[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]



 
                 H.R. 22, THE POSTAL REFORM ACT OF 1997
=======================================================================

                                HEARING

                               before the

                   SUBCOMMITTEE ON THE POSTAL SERVICE

                                 of the

                        COMMITTEE ON GOVERNMENT
                          REFORM AND OVERSIGHT
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED FIFTH CONGRESS

                             FIRST SESSION

                                   ON

                                H.R. 22

             TO REFORM THE POSTAL LAWS OF THE UNITED STATES

                               __________

                             APRIL 16, 1997
                               __________

                           Serial No. 105-40

                               __________

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






                     U.S. GOVERNMENT PRINTING OFFICE
43-748                       WASHINGTON : 1997
________________________________________________________________________
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Internet: bookstore.gpr.gov  Phone: toll free (866) 512-1800; (202) 512ï¿½091800  
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              COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
J. DENNIS HASTERT, Illinois          TOM LANTOS, California
CONSTANCE A. MORELLA, Maryland       ROBERT E. WISE, Jr., West Virginia
CHRISTOPHER SHAYS, Connecticut       MAJOR R. OWENS, New York
STEVEN SCHIFF, New Mexico            EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California          PAUL E. KANJORSKI, Pennsylvania
ILEANA ROS-LEHTINEN, Florida         GARY A. CONDIT, California
JOHN M. McHUGH, New York             CAROLYN B. MALONEY, New York
STEPHEN HORN, California             THOMAS M. BARRETT, Wisconsin
JOHN L. MICA, Florida                ELEANOR HOLMES NORTON, Washington, 
THOMAS M. DAVIS, Virginia                DC
DAVID M. McINTOSH, Indiana           CHAKA FATTAH, Pennsylvania
MARK E. SOUDER, Indiana              TIM HOLDEN, Pennsylvania
JOE SCARBOROUGH, Florida             ELIJAH E. CUMMINGS, Maryland
JOHN B. SHADEGG, Arizona             DENNIS J. KUCINICH, Ohio
STEVEN C. LaTOURETTE, Ohio           ROD R. BLAGOJEVICH, Illinois
MARSHALL ``MARK'' SANFORD, South     DANNY K. DAVIS, Illinois
    Carolina                         JOHN F. TIERNEY, Massachusetts
JOHN E. SUNUNU, New Hampshire        JIM TURNER, Texas
PETE SESSIONS, Texas                 THOMAS H. ALLEN, Maine
MICHAEL PAPPAS, New Jersey                       ------
VINCE SNOWBARGER, Kansas             BERNARD SANDERS, Vermont 
BOB BARR, Georgia                        (Independent)
ROB PORTMAN, Ohio
                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
                       Judith McCoy, Chief Clerk
                 Phil Schiliro, Minority Staff Director
                                 ------                                

                   Subcommittee on the Postal Service

                   JOHN M. McHUGH, New York, Chairman
MARSHALL ``MARK'' SANFORD, South     CHAKA FATTAH, Pennsylvania
    Carolina                         MAJOR R. OWENS, New York
BENJAMIN A. GILMAN, New York         DANNY K. DAVIS, Illinois
STEVEN C. LaTOURETTE, Ohio
PETE SESSIONS, Texas

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
                       Dan Blair, Staff Director
             Heea Vazirani-Fales, Professional Staff Member
                 Robert Taub, Professional Staff Member
               Steve Williams, Professional Staff Member
               Jane Hatcherson, Professional Staff Member
                         Jennifer Tracey, Clerk
          Cedric Hendricks, Minority Professional Staff Member











                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on April 16, 1997...................................     1
    Text of H.R. 22..............................................     3
Statement of:
    Crew, Michael, economics professor, Rutgers University.......   101
    Kleindorfer, Paul, economics professor, University of 
      Pennsylvania...............................................   102
    Kwoka, John, economics professor, George Washington 
      University.................................................    30
    Popkin, Joel, president, Joel Popkin and Co..................    69
    Rose, Kenneth, senior economist, the National Regulatory 
      Research Institute.........................................    52
    Sidak, Gregory, resident scholar, American Enterprise 
      Institute for Public Policy Research.......................    88
Letters, statements, etc., submitted for the record by:
    Kleindorfer, Paul, economics professor, University of 
      Pennsylvania, and Michael Crew, economics professor, 
      Rutgers University:
        Followup questions and responses.........................   214
        Prepared statement of....................................   105
    Kwoka, John, economics professor, George Washington 
      University:
        Followup questions and responses.........................   148
        Prepared statement of....................................    33
    Popkin, Joel, president, Joel Popkin and Co.:
        Followup questions and responses.........................   136
        Prepared statement of....................................    72
    Rose, Kenneth, senior economist, the National Regulatory 
      Research Institute:
        Followup questions and responses.........................   173
        Prepared statement of....................................    55
    Sidak, Gregory, resident scholar, American Enterprise 
      Institute for Public Policy Research:
        Followup questions and responses.........................   207
        Prepared statement of....................................    91













                 H.R. 22, THE POSTAL REFORM ACT OF 1997

                              ----------                              


                       WEDNESDAY, APRIL 16, 1997

                  House of Representatives,
                Subcommittee on the Postal Service,
              Committee on Government Reform and Oversight,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:04 a.m., in 
room 2203, Rayburn House Office Building, Hon. John M. McHugh 
(chairman of the subcommittee) presiding.
    Present: Representatives McHugh, Gilman, LaTourette, 
Sessions, Fattah, Owens, and Davis.
    Staff present: Dan Blair, staff director; Heea Vazirani-
Fales, Robert Taub, Steve Williams, and Jane Hatcherson, 
professional staff members; Jennifer Tracey, clerk; and Cedric 
Hendricks, minority professional staff member.
    Mr. McHugh. To make it official, let me hit the gavel and 
call the subcommittee to order.
    Welcome to all of you today. The subcommittee this morning 
is turning its attention to postal reform as we focus on the 
provisions contained in H.R. 22, the Postal Reform Act of 1997. 
As I am sure most of you are aware, this was introduced last 
year and was the subject of four extensive hearings where we 
heard from a broad range of postal stakeholders regarding their 
views and recommendations on reform measures that many, 
certainly that I felt were necessary to improve the Postal 
Service.
    This morning's session will specifically focus on reforms 
of the current ratemaking process as envisioned in that 
particular bill. The current structure, as we know, was enacted 
27 years ago and removed the Congress from the ratemaking 
process by implement- ing a cost basis ratemaking system, 
whereby rates are based on the cost of providing the specific 
services. H.R. 22 proposes to update this process through the 
initiation of a rate cap pricing regime.
    I want to begin by welcoming our witnesses here today and 
express both my and the subcommittee's appreciation for taking 
the time out of your busy schedules to not just appear today 
but to prepare your very insightful and thoughtful testimony. I 
have had the opportunity to read them all. I was reminded of 
many things, not the least of which is why I didn't become an 
economics major, not because it isn't interesting, not because 
it isn't tremendously useful, but because I didn't have the 
intelligence to grasp it. I hope you gentlemen will bear that 
shortcoming of mine in mind as we proceed today. But again, 
thank you so much for joining us.
    The dialog that I hope to initiate this morning, is 
intended to highlight any modifications that we may need to 
consider in evalu- ating ratemaking reforms. H.R. 22 proposes 
dividing postal products into competitive and noncompetitive 
categories, with the later subject to rate cap regulation. I 
anticipate that our witnesses will comment on this proposed 
structure with their detailed analysis, and, I am sure, 
constructive recommendations.
    This forum gives us the opportunity to explore in what 
appropriate ways a price cap should be determined, including 
what, if any, inflation index to use as the benchmark, and 
whether a factor representing productivity gains in the economy 
should be applied against this inflation marker. I expect that 
we will examine what postal products best fit in which baskets.
    H.R. 22 also proposes what I feel are important new 
authorities on the Rate Commission, including responsibility 
for ensuring against service and delivery degradation. This 
dialog is critical in further refining our efforts to achieve a 
rational rate-setting process which protects captive customers 
from undue discrimination in rates while recognizing demand 
factors in pricing postal products. I hope the conversations I 
anticipate today will play a constructive role in our efforts 
to improve mail delivery and service.
    In designating H.R. 22, we conspicuously attempted to draft 
a bill that would reflect the times conflicting demands placed 
on our expectations of the Postal Service. To that extent we 
welcome suggestions on how to best improve our efforts, and 
criticisms as well. I only ask that such comments be 
accompanied by a constructive engagement with the subcommittee.
    I want to commend highly those in the profession who have 
chosen to offer honest dialog regarding their legitimate 
concerns over the potential impact postal reform could have on 
their respective interests. Sadly, I feel some have feigned 
interests to be constructive and have actually undertaken steps 
aimed at undermining any and all reform initiatives. I can only 
speculate that such behavior is grounded in one's attempts to 
protect pecuniary special interests or that those parties are 
so vested in the current process that they lack objectivity in 
evaluating needed reform measures.
    Whatever the case, I hope all postal stakeholders can put 
aside past squabbles and petty rivalries and honestly assess 
their interest in preserving the one institution charged with 
providing mail service in our country. The Postal Service has a 
long history of fulfilling this role and our failure, in my 
opinion, to enact timely reforms jeopardizes both the 
institution and the desire to provide timely, efficient, and 
affordable universal mail service.
    I first entered this debate with the stated intention to 
improve mail service to all postal customers. This goal remains 
paramount to me, and I know it does to the subcommittee members 
as well. I hope I can rely on all postal stakeholders in 
support of this effort.
    I would like to now yield to the ranking member of the 
subcommittee, Mr. Fattah, for any comments he may wish to make 
at this time.
    [The text of H.R. 22 follows:]
105th CONGRESS
1st Session
                                H.R. 22

            To reform the postal laws of the United States.

                                 ______
                                 

                    IN THE HOUSE OF REPRESENTATIVES

                            January 7, 1997

  Mr. McHugh introduced the following bill; which was referred to the 
              Committee on Government Reform and Oversight

                                 ______
                                 

                                 A BILL

            To reform the postal laws of the United States.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE; TABLE OF CONTENTS.

    (a) Short Title.--This Act may be cited as the ``Postal Reform Act 
of 1997''.
    (b) Table of Contents.--The table of contents for this Act is as 
follows:

Sec. 1. Short title; table of contents.

                         TITLE I--ORGANIZATION

Sec. 101. Redesignations relating to the Governors and the Board of 
    Governors.
Sec. 102. Redesignations relating to the Postmaster General and the 
    Deputy Postmaster General.
Sec. 103. Clarification relating to execution of amendments.

                      TITLE II--GENERAL AUTHORITY

Sec. 201. Employment of postal police officers.
Sec. 202. Date of postmark to be treated as date of appeal in 
    connection with the closing or consolidation of post offices.

     TITLE III--PRESIDENTIAL POSTAL EMPLOYEE-MANAGEMENT COMMISSION

Sec. 301. Presidential Postal Employee-Management Commission.

                           TITLE IV--FINANCE

Sec. 401. End of Treasury control of Postal Service banking.
Sec. 402. Postal Service investments.
Sec. 403. Exclusion from Federal Financing Bank.
Sec. 404. Elimination of Treasury preemption of borrowing by the Postal 
    Service.
Sec. 405. Elimination of Postal Service ``put'' on Treasury.

               TITLE V--BUDGET AND APPROPRIATIONS PROCESS

Sec. 501. Repeal of provision relating to transitional appropriations.
Sec. 502. Provisions relating to benefits under chapter 81 of title 5, 
    United States Code, for officers and employees of the former Post 
    Office Department.
Sec. 503. Repeal of authorizations of appropriations for public service 
    costs, revenue forgone, and certain compensatory appropriations.
Sec. 504. Congressional oversight preserved.

 TITLE VI--MISCELLANEOUS PROVISIONS RELATING TO POSTAL RATES, CLASSES, 
                              AND SERVICES

Sec. 601. Change-of-address order involving a commercial mail receiving 
    agency.
Sec. 602. Rates for mail under former section 4358.
Sec. 603. Powers of the Postal Rate Commission.
Sec. 604. Volume discounts.

  TITLE VII--PROVISIONS RELATING TO THE TRANSPORTATION, CARRIAGE, OR 
                            DELIVERY OF MAIL

Sec. 701. Obsolete provisions.
Sec. 702. Expanded contracting authority.
Sec. 703. Private carriage of letters.
Sec. 704. Mailbox demonstration project.

TITLE VIII--DIRECT APPEAL OF DECISIONS OF THE MERIT SYSTEMS PROTECTION 
                                 BOARD

Sec. 801. Direct appeal of decisions of the Merit Systems Protection 
    Board.

                       TITLE IX--LAW ENFORCEMENT

         Subtitle A--Amendments to Title 39, United States Code

Sec. 901. Make Federal assault statutes applicable to postal contract 
    employees.
Sec. 902. Sexually oriented advertising.
Sec. 903. Allow Postal Service to retain asset forfeiture recoveries.
Sec. 904. Hazardous matter.

                      Subtitle B--Other Provisions

Sec. 911. Stalking Federal officers and employees.
Sec. 912. Nonmailability of controlled substances.
Sec. 913. Enhanced penalties.
Sec. 914. Postal burglary provisions.
Sec. 915. Mail, money, or other property of the United States.

  TITLE X--NEW SYSTEM RELATING TO POSTAL RATES, CLASSES, AND SERVICES

Sec. 1001. Establishment.
Sec. 1002. Termination of ratemaking authority under chapter 36 and 
    related matters.

                         TITLE I--ORGANIZATION

SEC. 101. REDESIGNATIONS RELATING TO THE GOVERNORS AND THE BOARD OF 
                    GOVERNORS.

    (a) References in Title 39.--Title 39, United States Code, is 
amended--
            (1) by striking ``Board of Governors'' each place it 
        appears and inserting ``Board of Directors'';
            (2) by striking ``Governors'' each place it appears (except 
        wherever it appears in ``Board of Governors'') and inserting 
        ``Directors''; and
            (3) by striking ``Governor'' each place it appears and 
        inserting ``Director''.
    (b) References Outside Title 39.--Any reference in any provision of 
law outside title 39, United States Code, enacted before the date of 
the enactment of this Act--
            (1) to the Board of Governors, within the meaning of 
        section 102(2) of title 39, United States Code, as in effect 
        before the date of the enactment of this Act, shall be treated 
        as referring to the Board of Directors, within the meaning of 
        such section 102(2), as amended by subsection (a); or
            (2) to any of the Governors, within the meaning of section 
        102(3) of title 39, United States Code, as in effect before the 
        date of the enactment of this Act, shall be treated as 
        referring to the corresponding Director or Directors, within 
        the meaning of such section 102(3), as amended by subsection 
        (a).

SEC. 102. REDESIGNATIONS RELATING TO THE POSTMASTER GENERAL AND THE 
                    DEPUTY POSTMASTER GENERAL.

    (a) In General.--(1) Section 202(c) of title 39, United States 
Code, is amended by striking ``Postmaster General'' and inserting 
``Chief Executive Officer of the United States Postal Service''.
    (2) Section 202(d) of such title 39 is amended by striking ``Deputy 
Postmaster General'' and inserting ``Deputy Chief Executive Officer of 
the United States Postal Service''.
    (3) Section 102 of such title 39 is amended by striking ``and'' at 
the end of paragraph (2), by striking the period at the end of 
paragraph (3) and inserting a semicolon, and by adding after paragraph 
(3) the following:
            ``(4) `Chief Executive Officer', unless the context 
        otherwise requires, means the Chief Executive Officer of the 
        United States Postal Service appointed under section 202(c); 
        and
            ``(5) `Deputy Chief Executive Officer', unless the context 
        otherwise requires, means the Deputy Chief Executive Officer of 
        the United States Postal Service appointed under section 
        202(d).''.
    (b) Other References in Title 39.--Title 39, United States Code, is 
further amended--
            (1) by striking ``Postmaster General'' each place it 
        appears (except wherever it appears in ``Deputy Postmaster 
        General'') and inserting ``Chief Executive Officer''; and
            (2) by striking ``Deputy Postmaster General'' each place it 
        appears and inserting ``Deputy Chief Executive Officer''.
    (c) References Outside Title 39.--Any reference in any provision of 
law outside title 39, United States Code, enacted before the date of 
the enactment of this Act--
            (1) to the Postmaster General shall be treated as referring 
        to the Chief Executive Officer of the United States Postal 
        Service; and
            (2) to the Deputy Postmaster General shall be treated as 
        referring to the Deputy Chief Executive Officer of the United 
        States Postal Service.

SEC. 103. CLARIFICATION RELATING TO EXECUTION OF AMENDMENTS.

    Any amendment made in this title to a term ``each place it 
appears'' (or other words to the same effect) shall be considered to 
include such term when it appears in a table of contents or a section 
heading.

                      TITLE II--GENERAL AUTHORITY

SEC. 201. EMPLOYMENT OF POSTAL POLICE OFFICERS.

    Section 404 of title 39, United States Code, is amended by adding 
at the end the following:
    ``(c)(1) The Postal Service may employ guards for all buildings and 
areas owned or occupied by the Postal Service or under the charge and 
control of the Postal Service, and such guards shall have, with respect 
to such property, the powers of special policemen provided by the first 
section of the Act cited in paragraph (2), and, as to such property, 
the Chief Executive Officer (or his designee) may take any action that 
the Administrator of General Services (or his designee) may take under 
section 2 or 3 of such Act, attaching thereto penalties under the 
authority and within the limits provided in section 4 of such Act.
    ``(2) The Act cited in this paragraph is the Act of June 1, 1948 
(62 Stat. 281), commonly known as the Protection of Public Property 
Act.''.

SEC. 202. DATE OF POSTMARK TO BE TREATED AS DATE OF APPEAL IN 
                    CONNECTION WITH THE CLOSING OR CONSOLIDATION OF 
                    POST OFFICES.

    (a) In General.--Section 404(b) of title 39, United States Code, is 
amended by adding at the end the following:
    ``(6) For purposes of paragraph (5), any appeal received by the 
Commission shall--
            ``(A) if sent to the Commission through the mails, be 
        considered to have been received on the date of the Postal 
        Service postmark on the envelope or other cover in which such 
        appeal is mailed; or
            ``(B) if lawfully delivered to the Commission by an 
        enterprise in the private sector of the economy engaged in the 
        delivery of mail, be considered to have been received on the 
        date determined based on any appropriate documentation or other 
        indicia (as determined under regulations of the Commission).''.
    (b) Effective Date.--This section and the amendments made by this 
section shall apply with respect to any determination to close or 
consolidate a post office which is first made available, in accordance 
with paragraph (3) of section 404(b) of title 39, United States Code, 
after the end of the 3-month period beginning on the date of the 
enactment of this Act.

     TITLE III--PRESIDENTIAL POSTAL EMPLOYEE-MANAGEMENT COMMISSION

SEC. 301. PRESIDENTIAL POSTAL EMPLOYEE-MANAGEMENT COMMISSION.

    (a) In General.--Section 206 of title 39, United States Code, is 
amended to read as follows:

``Sec. 206. Presidential Postal Employee-Management Commission

    ``(a) There shall be established a Presidential Postal Employee-
Management Commission (hereinafter in this section referred to as the 
`Commission').
    ``(b)(1) The Commission shall study and make recommendations, in 
accordance with this section, on how employee-management relations 
within the Postal Service might be improved.
    ``(2) The Commission shall submit its recommendations--
            ``(A) to the President and the Congress, to the extent that 
        they involve any legislation; and
            ``(B) to the Postal Service, to the extent that no 
        legislation would be involved.
    ``(3) All recommendations shall be submitted in the form of a 
written report, with the first set of reports due within 18 months 
after the Commission is first constituted, and the second and third 
sets of reports in 12-month intervals thereafter.
    ``(4) The Commission shall terminate after submitting its third set 
of reports.
    ``(c)(1) The Commission shall be composed of 7 members, all of whom 
shall be appointed by the President. Of the members--
            ``(A) 2 shall be appointed from among persons who will 
        represent the views of nonpostal labor organizations familiar 
        with issues common to postal employees;
            ``(B) 2 shall be appointed from among persons who will 
        represent the views of the management of private corporations 
        similar in size to the Postal Service;
            ``(C) 2 shall be appointed from among persons well known in 
        the fields of employee-management relations, labor mediation, 
        and collective bargaining; and
            ``(D) 1 shall be appointed from among persons well known in 
        the fields described in subparagraph (C), who are also 
        generally viewed as not being predisposed to the interests of 
        employees or management.
    ``(2) All members shall be appointed for the life of the 
Commission.
    ``(3) Not more than 4 members may be of the same political party.
    ``(4) Members shall serve without compensation, but shall be 
reimbursed for necessary travel and reasonable expenses incurred in 
attending meetings of the Commission.
    ``(5) The member appointed under paragraph (1)(D) shall serve as 
chairman of the Commission.
    ``(d)(1) The Commission shall have a Director who shall be 
appointed by the Commission and paid at a rate not to exceed the rate 
of basic pay payable for level IV of the Executive Schedule under 
section 5315 of title 5.
    ``(2) Upon request of the Commission, the Federal Mediation and 
Conciliation Service may detail, on a reimbursable basis, any of the 
personnel of that agency to the Commission to assist it in carrying out 
its duties under this Act.
    ``(3) The Commission may not appoint or retain any staff, except as 
provided in paragraph (1) or (2).''.
    (b) Clerical Amendment.--The table of sections at the beginning of 
chapter 2 of title 39, United States Code, is amended by striking the 
item relating to section 206 and inserting the following:

``206. Presidential Postal Employee-Management Commission.''.

                           TITLE IV--FINANCE

SEC. 401. END OF TREASURY CONTROL OF POSTAL SERVICE BANKING.

    (a) In General.--Subsection (d) of section 2003 of title 39, United 
States Code, is amended to read as follows:
    ``(d)(1) The Postal Service, in its sole discretion--
            ``(A) may provide that amounts which would otherwise be 
        deposited in the revolving fund referred to in subsection (a) 
        shall instead, to the extent considered appropriate by the 
        Postal Service, be directly deposited in a Federal Reserve bank 
        or a depository for public funds selected by the Postal 
        Service; and
            ``(B) may provide for transfers of amounts under this 
        subsection between or among--
                    ``(i) Federal Reserve banks;
                    ``(ii) depositories for public funds; and
                    ``(iii) the revolving fund referred to in 
                subsection (a).
    ``(2) The Postal Service, after consultation with the Secretary of 
the Treasury, shall prepare and may from time to time revise a master 
plan for the exercise of any authority under this subsection. Such plan 
shall address--
            ``(A) the criteria that shall be applied by the Postal 
        Service in deciding when and how any such authority shall be 
        exercised;
            ``(B) matters such as risk limitations, reserve balances, 
        allocation or distribution of monies, liquidity requirements, 
        and measures to safeguard against losses;
            ``(C) the types of notification or consultation 
        requirements the Postal Service shall follow in connection with 
        any exercise or proposed exercise of authority under this 
        subsection; and
            ``(D) procedures under which the Postal Service shall, at 
        least annually, render a full accounting as to how any 
        authority under this subsection has been exercised during the 
        period involved.
    ``(3)(A) Authority under this subsection may not be exercised 
except in accordance with applicable provisions of the master plan 
under paragraph (2).
    ``(B) The Postal Service shall submit its master plan (and any 
revision thereof) to the President, the Secretaryof the Treasury, and 
each House of Congress at least 30 days before the date of its proposed 
implementation.''.
    (b) Savings Provision.--Until the authority under section 2003(d) 
of title 39, United States Code, as amended by subsection (a), becomes 
available, the provisions of such section 2003(d), as last in effect 
before being so amended, shall be treated as if still in effect.
    (c) Status of Monies Unchanged.--(1) Any amounts invested under 
section 2003(c) of title 39, United States Code, as amended by this 
title, shall be considered to be part of the Postal Service Fund, to 
the same extent as if they had been invested under section 2003(c) of 
such title 39, as last in effect before the date of the enactment of 
this Act.
    (2) Any amounts deposited or transferred under section 2003(d) of 
title 39, United States Code, as amended by this title, shall be 
considered to be part of the Postal Service Fund, to the same extent as 
if they had been transferred under section 2003(d) of such title 39, as 
last in effect before the date of the enactment of this Act.

SEC. 402. POSTAL SERVICE INVESTMENTS.

    Section 2003(c) of title 39, United States Code, is amended by 
striking all after ``it may'' and inserting the following: ``invest 
such amounts as it considers appropriate in obligations of, or 
obligations guaranteed by, the Government of the United States.''.

SEC. 403. EXCLUSION FROM FEDERAL FINANCING BANK.

    Section 2005(d) of title 39, United States Code, is amended--
            (1) in paragraph (4) by striking ``and'' after the 
        semicolon;
            (2) in paragraph (5) by striking the period and inserting 
        ``; and''; and
            (3) by adding at the end the following:
            ``(6) notwithstanding the provisions of the Federal 
        Financing Bank Act of 1973 or any other provision of law 
        (except as may be specifically provided by reference to this 
        paragraph in any Act enacted after this paragraph takes 
        effect), not be eligible for purchase by, or commitment to 
        purchase by, or sale or issuance to, the Federal Financing 
        Bank.''.

SEC. 404. ELIMINATION OF TREASURY PREEMPTION OF BORROWING BY THE POSTAL 
                    SERVICE.

    Section 2006(a) of title 39, United States Code, is amended by 
striking all after the first sentence.

SEC. 405. ELIMINATION OF POSTAL SERVICE ``PUT'' ON TREASURY.

    Section 2006(b) of title 39, United States Code, is amended to read 
as follows:
    ``(b) The Secretary of the Treasury may purchase obligations of the 
Postal Service in such amounts as the Secretary of the Treasury and the 
Postal Service, in their discretion, may agree.''.

               TITLE V--BUDGET AND APPROPRIATIONS PROCESS

SEC. 501. REPEAL OF PROVISION RELATING TO TRANSITIONAL APPROPRIATIONS.

    (a) Repeal.--(1) Section 2004 of title 39, United States Code, is 
repealed.
    (2) The item relating to section 2004 in the table of sections at 
the beginning of chapter 20 of such title 39 is repealed.
    (3) Section 2003(e)(2) of such title 39 is amended by striking 
``sections 2401 and 2004'' each place it appears and inserting 
``section 2401''.
    (b) Clarification That Liabilities Formerly Paid Pursuant to 
Section 2004 Remain Liabilities Payable by the Postal Service.--Section 
2003 of title 39, United States Code, is amended by adding at the end 
the following:
    ``(h) Liabilities of the former Post Office Department to the 
Employees' Compensation Fund (appropriations for which were authorized 
by former section 2004, as in effect before the effective date of this 
subsection) shall be liabilities of the Postal Service payable out of 
the Fund.''.
    (c) Effective Date.--This section and the amendments made by this 
section shall take effect on October 1, 1998.

SEC. 502. PROVISIONS RELATING TO BENEFITS UNDER CHAPTER 81 OF TITLE 5, 
                    UNITED STATES CODE, FOR OFFICERS AND EMPLOYEES OF 
                    THE FORMER POST OFFICE DEPARTMENT.

    (a) In General.--Section 8 of the Postal Reorganization Act (39 
U.S.C. 1001 note) is amended by inserting ``(a)'' after ``8.'' and by 
adding at the end the following:
    ``(b) For purposes of chapter 81 of title 5, United States Code, 
the Postal Service shall, with respect to any individual receiving 
benefits under such chapter as an officer or employee of the former 
Post Office Department, have the same authorities and responsibilities 
as it has with respect to an officer or employee of the Postal Service 
receiving such benefits.''.
    (b) Effective Date.--This section and the amendments made by this 
section shall take effect on October 1, 1998.

SEC. 503. REPEAL OF AUTHORIZATIONS OF APPROPRIATIONS FOR PUBLIC SERVICE 
                    COSTS, REVENUE FORGONE, AND CERTAIN COMPENSATORY 
                    APPROPRIATIONS.

    (a) In General.--Section 2401 of title 39, United States Code, is 
amended by striking subsections (b), (c), (d), (f), and (g), and by 
redesignating subsection (e) as subsection (b).
    (b) Conforming Amendments.--(1) Section 2003 of title 39, United 
States Code, is amended--
            (A) in subsection (e) by striking paragraph (2) and by 
        redesignating subsection (e)(1) as subsection (e); and
            (B) by striking subsection (f) and by redesignating 
        subsection (g) as subsection (f).
    (2) Section 2009 of such title 39 is amended by striking the last 
two sentences.
    (3) Sections 2803(a) and 2804(a) of such title 39 are amended by 
striking ``2401(g)'' and inserting ``2401(b)''.
    (4) Section 3626(a)(2)(B) of such title 39 is amended by striking 
``paragraph (3)(A) or section 2401(c);'' and inserting ``paragraph 
(3)(A), section 3217, or sections 3403-3406;''.
    (5)(A) Section 3627 of such title 39 is repealed.
    (B) The item relating to section 3627 in the table of sections at 
the beginning of chapter 36 of such title 39 is repealed.
    (C) Section 3684 of such title 39 is amended by striking ``Except 
as provided in section 3627 of this title, no'' and inserting ``No''.
    (c) Effective Date.--This section and the amendments made by this 
section shall take effect on October 1, 1998.

SEC. 504. CONGRESSIONAL OVERSIGHT PRESERVED.

    Subsection (b) of section 2401 of title 39, United States Code, as 
so redesignated by section 503(a), is amended--
            (1) by striking ``Committee on Post Office and Civil 
        Service'' each place it appears and inserting ``Committee on 
        Government Reform and Oversight'';
            (2) by striking ``and the Committees on Appropriations of 
        the Senate and the House of Representatives'';
            (3) in the matter before paragraph (1)--
                    (A) by striking ``2009 of this title,'' and 
                inserting ``2009 for a fiscal year,''; and
                    (B) by striking ``for the fiscal year for which 
                funds are requested to be appropriated,'' and inserting 
                ``for such fiscal year,'';
            (4) in paragraph (3) by striking ``during the fiscal year 
        for which funds are requested to be appropriated,'' and 
        inserting ``during the fiscal year referred to in the matter 
        before paragraph (1),'';
            (5) by striking ``Not later than March 15 of each year,'' 
        and inserting ``Each year,''; and
            (6) by striking ``any such committee considers necessary to 
        determine the amount of funds to be appropriated for the 
        operation of the Postal Service,'' and inserting ``either such 
        committee considers necessary,''.

 TITLE VI--MISCELLANEOUS PROVISIONS RELATING TO POSTAL RATES, CLASSES, 
                              AND SERVICES

SEC. 601. CHANGE-OF-ADDRESS ORDER INVOLVING A COMMERCIAL MAIL RECEIVING 
                    AGENCY.

    (a) In General.--Subchapter V of chapter 36 of title 39, United 
States Code, is amended by adding at the end the following:

``Sec. 3686. Change-of-address order involving a commercial mail 
                    receiving agency

    ``(a) For the purpose of this section, the term `commercial mail 
receiving agency' or `CMRA' means a private business that acts as the 
mail receiving agent for specific clients.
    ``(b) Upon termination of an agency relationship between an 
addressee and a commercial mail receiving agency--
            ``(1) the addressee or, if authorized to do so, the CMRA 
        may file a change-of-address order with the Postal Service with 
        respect to such addressee;
            ``(2) a change-of-address order so filed shall, to the 
        extent practicable, be given full force and effect; and
            ``(3) any mail for the addressee that is delivered to the 
        CMRA after the filing of an appropriate order under this 
        subsection shall be subject to subsection (c).
    ``(c) Mail described in subsection (b)(3) shall, if marked for 
forwarding and remailed by the CMRA, be forwarded by the Postal Service 
in the same manner as, and subject to the same terms and conditions 
(including limitations on the period of time for which a change-of-
address order shall be given effect) as apply to, mail forwarded 
directly by the Postal Service to the addressee.''.
    (b) Clerical Amendment.--The table of sections at the beginning of 
chapter 36 of title 39, United States Code, is amended by adding after 
the item relating to section 3685 the following:

``3686. Change-of-address order involving a commercial mail receiving 
    agency.''.

SEC. 602. RATES FOR MAIL UNDER FORMER SECTION 4358.

    Section 3626 of title 39, United States Code, is amended by adding 
at the end the following:
    ``(n) In the administration of this section, matter shall not be 
excluded from being mailed at the rates for mail under former section 
4358 solely because such matter does not meet the requirements of 
former section 4354(a)(5).''.

SEC. 603. POWERS OF THE POSTAL RATE COMMISSION.

    Section 3604 of title 39, United States Code, is amended by adding 
at the end the following:
    ``(f)(1) Any Commissioner of the Commission, any administrative law 
judge appointed by the Commission under section 3105 of title 5, and 
any employee of the Commission designated by the Commission may 
administer oaths, examine witnesses, take depositions, and receive 
evidence.
    ``(2) The Chairman of the Commission, any Commissioner designated 
by the Chairman, and any administrative law judge appointed by the 
Commission under section 3105 of title 5 may, with respect to any 
proceeding under section 3624 or 3661 or chapter 37--
            ``(A) issue subpenas requiring the attendance and 
        presentation of testimony of any individual, and the production 
        of documentary or other evidence, from any place in the United 
        States, any territory or possession of the United States, the 
        Commonwealth of Puerto Rico, or the District of Columbia; and
            ``(B) order the taking of depositions and responses to 
        written interrogatories.
The written concurrence of a majority of the Commissioners then holding 
office shall, with respect to each subpena under subparagraph (A), be 
required in advance of its issuance.
    ``(3) In the case of contumacy or failure to obey a subpena issued 
under this subsection, upon application by the Commission, the district 
court of the United States for the district in which the person to whom 
the subpena is addressed resides or is served may issue an order 
requiring such person to appear at any designated place to testify or 
produce documentary or other evidence. Any failure to obey the order of 
the court may be punished by the court as a contempt thereof.
    ``(g)(1) If the Postal Service determines that any document or 
other matter it provides to the Commission pursuant to a subpena issued 
under subsection (f), or otherwise at the request of the Commission in 
connection with any proceeding or other purpose under this chapter or 
chapter 37, contains information which is described in section 410(c) 
of this title, or exempt from public disclosure under section 552(b) of 
title 5, the Postal Service shall, at the time of providing such matter 
to the Commission, notify the Commission, in writing, of its 
determination (and the reasons therefor).
    ``(2) No officer or employee of the Commission may, with respect to 
any information as to which the Commission has been notified under 
paragraph (1)--
            ``(A) use such information for purposes other than the 
        purposes for which it is supplied; or
            ``(B) permit anyone who is not an officer or employee of 
        the Commission to have access to any such information.
    ``(3) Paragraph (2) shall not prevent information from being 
furnished under any process of discovery established under this title 
in connection with a proceeding under this chapter or chapter 37 which 
is conducted in accordance with sections 556 and 557 of title 5. The 
Commission shall, by regulations based on rule 26(c) of the Federal 
Rules of Civil Procedure, establish appropriate administrative and 
other safeguards to ensure the security and confidentiality of any 
information furnished under the preceding sentence.''.

SEC. 604. VOLUME DISCOUNTS.

    (a) In General.--Subsection (c) of section 403 of title 39, United 
States Code, is amended by striking ``(c)'' and inserting ``(c)(1)'' 
and by adding at the end the following:
    ``(2) Nothing in this title shall be considered to preclude the 
Postal Service from offering any discount in a rate or fee, on the 
basis of volume, so long as--
            ``(A) all persons are, with respect to the class of mail or 
        postal service involved, eligible for the same volume discount; 
        and
            ``(B) the discounted rate--
                    ``(i) if a product in the noncompetitive category 
                of mail is involved, does not exceed the maximum rate 
                then allowable for such product under subchapter II of 
                chapter 37; or
                    ``(ii) if a product in the competitive category of 
                mail is involved, satisfies the requirement under 
                section 3742(b) that each such product bear the direct 
                and indirect postal costs attributable to such product 
                plus a reasonable contribution to all other costs of 
                the Postal Service.''.
    (b) Demonstration Project.--
            (1) In general.--
                    (A) Purpose.--As soon as practicable after the date 
                of the enactment of this Act, the United States Postal 
                Service shall conduct a demonstration project, the 
                purpose of which shall be to determine the feasibility 
                and desirability of affording volume discounts to 
                mailers on a negotiated basis.
                    (B) Limitation.--The demonstration project shall be 
                limited to products in the competitive category of mail 
                (within the meaning of section 3741(2) of title 39, 
                United States Code, as amended by section 1001).
                    (C) Discounts.--Under the demonstration project, 
                any discounts shall be on such terms and conditions as 
                may be mutually agreed to by the Postal Service and the 
                mailer, subject to section 403(c)(2)(B)(ii) of title 
                39, United States Code (as amended by subsection (a)).
            (2) Other requirements.--Subsections (c)(1)(A), (d)(1) 
        (excluding subparagraphs (A)(i), (B)(ii), and (C)(ii) thereof), 
        and (e) of section 704 shall apply with respect to the 
        demonstration project under this subsection.
    (c) Effective Date.--This section and the amendments made by this 
section shall take effect on the date on which section 1002 (relating 
to termination of ratemaking authority under chapter 36 and related 
matters) takes effect.

TITLE VII--PROVISIONS RELATING TO TRANSPORTATION, CARRIAGE, OR DELIVERY 
                                OF MAIL

SEC. 701. OBSOLETE PROVISIONS.

    (a) Repeal.--Chapter 52 of title 39, United States Code, is 
repealed.
    (b) Conforming Amendments.--(1) Section 5005(a) of title 39, United 
States Code, is amended--
            (A) by repealing paragraph (1); and
            (B) in paragraph (4) by striking ``(as defined in section 
        5201(6) of this title)''.
    (2) Section 10721(b)(1) of title 49, United States Code, is amended 
by striking ``chapters 50 and 52'' and inserting ``chapter 50''.
    (c) Eliminating Restriction on Length of Contracts.--(1) Section 
5005(b)(1) of title 39, United States Code, is amended by striking 
``shall be for periodsnot in excess of 4 years (or where the Postal 
Service determines that special conditions or the use of special 
equipment warrants, not in excess of 6 years) and''.
    (2) Section 5402(c) of such title 39 is amended by striking ``for a 
period of not more than 4 years''.
    (3) Section 5605 of such title 39 is amended by striking ``for 
periods of not in excess of 4 years''.

SEC. 702. EXPANDED CONTRACTING AUTHORITY.

    Subsection (d) of section 5402 of title 39, United States Code, is 
amended to read as follows:
    ``(d) Notwithstanding the provisions of subsections (a) through 
(c), the Postal Service may contract for the transportation of mail by 
aircraft, except as provided in subsections (f) and (g).''.

SEC. 703. PRIVATE CARRIAGE OF LETTERS.

    Section 601(a) of title 39, United States Code, is amended by 
inserting ``when the amount paid for private carriage of the letter is 
at least $2, or'' before ``when''.

SEC. 704. MAILBOX DEMONSTRATION PROJECT.

    (a) Purpose.--The purpose of this section is to determine the 
feasibility and desirability of allowing non-postage bearing matter to 
be deposited in private letterboxes.
    (b) Project.--As soon as practicable after the date of the 
enactment of this Act, the United States Postal Service shall--
            (1) develop a plan for the conducting of a demonstration 
        project under this section; and
            (2) within 18 months after the date of the enactment of 
        this Act, commence implementation of such plan.
    (c) Specifications.--
            (1) In general.--The demonstration project--
                    (A) shall be conducted over a 3-year period;
                    (B) shall include such areas as the Postal Service 
                considers appropriate, except that such project shall 
                include at least 1 urban area, 1 rural area, and 1 
                suburban area, each of which shall involve a sufficient 
                level of participation so as to ensure meaningful 
                results; and
                    (C) shall include provisions under which any person 
                may elect not to participate, or to cease to 
                participate, in the project.
            (2) Temporary suspension of section 1725 of title 18.--
        Section 1725 of title 18, United States Code, shall not apply 
        with respect to conduct occurring--
                    (A) within an area included in the demonstration 
                project; and
                    (B) while the demonstration project is ongoing.
    (d) Procedures.--
            (1) In general.--The Postal Service shall--
                    (A) develop a plan for the demonstration project 
                which identifies--
                            (i) the specific areas to be included in 
                        the project;
                            (ii) the commencement and termination dates 
                        of the project;
                            (iii) the legal authority for the project; 
                        and
                            (iv) specific details as to what the 
                        project will entail;
                    (B) at least 90 days before commencing 
                implementation of the project--
                            (i) publish the proposed plan in the 
                        Federal Register, including notice as to the 
                        time and manner in which interested persons may 
                        submit written comments; and
                            (ii) provide notification of the proposed 
                        plan to persons served within the areas to be 
                        included in the project, including the relevant 
                        information as to the time, form, and manner in 
                        which any such person shall have the 
                        opportunity to present their views, in writing 
                        or by oral presentation, as they may elect; and
                    (C) after considering the comments and views and 
                any other information received under subparagraph (B), 
                prepare the final version of the plan for such project 
                and, not later than 30 days before commencing 
                implementation of the project--
                            (i) publish the final plan in the Federal 
                        Register; and
                            (ii) provide notification of the final plan 
                        to persons served within the areas to be 
                        included in the project.
            (2) Factors to be taken into account in selecting areas for 
        inclusion.--In identifying areas for inclusion in the 
        demonstration project, the Postal Service shall take into 
        account--
                    (A) what types of data are needed in order to 
                permit a meaningful evaluation under subsection (e); 
                and
                    (B) such other factors as the Postal Service 
                considers appropriate.
            (3) Written determinations.--Any determination of the 
        Postal Service to commence implementation of the demonstration 
        project shall be in writing and shall include the findings of 
        the Postal Service with respect to the factors required to be 
        taken into account under paragraph (2). Such determination and 
        findings shall be made available to the persons served by the 
        Postal Service within each area included in the project.
    (e) Evaluation.--Not later than 1 year after the demonstration 
project ends, the Comptroller General of the United States shall submit 
to each House of Congress a written evaluation of such project, 
including recommendations as to whether or not the authority tested by 
the project should be broadened in scope and made permanent and, if so, 
with what modifications (if any).

TITLE VIII--DIRECT APPEAL OF DECISIONS OF THE MERIT SYSTEMS PROTECTION 
                                 BOARD

SEC. 801. DIRECT APPEAL OF DECISIONS OF THE MERIT SYSTEMS PROTECTION 
                    BOARD.

    Section 7703 of title 5, United States Code, is amended by adding 
at the end the following:
    ``(e)(1) The Chief Executive Officer may, with respect to any 
employee of the Postal Service or applicant for employment with the 
Postal Service, and subject to the provisions of sections 409(b)-(e) 
and 411 of title 39, obtain review of any final order or decision of 
the Board by filing a petition for judicial review in the United States 
Court of Appeals for the Federal Circuit if the Chief Executive Officer 
determines, in his or her discretion, that the Board erred in 
interpreting a civil service law, rule, or regulation affecting 
personnel management and that the Board's decision will have a 
substantial impact on a civil service law, rule, regulation, or policy 
directive, as applied with respect to the Postal Service. If the Chief 
Executive Officer did not intervene in a matter before the Board, the 
Chief Executive Officer may not petition for review of a Board decision 
under this section unless the Chief Executive Officer first petitions 
the Board for a reconsideration of its decision, and such petition is 
denied. In addition to the named respondent, the Board and all other 
parties to the proceedings before the Board shall have the right to 
appear in the proceeding before the Court of Appeals. The granting of 
the petition for judicial review shall be at the discretion of the 
Court of Appeals.
    ``(2) For purposes of applying the provisions of section 7701(e) in 
the case of a decision that relates to an employee of the Postal 
Service or applicant for employment with the Postal Service, such 
provisions shall be applied by substituting `Director or Chief 
Executive Officer of the United States Postal Service' for `Director'.
    ``(3) For purposes of this subsection--
            ``(A) the term `Chief Executive Officer' means the Chief 
        Executive Officer of the United States Postal Service; and
            ``(B) the term `Postal Service' means the United States 
        Postal Service.''.

                       TITLE IX--LAW ENFORCEMENT

         Subtitle A--Amendments to Title 39, United States Code

SEC. 901. MAKE FEDERAL ASSAULT STATUTES APPLICABLE TO POSTAL CONTRACT 
                    EMPLOYEES.

    Section 1008 of title 39, United States Code, is amended--
            (1) in subsection (a) by inserting ``or entrusted with mail 
        under contract with the Postal Service'' after ``mail''; and
            (2) in subsection (b) by inserting ``an employee of the 
        Postal Service for the purposes of sections 111 and 1114 of 
        title 18, and'' after ``deemed''.

SEC. 902. SEXUALLY ORIENTED ADVERTISING.

    (a) Civil Penalty.--Section 3011 of title 39, United States Code, 
is amended--
            (1) by redesignating subsections (b) through (e) as 
        subsections (c) through (f), respectively; and
            (2) by inserting after subsection (a) the following:
    ``(b)(1) Upon a finding by the court that a sexually oriented 
advertisement has been mailed in violation of section 3010(b), the 
court may assess, on whoever made the mailing or caused it to be made, 
a civil penalty of not less than $500 and not more than $1,500 for each 
violation. Each piece of mail sent in violation of section 3010(b) 
shall constitute a separate violation.
    ``(2) For purposes of this subsection--
            ``(A) receipt of a sexually oriented advertisement after 
        the recipient's name and address have been listed (as described 
        in section 3010(b)) for at least 60 days shall create a 
        rebuttable presumption that such advertisement was mailed more 
        than 30 days after that individual's name and address became so 
        listed; and
            ``(B) receipt in the mail of a sexually oriented 
        advertisement addressed to `Occupant' or `Resident' (or any 
        other term permitted by Postal Service standards on simplified 
        addressing) at the recipient's address, or which is 
        specifically addressed to the recipient, but with an 
        inconsequential error or variation in the recipient's name or 
        address, shall, for purposes of applying the mailing 
        prohibition of section 3010(b), create a rebuttable presumption 
        that such advertisement was mailed to such recipient.
    ``(3) Any penalty assessed under paragraph (1) shall be paid to the 
Postal Service for deposit in the Postal Service Fund established by 
section 2003.''.
    (b) Repeal.--
            (1) In general.--Section 3008 of title 39, United States 
        Code, and the item relating to such section in the table of 
        sections at the beginning of chapter 30 of such title, are 
        repealed.
            (2) Conforming amendments.--(A) Subsection (f) of section 
        3011 of such title 39 (as so redesignated by subsection (a)) is 
        amended by striking ``section 3006, 3007, or 3008'' and 
        inserting ``section 3006 or 3007''.
            (B) Section 1737 of title 18, United States Code, is 
        amended--
                    (i) in subsection (a) by striking ``3008 or''; and
                    (ii) in subsection (b) by striking ``3008(a) or''.
    (c) Effective Date.--This section and the amendments made by this 
section shall take effect 90 days after the date of the enactment of 
this Act. The amendments made by this section shall be treated as if 
they had never been enacted for purposes of any mailing made or caused 
to be made before this section takes effect.

SEC. 903. ALLOW POSTAL SERVICE TO RETAIN ASSET FORFEITURE RECOVERIES.

    Paragraph (7) of section 2003(b) of title 39, United States Code, 
is amended to read as follows:
            ``(7) amounts (including proceeds from the sale of 
        forfeited items) from any civil forfeiture conducted by the 
        Postal Service and from any forfeiture resulting from an 
        investigation in which the Postal Service has primary 
        responsibility, except that nothing in this paragraph shall 
        preclude the Postal Service, on such terms as it may determine, 
        from sharing such amounts with any Federal, State, or local law 
        enforcement agency which participated in any of the acts which 
        led to the seizure or forfeiture of the property; and''.

SEC. 904. HAZARDOUS MATTER.

    (a) Civil Penalty.--Chapter 30 of title 39, United States Code, is 
amended by adding at the end the following:

``Sec. 3016. Civil penalty for prohibited mailing and deficient 
                    packaging of hazardous matter

    ``(a) For the purposes of this section--
            ``(1) the term `parcel' includes any kind of package, 
        envelope, container, or other piece of mail;
            ``(2) the term `manner' includes the preparation and 
        packaging of a piece of mail;
            ``(3) a person shall be considered to have acted knowingly 
        if--
                    ``(A) such person had actual knowledge of the facts 
                giving rise to the violation; or
                    ``(B) a reasonable person acting in the same 
                circumstances and exercising due care would have had 
                such knowledge; and
            ``(4) the term `hazardous matter' has the meaning given 
        such term by section 1716 of title 18.
    ``(b) Any person--
            ``(1) who knowingly mails or causes to be mailed any 
        parcel, the contents of which constitute or include any 
        hazardous matter which has been declared by statute or Postal 
        Service regulation to be nonmailable under any circumstances;
            ``(2) who knowingly mails or causes to be mailed a parcel 
        in violation of any statute or Postal Service regulation 
        restricting the time, place, ormanner in which hazardous matter 
may be mailed; or
            ``(3) who knowingly manufactures, distributes, or sells any 
        container, packaging kit, or similar device that--
                    ``(A) is represented, marked, certified, or sold by 
                such person for use in the mailing of any hazardous 
                matter; and
                    ``(B) fails to conform with any statute or Postal 
                Service regulation setting forth standards for 
                containers, packaging kits, or similar devices used for 
                the mailing of hazardous matter;
shall be liable to the Postal Service for a civil penalty in an amount 
not to exceed $25,000 per violation.
    ``(c) The Postal Service may enforce this section by commencing a 
civil action in accordance with section 409(d). The action may be 
brought in the district court of the United States for the district in 
which the defendant resides or any district in which the defendant 
conducts business or in which a violation of this section was 
discovered.
    ``(d) In determining the amount of any civil penalty to be assessed 
under this section, the district court--
            ``(1) shall treat as a separate violation--
                    ``(A) each parcel mailed or caused to be mailed as 
                described in paragraph (1) or (2) of subsection (b); 
                and
                    ``(B) each container, packaging kit, or similar 
                device manufactured, distributed, or sold as described 
                in subsection (b)(3); and
            ``(2) shall take into account--
                    ``(A) the nature, circumstances, extent, and 
                gravity of each violation committed; and
                    ``(B) with respect to the person found to have 
                committed such violation, the degree of culpability, 
                any history of prior offenses, ability to pay, effect 
                on ability to continue to do business, and such other 
                matters as justice may require.
    ``(e) All penalties collected under authority of this section shall 
be paid into the Postal Service Fund established by section 2003.''.
    (b) Clerical Amendment.--The table of sections at the beginning of 
chapter 30 of title 39, United States Code, is amended by adding at the 
end the following:

``3016. Civil penalty for prohibited mailing and deficient packaging of 
    hazardous matter.''.

                      Subtitle B--Other Provisions

SEC. 911. STALKING FEDERAL OFFICERS AND EMPLOYEES.

    (a) In General.--Chapter 41 of title 18, United States Code, is 
amended by adding at the end the following:

``Sec. 881. Stalking Federal and postal officers and employees

    ``(a) Whoever--
            ``(1) repeatedly engages in a pattern of conduct (including 
        maintaining a visual or physical proximity or verbal or written 
        threat) directed at another person who is or was an officer or 
        employee--
                    ``(A) in the executive, legislative, or judicial 
                branch of the Federal Government; or
                    ``(B) in the United States Postal Service;
        while such other person is engaged in official duties or on 
        account of such duties;
            ``(2) knows that such conduct is likely to place that other 
        person in reasonable fear of sexual battery, bodily injury, or 
        death; and
            ``(3) thereby induces such fear in that other person;
shall be punished as provided in subsection (b) of this section.
    ``(b)(1) The punishment for an offense under subsection (a) of this 
section is the greatest of the following:
            ``(A) In the case of a first conviction under such 
        subsection, a fine under this title or imprisonment for not 
        more than 3 years, or both.
            ``(B) In the case of a second or subsequent conviction 
        under such subsection, a fine under this title or imprisonment 
        for not more than 15 years, or both.
            ``(C) If, during the commission of the offense, the 
        offender uses a deadly or dangerous weapon, a fine under this 
        title or imprisonment for not more than 10 years, or both.
            ``(D) If the offense violates a protective order, a fine 
        under this title or imprisonment for not more than 5 years, or 
        both.
    ``(2) If a sentence of probation is imposed for an offense under 
subsection (a) of this section, the court shall require the defendant 
to undergo appropriate psychiatric, psychological, or social 
counselling.
    ``(c) As used in this section, the term `protective order' means 
any court order that requires an individual--
            ``(1) to refrain from behavior prohibited by subsection (a) 
        of this section; or
            ``(2) to refrain from contact with the person who 
        subsequently is a victim of the offense under such subsection 
        that is committed by that individual.
    ``(d)(1) Whoever is or is about to be aggrieved by a violation of 
subsection (a) of this section may, in a civil action, obtain from the 
person engaging or about to engage in that violation, appropriate 
relief, including punitive damages in the case of a completed violation 
and reasonable attorney's fees.
    ``(2) If--
            ``(A) the court issues an injunction against the person 
        engaging or about to engage in a violation of subsection (a) of 
        this section;
            ``(B) such person is an officer or employee in the 
        executive branch of the Federal Government or in the United 
        States Postal Service; and
            ``(C) there is a nexus between the enjoined conduct and 
        such person's office or employment;
the court may order that the person be suspended or summarily 
discharged from such office or employment.''.
    (b) Clerical Amendment.--The table of sections at the beginning of 
chapter 41 of title 18, United States Code, is amended by adding at the 
end the following:

``881. Stalking Federal and postal officers and employees.''.

SEC. 912. NONMAILABILITY OF CONTROLLED SUBSTANCES.

    Section 1716 of title 18, United States Code, is amended by adding 
at the end the following:
    ``Whoever knowingly deposits for mailing or delivery, or knowingly 
causes to be delivered by mail, according to the direction thereon, or 
at any place at which it is directed to be delivered by the person to 
whom it is addressed, unless in accordance with the rules and 
regulations authorized to be prescribed by the Postal Service, any 
controlled substance, as that term is defined for the purposes of the 
Controlled Substances Act, shall, if the distribution of a like amount 
of such substance is a felony under such Act, be fined under this title 
or imprisoned not more than 5 years, or both.''.

SEC. 913. ENHANCED PENALTIES.

    Pursuant to its authority under section 994 of title 28, United 
States Code, the United States Sentencing Commission shall amend its 
sentencing guidelines to--
            (1) appropriately enhance penalties in cases in which a 
        defendant is convicted of stealing or destroying a quantity of 
        undelivered United States mail, in violation of sections 1702, 
        1703, 1708, 1709, 2114, or 2115 of title 18, United States 
        Code; and
            (2) establish that the intended loss in a theft of an 
        access device as defined in section 1029(e)(1) of title 18, 
        United States Code, shall be based on the credit line of the 
        access device or the actual unauthorized charges, whichever 
        amount is greater.

SEC. 914. POSTAL BURGLARY PROVISIONS.

    (a) Larceny Involving Post Office Boxes and Postal Stamp Vending 
Machines.--Section 2115 of title 18, United States Code, is amended--
            (1) by striking ``or'' before ``any building'';
            (2) by inserting ``or any post office box or postal 
        products vending machine,'' after ``used in whole or in part as 
        a post office,'';
            (3) by inserting ``or in such box or machine,'' after ``so 
        used''; and
            (4) by striking ``not more than $1,000'' and inserting 
        ``under this title''.
    (b) Receipt, Possession, Concealment, or Disposition of Property.--
Section 2115 of title 18, United States Code, is amended--
            (1) by inserting ``(a)'' before ``Whoever''; and
            (2) by adding at the end the following:
    ``(b) Whoever receives, possesses, conceals, or disposes of any 
mail matter, money, or other property of the United States, that has 
been obtained in violation of this section, knowing the same to have 
been unlawfully obtained, shall be fined under this title or imprisoned 
not more than 5 years, or both.''.

SEC. 915. MAIL, MONEY, OR OTHER PROPERTY OF THE UNITED STATES.

    (a) Enhanced Penalty for Robbery.--Subsection (a) of section 2114 
of title 18, United States Code, is amended to read as follows:
    ``(a) Assault.--Whoever assaults any person having lawful charge, 
control, or custody of any mail matter or of any money or other 
property of the United States, with intent to rob, steal, or purloin 
such mail matter, money, or other property of the United States, or 
robs or attempts to rob any such person of mail matter, or of any 
money, or other property of the United States, shall, for the first 
offense, be imprisoned not more than 10 years or fined under this 
title, or both. If, in effecting or attempting to effect such robbery 
the defendant wounds the person having custody of such mail, money, or 
other property of the United States, or puts that person's life in 
jeopardy by the use of a dangerous weapon, or the offense is a 
subsequent offense under this subsection, the defendant shall be 
imprisoned not more than 25 years or fined under this title, or both. 
If the death of any person results from the offense under this 
subsection, the defendant shall be punished by death or life 
imprisonment.''.
    (b) Attempt Offenses.--
            (1) The second paragraph of section 501 of title 18, United 
        States Code, is amended by striking ``uses or sells,'' and 
        inserting ``uses or sells or attempts to use or sell,''.
            (2) Section 1711 of title 18, United States Code, is 
        amended by inserting ``attempts to loan, use, pledge, 
        hypothecate, or convert to this own use,'' after ``converts to 
        his own use,''.

  TITLE X--NEW SYSTEM RELATING TO POSTAL RATES, CLASSES, AND SERVICES

SEC. 1001. ESTABLISHMENT.

    (a) In General.--Title 39, United States Code, is amended by adding 
after chapter 36 the following:

 ``CHAPTER 37--NEW SYSTEM FOR ESTABLISHING POSTAL RATES, CLASSES, AND 
                                SERVICES

                ``SUBCHAPTER I--BASELINE RATES AND FEES

    ``Sec.
``3701. Establishment of baseline rates and fees.

  ``SUBCHAPTER II--RATES AND FEES FOR PRODUCTS IN THE NONCOMPETITIVE 
                            CATEGORY OF MAIL

``3721. Definitions.
``3722. Maximum rates.
``3723. Adjustment factor.
``3724. Action of the Directors.

   ``SUBCHAPTER III--RATES AND FEES FOR PRODUCTS IN THE COMPETITIVE 
                            CATEGORY OF MAIL

``3741. Definitions.
``3742. Action of the Directors.
``3743. Transfers of products from the noncompetitive category of mail.
``3744. Application of antitrust laws.

         ``SUBCHAPTER IV--MARKET TESTS OF EXPERIMENTAL PRODUCTS

``3761. Market tests.

     ``SUBCHAPTER V--REPORTING REQUIREMENTS AND RELATED PROVISIONS

``3781. Definition.
``3782. Reporting requirements.
``3783. Use of profits.

                ``SUBCHAPTER I--BASELINE RATES AND FEES

``Sec. 3701. Establishment of baseline rates and fees

    ``(a) Requirement That a Ratemaking Request Be Made.--
            ``(1) In general.--Except as provided in paragraph (2), the 
        Postal Service shall, within 18 months after the effective date 
        of this chapter, request the Postal Rate Commission to submit a 
        recommended decision on appropriate changes in rates of postage 
        and in fees for postal services, in accordance with section 
        3622(a).
            ``(2) Exception.--A request under this subsection may not 
        be made if, on the effective date of this chapter--
                    ``(A) a new schedule of rates and fees takes effect 
                under subchapter II of chapter 36 pursuant to a 
                previous request under section 3622(a); or
                    ``(B) a recommended decision or further recommended 
                decision pursuant to a previous request under section 
                3622(a), or judicial review of any such decision or 
                recommended decision, is pending.
    ``(b) Baseline Rates and Fees Established Pursuant to This 
Section.--
            ``(1) In general.--For purposes of this title, the baseline 
        rates and fees established pursuant to this section shall be--
                    ``(A) the rates and fees taking effect pursuant to 
                a request made under subsection (a)(1), subject to 
                subparagraph (C)(i) or paragraph (2)(A) (as 
                applicable);
                    ``(B) the rates and fees--
                            ``(i) that, by virtue of subsection 
                        (a)(2)(A), preclude the making of a request 
                        under subsection (a)(1); or
                            ``(ii) that take effect upon completion of 
                        all proceedings referred to in subsection 
                        (a)(2)(B), subject to subparagraph (C)(ii) or 
                        paragraph (2)(B) (as applicable); or
                    ``(C)(i) if a request under subsection (a)(1) is 
                made, but proceedings pursuant to such request have not 
                been completed by the end of the 18-month period 
                beginning on the date on which such request is made, 
                the rates and fees in effect at the end of such period 
                (including any temporary rate or fee then in effect 
                under subchapter III of chapter 36); or
                    ``(ii) if a request under subsection (a)(1) is 
                precluded by virtue of the provisions of subsection 
                (a)(2)(B), but the proceedings referred to in such 
                provisions have not been completed by the end of the 
                18-month period referred to in subsection (a)(1), the 
                rates and fees in effect at the end of such period 
                (including any temporary rate or fee then in effect 
                under subchapter III of chapter 36).
            ``(2) Applicable statutory deadline not changeable by 
        administrative or other action.--Rates and fees established 
        under chapter 36 pursuant to--
                    ``(A) a request made under subsection (a)(1) shall 
                take effect as of the date determined in accordance 
                with section 3625(f) or otherwise applicable provisions 
                of such chapter, except that in no event may the date 
                so determined be later than the last day of the 18-
                month period referred to in paragraph (1)(C)(i); or
                    ``(B) a previous request, as referred to in 
                subsection (a)(2)(B), shall take effect as of the date 
                determined in accordance with section 3625(f) or 
                otherwise applicable provisions of such chapter, except 
                that in no event may the date so determined be later 
                than the last day of the 18-month period referred to in 
                subsection (a)(1).
    ``(c) Priority of Ratemaking Factors if Pursuant to a Request Under 
This Section.--If a request under subsection (a)(1) is made, then, for 
purposes of all proceedings under chapter 36 relating to such request, 
subsection (b) of section 3622 shall be considered to be amended to 
read as follows:
    `` `(b) Upon receiving a request, the Commission shall make a 
recommended decision on the request for changes in rates or fees in 
each class of mail or type of service in accordance with the policies 
of this title and the following factors, set forth in descending order 
of priority:
            `` `(1) The requirement that each class of mail or type of 
        mail service bear the direct and indirect postal costs 
        attributable to such class or type plusthat portion of all 
other costs of the Postal Service reasonably assignable to such class 
or type.
            `` `(2) The value of the mail service to senders, as 
        reflected by the volume response of classes of mail and types 
        of service to changes in postal rates and fees, and, as 
        appropriate, the price and quality of alternative means of 
        sending mail.
            `` `(3) The quality of mail service actually provided each 
        class or type of mail service, including the collection, mode 
        of transportation, priority of delivery, and timeliness of 
        delivery (as measured by reference to standards established by 
        the Postal Service).
            `` `(4) The available alternative means of sending and 
        receiving letters and other mail matter at reasonable costs.
            `` `(5) The degree of preparation of mail for delivery into 
        the postal system performed by the mailer and its effect upon 
        reducing costs to the Postal Service.
            `` `(6) The effect of rate increases upon users of the mail 
        and the general public.
            `` `(7) Simplicity of structure for the entire schedule and 
        simple, identifiable relationships between the rates or fees 
        charged the various classes of mail for postal services.
            `` `(8) The educational, cultural, scientific, and 
        informational value to the recipient of mail matter.
            `` `(9) The establishment and maintenance of a fair and 
        equitable schedule.
            `` `(10) Such other factors as the Commission deems 
        appropriate.'.

  ``SUBCHAPTER II--RATES AND FEES FOR PRODUCTS IN THE NONCOMPETITIVE 
                            CATEGORY OF MAIL

``Sec. 3721. Definitions

    ``For purposes of this subchapter--
            ``(1) Year.--The term `year' means a calendar year.
            ``(2) GDPPI.--The term `GDPPI' means the Gross Domestic 
        Product Chain-Type Price Index (published quarterly by the 
        Bureau of Economic Analysis of the Department of Commerce).
            ``(3) Product.--The term `product' means a class of mail or 
        type of postal service, including--
                    ``(A) a subclass or other similar subordinate unit 
                thereof; and
                    ``(B) any further subordinate unit thereof (below 
                the first level of subordinate units referred to in 
                subparagraph (A)).
            ``(4) Products in the noncompetitive category of mail.--The 
        term `products in the noncompetitive category of mail' means 
        the respective products in the first, second, third, and fourth 
        baskets of products (within the meaning of section 3723(a)).
            ``(5) Rate.--The term `rate', used with respect to a 
        product, means--
                    ``(A) for a class of mail, the rate for such class 
                of mail; and
                    ``(B) for a type of postal service, the fee for 
                such service.
            ``(6) Noncompetitive product.--The term `noncompetitive 
        product' means a product in the noncompetitive category of 
        mail.

``Sec. 3722. Maximum rates

    ``(a) In General.--Except as otherwise provided in this subchapter, 
the rate for a noncompetitive product may not, in any year, exceed the 
maximum rate allowable for such product in such year under this 
section.
    ``(b) Computation of Maximum Rate Allowable.--
            ``(1) In general.--The maximum rate allowable for a 
        noncompetitive product in any year shall be computed by 
        multiplying--
                    ``(A) the change in the GDPPI for such year, 
                adjusted by the adjustment factor for such year, times
                    ``(B) the maximum rate allowable for such product 
                in the preceding year (determined disregarding 
                paragraph (4), any exercise of authority under section 
                3724(d), and any alternative limitation under section 
                1002(e) of the Postal Reform Act of 1997).
            ``(2) Definitions.--For purposes of this subsection--
                    ``(A) Change in the gdppi.--The change in the GDPPI 
                for any year shall be equal to the percentage (if any) 
                by which--
                            ``(i) the GDPPI for the preceding year, 
                        exceeds
                            ``(ii) the GDPPI for the second preceding 
                        year.
                    ``(B) GDPPI for any year.--The GDPPI for any year 
                is the average of the GDPPI for the 4 consecutive 
                calendar quarters ending on September 30th of such 
                year.
                    ``(C) Adjustment factor.--The adjustment factor for 
                any year shall be determined in accordance with section 
                3723.
            ``(3) Special rule for first computation.--For purposes of 
        the first computation of a maximum rate allowable under this 
        section for any product, the rate applied under paragraph 
        (1)(B) shall be the baseline rate established for such product 
        under section 3701.
            ``(4) Rounding.--Any maximum rate computed under this 
        section shall be rounded to the nearest cent (rounding \1/2\ of 
        a cent to the next higher cent).

``Sec. 3723. Adjustment factor

    ``(a) Definitions.--For purposes of this section--
            ``(1) Ratemaking cycle.--
                    ``(A) In general.--The term `ratemaking cycle' 
                means--
                            ``(i) the 5-year period beginning on the 
                        first day of the second year beginning after 
                        the effective date of the baseline rates and 
                        fees established pursuant to section 3701; and
                            ``(ii) each 5-year period beginning on the 
                        day after the last day of the immediately 
                        preceding 5-year period under this paragraph.
                    ``(B) Earlier initial date.--The Postal Rate 
                Commission may, by written determination, advance the 
                date applicable under subparagraph (A)(i) to the date 
                which occurs 1 year earlier, but only if that earlier 
                date does not precede the date on which all 
                requirements of this section have been completed with 
                respect to the ratemaking cycle involved.
            ``(2) Basket of products to which this section applies.--
        The term `basket of products to which this section applies' 
        means the first, second, third, and fourth baskets of products.
            ``(3) First basket of products.--The term `first basket of 
        products' means--
                    ``(A) single-piece first-class letters (both 
                domestic and international);
                    ``(B) single-piece first-class cards (both domestic 
                and international); and
                    ``(C) single-piece first-class parcels (both 
                domestic and international).
            ``(4) Second basket of products.--The term `second basket 
        of products' means all first-class mail not in the first basket 
        of products.
            ``(5) Third basket of products.--The term `third basket of 
        products' means periodicals.
            ``(6) Fourth basket of products.--The term `fourth basket 
        of products' means standard mail (except for parcel post).
            ``(7) Rule of construction.--
                    ``(A) In general.--Mail matter referred to in 
                paragraphs (3) through (6) shall, for purposes of such 
                paragraphs, be considered to have the meaning given 
                them under the mail classification schedule (within the 
                meaning of section 3623) as of the effective date of 
                this chapter.
                    ``(B) Updates.--The Board of Directors shall, 
                whenever any relevant change occurs (pursuant to a 
                reclassification under chapter 36, a transfer of a 
                product from the noncompetitive category of mail under 
                section 3743, or the conversion of an experimental 
                product under subchapter IV to a permanent one), 
                prescribe new lists of products within the baskets 
                under paragraphs (3) through (6), respectively. The 
                revised lists shall indicate how and when any previous 
                lists are superseded.
    ``(b) Procedures Relating to Determining Adjustment Factors.--
            ``(1) Commencement.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), the Postal Rate Commission shall, 
                beginning in December of the second year before the 
                start of each ratemaking cycle, provide the opportunity 
                for a hearing on the record under sections 556 and 557 
                of title 5 to the Postal Service, users of the mails, 
                and an officer of the Commission who shall be required 
                to represent the interests of the general public, with 
                respect to the adjustment factors to be established for 
                the upcoming ratemaking cycle.
                    ``(B) Exception.--For purposes of the first hearing 
                under this subsection, proceedings shall be commenced 
                during the second month beginning on or after the 
                effective date of the baseline rates and fees 
                established pursuant to section 3701.
            ``(2) Rules of proceedings.--In order to conduct its 
        proceedings with utmost expedition consistent with procedural 
        fairness to the parties, the Commission may (without 
        limitation) adopt rules which provide for--
                    ``(A) the advance submission of written direct 
                testimony;
                    ``(B) the conduct of prehearing conferences to 
                define issues, and for other purposes to insure orderly 
                and expeditious proceedings;
                    ``(C) discovery both from the Postal Service and 
                the parties to the proceedings;
                    ``(D) limitation of testimony; and
                    ``(E) the conduct of the entire proceedings off the 
                record with the consent of the parties.
            ``(3) Printing and notice requirements.--
                    ``(A) In general.--The Commission's decision and 
                the record of the Commission's hearings shall be made 
                generally available at the time the decision is issued 
                and shall be printed and made available for sale by the 
                Public Printer within 10 days following the day the 
                decision is issued.
                    ``(B) Timing.--All actions required of the 
                Commission under this section, including those under 
                subparagraph (A), shall be completed as expeditiously 
                as possible, but in no event later than the end of the 
                year before the commencement of the ratemaking cycle to 
                which the decision relates.
    ``(c) Factors.--Adjustment factors shall be established in 
accordance with the policies of this title and the following:
            ``(1) The value of the product to senders, as reflected by 
        the volume response of classes of mail and types of service to 
        changes in postal rates and fees, and, as appropriate, the 
        price and quality of alternative means of sending mail.
            ``(2) Cost to the Postal Service of providing the product.
            ``(3) Productivity of the Postal Service in providing 
        postal services.
            ``(4) The level of postal revenues attributable to the 
        product.
            ``(5) The actual level of service (described in terms of 
        speed of delivery and reliability) provided with respect to the 
        product.
            ``(6) Such other considerations as the Postal Service and 
        the Commission mutually agree to be appropriate.
    ``(d) Separate Adjustment Factor Required for Each Basket of 
Products.--A separate adjustment factor shall be established for each 
basket of products to which this section applies, and, except as 
provided in section 3724(d), the adjustment factor applicable to any 
basket shall be uniformly applied to all products within such basket.
    ``(e) How Each Adjustment Factor Is To Be Expressed and Applied.--
            ``(1) Expression.--Each adjustment factor established under 
        this section shall be expressed as a percentage.
            ``(2) Application.--For purposes of section 3722(b)(1)(A), 
        to adjust a change in the GDPPI by an adjustment factor, the 
        adjustment factor shall be added to or subtracted from such 
        change in the GDPPI, as the case may be.
    ``(f) Exigent Circumstances.--
            ``(1) In general.--Upon a majority vote of the Directors 
        then holding office, the Postal Service may request the Postal 
        Rate Commission to render a decision on changing the adjustment 
        factors to be applied during the then current ratemaking cycle 
        (after having previously been established under this section 
        for such cycle).
            ``(2) Conditions.--A request made under paragraph (1) may 
        be considered only upon written certification by the Directors 
        that--
                    ``(A) the Postal Service faces severe financial 
                exigencies; and
                    ``(B) the change is warranted to restore the Postal 
                Service to fiscal soundness.
            ``(3) Effect; duration.--A change granted under this 
        subsection--
                    ``(A) shall supersede the adjustment factors which 
                would otherwise apply under this section; and
                    ``(B) shall remain effective for the remainder of 
                the ratemaking cycle involved, subject to paragraph 
                (5).
            ``(4) Expedited consideration.--A request made under 
        paragraph (1) shall be acted on in the same manner as if 
        initiated under subsection (b)(1), except that a decision on 
        such request shall be rendered not later than 6 months after 
        the date on which such request is made.
            ``(5) Frequency.--Nothing in this section shall be 
        considered to limit the number of times that authority under 
        this subsection may be invoked or exercised during any 
        particular ratemaking cycle.
            ``(6) Finality.--A decision of the Postal Rate Commission 
        under this subsection shall be final and shall not be subject 
        to administrative or judicial review.
    ``(g) Appellate Review.--Except as provided in subsection (f)(6), a 
decision of the Postal Rate Commission under this section may be 
appealed to any court of appeals of the United States, within 15 days 
after its publication by the Public Printer, by an aggrieved party who 
appeared in the proceedings under subsection (b). The court shall 
review the decision, in accordance with section 706 of title 5, and 
chapter 158 and section 2112 of title 28, except as otherwise provided 
in this subsection, on the basis of the record before the Commission. 
The court may affirm the decision or order that the entire matter be 
returned for further consideration, but the court may not modify the 
decision. The court may not suspend the effectiveness of the adjustment 
factors, or otherwise prevent them from taking effect until final 
disposition of the suit by the court. No court shall have jurisdiction 
to review a decision made by the Commission under this section except 
as provided in this subsection.

``Sec. 3724. Action of the Directors

    ``(a) In General.--The Directors, with the written concurrence of a 
majority of all of the Directors then holding office, shall establish 
rates for products in the noncompetitive category of mail in accordance 
with the requirements of this subchapter and the policies of this 
title.
    ``(b) Procedures.--
            ``(1) In general.--Rates under this section shall be 
        established in writing, complete with a statement of 
        explanation and justification.
            ``(2) Publication.--The Directors shall cause each such 
        decision and statement to be published in the Federal Register 
        at least 45 days before the rate or rates to which they pertain 
        take effect.
    ``(c) Limitations on Authority.--
            ``(1) In general.--Except as provided in paragraph (2)--
                    ``(A) Frequency.--Ratemaking authority under this 
                section may not be exercised more than once for 
                purposes of any year.
                    ``(B) Uniform effective date.--All changes in rates 
                pursuant to this section shall take effect beginning on 
                the same date.
            ``(2) Exception for change due to exigent circumstances.--
                    ``(A) In general.--If the maximum rate allowable 
                for a product in a year changes pursuant to a request 
                granted under section 3723(f), then, in the event that 
                ratemaking authority under this section was previously 
                exercised with respect to such product for such year, 
                such rate may be modified, not more than once more in 
                such year, based on the change in the maximum rate 
                allowable.
                    ``(B) Uniform effective date.--All changes in rates 
                pursuant to this paragraph shall, to the extent based 
                on the same change in the maximum rate allowable, take 
                effect beginning on the same date.
    ``(d) Exception to Requirement Relating to Uniform Applicability of 
Each Maximum.--
            ``(1) Definitions.--For purposes of this subsection--
                    ``(A) Subordinate unit.--The term `subordinate 
                unit', with respect to a product, means a subclass or 
                other similar subordinate unit of such product, as 
                described in subparagraph (A) of section 3721(3).
                    ``(B) Further subordinate unit.--The term `further 
                subordinate unit', with respect to a subordinate unit, 
                means a further subordinate unit thereof, as described 
                in subparagraph (B) of section 3721(3).
            ``(2) Applicability.--This subsection applies with respect 
        to the second, third, and fourth baskets of products.
            ``(3) Rule.--
                    ``(A) In general.--Notwithstanding the uniformity 
                requirement in section 3723(d), for purposes of 
                establishing rates for further subordinate units of any 
                particular subordinate unit of a product, rates may be 
                established at such levels as the Directors consider 
                appropriate, subject to subparagraph (B).
                    ``(B) Requirement.--The rates so established may 
                not exceed the maximum rates established for such 
                further subordinate units in accordance with 
                subparagraph (C).
                    ``(C) Alternative maximum rates.--Alternative 
                maximum rates may be established under this 
                subparagraph by using adjustment factors (other than 
                those that would otherwise apply absent this 
                subsection) fixed at levels which the Directors 
                consider appropriate, so long as the resulting average 
                maximum rate, for the further subordinate units 
                comprising such subordinate unit (determined separately 
                for each successive level, if there are 2 or more 
                levels of further subordinate units), remains equal to 
                the maximum rate that would otherwise apply with 
                respect to those further subordinate units.
    ``(e) Finality of Decisions.--Decisions of the Postal Service under 
this section shall be final and shall not be subject to administrative 
or judicial review.

   ``SUBCHAPTER III--RATES AND FEES FOR PRODUCTS IN THE COMPETITIVE 
                            CATEGORY OF MAIL

``Sec. 3741. Definitions

    ``For purposes of this subchapter--
            ``(1) Year, product, rate, etc.--The terms `year', 
        `product', `rate', and `product in the noncompetitive category 
        of mail' each has the meaning given such term by section 3721, 
        unless the context otherwise requires.
            ``(2) Products in the competitive category of mail.--The 
        term `products in the competitive category of mail' means--
                    ``(A) priority mail;
                    ``(B) expedited mail;
                    ``(C) mailgrams;
                    ``(D) international mail;
                    ``(E) parcel post;
                    ``(F) special services; and
                    ``(G) any product transferred to the competitive 
                category of mail under section 3743;
        except that such term does not include any product then 
        currently in the noncompetitive category of mail.
            ``(3) Rule of construction.--
                    ``(A) In general.--Mail matter referred to in 
                paragraph (2) shall, for purposes of such paragraph, be 
                considered to have the meaning given them under the 
                mail classification schedule (within the meaning of 
                section 3623) as of the effective date of this chapter.
                    ``(B) Updates.--The Board of Directors shall, 
                whenever any relevant change occurs (pursuant to a 
                reclassification under chapter 36, a transfer of a 
                product from the noncompetitive category of mail under 
                section 3743, or the conversion of an experimental 
                product under subchapter IV to a permanent one), 
                prescribe a new list of products under subparagraphs 
                (A) through (G) of paragraph (2). The revised list 
                shall indicate how and when any previous list is 
                superseded.

``Sec. 3742. Action of the Directors

    ``(a) In General.--The Directors, with the written concurrence of a 
majority of all of the Directors then holding office, shall establish 
rates for products in the competitive category of mail.
    ``(b) Requirements.--Rates under this section shall be established 
in accordance with the policies of this title and the requirement that 
each product in the competitive category of mail bear the direct and 
indirect postal costs attributable to such product plus a reasonable 
contribution to all other costs of the Postal Service.
    ``(c) Procedures.--Subsections (b), (c)(1), and (e) of section 3724 
shall apply with respect to rates and decisions under this section.

``Sec. 3743. Transfers of products from the noncompetitive category of 
                    mail

    ``(a) In General.--The Postal Service or users of the mails may 
from time to time request the Postal Rate Commission to submit, or the 
Commission may submit to the Directors on its own initiative, a 
recommended decision on transferring one or more products in the 
noncompetitive category of mail to the competitive category of mail.
    ``(b) Criteria.--A recommended decision under this section shall be 
made in accordance with the policies of this title and taking into 
consideration the availability and nature of enterprises in the private 
sector engaged in the delivery of the product involved.
    ``(c) Procedures.--If the Commission receives a request under 
subsection (a) or decides to act on its own initiative, the Commission 
shall, after proceedings in conformity with section 3624, issue a 
recommended decision which shall be acted upon in accordance with the 
provisions of section 3625 and subject to review in accordance with the 
provisions of section 3628.

``Sec. 3744. Application of antitrust laws

    ``(a) Applicability of the Antitrust Laws.--The antitrust laws 
shall apply with respect to the Postal Service to the extent that the 
Postal Service engages in conduct with respect to--
            ``(1) any product in the competitive category of mail; and
            ``(2) any product offered pursuant to a market test under 
        subchapter IV.
    ``(b) Definition.--For purposes of subsection (a), the term 
`antitrust laws' has the meaning given such term in subsection (a) of 
the first section of the Clayton Act (15 U.S.C. 12(a)), but includes 
section 5 of the Federal Trade Commission Act (15 U.S.C. 45) to the 
extent that such section 5 applies to unfair methods of competition.
    ``(c) Effective Date.--This section shall not apply with respect to 
conduct occurring before the effective date of this chapter.

         ``SUBCHAPTER IV--MARKET TESTS OF EXPERIMENTAL PRODUCTS

``Sec. 3761. Market tests

    ``(a) In General.--The Postal Service may conduct market tests of 
experimental products. Subject to the provisions of this section, the 
conducting of any such market test by the Postal Service shall not be 
limited by any lack of specific authority under this title to take the 
action contemplated, or by any provision of this title or any rule or 
regulation prescribed under this title which is inconsistent with the 
action.
    ``(b) Procedural Requirements.--Before conducting a market test, 
the Postal Service shall--
            ``(1) develop a plan for such test which identifies--
                    ``(A) the purposes of the test (and how they 
                comport with the provisions of section 101);
                    ``(B) the duration;
                    ``(C) the anticipated costs for each year;
                    ``(D) the anticipated revenues for each year;
                    ``(E) a specific description of any aspect of the 
                test for which there is a lack of specific authority; 
                and
                    ``(F) a specific citation to any provision of law, 
                rule, or regulation which, if not waived under this 
                section, would prohibit the conducting of the test, or 
                any part of the test as proposed;
            ``(2) at least 60 days in advance of the date any test 
        proposed under this section is to take effect--
                    ``(A) publish the plan in the Federal Register;
                    ``(B) submit such plan to each House of Congress; 
                and
                    ``(C) provide notification of the proposed test to 
                officers and employees likely to be affected by the 
                test.
    ``(c) Restrictions.--No market test under this section may provide 
for a waiver of--
            ``(1) any provision of section 410(b)-(d) (or any law 
        applicable to the Postal Service by virtue of any such 
        provision);
            ``(2) section 412 or any other provision of law (not 
        otherwise covered by paragraph (1)) providing for the 
        nondisclosure of names or addresses or any other information or 
        matter by the Postal Service;
            ``(3) the limitation on compensation under the last 
        sentence of section 1003(a);
            ``(4) any provision of chapter 10 (relating to employment 
        within the Postal Service);
            ``(5) any provision of chapter 12 or of any collective-
        bargaining agreement under such chapter;
            ``(6) any provision of section 3623(d) (relating to 
        maintaining one or more classes of mail for the transmission of 
        letters sealed against inspection);
            ``(7) any provision of law--
                    ``(A) providing for equal employment opportunity 
                through affirmative action; or
                    ``(B) providing any right or remedy available to 
                any officer or employee or applicant for employment in 
                the Postal Service; or
            ``(8) any rule or regulation prescribed under any provision 
        of law referred to in any of the preceding paragraphs of this 
        subsection.
    ``(d) Limitations.--
            ``(1) Duration.--Each market test under this section shall 
        terminate not later than 3 years after such project takes 
        effect, except that the project may continue beyond the date on 
        which it would otherwise terminate, if proceedings under 
        subsection (g) are then pending with respect to the product 
        involved.
            ``(2) Dollar limitation.--A market test under this section 
        may not be conducted if the anticipated revenues attributable 
        to such test would, for any calendar year, exceed $100,000,000.
    ``(e) Employees Within Bargaining Units.--Employees within a unit 
with respect to which a labor organization is accorded exclusive 
recognition under chapter 12 shall not be included within any market 
test under this section--
            ``(1) if the test would violate a collective-bargaining 
        agreement under such chapter between the Postal Service and the 
        labor organization, unless there is another written agreement 
        with respect to the test between the Postal Service and the 
        organization permitting the inclusion; or
            ``(2) if the test is not covered by such a collective-
        bargaining agreement, until there has been consultation or 
        negotiation, as appropriate, by the Postal Service with the 
        labor organization.
    ``(f) Other Employees.--Employees within any unit with respect to 
which a labor organization has not been accorded exclusive recognition 
under chapter 12 shall not be included within any market test under 
this section unless there has been consultation by the Postal Service 
regarding the test with the employees in the unit.
    ``(g) Conversion to Permanence.--A request to make an experimental 
product (as referred to in subsection (a)) permanent--
            ``(1) shall be made in accordance with the same 
        requirements as set forth in section 3743(b);
            ``(2) shall be subject to the same procedures (including 
        review) as set forth in section 3743(c), except as provided in 
        subsection (h); and
            ``(3) may not be considered unless it is made by the Postal 
        Service.
    ``(h) Time Limitation on Commission Deliberations.--For purposes of 
applying section 3624 (pursuant to subsection (g)(2)) with respect to a 
request to make an experimental product permanent--
            ``(1) section 3624(c) (as deemed to have remained in effect 
        under paragraph (2)) shall be applied with respect to such 
        request in the same manner as would have applied in the case of 
        a request made under section 3622 (as last in effect before 
        being repealed by section 1002); and
            ``(2) section 3624 (as last in effect before being repealed 
        by section 1002) shall be deemed to have remained in effect, 
        except that subsection (c) of such section (as then in effect) 
        shall be applied by substituting--
                    ``(A) `6 months' for `10 months' in paragraph (1) 
                thereof; and
                    ``(B) `6-month period' for `10-month period' in 
                paragraph (2) thereof.

     ``SUBCHAPTER V--REPORTING REQUIREMENTS AND RELATED PROVISIONS

``Sec. 3781. Definition

    ``For purposes of this subchapter, the term `product' has the 
meaning given such term by section 3721(3).

``Sec. 3782. Reporting requirements

    ``(a) In General.--No later than 3 months after the last day of 
each fiscal year, the Postal Service shall submit sufficient 
information to the Postal Rate Commission to demonstrate that the then 
current rates for products are in compliance with all applicable 
requirements of this title.
    ``(b) Audits.--
            ``(1) In general.--Before submitting any information under 
        subsection (a), the Postal Service shall have such information 
        audited by an independent professional accounting organization 
        (from outside of government), and such audit shall be submitted 
        along with the information to which it relates.
            ``(2) Access to papers and supporting materials.--
                    ``(A) In general.--The Commission shall have access 
                to the working papers and supporting materials of an 
                auditor in connection with any audit conducted by such 
                auditor under this subsection.
                    ``(B) Confidentiality.--Any information described 
                in paragraph (3) to which the Commission gains access 
                under subparagraph (A) shall be subject to section 
                3604(g)(2) in the same way as if the Commission had 
                received notification with respect to such information 
                under section 3604(g)(1).
            ``(3) Identification of protected information.--
                    ``(A) In general.--The Postal Service shall, in 
                accordance with regulations which it shall prescribe, 
                ensure that--
                            ``(i) any protected information shall, 
                        before being furnished to an auditor under this 
                        section, be appropriately identified 
                        (including, to the extent practicable, by being 
                        appropriately stamped, labelled, tagged, or 
                        otherwise physically marked); and
                            ``(ii) appropriate measures are taken (such 
                        as the inclusion of appropriate terms in any 
                        contract or other agreement with the auditor) 
                        to safeguard the security and confidentiality 
                        of protected information.
                    ``(B) Protected information defined.--For purposes 
                of this paragraph, the term `protected information' 
                means any information which, in the judgment of the 
                Postal Service, is information of a type which is 
                described in section 410(c) of this title, or exempt 
                from public disclosure under section 552(b) of title 5.
    ``(c) Additional Requirements.--The Postal Service shall submit to 
the Commission, at the time of making its submissions under subsections 
(a) and (b)--
            ``(1) a copy of the then most recent comprehensive 
        statement under section 2401(b);
            ``(2) a copy of the then most recent performance plan and 
        program performance reports required under sections 2803 and 
        2804, respectively; and
            ``(3) for the most recently completed fiscal year, with 
        respect to each product in the competitive category of mail, 
        each product in the noncompetitive category of mail, and each 
        product under subchapter IV--
                    ``(A) market information, including mail volumes;
                    ``(B) postal financial information, including costs 
                to the Postal Service and revenues;
                    ``(C) measures of the speed and reliability of 
                postal service, including--
                            ``(i) the service standard applicable to 
                        each product;
                            ``(ii) the actual level of service 
                        (described in terms of speed of delivery and 
                        reliability) provided; and
                            ``(iii) the degree of customer satisfaction 
                        with the service provided; and
                    ``(D) any other information that the Commission and 
                the Postal Service mutually agree upon.
    ``(d) Regulations.--The Commission shall prescribe regulations 
specifying the form and detail of the information required under this 
section, consistent with otherwise applicable provisions of this title. 
Such regulations shall give due consideration to avoiding unnecessary 
or unwarranted administrative effort and expense on the part of the 
Postal Service.

``Sec. 3783. Use of profits

    ``(a) Definition of Profits.--For purposes of this section, the 
term `profits', with respect to any fiscal year, means the amount by 
which total income of the Postal Service attributable to such year, 
exceeds total costs of the Postal Service attributable to such year, as 
determined by the Directors, in writing, in accordance with generally 
accepted accounting principles.
    ``(b) Determination of Noncompliance.--Not later than 90 days after 
receiving all the submissions required under section 3782 with respect 
to a fiscal year, the Postal Rate Commission shall make a written 
determination as to--
            ``(1) whether any rates or fees were placed in effect 
        during such fiscal year which were not in compliance with 
        applicable provisions of this title;
            ``(2) whether any performance goals, established under 
        section 2803 or 2804 for such fiscal year, were not met; and
            ``(3) whether any service standards for such fiscal year 
        were not met, based on the information under section 
        3782(c)(3)(C).
    ``(c) If No Noncompliance Is Found.--If the Commission does not 
make a timely determination of noncompliance under subsection (b), or 
if a timely determination is made under subsection (b) to the effect 
that no instances of noncompliance occurred, up to 100 percent of the 
profits (if any) from the preceding fiscal year may be used by the 
Postal Service for the purposes described in subsection (e).
    ``(d) If Any Noncompliance Is Found.--If the Commission makes a 
timely determination of noncompliance under subsection (b)--
            ``(1) the Commission may order, based on the seriousness of 
        the noncompliance, that a specific percentage of the previous 
        fiscal year's profits (if any), not to exceed 50 percent, be 
        set aside for the purposes described in subsection (f); and
            ``(2) up to 100 percent of the remainder of the previous 
        fiscal year's profits (if any) may be used by the Postal 
        Service for the purposes described in subsection (e).
    ``(e) Bonuses.--
            ``(1) In general.--The Postal Service shall establish a 
        program under which cash bonuses may be paid to officers and 
        employees of the Postal Service out of any profits which are 
        available for that purpose.
            ``(2) Requirements.--Under the program--
                    ``(A) bonuses may be paid to officers and employees 
                of the Postal Service under criteria which shall be 
                fair and equitable;
                    ``(B) the sole source of funding shall be any 
                profits from any fiscal year, subject to the 
                application of subsection (d)(1) with respect to such 
                fiscal year; and
                    ``(C) subject to subsection (h), bonuses shall not 
                be precluded by the limitation on compensation under 
                the last sentence of section 1003(a).
            ``(3) Discretionary nature of program.--Nothing in this 
        section shall be considered to create any entitlement to 
        receive bonuses or to require that any portion of the profits 
        from any fiscal year be used for bonuses in excess of whatever 
        amount the Postal Service considers appropriate (if any).
            ``(4) Considerations relating to the portion of profits to 
        be available for bonuses.--In any decision relating to what 
        portion of the available profits from any fiscal year shall be 
        available or used for purposes of the payment of bonuses under 
        this subsection, there shall be taken into consideration--
                    ``(A) the duty on the part of the Postal Service to 
                provide efficient and economical postal services in 
                accordance with the requirements of section 101, 
                section 403, and this chapter; and
                    ``(B) what portion of those profits (if any) should 
                be used--
                            ``(i) to retire debts or other obligations 
                        of the Postal Service;
                            ``(ii) to limit future increases in postal 
                        rates or fees for products in the 
                        noncompetitive category of mail; or
                            ``(iii) to carry out any other purpose.
    ``(f) Dedication of Funds Toward Reducing Rates and Fees.--
            ``(1) In general.--Any amounts ordered to be set aside 
        under subsection (d)(1) may not be used for any purpose other 
        than to defray increases in future rates and fees for products 
        in the noncompetitive category of mail or to reduce the rates 
        and fees already in effect for such products.
            ``(2) Compliance.--Whenever an order under subsection 
        (d)(1) is issued, the Postal Service shall include in its next 
        comprehensive statement under section 2401(b) (and each 
        subsequent statement thereunder until the order has been fully 
        complied with)--
                    ``(A) a statement of the measures which have been 
                or will be implemented in order to comply with the 
                order;
                    ``(B) the amount of savings actually passed on to 
                mailers during the reporting period, as compared to the 
                estimated savings for such period; and
                    ``(C) what measures, if any, have been or will be 
                implemented in order to reconcile any difference 
                identified under subparagraph (B).
            ``(3) Nonredundant information.--Nothing in paragraph (2) 
        shall be considered to require that the same information be 
        reported if included in a previous report under this 
        subsection.
    ``(g) Procedures.--The provisions of sections 556 and 557 of title 
5 shall not apply to any review carried out by the Commission under 
this section.
    ``(h) Reporting Requirement.--Included in its comprehensive 
statement under section 2401(b) for any period shall be--
            ``(1) the name of each person receiving a bonus during such 
        period which would not have been allowable but for the 
        provisions of subsection (e)(2)(C);
            ``(2) the amount of the bonus; and
            ``(3) the amount by which the limitation referred to in 
        subsection (e)(2)(C) was exceeded.''.
    (b) Representation in an Antitrust Action.--Section 409(d) of title 
39, United States Code, is amended by striking ``(d) The'' and 
inserting ``(d)(1) Except in any instance in which the Postal Service 
elects to employ attorneys under paragraph (2), the'' and by adding at 
the end the following:
    ``(2)(A) As used in this paragraph, the term `antitrust laws' has 
the meaning given to it by section 3744(b).
    ``(B) The Postal Service may, in connection with any litigation 
brought against the Postal Service under any of the antitrust laws, 
employ attorneys by contract or otherwise to conduct litigation on its 
behalf without regard to any provision of paragraph (1).''.
    (c) Technical and Conforming Amendments.--
            (1) Section 410(c)(4) of title 39, United States Code, is 
        amended by inserting ``or 37'' after ``36''.
            (2) Section 409(a) of title 39, United States Code, is 
        amended by striking ``section 3628'' and inserting ``section 
        3628 (or any provision of this title incorporating such section 
        by reference) or section 3723(g)''.

SEC. 1002. TERMINATION OF RATEMAKING AUTHORITY UNDER CHAPTER 36 AND 
                    RELATED MATTERS.

    (a) Authority To Fix Rates and Classes.--Section 3621 of title 39, 
United States Code, is amended--
            (1) in the first sentence by striking ``this chapter'' and 
        inserting ``this chapter and chapter 37'';
            (2) by repealing the last 2 sentences.
    (b) Rates and Fees.--
            (1) In general.--Section 3622 of title 39, United States 
        Code, is repealed.
            (2) Clerical amendment.--The item relating to section 3622 
        in the table of sections at the beginning of chapter 36 of such 
        title 39 is repealed.
    (c) Recommended Decisions of Commission.--Section 3624 of title 39, 
United States Code, is amended--
            (1) in subsection (a) by striking ``section 3622 or 3623'' 
        and inserting ``section 3623'';
            (2) by repealing subsection (c); and
            (3) in subsection (d)--
                    (A) by striking ``rate, fee, or''; and
                    (B) by striking ``section 3622 or 3623, as the case 
                may be.'' and inserting ``section 3623.''.
    (d) Action of the Governors.--Section 3625 of title 39, United 
States Code, is amended--
            (1) in the third sentence of subsection (d)--
                    (A) by striking ``(1)''; and
                    (B) by striking ``chapter, and (2)'' and all that 
                follows through the period and inserting ``chapter and 
                chapter 37, respectively.''; and
            (2) by amending subsection (f) to read as follows:
    ``(f) Except as otherwise provided in this title, the Board shall 
determine--
            ``(1) the date on which any changes in the mail 
        classification schedule (whether made under this chapter or 
        chapter 37) shall become effective; and
            ``(2) the date on which new rates and fees under chapter 37 
        shall become effective.''.
    (e) Reduced-Rate Categories of Mail.--
            (1) Continued applicability of relevant provisions of 
        chapter 36 for the limited purpose of computing alternative 
        rate limitations for noncompetitive products.--Notwithstanding 
        any other provision of this Act (or any amendment made by this 
        Act), the rate of postage established under subchapter II of 
        chapter 37 of title 39, United States Code, as amended by this 
        Act, for a class of mail or kind of mailer referred to in 
        section 3626(a)(1) of such title may not, at any time, exceed 
        the lesser of--
                    (A) the maximum rate then otherwise allowable under 
                chapter 37 (determined as if this subsection had not 
                been enacted) for such class of mail or kind of mailer; 
                or
                    (B) the rate determined under paragraph (2) for 
                such class of mail or kind of mailer.
            (2) Determination of rates which would then otherwise apply 
        under chapter 36.--
                    (A) In general.--For purposes of paragraph (1)(B), 
                the United States Postal Service shall determine, and 
                subsequently revise whenever necessary in order to keep 
                determinations under this paragraph current, the rate 
                of postage which would then otherwise apply with 
                respect to each class of mail or kind of mailer 
                referred to in section 3626(a)(1) of such title 39.
                    (B) Methodology.--Subparagraph (A) shall be carried 
                out--
                            (i) by applying the provisions of 
                        paragraphs (2) through (5) of section 3626(a) 
                        and of section 3642 of such title 39; and
                            (ii) by using the then most recent 
                        information available to the Postal Service 
                        relating to costs attributable and 
                        institutional costs (within the meaning of the 
                        provisions referred to in clause (i)).
            (3) Limitation under this subsection to be used instead of 
        (and to be treated as) the limitation under section 3722.--The 
        maximum rate determined for a product under this subsection 
        shall, for all purposes (except paragraph (1)(A)), be used 
        instead of (and shall be treated as) the maximum rate allowable 
        for such product under section 3722 of such title 39.
            (4) Statement of limited purpose.--Section 3626(a) of such 
        title 39 is amended by adding at the end the following:
    ``(6) Neither this subsection nor section 3642 shall have any force 
or effect, except for purposes of section 1002(e) of the Postal Reform 
Act of 1997. Nothing in the preceding sentence shall be considered to 
affect any baseline rate established pursuant to section 3701.''.
            (5) Regulations.--The United States Postal Service shall 
        prescribe such regulations as may be necessary to carry out the 
        provisions of sections 3626 (including subsections (b) through 
        (n) thereof) and 3642 of such title 39 (as amended by this Act) 
        in a manner consistent with chapter 37 of such title 39 (as 
        amended by this Act) and with the purposes of this Act.
    (f) Other Temporary Rates.--
            (1) In general.--Section 3641 of title 39, United States 
        Code, is amended--
                    (A) by repealing subsections (a) through (d); and
                    (B) in subsection (f) by striking ``in rates of 
                postage, and fees for postal services, or''.
            (2) Clerical amendments.--
                    (A)(i) The heading for section 3641 of such title 
                39 is amended to read as follows:

``Sec. 3641. Temporary changes in classes''.

                    (ii) The item relating to section 3641 in the table 
                of sections at the beginning of chapter 36 of such 
                title 39 is amended to read as follows:

``3641. Temporary changes in classes.''.
                    (B)(i) The heading for subchapter III of chapter 36 
                of such title 39 is amended to read as follows:

                 ``SUBCHAPTER II--TEMPORARY CLASSES''.

                    (ii) The analysis for chapter 36 of such title 39 
                is amended by striking the item relating to subchapter 
                II and inserting the following:

                 ``SUBCHAPTER II--TEMPORARY CLASSES''.

    (g) Rate and Service Complaints.--Section 3662 of title 39, United 
States Code, is amended to read as follows:

``Sec. 3662. Rate and service complaints

    ``(a) Interested parties who believe the Postal Service is charging 
rates which do not conform to the policies set out in this title or who 
believe that they are not receiving postal service in accordance with 
the policies of this title may lodge a complaint with the Postal Rate 
Commission in such form and in such manner as it may prescribe. The 
Commission may in its discretion hold hearings on such complaint.
    ``(b)(1) If the Commission, in a classification matter covered by 
subchapter II, determines the complaint to be justified, it shall, 
after proceedings in conformity with section 3624, issue a recommended 
decision which shall be acted upon in accordance with the provisions of 
section 3625 and subject to review in accordance with the provisions of 
section 3628.
    ``(2) If a violation of a limitation under section 3722 or 3724(d) 
(relating to the maximum rate allowable for products in the 
noncompetitive category of mail) or section 3742(b) (relating to 
requirements applicable with respect to rates established for products 
in the competitive category of mail) is involved, it may issue an 
appropriate order under section 3783.
    ``(3) If a matter other than a matter covered by paragraph (1) or 
(2) is involved, and the Commission after a hearing finds the complaint 
to be justified, it shall render a public report thereon to the Postal 
Service which shall take such action as it deems appropriate.''.
    (h) Limitations.--Section 3684 of title 39, United States Code, is 
amended by striking ``or 34'' and inserting ``34, or 37''.
    (i) Mail Classification.--Section 3623 of title 39, United States 
Code, is amended--
            (1) by repealing subsection (a);
            (2) in subsection (b) by striking ``Following the 
        establishment of the mail classification schedule requested 
        under subsection (a) of this section, the'' and inserting 
        ``The'';
            (3) in subsection (c) (in the matter before paragraph (1)) 
        by striking ``this title'' and inserting ``this title, 
        subsection (e),''; and
            (4) by adding at the end the following:
    ``(e)(1) Any change under this subchapter in the mail 
classification system shall be in accordance with the requirements of 
paragraph (2).
    ``(2) The requirements of this paragraph are as follows:
            ``(A) A product may not be reclassified from the 
        competitive to the noncompetitive category of mail.
            ``(B) The reclassification of a product from one basket to 
        another basket of the noncompetitive category of mail shall not 
        be effective during a ratemaking cycle unless notice of the 
        final decision on the reclassification is given to the Postal 
        Rate Commission before the start of proceedings under section 
        3723(b) in connection with such cycle.
            ``(C)(i) A new product may not be made available to the 
        public before it has been placed in--
                    ``(I) either the competitive or the noncompetitive 
                category of mail; and
                    ``(II) if placed in the noncompetitive category of 
                mail, the appropriate basket thereof.
            ``(ii) Any decision as to whether a new product should be 
        placed in the competitive or the noncompetitive category of 
        mail shall be made in accordance with the requirements set 
        forth in section 3743(b). Such requirements shall be 
        specifically addressed in any statement required under section 
        3624(d) with respect to such decision.
    ``(3) For purposes of this subsection--
            ``(A) the term `product' has the meaning given such term by 
        section 3721(3);
            ``(B) the term `noncompetitive category of mail' refers to 
        the category of mail under subchapter II of chapter 37;
            ``(C) the term `competitive category of mail' refers to the 
        category of mail under subchapter III of chapter 37;
            ``(D) the term `basket' refers to a basket under paragraph 
        (3), (4), (5), or (6) of section 3723(a);
            ``(E) the term `ratemaking cycle' has the meaning given 
        such term by section 3723(a)(1); and
            ``(F) the term `new product' means a product which, as of 
        the effective date of this subsection, is not available to the 
        public through the Postal Service.''.
    (j) Effective Date.--This section and the amendments made by this 
section shall become effective on the effective date of the baseline 
rates and fees established pursuant to section 3701 of title 39, United 
States Code, as amended by section 1001.

    Mr. Fattah. Thank you, Mr. Chairman.
    I will ask that my opening statement be entered for the 
record, and also an opportunity for all subcommittee members to 
extend and revise their remarks for the record.
    There is a lot to get through this morning so I want to be 
as expeditious as possible, but I do want to welcome the 
guests, and given the present ratemaking structure involving 
the Postal Service, I guess there is a question about which 
basket all of us belong in, because it is a procedure that does 
cry out for reform.
    We talk, we use that term a lot around here, but I think 
that the chairman is sincere in his efforts to actually have 
this be a reform that actually improves the provision of 
universal service and delivery, and it is fair for all 
involved. Obviously, we need to balance the Postal Service's 
needs for an expedited process for pricing purposes, but we 
have to balance that in terms of the public's concern for 
fairness and accountability, and I look forward to the 
testimony, and I want to welcome my own constituent from the 
Wharton School who is here today, and look forward to hearing 
from all of you and any stock market tips you want to impart.
    Thank you very much.
    Mr. McHugh. I appreciate the gentleman's comments and his 
interest in expediting the process.
    As he noted, both his and all other Members' statements 
will be entered into the record in their entirety, without 
objection.
    Before we go through the required exercise of swearing in 
the members of the panel today, let me take a moment to 
introduce them in the order in which they are printed on this 
sheet, which has no relation to anything other than that is how 
they are printed on the sheet.
    The first is John Kwoka, who is economics professor at 
George Washington University; Mr. Kenneth Rose, senior 
economist at the National Regulatory Research Institute; Joel 
Popkin, who is president of the Joel Popkin and Co.; Gregory 
Sidak, who is resident scholar at the American Enterprise 
Institute for Public Policy Research; Mr. Paul Kleindorfer, who 
is a professor of economics at the University of Pennsylvania, 
as you just heard; and he is joined by Mike Crew, economics 
professor at Rutgers University.
    Before we do the swearing in, I note that the gentleman 
from New York, Mr. Gilman, has joined us, and I would be happy 
to yield to him for any comment he would like to make at this 
time.
    Mr. Gilman. I know that you are anxious to get on with the 
testimony.
    Mr. McHugh. Thank you very much. I appreciate the 
gentleman's understanding.
    With that, I would like to ask the panel members to please 
rise, and I will tell you this is committee practice. It has 
nothing to do with our doubt of your veracity, but if you will, 
raise your right hand and repeat after me.
    [Witnesses sworn.].
    Mr. McHugh. Thank you. The record will show that all of the 
panel members responded to the oath in the affirmative.
    With that, let me begin on my right, your left, with John 
Kwoka. We have all of your testimony in its entirety and made 
it a part of the record, and that is a very important part of 
the process. It will be considered in its entirety, I guarantee 
you, if for no other reason than I don't read something as in-
depth as that and then don't use it. It would be helpful.
    But we do not have time here today for each of you to 
present your testimony so we would ask you to limit your 
remarks to 10 minutes or so, and highlight it as you feel is 
appropriate. So with that, Mr. John Kwoka, welcome, sir, and 
our attention is yours.

STATEMENT OF JOHN KWOKA, ECONOMICS PROFESSOR, GEORGE WASHINGTON 
                           UNIVERSITY

    Mr. Kwoka. Thank you, Mr. Chairman and members of the 
subcommittee. I appreciate your invitation to appear here today 
to talk about price caps for the Postal Service. I will try to 
summarize in just a few minutes the major points of the 
testimony that, as you said, I have submitted for the record.
    A decade ago, price caps seemed like a novel experiment. 
Some even said it was a radical idea. I remember this well 
since 10 years ago, exactly at that time, I was on leave from 
George Washington University working at the Federal 
Communications Commission on price caps for the 
telecommunications industry. The price cap plan that I worked 
on at the time went into effect for AT&T in 1989, and for the 
major local exchange carriers in 1991.
    Since that time, most State public utility commissions have 
adopted price caps or similar earnings sharing plans for local 
telephone service. Price caps and other forms of incentive 
regulation are also now widely used in our electric power 
industry. On last count, over 40 States have either price caps 
or other forms of performance-based ratemaking in place for 
their electric utilities.
    In the U.K., British Telecom has been subject to price caps 
since 1984. So too has been their National Grid Co., the 12 
regional electric companies, British Gas, water distribution, 
water supply companies, and parts of the British Airports 
Authority.
    So price caps, in short, over the past 10 or 15 years, have 
quite rapidly replaced cost-based ratemaking, rate of return 
regulation, as the mechanism of choice for overseeing franchise 
monopolies and dominant companies generally, and the reasons 
are well-known to everyone here. Rate of return regulation 
creates effectively a zero sum gain, where any cost savings 
achieved by the company are quickly recaptured.
    Price caps offers companies a deal. Prices are fixed so 
that consumers may be made better off than under conventional 
regulation, but the company gets to keep at least a portion of 
the further cost savings that it achieves.
    The record compiled under price caps, particularly for the 
companies that I have mentioned, shows that price cap plans 
can, in fact, work very well. Consider AT&T. At the first 
review of the price cap performance for AT&T in 1993, the first 
review 4 years after the inauguration of the plan, the Federal 
Communications Commission concluded that the added productivity 
gains that were passed on to consumers in the preceding 4 years 
totaled $900 million. At the very same time, through that same 
4-year period, AT&T's rate of return had risen by a full 
percentage point, to 13.2 percent, a full percentage point 
above that last prescribed under rate of return regulation. 
Taken at face value, this illustrates perfectly the positive 
sum nature of the gain that price caps create in place of rate 
of return.
    It may in fact be a measure of the success of the AT&T plan 
that there has never been a second performance review. In fact, 
beginning in 1991, and concluding last year in 1996, the FCC 
determined in a series of actions that groups of services 
previously subject to price caps could be altogether 
deregulated. Now essentially all of AT&T's prices are set in an 
unregulated market so that in fact that very important chapter 
of the history of price caps is now closed.
    Most but not all economic studies of the effectiveness of 
price caps corroborate the favorable assessment of price caps 
for AT&T. There have been a number of economic studies of which 
I am aware and which are cited in my written statement. Several 
of these find that in States with incentive regulation and 
price caps, telephone service prices are from 4 to 18 percent 
lower than in States that do not have any incentive regulation 
in place.
    But it's important to point out that at least one study 
finds some contrary evidence, and all studies find considerable 
variation in the kind of outcomes that are achieved. The reason 
is that not all price cap plans work equally well, and in fact 
some may not work well at all. The reasons are several and are 
worth enumerating.
    Some plans are adopted for companies in particularly 
difficult business circumstances. Those sorts of contexts are 
not likely to result in particularly favorable outcomes after 
an interval of time where the price cap plan is, even after 
some interval of time that the price cap plan may have been in 
place not, however, through any fault, necessarily, of the plan 
itself.
    Another difficulty in identifying or being certain of the 
effects of price cap plans is that many are experimental in 
nature. This may induce companies to front load benefits in 
order to ensure continuation of the plan, and not all of the 
initial benefits may persist in the longer term. Most 
fundamentally the degree of success of these plans depends on 
the provisions--the particular provisions--of the plans 
themselves.
    Let me offer some observations about the aspects of the 
plans that I think are most decisive in influencing their 
prospects for success, with some reference to their 
applicability to the Postal Service.
    First and foremost, a good price cap plan must work to the 
advantage of both consumers and the companies. If it does not, 
it will be seen as serving one party's interests and it will 
soon be discredited. For a price cap plan to have consumer 
benefit, price must, on average, be lower than under 
alternative regulation. This requires a pricing formula that 
demonstrably brings price down, at least for critical consumer 
services. That requires in turn a choice of a price index and 
productivity offset, as I discuss in my written testimony, 
together perhaps with baskets and pricing bands, that reflect 
important policy interests.
    Plans with poorly chosen price formulas, and there have 
been some in this country and elsewhere, have not succeeded. 
For a price cap plan to benefit the company, there must be 
strong incentives for true cost savings. This requires a 
commitment on the part of those who initiate regulation to 
allow the enterprise, in fact, to retain the added earnings 
from truly superior efficiencies that may be achieved. In the 
case of the Postal Service, this task is made more difficult, 
as we recognize, by the fact that there are no private 
shareholders to insist that the enterprise minimize cost or 
maximize profit.
    The alternative would appear to be an incentive structure 
to motivate and reward officers and employees in a fashion that 
adequately compensates for the added productivity gains that 
are being sought. Plans where efficiency benefits are not 
clear, not adequately rewarded, or subject to manipulation have 
not succeeded, and there have been examples of that both here 
and abroad.
    In addition, there may be legitimate concerns about service 
quality since quality erosion lowers cost, and for that reason 
may produce earnings to the company. There's no systematic 
evidence of which I am aware that price cap plans suffer from 
this problem as a general rule, but there are any number of 
anecdotal experiences that underscore the fact that service 
quality requires continued vigilance.
    Finally, nothing helps a successful adoption and launch of 
a price cap plan quite so much as keeping the task simple. To 
the extent that additional issues can be postponed and added 
complexity avoided, to the extent that other objectives need 
not be considered at the same time, then the cut-over to rate 
of return or cost-based regulation will be facilitated.
    So issues such as entry into new markets, universal 
service, and rate initialization may all deserve consideration. 
Indeed they do, but since none is distinctive to price caps, it 
may be advisable to separate those issues from the simple 
choice between a superior versus are inferior mechanism of 
regulation and allow those other issues to be revisited 
separately at an appropriate time.
    Thank you very much, Mr. Chairman, and members of the 
committee. I will be happy to answer questions at any time.
    Mr. McHugh. Thank you, Mr. Kwoka.
    [The prepared statement of Mr. Kwoka follows:] 
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    Mr. McHugh. I think in order to keep some continuity here, 
we should hear from all the panelists and engage in whatever 
followup discussion is appropriate. So Dr. Rose, if you would 
please give us your presentation now, and we appreciate you 
being here.

   STATEMENT OF KENNETH ROSE, SENIOR ECONOMIST, THE NATIONAL 
                 REGULATORY RESEARCH INSTITUTE

    Mr. Rose. Thank you, Mr. Chairman, and thank you to the 
other members of the subcommittee and staff.
    What I primarily do is work with utility regulation, and 
actually primarily electric regulation, so looking at price 
caps being applied to something that I haven't previously done 
any work in before was quite interesting, and I enjoyed the 
opportunity to do that and I thank you for asking me to 
participate in this.
    I am going to try to bottom line it as best I can for how I 
think price caps would work for Postal Service regulation. I 
will first paint a little picture of the issue that's probably 
not much different than what Professor Kwoka outlined.
    There's a survey in my written testimony that outlines some 
of the details of the specifics of the plans that the States 
are doing, and I won't go into detail, but just say right now 
in telecommunications at the State level, price caps is really 
the norm now, it's not really the exception anymore. It's not--
could hardly be called an alternative form of regulation, 
although it is more rare for gas and electric utilities. In 
fact, it was just starting to get off the ground a little bit 
for electric when the restructuring of the industry hit, it 
seems to have stalled in that industry at the moment.
    In general, I would say that price caps have obtained the 
initial objective of holding down costs and prices and increase 
productivity. While there is some contradiction in the 
literature on that, it seems to be pointing in that direction.
    There does appear to be a problem with quality of service, 
and as Professor Kwoka pointed out, the academic literature and 
some of the studies are contradictory on that, but the States, 
if you talk to people in several States that have actually 
implemented price caps, they are quite convinced that there is 
a problem with service quality degradation. They have 
instituted plans to make sure that that doesn't get to an 
alarming level. In the survey, as I mentioned, we found that 
there were 16 States that have a quality of service mandate of 
some kind and I think it's safe to say that the number appears 
to be rising over time.
    One fortunate thing about quality of service, though, is 
that it can be mitigated; this isn't an insurmountable problem. 
It's something that has to be looked at, and I would recommend 
some kind of provision be put into the law.
    My reading of H.R. 22 has quality of service provisions in 
two different places, one for the establishment of the initial 
rate, it appears to be mentioned also when determining the 
adjustment factor, quality of service is also mentioned again, 
which seems to give the PRC some latitude in adjusting the 
prices of the Postal Service to account for any decrease in the 
quality of service. However, it wasn't clear to me if the PRC 
would be able to impose some kind of financial penalty after 
the initial rate has been set and in between the adjustments 
being made. States have done it in several ways to implement 
these penalties. One way is to add something to the 
productivity factor, they decrease the amount of the potential 
increase, or increase the amount of the decrease, depending on 
the relative size of the price index and the productivity 
index.
    I think what it comes down to is if a regulator is thinking 
about whether to have cost of service regulation or price cap 
regulation, one way of looking at it is to ask which is easier 
to monitor. Is it easier to monitor the cost, which is very 
costly, of course, we have learned from the utility experience, 
prudence reviews, very intensive rate cases that last a long 
time, sometimes up to 2 years or more and often are litigated 
past that, or is it easier to monitor quality of service? I 
would argue it's easier to monitor quality of service, and my 
read on Postal Service regulation is I think it's true there as 
well.
    My largest concern that I have, though, in applying price 
caps at the Postal Service was one significant difference, I 
think there is between with the Postal Service with utilities. 
This is primarily what it is that motivates them. Price caps 
are really effective, I think it was just obvious, because it 
picks up on the drive for profits as really the motivating 
factor, or to avoid the imposition of some kind of penalty. And 
while the Postal Service I understand is financially 
independent and is regulated by the PRC, and in that sense it's 
very similar to a utility, in many other ways it's very 
different. I think that's one striking difference.
    In the case of a price caps, the harder a firm works, the 
more potential the firm can gain. There are some limits in H.R. 
22 that seem to diminish perhaps any kind of an incentive 
proposal, although there were bonus provisions in there. 
Perhaps to get around this limitation, one way would be to 
enhance or strengthen the bonus provisions that are already in 
H.R. 22 or allow the PRC to decide how to do that.
    I think it comes down to a matter of what's the objective. 
If the objective is to make Postal Service regulation easier, 
then the price caps may be a viable alternative because it will 
probably be easier to monitor things like quality than things 
like cost. If the objective is to really lower cost and get the 
prices down and increase productivity of the Postal Service, 
then I am somewhat in doubt whether or not you will get that 
response from the Postal Service, given the kind of incentive 
structure that they have and the possibility of a dampening 
effect because they don't have a profit motive.
    Let me summarize by saying that price caps have been 
successful in lowering prices and increasing productivity. 
There's little doubt in my mind that it has reached that 
objective. Quality of service may be a problem, and at the very 
least it ought to be monitored. The evidence that we have, even 
though it may be anecdotal, suggests to me it's not something 
that should be overlooked.
    There is an opportunity I think to use price caps here for 
the Postal Service, but with the caveat that perhaps some kind 
of strengthening of incentives or penalties that might be 
imposed for any possible future decrease in quality of service, 
those provisions may be strengthened to get the desired effect 
your subcommittee
is after.
    Thank you very much, Mr. Chairman.
    Mr. McHugh. Thank you, Dr. Rose, for your comments and your 
prepared testimony.
    [The prepared statement of Mr. Rose follows:] 
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    Mr. McHugh. Next we have Dr. Joel Popkin. Sir, welcome.

    STATEMENT OF JOEL POPKIN, PRESIDENT, JOEL POPKIN AND CO.

    Mr. Popkin. Thank you, Mr. Chairman, and I appreciate the 
invitation to appear before you and the members of the 
committee today.
    My testimony has essentially two parts. The first part is 
presentation of the background against which this legislation 
is being considered, the economics of the Postal Service at 
present, so to speak. And the second part has to do with 
specific details of H.R. 22. I would say, on average, looking 
at the data available from the Government and other sources, 
the performance of the Postal Service since its reorganization 
in 1971 has been a little bit better than that of the average 
U.S. private business. And that's even more remarkable, I 
think, when account is taken of the fact that the Postal 
Service has the obligation to provide universal service at 
uniform rates. So I think the Postal Service, as these charts 
will demonstrate, has been functioning quite well.
    The first chart shows the price performance of the Postal 
Service. You can see the price of all postal services, the BLS 
number, shows it at all times below the Consumer Price Index. 
The thing that always strikes me about that is I am not sure 
that should be the standard. The Postal Service is a service 
industry, and I think the standard ought to be the CPI for 
consumer services, and as you can see, that's gone up quite a 
bit faster than the price of postage.
    The next chart takes a look at the wage performance of the 
Postal Service. The top line is the employment cost index for 
private nonfarm workers. The lower line is the rate of pay for 
a level 5, step 0 postal worker. Your typical postal worker is 
in level 5, step 0, and you can see that postal wages, looks 
like since about 1981, have lagged behind private sector wages 
in general.
    Can we have the next chart, please?
    Now, here is another measure of wage performance. This 
takes a look at the pay structure of the Postal Service; it 
takes account of step promotions and changes in the number of 
steps in each grade and takes a look at the average amount of 
straight time hourly pay the Postal Service pays its employees. 
And you can see that that lags even further behind the 
employment cost index for private sector workers. On average, 
the pay of postal--the real pay, inflation-adjusted pay of 
postal workers has declined at an average annual rate of five-
tenths of 1 percent over the period of time we are looking at.
    The next thing is the productivity of the postal workers. 
Here we have private nonfarm unit labor costs. That's wages 
minus productivity. And for the private sector, you have the 
blue line, for the APWU bargaining unit using BLS measure of 
output, a pink line. You can see that those unit labor costs 
have gone up less than the private economy, and in fact, if you 
just use pieces of mail, a cruder measure, not as sophisticated 
as the BLS measure, you can see that the average unit labor 
costs have fallen even further behind those of the private 
nonfarm sector.
    Now, if all these things are true, some good things must be 
happening to the Postal Service, and in fact I think the next 
charts show that. This is the--these are the major industries 
that comprise the U.S. communication and transportation 
sectors. I have the revenue growth rate, their volume growth 
rate, and their price rate over the last 10 years. And you can 
see that the Postal Service's revenue has grown at an average 
annual rate of 6.5 percent.
    Now, all of these sectors' growth rates have grown at an 
average annual rate of 5.5 percent, so in fact the Postal 
Service has grown faster in terms of market share than the 
average, which means and the next chart will demonstrate--you 
can see the Postal Service, which is the sort of purple one--
just below the white one, I think that the--I can't read those 
increases, but there certainly is an increase of at least a 
percentage point in market share among communication and 
transportation sectors of the economy.
    Now, a lot of the success of the Postal Service comes from 
the fact that its business is--an important part of its 
business is advertising driven, and the next table shows 
advertising driven revenues. As you can see cable TV is the 
leader, 17.1 percent average annual rate of increase, and I 
guess that will jump up even more given the most recent 
increases that cable TV have announced that they are going to 
charge the consumer.
    The Postal Service revenues in the advertising field have 
really grown second, more than magazines, more than TV, more 
than radio, well above the 5.1 percent average annual rate of 
all advertising driven communications business. This is not a 
bad performance, and if you go to the next chart, you will see 
how that looks on a pie chart.
    As I recall, that's a 3 percentage point increase in market 
share in the advertising business. So I want to--I feel 
comfortable drawing the conclusion that the Postal Service is 
really doing quite well, and with that I want to turn to some 
of the aspects of H.R. 22 that I think are appropriate for 
discussion today.
    The first thing, and since that table is on the easel, let 
me call to your attention the difference in the labor intensity 
of the different industries that have, some of which have been 
mentioned and will be mentioned in subsequent testimony by 
other panelists.
    We have the telephone industry, for example, an industry 
where price caps are being used more extensively. The labor 
costs in the telephone industry are 24 percent of total costs. 
That means other costs make up 76 percent. Radio broadcasting, 
42 percent labor costs. The health services, 51 percent of 
revenues in health services go to labor. In the Postal Service, 
80 percent of total revenue goes to labor.
    And the conclusion I draw from this is that price caps in 
an industry that's as labor intensive as the Postal Service is 
tantamount to wage caps. There's no other way, there's no more 
flex in the system. It's either jobs or wages. There's no give. 
In telephone, there's give. There are changes in capital 
investment strategies and that sort of thing. In the Postal 
Service, there's no give.
    The other point I want to make has to do with some of the 
tradeoffs that the bill proposes would be made in order to let 
the Postal Service have more flexibility in what's called the 
competitive part of H.R. 22. The point I want to make here is 
that I am not so sure that the pro competitive parts of this 
bill are necessarily worth some of the things that the Postal 
Service and the consumer have to give up to achieve them. And 
in particular, as a homeowner, I can tell you that I really 
don't want to invite more traffic up to the mailbox that's in 
the carport in my home. I don't want ununi-formed people 
accessing my property.
    Now, different people may feel differently about that, but 
it's hard enough to keep track of all the people that come onto 
your property, and I for one am concerned about the 
proliferation of people who have access to the front doors and 
mailboxes of homes.
    So I think there are two aspects here of the provisions of 
H.R. 22 that I want to, that I have tried to draw attention to. 
I think that I have demonstrated today using official 
Government and advertising trade data that the USPS is a quite 
healthy business, despite having to cope with more than its 
share of market impacts from technological impacts.
    Postal market shares are growing, particularly in 
advertising; postal wages have risen less than other private 
sector wages; APWU labor productivity has risen faster than the 
total private economy for; and postal rates have risen about as 
fast as the CPI and less than the CPI for services. There is 
really no need to alter the regulatory environment of the USPS. 
In fact, the proposed alterations may do both business mailers 
and consumers more harm than good.
    Thank you, Mr. Chairman.
    Mr. McHugh. Thank you, Dr. Popkin.
    [The prepared statement of Mr. Popkin follows:] 
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    Mr. McHugh. Next, Mr. Gregory Sidak, who as I mentioned is 
resident scholar at the American Enterprise Institute. Sir, 
thank you for being here. We look forward to your comments.

    STATEMENT OF GREGORY SIDAK, RESIDENT SCHOLAR, AMERICAN 
        ENTERPRISE INSTITUTE FOR PUBLIC POLICY RESEARCH

    Mr. Sidak. Thank you, Mr. Chairman.
    I would like to say a few words about price caps and relate 
those remarks to the scope of the Postal Service's statutory 
monopoly and also the application of the antitrust laws to the 
Postal Service.
    I have three main points to make with respect to price 
caps. First is one that came up earlier this morning, and that 
is that the Postal Service is a not-for-profit enterprise. So 
we have to be very careful about making inferences about how 
price caps would work in that nonprofit context, because all of 
our experience with price caps really relates to for-profit, 
private companies that have a shareholder constituency. The 
Postal Service is not currently a profit maximizer. That's 
partly by statute because of the regulatory constraint that is 
currently in the law; the Postal Service, as a consequence, is 
not subject to the same forces that a private shareholder-owned 
company is for its management to try to minimize costs and 
maximize profit.
    Section 3783(e) of the bill would attempt to create the 
opportunity for bonuses to be paid to Postal Service employees 
and officers to try to replicate some of the incentives that 
exist inside a private firm. But I don't think those provisions 
will go far enough to replicating what private enterprise is 
able to do in terms of creating incentives for profit-
maximizing, cost-minimizing behavior. The provisions also 
invite the question that if Congress believes that replicating 
the incentives that exist within private enterprise would be a 
good thing for the Postal Service, why not go the whole way and 
privatize the enterprise? I don't believe that's on the table 
right now, so that leaves us to ask how well will the current 
proposal work in terms of increasing the efficiency of the 
Postal Service.
    The second point about the price caps, is that it's 
important not to lose the forest for the trees here. We should 
not dive into a technical debate on how best to measure 
productivity or how best adjust for exogenous changes in cost, 
and lose sight of the fact that price caps may not work very 
well for the reasons I just described because we are trying to 
apply them to a nonprofit-maximizing enterprise.
    A related point concerns the capital-labor ratios of the 
Postal Service. If 80 percent of its total current costs are 
labor, that does not necessarily tell us that that is the cost-
minimizing capital-labor ratio. We would want to compare that 
ratio to private firms that are providing comparable kinds of 
services.
    A final point relating to price caps is benchmarking. 
Currently, one of the advantages of price-cap regulation on a 
State-by-State basis is that one State can look to what's going 
on in another State. If a local exchange carrier in Ohio has 
substantially higher costs than in Pennsylvania, the regulatory 
commissions in those two States can compare notes. The National 
Association of Regulatory Commissions [NARVC] is capable of 
exchanging that information on behalf of its commissions.
    Now, if price caps are, in effect, an alternative to 
competition a way to come up with better regulation and if they 
are not likely to work as well in the not-for-profit sector as 
in the for-profit sector, why don't we consider the real thing? 
Why don't we consider instilling more competition in the 
marketplace here?
    So that leads to the question of the statutory monopoly 
that the Postal Service currently enjoys.
    There are two kinds of monopolies. One is the Private 
Express Statutes, and the other is the monopoly over the 
customer's mailbox. Let me say a few words about the Private 
Express Statutes and why I think that more could be done in 
H.R. 22 to address the monopoly.
    The monopoly covers the term ``letter.'' It also covers 
``packets,'' which is now an archaic term. The Postal Service 
in turn has power to define the scope of that key term of art, 
``letter.'' So in that sense, the Postal Service has the 
ability to define the scope of its own monopoly. This is unlike 
any kind of regulation of monopoly that we see in other 
industries where public utility commissions regulate privately 
owned firms that are providing utility services.
    In addition, the Private Express Statutes appear in the 
U.S. Criminal Code. They are criminal prohibitions. The 
doctrine of vagueness in constitutional law says that, as a 
matter of due process, a statute is void and unenforceable if 
persons ``of common intelligence must necessarily guess at its 
meaning and differ as to its application.'' If we are coming up 
with extremely complicated definitions of what a letter is, 
definitions that may be counterintuitive to many people of 
common intelligence, that strongly counsels Congress to provide 
definition try to come up with and to give the authority for 
flushing out that definition to some neutral body other than 
the Postal Service, the recipient of the monopoly privilege.
    Let me say a word now about the mailbox monopoly. This 
provision also is in the criminal code, 18 U.S.C., Section 
1725.
    I think there are three significant economic consequences 
of the mailbox monopoly. First, it enables the Postal Service 
to raise the cost of its rivals of making a delivery to its 
customers. In antitrust law there's a theory called ``raising 
rivals cost,'' and this is an example of that.
    Second, it deters integration by businesses such as banks 
or utilities, which would have large numbers of mailings going 
to virtually every postal customer on a given route. It's 
telling that the mailbox monopoly was not enacted at the same 
time that the Private Express Statutes were enacted in the 
1840's. It was enacted in 1934, specifically to counteract 
vertical integration by these kinds of businesses into the 
delivery of monthly bills.
    The third point about the mailbox monopoly is that it 
imposes a cost on the customer as well, in terms of 
substituting alternative delivery services for the Postal 
Service because the customer would have to build a new 
receptacle to house the deliveries of a private delivery 
service.
    I think that the demonstration projects that are proposed 
in section 704 of H.R. 22 are a good idea, but I think Congress 
can go much farther. I think where we should go is down the 
road of open access, much as has taken place in natural gas 
transmission, wheel of power, and open access in local 
telephony. The mailbox can be thought of as the customer 
premise equipment of the postal network. In the early 1980's, 
the FCC deregulated customer premise equipment. The result was 
a proliferation of new kinds of telephones and answering 
machines and the like, lower prices, and higher product 
variety.
    The security question that came up a minute ago is a valid 
consideration. One way to deal with that is to require that any 
private carrier that would have access to a customer's mailbox 
be licensed and bonded. We could require be uniformed to 
facilitate their identification by the customer.
    Let me say a word about the antitrust laws. H.R. 22 would 
extend the antitrust laws explicitly to the Postal Service in 
section 3744, with respect to the competitive categories of 
mail and the experimental products that are described in the 
bill. It's important to work through the statutory analysis, 
though, because that may not result in extending the antitrust 
laws quite as far as it might seem at first examination.
    A second point is, why not extend antitrust scrutiny to all 
services of the Postal Service, including letter mail? In this 
respect it's useful to compare the closest communications 
industry, the telephony industry. The Bell System was opened up 
to competition not through regulatory action but through an 
antitrust case in which the former AT&T monopoly vigorously 
attempted to defend itself on the grounds that it was regulated 
by State and Federal commissions and should be exempt from the 
antitrust laws. Judge Harold Greene rejected that argument, and 
I think rightly so. The antitrust laws were applied even to a 
statutory monopoly. Were that not the case, we probably would 
not have had the divestiture of the Bell System in the way that 
occurred.
    Let me just conclude by saying that my preferred approach 
is what I call ``commercialization'' of the Postal Service. 
It's something that I describe at length in the book that 
Professor Spulber and I have written. Basically, it would 
entail repealing the Private Express Statutes, the mailbox 
monopoly, and other statutory privileges, but it would also 
relieve the Postal Service of what we call ``incumbent 
burdens,'' including its unique responsibilities for providing 
universal service. That's not to say universal service would 
end. But it would be funded through a different mechanism than 
embedding it in the structure of the mail. All services of the 
Postal Service would then be subject to antitrust oversight.
    Now, if we couldn't do the commercialization option, I 
think that what we are left with is really stricter public 
oversight of the Postal Service, which would mean a more 
vigorous, invasive role for the Postal Rate Commission. We 
would have to consider seriously the option that the mandate 
review in Canada has proposed, which would be to require the 
Postal Service to exit markets that are demonstrably 
competitive. We would have to explicitly subject the Postal 
Service to the antitrust laws. Thank you.
    Mr. McHugh. Thank you. Well, it's good to know we all 
agree.
    [The prepared statement of Mr. Sidak follows:] 
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    Mr. McHugh. Our last two presenters, as I understand it, 
have decided to really split their time. This is not an unusual 
position for they have written any number of books and articles 
together, so we are very pleased that they are able to appear 
here together this morning. According to the high sign I got, 
we will begin with Professor Michael Crew first.
    Thank you both for being here, and professors, we are 
awaiting your comments.

    STATEMENT OF MICHAEL CREW, ECONOMICS PROFESSOR, RUTGERS 
                           UNIVERSITY

    Mr. Crew. Thank you, Mr. Chairman, for inviting us to 
testify. We do intend to stick to our time, and we have 
powerful incentives to do so, because as professors we are 
doing something rather unusual today, we are teaching, and we 
have to get back.
    This is indeed a crucial issue that faces the U.S. Postal 
Service and the Congress, the question of legislation and 
reform right now. What I am going to do is begin by emphasizing 
the contexts in which our proposal should be understood, and 
then Dr. Kleindorfer is going to highlight some of the 
principal changes that really should be considered in revising 
H.R. 22.
    The current state of postal and delivery services presents 
Congress and the Postal Service with some difficult choices. 
The situation has arisen primarily because of exogenous 
changes, chiefly including the technological change in 
microelectronics, optical fiber, and computer-based 
alternatives, such as the Internet, which are revolutionizing 
traditional communications and advertising.
    In our experience with international conferences with 
postal delivery services since the early 1990's, we have 
noticed there's been a strong interest worldwide in reforming 
the postal service, so this remains an important sector in the 
communications marketplace and not an albatross around the neck 
of National Government.
    In order to remain viable, postal administrations have been 
moving to a more businesslike approach to postal service and to 
the incorporation of regulatory innovations such as incentive 
regulation. H.R. 22 recognizes this mandate and the dangers of 
not heeding it. The problem is that H.R. 22 does not fully 
recognize the seriousness of the current situation, and 
incorporate the major changes required.
    For the good intentions of H.R. 22 to bear fruit, two major 
changes must be incorporated in any postal reform legislation. 
One, the Postal Service should cease to be a public enterprise. 
The new law should call for its privatization. Two, the labor 
relations framework for a privatized Postal Service should be 
that of a private company with the right to strike and lock 
out, and not subject to binding arbitration as presently.
    H.R. 22 proposes incentive regulation, specifically price 
cap regulation. It comes as no surprise that the U.K.'s 
adoption of price caps regulation for its newly privatized 
industries are generally cited as a major success story. Price 
cap in the U.K. was successful because the industries concerned 
were privatized. For price cap regulation to succeed, there 
must be residual requirements and the dissolution of the 
capital markets, including bankruptcy. By being more efficient, 
the private company under a price cap can make additional 
profits just like any unregulated private company and use these 
to motivate management to make further profits and increase the 
value of the shareholders' investment. It is the existence of 
residual claimants that drives the efficiency promised by price 
cap regulation. Absent residual claimants, these potential 
efficiency benefits will not be achieved.
    If all that is added to the current mix of public ownership 
and binding arbitration is price cap regulation, it's not clear 
what benefits, if any, will ensue. Indeed, it may make matters 
worse. Additional profits might be arguably counterproductive 
under the present system and might simply send a signal to 
arbitrators that the Postal Service could pay more.
    Without privatization and changed labor relations, reforms 
envisioned in H.R. 22, or almost any other adoption of price 
cap regulation would do little or nothing to improve the status 
quo. Indeed, the result may be much worse than the current 
situation in that it would create false hopes and further delay 
the implementation of needed reforms.
    For all these reasons, the specifics of price cap 
regulation now to be identified by my colleague, Dr. 
Kleindorfer, should be conditional on concurrent privatization 
and reform of labor relations.
    Thank you again, Mr. Chairman, and committee members. I'd 
like to now hand over the baton to my colleague.
    Mr. McHugh. Dr. Kleindorfer, our attention is yours. Thank 
you for being here.

STATEMENT OF PAUL KLEINDORFER, ECONOMICS PROFESSOR, UNIVERSITY 
                        OF PENNSYLVANIA

    Mr. Kleindorfer. Thank you, Mr. Chairman, committee 
members, ladies and gentlemen. I'd like to address a few 
comments to the details of H.R. 22 and specifically to its 
approach to the implementation of price caps.
    In the spirit of Dr. Crew's comments, my remarks are not 
meant to provide a detailed prescription, but rather only an 
outline of key points, all of which are intended to reinforce 
two central ingredients of reform and we believe also are the 
intent of H.R. 22.
    First, the Postal Service should be given the opportunity 
and flexibility to compete and to evolve, and second, the 
Postal Service should be given the incentive to do so. In this 
regard, H.R. 22 has a number of problems in the structure of 
the price cap which it proposes. It also has a number of good 
points, but I am going to try to be constructive here and I 
will focus on only the problems, Mr. Chairman.
    Our concerns are with the structure of baskets and with the 
uniform applicability of adjustment factors within a basket. 
Both of these directly affect the issue of flexibility of the 
Postal Service to compete and to innovate.
    Except as specified in subsection 3724, no individual price 
within any basket is allowed to increase by more than the price 
index which is specified in H.R. 22 as the GDP price index less 
X. This contrasts with the more common arrangement where the 
prices in the basket are aggregated into an index which is 
allowed to increase--the index, that is--by GDP minus X.
    Under H.R. 22, since price reductions wouldn't count, there 
would be very little incentive not to increase the price by 
less than the maximum allowed. Thus, the potential for 
adjustments within the baskets over time would be minimal, 
which would fail to provide flexibility and opportunities for 
change normally allowed in price gap regulation.
    The solution? Use the standard price gap index approach to 
ensure pricing flexibility within baskets.
    Another concern is the actual structure of the baskets. 
H.R. 22 provides for four baskets which comprise the vast 
majority of the revenue of the Postal Service, including some 
products which should be considered competitive.
    Too many mail products are considered monopoly type 
products when they are subject increasingly to competition. The 
result of this is to fail to provide the flexibility that the 
Postal Service needs to compete and evolve.
    The solution? Our approach to the definition of ``baskets'' 
concentrates on those parts of the market where the Postal 
Service has monopoly power. Thus, we propose price regulation 
should apply only to monopoly services and not to a wide class 
of products. Services provided would be, in our proposal, 
divided into two groups, regulated and nonregulated. The 
regulated basket would, however, consist of only those services 
where there is monopoly power. Price gap regulation would apply 
only to the regulated basket. All other services would be in 
its unregulated basket.
    The price cap index that we would envisage would also be 
rather simple. The regulator would set the price of the basic, 
single piece, First Class postage, both domestic and 
international, the price of access to the local delivery 
network and the price of special services and services mandated 
by Congress, such as material for the blind and Certified Mail.
    The Postal Service would be free to raise rates by the rate 
of index minus X formula over the period of the price gap. The 
Postal Service would be allowed to set all other prices, the 
unregulated basket, without regulation.
    It is important to note that the Postal Service, when 
subject to price gap regulation, would not have the incentive 
to cross-subsidize its unregulated operations as it might under 
cost-of-service regulation.
    Although the Postal Service would have considerable 
latitude under this proposal in pricing, for example, its bar 
code and other bulk mail operation, it would still be subject 
to certain constraints. For example, its regulated access price 
would represent a floor below which it would not be able to set 
its price for its other services, so the rate for both Bar-
Coded Mail could not be set below the rate for access.
    Similarly, the ceiling price that it would be allowed to 
charge would be the price gap on single piece, First Class 
Mail. Between the floor and the ceiling, for work sharing and 
discounts and other issues of this sort, the Postal Service 
would be free to set its prices for its unregulated products. 
In addition, a privatized Postal Service would, of course, be 
subject to the full force of the antitrust laws, just like any 
other private company.
    Other aspects of our proposal are spelled out in more 
detail in our testimony, including quality issues, 
initialization, and so forth. I won't go into these here.
    While our proposals represent a significant change in 
postal regulation, they are consistent with current practice in 
other industries. Our proposals are also consistent with H.R. 
22 in providing protection against monopoly exploitation in any 
regulatory Government structure through the PRC for resolving 
disputes.
    A central issue which our proposal attempts to address is 
to provide a framework which encourages the Postal Service to 
innovate and to evolve in the face of market changes. Things 
may be good now, ladies and gentlemen, but in all places and 
all parts of the world we are seeing, based on sophisticated 
econometric modeling, real challenges that are going to erode 
this rosy picture soon unless we also have a competitive, 
evolving, and adaptable Postal Service.
    The more flexible basket definitions we have proposed and 
the use of indexing within the regulated basket provide 
significant increases in opportunities and incentives for 
product innovation relative to the current version of H.R. 22, 
which essentially maintains rigid line of business restrictions 
as currently embodied in reclassification procedures.
    Conclusions: Absent major changes, the Postal Service will 
not be able to survive in its present form. There will be major 
reductions in employment levels and large reductions in mail 
volume, not perhaps in the next year or two, but soon.
    H.R. 22 is important in recognizing the need for change and 
proposing incentive regulation, but it doesn't address the 
problem adequately. In our view, what is needed is a two-
pronged approach, spearheaded by privatization of the Postal 
Service, or at least a time line for privatization of the 
Postal Service, and reform of labor relations practices, 
together with an approach to incentive regulation, such as 
envisioned here, which focuses on those aspects of postal 
delivery service which need to be regulated, leaving others to 
be regulated by the force of competition.
    [The prepared statement of Mr. Kleindorfer and Mr. Crew 
follows:] 
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    Mr. McHugh. Thank you, Professor.
    Are you sure you don't want to take a few minutes and talk 
about the good things? We appreciate your comments.
    I would like to start out on a kind of general basis, and 
before I do that, let me first of all recognize the presence of 
the gentleman from Illinois, Mr. Danny Davis, who has joined 
us. He has been a real stalwart since appointment to this 
subcommittee, and we appreciate his presence.
    The gentleman from Ohio, Mr. Steve LaTourette, had to leave 
to preside over the session which began a few moments ago. We 
appreciate his being here as well.
    Professor Kleindorfer made some comments about what the 
future looks like. I can tell you that we didn't get involved 
in this procession just for the exercise. We felt that there 
was a need to prepare for the future, and we felt as well, at 
least strategically, it is better to act absent an immediate 
crisis atmosphere, where you can think about things in a more 
reasoned and reasonable manner.
    Listening to Dr. Popkin, I am not certain he would agree 
with the need to make what he might consider overly dramatic 
changes. I am always reminded of the old saying: Before the 
Little Big Horn, George Custer was undefeated. I think we do 
have to worry about tomorrow.
    But if there is no need, if the Postal Service of tomorrow 
is going to be fine, then there is no need to do this at all. 
So I would like--and Professor Kleindorfer mentioned some of 
the things that he felt would happen--I would like to have each 
of you just respond to what you think the future of the Postal 
Service will be under status quo, be it good, bad or 
indifferent.
    I know that a number of you have not been involved in 
postal issues, but you did take a lot of time--and I appreciate 
that--in looking at the Postal Service vis-a-vis the rate 
structure we are talking about. If you formed an opinion, I 
think it would be interesting. Maybe we ought to turn out the 
lights and go home.
    Mr. Kwoka. I am not an expert on the Postal Service, but I 
have spent a bit of time looking at the issues here, and I 
would offer the following opinion based both on what I am 
familiar with in the Postal Service and other industries.
    Advocacy of price gap regulation stems from the belief that 
the cost of service regulation in any context where we have 
seen it does not work well, does not encourage efficiencies, 
and, almost without exception, except for badly flawed plans, 
will produce a superior degree of efficiency and benefits to 
both consumers and the companies.
    So I would offer the view, based on a wide range of other 
companies and industries both in this country and others, that 
taking exactly the same enterprise, subjecting it to the 
incentives of rate of return regulation, and then, in the 
alternative to the incentives under price caps, there should be 
little doubt which of those will produce a superior set of 
performance records in the future.
    I have no crystal ball, particularly with regard to how the 
Postal Service might perform in the absence of some cut over to 
price gaps, but the straightforward comparison that I think is 
embodied in H.R. 22 and is before this subcommittee is one that 
I think offers a great deal of credence to the view that price 
gaps, at a minimum, ought to be able to improve on whatever it 
is in the alternative that might happen to the service.
    Mr. McHugh. Thank you.
    Dr. Rose, you noted particularly that you had not worked on 
postal issues before but you enjoyed this.
    Mr. Rose. Right.
    Mr. McHugh. I want to hear you say that when you walk out 
of the room, but we believe you for now.
    Mr. Rose. It is actually getting better. It is more 
interesting. Well, most of my remarks and what I wrote was 
focused on price caps and what you are proposing in H.R. 22.
    There is an aspect in H.R. 22, that I warmed up to that I 
recognized in the utility debate, and that is Aunt Minnie. I 
think Aunt Minnie is in there. And that is the idea of 
preserving some basic service in the form that most people have 
become accustomed to. My general impression is, the Postal 
Service does a very good job on that.
    In the utility field, even in the talk of restructuring, 
there is always, we are going to have to take care of--there is 
no Aunt Minnie, we usually talk about little old ladies 
freezing in the dark as the problem, and where little old 
ladies in sneakers is what they say in telecom, it is the same 
equivalent argument. You have to have some kind of basic 
service, some kind of fallback.
    That is what I perceived, and I could be wrong on this, but 
that is what I perceived was going on in H.R. 22, to set those 
aside. Clearly, if in the extreme, if there was competition for 
First-Class letters and First-Class cards, I don't think Aunt 
Minnie would be able to mail a Christmas card to her nieces and 
nephews across the country for 32 cents. That is a heck of a 
bargain, and we have to recognize that. I think I recognize the 
need to want to preserve that, and I recognize that same thing 
in the utilities.
    So that is what I think is going on, not so much as trying 
to open up everything to competition, even though, as an 
economist, I am genetically predisposed to think competition is 
better for everything, but I recognize the limitations.
    Mr. McHugh. Thank you, sir.
    Before we proceed to Dr. Popkin, I want to recognize Pete 
Sessions, Congressman Sessions, the gentleman from Texas.
    Thank you for joining us, sir.
    Mr. Sessions. Thank you. I appreciate that.
    Mr. McHugh. Before we ask for your comments, Dr. Popkin, 
let me just say, I couldn't agree with you more with respect to 
the very, very admirable job that the Postal Service, and 
particularly the postal workers, have done.
    I have said many times to similar meetings such as this and 
in various forums, I live in a very small community that relies 
very heavily on a universal delivery standard that is delivered 
and brought to us by those postal workers, and they have my 
utmost admiration.
    What I am concerned about is what happens tomorrow or the 
day after tomorrow without these kinds of changes. You feel, I 
suspect, that this procedure is not necessary. But I don't want 
to put words in your mouth. What do you think the Postal 
Service of tomorrow would look like under status quo?
    Mr. Popkin. I think that in the context of the way you have 
framed this: What is the future for the Postal Service? as I 
hear Mr. Kleindorfer describe it, I think the only way the 
Postal Service could resolve the future he has in store is to 
become a Microsoft or an IBM.
    The problem is electronic communication. There is no wage 
and price at which the Postal Service can compete with 
electronic communication. That is going to happen. That is 
technological progress. We can't turn that back.
    Rather, the way I view it is that there is a delicate 
balance that you have in this institution, that the institution 
called the Postal Service creates. In jargon my colleagues on 
the panel would recognize, the various forms of alternative 
communication, such as electronic communication, create what 
are called contestable markets.
    The Postal Service really isn't a monopoly. Some of its 
markets are contested. By the same token, it does a very 
helpful thing for the U.S. economy. It resolves a very 
difficult cross-subsidization issue that Mr. Rose was talking 
about. In other words, how do you get mail to Aunt Minnie at 32 
cents out in farmland in the United States?
    When I look at the problems that we are having in resolving 
cross-subsidization issues, I think there is an ongoing 
debate--you read about it almost every day in the paper--
between the long-distance and local telephone companies, about 
this access charge, which really is a cross-subsidization. 
These are very difficult matters to handle.
    Mr. Sidak mentioned maybe there are some alternative ways 
to deal with cross-subsidization. I think that is what they are 
struggling with in terms of Internet access, some kind of pools 
where companies put some money into something and that can be 
used to hook lines up to all the schools in the hinterland.
    But I think that the biggest competitive threat is a 
technological one that you can't do anything about, and 
meanwhile the Postal Service faces contestable markets and yet 
it makes this very delicate transfer by providing universal 
service at uniform rates.
    So I am upbeat. I am a fan of the Postal Service.
    Mr. McHugh. I am as well. Believe me, one of the primary 
objectives I have personally is to keep that universal service 
into what you call the farmland. I would like to keep it into 
the inner-cities as well. I think all of that is important. But 
I appreciate your comments.
    Mr. Sidak.
    Mr. Sidak. Thank you.
    Universal service is an issue that comes up in every one of 
the regulated industries. It is useful to look at what Congress 
did last year in the Telecommunications Act. It said universal 
service is important, we are going to preserve it. We are even 
going to expand the definition to take into account new 
technologies. But we are not going to tolerate monopolies. 
State-sanctioned local exchange monopolies are preempted.
    Of course, there wasn't anywhere on the table a proposal to 
resort to public ownership of telecommunications networks in 
the name of providing universal service.
    Now, what has happened since the act passed? A Federal-
State joint board has met, and it, in accordance with the 
instructions that Congress gave, has attempted to identify ways 
of making subsidies transparent and explicit, rather than 
hidden in the rate structure, and to make them competitively 
neutral so that they don't favor any one competitor in the 
market.
    That is a process that follows efforts by many of the State 
commissions for several years now to address universal service 
in telecom and in other industries. In New York, for example, 
there is a case that has been going on since 1994, to address 
the funding of universal service in a competitively neutral way 
in local telephony.
    I think part of what we are seeing is that the Postal 
Service is a giant army that has been assembled to win the war 
of delivering universal service. We have won that war and now 
have a large standing army. We have to figure out what to do 
with that army now that the mission is accomplished. 
Particularly if electronic means of communication make letter 
mail less important to consumers in the future, there will be a 
large labor force that is not as necessary to a public mission 
as it once was.
    That, in turn, I think, raises a question of what is the 
future objective of the Postal Service and its management. I am 
concerned that the Postal Service not stray farther and farther 
away from the original mission of this public enterprise, which 
was to provide universal service and bind the country together. 
I think that the Postal Service has accomplished that goal 
admirably.
    Mr. McHugh. Gentlemen, I will defer to you. Who prefers to 
go first?
    Mr. Kleindorfer. I would like to comment briefly directly 
to the question you raised, Mr. Chairman, about whether the 
future is rosy or not.
    Our view is that one doesn't have to know exactly what the 
future is in order to know that flexibility and the opportunity 
to fit well are important attributes.
    I personally view, having reviewed over the past 7 or 8 
years the issues of the technological threat and erosion of 
mail volumes, especially in the advertising area--I have some 
views about what is happening there. I think my views are 
perhaps best put in terms of saying that there is a real threat 
from electronic competition.
    The vast majority of mail, First-Class and bulk mail, 
either originates or destinates with business. Those businesses 
are looking for opportunities to more effectively communicate. 
They are going to find them. With the growth from a mere 1 
million Internet users in 1996 to 100 million projected by the 
turn of the millennium, we can expect them to find success in 
this respect.
    So business as usual? I would expect a bureaucratic 
enterprise, certainly one that is very devoted, and I would 
take nothing away from the intent of the people that work 
there.
    But the opportunity to compete and evolve will not be 
there. They will be forced to go through lengthy procedures, 
just as they do now, to reclassify, to introduce new products. 
There will be significant line of business restrictions, 
inflexibility will naturally obtain, and I do not see that as 
providing the necessary confluence with an adaptive 
communications marketplace.
    If they change, then I see actually a fairly--I believe 
what we have heard and what we know about the competence of the 
postal employees here and the management, I think we can 
anticipate those folks can compete just like Microsoft or IBM, 
but they have to have the framework within which they can do 
it.
    To try to reinvent all of corporate law, everything else 
that actually surrounds the private firm through a piece of 
legislation, that is not going to work. We have got huge legal 
precedents and procedures that define exactly what it is to be 
a corporate entity.
    It seems to me that that is our hope for not just a so-so 
future for the Postal Service but for a future that, in fact, 
emulates that which our private sector has gone through in the 
last 10 years through its own restructuring activities, giving 
us a tremendous boon in employment, a tremendous boon in 
satisfaction for those who even have been outsourced and 
started new businesses. Those are the kinds of activities that 
arise naturally from trusting in the market.
    If we trust in bureaucracy, I am afraid we will get further 
and further entangled into it, just as my colleague, Dr. Sidak, 
has explained as the other alternative. So business as usual, 
means bureaucracy, change with I think we have got some hope of 
evolving, of seeing an adaptive Postal Service as a part of the 
next millennium.
    Mr. McHugh. Thank you.
    Dr. Crew, would you like to add something?
    Mr. Crew. I would add little to that, except to say we have 
been thinking about this and working on this problem for a few 
years, and in fact this particular issue that we proposed in 
our testimony for reorganization of the Postal Service was 
first unveiled 2 or 3 years ago at a conference at the American 
Enterprise Institute organized by Mr. Sidak. At that particular 
conference, we actually came short of recommending 
privatization.
    But I think my colleague put it very well when he said that 
we don't want to reinvent the whole of corporate law and things 
like that to make this work. We have got an institution, the 
private corporation, which could do the job, and that would be 
the way to go in the present situation.
    In terms of why do we see the picture as somewhat bleak, in 
the international conferences that we have been participating 
in, most of the Europeans are much more concerned about market 
erosion than people seem to be here. The papers have been 
written, econometric papers on this, that show significant 
competitive effects from electronic media, and much, much more 
important, growing potential.
    Mr. McHugh. I am probably getting close to the 5-minute 
limit. I would like to yield to the ranking member and thank 
him for his patience.
    Mr. Fattah. Any time the chairman is talking, I don't even 
look at the clock. I do understand the role of the minority 
here in the Congress.
    Let me say that the future is now in many respects, because 
I am going to have to depart from this hearing very soon, but I 
do want to make a number of comments. One is that I do 
appreciate all of your testimony today and the various levels 
of inspection you bring to this matter.
    I am concerned that perhaps some of us are working at cross 
purposes inasmuch as I am not sure that we are talking about 
the same thing. I want to work with the chairman, and I know 
that he is interested in reforming the Postal Service.
    But I am interested in reforming it as a public good and a 
public enterprise dedicated to public service, which I think is 
the basic mandate under which it is operating now. And the 
notion of privatization, and even some of what has been talked 
about in terms of commercializing the Postal Service, concerns 
me, because I think that, as economists, obviously you are 
looking at a different set of dynamics than perhaps those of us 
as public officials may be looking at.
    I am much more interested in Aunt Minnie, I think was the 
term of art Mr. Rose used, and whether she can have a reliable 
vehicle. She may not be surfing the net, not today, not 
tomorrow, and not any time in the near-term future.
    And I note that there is a lot of interest in thinking 
about what the future may bring, and the Government itself is 
taking certain steps. We are moving all of our payments to 
electronic form. That is going to cost the Postal Service $100 
million. This is a real issue.
    But I am not sure price caps, in and of themselves, address 
any of the issues relative to the competition brought on 
through electronic devices, issues of communications. The 
reality is that we need, I think, to ensure, first and 
foremost, universal service to Americans across the board.
    We can talk about our European neighbors if you want. I 
would not benchmark any of their systems of mail delivery as a 
focus to begin the discussion of how do we reform ours. We have 
the best in the world, from all that I know, and I have spent 
some time looking at this, and I think the chairman is correct 
that we must be concerned about what steps we take. Even in our 
haste to do good, the Congress has been known in the past to 
make things that are going well disappear, in our haste to show 
our importance to the process.
    The Postal Service, as has been pointed out, for 32 cents, 
does a hell of a job today. The question is really, how do we 
improve that without destroying it? Which is where I am in this 
process.
    So the ratemaking process, as best as I can discern, is a 
process that is overly cumbersome. It takes 10 months, at best. 
It allows a lot of interested parties to participate in that 
process in ways that are interesting, to say the least, and the 
question is, can we expedite that? Can we have a service in the 
contestable markets, if you will? There could be some 
flexibility in price to important customers. There are other 
ways we can look at this. And can we also protect the 
marketability of those private sector enterprises that have 
joined and are, in fact, an important part of our way business 
is done now in this country?
    I think there are some issues to work through, but I don't 
want us to use a sledgehammer to approach this. I think we 
ought to be very, very careful that we don't take what is the 
best Postal Service in the world and, through some notion of 
economic purity--and I have spent some time at the Wharton 
School with my friend; there are a lot of interesting theories 
about how things should work, but this is also the practice.
    In practice, the reason why we created public monopolies 
for a whole range of services in this country was where there 
was an essential need to make sure the service was provided, 
and that the profit motive, in and of itself, may not take care 
of Aunt Minnie's mail. In fact, it may work against her getting 
her mail in some cases. We created public monopolies to ensure 
those services.
    Whether we are talking about police or fire, I would rank 
right up there mail delivery, that it is an important public 
commodity and service that needs to be protected through this 
reform process. We need to find ways to improve the prospects 
of a future that is brighter than the one that has been 
predicted by some. I look forward to working with the chairman 
in that regard.
    Mr. McHugh. I thank the gentleman.
    I know Professors Kleindorfer and Crew have to leave very 
shortly.
    Mr. Kleindorfer. Excuse me, sir.
    Mr. McHugh. As of right now. That is shortly. Thank you for 
coming.
    Mr. Fattah. They are leaving on Amtrak, another Government 
supported----
    Mr. McHugh. I thank the gentleman for his comments. I can 
assure him our objectives are identical. We will work together, 
and we are looking forward to that.
    In fairness, would anyone like to respond, at least for the 
record?
    Mr. Kwoka. In listening to Congressman Fattah say that 
those here are speaking to different points, that, of course, I 
think, is characteristic of, any time you get five or six 
economists together, you will get at least an equal number of 
opinions on most any issue; that is right.
    But in keeping with his admonishment to focus on the most 
important issues, I will simply hark back to the conclusion of 
my statement where I said an important part of any reform is to 
keep the task simple.
    To the degree that this subcommittee wants to take on a 
range of issues or append a series of other policy reforms at 
the same time, that, obviously, is its prerogative. But the 
downside risk of that is that there may be something lost in 
the process as well.
    Universal service need not and should not be sacrificed. 
Privatization may be a desirable feature in some industries. 
This, the Postal Service, may or may not be such an enterprise 
where privatization would work the wonders it has elsewhere.
    But those decisions do not have to be made, I think, 
simultaneously with that which is proposed in H.R. 22. One can 
simply look at a straightforward comparison between a public 
enterprise with universal service where ratemaking is governed 
through cost of service regulation, and compare that very same 
public enterprise with universal service obligations, and 
compare its operation under cost of service.
    If one can come to a conclusion as to the wisdom of price 
caps and, in the alternative, to cost of service regulation, 
then the other issues need not be addressed at the same time.
    I, myself, have seen no reason why universal service has to 
be compromised in any fashion whatsoever. I also share most of 
my colleagues' views that privatization is a good idea in most 
enterprises, though I have conducted economic research that 
shows that in some other utility areas that it is not 
unambiguously always preferable.
    I think there are some reasons why public enterprise, as 
the Congressman stated, may serve the public interest 
considerably better under circumstances that many of us can 
identify. So I would second the notion that focus on the 
narrower issue of which regulatory regime is superior is one 
that can be done in isolation from some other policy reforms 
that others may choose at a different time.
    Mr. McHugh. Thank you.
    Mr. Sidak.
    Mr. Sidak. Mr. Chairman, I would just add that when you are 
looking at the different regulatory regimes, don't forget 
competition. One option that certainly is available to Congress 
is to narrow or repeal the statutory monopolies that currently 
exist and to facilitate competitive services in those areas 
that currently are limited to the operation of the Postal 
Service.
    I also agree that universal service is not something that 
has to be sacrificed. Speaking for myself, I have never been 
elected to public office; so it is not my place to say what the 
level of the universal service should be. But the role of an 
economist is to say, once the policymakers make that call, how 
you can deliver that level of public service in the most 
efficient way.
    That is why it would be useful to consider, for example, 
putting out to competitive bidding delivery to high-cost areas. 
Who can provide service to Montana with the least amount of 
subside. Do it the same way that we put out all forms of 
Government contracts to private providers who, on the basis of 
price and quality, can deliver the services.
    Mr. McHugh. Just let me say a couple of things about the 
intent of the bill. We are attempting to recognize, that while 
giving flexibilities, and allowing the Postal Service to 
compete, to, in fairness, require them to compete, we do narrow 
the monopoly to some degree. I am sure it is not as deep and as 
extreme as you and perhaps others would like. I understand 
that. We could talk about that further at another time.
    But I think the point of your comment is not lost upon us. 
I understand that, and I think it is well founded.
    Dr. Popkin.
    Mr. Popkin. I just wanted to make a comment on the 
competitive model, and it is this: I can see the competitive 
model working very well. In fact, in the example that Mr. Sidak 
used, it was a model where somebody came in and did the work or 
competes or delivers with the Postal Service. I can see that. 
That is not hard to envision in your mind.
    What I find hard to envision is what the Postal Service 
buys in return, unless it can turn itself into a Microsoft or 
some Internet provider or something like that. I think as far 
as these competitive products that we talk about, that the 
Postal Service in certain areas would be competitive, but I 
don't see at this point what those areas are.
    So it seems to me that the competitive model runs the risk 
of taking more away from the Postal Service than it puts back.
    Mr. McHugh. Again, and there is neither the time nor really 
the need to get into debate about that, the theory of what you 
are buying is flexibility, the lack of which, as I think you 
heard Dr. Kleindorfer say, has in his views--and I share those 
views--some rather dire long-term consequences of the decrease 
in regulatory burden that attends part of the PRC procedures.
    You also have the flexibility to introduce new products 
that at least the postal administration feels is important to 
be able to change as the environment changes. You could argue 
this bill doesn't do that, that either that is not necessary, 
but that in theory is what is being bought here. Whether it is 
fair purchase is the issue; I understand that.
    Dr. Rose.
    Mr. Rose. First of all, let me just chime in with what Mr. 
Sidak and Dr. Kwoka said on the issue of universal service. I 
think Mr. Sidak was saying earlier, on the point of utilities, 
that is not really a conflicting goal. You can have lots of 
competition in those services that are competitive and still 
meet your universal service standards. That has not been a 
problem. Once you have decided that is what you wanted, then 
you should go ahead with that.
    But I want to go back to a point I think Mr. Fattah was 
also saying. He was also saying something about making it 
simpler. This kind of gets back to the price cap, which I 
thought was the original intent of the hearing today.
    Mr. McHugh. We sometimes lose our way.
    Mr. Rose. Obviously, universal service is very important. 
Making it simple though, I think if that is the objective, as I 
made in my opening remarks--if the objective is to make it 
simpler, something simpler than cost of service, then price 
caps is probably your answer. If the objective is to lower 
costs, then that is what I am skeptical of. I don't think you 
are going to get that.
    Let me say that critics of price caps will often point out, 
it is just as expensive or costly to do that as it is cost of 
service. I think that is true in the beginning, when you first 
get them running. But once it is running, the administrative 
costs do tend to be lower, and they can function quite well.
    I can't make a prediction if that would be true in the 
Postal Service, but just from our experience in telecom in 
particular, once they are up and running, they are a little bit 
simpler.
    Mr. McHugh. Mr. Davis has been very patient, sir. Thank 
you. I am happy to yield to however belated that yielding might 
be.
    Mr. Davis. Thank you very much, Mr. Chairman. I certainly 
appreciate the opportunity.
    I would like to make just a couple of comments based upon 
the discussion. It seems to me that a great deal of the 
suppositions relative to the utilization of price caps have 
centered around the experiences of public utilities, and I am 
not absolutely certain of the similarity or dissimilarity of 
the Postal Service System with that of some of the other 
entities that we have designated as being public utilities and 
the other aspect of that as well.
    I am not sure where the role of the consumer really fits. 
Even when we have used other public utilities as an example, 
there has always been a need or a feeling on the part of 
consumers that in some instances they were being shafted, left 
out, or there was a need for some recourse. That aspect 
concerns me a bit.
    Also, when we talk about further privatization--and I am 
one of those individuals who don't necessarily believe that 
privatization is a panacea for everything that ails us, that 
all you have got to do is privatize it and all of a sudden, 
whatever the problems, whatever the needs, whatever the 
differences, whatever the difficulties are, they go away, or 
that every time we talk about reform that it means we are going 
to improve.
    Sometimes reform simply means to change, but not 
necessarily to improve. Sometimes actually it even will make 
matters worse rather than better.
    I guess the one question that I wanted to raise is, can we 
really see the impact of further privatization as it relates to 
the Postal Service? And I don't think you can discuss one 
aspect without the other. I come from a school of thought that 
says, unless it is broken, I am not sure that it really needs 
to be fixed, that certainly you need to keep looking at it, you 
need to analyze it, you need to try and project what the future 
will bring.
    So my one question is, what are we trying to really fix? 
What? What are we actually trying to fix? I know what we are 
trying to change, but what are we trying to fix?
    The other question would be, what impact would 
privatization perhaps have on the ability to provide the 
universal service that I think everybody has indicated is a key 
component of the system and has to continue if the system is to 
work?
    Mr. McHugh. Can we just establish for the record before 
they respond that your question vis-a-vis privatization, I 
assume, is based upon some of the comments here today, and not 
with respect to H.R. 22, because that bill does not privatize?
    Mr. Davis. That is correct.
    Mr. McHugh. Thank you.
    Gentlemen.
    Mr. Kwoka. Let me address in particular your question, 
Congressman, with regard to what it is that ratemaking reform 
is striving to fix, as you say.
    In the industries where price caps and other forms of 
incentive regulation have been put in place, in many instances 
what has motivated or prompted those changes has been precisely 
what I think has prompted H.R. 22, looking ahead and 
envisioning greater difficulties with conventional ratemaking 
procedures and a future that is subject to greater uncertainty, 
to more technological change, to dramatic shifts in 
demographics and other features that put ever-increasing 
pressures on traditional rate making procedures.
    When price caps were put in place for AT&T and the local 
exchange carriers and for electric utilities at the State 
level, in many instances there wasn't necessarily a crisis that 
happened or any particular issue that needed to be fixed at the 
time. Rather, what was intended was to establish in advance of 
any such crisis a rate structure or rate-setting procedure 
which would be more flexible and adaptable to changes that 
everyone could foresee.
    At the same time, your concern about what is in it for the 
consumer has been very much at the forefront of the minds of 
most regulatory commissions at both the Federal and State 
levels.
    The intent in the case of the Postal Service could be 
stated--I wouldn't presume to state what it, in fact, is but 
could be stated as follows: The chart that Dr. Popkin showed 
indicating what the postal price rate of change was over the 
past 20 years or so. The intent of price caps would be to 
decelerate that rate of increase. Wherever that line lies 
relative to CPI or CPI for services, the intent would be to 
decelerate its further increase.
    In particular, if there is concern over the 32-cent stamp, 
the Aunt Minnie services, or services to rural or any inner-
city areas that are particularly vulnerable to cross pressures 
and other such impediments, those can be separately capped or 
put in baskets, as they were in the case of the 
telecommunications industry.
    Local residential dial-up service was capped separately so 
as to ensure that there was no rebalancing of higher rates to 
those consumers for the benefit of lower rates to others.
    Price caps allow, in short, to maintain or improve on any 
structure of prices the rate of return regulation does and then 
to offer price decreases on average and perhaps price decreases 
targeted to particular consumers.
    So the intent, in short, would be as it was in these other 
regimes, to introduce pressures for cost efficiency and to 
moderate rates of price increase and to offer perhaps 
particular protections for those prices and those services that 
were seen as socially most important.
    Mr. McHugh. Dr. Rose.
    Mr. Rose. Let me try to answer your first question, which I 
think was, what is the difference?
    There is a significant difference between utilities, 
electric utilities, telecom, gas, and postal customers. That is 
true, and I acknowledge that. But the electric utilities and 
gas and telephone were all regulated by cost of service 
regulation historically, and for a number of years now, 20-some 
years, the Postal Service has been regulated in a similar way.
    Now in the last 10 years, the telecom and the others a 
little lagging behind have been evolving into price cap 
regulation, and I agree with all of the advantages that Dr. 
Kwoka mentioned as there being with that. That is the reason 
for the change.
    So the idea is to just try to form a similarly regulated 
industry rather than trying to say these are exactly the same, 
and therefore it is exactly transferable.
    If you are going to adopt a price cap approach, as I tried 
to point out, where some of those differences are, like, since 
it is a nonprofit organization, the motivation is different, 
you will have to come up with something, a means of adopting it 
to Postal Service regulation. You can't take it wholesale from 
the utility side.
    But there are lessons that we have learned in the utility 
side that I think are transferable and probably shouldn't be 
lost. That is an advantage that I think you have now, that is 
to learn something from that.
    Mr. McHugh. Gentlemen. Dr. Popkin.
    Mr. Popkin. I think Professor Kwoka's comments about having 
an objective--that it is the objective to come out with a price 
increase that is lower than the one that is in that chart--
demonstrates one of my major concerns about the bill, because 
that is the way people kind of relate to it. It is less than, 
not more than.
    And when you look at an industry that 80 percent of its 
costs are labor, if anybody wants to bring the postal rate 
increases down to a lower rate, there is only one way that is 
going to happen, and that is to further depress the real wages 
of postal workers. They have already been declining at an 
annual rate of about 0.5 tenths of 1 percent. That is more than 
the average private sector worker.
    So this is the way people jump once you get price caps in 
place. They think that the X factor is a one-way factor.
    Mr. McHugh. OK. In deference to my colleague who posed the 
question, I want to go to Mr. Sidak, but then I would like to 
come back to that at some point.
    Mr. Sidak. Thank you.
    In terms of what are we trying to fix here, I think it is 
important to focus on more than just price. There is another 
dimension to consumer welfare besides price, and that is 
service quality and innovation.
    I am reminded of a remark that Judge Douglas Ginsberg made 
at the AEI conference that Professor Kleindorfer mentioned 
earlier, which we held several years ago. Judge Ginsberg 
analogized the current monopoly provision of letter mail to the 
old black rotary dial telephone that you used to get from the 
Bell monopoly in the predivestiture days, before the 
deregulation of customer premise equipment.
    We don't really know what postal services will look like in 
a more competitive environment where there are higher levels of 
product innovation. We could see something that is analogous to 
what happened with the explosion of choices in the kinds of 
telephones that you could get once the market was open to that. 
The current homogeneity of the services that are offered by the 
Postal Service is one cost that consumers bear that could be 
changed in the future.
    Mr. Davis, you also mentioned the concern about trying to 
fix things that are not broken. I want to reiterate that the 
monopoly over the mailbox was something that was imposed in 
1934. It wasn't the original state of affairs, and it wasn't 
something that accompanied the Private Express Statutes in the 
1840s. Maybe things weren't broken in 1934, when that fix was 
produced by Congress, and maybe that is a good place to go back 
and reconsider whether it should be removed today.
    Mr. Davis. Thank you very much, Mr. Chairman. That pretty 
much concludes my comments and concerns. It is an issue that I 
think we must take a real hard look at.
    I have gotten more than 500 postcards from constituents of 
mine----
    Mr. McHugh. At least they mailed them.
    Mr. Davis [continuing]. In the last 3 days, and it is an 
indication that, certainly in this particular area, people are 
indeed very much concerned about it and they are aware of it, 
they are watching it, and they want to make sure their voices 
are heard and that they have input into the process.
    I certainly thank the gentlemen for their testimony and 
thank you.
    Mr. McHugh. I thank you.
    For those of us who have labored in empty subcommittee 
rooms, it is nice to have the people's attention. It took us a 
while to do it, but, by God, we have, for better or worse.
    Mr. Popkin, let me return to your comment, both in your 
opening statement and your response to Mr. Davis, because I 
would like to prove once and for all why I am not an economist. 
As I said, I probably don't grasp this, but I am a little 
constrained to understand how you equate the pricing structure 
in H.R. 22 to a wage cap.
    Certainly there is nothing in there by statute that caps 
wages. Wages are totally unaffected in the language of the 
bill, unlike certain pricings that are held to an index to be 
determined. Wages are not in any way constrained to be at or 
below that index. So your concern can't be legal because there 
is no legal component of the bill that does that.
    Do you agree with that statement? Are we together so far?
    Mr. Popkin. Yes.
    Mr. McHugh. OK. Second of all, the intent--and we can 
disagree with the effect--but the intent in the bill has always 
been to allow the Postal Service to enter more effectively into 
markets that will provide them at least the opportunity in a 
competitive atmosphere to increase their market share.
    I thought I understood you to say in your opening comments, 
particularly with respect to the Postal Service's performance 
in recent years, that market share has been growing, and that 
is important. Market share means increased revenues, which 
means a greater part of the pie.
    I do know a little bit about wage negotiations. I was at 
that level at city management for 5 years and have been at the 
bargaining table, and I know how unions and employee groups are 
very effective in determining revenue pools. So the intent of 
the bill is to provide greater access to revenues and greater 
ability to compete, which I assume would be good.
    But the thing that I am most pressed to understand is, you 
spent a lot of time very effectively on your chart showing how 
at least APWU, one bargaining unit, has had their wages 
demonstrably below the CPI index year after year, and then 
express concern that somehow the CPI index would constrain your 
wages. How can you argue that when you have not been at CPI to 
begin with?
    Mr. Popkin. Let me just clarify a point about the use of 
APWU productivity. I think a paper of Laurits Christiansen's 
was circulated today from the U.S. Postal Service, and that 
shows total factor productivity, the whole post office, to have 
risen faster than total factor productivity in the private 
sector.
    So my choice of the APWU doesn't bias that conclusion of 
postal productivity. I wanted to clarify that for the record.
    Mr. McHugh. I appreciate that. I used it because you did.
    Mr. Popkin. The concern that I have that the price cap, if 
there are reasons such as mismanagement that lead the Postal 
Service to have performance that isn't as good as the private 
sector, and therefore actually there would be a tendency for 
its prices to rise faster than the CPI--which, incidentally, I 
don't think is the right standard, I think the service sector 
CPI is.
    But if that happens, it is quite likely that the reaction 
to that within the Postal Service would be to--and we have 
heard it before--cut out Saturday mail, do those kinds of 
things to cut into jobs, or, alternatively, to take a different 
posture at the bargaining table.
    I am saying these are the economic consequences that could 
flow from this. And the likelihood that they will flow from it 
is increased the minute you get a cap, because people are 
talking about an X factor. The Postal Service calls it a 
stretch factor, but it all points in the same direction.
    It puts even more pressure on the Postal Service, and 
that's really my concern, that a labor-intensive industry, 80 
percent of costs are labor, there's no room. In the telephone 
industry, they have 76 percent of costs that they can also work 
with. In the Postal Service, they only have 20 percent of costs 
that they can work with without having to impinge on labor's 
compensation or the number of jobs. So I am not asserting this 
as a fact, that it's going to--certainly that this is going to 
obtain in the future, but I can see that all the preconditions 
are there for that sort of thing. That could evolve. That's not 
an unlikely scenario, in my view.
    Mr. McHugh. Well, listen, I am in politics. I accept a lot 
of scenarios, perhaps unwisely. Me personally, not yours.
    I understand and recognize what you are stating. I don't, 
frankly, think it's any more realistic than what is happening 
today, and as I said, most importantly, and the reason you have 
contracts is that those are binding. There's nothing in this 
bill, that's what I want to make clear, there's nothing in this 
bill that produces that de facto.
    But your comments bring up a point that was a theme that 
was present amongst all the presenters, whether they felt price 
caps were a 10, on a scale of 1 to 10, or whether they thought 
it was a 1 or below, and that is the issue of residual 
claimants. How do you ingrain into a price setting structure as 
proposed in H.R. 22 vested interests, to use perhaps a more 
common phrase to some of us, that will drive the Postal Service 
toward increased efficiencies, economies, to make sure 
standards of efficiency are maintained? Because the Postal 
Service in its current structure is rather unique versus where 
price caps have been tried in other industries. I think we all 
agree on that.
    Our intent was to have the role of what economists call 
residual claimants be played by, No. 1, a strong regulator--we 
give, I think, substantial new powers to the Rate Commission--
and two, by the institution of profit sharing at all levels and 
through the work force from top to bottom, which is currently 
not the case.
    The question I would have for you, gentlemen, and we will 
pose it in writing to Messrs. Crew and Kleindorfer because I 
would be very interested in their comments, since, while they 
endorsed price caps, they particularly had this concern. I 
would like to have your comments, forgetting for the moment 
whether price caps are the right or wrong thing to do, how 
likely is our substitute residual claimants' entities to 
provide the traditional service or traditional function?
    Why don't we begin with Mr. Sidak, just to change things.
    Mr. Sidak. Thank you. Let me talk about the profit-sharing 
component first. It's true that a profit-sharing plan as 
envisioned in section 3783(e) would create incentives on the 
upside. You could do that even more extensively through share 
ownership, though. So it's in the right direction, but the 
magnitude is not as great as if there were tradeable shares.
    I am concerned about downside losses. It's true that profit 
sharing allows management and employees to share in profits. 
But is there a mechanism for penalizing substandard performance 
as there is in a private corporation, where the board of 
directors quickly feels heat from shareholders and, even in 
some very prestigious American corporations, replaces the CEO?
    With respect to the strong regulator, I certainly endorse 
efforts to give the Postal Rate Commission more of the kinds of 
powers that you would find in a typical State public utility 
commission or the Federal Communications Commission or FERC. I 
endorse that 100 percent.
    Mr. McHugh. OK. Dr. Popkin.
    Mr. Popkin. Well, I think--I am also concerned about 
something like profit-sharing arrangements, but from a 
different, for a different reason.
    It's my experience that there are a lot of people at work 
every day who really don't want to share risk. They would 
rather have a certain salary rather than variable salaries. 
Because it could work that you reduce salaries, I suppose. So I 
think there would be that issue to consider, that not everybody 
wants to be an owner. And so I think that that's a 
disadvantage.
    The other thing that concerns me is it now seems as though 
some--while some powers in this bill would be taken away from 
the PRC, I am concerned about the loss to the Postal Service of 
its ability to set revenues, which gets back the cost of 
service and ultimately that gets you to a situation where I 
think perhaps you really end up relying more on the PRC, 
because they are going to be the sole monitors of the quality 
of service. And I would assume that if the quality of service 
is--if in their view the quality of service is deteriorating, 
then they have got to make the X factor positive, it has to be 
an add-on to the inflation rate.
    Is that the logic to the bill, I guess is my sort of 
reaction to it? So even though the PRC is being made less 
intrusive on a day-to-day rate-setting basis by a price cap, 
you are giving it a lot of power in the area of determining the 
quality of service and what kind of X factor is necessary to 
adjust for their perception of the quality of service.
    Mr. McHugh. You are right to the extent--you are right in a 
lot of ways, but on this point you are right, the X factor 
could indeed be a plus. Everyone assumes it will be a minus, 
and I think logically under most circumstances it will be, but 
it could technically and legally be a plus.
    However, the bill I think is pretty clear in its 
designation of the authority of the Postal Rate Commission to 
suspend profits which would result from a degradation 
specifically of service and presumably productivity. A plus 
would be more exogenous to the extent that things are going on 
in the economy that affect it outside the Postal Service.
    But you raise a point about expanded powers, and there are 
expanded powers. We give them an IG, we give them the right of 
subpoena. It goes back to our intent, to try to have the 
regulator serve in some function as a residual claimant.
    So I continue down the line for Dr. Rose. Profit sharing, 
is that a good enough residual claimant?
    Mr. Rose. The idea that the PRC will act in a stronger 
manner than they are now and given these expanded powers, the 
way you say it is acting as a surrogate for the marketplace. 
That sounds very familiar to me as the logic behind cost of 
service regulation, not price cap regulation. In fact, the 
whole idea of price cap was to get away from that and have less 
intrusiveness in looking at the cost structures of the utility. 
The idea of the price cap was to have a way to give better 
incentives for the utility to act on its own behalf that would 
be in a way that is consistent with the interests of the 
public. That was the general logic. The whole cost of service 
theory was that the regulator was the stand-in for the market.
    So when you phrase it that way, it sounds more like cost of 
service than the price caps. And there may be reasons to expand 
it, it may be too weak now, I can't comment on that. I am only 
commenting on the idea of relating to the price cap, not what 
the PRC does today.
    On the profit sharing, it looked to me a little on the weak 
side. There were certain provisions it had to go through and be 
divided, and I suggested in my written testimony perhaps 
something like a base salary and a bonus where the bonus amount 
is adjusted, that kind of arrangement, or perhaps even a 
noncash option as well, maybe a way to provide some kind of a 
bonus.
    I guess I am with Greg Sidak on one point. There was a 
phrase that really stood out in H.R. 22 for me that kind of got 
me started along these lines, and I wrote it down. ``To restore 
the Postal Service to financial soundness.'' In other words I 
didn't write down the section, I think it's in my testimony--
that the PRC was allowed to adjust the adjustment factor, 
change the adjustment factor to, ``restore the Postal Service 
to fiscal soundness.'' That's limiting the downside, a private 
firm of course can lose the whole enterprise, they can simply 
go under. It's not unusual for utilities to even go into 
bankruptcy. Receivership is rare but bankruptcy is not 
uncommon.
    So that idea that there's a serious downside and a heavy 
price to pay for the stockholders who don't like that happening 
to their company, they are protected from it. There's an 
asymmetry in that sense, there's a little bit of upside and no 
real downside.
    And as I pointed out in the paper, I am not suggesting you 
take that phrase out because I don't think anybody wants the 
Postal Service to go under, but perhaps there's a way of 
linking it to the bonus. You never get below your base salary 
but you don't get the bonus if it turns out that quality of 
service was degraded, something along those lines.
    Mr. McHugh. Interesting, thank you. Dr. Kwoka.
    Mr. Kwoka. I think in asking this question about the 
residual claimant you have really identified the key question 
before everybody in this process. The question after all is not 
whether price caps can and do work, we know they can; the 
question is whether they can be made to work in the context of 
the Postal Service which has this distinctively different 
characteristic. That's not to say there aren't bad price cap 
plans. Anybody can devise one that doesn't work.
    But the truth of the matter is the determination of X 
factors and proper baskets and all of the rest are technical 
issues. While there wouldn't be necessarily agreement, these 
are subject to routine economic and policy analysis, and the 
plan, the one in H.R. 22 or modified in some way, will emerge 
from that process.
    The question is really whether taking the trappings of all 
price cap plans and applying them to the Postal Service will 
work at all, and that's a theme, of course, sounded by most of 
my colleagues here.
    I am unaware of any other context, certainly in this 
country nor in others, that price caps have been applied to 
public enterprises. I am not familiar with that experience. I 
have asked a number of other people as well to see if my 
understanding was incomplete. I'm not aware of any such 
experience. That may say something. It certainly raises a 
caution about its applicability and its prospects for success. 
I am not nearly as pessimistic. In fact, I am not pessimistic 
at all, necessarily about the ability to adapt a plan for 
public enterprise, for reasons I will mention in a moment.
    But particularly with regard to your points--the regulator 
as residual claimant and the ability of profit sharing to serve 
its role--I would concur with Ken Rose that the role of the 
regulator in the plan I would hope would not be construed as 
one of the residual claimant. Indeed, the role of regulator is 
supposed to be one that withdraws as much as possible from a 
system where private incentives or profit incentives are put in 
place of regulatory strictures. That's not to say that some 
regulatory oversight is not required. We all agree on the 
quality side there may be no good substitute for vigilance, 
perhaps greater vigilance.
    That said, I think that one ought to see the, stylistically 
speaking, the magnitude of the regulator's role and the 
magnitude of profit incentives as moving in opposite 
directions.
    The question here is whether profit incentives will work in 
this context. Price caps will succeed or fail to the degree 
that profit incentives work, not to the degree that the 
regulator plays a more substantial role. That again simply 
raises the question will profit incentives work, will profit-
sharing work in the fashion that's described here. I think that 
they have good prospects for success if carefully devised.
    I am not an expert on pay incentive schemes, on profit-
sharing schemes, and I would not offer any detailed comments 
about the type of plan that would be most suitable. Others know 
more about that and others, perhaps not here, can and have 
talked with you all about that. I would simply offer the 
following several observations.
    First, even in private enterprise, even in ordinary garden 
variety companies that we are all familiar with, the mere fact 
that it's a private company does not make the company minimize 
cost, maximize profit for its shareholders in any inexorable 
and automatic way. It's for that very reason that even in 
private enterprises, profit-sharing schemes are employed. If we 
believed that simply privatization were the key, that it was 
necessary and sufficient, then we wouldn't need profit-sharing 
schemes in private enterprise to move management in ways that 
may be ultimately more consistent with shareholders' interests.
    So I would offer the observation that even in private 
enterprise, profit-sharing schemes have been used successfully 
to alter the behavior of management in ways that would be 
consistent with that sought here. I also would offer the 
observation that, in the context of the Postal Service, there 
are serious questions about the size of the bonuses, about the 
symmetry, the upside versus the downside, about who should get 
that, that is, all levels equally or in some other unequal 
fashion.
    I would say at a minimum that it would be useful to specify 
a good deal of that in the act so that individuals know exactly 
the consequences, not in terribly disaggregated detail, but 
with some specificity, that categories of individuals know what 
their stake will be in superior performance by the whole of the 
Postal Service.
    I also raised in my written testimony concerns about the 
possibility, hopefully the reality, that profits will be very 
large in some particular years: Would one want all of those 
profits to be distributed, or in the alternative, would some 
part of the profit go back to the Treasury Department or some 
other residual claimant in line. So issues of size, of 
symmetry, of identification of who would be the recipient, all 
play quite an important role in the design of profit-sharing 
schemes. And I would urge that that would be an important 
ingredient in ensuring good prospects for success here.
    Mr. McHugh. Thank you. Thank you all.
    Mr. Davis, any further questions?
    Mr. Davis. Nothing further.
    Mr. McHugh. Well, we have been here now for over 2 hours. 
That's longer than most classes in economics, be it advanced or 
otherwise, and we do appreciate it. In all sincerity, we could 
continue here all day and then some, if based on nothing more 
than the content of all of your statements. It reflected a 
great deal of work, a great deal of thought and insight, and I 
deeply appreciate each and every one of you joining us.
    I would ask, however, for the opportunity to present you 
with some written followup questions for the record. I know 
that's a further imposition on your valuable time, but it would 
be very useful to us. There are a number of comments made in 
your individual statements that lead us to want to pursue some 
issues further. If you would accommodate us, it would be very 
much appreciated.
    [Note.--The book entitled, ``Journal of Regulatory 
Economics,'' can be found in subcommittee files.]
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