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.
    [The information referred to follows:]
    Offset folio 121 inserts here.
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    [The official committee record contains additional material here.]
    [The official committee record contains additional material here.]

    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.
    [The official committee record contains additional material here.]
    [The official committee record contains additional material here.]

    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:]
    Offset folios 171 to 211 insert here.
    [The official committee record contains additional material here.]
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    [The official committee record contains additional material here.]

    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:]
    Offset folios 213 to 220 insert here.
    [The official committee record contains additional material here.]
    [The official committee record contains additional material here.]

    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 monopoly products, over the fence to the private law corporation.
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    The bill says that the Postal Service has an obligation to meet this universal service obligation. It does not say that that Postal Service has to have letter carriers, it does not say that the Postal Service has to have mail handlers, it does not say that the Postal Service has to have clerks to collect, process and deliver that mail.
    The private law corporation provision is, and this is a constructive criticism, please understand, it is written in a manner which would allow the Postal Service to contract with the private law corporation, which is not obligated, by the way, to use union labor, to perform all the functions that are necessary to fulfill its obligation, leaving you with a hollow virtual Postal Service, if you will; a couple of floors at 475 L'Enfant Plaza where there are some contracting officers; a few policy people; maybe somebody to come up and testify occasionally. Those are some of the concerns that we have.
    But, again, when it comes to non-postal products, the private law corporation in the narrow sense is a better approach than what we now have, where there is a free ride on the back of monopoly revenues.
    Mr. MCHUGH. Well, I won't say it sounds like a chapter in the X files, but you've thought the line out to——
    Mr. GLEIMAN. It may be a chapter from the X factors, though.
    Mr. MCHUGH. Flashback.
    Mr. GLEIMAN. I think that the comments that we've made are fairly far reaching. But we've also noted that the private law corporation first appeared in H.R. 22 when it was marked up last fall. This is the first time there has been a hearing where anybody has had an opportunity to comment. In this set of hearings, it's the first time anybody will have had an opportunity to really talk about H.R. 22's private law corporation provision.
    I take you at your word when you have said repeatedly that this is a work in progress. We would like to see it progress, but we would like to see it progress in a manner which is going to deal with the problems that we all thought we were trying to deal with at the outset.
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    Mr. MCHUGH. Your point on the first opportunity is correct. A lot of what you said is a fundamental, or I should say a philosophical, question, much like is there cross subsidy or not. We could argue or discuss for quite some time. As I know you understand, the current system has no requirement that there be clerks and postal delivery people. Indeed, if you turn to some of the gentlemen behind you, I think they would readily voice concerns about what they view to be the privatization in place, if you will, already of many traditional postal services through contracting out and such. So I don't know as I would agree we may not be solving that problem, but I don't agree we'd be creating it anew here.
    Mr. GLEIMAN. Mr. Chairman, what the bill does is put the imprimatur of law behind contracting out. You are absolutely right. It's not prohibited under current law, but there is nothing under current law that can be read point blank to endorse that type of activity. I think there are reasonable people who will read the provisions and assume that it says this is OK.
    But, you know, I think that the real issue here is taking a couple of steps back and asking the question, does the Postal Service really have to be involved in non-postal activities? The only reason I raise this is because we're all concerned, I think, about finding a way to make sure that we have a Postal Service that has sufficient funds, in the face of declining volume at some point in the future, to continue to provide the services that the ranking member talked about earlier.
    Mr. MCHUGH. The necessity in a political world to craft a bill that can be passed and signed into law, and a bill that tries to, as effectively as it can, respond to the very legitimate concerns of corporate America and private enterprise that feel that indeed under the current structure they are being asked, totally contrary to their philosophical view of capitalism in the longest lived democracy in the history of the world, to compete against a highly subsidized one in terms of government monopoly. And that's the challenge we have.
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    I want to just go back to the point about what H.R. 22 does or does not do. Without rejecting out of hand your interpretation, I would suggest again that practice has shown that the current structure has no prohibitions against privatization, and it is being done. H.R. 22 does in no way expand upon what currently exists in that regard, notwithstanding your concerns and not discounting your concerns.
    But I don't want any one to leave this room under the impression of a point that I don't think you are making. There is nothing explicitly in H.R. 22 that calls for or in any way expands upon current law. I understand the point you've made twice now, but let me just add a couple of other things.
    One of the other intents of the private law corporation, beyond those you described that talk about the monopoly underwriting the competitive or non-postal activities, the need to provide opportunities in the future for the Postal Service to add to its current fiscal structure through non-postal opportunities, but it was also to try to shield captive rate payers from the current practice where they and they alone are the financial carriers of any kind of ill-advised experiment in non-postal products.
    You mentioned very accurately, and I think we all know this through our own experience, but as the GAO report, as you said we requested, recently illustrated, the track record of the Postal Service on these non-postal products in terms of the economics of it, and they would argue, by the way, we've not had a long enough history of it, there are many other reasons for it but, nevertheless, the picture as it stands today has not been positive. Those failures have been, would you agree, have been borne totally by the captive rate payer?
    Mr. GLEIMAN. There is no question about that. Let me repeat again what I said before, and what is in our testimony. In that regard, H.R. 22 is an improvement over current law. It shields, to a degree, a monopoly player from bearing a burden of allowing the Postal Service to get involved in non-postal activities. Also, as there are no requirements today that postal employees be unionized, there is no prohibition in H.R. 22 that any future activities they would do through the private law corporation would not be unionized.
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    Mr. MCHUGH. And I suspect that when as H.R. 22 requires the shareholders and the sole interest in the private law corporation must be held by the U.S. Postal Service, that when our union friends go to the bargaining table in 2008, the year after I said if we had started today H.R. 22 would be in effect, they might indeed be talking about the activities of the private law corporation to the CEO and chairman, who I assume would be the Postmaster General, about the opportunities for union employees in the private law corporation.
    Mr. GLEIMAN. I'm sorry, did I—I don't know whether I understood you just now——
    Mr. MCHUGH. Good, because I didn't understand a lot of what you said either. What I'm suggesting is there is nothing in H.R. 22 that would preclude—you mentioned there is nothing that requires employees that they hire be union. And I said there is no requirement for that currently on the baseline within the Postal Service. And in the comment I said there is nothing that would preclude, under H.R. 22, any employee hired under the private law corporation to in fact be union.

    And that I suspect, and this is based only on about 15 years of experience in negotiating various employee contracts at both the State and Federal level, that when the union representatives for the more than 700,000 union employees of the Postal Service would go in and talk to the Postal Service management, who also would be the representatives of the sole stakeholder in the private law corporation, they might talk about hiring union employees as part of the private law corporation. Not that there would be any direct fiscal link or legal link, but I bet that would happen.
    So all I'm suggesting is, I don't know as it is a valid critique—it's valid but I don't know as it's relevant to say there is nothing that would require those employees to be union, other than to get the attention of the first row here [indicating union representatives].
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    Mr. GLEIMAN. Mr. Chairman, all I'm suggesting is that this is a new concept that was added to a bill that was marked up last fall. It has not been examined in great detail in public. I think there is ample opportunity for people to agree with you and/or with me. What I think is necessary, and what we said in the written statement, is that we think that there needs to be a careful and thoughtful examination of just what's intended. I go back to my original point: If the private law corporation, whatever it does, is not going to provide sufficient revenues, and those revenues are not required by the bill to be plowed back into the monopoly side or the non-competitive side, then I'm not sure what useful purpose the bill serves.
    You said the purposes were opportunities to add to the current stable of products and develop new funds and to shield the monopoly. I don't disagree with you. I just think that we have to look at the realities of the situation and some parts of the bill as drafted. If we want the money that the corporation may make, whatever you ultimately decide it should be allowed to do, to benefit the monopoly, then we ought to have a requirement to that end.
    We ought to have some checks and balances to make sure that if those Postal Service amendments are accepted, that the Postal Service hierarchy doesn't just use the Postal Service as a cash cow to fund the private law corporation. It's down to that. I assume we'll have some discussion. I would like to think we'll have some discussions about it.
    Mr. MCHUGH. We will. And your points are excellently taken. So to sum up on that issue. You are concerned about the permissive nature of H.R. 22 which permits, allows for, a contribution back. You feel it would be more appropriate if there was some sort of requirement of a contribution back. I'm not terribly troubled by that component. What the challenge then becomes is, how do we do that percentage, based on what determination? So we need to talk.
    Mr. GLEIMAN. Please listen carefully. This may be the only time in my life I ever give a one word answer. Yes.
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    Mr. MCHUGH. Good. I would be happy to yield to the ranking member, Mr. Fattah.
    Mr. FATTAH. Thank you. I'm at somewhat of a disadvantage. I told you I had Secretary Riley over in the other room. But let me thank you for coming forward. And, as I understand from your written testimony, and I wasn't here for some of the back and forth, well, let me ask you like this. The price cap issue, your position on that is what? And it doesn't have to be one word, but brevity is helpful.
    Mr. GLEIMAN. I think with some fine tuning the price cap approach can work. There are a couple of issues that I think need to be dealt with. We understand and feel that the price caps would be set at the rate element level—the rate cell level, excuse me. Most of us think that this is an appropriate place to set the price caps.
    The Postal Service feels it should be done a different way. We disagree with them. The way they would propose it, to set it at the subclass level, would allow for below-cost pricing under the subclass. We don't think that's consistent with one of the basic premises of the bill, which says everybody ought to pay his cost.
    The Postal Service also proposes some modifications to the nature of price caps. And these modifications are a bit troublesome in that they would provide for larger increases. Now, when this question was asked, and I can't recall whether it was you or one of the other Members who asked the question of Mr. Henderson, the response was that, well, when it comes to the first basket, First Class letter mail, don't worry, we can't go over the price cap. And that's right. They've set a band of 2 points below the price cap and zero above, but they've only set that for First Class letter mail, the Aunt Minnie basket. When it comes to baskets two, three and four in the Postal Service proposal, which has business First Class Mail, and has Standard A mail, and periodicals, the Postal Service has given itself a bit more discretion. There it says that prices can go up as much as 1 1/2 points above the cap.
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    If you use an example, and I don't want to confuse anybody with this, but if you assume inflation is 3 percent, and then under the proposal in the bill the Rate Commission knocked off 1 percent so that the price cap was 2 percent, rate increases for all mail would be somewhere between 0 and 2 percent.
    Under the Postal Service's proposal, again 3 percent inflation but no adjustment factor, it would have you set rates at anywhere between 2 points below the cap, which in its case is 3 percent, or 1.5 percent above the cap. So, under the Postal Service amendments, the rate increase, in the same situation with the same inflation, could range for advertising mail or periodicals, what have you, between 1 percent and 4.5 percent.
    I would submit that if one of the basic premises of the bill is to tighten up, then we don't want to have a range of price increases from plus 1 to plus 4.5. We want to have a range of price increases between 0 and 2. It's better for the mailer, and it's better for the economy as a whole.
    Mr. FATTAH. The interaction, as you see it, and H.R. 22, as proposed, that would rearrange to some degree the third principle you talk about in your comments, this competition, notion of a fair playing field. It's hard, as I grapple with this.
    The Postal Service is more than just a competitor to these other players in the market. It has these other burdens, other responsibilities, and other restrictions on it. And I'm interested in how you see, assuming H.R. 22 is passed without amendment, without any of the amendments that have been offered by the Postal Service, do you think that would create a fair playing field?
    Mr. GLEIMAN. I'm sorry, I couldn't hear you?
    Mr. FATTAH. Do you see H.R. 22, as it exists in its present form, creating a fair playing field, in terms of competition?
    Mr. GLEIMAN. By and large, yes. We've offered a list of what we think are relatively modest amendments; proposals that I think would sharpen up the bill. But by and large, yes. When I say that, let me just say that I have some heartburn about the private law corporation. But if you are dealing with how the rates are going to be set, boxes one and two, of the three boxes, the non-competitive and competitive, I think it's workable. I think it's doable.
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    Mr. FATTAH. The private law corporation issue, I understand you have some concerns about it, is an opportunity for mischief to take place?
    Mr. GLEIMAN. I think that we need to explore it further. And, we had some specific suggestions there, also. For example, we think that more of an arm's length relationship has to exist if there is going to be a private law corporation. Right now the directors of the corporation are appointed by the directors of the Postal Service.
    There may be, and I don't have off the top of my head another way of getting those folks in place, but perhaps there is another way that would insulate them somewhat from dealings with the Postal Service, make it arms length. Also we're concerned about postal employees moving over to get higher salaries in the private law corporation.

    Mr. FATTAH. I know this is a pet peeve of yours, so I don't want to get too mired down in this yet. But let us just go back to this issue of competition for a minute. Is it your view that the public's interest is served by this fairer competition that would be an outcome of H.R. 22? I'm differentiating the mailers and the other stakeholders from the public in general.
    Mr. GLEIMAN. I think all of you, especially the chairman, have worked very hard at this and if you haven't leveled the playing field, you've come darn close to it. I'm not sure, how much closer you can come. In that sense, I think, yes, the public would generally be served. We have some concerns, again, about the burden shifting and the like, but I think that they can be dealt with in a reasonable manner with modest amendments.
    Mr. FATTAH. I'm going to yield back.
    Mr. MCHUGH. Well, I thank the gentleman for his questions. Again, I would invite any of your fellow commissioners——
    Mr. GLEIMAN. I'll lean back and push the mic away.
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    Mr. MCHUGH. I'm not trying to move you off stage, Mr. Chairman, but I just have some very knowledgeable people here. Commissioner Omas.
    Mr. OMAS. Mr. Chairman, I don't know that I have a whole lot to add. I do agree with the chairman on many of the issues. But I, too, share his concerns about the management of the private law corporation, how do you separate the Postal Board of Governors and the management structure of the governing body of the private law corporation? That is probably my biggest concern.
    I think the bill as drafted is fine and you should be commended. H.R. 22 is a good bill and I think it's a workable bill. Mr. Chairman are to be commended on how you've managed to get everybody to the table. I thank you for this opportunity.
    Mr. MCHUGH. Thank you, George. Well, and as I said in my opening remarks to the chairman, and the chairman's comments, I understand, are the collective thoughts and works of the entire Commission, there was a very substantial amount of work and thought and analysis that went into that and I do deeply appreciate it. And there are areas that we want to explore further, as I indicated to you, particularly where you have made, as you indicated to the ranking member, some suggestions for changes. We want to pursue those.
    I will go back to my comment about the willingness that I have to re-examine the issue of contribution from the private law corporation to the Postal Service to the non-competitive, and what might be able to be constructed, if anything, to make that more clear than it currently is. I do not discount your concerns. More than that, I understand them and share them and if we can develop an approach, I would support that.
    So as with past practice and as I indicated to the Postmaster General we will have some written questions. In the past you have been very gracious in responding to them and we'd appreciate that in the future. But thank you all for your good and hard work, and we're looking forward to working with you. We appreciate it.
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    Mr. GLEIMAN. Thank you for the opportunity and we look forward to working with you, too.
    Mr. MCHUGH. Thank you, Mr. Chairman.
    [Additional questions submitted to Mr. Gleiman follow:]
    "The Official Committee record contains additional material here."

    [The official committee record contains additional material here.]

    Mr. MCHUGH. The next panel is comprised of the management associations. As we're in the process of changing the name placards, we are pleased to welcome today the president of the National Association of Postmasters of the United States, Ted Carrico; the president of the National League of Postmasters of the United States, Joe Cinadr; and the president of the National Association of Postal Supervisors, Vince Palladino. Welcome, gentleman.
    We have a substitute in the line up. Now playing, Vince Palladino will be——
    Mr. KEATING. My name is Ted Keating. I'm the executive vice president for the National Association of Postal Supervisors. Mr. Palladino was called home to New York last night. His father is critically ill. He expresses his regrets at not being here this morning.
    Mr. MCHUGH. Well, that's very, very sad and troubling. Please express our best wishes to him, and particularly his father, our concern that he have a full and speedy recovery. But we do welcome you and thank you for being here and for sitting in in representation of the National Association of Postal Supervisors.
    I'm sorry I allowed you to be seated before we administered the oath, so if you will bear with me, please rise.
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    [Witnesses sworn.]
    Mr. MCHUGH. The record will show that all three witnesses responded in the affirmative to the oath. With that we will, as in the past two panels, say that all of your prepared testimony will be submitted in its entirety to the record. We would ask as we yield to you if you would summarize your comments and make those kinds of observations as you see fit.
    So, again, welcome. And we'll proceed in the order in which you are represented here today, beginning with President Carrico of the National Association of Postmasters. Welcome. Good to see you again.

STATEMENTS OF TED CARRICO, 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 ASSOCATION OF POSTAL SUPERVISORS
    Mr. CARRICO. Thank you Mr. Chairman, members of the subcommittee. I am Ted Carrico, the Postmaster of Palisade, CO. I also have the honor of serving as the national president for the National Association of Postmasters. We represent more than 45,000 active and retired postmasters who ultimately are responsible for the quality of mail service provided to cities large and small, as well as to those areas which have no definable municipality.
    Palisade, CO, is located in a rural area of western Colorado, much like the hamlet in upstate New York that you call home. As you know, we have some different needs in rural America than the rest of the community. H.R. 22, I think, addresses those needs very well.
    Postmasters want to ensure that delivery is provided to each and every one of our customers every day, everywhere, and I think that your bill does that. For a long time, though, detractors have alleged that the Postal Service is a lumbering dinosaur whose time for extinction has long passed, and that the private sector can do things a lot better than the Postal Service.
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    I've not seen that in rural America. Rural America depends upon, I guess it's what I would call the subsidy that is provided by the larger markets, the big cities in America. I've heard many discussions about all the baskets and stuff. And, you know, postmasters aren't concerned about baskets, we're concerned about delivering the mail. We're concerned about fair play.
    And we realize that mail can be delivered in the larger cities a lot cheaper than it can be delivered in the small towns. We rely on new ideas to build upon that revenue, the growth coming in, new products, new services. And I think the Postal Service is doing an outstanding job. If you look at the recent polls, and I think all politicians look at polls, the AP poll found that 75 percent of Americans believe that the Postal Service is doing an excellent or a good job. Last year a Pew Research Survey concluded that the Postal Service enjoys a 90 percent approval rating. And in the most recent Price Waterhouse survey, it was determined that 93 percent of over-night First Class Mail is being delivered on time.
    Americans demand a strong Postal Service that will provide essential value to everyone. Postmasters know your goal is to strengthen the agency so it can support uniform service to every community in the Nation, thus enabling the Postal Service to expand its revenue and to support the infrastructure making universal service possible.
    Let me assure you postmasters, side by side with the entire Postal management team and the loyal hardworking craft employees, will continue to work to see that these new revolutionary products and services are provided to the American public.
    I have a concern that our competitors would like to do some cherry picking, and that's where we have to protect the American people. There has been many times in my career that postmasters or the postmaster organization doesn't always agree with the Postal Service.
    We take public service real seriously. And there is probably no other group that's engaged with communities across this country more than postmasters. Many times the Postal Service will make a proposal that will find us on the other side of the table, whether it be the box rent issue that we had 2 or 3 years, or the closing of small post offices.
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    This bill must take care of rural America and intercities but it must also strengthen the Postal Service so we can do this. I think your job and my job first and foremost must be to take care of all Americans. We have a service that's set in place. We do not have to redefine that whole service but we have to fine tune it to make sure that that service is there for our kids and our grandkids. Those are the concerns that I have. I've summarized it pretty briefly.
    It's a very competitive industry out there. We all know that e-commerce, foreign posts, many different things are going to affect service in the future years, but I think we're taking a step in the right direction. And I just want to let you know that postmasters are willing to work with you or anyone else who is willing to enhance the service that we have and protect the interests of the American people. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Carrico follows:]
    "The Official Committee record contains additional material here."

    [The official committee record contains additional material here.]

    Mr. MCHUGH. Thank you, President Carrico for your comments and also for your cooperation. Next, President Cinadr, National League of Postmasters of the United States. Welcome, sir.
    Mr. CINADR. Thank you. It's a pleasure to be back with you. As you stated, I am Joe Cinadr. I am the postmaster of Mansfield, OH, and I have been serving the National League of Postmasters for the last 5 years as vice president, executive vice president, and now as national president.
    I do appear before this committee today on behalf of the Nation's postmasters, retired postmasters and associate members of the League of Postmasters. And I do thank you, Mr. Chairman, for allowing my entire written testimony to become part of the record. As you requested I will simply highlight what I consider to be the most important parts of that testimony.
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    First, representative postmasters from our 50 States, commonwealths, and territories will be here in Washington, DC, the first week of March to personally express their opinions of H.R. 22 and many pieces of legislation to their own Congressmen and Senators.

    Our primary focus is for the U.S. Postal Service to remain the best Postal Service in the world, and for postmasters to maintain their leadership role. The results of the legislation being considered must allow us to continue to provide all Americans with universal service at reasonable prices. We do, as Mr. Henderson stated earlier, need the authority to offer reasonable volume discounts, again, for us to remain competitive and engage in what are commonly accepted as good business practices.
    Almost everyone, some more grudgingly than others know how good we are. As Ted mentioned, the Pew Research Center survey and the Associated Press survey this past month proved that. We do what no one else does or even wants to do, and that is to provide excellent mail service to towns and hamlets like Pierrepont Manor, NY; Pineland, SC; Wayland, OH; Suplee, PA; Bethel, NY; Lee Center, IL; and many, many others too numerous to mention.
    I am reminded, as I sit here, of Senator Ted Stevens' remarks as I review with concern that this bill could become a vehicle for undercutting the basic principles of the Postal Reorganization Act of 1970. What he said was, ''Our Postal Service is a national treasure. A vital organization made up of outstanding people.'' We in the League certainly value his judgment and thank him for his continued support.
    We had serious problems in the 1960's and needed corrective and farsighted legislation. What I see now is an attempt by our competitors to regulate or re-regulate the most successful Postal Service in the world. I ask why we need organizations and or individuals with little or no postal experience or knowledge making decisions that will impact our futures, our pay, our benefits, and most importantly universal services?
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    The issues are not taxes, tickets and tags. The real issues are prices and universal service. I look forward to our postmaster visits to the Hill on March 2nd. Postmasters are valuable contributing members of our communities and our country, and they serve much more than just collecting, processing and delivering the mail.
    I do pledge to work with this committee as long as this bill, as reported out, continues to allow postmasters to provide excellent mail service and keep the customer first. I thank you for allowing me to testify. I will entertain your questions.
    Mr. MCHUGH. Thank you, President Cinadr.
    [The prepared statement of Mr. Cinadr follows:]
    "The Official Committee record contains additional material here."

    [The official committee record contains additional material here.]

    Mr. MCHUGH. Finally, we move to Vice President Ted Keating, who is, as we've heard, sitting in for President Vince Palladino of the National Association of Postal Supervisors. Mr. Keating, welcome.
    Mr. KEATING. Good afternoon Mr. Chairman, members of the committee. My organization has appeared before this committee in the past and expressed concerns about the make up of the original version of H.R. 22, and subsequent versions. You and your committee have addressed those concerns by making changes and we would like to thank you at this time for that.
    President Palladino's testimony is on the record. I'm not going to read the entire thing, but he did ask me to make a couple of comments which would be that we reserve the right, with your permission, to come back and make final comments on the final language of H.R. 22, whenever that may be.
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    He did ask me particularly to read his closing remarks, which is page 4 of his testimony, which is as follows.

    In closing Mr. Chairman, I caution that as we focus on the details of H.R. 22, as clearly we must, we do not at the same time lose sight of what we are putting together here.
    Accordingly, I must respectfully propose to you and your distinguished colleagues the question of overriding concern to me. You could call it food for thought. I'll state it as simply as I can. As we rush headlong into creating a Postal Service that walks, talks and otherwise operates like a public corporation, are we truly crafting an entity that has a genuine chance of survival?
    More to the point, Mr. Chairman, what commercial enterprise in this country would remain in business long if its officers had to operate under a host of Federal statutes governing the types of products and services it could offer and at what price, and under the watchful eye of, all at the same time, a Board of Governors, our Directors, Postal Rate Regulatory Commission and Inspector General and, with all due respect, a Congressional oversight committee or two? I pray you probably know the answer to that question.

    We thank you again for the opportunity again to appear before you. It's always a privilege to work with the committee and look forward to future testimony on this. Thank you very much.
    Mr. MCHUGH. Thank you, Vice President Keating. And, again, please pass our best wishes on to Vince Palladino and wish his father, as I said, a speedy and full recovery.
    Mr. KEATING. Thank you.
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    [The prepared statement of Mr. Palladino follows:]
    "The Official Committee record contains additional material here."

    [The official committee record contains additional material here.]

    Mr. MCHUGH. I think to President Palladino's last comment, as you read it into the record, I would simply say and respond with another question. What commercial enterprise continues to operate under the same set of regulations, guidelines and mandates that it did nearly three decades ago? What we're faced with here is the U.S. Postal Service is, indeed, that kind of enterprise.
    The road to hell, as I said in the past, and I didn't make this up myself as you know, is paved with good intentions. Recognizing that, the intention has always been at the core of this to preserve and to ensure the continuation of the kinds of services that President Carrico, particularly, raised in his testimony a few moments ago. That provision in places like Pierrepont Manor, and what a coincidence you mentioned that first, I was stuck by that, and in places like Philadelphia, PA.
    I go to a small post office when I'm home every day. Mary Ann Aubin, the postmaster, is an important part of that community and does a terrific job. I have a perspective and place a value on that that may or may not be unique. I suspect it isn't. I suspect most Americans view their postal employees and view the postal workers almost as a part of their family because they see them with such frequency.
    And I think that's reflected in the polling data. Politicians do indeed pay attention to polling data. We only tend to talk about the ones we like, but clearly the vast majority of Americans have a great deal of admiration for what you do and who you are. We respect that and not only respect it, we would want to make every effort to continue it.
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    But I think, as you know, the pressures that the Postal Service is coming under, and the pressures we know are down the line with respect to new types of communications, are really going to demand some kind of change. Whether we do it in H.R. 22 in an atmosphere of relative calm, or whether we do it, as occurred back in the 60's, in an atmosphere of crisis is our choice. And we'll see which path we'll choose.
    But let me just ask you to comment on the few of the specifics that you mentioned both as you presented your summary and your written testimony, because the comments that you made, I think, are important ones. I want to be able to reconcile on the record what we believe is not just the intention, but the effects of H.R. 22, versus what you interpret and you have stated some concerns. President Cinadr, for example, you just said that this bill could become a vehicle by which we undercut the provisions and the forces of the 1970 act. I was curious, the ''basic principles,'' I believe is the phrase you used. Could you explain or kind of expound, or expand upon rather, on what provisions of the 1970 act do you think were jeopardized? Because if that's the case, we indeed need to take a very careful look at that.
    Mr. CINADR. Well, I think it reflects on the universal service requirement, that the Post Office is unique in having that responsibility. I am concerned about how the funding of the private corporation would affect universal service. And I believe you did address that issue with the prior panel, with the Postal Rate Commissioners. So, as you are well aware, I prepared this testimony before knowing what they were going to say.
    Mr. MCHUGH. Right. So am I hearing, and that's totally fair if it's true, that you learned some things that at least lessened or narrowed that concern?
    Mr. CINADR. Yes.
    Mr. MCHUGH. OK. Well, good. All of you, all of the presentations in one way or another, some a little bit more directly than others, voice again concern about how this bill may, the phrasing used, ''re-regulate'' or ''regulate'' the Postal Service as it does not currently exist. Concerns, understandably, about turning over to non-postal individuals control of issues like pay, and employee working conditions, and such, that would be enormously troubling to me as well.
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    And I very much would want to meet those concerns. So I'm wondering if you could define for us some of the specific parts of the bill that you think do that so that we could take a further look at those? President Carrico.
    Mr. CARRICO. Could you clarify your question please?
    Mr. MCHUGH. Well, all of you had said that the bill could re-regulate and as another step put non-postal people in control of issues like employee wages. For example, President Cinadr says we could penalize postal employees in some aspects of H.R. 22.
    I'm just trying to understand if you are concerned about that happening, and I don't have a problem with that. Change is always an issue for concern. If it is a matter of your being troubled by doing it differently and possibly something happening bad, I'm Irish Catholic, I know how that works. I sit home and think about that every night.
    However, if there are specific provisions of this bill that in your view, for example, as was stated, gives further control of the Congress to meddle, as President Carrico suggested in his testimony, to meddle in the Postal Service, that's not our intent. If there are provisions in the bill where we can go in and alleviate your concern, we want to do that. So I'm just trying to pinpoint——
    Mr. CARRICO. I see what you are getting at now. Yes. I believe there is a problem with the PRC appropriation. I think we can springboard off Chairman Gleiman. Chairman Gleiman really is the watch dog and I think he's done that very well.
    I have some concern that if the bill authorizes congressional appropriations, more congressional micromanagement would result. And I don't think that's anything that we need. The PRC is doing a great job protecting our interests there right now.
    Mr. MCHUGH. So the provision of the bill that calls for a change in how the Postal Rate Commission receives its funding, currently it comes through the Postal Service, we would now have it as an appropriation from Congress, concerns you because you think Congress could then use that to control the Postal Service?
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    Mr. CARRICO. Well, I think that's what the Postal Reorganization Act in 1970 did was it took it out of the hands of Congress. Now it seems to me like this part wants to come back in. That also could make funding and different appropriations become more political and our competition could use their political clout to drive a wedge in there.
    Mr. MCHUGH. But that happens right now. You need only to go to last year to see that, under the Postal Treasury Appropriations bill, a provision was presented to affect everything from your pack-and-send to international mail and the international postal union. So I understand what you are saying but I want you to be assured, and this isn't of much comfort, that we're not going to do anything worse to you under this bill than we already do.
    Mr. CARRICO. And that concerns me.
    Mr. MCHUGH. And that appropriation to the PRC is not, as you understand, not a direct appropriation to the Postal Service, obviously.
    Mr. CINADR. Mr. Chairman.
    Mr. MCHUGH. Sure.
    Mr. CINADR. I view my testimony as my opportunity to express to you and the other members of the committee what the concerns and the worries of my constituents are, and those are the postmasters of this country. And I defend postmasters of this country to the utmost. And if I sound too proud, I've spent 37 years in the Postal Service and I am very proud of what it has done, what it accomplishes, and what it continues to accomplish under the present set up.
    I am concerned on how that will change and what effect it will have on postmasters and the rest of the postal community. And the point I'm trying to make is that we are presenting a level view of the playing field, and I don't see that when my competitors testify.
    Mr. MCHUGH. Well, as you will find, those who are on the other side of the fence in this equation are not particularly happy in all aspects of the bill either, which in this town means that maybe we're on to something. But, first of all, you have not only every right but every reason to be very proud of nearly four decades of service in the Postal Service. Those of us who are in politics wish we had half as much to be proud of as you do.
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    And I do not for a moment, gentleman, question not only again your right but your responsibility to view concerns that are held by your members. You've all done that very, very well, and I commend you for it. The main point I wanted to make as I read your testimony is not objecting to the concerns you share, but trying to make it clear to you that if you have specific concerns in the bill that we can talk about and address, we want to do that. Because, and let me narrow it, my objective is much along the lines of yours, to ensure that universal service at a uniform price continues as it has in the past.
    So that when I go to the post office in Pierrepont Manor, No. 1, it's there and it's open and No. 2, that I can receive the mail in the effective, efficient, affordable way I can today. I mean that's the underlying premise here.
    So we want to be able to work with you. Where you have concerns of a specific nature, we would not just encourage you but plead with you to come with us and share those and we'll do everything we can to work that out. That's all I wanted to say on that. President Carrico, you look like you want to say something?
    Mr. CARRICO. Yes. I would like to look at the double postage rule on the priority mail because I do have some concerns on that one also. And I guess my concerns, again, go back to rural America. Priority mail is a very popular product both in the cities, but primarily in the rural areas, because it does speed up the service.
    It would be very easy for me to deliver 1,000 pieces in Washington, DC, and make a pretty decent profit. But for me to deliver 1,000 pieces in rural America, it would be very difficult to make a profit. Under the bill, I think there is a six-time postage rule which would make postage for priority mail go as cheap as $1.98. I think that could really have some devastating effects on some of the outlying areas. And I think priority mail as a product that we know today would probably dwindle, if that were to occur.
    Mr. MCHUGH. I understand that. No. 1, I think it's instructive that the Postal Service has not objected to that provision. And I think the reason is simply that, once you are through all the math calculations, the result of that is that it puts into play only 3 percent of the current monopoly business that you hold.
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    But, most importantly, and I think if you went and talked to the Postmaster General and others, the reason they support that 3 percent that it puts into play, it doesn't mean you are going to lose it, just that there is now open competition on that 3 percent. That in return for that they receive a substantial menu of competitive tools that they now don't enjoy. So you know——
    Mr. CARRICO. It's a tradeoff.
    Mr. MCHUGH. It is. And I'm not trying to shoot down the Postal Service's position here, but any time you can retain 97 percent of what you got and get back quite a bit in return, that's a probably pretty good deal. And it's probably what we're going to hear as some of the opposition to this bill, but I won't tell them, if you don't. OK? But I understand your concerns, I think.
    We, I should note, have been joined by Representative Danny Davis, from the great State of Illinois, who has been a loyal and very productive member of the subcommittee, and we welcome him back this year. I would, at this time, yield to the ranking member, the gentleman from Philadelphia, Mr. Fattah.
    Mr. FATTAH. Thank you very much. I'm trying to see if we can just identify—let me start here. I know we all have a tremendous amount of appreciation for the work and labor that's been put into developing H.R. 22 to this point. But we still need to understand where there are disagreements or concerns, because to the degree that this train leaves the station, you know, it is something that your Members are going to have to live with and the public is going to have to live with for a very long time.
    So I'm going to see if we can crystallize, to whatever degree it's possible, some of these issues. Now, as I stated in my opening statement, and I think that is a concern of the chairman, this question of universal service and whether or not there is anything in H.R. 22 that creates concerns, legitimate concerns down this road, that somehow the Postal Service requirement and burden in terms of universal service would be infringed upon in any way, shape or form.
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    So I'd like to see if each of you would just make a comment on your view, relative to the universal service and the reforms or the changes as outlined in H.R. 22. Let's start with President Cinadr.
    Mr. CINADR. The problem I see is, again, how the funds if this private corporation is set up, how they would be used. And when I look at how funds are used in private corporations today, I see much the same testimony that Mr. Gleiman gave, that is that part of those funds are used to, obviously, pay back stockholders or shareholders, and part of them are used to reward the successful employees of that company. And, as I've stated before, if the bill is going to address the other use of that fund to support the infrastructure, then I believe that would be the correct way to go.
    Mr. FATTAH. The requirement in the bill, as drafted, first things first, is that there would be a study done to determine the parameters about what should be universal service.
    Mr. CINADR. OK. Maybe the biggest problem with testifying here today was my information was that this bill was in a state of flux or very fluid. And that's why I have pointed out the main concerns of postmasters, rather than getting into specifics of the bill.
    Mr. FATTAH. I understand.
    Mr. CINADR. OK.
    Mr. FATTAH. Do you have any other comments, President Cinadr?
    Mr. CARRICO. My only concerns are that when you are talking government agency and the private sector, the private sector is going to go where the money is. And if they take that part of the market and just leave rural America, my concerns are really what's going to happen to the postage rates. I think the way it is addressed on universal service, you guys are on top of that.
    I don't have a problem with that part of it but that's something that we always need to be aware of. And I know earlier in the testimony we talked about airline deregulation and what that's done to rural America. Those are things, the potential is out there, but I don't have great concerns. I know you guys are aware of those.
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    Mr. MCHUGH. Vice President Keating.
    Mr. KEATING. I don't have anything to add to that, no.
    Mr. MCHUGH. OK. Thank you.
    Mr. FATTAH. I yield.
    Mr. MCHUGH. Thanks, gentlemen. Mr. Davis.
    Mr. DAVIS. Thank you very much, Mr. Chairman. Mr. Palladino, you mentioned——
    Mr. KEATING. Mr. Palladino is not here. My name is Ted Keating, I'm representing Mr. Palladino.
    Mr. DAVIS. OK. In Mr. Palladino's testimony he mentioned concerns about labor management relationship and the various summits that netted perhaps some results. That still constitutes a big part of the discussion and a big part of the problem. Do you have any suggestions or recommendations in terms of how some recourse of movement toward solution could be built into the legislation that we're discussing?
    Mr. KEATING. Not directly into legislation, sir. But I believe we commented in President Palladino's testimony that the summit, which I believe was Congressman McHugh's idea, seems to be working.
    I give you the background that I've only been in this position for 6 months, so I've only been to meetings that took place in that last 6 months. But I have seen signs of progress. And the very fact that you have management organizations, the Postal Service, and all of its respective unions sitting at the table together, that's the direction to go and I believe we should continue that.
    Mr. DAVIS. Let me just ask one of the other gentlemen. I also got this notion that training requirements may have something to do with the level of difficulty that's being experienced, and especially for management personnel or supervisory personnel.
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    Mr. CINADR. I'm not sure where you are going with that, but I would say that my personal experience with the summit meetings is that, again, I would compliment the chairman for that idea. I think it is working, we are making progress, that we do need to take the lessons that we are learning from the summit meeting and possibly utilize them in the structure of the Postal Service, in particular with the Board of Governors.
    Mr. DAVIS. Go ahead.
    Mr. CARRICO. I do think that the summit process is a system that's bringing us together. I probably share a different view than either of my colleagues. If there is one item that affects postmasters that keeps us apart right now, it's the pay system, the way we consult—and we use the word ''consult'' because I get chastised if I use the ''N'' word, ''negotiate''—because we don't have any real power to determine the basis of our pay systems.
    Back in 1970, NAPUS was the only organization that supported postal reorganizations. And as a result of that, we are the only organization that does not have some kind of third party intervention in pay consultations. I say ''we,'' I mean the postmasters are the only party that does not have some kind of third party intervention. At the last pay talks, it's the first time in history that postmasters did not reach a pay agreement. And there is so much ill will out there as a result of that, that it's tearing us apart. The pay package that they imposed on, especially, our lower level postmasters did not do what it was supposed to do. They said they wanted a teamwork incentive program. And they provided a program called EVA that rewards the people at the top tremendously, several thousands of dollars. And then at the very bottom end of the scale, the people who are doing the work, they may get a couple of hundred dollars.
    The whole pay system needs to be looked at as far as managers. Through the summit process, I did ask for mediation. And I've been in the dog house with headquarters ever since. But I've asked, through Congressman McHugh's office, that GAO look at that pay practice. And you are doing that, and I thank you for that. I know it's not going to be 100 percent my way and it doesn't have to be that way, but it needs to really be looked hard at.
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    Mr. DAVIS. Let me ask either one of you gentlemen, there is a lot of conversation about price caps. And, of course, many people think that when you talk about price caps that you are also talking about wage caps, that you can't go up one way unless you are going up the other way. Could you respond to the impact you feel that price caps may have on the ability to bargain wages?
    Mr. KEATING. Speaking for my organization, I'm not sure it's relevant. I don't have a concern in that area.
    Mr. CARRICO. I think I would echo that too, that price caps probably more affect our colleagues in the unions more than they do us.
    Mr. DAVIS. So you have no real concerns about the price cap notion. Thank you. Thank you very much, Mr. Chairman.
    Mr. MCHUGH. Thank you, Mr. Davis.
    [The prepared statement of Hon. Danny K. Davis follows:]
    "The Official Committee record contains additional material here."

    [The official committee record contains additional material here.]

    Mr. MCHUGH. Gentleman, I appreciate your being here. And at the risk of being incredibly repetitive, nevertheless, I'll say it again. As you go through this and you do have specific concerns, as those understandable and very legitimate general concerns crystallize, as I hope they won't but as they may, that you feel free to come to us and try to see if there is some way that we can work through those.
    To Vice President Keating, I would tell you that no representative of the National Association of Postal Supervisors has done as good a job as you. I would tell you that but your president, Vince Palladino, has come into the room and I wouldn't dare say that because of the great job he has done.
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    Mr. FATTAH. Could I just ask a quick question?
    Mr. MCHUGH. Sure.
    Mr. FATTAH. President Carrico. At this point in time, universal service, as you understand it to be maintained by the Postal Service, means what?
    Mr. CARRICO. Universal service means that each and every community would maintain a post office, that they would maintain frequent delivery just like we have now. I don't feel that people should be penalized for living in rural America, that they are entitled to the same service that is given to the——
    Mr. FATTAH. The same service at the same price?
    Mr. CARRICO. Yes.
    Mr. FATTAH. Thank you.
    [Additional questions submitted for the record to Mr. Carrico and Mr. Cinadr follow:]
    "The Official Committee record contains additional material here."

    [The official committee record contains additional material here.]

    Mr. MCHUGH. Well, I stand corrected. My old ears heard ''Vince Palladino'' and apparently Vince Sombrotto has come in. So my feeble attempt at humor didn't even come close.
    Mr. KEATING. Mr. Chairman, they are both from New York so you probably couldn't tell the difference.
    Mr. MCHUGH. Well, we're delighted that Vince Sombrotto is with us, but remain sorry that Vince Palladino is not. But, again, thank you all very much for being here, and we look forward to continue working with you.
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    Mr. KEATING. Thank you, Mr. Chairman.
    Mr. MCHUGH. Last, certainly not least, the four unions. The American Postal Workers Union, President Moe Biller; as I just said, President Vince Sombrotto, National Association of Letter Carriers; President William Quinn, the National Postal Mail Handlers Union; and President Steve Smith, the National Rural Letter Carriers Association.
    As we're changing placards and drawing those up, we'll take about a 40-second break here.
    [Brief recess.]
    Mr. MCHUGH. If you'll stand, I'll administer the oath now.
    [Witnesses sworn.]
    Mr. MCHUGH. Let the record show all four presidents responded affirmatively to the oath. Gentlemen, welcome. We thank you very, very much for being here and we look forward to your comments. Here, too, I have read all of your prepared testimony and we will submit into the record in its entirety those submissions. I would ask if you could summarize them today. And, as in the past, we'll go by order of the announcement.
    President Moe Biller, welcome. Good to see you, how have you been?
    Mr. BILLER. Pretty good. A little injured knee, that's all. I broke my hearing aid, so be careful.
    Mr. MCHUGH. You injured your hearing aid?
    Mr. BILLER. I injured my knee and broke a hearing aid.
    Mr. MCHUGH. Oh. I need a hearing aid, apparently. Well then, if I say bad things about you, I'll do it quietly. We're truly pleased you are here and, please, the floor is yours.

STATEMENTS OF MOE BILLER, 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
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    Mr. BILLER. Mr. Chairman, members of the subcommittee, I'm pleased to appear again before you today to represent the views of the 361,000 members of the American Postal Workers Union, AFL–CIO on the subject of postal reform and your latest proposal for reform, H.R. 22.
    May 8th of this year, I will begin my 63rd year in postal activity, and 68 years in the trade union movement. Mr. Chairman, I want to make it clear that I greatly appreciate the sincere effort and concern you have brought to bear on this difficult topic. Unfortunately, as has been true with respect to similar bills that were introduced in the last session of Congress, we still have several fundamental problems with H.R. 22, and therefore cannot support this legislation that was introduced unless these matters are corrected.
    Our objections have been expressed many times before. The bill continues to have a pre-fixed formula specifying a rate cap on non-competitive mail. Unlike the telecommunications industry or other industries which have tried this form of regulation, the Postal Service remains a labor intensive operation.
    From our perspective, this means that if there are unanticipated adverse changes and expenses, market demand, or competition, the Postal Service's sole recourse, if it is to stay within the cap is to impose concessions on its workers. We cannot be sure whether such concessions will take the form of wage and benefit give backs or harsher working conditions applied for the purpose of achieving greater output.
    But we can be sure that in a labor intensive industry, a price cap inevitably pushes downside risk of adverse changes in price or market conditions onto workers while, as has been true over the last several years, the upside benefits of low inflation and a growing economy are retained by mailers and managers. We cannot acquiesce to the creation of this sort of scenario.
    I am pleased to report to you that we recently reached and ratified a collective bargaining agreement with the Postal Service. This is the first such agreement reached without resort to interest arbitration in over 11 years. The contract was overwhelmingly ratified by 64 percent of the APWU membership. It was not easy and both sides worked hard to resolve a number of complex issues.
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    The wage bargaining was, of course, the most difficult problem, given the uncertainty and volatility of the worldwide economy. I cannot imagine how we could have worked our way through all of these problems if, in addition to everything else on the table, we had to factor in the potential impact and risks associated with a congressionally imposed price cap on mail services.
    Indeed, it is clear to me that the existence of an external formula shifting downside risk of market and material changes onto workers will make voluntary agreements, such as the one we just achieved, far less likely and interest arbitration the inevitable norm.
    While the price cap issue is our most fundamental concern, it is not our only concern. We continue to object to the bill's specification, in Section 503, that a letter may be carried out of the mail stream when the amount paid for private carriage is at least six times the postage for the first ounce of First Class Mail. While I recognize that the floor for private carriage is higher than in previously introduced legislation, the fact remains that the proposal is obviously the first step toward postal privatization. Indeed, former Postmaster General Marvin Runyon stated that this proposed rollback of the Private Express statutes places $4 billion of the USPS' First Class Mail market at risk.
    Under the present format of the bill, the impact of this loss of revenue will inevitably be borne by workers. Beyond the impact on our members, though, allowing USPS' competitors to skim the cream off of a major piece of the USPS' market, in the way proposed by H.R. 22, will obviously jeopardize the Postal Service's capacity to provide universal mail service at uniform rates. Universal postal service is a fundamental feature of American life and we cannot endorse any proposal which places it in jeopardy.
    Finally, we believe the proposed study of labor-management relationships in the Postal Service by the National Academy of Public Administration, set forth in Section 601, is totally unnecessary. If the goal here is to improve labor-management relationships in the USPS, I would submit that we have made a quantum leap in that area through the recent APWU–USPS contract. This contract was, for the first time since 1987, agreed to by both parties, without the interference of an outside arbitrator.
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    If you think this is insignificant, then please allow me to share with you the following from the Washington Post, on January 9, 1999. ''I am delighted with the outcome,'' Postmaster General Henderson said, ''This is an agreement that is clearly in the best interests of our employees and all of America.'' Henderson added, ''My hat's off to Moe Biller, and his negotiating team, and our negotiating team for having the patience and the forbearance to bring a long, hard set of talks to conclusion.''
    Labor-management relationships in the USPS have been studied to death. We are presently involved in ongoing work with the Federal Mediation and Conciliation Service to resolve long term problems. And that agency, at least, has the benefit of direct experience with resolving labor-management conflict. I see nothing to be gained by inserting yet another outside party into this mix.
    Time has shown that we all do best when our efforts are focused on improving the collective bargaining relationship and our mutual capacity to resolve problems. A Republican American President with traditional conservative views, Richard M. Nixon, understood this when he approved collective bargaining in the Postal Reorganization Act of 1970. His insight is equally valid today.
    To be sure, consistent with the overall goal of H.R. 22, we are interested in authorizing the USPS to enter into new markets and to compete in them. Our union has, in fact, agreed to certain competitive projects with respect to work that has been contracted out.
    However, the price exacted by the bill for allowing us to compete, price caps in the USPS' major markets and yet another rollback of the Private Express statutes, is too high. Based on this, and notwithstanding its many constructive elements, we cannot support H.R. 22.
    Mr. Chairman, that concludes our testimony. I would be pleased to answer any questions you or other members of the subcommittee may have.
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    Mr. MCHUGH. If I get a letter from Richard Nixon, will you support it?
    Mr. BILLER. I'll get you that letter.
    [The prepared statement of Mr. Biller follows:]
    "The Official Committee record contains additional material here."

    [The official committee record contains additional material here.]

    Mr. MCHUGH. OK. Thanks. We have a vote under way, as you've heard. We understand there will be that single vote and then more discussion on other amendments. So if we could suspend, I apologize. And, hopefully, we can move over there and vote and come back as quickly as possible. So if we could stand in adjournment for just a few moments. And I apologize, gentlemen.
    [Recess.]
    Mr. MCHUGH. Why don't we, with the indulgence of the minority, continue with the statements? Because, as I indicated earlier, and as he did as well, the ranking member is in another committee meeting and he is trying his best and doing very well in coming back and forth. So if we could continue with the presentations, I think we can expedite matters.
    And with that, we are pleased to welcome President Vince Sombrotto, the National Association of Letter Carriers. Vince, you do not look like Vince Palladino in any shape or fashion, but we're glad you're here and we look forward to your comments.
    Mr. SOMBROTTO. It's some good news if you think I'm Palladino. I just gained a number of members and I'll improve their performances in the Postal Service. I thank you Chairman McHugh and members of the subcommittee for the opportunity to discuss this important piece of legislation. I'm Vincent R. Sombrotto, president, National Association of Letter Carriers, AFL–CIO, and I'm pleased to be here representing some 310,000 members of the NALC.
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    A recent survey conducted by Pew Research Center for the people and the press stated that the public gave the Postal Service an 89 percent favorability rating, higher than any other Federal agency. Another study by ICR of Media, PA, said that nearly three fourths of Americans believe the Postal Service is doing an excellent or good job. This is a tribute to the hardworking men and women who make the system work on a daily basis.
    As the public face of the Postal Service, letter carriers take great pride in receiving such recognition for the outstanding service we provide. While every American has come to rely on these vital services, few understand the way the USPS operates. I can even remember a time, Mr. Chairman, when you yourself acknowledged being surprised by the intricacies involved with timely and efficient mail delivery. You are to be congratulated for dedicating yourself to learning about the Postal Service and taking on this effort to enhance its performance through the introduction of H.R. 22, the Postal Modernization Act of 1999.
    As the members of the subcommittee are well aware, the fundamental principle which guides the USPS is universal service at uniform rates. This means that Postal Service employees must continue to provide normal 6-day delivery to all addresses at the same reasonable rate. The public demands nothing less, and the NALC believes that any proposed postal reform must fit into that framework.
    Rather than taking time today to go through the bill section by section, I'd like to focus on a few key points which are critical for meaningful postal reform. We are encouraged by some of the changes that have been made in H.R. 22 since its introduction. Chief among those is the elimination of the mailbox demonstration program proposed in the original draft of the bill.
    As you know, the relationship between letter carriers and the public they serve is one of trust and security. Some of our competitors would like nothing more than to destroy that trust, sacrificing a public service in the name of profits. We view that removing of the mailbox demonstration program from the bill as an acknowledgement of the desire to maintain the high level service and professionalism the American people have come to expect from letter carriers.
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    We are pleased with Congressman Gilman's efforts to ensure that the proposed Postal Regulatory Commission envisioned in the bill will not undermine the collective bargaining process. The language discourages the new commission from using its expanded authority to interfere with matters best left up to labor and management representatives. We applaud this suggestion and encourage its adoption with the full force of law and not just the sense of the Congress.
    Also, I'd like to thank Congressman Fattah for his proposal which would create a labor seat on the Postal Board of Directors as created in H.R. 22. Since its inception in 1971, 50 individuals have served on the Postal Board of Governors. Members of the business community, former congressional staff, and even dentists have served on the Board, but not one person has come from the ranks of organized labor. Mr. Chairman, there are hundreds of thousand of union employees within the USPS.
    Sound business practice would dictate that someone serve on the Board who understands the challenges facing these hardworking employees. I know there are Members of the Congress who have legitimate concerns over reserving specific seats on the Board. At the same time, I thank the subcommittee for acknowledging the inequity that has existed for all these years.
    I am aware that the Postal Service is proposing a number of changes to H.R. 22. We have recently received some of these proposed measures and are working so that we may fully understand their impact. Given their far reaching scope, it would be imprudent for the NALC to express a position on them at this time. We take these proposed changes as well intended, and are eagerly awaiting the reaction of the mailers, other customers and competitors.
    While most of the groups paying attention to this bill have the public's best interests at heart, we at the NALC are concerned with some competitors of the Postal Service who are trying, at all costs, to break the Postal Service's mandate of universal service. It is imperative that H.R. 22 not become a vehicle for their self-serving attempts to weaken the Postal Service. Such an effort would undermine the constructive spirit which has characterized the healthy debate surrounding H.R. 22.
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    As you are well aware, Mr. Chairman, there have been questions raised recently about authority over the Universal Postal Union, much of which was initiated during appropriations process. An apparent compromise was satisfactorily reached. I think it's fair to say all sides gave a little in order to reach that point.
    My concern is not over a good faith debate about proper policy and objects, instead, I would suggest these issues be considered and brought up using the normal legislation process. I am convinced that if we had worked through the committees of proper jurisdiction with the necessary background on the subject matter, not only would we have been able to reach a faster resolution, but probably would have avoided 2 years of rancor and disagreement.
    I want to be very clear with the members of the subcommittee. Despite the misinformation being spread by Postal competitors, competition within the mailing market is fierce. Private companies are free to charge different rates for delivery to different addresses or, in the alternative, they may choose to provide no service at all.
    In addition to taking on the Postal Service's business internationally, some of our competitors have stepped up their attacks on profitable enterprises such as priority mail, a product on which millions of Americans depend on a daily basis. The revenue generated by such products helps us maintain universal service. At best, the tactics used by these companies refuses to acknowledge this necessity. At worst, they simply don't care. Without this stream of revenue, the Postal Service will not be able to meet with your constituents' demand for service.
    Given my years of dealing with the Postal Service and their many issues, I appreciate the difficulty of trying to pass a postal reform bill through the Congress. There are a number of organizations seeking to place their imprint on this bill. Chairman McHugh, you and your staff have been accessible and open-minded in taking on this monumental project.
    As you were recently quoted by the Associated Press, ''The person who brings the mail is almost a member of the family who visit each and every day.'' We want to continue that relationship and dedicated service. On behalf of the National Association of Letter Carriers, I'd like to thank you for your tireless efforts to improve the public service provided by the Postal Service. As this bill progresses and continues to take shape, we look forward to working with you.
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    Mr. MCHUGH. Thank you, Vince, I appreciate your comments. And more to the point, I appreciate you and George Gould, and everybody's efforts to make this a better bill.
    [The prepared statement of Mr. Sombrotto follows:]
    OFFSET FOLIOS 350 TO 361 INSERT HERE
    [The official committee record contains additional material here.]
    [The official committee record contains additional material here.]

    Mr. MCHUGH. With that, we will now turn to President Quinn, the president of the National Postal Mail Handlers Union. Welcome, sir, good to see you again. We look forward to your comments.
    Mr. QUINN. Good to see you, Mr. Chairman. Thank you again, and to the distinguished members of the subcommittee, I'm Billy Quinn. I'm the national president of the National Postal Mail Handlers Union. On behalf of the more than 50,000 mail handler union members employed by the Postal Service, I appreciate the opportunity to testify about postal reform and H.R. 22, the Postal Modernization Act of 1999.
    Our approach to postal reform is relatively simple because it is motivated by two fundamental principles. First, as we stated in our joint statement with the letter carrier unions last year, if it is to be enacted at all, postal reform must maintain and indeed enhance the operations of the Postal Service.
    By this we mean that the key ingredient to any type of postal legislation is to protect the ability of the Postal Service to provide universal service to the mailing public. Postal employees must continue to process and deliver letters and packages to every one, every where, every day. This universal service has to be maintained at affordable rates, but these rates must be sufficient to protect and support the infrastructure that universal service requires and to provide postal employees with a decent and fair standard of living. We understand that this subcommittee agrees with the fundamental goal of universal service, and we commend your painstaking efforts to ensure that any reform legislation furthers this goal.
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    Second, and equally fundamental, we also strongly believe that Congress should not impede upon the often complex relationship between the Postal Service and its employees. This relationship, though at times difficult if not contentious, is best carried out within the framework of collective bargaining. The collective bargaining process should be treated as sacred, and should not be adversely affected either intentionally or inadvertently by enactment of postal reform.
    Indeed, as you may know, the Postal Service and the National Postal Mail Handlers Union just recently signed a new 2 year collective bargaining agreement, demonstrating once again that face-to-face negotiations can and should be the means for resolving labor disputes.
    In simple terms, this means that any reform legislation should not allow or encourage interference in Postal labor relationships, either directly from Congress through the statute itself, or less directly through the Postal Rate Commission, or the Postal Regulatory Commission, or some other legislatively imposed party.
    On another more complex level, this means that the collective bargaining process must be allowed to function without artificially imposed constraints such as price caps that effectively become wage caps. The bargaining process must be allowed to set wages and benefits. And the Postal Service must realize it needs to pay for its labor costs through appropriate postal rates. These two fundamental principles dictate our approach to postal reform.
    We therefore support legislative efforts to truncate the overly cumbersome ratemaking process and generally support the pricing flexibility sought by the Postal Service. With equal vigor we oppose any legislative reform that effectively would limit that pricing flexibility with an unfair and unreasonable cap on rates. If fair and decent wages require an increase in postal rates, then the Postal Service must be allowed to raise its rates without jumping through the overly cumbersome hoops that exist under the current PRA.
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    Two additional points deserve mention. First, the NPMHU generally supports the amendments adopted by the subcommittee last September, especially those that would add a labor representative to the Board of Governors, provide re-employment assistance if any Postal workers are displaced by automation or privatization, and to prevent any reform legislation from adversely affecting employee or union rights.
    Finally, I would be remiss if on the record I did not alert the subcommittee to a lurking danger that is known by everyone in this room, but that few are willing to acknowledge openly. Namely that the driving force behind particular provisions of H.R. 22 should be the public interest and not the interests of certain large profit-driven corporations such as Federal Express or the United Parcel Service.
    For more than 200 years the Postal Service and its employees have served the Nation by ensuring universal service of postal communications at reasonable rates. Postal reform that puts the Postal Service or its employees at risk does not serve the public interest, but rather will be remembered only as legislation that destroys one of the unique aspects of the American experience.
    Thus, the primary factor in your consideration of H.R. 22, during the coming weeks and months, must be the interests of the public in maintaining the strength and viability of Postal Service and its 800,000 employees. I dare say, even if others are hesitant to say so publicly, that Federal Express of FedEx, UPS, and other competitors of the Postal Service are motivated by other factors.
    I know the members of this subcommittee recognize this reality. We look forward to continuing to work with the subcommittee and its staff during the next few months to ensure that H.R. 22, if reported out of committee, is legislation that the NPMHU can support. Thank you for the chance to testify today. I would be happy to answer any questions that you may have.
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    Mr. MCHUGH. Thank you very much, Billy, I appreciate it. And to you, as well, thanks on behalf of all the subcommittee for your efforts and untiring work to try to have this bill better reflect the interests of your members.
    [The prepared statement of Mr. Quinn follows:]
    "The Official Committee record contains additional material here."

    [The official committee record contains additional material here.]

davis
    Mr. MCHUGH. Last, certainly not least, the president of the National Rural Letter Carriers Association, Steve Smith. Mr. President, good to see you. Thanks for being with us. And the floor is yours, sir.
    Mr. SMITH. Thank you, sir, and thank you for the opportunity. Good afternoon, Mr. Chairman and members of the committee. I am Steve Smith, president of the 97,000 member National Rural Letter Carriers Association. Most rural carriers drive their own vehicles while serving as a post office on wheels. Daily, we travel more than 3 million miles to 27.4 million delivery points on some 63,000 rural routes across the United States.
    Chairman McHugh, in response to changing competition, expanding alternatives to the Postal Service, and postal officials' requests, you began to examine the regulatory framework imposed by that legislation. You conducted comprehensive hearings, you held endless private meetings with all organized groups concerned and affected by reform legislation. You even utilized the Internet.
    You and your staff have crafted a comprehensive proposal for change in the Postal universe. In the process of arriving at a proposal, you have been thoughtful, open and creative. This is why the NRLCA will remain supportive of your efforts to enact comprehensive reform capable of carrying the Postal Service into the 21st century. We remain cautiously optimistic pending proposed amendments and the natural ebbs and flows of the legislative process in both chambers and conference committee.
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    We hope our competitors learn the U.S. Postal Service is not the principle reason for their market share decline. The Postal Service did not cause the UPS strike, or business loss in Europe as the result of European postal competition, referring to the Wall Street Journal article on January 18, 1999.
    The Postal Service has merely 6 percent of the parcel post business. Our competitors further cite the proposition that USPS does not pay for tags nor taxes on vehicles. When this accusation is made, they omit the fact that most rural carriers use their own vehicles to deliver the mail. Rural carriers certainly do buy tags and pay all appropriate State and local taxes on their vehicles.
    NRLCA has always remained somewhat skeptical of the separate accounting concept for the competitive products. We simply do not see how dividing the competitive and non-competitive products for accounting purposes is done easily; 54 percent of rural letter carriers work out of post offices with one or two rural routes; 82 percent of rural letter carriers work out of one to five route post offices. Every day we carry both types of mail in varying volumes. In those offices there is no alternative to rural carriers delivering all types of mail. How can one accomplish separate accounting of personnel and vehicles.
    The proposed legislation would allow the USPS to form a private law corporation for non-postal products and engage in strategic alliances in or with private companies. The Postal Service has enhanced your concept with its proposed amendments by suggesting this corporation should issue stock. However, once stockholders are involved, the obligation of the company would shift to satisfying the shareholders. NRLCA believes that those shareholders wouldn't be very interested in sharing profits with the competitive and monopoly side of the ledger.
    Additionally, let us look at a few examples of USPS attempts at non-traditional business products such as caps, mugs, ties, t-shirts, auto flyers and mailing on-line. Each enterprise prompted small business owners to appeal to their congressional Representatives to stop the Postal Service from selling these goods. NRLCA suspects that even after postal reform there will be continuing congressional oversight of the USPS.
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    In the final analysis, the public and its elected representatives are going to demand that the U.S. Postal Service stick to the basic public policy mandate of serving the public by collecting and delivering mail every where, to every one, every day. Mr. Chairman, and members of the committee, thank you.
    [The prepared statement of Mr. Smith follows:]
    "The Official Committee record contains additional material here."

    [The official committee record contains additional material here.]

    Mr. MCHUGH. Thank you, President Smith. And to you and your membership a great appreciation for your very constructive and positive role. As with the management associations it's obviously very clear to me and everyone on this subcommittee, that all of you bring a very fierce loyalty for your membership. That's not just understandable, it's the right thing. Your members are collectively very, very well served.
    As you know, President Sombrotto, and Smith, and Quinn, you chose to stay involved and be at the table, and I thank you for that. President Biller chose a different tact. I wished he hadn't. Not so much that it would have helped or hurt him personally, but rather I think their presence at the table would have been enormously beneficial to us and to our work product.
    However, even at that, as President Biller said, Moe said in his opening comments, we are very well aware of the concerns and the objections to the bill that you have. So you have certainly represented your membership well in that regard, as well. There probably is no other part of this process that has been amended more times than that with respect to employee relations.
    In spite of the pledge that I took very early on in this process, that we were not intending in this bill to in any way negotiate or to settle any of the management-labor differences, we have still time and time again tried to respond to the very legitimate concerns that in the main you people brought to us.
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    President Quinn mentioned the amendments that the ranking member and others through the last mark-up brought with respect to adding a member of labor to the Board of Governors, with respect to doing legislative language that would try to ensure that whatever happens does not have an adverse impact on the Postal employees.
    We, as well, have tried to build in H.R. 22 a number of changes that Vince Sombrotto and others have mentioned with respect to eliminating the mailbox test because of the concerns that you expressed.
    We have put in language that very clearly, I think, says that, No. 1, the Postal Rate Commission has no authority, no role in the collective bargaining process, that none of its deliberations can or should have any impact on that process. And, No. 2, to provide a very specific provision in the bill to ensure that the PRC can actually grant to the Postal Service additional pass-throughs above CPI, where there are the kinds of expenses beyond the cap that a union contract might indeed produce. So those are the kinds of things, the issues that you brought to us, and we tried to address those. As President Smith said, we expect that process will continue. We look forward to your additional comments and input. I'd invite Moe Biller back to at least talk to us, as that process goes forward. The door is open at any time in that regard.
    But let me just make a couple of comments about wages, and about union contracts and collective bargaining, because it is important. The economist that President Biller's union has engaged, Dr. Popkin, has presented testimony to the subcommittee on this issue. It's been reflected in a variety of ways since then. And I don't want to repeat myself.
    But, again, if we can go back to the specific language that talks about how nothing in the rate caps is intended in any way to affect the collective bargaining process, that, again, there is a direct provision for an additional pass-through on rates above CPI where the union contracts do become an added cost driver, I think it's important to point out a couple of things, and this point has been raised by some of you at the table as a source of pride, and understandably.
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    The fact of the matter is, when we close the text books on the economic discussions and theory, as interesting as they are, the experience of Postal employees is clear and it's undeniable. Your wages have not kept pace with CPI. So even if CPI and the wage cap were a hard ceiling, which I again argue they are not, but even if they were, had your contracts reflected CPI, your members would be earning more money than they are right now, No. 1.
    No. 2, as you know, one of the things we wanted most to change was to institute a bonus system that brings the people into the benefit package that, in my opinion, do the lion's share of the work, your members. Right now it's basically management levels that share the bonus.
    We did a calculation that shows that had the bonus provisions of H.R. 22 been in force over just the past 4 years, the average employee, and many obviously are above average, but the average employee would have received nearly $1,700, would have received $1,689 in each 1 of those past 4 years. That would have meant $6,800 more in pocket to your members, each and every member, had this bill been in place.
    The point is we made every effort, it seems to me, to try to ensure that employees are not harmed by this, that, indeed, they are helped by this. Because, as Moe Biller said, this is a highly labor intensive organization. When you have 800,000 or 750, depending on whose figures you use, over 700,000 hard working Americans in an organization that really is equatable to about 80 percent of the operating costs, you've got to pay attention to them if you are going to do anything remotely positive. And we've always tried to keep that in mind.
    So at the end of the day, we want to ensure that this is good for your members, it is good for Postal employees. And I'm not troubled by that. I'm not worried about anybody labeling me as a lackey of this group or a lap dog of that one, because the Postal Service that I know is successful for one reason, because of those people who go out and make it work in the Pierrepont Manors, and in the Philadelphias, and in every town, hamlet, village, and city of this Nation. So I wanted to put that on the record to reassure you, if nothing else, of our intent.
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    I, frankly, don't have any questions for you gentlemen. And that's for one reason. We have been with you at the table and exchanging information and I don't think we have any areas of misunderstanding or in need of clarification, No. 1. And, No. 2, I feel very confident we are going to continue to work together. Now what that means is at the end of the day it will be your judgment to make. And I'd like to try to persuade you but I'm not going to try to do that. You are far too loyal on behalf of your members to have that kind of effort succeed any way. So we're really looking forward to that continuing.
    And in reading your testimony, by and large, it confirmed the relatively positive feeling in that regard that I have. So I could sit here and throw a few out for the record, if it would make everybody happy. But, by and large, I think we need to continue to do what we have been doing. At the end of it, hopefully we will have done some good. So that's my speech. Has anybody got one back at me? President Smith.
    Mr. SMITH. I would like to thank you for the opportunity to come to you, as you gave us the opportunity, to address those issues that we were concerned with. And you gave us that opportunity.
    I was struck by your remarks a moment ago about all of us being fiercely loyal to our members, but you know we and our members are fiercely loyal to the Postal Service. We want the Postal Service to succeed. And all of us want whatever comes out of this bill to be good for the Postal Service because it in turn is good for us. Thank you for the opportunity to participate.
    Mr. MCHUGH. Thank you. And, by the way, you should always as a politician remember you are never sure how your words are going to be interpreted. I meant ''fiercely loyal'' as a compliment. I hope you took it that way?
    Mr. SMITH. Yes.
    [Additional questions for Mr. Smith follow:]
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    "The Official Committee record contains additional material here."

    [The official committee record contains additional material here.]

    Mr. MCHUGH. Well, with that, gentlemen, thank you again. I look forward to working with you. Let me thank everyone in the room here today for your incredible patience, perhaps your lack of sanity, but your incredible patience. This has been as open a process as we have been able to maintain. We are going to continue to try to do that. You know the staff, and we look forward to working with you.
    We have a Y2K hearing on February 23rd, if you are really looking for some excitement. But the next hearing on this issue will be conducted March 4th. I don't know if it will be in this room. After my treatment of him this morning, the chairman will probably never let me back in here. But we'll let you know where, and we hope you'll share some time with us then. And with that, the hearing is adjourned.
    [Whereupon, at 2:25 p.m., the subcommittee was adjourned.]
    [Additional information submitted for the hearing record follows:]
    "The Official Committee record contains additional material here."

    [The official committee record contains additional material here.]

H.R. 22, THE POSTAL MODERNIZATION ACT OF 1999

THURSDAY, MARCH 4, 1999
House of Representatives,
Subcommittee on the Postal Service,
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Committee on Government Reform,
Washington, DC.
    The subcommittee met, pursuant to notice, at 1:07 p.m., in room 2154, Rayburn House Office Building, Hon. John M. McHugh (chairman of the subcommittee) presiding.
    Present: Representatives McHugh, Sanford, LaTourette, Burton, Owens, and Davis.
    Staff present: Jane Hatcherson, legislative assistant; Abigail D. Hurowitz, clerk; Tom Sharkey; Robert Taub, staff director; Heea Vazirani-Fales, counsel; Denise Wilson, minority professional staff member; and Jean Gosa, minority staff assistant.
    Mr. MCHUGH. Let me call the meeting to order. Good afternoon. I want to welcome you all to what is the third hearing for the Postal Subcommittee in this Congress. Three weeks ago, as many of you heard and witnessed, we received testimony from the Postal Service, the Rate Commission, and the postal employee groups on the current version of H.R. 22, as reported by the subcommittee last fall.
    Our 4-year journey continues today as we hear from Cabinet departments, it says—I guess it should read Cabinet department and I will say a little bit about that in a moment—and a variety of competitors and customers of the Postal Service, both live and for the record.
    Such a hearing, I feel, is consistent with our longstanding approach of attempting to ensure that we obtain as many points of view on this legislation as practical. As in the past, I look forward to yet another full and frank exchange with all four panels, or three-and-a-half panels, as the case may be.
    As I have tried to consistently maintain, the goal of H.R. 22 has been and remains twofold: to provide the Postal Service greater freedom to compete, both today and into tomorrow, in order to successfully carry out its universal service mission, while at the same time establishing new rules to ensure fair competition and protect the public interest.
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    We will hear today from some who suggest that the best alternative is to generally keep the status quo and restrict the Postal Service to its noncompetitive products, leaving it unresponsive, as demand for those services continues to decline.
    Of course, many of these same groups also demand the Postal Service somehow provide lower rates and better service. Given such statements, I believe it is important to underscore that, because of H.R. 22's price caps, strong oversight, and overall incentives for greater competitiveness and efficiency, this bill would almost surely result in lower rates and better Postal Service for noncompetitive customers compared to what rates and service will be if H.R. 22 is not, in my opinion, ultimately enacted.
    H.R. 22, I believe, strengthens consumer protections through such provisions, among others, as quality of service reviews, complaint processes with much greater enforcement power, subpoena power, and annual audits.
    Let us take price caps as one example. Rather than being a totally untested and unknown process, as a few of the testimonies submitted today imply, in reality, eight foreign nations presently use price-cap plans to regulate their post office's rates. So it is not some blind journey into the unknown.
    While price caps would provide the Postal Service new pricing freedom, they would also rectify a problem with the 1970 act. Currently, the Service has sole discretion to determine the overall level of revenues to be extracted from captive customers and, as such, has little reason to control costs.
    Clearly, an independently administered system of price caps would represent a vast improvement in protecting the public interest. Some mailers apparently feel that they are riding a winning trend with respect to their particular rates, as determined in the last few rate cases, and, therefore, assume that this trend will continue, in their minds, forever. However, I would suggest we don't have the luxury of enjoying the future until it has, in fact, become the past. When you have a system, as we do, that is without constraint and at a meaningful measure as to the overall level of revenues that the Postal Service can demand in a rate case, then no one should feel secure about their likely position come tomorrow.
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    Perhaps a few of those folks who somehow feel warm and fuzzy about their future rate trends and protections under the existing framework might wish to speak to the nonprofit mailers testifying today who would, I think, provide a somewhat different perspective.
    While this may be the last of 4 years of subcommittee hearings on H.R. 22, the last subcommittee hearing on H.R. 22—[laughter.]
    We are at step 1 of the legislative process, and there still is a long way to go. At the conclusion of today's hearing, as we have since the beginning, we will fully digest all of the comments received and, where we can, modify the bill to respond to those constructive concerns and suggestions that have been put forward, and there are many.
    I would be remiss if I did not note a special coincidence today. In fact, at this moment, there is a memorial service being held on the House floor for a legendary and well-respected Member of the House, Mo Udall. As many know, Congressman Udall was one of the key forces in making the Postal Reorganization Act a reality back in 1970. Indeed, as just one example of how far that Postal Service has come from its challenges in those old days, some of us may be able to recall Mr. Udall's joking remedy for the inflation this Nation was dealing with in 1972, when he said, ''Let's turn inflation over to the post office. That will slow it down.'' [Laughter.]
    I know our dear, departed friend would be pleased to know that through the work he helped to begin, and especially because of the hardworking postal workers, that joke no longer works. Times have certainly changed, and the postal system he helped create has served this Nation so very well for more than a generation. As we continue the journey of modernizing our Nation's postal laws, I know that we will succeed if we infuse our efforts with the vision and the bipartisanship that Congressman Udall and his colleagues brought to the table nearly 30 years ago.
    So, with that, again, I welcome you all. I would be happy to yield to my friend on my right, Danny Davis, the acting ranking member, for any comments he may wish to make.
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    [The prepared statement of Hon. John M. McHugh follows:]
    Offset folios 001 to 002 insert here.
    [The official committee record contains additional material here.]
    [The official committee record contains additional material here.]

    Mr. DAVIS. Well, thank you. Thank you very much, Mr. Chairman. And as you have already indicated, this may very well be the last in a set of hearings that we will have had on this very important matter. Therefore, I would like to thank all of those who have come before us as witnesses and those who have come today.
    I am very much interested in hearing from all of them as we continue to engage in what I like to call this information-sharing process. Obviously, H.R. 22 is one of the biggest measures aimed at reforming or revamping, if you will, the U.S. Postal Service, and this is indeed a very complex bill. I must say that I still have some concerns with the long-term outcome of the price cap and the private law corporation as set up in the bill and how that pertains to and continues to protect and promote the rights of the consumer.
    At the heart of this bill, as this committee deliberates on how to make the Postal Service compete more efficiently, I want to again pose the question and trust that all of us will continue to consider it, and that is at the bottom line, who does this bill really serve? Is it in the best interests of the individual consumer? We cannot get away from what the Postal Service's No. 1 priority ought to and must be, and that is delivering mail to the consumer in the most efficient and effective manner that we can generate. This means ensuring that both those who live in urban and rural areas get the mail for the same price and basically in the same manner.
    Delivering mail has to be the top priority of our Postal Service and of our postal system. The consumer interest must be the bottom-line priority. I trust that we will get there, and I am sure that we will. So with you, Mr. Chairman, I look forward to hearing the witnesses and, again, thank you for the opportunity to comment and look forward to a very productive session.
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    Thank you very much.
    Mr. MCHUGH. I thank the gentleman. I thank him and all of the Members on his side for their, not just cooperation, but their active participation in this process. It has been very helpful.
    Before we go to our first witness, I would be happy to yield to the vice-chairman of the subcommittee, the gentleman from South Carolina, Mr. Sanford, if he has any opening comments he would like to make.
    Mr. SANFORD. Thank you for doing so, but, no, I do not have opening comments.
    Mr. MCHUGH. I thank the gentleman.
    I mentioned during my opening statement that we had a last-minute change in the roster. We had, at the request of the minority, happily invited the Department of Treasury to present testimony, both for the record and in person, and until 1 o'clock—or 1:03 p.m.—we were under the impression that they were still going to appear. The empty seat you see is obvious testimony to the fact they did not appear, and apparently did not intend to, without ever informing at least our side.
    I should note that I am very disappointed not only for what I think is a pretty clear act of a lack of common courtesy, in notifying people of your intentions, particularly when those intentions go contrary to your original statements, but also because I feel they had something to offer.
    I am going to ask unanimous consent that Department of Treasury's written testimony be submitted for the record, although I have to admit to you I am somewhat tempted to strike it out because it is not all positive from my perspective, as you understand. But, in fairness, they do bring some valid concerns to the table.
    I would like to believe that someone shared with them my scintillating, probing questions, and they were too frightened to show their faces, but that is probably not the case. It is probably something other than that.
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    So I am disappointed in Treasury and the absence of Lewis Sachs, who is Deputy Assistant Secretary of Government Financial Policy, who both submitted the testimony and we had expected to be here.
    [The prepared statement of Mr. Sachs follows:]
    Offset folios 510 to 512 insert here.
    [The official committee record contains additional material here.]
    [The official committee record contains additional material here.]

    Mr. MCHUGH. But, nevertheless, in no way diminishing the first panel, we still are very fortunate to have with us a representative of the Department of Justice, Deputy Assistant Attorney General of the Antitrust Division, Donna Patterson, whom we welcome here this afternoon.
    I will say for the public record what I said earlier, happy birthday.
    Ms. PATTERSON. Thank you.
    Mr. MCHUGH. You are welcome. And I know you are looking forward to finally drinking legally. [Laughter.]
    With that, Ms. Patterson, again, in all seriousness, welcome. We are particularly happy now that you are here because we wouldn't have a panel 1 without you. [Laughter.]
    And also because of your testimony. I have read your testimony and, as with all panels and witnesses, would ask unanimous consent that their prepared statements be entered in their entirety for inclusion in the record.
    Also, before we begin, consistent with full committee rules, every witness before either the full committee or any of its subcommittees is required to take an oath. So if you would rise, please, and raise your right hand and affirm after me.
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    [Witness sworn.]
    Mr. MCHUGH. The record will show that Ms. Patterson affirmed the oath.
    Welcome. If you could summarize your statement, that would perhaps expedite things.
    So, welcome, and we are all ears.

STATEMENT OF DONNA E. PATTERSON, DEPUTY ASSISTANT ATTORNEY GENERAL OF THE ANTITRUST DIVISION, DEPARTMENT OF JUSTICE
    Ms. PATTERSON. Thank you, Mr. Chairman.
    I am pleased to be here this afternoon to present the views of the Antitrust Division on H.R. 22, the Postal Modernization Act of 1999. My written statement and remarks present only the views of the Antitrust Division. The Division's comments should not be read as addressing issues outside our area of expertise or as reflecting the position of the Department of Justice or the administration with respect to overall postal reform.
    Since passage of the Sherman Act in 1890, the United States has committed itself to protecting free and unfettered competition in the vast majority of markets in our economy. This reliance on free-market competition has served us well and provided numerous benefits to consumers, including more innovation, a greater choice of products, and lower prices.
    The primary antitrust enforcement tools are sections 1 and 2 of the Sherman Act, which prohibit conspiracies and restraint of trade and monopolization, respectively, and section 7 of the Clayton Act, which prohibits mergers or acquisitions that may tend to substantially lessen competition.
    In addition to our primary law enforcement activities, the Antitrust Division engages in a program of competition advocacy. Since the enactment of the Postal Reorganization Act of 1970, we have provided views with respect to postal issues in a variety of arenas. We have challenged the efforts of the Postal Service to expand the scope of the protections afforded under the private express statutes and have suggested the need for a comprehensive review of competition in domestic and international markets for mail services.
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    A number of our prior efforts are listed in my written statement. Most recently, we supported the legislative amendment transferring responsibility for international postal policy from the Postal Service to the State Department. We applaud the subcommittee's efforts in spearheading and enacting that legislation. We believe it will have beneficial competitive consequences.
    The Division's position with respect to the key competition policy issues affecting domestic and international mail consistently has been to promote competition where feasible. Accordingly, we have criticized attempts by the Postal Service to use its regulatory authority to expand the scope of the private express statutes, and we have opposed efforts to erect restrictions on competition in international mail services.
    These positions are consistent with our general view that statutory exceptions to the Federal antitrust laws should be avoided whenever possible.
    Federal competition policy objectives are best served when the Federal antitrust laws are applied uniformly rather than allowing the distortions that arise when special protections are given to classes of competitors or to selected industries.
    I would like to turn now to the proposed legislation. First and foremost, I want to commend the subcommittee for ensuring that competitive principles play an important role in Postal Service reform. Today, competitors have entered a number of the activities formerly carried out only by the Postal Service. At the same time, it appears unlikely that other entities currently have the infrastructure necessary or the desire to compete for general First Class Mail delivery at the size and scope necessary to preserve universal service of mail delivery.
    The policy question that the proposed legislation addresses is whether an acceptable system can be devised to put the Postal Service on roughly the same footing as others in the areas in which it faces competition, while ensuring that the Postal Service continues to have the ability to meet the requirements of its universal service obligation efficiently.
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    H.R. 22 recognizes the distinction between the Postal Service's universal service obligation and its participation in newly competitive markets by treating these services differently.
    From the perspective of competition policy, the goal and intent of the legislation to enhance the ability of the Postal Service to participate in competitive markets, while at the same time addressing concerns about cross-subsidization, is a step in the right direction.
    A significant aspect of the legislation is the move from cost-based to price-cap regulation for the Postal Service's monopoly products. In many instances, price-cap regulation systems have advantages over cost-based price regulation because price cap systems tend to create greater incentives to lower costs and to increase efficiency.
    One of the keys to implementing the regulatory pricing scheme contained in the legislation will be to ensure that an appropriate cost-allocation methodology is adopted. Another important component of the new structure is the application of the antitrust laws to the Postal Service for activities relating to its nonmonopoly products.
    I would like to turn now to comments on two specific provisions of the bill, section 305 and section 603. Section 305 appears to create a regulatory scheme under which the Postal Regulatory Commission would proscribe regulations to enforce statutory requirements that the Postal Service not, among other things, create any competitive advantage for itself or any other party. We would like to discuss this section with the subcommittee.
    We are concerned that, without clarification, the standards in this section may diverge from the antitrust laws. We are also concerned that future interpretations of the section could lead to unintended consequences such as disputes over the meaning of competitive advantage or the chilling of legitimate procompetitive behavior. We welcome the opportunity to work with the subcommittee on this issue.
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    Section 603 would require the Department of Justice to prepare a comprehensive report identifying Federal and State laws that apply differently to competitive products of the Postal Service than to products of other companies. The Department of Justice is not an appropriate agency for such an assignment. We are concerned that such a requirement would require us to divert scarce resources from our law-enforcement activities and, therefore, detract from the appropriate enforcement of the antitrust laws. We respectfully request that if this reporting requirement is retained as the legislation goes forward, the job be assigned to a more appropriate agency.
    I would like to finish my remarks by again noting that the promotion of competition, where possible, should be an important goal in any Postal Service reform, and I thank the subcommittee for taking important steps in that direction.
    I am ready to answer your questions.
    [The prepared statement of Ms. Patterson follows:]
    Offset folios 521 to 529 insert here.
    [The official committee record contains additional material here.]
    [The official committee record contains additional material here.]

    Mr. MCHUGH. Thank you very much, Ms. Patterson.
    I had planned to bring the two departments, Treasury and Justice, together at least insofar as discussion of what I think are important issues regarding competitiveness and the areas of concern raised by Treasury. That is not going to be possible here today.
    Let me just ask you a particular question. It is actually a generic question. Is it fair of me to say that, whether we are dealing with a Postal Service or any other business-type organization, the questions of borrowing and banking and such are indeed an issue of competitiveness, and that inequitable treatment between two sectors can, in fact, lead to an unlevel playing field? So, in other words, if one borrower has a particular advantage or a particular situation, that by law enriches it above another, isn't that an issue of competitiveness?
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    Ms. PATTERSON. I am not prepared to comment on the Treasury Department's views on this.
    Mr. MCHUGH. Just the question I asked.
    Ms. PATTERSON. With respect to competitiveness and a level playing field, our goal in enforcing the antitrust laws and thinking about appropriate antitrust laws, is always to have competitors subject to the same scheme of laws and regulations.
    By a level playing field, I think what we generally mean is an equal opportunity to compete, not absolute equality in every characteristic. Indeed, I would be hard pressed to think of an industry where every competitor had the same characteristics, the same borrowing power or the same quality of trademark. So I think differences among competitors are inherent in competition, and it is the opportunities afforded them to compete that need to be level.
    Mr. MCHUGH. Mr. Sachs, what do you have to say for yourself? Oh, he is not here. [Laughter.]
    I appreciate that. But given the absence of Treasury, I will just move to two quick questions I have specifically relating to your testimony and two things that you mentioned.
    The first being, and both of them are on page 9 of your testimony, you talked about the concerns that you have with respect to the assignation of responsibilities that Justice has in identifying certain Federal and State laws that inure certain benefits or apply differently to the Postal Service, and you asked that it be assigned to a more appropriate agency. I don't disagree with that but I am curious, do you have a suggestion as to which more appropriate agency we might assign them to?
    Ms. PATTERSON. I don't have a particular agency in mind. We don't have any comparative advantage with respect to State laws or, indeed, with respect to all Federal laws. We really only know about the antitrust laws.
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    I believe there are other agencies that do—regulatory and reporting agencies—that do such studies from time to time, and I would think one of them would be more appropriate.
    Mr. MCHUGH. If we could ask then that you and your people give some thought to that, because we are perfectly willing to consider it. It wasn't really an attempt to punish you, I assure you, and you may view it differently.
    Ms. PATTERSON. We didn't interpret it that way.
    Mr. MCHUGH. But we want to, where possible, assign these kinds of things to the most appropriate agency. So if you have any specific thoughts, as we go along, we would be very interested.
    Ms. PATTERSON. We would be happy to provide you with our thoughts.
    Mr. MCHUGH. Thank you very much. The other is your reference to section 303, which was stated above that. We are somewhat concerned that the standards contained in the mentioned section appear to diverge from the antitrust laws and about the availability of different forums for addressing the same conduct. It could be possible that legitimate and procompetitive business practices may be inhibited by this action. You then go on to say that we want additional discussion. I appreciate that.
    But I just thought for the purposes of your appearance here today, do you have any specific examples or generically specific examples about what kind of procompetitive business practices may, in fact, be inhibited? What kinds of areas are we likely——
    Ms. PATTERSON. With respect to subsection 4 of section 305, I think it is possible that that prohibition on the Postal Service could prevent the Postal Service from providing information to its customers about all competitors who provide a certain service, and I think that would be legitimate procompetitive behavior that would be affected by that subsection.
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    Mr. MCHUGH. Well, there are two. You offered kindly for further discussion, and we will certainly take you up on that. I appreciate it.
    I am going to, with great appreciation, recognize the chairman of the full committee, who has joined us and, who I should say, before I do yield, has been a great leader and a great supporter in this process. He was at our last subcommittee hearing as well, and we're delighted he has been able to take at least a few minutes to be with us here today, the gentleman from Indiana, Chairman Burton.
    Mr. Chairman, welcome.
    Mr. BURTON. Thank you, Mr. Chairman.
    I just came here to be educated, and I really appreciate all of the hard work you have done.
    I have a statement for the record I would like to submit.
    Mr. MCHUGH. Without objection, sir.
    [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. BURTON. Do you know where Mr. Sachs is?
    Mr. MCHUGH. Well, funny you should ask. Actually, Mr. Chairman, I expressed a great level of disappointment. We learned at 1 o'clock, or perhaps a few minutes after, that Treasury did not intend to send a representative.
    Mr. BURTON. Was there any reason they gave or anything?
    Mr. MCHUGH. To this moment, we have not, to my knowledge, received, on our side, any kind of indication. Apparently, there was some contact with the minority side, but I think they would agree with me that it was late, and it was less than decisive, and we received no indication at all.
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    Mr. BURTON. Mr. Chairman, let me just say that if you require witnesses to be here and they choose not to be here, we will be very happy to assist you by issuing a subpoena to make sure they are here. We will contact Mr. Sachs and find out why he wasn't here because you deserve the respect that is due your position. You have worked on this issue for about 4 or 5 years. So we will talk to Mr. Sachs and make sure he never does this again.
    Thank you.
    Mr. MCHUGH. Thank you, Mr. Chairman, and we will keep that in mind. I would prefer to subpoena people who support the bill, however. [Laughter.]
    Before we proceed to the minority for questioning, we have been joined, also, by the gentleman from Ohio, Mr. LaTourette, one of the original subcommittee members who, as I mentioned last time, continues to voluntarily serve, so that deserves recognition. I would be happy to yield to him if he has any opening comments.
    Mr. LATOURETTE. I will wait.
    Mr. MCHUGH. I thank the gentleman.
    At this time I would yield to the gentleman from New York, Mr. Owens, for any comments or questions.
    Mr. OWENS. No questions.
    Mr. MCHUGH. Well, Ms. Patterson, we thank you.
    Oh, I am sorry, Mark. Mr. Sanford——
    Mr. LATOURETTE. Mr. Chairman, I am sorry. I thought you were asking me for opening remarks.
    Mr. MCHUGH. I am asking you for whatever you want to throw out there, Steve.
    Mr. LATOURETTE. Then hang on just a second. I apologize.
    I was going to save my opening remarks until my pithy questions, and I just have, Ms. Patterson, a couple of questions that relate to the last hearing with the Postmaster General, and I think he, in his testimony, made some observations that were a little alarming to me and some other members of the subcommittee as well.
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    We always hear about foreign government subsidization of industry. People in the steel industry are now coming to us saying their companies are subsidizing the steel industry and putting our industries at a disadvantage. I think he mentioned Germany in particular, and I think he mentioned England as well; wherein, they had sort of gotten big time into the mail business. The concern was that with the leverage created by not only the Government being behind that enterprise, but also their involvement in private corporations, that they were going to be putting the U.S. Postal Service at a disadvantage.
    Relative to your comments and observations on antitrust, I am just wondering whether or not the Department of Justice has ever taken a look at the potential antitrust implications of someone other than the U.S. Postal Service or some of the competitors that are going to testify before us today as it comes to a monopolization of mail products abroad.
    Ms. PATTERSON. I don't believe that we have ever had concerns of that sort addressed to us in the context of specific behavior. Generally, we investigate specific behavior that is alleged to be harming competition at the time.
    Mr. LATOURETTE. Then the second question is we are going to hear from not only customers, but also competitors of the U.S. Postal Service today. Are you aware of any information the Department of Justice has on complaints or cases against the major competitors of the U.S. Postal Service relative to antitrust violations or monopolization?
    Ms. PATTERSON. Not as I sit here today, I am not aware of any specific investigations that are underway, although we get complaints from time to time from a lot of quarters about a lot of things, and we generally investigate them at the level that we believe appropriate at the time.
    Mr. LATOURETTE. And, last, as I read your testimony and also heard you testifying about, you had some concerns about the responsibilities that H.R. 22 would deliver to the Department of Justice under section 603, and it is your observation that that should go to a more appropriate agency than Department of Justice because of manpower constraints and things? Do you have a suggestion as to who would be more appropriate?
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    Ms. PATTERSON. As I said to the chairman, I don't have a suggestion about a specific agency, but we have agreed to give that some thought and get back to the subcommittee with any suggestions we have.
    Mr. LATOURETTE. Thank you very much.
    Ms. PATTERSON. Thank you.
    Mr. LATOURETTE. I thank the Chair.
    Mr. MCHUGH. Again, Ms. Patterson, thank you for being here. As we have already discussed on several occasions, we are looking forward to working with you, particularly on those two sections and we appreciate that opportunity.
    Ms. PATTERSON. Thank you. We look forward to working with the committee.
    [Additional questions for the record follow:]
    Offset folios 003 to 006 insert here.
    [The official committee record contains additional material here.]
    [The official committee record contains additional material here.]

    Mr. MCHUGH. Thank you very much. Thanks for being here, too. [Laughter.]
    The next panel is made up of two very distinguished gentlemen: Mr. Fred Smith, who is chairman and chief executive officer of the Federal Express Corp.; and Mr. James P. Kelly, who is president and chief executive officer of United Parcel Service.
    I asked staff if they were here, and someone said, ''Gee, I haven't seen them, and I hope they are not with Mr. Sachs.'' [Laughter.]
    So these two guys walk into a bar. The first guy says—[laughter.]
    They are checking to see if they are in a holding room. I didn't know we had one, but—[laughter.]
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    [Pause.]

    Mr. MCHUGH. Have you gentlemen seen Lew Sachs? [Laughter.]
    To let you in on that, he was the gentleman on the first panel who didn't show up, and we were beginning to worry you three were together somewhere. [Laughter.]
    Mr. SMITH. We were right behind the door, but it still took us 10 minutes to get here.
    Mr. MCHUGH. I said awfully nice things about you while you were out of the room. I will show you the record later.
    I do deeply appreciate you two gentlemen being here. You both have extraordinarily busy schedules, extraordinarily successful companies, and are most gracious in agreeing to be here today and to give up some of your valuable time in helping us to go over this issue. In that regard, we have also appreciated very much the opportunity to work with both of you personally, but on a continuing basis with your representatives who have been fully engaged in this process, as you know. You have provided a great service, certainly to the subcommittee, but I think to the entire country on this important matter.
    As I mentioned with the abbreviated first panel, we have made both of your statements part of the record and entered them in their entirety, and we appreciate the work and thought that went into those. I have read them both. I would yield to you now for the opportunity to make an oral presentation. But before we do, the subcommittee and committee rules require, as I think both of you have done in the past, ask you to rise and to affirm an oath. If you would do that, please, gentlemen and raise your right hands.
    [Witnesses sworn.]
    Mr. MCHUGH. The record will show both witnesses responded in the affirmative.
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    With that, welcome. I am going to, for no other reason than this is how they are listed here—this is no reflection on seniority, no reflection on success, no reflection on anything other than that this is how they were typed—I will yield first to Mr. Smith who, as I said, is chairman and CEO of FDX, and welcome him and pay our attention to you, sir, as you make whatever comments you would like to at this time.

STATEMENTS OF FRED SMITH, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, FDX CORP.; AND JAMES KELLY, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, UNITED PARCEL SERVICE
    Mr. SMITH. Thank you very much, Mr. Chairman. I am delighted to be here representing tens of thousands of employees and independent operators that drive the FDX system, two primary components of which are Fed Ex and RPS.
    I am delighted to be here with my friend, Jim Kelly, as well, representing the fine folks at UPS. I think both our companies have many more similarities in outlook on this matter than disagreements. In fact, I think we would both very much like to end up in exactly the same place, and whatever disagreements we have are probably as to how best to get there.
    In that regard, as you know, we support H.R. 22 and think that it is a good piece of legislation, well thought out, that takes the country, and our industry and, for that matter, the Postal Service in the direction that it should and must go in the 21st century.
    I think it is important to look at this issue from a broader perspective than is often the case. In that regard, the way I characterize what the Postal Service is trying to do today is what private business would call a diversification.
    As you well know, the Postal Service was given a monopoly in 1871 to carry letters. And the primary justification for that was to provide universal service and the primary commercial ties for an expanding nation.
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    In the early part of the 20th century, the Postal Service began to add, in addition to their letter traffic, the movement of publications and physical goods, and over a number of years developed a substantial business in that regard.
    Then in the middle part of this century—and Mr. Kelly could tell you a lot more about it than I can because his company was right in the middle of it—the Postal Service, in essence, withdrew from the goods delivery business. One of the reasons that they did was that they found that the operating systems—the vehicles, the post offices and so forth—could either be optimized for the delivery of letters, and publications and small items or they could be optimized for the delivery of packages, but not both. To put it in very simplistic terms, it is one thing to be delivering letters in a small jeep vehicle with a right-hand drive in your neighborhood, and it is quite something else to be delivering parcels which require the capabilities of step vans of the type operated by UPS or Fed Ex or RPS.
    UPS became the primary parcel delivery entity in this country, and only recently has the USPS begun to turn its attention away from the delivery of letters and small items back to the delivery of goods, both in this country, and more worrisome, as a matter of fact, in the international sphere where they are under far less oversight.
    The reason that they are doing that, at least according to their own statements, is that they fear technological obsolescence of the movement of letter mail, and they feel that they should be allowed to be competitive in areas which are also served by the private sector.
    Quite frankly, we find no compelling public argument to support that position of the Postal Service. It is hard for me to fathom why it is in the public interest. The Postal Service is exempt from antitrust regulation, is exempt from most tort claims—at least according to them that they are—is represented by taxpayer-funded lawyers, does not pay any sales, excise or property taxes, is exempt from zoning regulations, does not buy license plates for their cars or their trucks, has no zoning restrictions on it and, in fact, only pays parking tickets if it voluntarily agrees to do so. With the Postal Service enjoying all of those advantages—not to mention the fact that for every dollar of profit that we return to our shareholders, we pay, at the moment, about 41 cents out of every dollar to the Federal Government—we can't for the life of us find any compelling public-interest argument for the Postal Service to be able to diversify into the goods movement sector.
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    But having said that, there is a very large private interest in the Postal Service becoming something that has a viable mission in the 21st century, and the political realities of that are so stark that we believe that H.R. 22 is a good compromise, dividing the Postal Service's operations into the sector which benefits from all of those advantages that I just listed—and many more, plus the monopoly rents that they can command by virtue of their letter monopoly—and a competitive sector which has the appropriate controls, and opportunities and risks that our companies take in the marketplace every day.
    So on that basis, we think H.R. 22 is a well thought out first step toward the commercial operations of the Postal Service becoming privatized. It recognizes the private interests of postal workers and the interests of the people who have come to depend on the mails, but also recognizes the realities of the world economy and the realities of the marketplace for the 21st century.
    One of the areas of particular concern, before I conclude my remarks and turn it over to Mr. Kelly, is the Postal Service's forays into the international marketplace. As you know from the Postal Service's own figures, they lose money. In fact, as well reported, they lost a considerable amount of money. That money has been paid for by the taxpayers of the United States in lost income taxes not paid by the commercial transportation companies that would have handled that traffic or by the first class letter mailers who would have enjoyed lower rates for the movement of their traffic had it not been for these efforts of the Postal Service to get involved in those sectors.
    In that sector, in particular, they are not under the same control elements and auspices of the Postal Rate Commission, as you know. And I think Jim Kelly, who has been very vocal about this and compared some of the rates being charged in the international sector compared to the domestic sector, makes a very, very compelling case as to how this is neither desirable nor fair.
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    I think, with that, I will stop and, hopefully, I have given you the very broad perspective of our view on the Postal Service's situation and the legislation itself.
    [The prepared statement of Mr. Smith follows:]
    "The Official Committee record contains additional material here."

    [The official committee record contains additional material here.]

    Mr. MCHUGH. Thank you, sir. You have indeed. I normally don't recommend reading to anyone, but anyone who might be interested in this process, the testimony that you have submitted is among the more complex and thoughtful that we have had, and I would recommend it to anyone who would care to review it.
    That isn't only my interpretation because you are generally supportive, although it probably helped. [Laughter.]
    I would now be happy and delighted to yield to our next witness, Mr. James Kelly, who is chairman and chief executive officer of United Parcel Service. As I said earlier, sir, we are delighted and honored that you are with us. Without further ado, let me yield to you and our attention is yours.
    Mr. KELLY. Thank you very much, Mr. Chairman. It is my pleasure to be here, and good afternoon to members of the subcommittee.
    UPS was founded in 1907 as the world's largest express carrier and package delivery company——
    Mr. MCHUGH. Excuse me, Mr. Kelly. Would you pull the microphone a little bit closer to you, please. Thank you.
    Mr. KELLY [continuing]. Serving more than 200 countries and territories around the world.
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    There is no single issue of greater importance to the future of UPS and our 330,000 employees and owners than postal reform, and thank you for inviting me here today to share our views.
    I would like to take a moment to thank you, Mr. Chairman, for your tireless work and patience in grappling with what must often seem like a thankless task. You have always been willing to listen to both sides of this controversial issue, and your hard work and leadership over the past few years have helped to define many of the problems and challenges at hand and to shape possible solutions.
    This is an extremely complex issue with profound ramifications for all Postal customers, as well as private competitors, like UPS. We have listened to all of the arguments made by the Postal Service that they need even greater flexibility over their prices to compete in the marketplace. They say they must maintain their monopoly on letter mail and remove what little oversight they now observe. Otherwise, they say they will not be able to deliver mail at affordable prices, stamp prices will go sky high, universal service will die, rural post offices will close and the doctrine of a service to ''bind the Nation together'' will die. And we all know none of this is true.
    Mr. Chairman, the logic leads us in the wrong direction. It perpetuates the fundamental problem with the Postal Service as a privileged competitor to private business and a Government agency.
    Let me pose two fundamental questions that goes to the heart of this debate:
    What is the role of this Government agency and is the proper role of the Government to leverage a monopoly power to compete with private business?
    You have stated the objective of reform should be to enhance the core mission of providing universal letter-mail services at uniform, affordable prices, and we agree. Unfortunately, we believe, in its present form, significant portions of H.R. 22 would create even greater danger of monopoly abuse by the Postal Service.
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    Reform should not grant the Postal Service additional freedoms to abuse its monopoly to compete with the private sector. Yet, that is exactly what we believe the current bill would do. That is not the role Congress intends for a Government-granted monopoly.
    The Postal Service is currently operating under a hybrid status where it is neither subject to the same controls as a Government agency nor is it under the same discipline or obligations that private businesses face. The Postal Service enjoys a host of exemptions from regulations such as taxes, licensing requirements, zoning regulations and so on. The result of this structure is a Postal Service that has abandoned its focus of providing superior first-class service for all Americans. This is all in efforts to garner market share from private-sector competitors, through abuses of its monopoly power, under the guise of protecting universal service in a changing marketplace.
    For the past decade or so, the Postal Service has ventured into new markets and products never envisioned by Congress when reforming the Postal Service in 1970. The Postal Service is engaged in predatory competition by using revenues from captive, first class monopoly customers and taking every advantage of its Government status to undercut prices of private-sector competitors.
    Last month, the postmaster general testified before this committee about the threat of the highly commercialized and capitalized foreign postal administrations entering the U.S. market. Mr. Henderson stated that the Postal Service would not have the ability to cut deals with foreign postal administrations and offer products priced below competitors, such as UPS and Federal Express.
    On Monday, the Postal Service announced an alliance with DHL Worldwide. They will offer a 2-day guaranteed service between the United States and Europe. The price for this service is significantly less than the prices charged by Federal Express, UPS, or DHL's own branded products. I ask the committee how can this be possible? Apparently, despite the rhetoric, the Postal Service isn't that terrified of foreign postal administrations entering the U.S. market, as DHL is owned, in part, by the Deutsche Post AG.
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    Should we allow the Postal Service greater flexibility to make such arrangements with foreign governments or is it time to reign them in? We believe it is the latter. It is time to have this Government agency refocus on its primary mission of providing superior universal letter mail delivery.
    Absence the elimination of the monopoly, Congress should, at a minimum, strengthen the Postal Rate Commission to increase the Postal Service's accountability to consumers and taxpayers. Currently, the PRC does not have all of the basic tools to get information it needs from the Postal Service to make informed and rational decisions.
    In the international arena, the PRC has no jurisdiction, and the Postal Service has total freedom to set at any rate and service.
    Again, I ask what is the role of this Government agency? The PRC should be granted subpoena power and the authority to make final binding decisions on all postal rates, including full jurisdiction over international rates. And to encourage cost efficiency of the Postal Service, the Commission should be given authority over the Postal Service's revenue requirement. As long as the Postal Service maintains a Government-granted monopoly and is in direct competition with the private sector, these short-term basic reforms are needed to help provide consumers, taxpayers and private competitors with the accountability Americans expect of a $60 billion Government agency.
    No monopoly should have the unchecked authority the Postal Service is seeking. These reforms will also help simplify and streamline the rate-setting process. A stronger system of accountability will be an important first step in whatever long-term reforms come to pass.
    Again, I thank the committee for your attention on this very important matter and for listening to UPS' views today and in the past. I certainly welcome any questions that you may have.
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    [The prepared statement of Mr. Kelly follows:]
    "The Official Committee record contains additional material here."

    [The official committee record contains additional material here.]

    Mr. MCHUGH. I thank the gentleman for his comments and, as I said, his participation.
    I think it is good to have two industry leaders, such as yourselves, side-by-side because the natural inclination may, in fact, be to think that you would be united from step one to step last on how this puzzle should be approached and ultimately pieced together. And as Mr. Smith said in his opening comments, that is not necessarily the case. Objectives may be the same, but perspectives along that process are not always shared exactly, and that is where we are today.
    I am tempted to ask that the two of you just chat and see if one can prevail over the other, but I don't know if that would really come to any good. So let me just ask a couple of questions and then go to my colleagues.
    First of all, let me say to Mr. Kelly I couldn't agree more. Clearly, one of the main reasons we are in this process is to attempt to level that playing field, to use the old cliche, that I think undeniably exists, and you mentioned a few of the examples that most trouble you and most concern you. Without trying to convince you of the merits of the bill, I would only note that the USPS, the Postal Service, venture with DHL couldn't have occurred, as it did, under H.R. 22; that, in fact, depending on how the argument came out, if it were a new competitive postal product or a new nonproduct as a joint venture, it would either have to go through the Competitive Products Fund, which would mean it would be under the auspices of the Postal Rate Commission, or it could only be done under the Private Law Corp., which would subject it to all of the kinds of pressures that you as private business people experience, and as Mr. Smith spoke about, taxes, the need to adhere to local zoning, land-use, and public-use regulations, and putting license plates that you actually paid for on your delivery trucks, et cetera. Also, the issues of providing, in the process of the Competitive Product Funds, the opportunity for the Postal Rate Commission to do a better job to get at the data it needs by granting it subpoena power and by requiring that products, through the equal cost coverage rule, contribute back in an equal way.
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    So I think we have tried to address that. Obviously, Mr. Kelly, you don't seem to think that we have gone quite far enough. You mentioned in your testimony that we need to do more.
    So I just throw a general question out there. If you could have us add any one or two or three things into this area within the structure of this bill, what it might be?
    Mr. KELLY. Yes, Mr. Chairman. We certainly believe that the committee is very sincere in attempting to do exactly what you just characterized, and we are working as hard as we can to help try to put our point of view to have that happen.
    Certainly, we are concerned about the dual ratemaking process that is involved in——
    Mr. MCHUGH. I am sorry. I didn't hear you. The what?
    Mr. KELLY. Dual ratemaking process, where cost becomes less of an issue in the competitive products. We are concerned about the Postal Service's ability to discount and increase its subsidies against competitive products.
    The Private Law Corp., as I understand it, it calls for them to do additional competitive products. We don't believe there is any reason for a Government agency to have to enter a competitive area. We just don't see why that exists, and we think the abuse that they use with their current monopoly should be limited and not allow them to extend that monopoly to other competitive situations.
    And, certainly, we believe the PRC needs more power, needs more teeth. The Postal Service has demonstrated over the years that they need that kind of control. They have, again, today, as I read, refused to give information to the PRC in order for them to do their job properly. We believe that the PRC has to have subpoena power.
    Mr. MCHUGH. But that is in the bill.
    Mr. KELLY. We believe they have to have the final say in ratesetting, and there are a number of issues.
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    Mr. MCHUGH. Forgive me. I didn't mean to interrupt. But the subpoena power is in the bill.
    Let me go back to the Private Law Corp. You would agree—and don't let me put words in your mouth—would you agree, as I think you testified to in your statement, that today, over your very understandable and strong objection, the Postal Service does, indeed, compete in just about any way it chooses with the private sector? Isn't that true?
    Mr. KELLY. Well, they have certainly become more aggressive in where and how they compete with the private sector, and we believe that that should be reduced and eliminated.
    Mr. MCHUGH. So the answer is, yes, they do do that. I mean, they offer phone cards, they offer mugs——
    Mr. KELLY. Yes, they do.
    Mr. MCHUGH. They offer ties, they offer mouse pads, they offer t-shirts——
    Mr. KELLY. And what next?
    Mr. MCHUGH. DHL——
    Mr. KELLY. Yes, they do.
    Mr. MCHUGH. Well, I don't know, but they do. So that is a given.

    I guess there are two ways to meet your concern. One is to say Postal Service go to your core business, as there has been legislation introduced. Do nothing else ever.
    And the other is to say, if you are going to continue in nonpostal products and compete in the private sector, you can only do it through the Private Law Corp., and that is our solution.
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    So I am assuming what you are saying is that you object to the Postal Service offering any kind of nonpostal product at all, ever.
    Mr. KELLY. Well, long-term, that is obviously what we believe.
    Mr. MCHUGH. OK. That is fine.
    Mr. KELLY. I think the reality of what exists today could make the second proposition doable if, in fact, you could build the firewall thick enough and tall enough that things couldn't be tossed back and forth across. And we don't believe, and we think it has been demonstrated over the years, that they can't be prevented from doing that without stronger language.
    Mr. MCHUGH. Then I would ask you, as we have asked in the past, that we need to see the language as to how to build that wall any thicker, because we have created, and even the chairman of the Postal Rate Commission has said, in his words, ''an almost perfect system.'' He doesn't like it. He dislikes it for other reasons, but he admits that the way in which it is done, he doesn't see how the issue of firewalls and backwash subsidies could be any better precluded.
    The reason there aren't more in there is not because we are ''agin 'em,'' but because nobody can think of them. And to preserve the Private Law Corp. and to build upon it, we are happy to do that.
    Let me, with that, go to Mr. Smith because he takes a much different view, as I recall his testimony on the Private Law Corp. and the issue, and I would be interested in hearing his views.
    Mr. SMITH. Mr. Chairman, you mentioned a moment ago that there, in essence, are only two solutions to this problem. The first solution would be to tell the USPS go to your core business and you are precluded from being involved in anything that a commercial enterprise can do, and the second is a track along this line.
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    As I said in my opening remarks, and I want to reiterate right now, if I had the power to prescribe the best public policy for the United States of America, and for that matter, for the Postal Service itself and the private sector, it would be to do the former, not the latter.
    The Postal Service would be much better off if it were relegated to carrying first class letters, and small packets with a limit of, say, 2 pounds because I am very confident—and I am sure Jim will agree with me based on the extensive knowledge both of us have in terms of the structure of pickup and delivery, and sortation facilities and what have you—the overall costs for the public would go down.
    On the other side of the coin, we serve every address in the United States of America with the exception of a very few points in Alaska, and I know UPS does too. The price of delivering goods to addresses should be reflective of the actual cost. If there is one thing that the last 50 years has taught the world, it is the great silliness of having governments misallocate capital and human resources. The whole problem in China and the former Eastern bloc is precisely that. People put money into ventures not because that was what the market was willing to pay or that was the most efficient allocation of resources, but because somebody was able to get the money and do that.
    That is really what the Postal Service is doing. It is a significant misallocation of resources for the Postal Service to be attempting to do what they are currently doing, which is diversifying into many of those sectors, but in particular into the goods movement sector. They don't have a congressional mandate to do that. They don't have, quite frankly, the infrastructure to do that. They actually got out of that business one time because of that consideration. They are doing it to diversify.
    So that would be the best public policy. But we don't think you can get there, given the political realities, and that is why we support H.R. 22 because it is the second-best alternative.
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    Mr. MCHUGH. I appreciate that. You have always been very clear about that as well.
    Can I assume, then, because I take very seriously a man of the stature of Jim Kelly when he is concerned, and I understand that, and I have said repeatedly I am not foolish enough to think anyone who has a responsibility, as each of you do, and Mr. Kelly does, for a corporation of the magnitude and the success of UPS, to walk blindly down an alley just because I would like it. I mean, that is ridiculous, and I don't.
    So I want to try to do what we can to build on the Private Law Corp. because I come down the same place you do. Regardless of how I may feel about all of the other things going on, they are going on. I don't see, quite frankly, in this Congress, in this administration, a likelihood of changing it to that reality, if that were my interest. So we are looking at the second reality.
    Are you content or satisfied that the Private Law Corp., as constructed, will, indeed, do what it is intended to do, and that is to preclude, to the greatest extent possible, the kinds of abuses, and misuse and misappropriation of public finances and the public privilege that the Postal Service now enjoys in those future products?
    Mr. SMITH. I would certainly hope so, Mr. Chairman. I think a lot of it depends on just how tough the PRC is in enforcing it. History shows that entities like the USPS, who are not accountable to the marketplace, per se, and to private interests, have a terrible tendency to abuse the powers that they have, and I would submit to you that Jim Kelly is absolutely right. That is what they are doing right now.
    So it largely depends on just how tough that oversight system is. I would hope that, if it is not tough enough, that the legislative history of this act would be such that the private sector could come to the Congress, if there are abuses, and seek amendments.
    The Postal Service has been intractable on occasions, as Jim pointed out, in providing information, in obfuscation. I think this may be just the heritage of the organization. I think it was before this committee, the Postmaster General—who may be here, I don't know—was testifying the same day Mr. Kelly and I were, and someone asked him and said, ''Do you think that you are subsidized?'' and he said no. Well, I got out of this room, and I talked to our folks, and I said that is the damndest thing I ever heard in my life, that the postmaster general would say that he is not subsidized when he has all of those advantages that I listed a little while ago and that are in his testimony. One of our very able lawyers said, ''Well, you have got to understand that he is coming from the postal world and what that means to him is that he is not getting a direct subsidy of taxpayer funds.''
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    Well, I think a lot of the problem here is that the marketplace that UPS and FDX work in is very brutal, and very tough, and it has a lot of penalties for making a mistake. There is a mentality inside the Postal Service that is somewhat insulated from that, and it leads to a hubris. I think that it is a real danger that they would attempt, in the interest of what they thought was their mission, to be a little bit trying to the oversight mechanisms that are in H.R. 22.
    Mr. MCHUGH. Well, any system of law, of corporations, of whatever you wish to cite, is only as good as those who oversee it, I would grant you. But we took very definitive steps, some of which came from your gentlemen's camps, as to how we can empower the PRC through subpoena power, through preapproval of negotiated service agreements, et cetera, so that that kind of thing doesn't happen. I don't know if it does or it doesn't. Obviously, you all feel very strongly, and I imagine we can find a large body of people to testify on your behalf. But you also recognize the Postal Service equally, and in an equally adamant way, denies that. So rather than trying to solve the ''chicken or the egg'' dispute, we tried to make sure there were no more chickens and no more eggs and fix the problem.
    Mr. SMITH. And, again, Mr. Chairman, that is why we support the bill. You asked me do I think it is strong enough, and I said it depends on how strong the PRC is, and if it doesn't work, we will just have to come back.
    Mr. MCHUGH. I appreciate that.
    I would be happy to yield to Mr. Owens.
    Mr. OWENS. Mr. Chairman, you have a long list of witnesses, and I think you have thoroughly explored this subject.
    I was curious to know why they weren't agreeing with each other, considering they are the two giants in this business. I think, after the conclusion of the dialog between the two of you, you both do agree. You, Mr. Smith, are saying you take off your businessman's hat, and you put on your politician's hat, and you said the reality is that we are going to go forward with the present situation, and we have to learn to live with it. Is that what you are saying?
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    Mr. SMITH. Yes, sir. Jim is probably better at this than I. I mean, I have gotten my brains kicked in a couple of times up here. [Laughter.]
    So I just am more mindful, perhaps, of the reality of trying to get where we need to go without going through this intermediate step. But that would be a fair way to put it, yes.
    Mr. OWENS. Memphis is my hometown.
    Mr. SMITH. Oh, it is? Great.
    Mr. OWENS. So say hello to the folks back home.
    Mr. MCHUGH. I thank the gentleman.
    Mr. LaTourette.
    Mr. LATOURETTE. Thank you, Mr. Chairman.
    Both of you gentlemen, when you were testifying, talked a little bit about the international market, and the ability of the Postal Service to compete in the international market. I think, Mr. Smith, you were talking about the fact that it is pretty well documented that they were losing money on some of their international shipments.
    Mr. Kelly, when you talked, I wrote down three times you asked the sort of rhetorical question, What is the role of Government? I was wondering if you would care to talk a little bit about the international aspects of the postal market, and I will ask you what you think the role of Government is in the expansion and development of international markets vis-a-vis the U.S. Postal Service and the businesses that you represent?
    Mr. KELLY. Thank you.
    I believe the Postal Service should continue to focus on the universal delivery of letter mail, and that is what they are there to do, and that is what they should continue to focus on.
    I think the whole international arena partially answers the question of why the Private Law Corp. gives to ZAJADA. When you talk about Postal Services expanding into competitive areas, when you talk about Postal Services acquiring private companies, we have a history that is only 2, 3, 4 years old in Europe of where exactly that has happened.
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    The Deutsche Post, for example, has purchased 6, 8, 10 private delivery companies in Europe. DHL, that the United States Postal Service formed the alliance with this week, is owned, in part, by the Deutsche Post.
    Another 25 percent of DHL is owned by Lufthansa. So, in effect, the relationship between the United States Postal Service and DHL, the only one who is going to benefit from that is the German Government. The American taxpayers are going to be disadvantaged by the subsidy of providing first class revenue to support that service in one case, and in the second case, there is no U.S. company that is going to derive any revenue or that is going to pay any taxes on that because it is going to wind up in Germany.
    There are some very complex and difficult issues that exist in Europe regarding postal services, and many of them are unfair. The situation is quite different because of the numbers of countries, of course, that exist in Europe. So they are competing with each other. In the United States, there is only one. If they give them the same kind of rights that the Deutsche Post is looking for, it would be devastating to private competitors in this country.
    There are virtually no private companies left in Europe.
    Mr. LATOURETTE. One of the comments that I think has come from UPS, in particular, that I have seen, has been criticism of the Postal Service's global package link.
    When we talk about issues of competitiveness, and I think that Chairman McHugh's excellent work on H.R. 22 is designed to get at competitiveness, but make it truly a level playing field and not a tilted scale, when we talk to the Postal Service about the global package link, they say that it is based upon economies of scale.
    So what you are doing when you complain about the fact that they are able to use their subsidization or monopolization to compete unfairly in the international market, well, they are just sending a lot of stuff and so they can do it cheaper. Do you have any thoughts or comments about that?
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    Mr. KELLY. Yes. I mean, they price that service, as I have mentioned a number of times, for a package to go from San Francisco to London is less expensive than it is to go from San Francisco to Los Angeles. The pricing makes no sense.
    The scale that they are talking about has to do with 10,000 packages, but it is not any ''X'' amount of packages per day. That is over the cost of the year. You can't gain the economies of scale that the Postal Service talks about gaining by spreading out those packages over the course of an entire year.
    Mr. LATOURETTE. I was interested in your discussion with the chairman about the Private Law Corp., in particular. Have you reached a conclusion that there is no firewall big enough or wide enough to fix this problem?
    Mr. KELLY. I am reluctant to say that. But if you look at the topic you have just discussed and you think of what they do with the global package link, and you think of what they do with subsidies today, to allow them to compete in additional areas, to allow them to buy private companies, it scares me to death of what they will do going forward. So, yes.
    Mr. LATOURETTE. Thank you very much.
    Thank you, Mr. Chairman.
    Mr. MCHUGH. I thank the gentleman. I want to probe that a little bit further because it is an important point.
    My understanding, and I believe it is reflected in Mr. Smith's testimony as well, is the Deutsche Post is actually selling their publicly held postal assets to directly utilize those funds for the purchase of the companies you are concerned about, and I am 99.9 percent certain that is true.
    H.R. 22 would totally prohibit that. It could not happen. The DHL-Postal Service joint venture shows that they can do these things today. As you know, they can actually go out and buy—the USPS could buy a company tomorrow, if one person, the Secretary of Transportation, signs off—Treasury, excuse me.
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    So that, in large measure, we are responding, trying to, to the very concerns you voice because the world that you fear of tomorrow is, I would suggest, far scarier from your perspective without H.R. 22 than it is with it. And I think, again, for a selfish reason, why I urge people to read Mr. Smith's testimony is because those issues are addressed.
    I do not, in any way, Mr. Kelly, belittle or wish to treat in a less than serious way the things you have stated. They are real, and I think fairness and the American system of capitalism, in theory, dictates that we look at it. That was part of the motivation and it is truly one of the things that I think is most directly addressed and the concerns that we have. So I just want to put that on the record. I am pleased that Mr. Davis is back, and I would be happy to yield to him.
    Mr. DAVIS. Thank you very much, Mr. Chairman.
    Gentlemen, let me apologize for having missed your verbal testimony.
    The Postal Service has presented a series of amendments. They encompass a number of things, including ratesetting process, pricing flexibility, the Private Law Corp. and others. Could you comment on these amendments, and then I would like to know if you think it would be possible that you would support the bill if those amendments were adopted.
    Mr. KELLY. Are you talking about the 32 amendments from the Postal Service?
    Mr. DAVIS. Yes, sir.
    Mr. KELLY. No. We certainly believe that they are subsidized now. We believe that all of the amendments will give them additional ability to compete unfairly with the private sector, and we absolutely and unequivocally would oppose the bill with the incorporation of the 32 amendments.
    Mr. DAVIS. I then ask you if you could comment on how your proposals would effect postal employees or if you think that your proposals could adversely effect postal employees.
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    Mr. KELLY. We have no intention of adversely affecting any employee group. And we think by focusing on First Class Mail delivery, the Postal Service, through its monopoly, provides an enormous amount of security for its folks that no private company, and, in fact, no other Government group, can provide. But we support that, and we are not looking for anyone to lose their job as a result of anything we are saying here. Our concern, of course, is to, in addition to that, to protect the employees of UPS and Fed Ex and not have them lose their jobs as a result of unfair competition with the Postal Service.
    But the Postal Service First Class Mail is continuing to increase, and all of the fears about all of the First Class Mail going away and no one having a job, if the compounded average growth of First Class Mail is 2 or 3 percent over the last 5 years, I don't think that fear has any foundation.
    Mr. DAVIS. Do you believe that the current or proposed new bill is better than what currently exists in the arena of competitiveness or promoting a more competitive atmosphere or environment?
    Mr. SMITH. I think the short answer to that would be that Jim does not agree with that and we do. We would think it would be better with the bill than without.
    Let me also say that we would oppose the Postal Service's amendments for exactly the same reason that he did and, secondarily, that it is my belief that the postal workers of the United States would have more job security, better future outlook, if the Postal Service concentrated on the movement of letters and small items because, regardless of the firewalls and what have you, there will be management diversion and inattention and the cost of letter and small items traffic will be greater with that diversification than without.
    The best way to preserve postal jobs is to have the most efficient and lowest cost letter and small package shipment service in the country.
    Mr. DAVIS. Recognizing the fact that sometimes it is virtually impossible to arrive at agreement, although we try, I mean, we are always looking for, I think, the common ground or the middle road or the place where there can be co-existence, how far apart do you think you and the Postal Service are in terms of a common ground that might be reached?
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    Mr. KELLY. When you talk about a common ground, let me again reiterate that we recognize and appreciate the amount of hard work and the amount of change that has gone into this bill, and it is a complex, difficult issue.
    There are a few things that concern us, and there are a few things that concern us a great deal, and at this point in time we are not able to support. But if you are talking about a compromise solution that is an interim solution, and when does the rest of it get fixed, and how does the rest of it get fixed, if you want to provide the Postal Service with the ability to compete more, the monopoly has to come away first, I believe.
    I don't believe you can provide them with additional competitive authority and allow them to keep the current monopoly that they have. Postal issues really haven't been addressed in a meaningful fashion in 30 years. So if we develop an interim solution, it is going to be a long time down the road before it is fixed again, I would feel.
    Mr. DAVIS. So you are saying that there would need to be additional competitive regulation put on the Postal Service to put it more in line with what happens in other parts of the industry.
    Mr. SMITH. From FDX's standpoint, we support H.R. 22. So the answer to your question is we have gone as far as we can go with H.R. 22. We would not support the postal amendments.
    I think what Jim is saying is, H.R. 22 doesn't go far enough in the direction of the appropriate levels of control.
    Mr. KELLY. That is correct.
    Mr. SMITH. I mean, that is the only difference. There may be this
much difference.
    So we certainly wouldn't go toward the Postal Service's position.
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    Mr. DAVIS. Thank you very much, gentlemen.

    Mr. MCHUGH. I thank the gentleman.
    We could do this all day, but we won't because you have been very gracious with your time. I am deeply appreciative, as is the entire subcommittee, for that. Just a wild guess on my part, but I bet we will talk again. We are looking forward to that.
    Once again, I do appreciate your participation and your efforts to assist the subcommittee in what has been a very interesting journey.
    So thank you, gentlemen.
    Mr. KELLY. Thank you very much.
    Mr. SMITH. Thank you very much, Mr. Chairman.
    [Additional questions for Mr. Frederick W. Smith follow:]
    Offset folios 836 to 839 insert here.
    [The official committee record contains additional material here.]
    [The official committee record contains additional material here.]

    Mr. MCHUGH. Panel 3, as we switch placards and turn chairs and such, is comprised of Mr. Jerry Cerasale, who is senior vice president of Government Affairs for DMA, Direct Marketing Association; Mr. Neal Denton, who is executive director of the Alliance of Nonprofit Mailers; Mr. Robert ''Kam'' Kamerschen, who is speaking on behalf of the Saturation Mailers Coalition.
    Gentlemen, welcome. Good to see you all. You know the drill. Stand up and raise your right hands.
    [Witnesses sworn.]
    Mr. MCHUGH. The record will show that all three of the panelists attested to the oath in the affirmative.
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    Thank you, gentlemen, for being here. As most everyone knows in this room, you all represent sizable numbers of those who, in different ways, perhaps, but in equally important fashion, both work with and depend upon the U.S. Postal Service. We welcome, too, our efforts to work with you on behalf of your organizations. So thank you for that effort.
    Without any further ado, keeping with my very well thought-out plan of earlier, I am going to recognize you in the order in which it was printed on the page, which coincides with the way in which I read it.
    So let me yield, first, to Jerry Cerasale, who as I mentioned, is senior vice president of Government Affairs of DMA. Jerry, thank you for being here. We are awaiting your testimony and your spoken words. We have entered all three of your gentlemen's written submissions in their entirety. So, if you could summarize for us, we would greatly appreciate it.

STATEMENTS OF JERRY CERASALE, 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
    Mr. CERASALE. Thank you very much, Mr. Chairman, members of the subcommittee.
    The Mailers Coalition for Postal Reform is honored to be here today. The members of the Coalition, the Advertising Mail Marketing Association, American Express Corp., the Direct Marketing Association, Magazine Publishers of America, the Mail Order Association of America, and Parcel Shippers Association, represent mailers who use all classes of mail and also are significant users of competitors of the Postal Service as well.
    I am Jerry Cerasale, senior vice president, Government Affairs for the DMA, and I have the privilege, I guess, of appearing before you representing the Coalition today.
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    The Coalition joined together in an effort to effect postal reform. All of us want a financially viable Postal Service in the 21st century and believe that without reform that goal is not obtainable.
    Our Nation is in the midst of the greatest peacetime economic growth in its history. However, during this economic boom, First Class Mail, upon which the financial stability of the Postal Service is very dependent, has not grown very much.
    H.R. 22 is not a guarantee that the Postal Service will survive in the 21st century, but it does provide the tools to the Postal Service to have a fighting chance. The burden then will be on the Postal Service management and its workers to improve the competitive edge of the Postal Service by improving productivity dramatically and providing products that meet the needs of the marketplace.
    The basic structure of H.R. 22, which separates classes of mail into competitive and noncompetitive categories and provides rate flexibility to the Postal Service, through indexing of the noncompetitive classes being one, is sound and has the Coalition's full support.
    Let me focus on those provisions of H.R. 22, which the Coalition believes are central to any postal reform, the competitive and noncompetitive products.
    Noncompetitive products should be defined as those products over which the Postal Service has a monopoly by law or through market dominance. Mailers who use such classes need the protections afforded by the indexed rate provisions in H.R. 22.
    However, we agree with the amendments suggested by the Postal Service that only the Service may initiate a request to the Postal Regulatory Commission to change a product's classification from noncompetitive to competitive. The Postal Service should have some control over its product offerings. However, once a product becomes competitive, it may not be reclassified as noncompetitive.
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    Allowing the Postal Service to change its mind and remove a product from the open marketplace would be unfair to competitors who shift their business plans in response to the Postal Service's competitive product offerings. Changing product classifications from noncompetitive to competitive must only be a one-way street.
    As we look at the product baskets, and I know I am speaking before Mr. Denton, but we will see what he says about the nonprofit area, and I will gladly, in a question, if it comes up, respond to his position on that, we agree with the rate baskets for noncompetitive products in H.R. 22, except that all international mail should be competitive. The Postal Service faces competition today from both foreign posts and private carriers for all international mail. We think that competition is only going to increase, so we think that we put international mail into the competitive category.
    In pricing, we agree with H.R. 22 that the Commission should establish baseline rates under the act without provisions for a contingency or prior years' losses.
    As we look at the competitive products, we don't agree with the requirement in H.R. 22 that the minimum markup for competitive classes of mail must be equal to the average markup for all postal products. If H.R. 22 were implemented today, it is our understanding that current rates for competitive classes of mail would have to increase by as much as 10 percent. Thus, H.R. 22 implies that the Postal Rate Commission erred in its most recent decision, and we disagree with that.
    We believe that the minimum contribution for competitive classes should be established by the Commission for base rates after applying all of the factors of the act. This would maintain the level playing field for postal competitors that the Commission established.
    Finally, we believe that after 5 years this minimum contribution requirement should sunset. We think that 5 years provides ample time for the Postal Service and its competitors to adjust to the marketplace, and the Postal Service would have to not do business at a loss and charge a fair-market price.
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    Looking at the noncompetitive products, we wholeheartedly agree with the index in H.R. 22 used to establish noncompetitive rates. There must be a productivity factor specifically applied to the Consumer Price Index as part of that index. This is needed as an incentive to the Postal Service to hold down costs. We strongly object to the Postal Service's amendment to remove the productivity factor ''because the CPI already contains productivity improvements.''
    The Postal Service should be required to do more than merely match productivity gains in the general economy. To fail to do so will imperil the Postal Service and the mail industry that depends on universal mail delivery.
    We also believe, however, that the pricing provisions in H.R. 22 are too rigid. Its application of the rate bands around the index severely reduces the pricing flexibility that we think the Postal Service needs. We have varying opinions about the specific method that best achieves the appropriate level of flexibility, but we believe that the provisions of the bill must be changed to provide some greater flexibility than H.R. 22 currently offers.
    We disagree with the Postal Service amendments that would allow the Postal Service to bank for up to 5 years any percentage increase allowed under the index, which was unused in a specific year by the Postal Service. If there is going to be any banking, we think 1 year would be a maximum.
    Special financial circumstances. There are three areas where we think that H.R. 22 may require some changes for special circumstances. The first is, if the Postal Service doesn't have enough money to run under the provisions of H.R. 22. We think in that case, the Postal Service should have to come to the Regulatory Commission and set up a brand new base case to establishing rates.
    A second area is when something occurs by Congress or executive or judicial branch that results in additional costs unforeseen on the Postal Service. We think, then, the Postal Service should be able to go to the Regulatory Commission and ask for a one-time adjustment in the index to take care of it. Don't let that adjustment stay in effect for 3, 4, 5 years because that will be overpaying the Postal Service for that adjustment.
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    The third area when there could be some circumstances to go beyond the index, would be when a specific rate is too low, the Postal Service is not covering its costs in a class of mail. We think the Postal Service should have to go to the Regulatory Commission and adjust, one time, the index, make an adjustment in the index, to increase the rates for that class on a one-time basis and then go on, under the current provisions, with the index previously set by the Regulatory Commission for the remainder of the 5 years.
    Market tests. It is important that the Postal Service have the ability to test new products, and I want to use the example with DHL as an example of potentially a market test. We agree that the Postal Service should have the ability to try and test products and products that may turn out to be a bust, products that may turn out to not cover their costs, but have the ability to test them. Otherwise the Postal Service is going to be hampered in its ability to meet market needs.
    We do support very much the provisions of H.R. 22 in this area, but do agree with the Postal Service on one amendment; increase the test side to $100 million.
    Negotiated Service Agreements. We wholeheartedly endorse NSA's. We, however, agree with the Postal Service that these agreements should be implemented immediately after the Postal Service provides public notice of the agreement and all its terms. We would then set up complaint procedures. After the notice, any party that believes it can meet the terms of the agreement would be eligible for the NSA, and if that party is denied a similar agreement, they may complain to the Regulatory Commission.
    In the same light, any party that feels that the noticed agreement violates the provisions of H.R. 22, such as there is no way they could be covering costs, for example, they should be able to complain to the Postal Regulatory Commission. We then think that the Commission should have 90 days to render a decision, a final decision, which would be subject to judicial review.
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    Complaint procedures. Similar to what we say for NSAs, we agree that users of the mail and competitors of the Postal Service must have an avenue of redress for any grievances concerning alleged abuse by the Postal Service of its regulatory discretion. Again, the Commission should have 90 days to issue a decision in the complaint and such decision should be final subject to judicial review.
    We really appreciate this opportunity to be here today, and I am ready to stand for any questions.
    [The prepared statement of Mr. Cerasale follows:]
    "The Official Committee record contains additional material here."

    [The official committee record contains additional material here.]

    Mr. MCHUGH. Thank you very much, Jerry. We appreciate that.
    Next on the list is Neal Denton, the executive director of the Alliance of Nonprofit Mailers. Neal, good to see you. Thank you for being here, and we look forward to your comments.
    Mr. DENTON. Thank you, Mr. Chairman, Mr. Davis and to the good staff sitting next to you and behind you. We appreciate this entire process that we have been through over the last several years.
    In preparing for today, I enjoyed reading some of the testimony that we have delivered and my colleagues here have delivered over the many years, as we have all gotten to know a little bit more about how the Postal Service runs and what types of possibilities are out there for meaningful reform.
    As you know, and we have been very clear with this every time we have talked with you, we have had very grave reservations over the many years about certain concepts in postal reform that would give the Postal Service greater freedom and flexibility to set postal rates. We believe that the most recent increases of January 10 offer some glaring examples of the types of abuse we have feared in an unfettered rate-setting environment.
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    I appreciate your comments in the beginning of the hearings today about nonprofit mailers having concerns here. Chairman Burton, in the last hearing, was right on the mark when, in recognizing the Postal Service surpluses over the last 4 years, questioned the Postmaster General as to whether we should have had any rate increases at all on January 10.
    As each of you know, the Alliance of Nonprofit Mailers is currently in litigation before the court of appeals over this case because we do believe that the increases of January 10 were unfair, that the increases of January 10 were unnecessary, and that they were unlawful.
    Unfair because, while the price of a first class stamp may have only gone up 1 cent, the price for a nonprofit basic standard A mail piece went up 3 cents.
    Unfair because, as each of you know, the rate increases imposed on nonprofit periodical publications in some instances cause a nonprofit educational magazine with no advertising to pay a higher postal rate than an identical commercial periodical publication thick with advertising. That is a rate anomaly that represents unfair rates that nonprofits are experiencing since January 10.
    We believe they were unlawful. Because, as Mr. Burton pointed out, the Postal Service didn't lose $1.1 billion in fiscal year 1998, as they forecasted. The Postal Service made $550 million. They enjoyed a $550 million surplus, and because of that we believe that the case was unlawful. The Postal Service is supposed to, by law, break even. They are not supposed to be enjoying these kind of surpluses. We can't turn a monopoly governmental authority loose to be making profits on the back of captive monopoly mailers.
    Now, all of this said, and it is important that I say it again because we have said it every time here, we do come to the table understanding the potential problems that face the national mail delivery network and recognizing that there must be some realities of political reform that all of us can talk about here that can help to move our national mail delivery network into the coming century.
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    We have looked at H.R. 22, and we have worked with you and your staff, and there are some provisions in H.R. 22 that we find very admirable and that we support; the caps and 2-percent bands provisions that protect all mailers from being singled out for especially damaging rate increases—the kind of rate increases nonprofits have faced as a result of the January 10 hikes.
    The bill also protects any mailers from the over-the-cap increases that could happen in consecutive periods; that is, the Postal Service can't pile on 2 percent above CPI increases in consecutive years. Nonprofit mailers were terribly concerned about that.
    There are three provisions that are specific to nonprofits that we have been very supportive of—one that would change the language mandating the overhead assignment for nonprofit mailers. It is very technical, but currently the law says that nonprofit overhead shall be 50 percent of the closely corresponding commercial overhead, and the bill would actually say no greater than 50 percent, which would allow some flexibility underneath that. That would be very welcome by nonprofit mailers.
    It also provides an important safeguard to prevent the Postal Service from attributing more cost to nonprofit mail than to an identical size, shape, weight commercial mail piece. That is very important. We are far away from that right now. But the way that the rate structure has been moving over the last several years, I like the idea of having that ceiling put in there firmly, so that the Postal Service can't creep above that in a coming rate case.
    The bill also authorizes nonprofit requester publications, an amendment that is something that we have thanked you for before and looked forward to seeing in the final bill.
    We also reviewed the Postal Service's proposed amendments. We spent quite some time looking at those. I think, after reviewing all of them, we probably have criticism with just about every one of them, except perhaps one. The Postal Service amendment that suggests that the ''x'' factor for productivity is superfluous and that the CPI already accounts for productivity, I believe is nonsensical. I agree with my colleague, Mr. Cerasale, over here. We ask you to continue to rely upon the H.R. 22 provisions that would allow the Postal Regulatory Commission to set a productivity offset to the index.
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    Frankly, in my mind, it is highly disturbing that any senior postal official would stand before you or before a large group of their customers and be so flippant as to suggest that potential productivity gains in future operations would be so insignificant as to not even include it in any legislative formula for setting rates. That is very disturbing, and perhaps we must overcome that type of thinking before any of these provisions in here are going to be successful.
    The mailers that have supported H.R. 22 aren't here because we like the idea of getting increased rates every year. We are here because we like the idea of the Postal Service, given productivity gains, being able to hold the cost of postage down.
    If the Postal Service is going to spend their time and energy promoting a legislative proposal that doesn't measure these productivity gains, I find that again very, very disturbing.
    We appreciate that many in the mailing community, and most especially, I am sure the colleagues joining me at this table today, are attracted by negotiated service agreements. As you know, over the years we have had an awful lot of concerns with the concept of NSA's, but we believe that the concerns that we have voiced to you over these years have been addressed very adequately in H.R. 22. For instance, the recovery of attributable cost and a fair portion of institutional costs, having the whole thing done in the open air before the Commission so that other organizations have an equal opportunity to participate in these programs, so that they will have an opportunity to also apply for these same types of NSA's in these open proceedings. We find that very agreeable, and we would support those safeguards and protective criteria and would reject the Postal Service's amendments to that.
    As I mentioned, though, one of the Postal Service's proposals does merit some consideration. Mr. Cerasale brushed upon it briefly, and that is, we are fascinated with the idea of creating a separate basket for preferred rate mailers. We have always been concerned that by averaging a basket of similar commercial and nonprofit mail, preferred rate mailers might fare poorly. The notion that all preferred rate mail be averaged separately is very interesting. However, the Postal Service's proposal would lump nonprofit standard A and nonprofit periodicals in the same basket. That would be apples and oranges in the same basket, and there is no other basket that is included in H.R. 22 that would contain two distinctly different types of mail than the one the Postal Service would propose here.
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    I think we would take the metaphor a little bit further, and I would get poked in the ribs by my colleagues who would. We have a basket at home. My wife and I have a picnic basket at home that has a divider down the middle, and I believe that if somehow we could create a nonprofit basket that would allow one-half of the basket to average out for those standard A products and one-half of the basket to average out to the CPI minus X for the periodical publications, and then the whole basket average out to meet that index, that would be very agreeable and might be an improvement upon what it is that we see with H.R. 22.
    I have discussed it with my colleagues that also represent nonprofit mailers, and I think that is something we might be able to work on if we talk a little more about it.
    The subcommittee also recently heard the testimony of the Postal Rate Commission and Chairman Gleiman. Included in our full remarks that you have incorporated into the record are some comments we have about their proposals, and I think they are very favorable.
    While I have your attention, I want to bring up one other subject, that you and I have talked about that in the past. It is a serious problem. We have recently witnessed some very unseemly bullying and harassing of nonprofit mailers over questionable revenue deficiencies, all under the name of the Postal Service's Revenue Protection Program.
    Postal inspectors and others should be commended for identifying fraud and illegal activity that robs resources from the Postal Service. Inspectors and others should also have the sense to know the difference between a criminal who is attempting to defraud the Postal Service and a nonprofit librarian who is advertising educational trips.
    As you know, eligibility restrictions outline what a nonprofit mailer can and what a nonprofit mailer cannot advertise in a preferred-rate mail piece. Many of the rules are shaded in gray generalities, the policies are often unclear not only to the mailers, but to postal officials, and the rules are very often applied differently across the country by different postal officials.
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    I am very sorry to report that some of the Postal Service agents have aggressively attempted to bankrupt community-based nonprofit organizations or drive eligible mailings out of the nonprofit mail stream with very questionable Postal Service interpretations of the eligibility restrictions. This disturbs us greatly.
    We would like to discuss this further with each of you because we believe that perhaps the blueprint used in the series of hearings last year on the heavy-handed approaches of the Internal Revenue Service might well be in order as we evaluate some of the methods used by the Postal Service in squeezing revenue from some nonprofit postal customers.
    We thank you for your fair and insightful approach to protecting the viability of our Postal Service, and I join with Mr. Cerasale in looking forward to your questions.
    [The prepared statement of Mr. Denton follows:]
    Offset folios 623 to 628 insert here.
    [The official committee record contains additional material here.]
    [The official committee record contains additional material here.]

    Mr. MCHUGH. Thank you very much, Neal. As we discussed, we look forward to working with you on those other kinds of issues, as we have in the past. I have written the chairman of the Board of Governors with respect to that anomaly on R97–1, and certainly the other concerns that you have are legitimate. We want to try to be able to be of assistance in probing those to an equitable solution in addition.
    Last, on this panel, is, as I said earlier, Kam Kamerschen, who is appearing on behalf of the Saturation Mailers Coalition. Kam, thank you as well for being here, and we look forward to your comments, sir.
    Mr. KAMERSCHEN. Mr. Chairman, and members of the committee, staff, I am Robert ''Kam'' Kamerschen, chairman of the board of ADVO, Inc. ADVO, as you know, distributes targeted saturation advertising mail to 60 million households every week. We represent 23,000 clients of all sizes and shapes, and make no mistake about it, our destiny is closely tied to the success of the Postal Service.
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    In many ways, I could dramatize that, but make it this way. The term ''partner'' is often used sometimes loosely. But I would submit the U.S. Postal Service is, indeed, our partner because 50 cents out of every dollar of revenue that we generate as a public corporation goes to the U.S. Postal Service in the form of postage. I think that sounds like a partnership, to me.
    I am here representing today the Saturation Mail Coalition. Inasmuch as that might not be familiar to many of you, let me tell you what it is all about. We represent 40 different companies that are essentially in three or four basic areas: weekly community newspapers, shopper publications, envelope coupon mailers, and other shared mailers like ourselves.
    To give you a frame of reference, those members run from relatively large companies, like Harte-Hanks, Money Mailer, people of that vestige, to very small operators who mail 15,000 to 20,000 households, which is essentially the size of a ZIP Code, as you know, and so it is quite a diversity of groups.
    The commonalities we have are that we are basically servicing a group of retailers and/or other service operators who depend very much on us in order to deliver their mail in a dependable, affordable fashion. Moreover, there is a bunch of consumers that also share the enthusiasm for that, as evidenced by the fact that every week we deliver important information on products, services, as well as coupons that represent huge savings to the consumer.
    Now, just as a frame of reference, since we are going in every household every week with different mailing organizations, what it says is that we are becoming available to all consumers, and that is a very important aspect from our dimension in that we are not discriminating. We are making these savings available to all of the public, and as a frame of reference or contrast, for example, the FSI's, the freestanding inserts, which represent savings to the consumer for coupons, are delivered with the purchase of a Sunday newspaper. So we believe we are delivering a valuable service, indeed.
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    We really feel, as I indicated, that mail is our preferred form of distribution, even though some of us do use private carrier delivery as well. We believe that way. It is our preferred option because of the basic credibility and reliability the Postal Service represents, which has made major improvements, as you know, from as recently as 5 years ago, and we certainly feel that way.
    I believe the crux of this whole conversation about fairness, competitiveness, level playing field, resides in a very simple fact. The fact is that the Postal Service, by definition, by law, is accountable and responsible for universal service, and here is the quandary: Each year the fundamental cost of the national infrastructure for providing that service is growing. It is growing because there are an additional number of households every year. Just in my tenure with the company, in this industry, which is only 10 years of length, I have seen an enormous increase of several million households every single year being fueled, obviously, by a high divorce rate and other considerations.
    So the infrastructure has got to keep growing. And, in turn, the Postal Service has to be able to finance that. The only way that I know of that we can finance that is a combination, I guess, of greater productivity, cost savings, but also growth. Growth is the imperative that we believe exists in helping to fuel that particular proposition.
    The subcommittee's goal is obviously modernizing and reforming the Postal Service, and we certainly applaud that, particularly as it relates to the greater pricing predictability and stability for the mailers that we represent. Think about this: There is nothing that disturbs a business person quite to the degree of unpredictability, certainly in their measured cost components, and as I indicated already, almost every one of our mailers representing our coalition spends at least 25 cents out of every dollar to Postal Service commissions.
    Our customers don't want to hear about the issues that might be driving the Postal Service's difficulties, as they were in the 10 years leading up to this period of time. They really want to know that they are having rates that are certainly at the rate of inflation, at the maximum and under the rate of inflation and, at the same time, reasonably predictable because God knows there is enough unpredictability in the other aspects or forces of the business that we operate in.
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    There is a subject that I want to underscore for a moment because there is a lot of discussion about competitive versus noncompetitive categories. I am not an economist. I don't proclaim to be one. But it seems to me that the issue of price elasticity is something that you don't have to be an economist to understand. It is a very simple concept that says demand is fundamentally affected by elasticity, and it is either elastic, which means it is highly responsive to price changes, or inelastic, which means it is not. I think one of the things that we need to consider here, and I refer you specifically to the testimony on page 5, which certainly dramatizes, as it relates to saturation mail, the extreme elasticity that exists. Let me be very specific, knowing that you are a very fact-based person and that your staff certainly is.
    From the period of fiscal years 1988–96, an 8-year period of time, as you know, postal rates at that time were running abound greatly in excess of rates of inflation, excessively so, as a matter of fact, and our particular form of mail, which was at the time called third-class carrier route presort, now called ECR—enhanced carrier route—during that entire 10-year period of time actually had a one-tenth of 1 percent decline, which simply says that that type of business was being adversely affected by these price degrees.
    In contrast, during the same period of time, First Class Mail went up 15 percent and noncarrier route mail went up 34 percent. So there is the negative side or the elastic side of downward pressure. Now why don't we contrast that with postal rate reclassification.
    Since that period of time, and as you recall the specifics of that, it represented about a 2.7-percent decline, average rate decline, for this particular subclass. Interestingly, in the 2 years that have followed that, Mr. Chairman, there has actually been a 17-percent increase in volume. I would respectfully submit that that is about as dramatic evidence on the subject of price elasticity as one can possibly—it is almost textbook if you are going to write a book about it and express it in that fashion.
    Clearly, the thing that makes this particular endeavor on your part so important to us, and as we look at the subject of price elasticity, and sensitivity and dynamics of the marketplace, deals with the subject of cost coverage. Our particular form of subclass, as I presume you know, involves a 203-percent markup, which means it is 103 percent higher than the costs attributed to this particular classification. You can contrast that number with the average for all postal products, which is 156 percent. So, mathematically, it is pretty clear that this particular form of mail is certainly carrying its fair share, if not unfair share, of the burden.
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    It is because of this sensitivity that the particular amendments or the particular aspects that you represent in this particular H.R. 22 appeal to us, but we would respectfully submit some suggestions in terms of improvements. Knowing you, Mr. Chairman, as much as I had a chance to sit in on the first day of these hearings, you specifically, and I think appropriately, said this is a work in progress. So to the degree this is a work in progress, we are going to take this opportunity to respectfully submit a couple of ideas that we would like you to seriously consider.
    This talk about the freeze that the individual noncompetitive categories represent is a subject that we are particularly interested in calling to your attention. The best way to ensure fairness, and the strength of the saturation mail system, in our opinion, is ultimately to lower these high-cost coverages, as I mentioned before, borne by our mailers.
    We understand, however, that the sensitivity of burdening others in the system with increases necessary to lower our cost coverages that is not palatable, and we realize that. Therefore, we are here today to advocate a method which our industry, or any other mail type for that matter, can earn in its own pricing rationalization and a manner that does not come at the expense of others.
    As a point, in fact, Mr. Chairman, our proposal is a self-financing proposal with no cost shifting involved in it. Our proposed negotiated service agreement language would give the U.S. Postal Service the pricing freedom necessary to act decisively in a business environment, where a protracted rate process would cripple its ability to manage the postal mailstream efficiently.
    The language prevents any contribution to overhead or any erosion of that and allows the customers to save by increased work share, but also by increased volume, as long as the total contribution is not lowered. NSA's are sunshined so that the public, mailers, and competitors are privy to the U.S. Postal Service's sanctioned discount.
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    Legislation clarifying the U.S. Postal Service's ability to use NSA's is needed even outside the context of H.R. 22, in our opinion. NSA's are an essential tool. As you know, they are an integral part of American business. Contract rates, volume contracts are very common. However, unlike the contract rates offered by private companies, the Postal Service NSA's would be subjected to nondiscrimination requirements that is available in comparable terms. In other words, any mailer able and willing to meet the terms of an existing NSA would be able to participate, an important safeguard in our view.
    H.R. 22 in its present form would allow the Postal Service to enter into NSA's with mailers in a noncompetitive category under strictly limited circumstances as to be of little use to either mailers or the Postal Service. The main problem with section 3641 requirement, from our point of view, mandating that NSA mail make a contribution to overhead cost that is ''equal, on an average unit basis'' to that of the most similar classification of mail. This ''equal unit contribution'' requirement and the requirement that mailers would have to undertake the additional mailing costs to earn a rate benefit would transform NSA's into an inferior form of traditional worksharing discounts from our point of view.
    The only rate benefit for a mailer would be the amount of additional postal cost savings that the agreement generates. Yet unlike worksharing discounts, an NSA discount would impose the risk of liquidated damages if the mailer failed to perform as contracted. This lessens, in our view, the intended attractiveness of NSA's to mailers.
    The bill's NSA provision should be expanded to permit NSA's that generate an equal or total dollar contribution to overhead costs. The principal concern raised about NSA's is that they might lead to rates that reduce the contribution of contracted mail to institutional costs, thereby burdening other mail or the postal system.
    The bottom-line test should be that each agreement must not result in a loss of contribution to overhead cost that then must be borne by other forms of mail. Through NSA's, mailers can provide the Postal Service with guaranteed contributions to institutional costs while we grow profitable volumes that will benefit the overall financial health of the system and support universal service. Yes, there is no free-lunch proposal here. It is earned.
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    A second change needed to bring increased flexibility is to eliminate the prohibition of transferring products to the competitive category. H.R. 22, as currently drafted, would freeze the types of mail in the noncompetitive category that could be transferred to the competitive category based on the current scope of the Postal Service's legal monopoly. Therefore, if a product is covered by a monopoly, it would be forever barred from transfer to the competitive category, regardless of how competitive that category may become. Forever is a very long time indeed. This provision would nullify an important part of the pricing flexibility that this bill intends to bring about for competitive mail.
    Consider the case of bulk First Class Mail. In the future, some bulk First Class Mail, such as billing statements, may become price sensitive and highly competitive due to changes in the communications technology or changes in the marketplace. As currently framed, the bill would not permit the U.S. Postal Service to respond to these significantly changed circumstances. It would risk losing that volume and its contribution to overhead costs.
    If the mail were, in fact, competitive in a marketplace sense, the U.S. Postal Service should be authorized to transfer that mail to a competitive category. With this ability, the USPS could retain the volume or mitigate the losses in contribution through competitive pricing adjustments.

    It is important that no statutory language prohibits the U.S. Postal Service's flexibility to respond to increasing dynamic market changes. The only statutory tests for transfer to the competitive category should be whether, in fact, it is competitive under marketplace standards.
    In short, a greater flexibility is needed in classifying and pricing mail that faces intense or greatly intensified competition and market conditions in these terribly turbulent times.
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    As you know, Mr. Chairman, our testimony offers several others that I will not go into today. Suffice it to say, that the two discussed today are critical to the future of the saturation industry as a whole, to my company, to small businesses, to consumers nationwide, and to the health of the U.S. Postal Service and its vital mission to provide universal service.
    With these modifications, your committee can report out a bill that we support with enthusiasm. It is laudable, Mr. Chairman, that you are working to reform and modernize the Postal Service in good times rather than trying to accomplish the much more difficult task of reform in times of economic stress.
    In this permanent Whitewater economy of ours, it is quite wise, indeed, to follow the sage advice of Charles Handy in his remarkable book, ''Age of Paradox.'' He said simply, ''If it ain't broke, fix it anyway.''
    Yes, continuous improvements, sir, is the compelling mantra of this age for all of us. We look forward to supporting your efforts through the 106th Congress.
    [The prepared statement of Mr. Kamerschen follows:]
    "The Official Committee record contains additional material here."

    [The official committee record contains additional material here.]

    Mr. MCHUGH. Thank you very much. My mechanic must have read that book. [Laughter.]
    I think your testimony, taken in total, and everyone I assume in this room understands, as I mentioned in the beginning, the varied interests that you represent really poses a great juxtaposition against the previous panel.
    Lest anyone comes away from this hearing believing that my sole interest in entering this process was to level the playing field, I felt it was equally important, perhaps, frankly, with my rural perspective, somewhat more important to try to do what we can to ensure that there is a U.S. Postal Service into tomorrow that will continue to deliver mail to Box 863, Piermont Manner, NY, 13674, at a price that whoever wanted to mail me can afford and can rely upon.
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    Over the short term, and maybe my horizons are not far-reaching enough, I think that can only be the U.S. Postal Service. I think you folks would agree with that, even though you understand, if not in some of your instances, represent some of the true giants of the private sector.
    Let me begin by asking you to respond to what Mr. Kelly said on the previous panel about his view that the first meaningful step in true reform has to be, in his opinion, the total end of the current first class monopoly, letter mail monopoly.
    How do you think, if at all, that monopoly cessation might affect the services that you utilize through the U.S. Postal Service?
    Kam, if you want to go first, you have got the microphone.
    Mr. KAMERSCHEN. I guess I do. In this era of 800-pound gorillas, which we just followed, we will respectfully submit our point of view on that.
    The thing I like that this committee is doing a lot is that you are proactively trying to shape the future of the U.S. Postal Service, and in its past, the Postal Service itself has not been as absolutely proactive on that score. Although I have to tell you that, in the last 5 years, I think those of us dealing with the Postal Service have seen a truly remarkable change, one that far exceeded what we would have anticipated, a far more customer-focused, market-driven enterprise, one that views the reality of what it is, which is a quasi-public, quasi-private institution.
    On the one hand, it has got the very appropriate burden of universal service, and on the other hand it has got the very appropriate challenge of financing that universal service. I am always amused when the word ''profits'' is used by some of the outsiders of this industry because, by definition, as you know, they are not supposed to make a profit. They are supposed to finance the continuation of the various services they have.
    This premise of competitiveness is quite changing. Whatever was viewed for competitiveness when the Founding Fathers—I guess it was Ben Franklin who was the first Postmaster General—put this together, that was a long time ago. We are entering the 21st century. There are fundamental realities that have changed. Indeed, the mailstream and sources of revenue by the Postal Service are getting attacked from all fronts, including electronically, as well as marketplace.
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    Consequently, I, a free-trade guy by background and conviction, see the challenge that the Postal Service has in trying to satisfy all of these independent wants and needs. My view is very simple because I think it is the view of certainly what I represent and, hopefully, what all of the other folks in this room represent. All of us need a Postal Service, and it needs to grow in order to finance this infrastructure requirement.
    And, therefore, I take the view that we should think outside the box in terms of allowing the Postal Service to seek revenue sources, be more competitive, all, however, within the understandable limitations of antidiscrimination and all of the rest of it.
    Mr. MCHUGH. Thank you.
    Neal.
    Mr. DENTON. Thank you, Mr. Chairman.
    I almost feel as though, when it comes to the question of whether or not we should support the letter monopoly or not, I should agree with the comments of Lewis Sachs from the first panel on this subject. [Laughter.]
    I think I find myself disagreeing with Mr. Kelly. His point of view on that is different from my constituents who see the strength of a national mail delivery network resting on the back of the letter mail monopoly.
    I smiled when I heard the one quote, ''Fix it, even if it isn't broke.'' I don't think that particular piece of the 1970 act is something that my constituents would be interested in seeing us tinker with at this point. It is not that broke, and it is not something I think we ought to be looking at doing, as H.R. 22 does not.
    Mr. MCHUGH. Mr. Cerasale.
    Mr. CERASALE. I don't think that we are ready to see what the consequences are for elimination of the letter monopoly. And I think Mr. Kelly, especially in his oral presentation today, discussed the idea that the Postal Service should limit itself and be limited in looking to delivery of letter mail.
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    One of the fears that we see is that we have heard numbers 25 to 50 percent of first class mailstream is made up of something to do with remittance, a bill, a dunning letter, the check coming back. A good deal of that product is already under competition from other sources. So we see a significant peril to the underpinnings of the First Class Mail, on which we all depend. So I don't think we need to cut it out now. We need to try and move forward and allow the Postal Service some opportunities to try and shore it up.
    Mr. MCHUGH. Thank you all. Let me just ask a few questions that are based on your testimonies, and some of the suggestions, some of the concerns that you did raise. Jerry, you mentioned, what I believe I recall correctly, your opinion that a baseline case should not contain contingency and prior year losses, which obviously we agree with——
    Mr. CERASALE. Yes.
    Mr. MCHUGH [continuing]. And I agree with. But then you say, similarly, you felt that if a rate case were held any time within a year of the assumed baseline case that the rate case should prevail, true?
    Mr. CERASALE. Yes; I did.
    Mr. MCHUGH. First of all, first quick question, why do you think that is important?
    Mr. CERASALE. I think it is important to start off right away with some Rate Commission rate. So I think if a case the Commission has gone through has been in effect for—comes through and been in effect for about a year, to go through the entire process again and the delay of that, we probably would be beyond what the contingency and prior year losses are. So our view would be let us get started and let us get going right away.
    Additionally, there are costs to having a rate case, and we could avoid those if it is within that short period of time.
    Mr. MCHUGH. So the assumption you are making is that, and I left this unsaid, and for those who may not be aware, obviously, in a rate case, contingency and prior year losses are included——
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    Mr. CERASALE. Yes.
    Mr. MCHUGH. As they would not be in the baseline.
    Mr. CERASALE. That is correct.
    Mr. MCHUGH. You feel the cost, both financially and probably emotionally, too, given what some of you folks endure, of a rate case, of doing another essential rate case, a baseline case, would be too high, and you would be willing to accept the inclusion of the contingency and prior year losses.
    Mr. CERASALE. Yes.
    Mr. MCHUGH. Let me follow up before you answer that. What concerns me, and what I am interested to know because I am sure you thought of it, is that a big concern, I think if we were to put that into the bill, I think the logical outcome is it would certainly be very tempting for the Postal Service to say, ''OK. Let's file a rate case'' within a year because they know that they then would be assured of prior year losses and contingency. I am assuming you made that calculation and, therefore, you say, ''Well, it may be, but given all other factors, we are willing to accept that.'' Am I correct in what I read?
    Mr. CERASALE. You are correct. I don't think any of us believe that a base case will come out with lower rates overall.
    Mr. MCHUGH. Neal.
    Mr. DENTON. If I could comment on that.
    It is so rare when I disagree with Jerry Cerasale on anything. [Laughter.]
    Mr. MCHUGH. I am going to give you a chance in a minute more, so go ahead.
    Mr. DENTON. I agree with the concept in H.R. 22 of allowing for a separate—a ''mother of all rate cases'' is what we would ultimately get out of this, I think. I speak not just for my organization, but for every attorney sitting behind me here that is involved in rate case litigation. I am not an attorney.
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    We are concerned that not only would it carry on the prior year losses, which are dwindling more and more now all of the time, and that would lock that in forever, and the contingency, and you bring both of those up, and they are not included in H.R. 22. But I think some of our folks are also fascinated with the notion that this ''mother of all rate cases'' will be conducted with the Postal Rate Commission having these new authorities, having new subpoena authority.
    A lot of the problems that have frustrated us in these last few cases are problems that were alluded to by the second panel of gentlemen; that the Postal Service is good at obfuscating and disguising data. It is a curiosity, when you have the U.S. Postal Service generating every bit of data used in a postal rate case. You have the U.S. Postal Service massaging every bit of data used in a postal rate case. You have them parsing it out in little, bitty pieces as they see fit in a postal rate case.
    I like the notion of going into a full-blown final rate case knowing that the Postal Rate Commission will have the kind of subpoena authority that is outlined in H.R. 22.
    Mr. MCHUGH. Thank you. As you just said, Neal, you and Jerry so rarely disagree that we don't want to pass up an opportunity to—you don't have a disagreement. You have a difference of opinion.
    One of you believes, Neal, although I think it is fair to say you have still concerns of the unknown, that the concept of rate caps with the band in place in H.R. 22 meets most. I am not asking you to start whistling, you know, ''Blue Bird on My Shoulder'' here——
    Mr. DENTON. We won't, don't worry.
    Mr. MCHUGH. I didn't think so. But meets most of your concerns. Whereas, Jerry feels, as you heard him in his verbal testimony, and it is in his written testimony as well, obviously, that the Postal Service needs more flexibility.
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    So I will pose it this way: Neal, why don't you turn to your friend, Jerry, and tell him why he shouldn't be so troubled by this.
    Mr. DENTON. As we began this process many years ago, the nonprofit community was as far away from agreeing with the notion of giving the Postal Service greater freedom and flexibility than the gentleman who sat in this seat before I sat down here.
    We have, over the many years, recognized some problems in the way that the Postal Service applies the preferred rate intent of the law to nonprofit rates. We see it now. We see it continually. I mentioned at the end of my testimony here, we see some problems with the enforcement of the eligibility restrictions.
    Someone used to tell me, ''just because you are paranoid, doesn't mean that they are still not out to get you.'' Nonprofit mailers are concerned about what could happen in an unfettered, free rate-setting environment if the Postal Service were able to get their hands on the preferred postal rate without the oversight of the Postal Rate Commission.
    What is built into the caps and the bands is the kind of protection that I think our folks need in order to be fully supportive of that freedom of flexibility. Those are the restrictions that, while Jerry would describe them as being too constrictive for nonprofit mailers, we would describe them as being protective, to prevent the type of situation that, frankly, we are living with now as a result of this last rate case; these January 10 increases, where the first class rate went up 1 cent, and the nonprofit standard A rate went up 3 cents, where commercial rate mailers are enjoying 3- and 4-percent rate increases and nonprofit charities and churches are looking at 15- to 18-percent or higher increases.
    We believe that the caps and bands type of arrangements, as described in H.R. 22, would prevent us from having to recognize that in the future.
    Mr. MCHUGH. Jerry, are you persuaded? Or turn to your friend, Neal, and say, ''Neal, here is why you should be more concerned.''
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    Mr. CERASALE. Right. I will do that.
    I am not persuaded, but this line of questioning hits the area where in my testimony I say we have some several opinions on how to do things.
    I think as we look at the application of the bands in H.R. 22, it goes down to the rate category level, we think. But the real key is that, in order to have any rate go above the index that is established, you must, in a year just prior to it, have that rate rise less than the index by a similar amount, thereby making the band really coming out to being just what the index is. And, therefore, some adjustments, those that Kam would say that their cost coverage is a little bit too high and maybe the Postal Service should be able to adjust for market purposes, it kind of puts a restraint on them.
    There are a couple of ways to look at some changes in how you would effect those bands. One is, you could establish the basket, which I think get to Neal's fifth basket there, the basket, and have the index apply to the basket. And underneath the basket every rate cell, basically, would be set within the bands, the 2 percent up, 2 percent down, above or below the index. That is one way of looking at it. And I think, from Neal's perspective on basket five, that is the problem he saw with standard A and publication mail being connected together.
    Another way to look at this would be to have the index apply to each subclass separately within the basket. I mean, I think a basket always has to be there so that it doesn't go above whatever the index is, but you can apply the index to each subclass, and then underneath it the rate categories can go above or below the index, the 2 percent. That would protect his subclasses of standard A and publication mail within a separate basket which, if the nonprofits agree with that, we have no problem establishing, from the Coalition's point of view, agreeing with the nonprofits to make a separate basket for them.
    I think another factor to, I think, cover one thing that H.R. 22 does, to try and not allow someone to constantly get an increase way above the index every year, which is why you had the saving provision in there, you might, another thought would be to put in a requirement that no rate could go above the CPI, which is different from the index, so that you can keep an inflation kind of cap or index on everyone, but still allow some flexibility for the Postal Service, in the noncompetitive classes, to make adjustments to the marketplace that aren't quite as constrained and rigid as those that appear right in H.R. 22.
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    Mr. MCHUGH. Well, good. We have got a deal.
    Mr. KAMERSCHEN. Do I get to cast the deciding vote? [Laughter.]
    Mr. MCHUGH. Sure.

    Mr. KAMERSCHEN. Not really.
    Look, the subject it is hard not to agree with some of the points on both sides. If we got, like Mr. Smith, if we got our druthers, obviously—our particular Coalition—we would like to examine what Jerry just described as this modest increase in cost coverage difference of 203 percent versus 156. His idea of mathematics are different than mine, but so be it.
    We, as you know, support the price cap concept. We would have submitted a version, but, frankly, the Postal Service beat us to it in terms of a proposed amendment. We have the very simple point of view that the price caps and the bands allow certainly directionally the stability and the predictability that we talked about earlier, but at the same time, a kind of disregard to the economic realities of the marketplace that say, gee, at any given point in time, isn't there some plus or minus modification of those bands to allow the Postal Service the flexibility to protect volumes, build volumes or what have you.
    So, we would support the plus or minus variations of the bands and, second, we would support the notion of treating that on a basket basis as opposed to a subclass basis. This, in our view, is a modicum of flexibility for the Postal Service which is really a modicum of flexibility for the mailers that I represent.
    [Additional questions for the record follow:]
    Offset folios 840–842, 890–892/1100 to 007–009 insert here.
    [The official committee record contains additional material here.]
    [The official committee record contains additional material here.]
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    Mr. MCHUGH. Thank you, gentlemen.
    We have a fourth panel coming up, and they have been very patient for quite some time. So I don't want to impose upon them any longer.
    I want to thank you all for not just your appearance here today, but your active participation in this process, as I know you have experienced in the past. We are going to look at all of the things that you have stated, both for the record here today, and suggestions that we have talked about and that you wrote about in your statements, and try to do the best we can in continuing what I am now beginning to wonder is maybe a work in process, not progress, but we are moving along the calendar. So thank you, gentlemen. I appreciate it.
    Mr. CERASALE. Thank you for your 4 years of working on this.
    Mr. MCHUGH. It beats prison. [Laughter.]
    Mr. KAMERSCHEN. Barely.
    Mr. MCHUGH. Barely, but it beats it. [Laughter.]
    Our final panel and, again, I appreciate their patience, is comprised of a very diverse group. First, the executive director of the Main Street Coalition for Postal Fairness, John T.—also known as Jack—Estes, who is accompanied by John F. Sturm, who is representing the Newspaper Association of America, and Lee Cassidy, National Federation of Nonprofits, and Joe Roos, the Associated Church Press—I hope we have enough chairs for all of these good people—and David Stover, Esq., from the Greeting Card Association, and Guy Wendler from the American Business Press, and Kenneth B. Allen of the National Newspaper Association and, finally, Charmaine Fennie, who is chairperson of the Coalition Against Unfair USPS Competition.
    Folks, I tell you what, please, before you all get settled, there are so many. Why don't you please stand, and if you will raise your right hands.
    [Witnesses sworn.]
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    Mr. MCHUGH. The record will show half the room responded in the affirmative. [Laughter.]
    Which included all of the witnesses.
    Jack needs to be seated because he will be one of two of all of you who are actually presenting oral testimony. I believe I am correct all of the rest of you submitted written testimony. I recall reading a lot of testimony, and I think the number matches the people at the table, and I appreciate the work that went into that.
    Also, Ms. Fennie will be presenting as well. I believe I am correct on that. Is that true? Robert tells me I am correct.
    So, Jack, thank you for being here. And, again, it bears repeating. Thank you for your patience. It has been a long day, and you are very gracious in still remaining with us. We are looking forward to your comments. So, sir, you may proceed.

STATEMENTS OF JOHN T. ESTES, 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
    Mr. ESTES. Thank you, Mr. Chairman. I am relatively hesitant to start out this way, but I must beg your indulgence. I was just informed before the hearing started that Joe Roos, from the Church Press, took ill and will not be here.
    I am under oath, and I can assure you he is not with Mr. Sachs. In fact, he is not even near the Treasury Department. [Laughter.]
    Mr. MCHUGH. That latter bit of news is good. We appreciate that. The former, of course, is not, and we hope that it is nothing serious and that he recovers quickly.
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    Mr. ESTES. I don't believe it is. He got word to me that he just couldn't be here, and he was sick. If it is OK, he would like to submit a short statement for the record, and I told him I would ask.
    Mr. MCHUGH. Absolutely. It will be submitted into the record, and we will review that, of course, and wish him our best for recovery.
    Mr. ESTES. Thank you.

    Mr. Chairman, in spite of your tireless efforts to improve postal reform and the Postal Service, both now and in the future, and in spite of our appreciation for advancing concepts which have forced all of us to look very carefully at what we believe to be the most precious aspect of the Postal Service; namely, the preservation of universal service, and in that regard, to put aside, in many cases, narrow self-interests and look at the broader national interests, and in spite of our appreciation for working with a truly professional, courteous, accessible staff, and I mean that in every sense of the word, in spite of all of those things, Mr. Chairman, we are unable to support H.R. 22 in the form in which it is introduced.
    We have come to that conclusion, as I am sure you know, not lightly. We have worked hard and long, not probably as hard and long as you have—probably few have in that regard. But we have asked ourselves a few key questions about why we have come to this conclusion.
    Really, the first one was whether or not, in our judgment, the Postal Service is destined to become obsolete in the near future. And our answer to that is, of course, no, but it will undergo some structural changes.
    We have asked ourselves whether the Postal Service will be unable to achieve its primary goal of providing universal service, and will it continue to provide such service. And our answer to that is, yes, again, even if there are some structural changes.
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    And, finally, Mr. Chairman, we have asked if there is clearly currently no clear and present danger now threatening the Postal Service from fulfilling its mission, even though there may be some clouds on the horizon, should we nevertheless start to implement plans to anticipate a bumpy road? And our answer to that, sir, is, yes, we should.
    As I am sure you have noted in our statement to you, Mr. Chairman, we divided our position into really three categories. We listed, first of all, those areas where we thought we could move ahead now promptly with some of the reforms you have suggested. And without going into detail, those included the Postal Regulatory Commission reforms, the evaluation of the labor and management relations situation, relaxing some of the Treasury Department finance proposals—many of those, really, we looked at in the Cochran bill in the other body—and nailing down some of the Board of Directors' qualifications.
    But more importantly, and probably the meat of what we are presenting to you is that, for reasons discussed in our statement, it may be that there are other areas that need to be recast and that there needs to be some evidence that it should be present—the evidence should be present before we pursue them, and we listed those. Again, those were the ratemaking price caps, the baseline rate case, rate flexibility for noncompetitive products and market tests.
    Now, I said evidence, and obviously you are probably thinking, well, what more evidence could you possibly want or need or think would be desirable? The evidence that we are really looking for, Mr. Chairman, is evidence of true, harmful, immediate or potential competition. What type of competition? Is it e-mail? Is it electronic diversion? How serious is it? What classes does it affect? Is there truly out there today a serious concern that there is evidence of that type of competition that could seriously harm and perhaps, in some cases, disable the Postal Service? We think more work needs to be done in that area, and that is why we have taken the position that some of these areas need to be looked at carefully, and in some cases, maybe, as we have suggested, the provisions of the bill need to be recast.
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    And then, last, Mr. Chairman, we have suggested that some of the reforms which you have proposed should be set aside, certainly for now, and that included testimony you have received earlier today on the USPS Corp. We do not believe negotiated service agreements are in the public interest, and we would hope that that would be set aside. And, of course, we are concerned about the bifurcation of the first class basket.
I21So having said all of that, Mr. Chairman, our basic line really, our bottom line, is that there may be reasons to go ahead in some areas, but we do not believe that the bill has addressed some of the urgent needs that need to be justified before some of the provisions that should be enacted. It may not be an emergency, but there certainly should be an urgency.
    We think H.R. 22, Mr. Chairman, is cast in more of a predicting-the-future mode, and it really should be in cast in a planning-for-the-future mode. We are very aware that it is highly desirable to gather and evaluate the evidence and that we have urged you to do. We are also very aware that you are probably unquestionably, as stated, today, have no interest apparently in moving ahead with additional hearings.
    There are concepts in this bill, Mr. Chairman, which we find confusing, complex, difficult, based on, as I have said, evidence that we are not convinced is a matter of record. So we would hope that we could look—and one of the problems we are really struggling with, Mr. Chairman, is the implementation of some of these concepts. It is one thing to put it in a statute, as you well know. It is another thing to struggle with the implementation, and therein lies some real problems.
    I appreciate very much your agreement to have us assemble our ''dream team'' and come before you with an ability, hopefully, to respond to your questions. And at the appropriate time, I trust that ''the team'' would be able to react to whatever you have to say.
    [The prepared statement of Mr. Estes follows:]
    
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"The Official Committee record contains additional material here."
    [The official committee record contains additional material here.]

    Mr. MCHUGH. Thank you very much. Some dream. [Laughter.]
    I appreciate your comments, and we are going to hold to the practice of going to Ms. Fennie and allow her to make her statement and then—the reason we swore all of you in is that, clearly, in the Q&A we are not just allowing, we are interested in the comments that any or all of you may have.
    So, with that, Charmaine Fennie, as I mentioned before, is the chairperson of the Coalition Against Unfair USPS Competition.
    Welcome. Thank you for being here, and our attention is yours.
    Ms. FENNIE. Thank you, Mr. Chairman, and members of the subcommittee. Thank you for the opportunity to be here today.
    I am Charmaine Fennie, chairman of the Coalition Against Unfair USPS Competition, and the Coalition strongly supports passage of H.R. 22 with certain changes. The Coalition represents the interests of more than 12,000 privately owned small businesses in all 435 congressional districts, including 10,000 mail and parcel centers and 2,000 independently owned office supply stores. These businesses exemplify small business at its best.
    We feel that H.R. 22 represents the best effort at comprehensive postal reform. However, there are important changes that we feel need to be made. We feel that we must see elimination of the Private Law Corp. for prohibition against competition with small businesses. The need for a Private Law Corp. has not been proven. No compelling case for authorizing the Postal Service to begin complete and unfettered competition with the private sector has been made.
    The powers of the PLC are extraordinary. It can go into any business it wants, invest in any private company, and enter into joint ventures with any private corporation and could become a Fortune 500 company. The PLC can purchase any of our members or any of their stores. The Coalition opposes Congress authorizing a Government-owned corporation that can compete with our industry or purchase our stores.
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    The Postal Service instituted its smallest rate case in a generation last January, 1 cent for First Class Mail. That rate hike is expected to generate an additional $1 billion in revenue annually. What would the PLC have to do to match this $1 billion in revenue? It would have to turn itself into a business, such as Merrill Lynch. The largest publicly traded brokerage house had a 1997 profit of $1.8 billion on gross revenues of $31.73 billion and was No. 24 on the Fortune 500 list; or Sears, 1997 earnings of $41.36 billion, a profit of $1.18 billion, and it was No. 16 on the Fortune 500; or Motorola, No. 29, on the Fortune 500, with 1997 profits of $1.18 billion on earnings of $29.79 billion.
    Mr. Chairman, the record of the USPS in private business ventures is terrible. In 1997, the GAO reported an $84.7 million loss on these new ventures. Even if the USPS were to turn its poor record completely around and make an $84.7 million profit, it would have to increase that profit by 1,200 percent to reach $1 billion. H.R. 22 should firmly direct the Postal Service to not compete with private business in new, nontraditional ventures.
    The Coalition respectfully requests that H.R. 198, the Postal Service Core Business Act be included in H.R. 22. H.R. 198 firmly states that the Postal Service is to return to its core mission of delivering postal services and not be distracted by the new, nonpostal ventures. Another version of this legislation has been proposed by the Mail Advertising Service Association.
    Packing is one of the principal product lines for the mail and packaging members of the Coalition, and the Coalition does not believe that the Postal Service should be in the packaging business. The Postal Service estimates it will generate only $13 million annually on packaging. This profit will only be realized by charging no advertising revenue to the Service.
    Considering that the Postal Service's multi-million-dollar advertising budget, this seems very unlikely. This $13 million is barely 1 percent of the $1 billion generated by the 1-cent rate hike. The Postal Service would become the largest single packaging service provider with over 7,000 locations. It would offer packaging in most congressional districts represented by subcommittee members, including Philadelphia, Cleveland, Indianapolis, Brooklyn and Chicago.
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    The Postal Service stated during the PRC proceeding that it would only offer packaging where it felt it could make a profit. This means only urban and suburban areas, where the private sector is already providing the service. The Coalition is unalterably opposed to the Postal Service providing packaging in competition with its members and requests the subcommittee to adopt language which would prevent the Postal Service from offering this service in direct competition with Coalition members.
    I would like to thank you, again, for the opportunity to testify. We feel H.R. 22 is very important to our members, and we urge action on the bill and these amendments as quickly as possible. It is our hope that this bill can be passed this year, so the implementation of postal reform can begin quickly.
    Thank you.
    [The prepared statement of Ms. Fennie follows:]
    
"The Official Committee record contains additional material here."
    [The official committee record contains additional material here.]

    Mr. MCHUGH. Thank you very much.
    As I said, I have gone through all of your testimonies and found them all very compelling. The one interesting thing, out of many, that I come away with from this process is I have never been involved in anything where there were more greater number of opinions voicing so much disparity in views that were all correct. [Laughter.]
    And I take issue with none of you. I truly don't. The process we have been engaged in has been one of trying to go forward where we can and build the broadest base of support where possible. We have tried to do it in the most open and the most receptive process that was possible for us and particularly the folks over here, Robert, and Heea, and Tom, and so many others who have done such a great job.
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    I think it is fair to say that we have dedicated to you, as individuals and the organizations you represent, dozens and dozens of hours trying to represent your versions. We are going to continue to do what we can and where we can. But where we don't it is not necessarily a lack of understanding of your views nor a lack of concern.
    I would ask you, Jack Estes, and if others of you speak for the record, please identify yourselves because you are such a large number, in fairness to the stenographer.
    You say there is not a pressing concern, and I understand that view. It is not falling apart. We are not in crisis. I think, frankly, that is one of our major challenges. You heard Kamerschen suggest that is the perfect time to go forward, but I don't think we can ignore certain realities. The Postal Service tells us that by the year 2000 they are going to lose what they estimate to be $38 billion transactions to electronic transfers and mostly in remittance mail. It is going to cost them $6 billion. That is a heck of a chunk.
    You heard, and many of you represent the interests, and Ms. Fennie certainly does, the great pain and pressure that private companies are under from what they have understandably come to know as a Postal Service monopoly that competes against them in ways that they find impossible to effectively respond to, and all of this is coalition building. I just don't know how we go forward without taking up the issue of a Private Law Corp. because I truly don't think that the environment in this Congress is such that you are going to pass through both Houses and have signed a bill that is going to restrict the Postal Service.
    So what you have is the choice of continuing where we are, which means that they can use their revenues to go into area, and Ms. Fennie's spoken and written testimonies attest to that very eloquently about their less-than-successful record, but no way to stop them.
    So the question is if we have the choice of doing H.R. 22, as construed, and understanding that we will try to do more things with it, or doing nothing, which is better in your environment?
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    Mr. ESTES. Let me say, first of all, Mr. Chairman, that many of the suggestions that we have advanced, particularly to Robert, many of them have found their way into the bill, and we are grateful for that. And your process has been open and fair. I just can't say enough about that.
    The question of whether or not there is an urgency to do something is one that really gnaws at us, and it is the corroboration of whether or not there is a real problem there. We hear from the Postal Service a conjecture that they will be faced with a revenue and volume loss because of certain competitive thrusts in years to come.
    But they are, in a sense, an interested party, and it may not be an unbiased party, but it clearly is an interested party that is making that conjecture. And one of the things we're struggling with is how can we bring to you, as the chairman, something that you can rely on and be comfortable with that is more than conjecture? Because the bill really does, as you know, and if you are right in that we will be faced with a serious problem, it turns our system on its ear in many ways. Now, that is not necessarily bad, but we have to be, I think, satisfied, and I think that is also important with respect to the acceptance level of the mailing community. That has to be raised.
    In our group, for example, in all honesty, that acceptance level for some of these reforms aren't there not because they may not be good reforms at the right time under the right circumstances.
    I think Ken wanted to say something.
    Mr. MCHUGH. As I said, for the record, identify both yourself and your organization.
    Mr. ALLEN. I am Kenneth Allen with the National Newspaper Association, and I am pleased to be here on behalf of America's community newspapers which inform and educate about 160 million people every week.
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    I should also note that I am relatively new to the postal arena, and I have had quite an education in the last year.
    Mr. MCHUGH. It only gets better. [Laughter.]
    Mr. ALLEN. It is an exciting area, I can tell.
    Community newspapers have one major partner, and that is the Postal Service. Most of our members rely on the Postal Service because there is no alternative. And the fact is that without the Postal Service and without one that provides quality of service at adequate rates, there wouldn't be a lot of the community newspapers.
    We are not here today to defend the status quo. We are here today to find a solution to a viable Postal Service in the future. And I think our concern, as part of the Main Street Coalition, is that we need to find creative and innovative solutions, and H.R. 22 certainly has a lot of those in there. We are concerned, however, with the risks of implementing all of those at this time. We think you have accomplished a lot in the past 4 years, and we think there are pieces of it that should go forward.
    But there are also some risks to us. And from the point of view of community newspapers, let me just tell you what we look at, briefly, and what our concerns are. We have three concerns: One, that rates need to stay fair and equitable and that the quality of service needs to remain adequate. And we have some concerns about price caps, whether worksharing will provide incentives for the cost reductions that we see now.
    Second, we are concerned that our competitors don't get better rates than we do. That is why we are concerned about negotiated service agreements.
    Third, we are concerned about not competing with the very organization that delivers our newspaper, and that is the Postal Service.
    So when you look at all of those, we are concerned that the risks of going forward with such a comprehensive change may lead to the demise of many newspapers. And it is easy to say that if it is wrong, in 2 or 3 years we will change it, but 2 or 3 years is a lifetime for many of the smaller newspapers in the country. And waiting that long to fix something I am concerned may not be adequate. So we want to work with you toward a solution.
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    Mr. MCHUGH. I appreciate that, and I would never tell you don't be worried, 2 or 3 years we will fix it. I think too much of you, and all of this oath-taking may rub off on me, and I don't want to get caught in a perjurious statement.
    Just for my own interests, when you say it may help your competitor, whom are you considering your competitors?
    Mr. ESTES. Our competitors are direct mail advertisers, the Internet, all sorts of media that generate advertising revenue. We have seen activities by the Postal Service in the past to promote direct mail advertising, for example, at the expense of newspapers, and we are concerned about that. We don't think that the Postal Service should be in the business of promoting one form of advertising or one form of mail over another.
    And with the Private Corp., we are concerned the Postal Service may get into advertising in other areas, in and of itself, and become a competitor.
    Mr. MCHUGH. I understand that. I mean, you have got situations that John Sturm can speak to about Auto Day and other things that, frankly, they are now legally empowered to enter into. I don't want to sound self-important here, the process that we are involved in, but I think one of the reasons that they agreed to withdraw was because we were involved in this process.
    The concern I would have, if I were in some of your shoes and seats, is what happens if we don't do something, what comes after? My view is that you are going to see, by necessity in their view, a far more aggressive Postal Service in the kinds of areas that you are concerned about. And, again, if your belief is that the Duncan-Hunter bill that you referenced on the Core Business Act, will be passed by both Houses and signed into law, then I guess your gamble is go with nothing. But I think that is a big gamble. No one asked me, but I am not sure that is what is going to happen.
    But I don't want to keep the rest of you from commenting.
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    Mr. STOVER. Mr. Chairman, if I may add something to Jack's answer. David Stover, the Greeting Card Association.
    Mr. MCHUGH. Yes, sir.
    Mr. STOVER. The question of whether it is time to reform the system, in light of how far off or how near the competitive threats from electronic media are, I think also has to be looked at in terms of whether reforming the ratemaking system is the way to meet that particular threat.
    A First Class letter today costs between 23.8 and 33 cents to send, depending on what rate category it is in. If the same information can be transmitted over the Internet to the satisfaction of the sender and recipient, it is difficult to see how any foreseeable rate reduction can compete on pure price with that electronic transaction, which perhaps costs a penny or two to execute.
    As a rate lawyer of many years standing, I am afraid, like a lot of people, I tend to assume that price is everything and that what is really important is how you make the price. But I think maybe we need to step back and see what the problem is that we are trying to cure before deciding that ratemaking reform is the only solution we need to consider.
    Mr. MCHUGH. Sir?
    Mr. CASSIDY. Mr. Chairman, first, I think it is important to note——
    Mr. MCHUGH. Pardon me. Please identify yourself and your organization. Thank you.
    Mr. CASSIDY. Yes, sir. I am Lee Cassidy. I am executive director of the National Federation of Nonprofits.
    Mr. MCHUGH. Thank you.
    Mr. CASSIDY. I think it is important to note that you have already made an indelible mark on the Postal Service by establishing a piece of the original legislation. I guess it was H.R. 3717, that piece being the inspector general, and that was a critically important step. Now, we have talked here some about implementation. In the case of the implementation of deregulation of other utilities, and the Postal Service must be considered basically a utility, we have had supervision of that implementation by an existing Regulatory Commission, usually within the States, in some cases nationally.
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    I would like to suggest, sir, that the next critical step is the strengthening of the Postal Rate Commission to create the Postal Regulatory Commission, as you have proposed in H.R. 22, to give that Commission significantly greater power in order to supervise the implementation of many of the—and maybe most, and perhaps all—of the reforms that are included in the rest of the bill.
    Had the Commission had those additional powers, the problems that we talked about in our testimony of the Postal Service not accurately estimating its costs, not accurately proposing rates; those problems, we believe, would have been largely corrected by a stronger Postal Rate Commission. And so from our standpoint, we see that as the next critical step and one that would permit a much smoother implementation of all of the other reforms.
    Mr. MCHUGH. Well, obviously, I agree that is an important step or it wouldn't be in the bill. I don't want to leave anybody with the impression that, in our interest of making progress, being creative, and building a coalition, that we have done anything that would be unacceptable in and of itself.
    The problem with your suggestion, I would suggest, or the difficulty of it, is that many people who find other parts of the bill less attractive find that one very attractive, and if you portioned that out, then they all of a sudden become far less interested in the other parts, and you start to pull the puzzle apart.
    The fact of the matter is we were very fortunate, with a lot of help from Senator Ted Stevens, and a number of others on the IG, to do something that was—correct a situation that was totally unique in the Federal Government; that is, an organization the size of USPS did not have its own inspector general. I think it was a once in a one of those lifetime moments.
    And the Postal Service, and its workers and other segments honestly believe, and strongly believe, on the opposite side of where you are, that the PRC is far too powerful now, that they have never obfuscated data, and that the only thing at risk here is proprietary information that would be used to further diminish their standing by those who wish them to do not so well, et cetera. The problem being I don't think we could pass it by itself.
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    So that is the challenge in virtually all of these, that this is a stew or it is a bad plate of green meat in the corner. I mean, together we can make a nice stew, the parts separately, you know, your mother wouldn't serve it to you. So that is the frustrating part from here.
    And when I say, again, I don't disagree with anything any of you are saying, that is the challenge.
    Mr. WENDLER. Mr. Chairman, my name is Guy Wendler. I am president of Stamats Communications in Cedar Rapids, IA. We publish four business magazines and are a member of the American Business Press. The American Business Press has about 100 member companies, and we publish a 1,000 magazines. Typical circulation would be 50,000/60,000. An example of that would be our Buildings Magazine that might be read by somebody who is responsible for managing this building right here. Some of the editorial that we have in Buildings would be on indoor air quality, security, safety, things like that.
    We very much appreciate the initiative that you are taking in trying to keep the Postal Service competitive and viable in the future because we depend 100 percent on it. I have no other choices to mail my magazines and none of the other members have any choices to mail the magazines as well. So we applaud your efforts in that regard, and we see some good things in the bill, such as strengthening the Postal Rate Commission.
    In the spirit of perhaps providing you some of our insights on why we are concerned with the current bill, the last two ratemaking proceedings that went on in the periodicals class, basically, involved an issue between the small circulation magazines and the large circulation magazines. We looked to the Postal Rate Commission to protect our interests there and I think protect public policy interests of unzoned, flat editorial rates.
    We are concerned that if we move to the indexed sort of system, we will lose some of that protection, and the Post Office will be able to accomplish some of the things that they haven't been able to in the last two rate cases, which really aren't being driven necessarily by competition.
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    We are also concerned in that it is unclear as to how the indexing will occur, whether it will be by basket, by class, by subclass, and that could have a major impact on the smaller circulation publications, and I wanted to share that with you. I thank you for all your efforts that you are making with this, and we hope you do make progress on it.
    Mr. MCHUGH. I appreciate that, and I appreciate both your comments and the supportive nature of them and the process that you have been a part of and your organization has been a part of.
    If I, honestly, could see how to more effectively guard against the thing you just stated you were concerned about, I would do it. I think you heard the prior panel where, if anything, a large class of mailers, who are highly dependent on the Postal Service as well, feel that the index, coupled with very tight banding that was suggested by some of you, by the way—we didn't dream it up—is too inflexible.
    If you make the assumption that your baseline rate case is fair and the PRC at that time presumably would have the increased powers that you support, so it would have a far better opportunity to produce a fair outcome in the baseline case than it presently does, then from that point forward, you are much more insulated against any—I mean, it becomes a matter of mathematics, not a matter of the whims of the Postal Service.
    So my point would be, if there are ways in which you want to talk about becoming even more strict with the index and the band, we will be happy to talk about that. But you have heard the problems that raises with other people who are very dependent upon the Postal Service, as well. You heard who they represented. So my point being, I don't discount the concerns you have. I truly don't. What I am searching for is a way in which we can meet those concerns, so they are not totally disruptive to the other effort. But let me move on to another point, if I may.
    I think there may be an exception or two, but most, if not all of you, expressed concerns about discriminatory pricing on negotiated service agreements. Here, too, is an area that I am very concerned about. It is a troubling aspect for you, so, therefore, it is for me as well.
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    You heard Mr. Kamerschen, who came here today to try to propose a way by which he felt it was a win-win situation to take a different tack on NSA's because he felt the language that we have in here is so tight that it is going to preclude any real benefit. I would ask if any of you have suggestions as to the approach we have taken on NSA's, as to what more we can do to prevent discriminatory pricing because, frankly, with the components of the current NSA that we have in there, I think we have pretty well covered that, but I want to learn.
    Mr. ALLEN. I am not going to say that there aren't some changes that could be made to tighten them up. Our concern comes back to the issue that, as we see the negotiated service agreements, they will primarily benefit the large-volume users.
    Mr. MCHUGH. But let me interrupt you because the requirement of the bill suggests that all similarly situated mailers have to be eligible for the same NSA, and beyond that, all discounts that derive from that singular NSA must be driven to those who don't get the discounts, as well. So it is a requirement that any benefit from the NSA be equitably distributed across the entire universe.
    Mr. ALLEN. But it is my understanding that you have to, once the NSA is negotiated, that you have to file for the similar discount; is that not correct?
    Mr. MCHUGH. On the NSA itself?
    Mr. ALLEN. Yeah.
    Mr. MCHUGH. If I understand your question correctly, it has to go with PRC prior approval.
    Mr. ALLEN. And then the individual users will get the benefits without any further proceeding?
    Mr. MCHUGH. If it is approved by the PRC.
    Mr. STOVER. May I——
    Mr. MCHUGH. What I am saying is, if there is, and we assume the PRC will approve NSA's that are of benefit, if there is a savings and a benefit of the discount to the individual NSA, that discount benefit has to be driven back to all mailers.
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    I don't know how else we would do that. It is not like there will be a single beneficiary. The entire mail universe will benefit.

    Mr. STOVER. David Stover, again, GCA.
    You, Mr. Chairman, mentioned the proposal made by Mr. Kamerschen in his testimony earlier. I did have a reaction to that. As I understand it, it would loosen the language in H.R. 22 so that the NSA mail would not have to pay the same contribution per piece as all other mail of that category. But the contract volume would have to pay the same total dollar amount into the institutional cost pool. This means that as the contract volume grew, which Mr. Kamerschen expected that it would, the per piece contribution, of course, would go down.
    There was a long discussion, as I recall, in the reclassification case at the PRC about 4 years ago, in which the question, what is a fair standard for contribution, was discussed; and there the conclusion was that you could look at that per piece contribution, and if that was equal, you had fair rates.
    So I don't think that you need to slacken your own language in order to achieve fairness in that regard.
    Mr. MCHUGH. In fairness to Mr. Kamerschen, I don't want to sit here and critique his bill in a negative sense without going back and giving it the fair consideration it deserves, but I don't know that I disagree with what you have just said. But that is not in the bill. I am concerned, and I don't believe you were addressing that when you all submitted your testimony on H.R. 22 with respect to NSA's.
    Mr. Cassidy.
    Mr. CASSIDY. Mr. Chairman, I concur with Mr. Stover's comments about NSA's. But apart from NSA's, if I understood your question correctly, it is, ''does the basic pricing system contribute to the elimination of or does it eliminate discriminatory pricing?'' And there are some special provisions in there relating to nonprofit mailers, and I can say that, from our standpoint, it is a vast improvement over what we have now. And while I am sure if we studied it for another 4 years we could come up with some minor refinements, we find that it is something that we certainly can live with, and we would be reasonably happy with.
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    Mr. MCHUGH. Well, I am glad I asked.
    Mr. WENDLER. I do have a comment——
    Mr. MCHUGH. I said I am glad I asked. I am sorry, Lee. I didn't know if you were—go ahead.
    Mr. WENDLER. On the NSA's and predatory pricing, one of the things to consider is relative bargaining power. My card is not in the Rolodex of the postmaster general. So if I wanted to call and try and negotiate something, I probably couldn't do that. And in terms of being protected by somebody else negotiating something like that and it being available to my company, it may not because we don't have the mailing density to a particular area, so we may not be able to take advantage of any of those things.
    Mr. MCHUGH. I couldn't agree more with the fact that not every mailer will be able to directly participate in NSA's. Clearly, that isn't going to happen, and there is no way you can legis—I mean, I guess we could legislate and the Postmaster General shall provide a business card to all mailers, but I don't think there's any way we can address that.
    But the point about discriminatory pricing I think is that, if you were able, or any two mailers were able to participate, on the one hand, you cannot negotiate an NSA with one and exclude the other, or if it's 10 or 20 or 100, however many wish to. I would suggest that this may, in fact, open up avenues for negotiated service agreements that small business people—and, believe me, I mean that as a compliment, not an insult—but small business people probably don't have the opportunity to go out and negotiate, and develop and think about, and it could be done for them by others. Then they'd look at the menu of approved NSA's and say, gee, I might be able to benefit from that.
    But even if you don't, under the unit contribution to institutional costs, you still benefit because it goes back as a unit-cost contribution that benefits every mailer. That is what we are looking at—protections, the bottom line, ladies and gentlemen. When you say you are concerned about discriminatory pricing, I am as well. We have tried to address that in a very direct manner, and Mr. Cassidy's points are well taken to the extent that we could sit here and theorize on things for the next 4 years, and ultimately we would come up with nuances of change.
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    But if there are ways by which, other than saying we can't do this, I mean, that is legitimate, and if that is your choice, I accept that. But, if there are ways in which we can change NSA's to your benefit and to the point of concern of nondiscriminatory pricing, that is a vitally important issue that moves us deeply. That says a couple of things; one, it is important and, two, our lives are moved by strange things. But we want to be helpful.
    John Sturm.
    Mr. STURM. I just thought I would offer this comment, Mr. Chairman, because you just sort of said it. I am John Sturm from the Newspaper Association of America.
    I guess Mr. Kelly said it a couple of panels ago, when he was talking about the division that this bill makes between competitive and noncompetitive services. One wonders whether if you, as Congress would do in this bill, made that choice and, indeed, you had price competition in competitive services. Why, in fact, do we need to go away from the current system in noncompetitive services? In other words, it strikes me that a lot of this is great concern about areas in which, for reasons that were detailed in the earlier panel by Mr. Kelly and Mr. Smith, there is a highly competitive business in parcel delivery, and I think they did a very good job of tracing the history of that.
    I look, then, at noncompetitive. You made a choice. You have put mail in different packages, and why we need to go down the route, if you will, of negotiated service agreements in noncompetitive mail when, in fact, at least to a lot of us, it poses the risk, at least, of being in a situation where either we don't qualify or we are going to be asked to pay for the discounts that are given to somebody else. And that's, I think, the great concern here.
    Mr. MCHUGH. You had me until the end. Well, you can make the argument, and I would be the first to admit the newspapers are in a very unique situation competitively in that, when you make the statement, we may pay for the discounts, you could make the argument, I suppose, that lost revenues because of lost advertising mail would be a way you would pay. But I would take exception if you meant by that, however, that you would pay for the discounts as a mailer because, as I said, we have the unit contribution requirement that, in fact, would be driven back to benefit you.
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    And, John, you and I have had long conversations and, as I understand it, we are going to have another one——

    Mr. STURM. Probably more.
    Mr. MCHUGH. I understand the unique situation that you have with the Postal Service and the question of advertising mail. But in what we call the noncompetitive areas, there are many, many mailers who, I think, would want to be classified that way, historically have been, and probably the rationale should be, who have no other real choice, who could, in fact, benefit from NSAs and could benefit, I would argue, under the way in which we have structured it to the inurement of the entire postal system. But we did, we made choices, no question about it.
    Mr. STURM. My only suggestion would be, perhaps you had it right the first time when you didn't include NSAs in the bill.
    Mr. MCHUGH. Perhaps we did. I don't question your right to question us.
    Well, if nothing else today, we have proven, as Will Rogers said, ''If two people agree all of the time on everything, one of them is unnecessary.'' So I guess we are all pretty necessary. [Laughter.]
    So, unless one of you would like to make an additional comment, we will look at your suggestions.
    I want to repeat, again, particularly on NSAs and the issue of discriminatory pricing and other such key issues, we want to try to do the best job we can. So we are looking forward to working with you.
    Let me just close by saying Jack made some comments about a new process, perhaps he didn't say it in so many words, but I certainly got the indication he felt we ought to have some more hearings. We have talked about this Competitive Products Fund since it was first discussed in an opening hearing we held back in I believe it was September 1997, and then it was first proposed a year ago—Private Law Corp. is what I am supposed to be mentioning—a year ago in December, and we have had several hearings, including this one.
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    And I, in no way, diminish the concerns that you have, but I think, when you couple the relative age of the proposal and the numbers of hearings we have had, and the repeated opportunities that we have provided and, thankfully, you have accepted to talk about this issue, that we really have, after 4-plus years now, reached a time when we have got to start making some decisions about that.
    So, as my opening statement said, I still believe, and I am always willing to learn, but I still believe we may have come to the public hearing end of the road, but we are only at step one on the legislative side, and we have not yet drafted a final bill. I think it is fair to say that when we first introduced H.R. 22 as a new proposal a little more than a year ago, a lot of individuals were fairly surprised at the depth of changes we made.
    If nothing else, I hope you will admit it shows that we are listening to a lot of people, and we are going to continue to do that. I am not making any predictions, but I am suggesting to you that we are going to try to be as open and as receptive as we can.
    Jack, are you just showing me your pen or did you want to say something?
    Mr. ESTES. I was just showing you my pencil.
    Mr. MCHUGH. It is a nice pen. [Laughter.]
    Mr. ESTES. I would like to say that these have not been 4 wasted years. I mean, really, we have made progress, and a lot has been done, a lot has been accomplished. As I said earlier, we, unfortunately, are uncomfortable about some of the major thrusts of the bill.
    Mr. MCHUGH. I understand that, and I hope I never suggested that I do disrespect that because I don't. And I don't feel they have been wasted. It has been a fascinating opportunity for me. I have worked with some terrific people.
    We will go to markup, and there is a time to say it, but the times I have looked bad are my own fault. The times I may have looked good, it is because of these people here. A tremendous staff. I have never been so fortunate in nearly 30 years in public office and public life to work with more caring, more thoughtful and hardworking folks. So I want to thank them for a great job, and you know them all. Robert, and Tom, and Steve is here. So many who go back ever since Bill Clinger made that ill-fated call back in 1993. That will teach you to answer the phone, folks. [Laughter.]
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    Thank you very much. We will be in touch.
    [Additional questions for the record follow:]
    Offset folios 0010, 843, 0011, 847 to 851 insert here.
    [The official committee record contains additional material here.]
    [The official committee record contains additional material here.]

    Mr. MCHUGH. The hearing is adjourned.
    [Whereupon, at 4:31 p.m., the subcommittee was adjourned.]
    [The prepared statements of Mr. Sturm, Mr. Cassidy, Mr. Stover, Mr. Wendler, Mr. Allen, Mr. Dzvonik, Mr. Disbrow, Ms. McFadden, and Mr. Williamson, and additional information submitted for the record follow:]
    "The Official Committee record contains additional material here."

    [The official committee record contains additional material here.]