of the private law corporation. Rather than form a leading question, I'd like to just allow you the opportunity to kind of define or describe your view and your position, and maybe we can go from there.
Mr. GLEIMAN. I don't want to hog the microphone, and I would invite my colleagues to jump in at any time on this.
Mr. MCHUGH. Especially if they disagree with you on this one, I would urge them as well.
Mr. GLEIMAN. As I recall, when we first started talking about postal reform, and this may have been before you arrived on the scene, although it was mostly talk and no action before you arrived on the scene, there were a couple of problems and concerns that people had.
One of the concerns was expressed by the private sector, which felt that the Postal Service was embarking on non-postal activities and was using monopoly moneys to underwrite their forays into these new non-postal areas. Some of these activities had no nexus whatsoever to anything postal. So the question was: How do you make sure that there is a level playing field and that a monopoly is not there as the underwriter?
The other big concern was that—let me step back a minute. The Postal Service felt, and many large mailers supported them, that it had to get involved in non-postal activities because that was a source of new revenue. We all know the Postal Service is going to need new revenue to underwrite its universal service obligations when First Class Mail volume, and perhaps other mail volumes, flatten out or decline.
Now, let's look at what we've got. We've got a private law corporation, which I believe was intended to address those problems by helping out on the finance side of things. There is no requirement, and I want to emphasize ''requirement,'' because I know there is a provision saying something can happen, but there is no requirement that if the private law corporation is wildly successful and makes a lot of money, that it has got to feed any of that money back in to underwrite the universal service obligation.
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We recommend that if you do go ahead with the private law corporation, than at the very least there be a requirement that if the corporation make money, that money be paid back to the Postal Service to underwrite the universal service obligation—to deal with the problem we all know is 3, or 5, or 10 years down the road.
On the product side of things, we have the monopoly in a position where it's going to indirectly fund non-postal products. By the way, it's not altogether clear the Postal Service will ever make any money with non-postal products. The track record, as evidenced by a GAO report prepared for you, indicates that the Postal Service is not all that strong when it comes to getting out there and competing in a non-postal area.
The money for the private law corporation, in the bill, comes from the competitive product fund. The fund can transfer excess contributions or surpluses, after the equal contribution requirement is met. That's not all that bad. It certainly is an improvement over the current situation. But it appears as though the Postal Service wants to take PLC funding much further.
And even before you get to the Postal Service amendments, there is a discussion—and these discussions have taken place at the staff level and higher between the Postal Service and the Rate Commission, the committee is aware of them—of mechanisms for funding the private law corporation.
For example, there has been a suggestion that one thing you can do when you distribute the assets to the competitive box and the non-competitive box, is have the competitive side sell its assets and lease them back. Then you can take the revenue that the competitive side has earned from selling its assets to the Postal Service's non-competitive side, and use this money to further fund the private law corporation above and beyond what I think your bill initially considered, which is that surplus in the competitive fund.
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Now, along comes the Postal Service, and the Postal Service wants to sell stock to the public. I suspect that if stock is sold to the public, that the stockholders are going to put pressure to be paid dividends, which is going to lessen the likelihood that any moneys are going to flow back over the fence to the Postal Service side. You know, it just gets very dicey.
Probably most troublesome, by the way, is the question a moment ago about the sunset after 5 years of the equal contribution provision. The Postal Service doesn't say that it's not going to mark up competitive products. It just says that it does not want to have to be worried about making a contribution over to the Postal Service side. It wants to have all the money that it makes on competitive products, both related to the cost of the products and related to any mark-up over the cost of those products, to be transferred into the private law corporation.
Step back to another Postal Service amendment. The Postal Service wants to be able to transfer whatever it wants, without regard, over to the competitive side. Anything that's not monopoly can go over to the competitive side. So you are left with First Class, Standard A letters, and a few other little things, that are covered by the monopoly. Everything else goes over into the competitive product area. Then you take all the money you make in a competitive product area, and you throw it over the fence into the private law corporation.
I thought we were all concerned about the monopoly captive audience. I thought we were all concerned about doing something to ensure that we were going to be able to meet the universal service obligations. The Postal Service's amendments seem to indicate that it is not all that interested in that, that it is more interested in the competitive aspects of this and in the private law corporation aspects. In terms of, you know, the financing has evolved, the role has also evolved.
I thought that you wanted them to be able to undertake some activities again in the non-postal area. Now the feeling is that it could transfer postal products. You could read the bill to allow the Postal Service to transfer everything, and I do mean everything, including the monop