[Senate Hearing 105-690]
[From the U.S. Government Publishing Office]
S. Hrg. 105-690
S. 2082--THE INTERNATIONAL POSTAL SERVICES ACT OF 1998
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HEARING
before the
SUBCOMMITTEE ON INTERNATIONAL SECURITY, PROLIFERATION, AND FEDERAL
SERVICES
of the
COMMITTEE ON
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FIFTH CONGRESS
SECOND SESSION
ON
S. 2082
TO AMEND CHAPTER 36 OF TITLE 39, UNITED STATES CODE, TO PROVIDE
AUTHORITY TO FIX RATES AND FEES FOR DOMESTIC AND INTERNATIONAL POSTAL
SERVICES, AND FOR OTHER PURPOSES
__________
JUNE 2, 1998
__________
Printed for the use of the Committee on Governmental Affairs
U.S. GOVERNMENT PRINTING OFFICE
49-590 CC WASHINGTON : 1998
_______________________________________________________________________
For sale by the Superintendent of Documents, Congressional Sales Office
U.S. Government Printing Office, Washington, DC 20402
COMMITTEE ON GOVERNMENTAL AFFAIRS
FRED THOMPSON, Tennessee, Chairman
WILLIAM V. ROTH, Jr., Delaware JOHN GLENN, Ohio
TED STEVENS, Alaska CARL LEVIN, Michigan
SUSAN M. COLLINS, Maine JOSEPH I. LIEBERMAN, Connecticut
SAM BROWNBACK, Kansas DANIEL K. AKAKA, Hawaii
PETE V. DOMENICI, New Mexico RICHARD J. DURBIN, Illinois
THAD COCHRAN, Mississippi ROBERT G. TORRICELLI, New Jersey
DON NICKLES, Oklahoma MAX CLELAND, Georgia
ARLEN SPECTER, Pennsylvania
Hannah S. Sistare, Staff Director and Counsel
Leonard Weiss, Minority Staff Director
Lynn L. Baker, Chief Clerk
------
SUBCOMMITTEE ON INTERNATIONAL SECURITY, PROLIFERATION AND FEDERAL
SERVICES
THAD COCHRAN, Mississippi, Chairman
TED STEVENS, Alaska CARL LEVIN, Michigan
SUSAN M. COLLINS, Maine DANIEL K. AKAKA, Hawaii
PETE V. DOMENICI, New Mexico RICHARD J. DURBIN, Illinois
DON NICKLES, Oklahoma ROBERT G. TORRICELLI, New Jersey
ARLEN SPECTER, Pennsylvania MAX CLELAND, Georgia
Mitchel B. Kugler, Staff Director
Ann C. Rehfuss, Professional Staff Member
Linda J. Gustitus, Minority Staff Director
Julie A. Sander, Chief Clerk
C O N T E N T S
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Page
Opening statement:
Senator Cochran.............................................. 1
Senator Levin................................................ 2
Senator Cleland.............................................. 2
WITNESSES
Tuesday, June 2, 1998
William J. Henderson, Postmaster General, U.S. Postal Service.... 3
Einar V. Dyhrkopp, Vice Chairman of the Board, U.S. Postal
Service Board of Governors..................................... 5
Christopher J. McCormick, Senior Vice President of Advertising
and Direct Marketing, L.L. Bean, Inc........................... 20
Fred Smith, Chairman and Chief Executive Officer, FDX Corporation 24
James P. Kelly, Chairman and CEO, United Parcel Service.......... 27
Alphabetical List of Witnesses
Dyhrkopp, Einar V.:
Testimony.................................................... 5
Prepared statement........................................... 58
Henderson, William J.:
Testimony.................................................... 3
Prepared statement........................................... 57
Kelly, James P.:
Testimony.................................................... 27
Prepared statement........................................... 65
McCormick, Christopher J.:
Testimony.................................................... 20
Prepared statement........................................... 59
Smith, Fred:
Testimony.................................................... 24
Prepared statement........................................... 61
APPENDIX
Copy of S. 2082.................................................. 43
Ad from Royal Mail US Inc., British Post Office.................. 45
Ernst and Young, LLP, letter dated June 1, 1998, to Michael J.
Riley from Daniel J. Murrin, with an attachment................ 46
DHL Worldwide Express, Inc., prepared statement.................. 67
Direct Marketing Association, prepared statement................. 75
R.R. Donnelley and Sons Company, prepared statement.............. 77
Letter from Mr. Henderson with responses to questions submitted
for the record................................................. 79
S. 2082--THE INTERNATIONAL POSTAL SERVICES ACT OF 1998
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TUESDAY, JUNE 2, 1998
U.S. Senate
Subcommittee on International Security,
Proliferation, and Federal Services,
of the Committee on Governmental Affairs,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:10 p.m. in
room 342, Senate Dirksen Building, Hon. Thad Cochran, Chairman
of the Subcommittee, presiding.
Present: Senators Cochran, Levin, Cleland, and Stevens.
OPENING STATEMENT OF SENATOR COCHRAN
Senator Cochran. The hearing of the Subcommittee will
please come to order.
I would like to welcome our witnesses and others who are
attending this hearing today on S. 2082, the International
Postal Services Act of 1998, which I introduced a few weeks
ago.\1\
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\1\ Copy of S. 2082 appears in the Appendix on page 43.
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This bill would amend Section 3621 of Title 39 of the U.S.
Code to subject international postal services to review by the
Postal Rate Commission. The authority of the Board of Governors
and Postal Rate Commission to collect and review postal service
data on costs, volumes, and revenues for each rate category now
extends only to domestic mail. Therefore, the regulators,
Congress, and the general public cannot examine data to support
statements by the Postal Service that international mail is
covering its attributable costs.
Allegations have been made that the Postal Service uses its
revenues from first class mail to subsidize its international
postal services. The Postal Service denies this, stating that
the Postal Reorganization Act prohibits the Postal Service from
using the revenues from one service to reduce the price of
another.
When Congress passed the Postal Reorganization Act of 1970,
no specific language was included that would grant the Postal
Rate Commission jurisdiction over international postal
services, as it was granted for all domestic postal services.
Instead, the authority to set international rates was left
solely to the Postmaster General. The Postal Reorganization
Act, in its legislative history, provides very little guidance
on the oversight of the Postal Service's rates for
international mail services.
This morning we will hear from two panels of witnesses. The
first will include William J. Henderson, Postmaster General,
and Einar Dyhrkopp, Vice Chairman of the U.S. Postal Service
Board of Governors. The second panel will include Christopher
J. McCormick, Senior Vice President of Advertising and Direct
Marketing at L.L. Bean, Inc., Fred Smith, Chairman and CEO of
the FDX Corporation, and James P. Kelly, Chairman and CEO of
United Parcel Service.
We have also received written statements from other
interested persons, and we will include those statements in our
hearing record.\1\
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\1\ Other statements provided for the record appear in the Appendix
on pages 67-78.
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Senator Cochran. I am pleased to yield for any comments or
statement from our distinguished Ranking Member of the
Subcommittee, Senator Levin.
OPENING STATEMENT OF SENATOR LEVIN
Senator Levin. Mr. Chairman, thank you.
The question of how these international postal rates should
be set may sound like a technical issue to some, but it
involves some very important issues of equity, of
competitiveness, and some other very significant and broad
policy issues. The importance of this issue is signified by the
panels that we have with us today, by who is on those panels,
and also by the fact that this room is so crowded that there
are people waiting to get into it.
So, Mr. Chairman, I think the significance of this hearing
is apparent, and I look forward to hearing the different
perspectives on this, including the history of the current
approach; issues about the fairness of the current approach;
and the competitive advantages and disadvantages of the current
approach, and I will join you in taking a very close look at
how we currently approach this issue and whether or not there
should be any change in the way we adopt these rates.
Senator Cochran. Thank you, Senator.
Senator Cleland.
OPENING STATEMENT OF SENATOR CLELAND
Senator Cleland. Thank you very much, Mr. Chairman. We are
delighted to be with all of you here today, and especially I am
delighted to welcome the Postmaster General and the staff, and
it's nice to be with our friends from UPS, which happens to be
located in Georgia, and my good fellow Vietnam veteran, Fred
Smith and company. I am delighted to be here with you and I
look forward to the hearing and the questions. Thank you.
Senator Cochran. Thank you very much.
We could now invite our first panel to come forward:
Postmaster General Henderson and Mr. Dyhrkopp.
We appreciate very much your providing us copies of your
statements in advance. We will make those a part of the hearing
record in full, and encourage you to make whatever comments in
summary or in detail as you think would be helpful to the
Subcommittee.
Mr. Henderson.
STATEMENT OF HON. WILLIAM J. HENDERSON,\1\ POSTMASTER GENERAL,
U.S. POSTAL SERVICE
Mr. Henderson. Thank you and good afternoon, Mr. Chairman
and Members of the Subcommittee. With me is the Vice Chairman
of the Postal Service Board of Governors, Einar Dyhrkopp. We
are pleased to be here today and welcome the opportunity to
speak with you about the proposed International Postal Services
Act of 1998.
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\1\ The prepared statement of Mr. Henderson appears in the Appendix
on page 57.
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Mr. Chairman, I appreciate that you took the time to
discuss this legislation with me last month. I believe the
dialogue we've begun will lead to a solution that resolves the
concerns behind S. 2082 and protects the best interests of the
Nation and America's mailers.
When you introduced this legislation, you raised two
questions: One, do international mail services pay their own
way? And two, should Congress put international rates under the
jurisdiction of the Postal Rate Commission as they did with
domestic rates in 1970 when the Postal Service was created?
The answer to the first question is yes. International
services do pay their own way, and more. As you pointed out
when introducing the bill, cross-subsidies between different
classes of mail are prohibited under postal ratemaking
statutes. In each rate case, the Postal Service must
demonstrate to the Postal Rate Commission that total
international revenues exceed international costs. This ensures
that domestic services, such as First-Class Mail, are not
subsidizing international ones.
The law also provides a remedy to those who believe the
Postal Service is charging domestic rates that don't conform to
these requirements. They can file a complaint with the Rate
Commission, which has jurisdiction to investigate and recommend
remedial action to the Governors of the Postal Service. This
remedy, in conjunction with the ratemaking process, makes it
unlikely that an actual cross-subsidy could be established, or
even survive. Our performance bears this out. Our international
business has run a surplus in each of the last 5 years. Last
fiscal year, 1997, we grossed $1.61 billion from our
international business. Attributable costs were $1.34 billion,
and the surplus was $273.2 million. Those results have been
certified by independent auditors.
Consequently, rather than customers paying higher domestic
rates to support international services, international services
are making a contribution to our overhead that helps keep
domestic rates down.
I believe these facts, and the established safeguards, are
a compelling response to the cross-subsidy issue. Nevertheless,
in view of the Subcommittee's interest, we are taking further
steps. The Board of Governors has asked the Inspector General
of the Postal Service to conduct an audit of the allocation of
costs between the Postal Service's domestic and international
products and services. Their findings will be reported to the
Board and to you, and this will provide an objective, factual
foundation for answering the cross-subsidy issue. If any
weaknesses emerge during this review, you have my personal
assurance that the Postal Service is willing and ready to work
with you to correct them.
QUESTION AND ANSWER FOR THE RECORD SUBMITTED BY THE U.S. POSTAL SERVICE
1. LWhat was the origin of the limitation of the jurisdiction
of the Postal Rate Commission in the area of international
rates at the time of Postal Reorganization in 1970?
A. LIt is our understanding that international rates were not
an issue at the time of the Postal Reorganizational Act of
1970. Unlike domestic rates, international rates were not set
by Congress and there appears to have been general agreement
that the international rate-setting process was working well.
The domestic rate-setting process, however, was under
Congressional control, and this needed to be changed as part of
the overall reform of postal finances. When the domestic rate
setting function was removed from Congress, it was neither
necessary or desirable to change anything about the way
international rates were set.
This brings us to the second issue, whether international
rates should be placed under the domestic price-setting system.
As you might expect, we firmly believe the answer is no,
for three reasons. First, unlike domestic letter mail, our
international postal business is not protected by the Private
Express Statutes. Everything we do in this field is subject to
marketplace competition. The market is the driving force
regulating international postal services. Any party whose
prices were subject to regulation would be at a unique
disadvantage. In our case, it would take 10 months to change
prices. In addition, closely-held proprietary information on
markets and pricing strategy would be an open book to other
firms and hundreds of other postal administrations.
Second, we are not dealing with a single, uniform market,
but hundreds of marketplaces. Each has its own laws, customs,
and market nuances. For example, in Germany, Deutsche Post
plans to go public in the year 2000, while in China we are
dealing with a state-run institution with a complex
bureaucratic overhead. In every country, circumstances are
different. Transportation costs vary from border to border and
change constantly. Currencies fluctuate daily. Tariffs and
entry requirements can be raised and revised at any time. This
places a premium on our ability to act quickly and to tailor
specific customer solutions under widely varying conditions.
Further, the domestic ratemaking process wasn't designed to
handle the unique requirements of international mail. It would
create an administrative nightmare for regulators. We have
about 10 products and services that go to hundreds of
countries. There are 189 postal administrations represented at
the Universal Postal Union alone. The actions of these nations
determine about half of the international mail costs in the
form of terminal dues. We pay them to deliver U.S. mail on
their soil. We have limited influence on these costs, which are
driven by the internal dynamics in the individual countries.
My third point is that none of this would be in the best
interest of our customers. It would tend to drive us out of the
international marketplace and deprive consumers and businesses
of all sizes of a valuable service alternative. Under current
law, we have used flexibility in international services to
design and implement Global Package Link, a service that helps
American companies sell to individual customers abroad.
We have negotiated service agreements that meet special
price or service needs of a variety of mailers. In every case,
we have opened doors to foreign markets for American customers
by providing them choice and value.
Placing international services in a domestic ratemaking
format would just simply take away that flexibility. As I
mentioned earlier, postal rate proceedings typically take 10
months. In addition, the negotiated service agreements
customers expect in international markets are not available
before the Postal Rate Commission. Without them, we would
expect to lose a large number of our valuable customers; but
more to the point, they would lose us, the U.S. Postal Service.
For these reasons the Postal Service strongly believes that
the approach taken in S. 2082 goes well beyond what might be
needed to resolve the issues it is intended to address.
Nevertheless, we are ready to do our utmost to debunk the
allegations of cross-subsidization to the full satisfaction of
this Subcommittee. We ask, however, that in doing so we do not
compromise the ability of the Postal Service to serve its
customers or to remain viable in world markets.
We are entering a new era of globalized postal services.
Foreign postal administrations are buying private delivery
firms. They are setting up shop in other nations; that includes
right here at home. We believe it is imperative that the U.S.
Postal Service retain its ability to respond. We are the bridge
between universal mail service at home and international
markets. This Nation and our customers need that bridge to
remain strong, open, and toll-free.
That concludes my prepared remarks. Vice Chairman Dyhrkopp
would now like to make a statement.
Senator Cochran. Thank you, Mr. Henderson.
Mr. Einar Dyhrkopp is Vice Chairman of the U.S. Postal
Service Board of Governors.
Mr. Dyhrkopp, we will hear from you, and then we will have
an opportunity to have questions for both of you.
Senator Stevens. Mr. Chairman, could I interrupt for just a
minute?
Senator Cochran. Senator Stevens.
Senator Stevens. I'm sorry, I wanted to stay, but we have
an Appropriations Subcommittee markup. I am very interested in
this subject and I will welcome the chance to review the
statements. I congratulate you for holding this hearing,
because I think it should be publicly aired, but I do think we
ought to wait for the Inspector General's report before we go
much further. Thank you.
Senator Cochran. Thank you, Senator Stevens, very much.
Mr. Dyhrkopp.
STATEMENT OF EINAR V. DYHRKOPP,\1\ VICE CHAIRMAN OF THE BOARD,
U.S. POSTAL SERVICE BOARD OF GOVERNORS
Mr. Dyhrkopp. Thank you, Mr. Chairman. I am pleased to be
here with Postmaster General Henderson to discuss the
international mail services of the U.S. Postal Service. As the
Vice Chairman of the Board of Governors of the Postal Service,
in the absence of Chairman Winters who is out of the country on
personal travel, I want to lend the support of the Governors to
the Postmaster General's statement before you today.
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\1\ The prepared statement of Mr. Dyhrkopp appears in the Appendix
on page 58.
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I also want to assure you and the other Members of your
Subcommittee that the Board of Governors take very seriously
our oversight responsibilities, as well as our role in the
ratemaking process. As you know, this takes on even greater
significance in the international mail area where the Postal
Reorganization Act authorizes the Postal Service to set
international rates.
Mr. Chairman, with that in mind, I would like to take a
step back in history. The Postal Service authority over
international rates was bestowed by the Nation's first Congress
in 1851, and was continued under the Postal Reorganization Act
in 1971. In creating the Postal Service in 1970, the Congress
divested itself of the practice of Congress setting domestic
rates. Instead, Congress established shared responsibilities
for setting these domestic rates in the Postal Rate Commission
and the Postal Service. However, it also left in place the
century-old practice of having the Postal Service set the
international rates. Indeed, Section 403 of the Postal
Reorganization Act specifically directs the Postal Service to
arrange for the delivery of written materials and parcels
``throughout the world,'' and to provide such other incidental
services as it finds ``appropriate to its functions and in the
public interest.''
As the postal administration of the United States, with the
authority over international mail and rates, the Postal Service
is also uniquely suited to represent the United States at the
Universal Postal Union, where it can deal and has dealt
directly and effectively with the postal administrations of
other countries. In fact, the Postal Service is a leader in the
Universal Postal Union. The Postal Service has taken a leading
role in important UPU work and has been effective in assisting
the UPU to be more responsive in a rapidly changing world.
The question as to whether international rates should be
placed under the domestic price-setting system is troubling to
the Board. Here again the Postmaster General has laid out
several compelling arguments as to why the present system is in
the best interest of the American public, with which the Board
agrees.
With the international arena largely a deregulated
environment, the Postal Service faces serious competition. The
Postal Service is but one of many customer choices, including
several domestic private courier services. In addition, several
foreign postal administrations have set up shop here in the
United States and are aggressively competing for the
international business. All of these domestic and international
competitors are unregulated.
The Board is very concerned over the allegations that
international mail services are being cross-subsidized with
Postal Service domestic products and services. The Postmaster
General very effectively communicated that this is prohibited
under existing ratemaking statutes. We have been assured by
management in discussions on international mail services that
that has not occurred, and will not occur.
We now have the benefit of a certification by an outside
CPA firm, retained by the Board of Governors, establishing that
domestic does not subsidize international rates. There is an
additional layer of protection in having a firm independent of
the organization certify the accuracy of costing and revenue
data.
Nevertheless, the Board has also taken a further step to
address the allegations which gave rise to this bill. We have
asked the independent Inspector General of the Postal Service
to conduct an audit into the cost relationships between
domestic and international postal services. Their findings will
be reported to us and made available to you. This should
provide an objective review and a factual foundation for
answering the cross-subsidization question. As the Postmaster
General has indicated, and we fully support, the Postal Service
is willing and ready to work with you to implement practical
solutions to any problems that emerge.
Mr. Chairman, in closing I want to assure you and the
Members of the Subcommittee that the Board of Governors of the
Postal Service were unanimous in our selection of Bill
Henderson as our new Postmaster General. We look forward to
working with Bill and fully support him in his future direction
of the Postal Service.
Mr. Chairman, that concludes my prepared remarks. We will
be happy to answer any questions at this time.
Senator Cochran. Thank you very much, Mr. Dyhrkopp, for
your statement.
I, too, want to extend my congratulations to Bill Henderson
on being selected as our new Postmaster General. I have had an
opportunity, as he mentioned, to meet with him and to talk
about the Postal Service and some of its challenges and its
accomplishments in recent years and what lies ahead. We look
forward, as the Subcommittee with oversight of the Postal
Service, to continue to work to help ensure that the Postal
Service is able to carry out its obligations under the statute
that created it.
The information that you gave us, Mr. Dyhrkopp, on the
origin of the limitation on postal ratemaking or rate approval
by the Postal Rate Commission was interesting, quoting from
Section 403 of the Postal Reorganization Act of 1970.
I wonder if you know, what was the reason for the
limitation of the jurisdiction of the Postal Rate Commission in
this way to domestic postal rate approvals? It was a conscious
decision, is what you're saying, an intentional act; it wasn't
an oversight that international ratemaking was left out from
the jurisdiction, was it?
Mr. Dyhrkopp. I am old enough to have been there when they
did the changing, but I wasn't and I'm not familiar with it,
but I will supply that information for the record.
Senator Cochran. Well, that would be helpful.
We think there is very little guidance about the
legislative history in the debates or the discussions of the
act. I was not a Member of Congress, either. Bill Henderson,
were you working for----
Mr. Henderson. I was a diaper specialist at that time.
[Laughter.]
Senator Cochran. You were not employed by the U.S. Postal
Service at that time, were you?
Mr. Henderson. No, but I have some background.
Senator Cochran. What's your understanding of the origin of
that?
Mr. Henderson. It's because it's primarily a deregulated
market. There are no postal protections there; it's wide-open
territory, so there was no reason to restrain the U.S. Postal
Service from competing in that market.
Senator Cochran. Another thing that came out in your
statements that was an interesting revelation to me--I'm new to
this job, too, as Chairman of this Subcommittee with
jurisdiction over the Postal Service--and that is the fact that
a lot of the competition in the international mail area comes
from foreign postal services of countries that you are
competing with; not just U.S. businesses that are also engaged
in the business of delivering things in the overseas market.
To what extent do these foreign postal service competitors
share in that international market? Is there any way to
quantify that?
Mr. Henderson. We don't have any numbers on how much mail
they take out into Europe and other countries, but we will show
you--there is a company called Royal Mail U.S., Inc.,
headquartered in New York. It is a subsidiary of Royal Mail,
and it has an active office in New York, one in Chicago, and in
California, where they are getting shippers.
This is an ad that says, ``Metro Mail and Royal Mail have
joined forces, so now you can mail Birmingham, England as
easily as Birmingham, Alabama.'' It's an attempt to get major
shippers in the United States to use them.
Here's another one that you might find of interest. In
North America, Royal Mail sales exceeded 25 million pounds in
1997 and 1998, and by the year 2000 the aim is to secure 10
percent of the deregulated bulk mail market. It says, ``Since
the early 1990's, Royal Mail has been selling bulk mailing
services to large international business mailers in continental
Europe, the United States, and Canada.''
Senator Cochran. For the information of the Subcommittee
and others, is Royal Mail--is that Great Britain's mail?
Mr. Henderson. That's Great Britain's mail, yes.
The Dutch are here with an active element. In fact, the
Dutch are here buying interest in mailing companies in the U.S.
So it's very much an open international competition, and if we
were to be regulated, we would be out of that market, because
they are certainly not regulated.
So it's not just an issue of U.S. companies and U.S. Postal
Service. It's truly a global situation.
Senator Cochran. Under the rules for setting and approving
rates on domestic mail service you have a deliberate process
that you follow for changing rates. Sometimes it takes up to 10
months; I think you mentioned that in your statement. In
comparison to domestic rate changes, how often does the Postal
Service currently change its international rates? And how would
international rate-setting change if it was subject to the
Postal Rate Commission's regulation?
Mr. Henderson. Well, you would completely lose your pricing
flexibility. Just take a simple product. We have a shipping to
Japan from L.L. Bean, and we have to adjust prices from time to
time because the Japanese change their in-country rates. We
wouldn't be able to do that if we were regulated as we are
domestically. We would have no pricing flexibility, and without
that, in a market that is completely unregulated and you're the
only one regulated, you're just simply not competitive. We
would just drop out as being one of the players. We don't think
that's a good idea.
Senator Cochran. How does that work in practice? Would
everybody peg their prices just below what your regulated price
would permit you to charge?
Mr. Henderson. No. They would peg their prices based on
their own efficiencies. That's why you have some people come in
priced at different levels. We set our prices to cover our
costs and a responsible markup. So I don't know what their
costing situation is. We don't examine our competitors' costing
or revenue numbers.
Senator Cochran. So in response to the question I asked
about how often the Postal Service changes its international
prices, is there any specific way to respond to that question?
Mr. Henderson. Well, I can go back for the record and show
you. But really, it's a marketplace determination.
Senator Cochran. Is the Postal Service developing new rates
for international mail at this time? And if you are, when do
you anticipate that new international rates will be announced?
Mr. Henderson. I am not sure that we are. I don't know if
today we are developing new international rates. I'd be happy
to find that out for you.
Senator Cochran. Can the Postal Service show that domestic
ratepayers are not cross-subsidizing international ratepayers?
Mr. Henderson. Yes.
Senator Cochran. How are you able to do that, if all we
have is what you gave us in your opening statement? You gave us
three numbers, the total gross numbers, and the net profit that
you're making on international mail, the cost of international
mail, and your revenues from international mail. But beyond
that, do you have any other data or information about those
numbers that will convince domestic ratepayers that they're not
cross-subsidizing international ratepayers?
Mr. Henderson. Well, today we have a letter from Ernst and
Young that was dated June 1, and I will submit this for the
record.\1\
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\1\ The referenced letter appears in the Appendix on page 46.
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In the last paragraph it says, ``In the context of the
overall report, and recognizing the variability of estimates
derived from the statistical systems for small categories, the
international mail category, representing less than 2 percent
of postal operations in aggregate, reflect a positive
contribution in 1997, an indication based on the Postal
Service's allocation and estimation process, that no aggregate
cross-subsidy at the marginal or incremental cost level existed
in 1997.'' This is from our outside auditors. In addition, I
think the Inspector General's report, hopefully, will put to
bed this issue once and for all.
Senator Cochran. Well, I think the Inspector General being
requested to do what you have announced today is a very
important step in the right direction to help put facts out in
the public domain so that those who have made suggestions that
you are in effect cross-subsidizing between international and
domestic ratepayers will at least have their suspicions
confirmed, or not. I think that is important for you to do and
we thank you for that.
Senator Levin.
Senator Levin. Thank you, Mr. Chairman.
On the Inspector General's report, when is that due?
Mr. Henderson. We have not set a timeframe. We asked her
yesterday to do it, and we have to get back to her and see what
kind of timeframe----
Senator Levin. Would you let us know what that timeframe
is?
Mr. Henderson. Yes, I will.
Senator Levin. Going back to the decision to leave the
rate-setting in international mail up to the Postal Service
instead of the Postal Rate Commission, you were asked by the
Chairman whether that was done intentionally, explicitly, or
whether it was done by default--in effect, by silence, by not
allocating that function to the Postal Rate Commission. And
your answer was that there was no reason to restrain the Postal
Service, or words to that effect, and I am a little unclear as
to what you meant.
Looking at the legislative history--or remembering it,
because I haven't looked at the legislative history--is it your
recollection that there was an intentional, purposeful decision
by the Congress to leave the rate-setting to the Postal
Service? Or was there just silence, with no record?
Mr. Henderson. It's my understanding--I wasn't there--it's
my understanding that that was the intention of Congress----
Senator Levin. The express intention?
Mr. Henderson. It was not an oversight.
Senator Levin. How many different international rates are
there?
Mr. Henderson. There are approximately 10 products, and the
products--the rates--will vary from country to country.
Senator Levin. So you have different rates for 10 different
products?
Mr. Henderson. That's right.
Senator Levin. So there could be 100 different rates?
Mr. Henderson. That's right.
Senator Levin. Or 500 different rates, depending?
Mr. Henderson. It depends on how many products we have in
each country, that's right.
Senator Levin. Do you change the rate for one product at a
time?
Mr. Henderson. Yes, one customer--on the customized
products, which have a certain volume requirement, we do change
the rate from customer to customer. We publish the overall rate
structure in the Federal Register, and we deviate from that
based on the costs associated with that customer.
Senator Levin. So that a product is a packaging product, is
that what you're saying?
Mr. Henderson. It's a bulk product, yes.
Senator Levin. Based on the shape or size?
Mr. Henderson. Based on volume, pieces and weights.
Senator Levin. So that different customers will get
different rates for the same product?
Mr. Henderson. Based on the costs. For example, just as one
example, the delivery costs--the delivery and entry costs--in
different countries are different.
Senator Levin. No, I don't mean that. Would two different
customers going to the same place in another country get
different rates, depending on how much they send?
Mr. Henderson. Depending on how we bill their costs, how
efficient they are. For example, some customers send mail to
Japan in bulk; some customers pre-sort it for Japan. It is
obviously more efficient for us if we don't have to do that
sortation.
Senator Levin. Would a customer pre-sorting 100 pieces get
a cheaper rate than a customer pre-sorting 50, possibly?
Mr. Henderson. Possibly.
Senator Levin. And those are negotiated rates?
Mr. Henderson. Negotiated rates, yes.
Senator Levin. Those are based on costs?
Mr. Henderson. Yes.
Senator Levin. Are they based on competition?
Mr. Henderson. No, just based on our costs and a reasonable
margin.
Senator Levin. So you don't watch what your competitor is
doing with a particular offering to a particular customer, and
meet it?
Mr. Henderson. Our competitors don't tell us what their
discounts are.
Senator Levin. But your customers might tell you what the
offer was from a competitor.
Mr. Henderson. No, they don't do that.
Senator Levin. The Ernst and Young reference that you made,
was that the audit that you referred to? That letter that you
just read from, is that the same document as--I think Mr.
Dyhrkopp said, ``We now have the benefit of certification by an
outside CPA firm.'' Is that the Ernst and Young reference?
Mr. Henderson. Yes.
Senator Levin. And is that audit available to us?
Mr. Henderson. Yes.
Senator Levin. And about how large a document is that? Is
that a 10-page, 100-page audit?
Mr. Henderson. It's about this thick.
Senator Levin. All right. And does that have all their
assumptions in it?
Mr. Henderson. Yes. Everything they reviewed is in there.
Senator Levin. Was there not a fear that you had that some
of your data was proprietary and that you were afraid of
disclosing that to a competitor?
Mr. Henderson. That's right.
Senator Levin. Is there any proprietary material in that
audit which you would not want your competitors to know?
Mr. Henderson. No, there's no proprietary material in this
audit.
Senator Levin. So whatever is in that audit is available to
us and can be shared publicly?
Mr. Henderson. That's right.
Senator Levin. What is not in there that you don't want to
share publicly? There has been some real debate over the years,
I believe, with prior bills--literally, Senator Pryor----
[Laughter.]
Senator Levin [continuing]. Who wished to have some kind of
analysis of certain material on your costs, and that was
apparently rejected because there was a fear that your
competitors would see what certain costs were, certain other
data.
Mr. Henderson. They would see what your pricing strategies
and your marketing strategies are, and that kind of information
is not shared among competitors. But we are going to turn over
to the IG, who will keep the information proprietary, all of
our international information, so that all those questions
about cross-subsidy can be resolved.
Senator Levin. Cost strategy, and you said pricing
strategy?
Mr. Henderson. Pricing strategy.
Senator Levin. What was the other strategy?
Mr. Henderson. Market strategy.
Senator Levin. Market strategy.
The pricing strategy is your cost plus a reasonable----
Mr. Henderson. That's right.
Senator Levin. That doesn't sound too complicated.
Mr. Henderson. It's not too complicated, but it is
competitive.
Senator Levin. But it doesn't sound very private. What is
in there that we're missing here?
Mr. Henderson. Well, how much the markup is by competitors
is not available to us. We have no idea what their markups are.
Senator Levin. No, I'm talking about what is in your
strategy that you don't want to make available to others. I
thought your strategy was to take your cost and add a markup.
Mr. Henderson. That's right, build our costs from the
bottom and add a reasonable margin to the markup.
Senator Levin. But what those costs are that you don't want
to be----
Mr. Henderson. That's right, and we would not like to have
our margins in our competitors' hands, also.
Senator Levin. All right. And what those costs are is not
in that audit, right?
Mr. Henderson. No, that's right.
Senator Levin. And your marketing strategy is not in that
audit, either?
Mr. Henderson. That's correct.
Senator Levin. All right.
One last question. How would someone who is skeptical--not
me, but anyone who is skeptical--how would a skeptic know that
the costs that you gave to your auditor are--these are
guesstimates, I take it? You are making estimates of costs; you
can't have actual, precise costs? You have to attribute certain
costs to certain activities, I assume. How would a skeptic know
that the attributed costs are in fact fairly apportioned costs
unless they could be reviewed by someone outside of the Postal
Service, or an independent auditor? Because you're giving that
auditor the attributed costs, I assume, aren't you?
Mr. Henderson. Yes. Well, I think that's a valid issue. We
don't want, year after year, to come up and defend what looks
like the fox counting the hens, so we are willing to turn over
to the Inspector General all of our costing data. That's a very
independent view of the Postal Service, and they can validate
the fact that we are not cross-subsidizing, and that's what we
intend to do.
Senator Levin. But the outside auditor was just given costs
that you attribute to the particular function, is that correct?
Mr. Henderson. Yes, that's right. But the international
attribution is similar, very similar, to the domestic
attribution, and the domestic attribution is under the full
scrutiny of the Postal Rate Commission.
Senator Levin. Thank you, Mr. Chairman.
Senator Cochran. Let me ask a couple more questions, Mr.
Henderson--oh, excuse me, Senator Cleland?
Senator Cleland. That's all right.
Senator Cochran. It's your turn.
Senator Cleland. Mr. Chairman, thank you.
Mr. Henderson, thank you very much. Your wonderful people
in Georgia do a great job there and we thank you very much for
you and all your employees in the tough job that you have to
do, in rain and snow and sleet and dark of night.
Let me ask you, would you consider the Postal Service
itself as a subsidized entity in this country?
Mr. Henderson. No, sir, I would not. We get all of our
revenues from stamps.
Senator Cleland. But you don't pay taxes, do you?
Mr. Henderson. No.
Senator Cleland. That looks a little bit like a subsidy to
me. I just thought I would throw that out. I'm not complaining
about it, but I just thought that you get a tax break, so to
speak, where other people don't who are in the same business.
Do you have any competitors here in terms of your domestic
market? Are there other people out there trying to do what you
do in the domestic market in which you find yourselves?
Mr. Henderson. There are people that do what we do, yes,
but in kind of a practical sense--in the package delivery
business, our domestic competitors are primarily in a business-
to-business competition, and we're primarily focused on
residential delivery. So while we talk about the fact that we
are competitors, they are really focused on a business-to-
business entity.
We provide a universal service. We go to everyone's
household every day. That accounts for some of our governmental
status. We're there in rural areas where there aren't other
people. We go to places where it's not cost-effective to go out
there and deliver mail.
So we are a different entity. We are a quasi-government
agency that is supposed to be run in a businesslike fashion,
and that's what we're trying to do. I think our improved
service of the last 4 years has raised the eyebrows of some of
our competitors. For 22 years in my experience in the Postal
Service, Federal Express and UPS rarely ever mentioned our
name. Now that our service levels are up and our customers are
saying, ``Hey, the Postal Service might be an alternative,'' we
are now getting on the radar screen.
Senator Cleland. But as a quasi-governmental entity, I'm
just really trying to understand the basis of your
authorization here in 1970. It is a quasi-governmental agency,
which is why we're here before a governmental entity, and you
don't pay taxes. You are, in effect, a quasi entity, and it
does seem to me you are somewhat subsidized by the American
taxpayer. I find it interesting that you don't feel that. Is
that correct?
Mr. Henderson. We get our revenues--when you talk of
subsidy, it's money--we get our money, except for postage for
the blind and franking privileges of Congress, we get our money
from our stamps. We provide a service, and not in all instances
for profit. We are a quasi-government institution.
Senator Cleland. That's another thing, too, that you don't
have to make a profit. You don't pay taxes and you don't have
to make a profit.
What percent of your business is international in this
market that you're out there wheeling and dealing and competing
for as another business? What percentage of your total business
is that?
Mr. Henderson. It's less than 2 percent.
Senator Cleland. I find it interesting that you say that if
you came under the Postal Rate Commission, that then you would
go out of business in the international market. You would lose
2 percent of your business?
Mr. Henderson. We would not be a competitor if we were
under the Postal Rate Commission and the domestic rules. We
simply wouldn't have pricing flexibility.
Senator Cleland. I find it fascinating. I know it takes a
long time, and you mentioned 10 months, but I find it hard to
believe that you would just go out of business in the
international market. It seems to me that if you had a good
justification and a good argument, you could make your case
before the Postal Rate Commission and that they would
understand the pressure of competition in the international
market.
Mr. Henderson. The domestic rules of the Postal Rate
Commission would not allow us to have customized agreements
with customers the way we do. That is simply not possible in
the current legislative framework.
Senator Cleland. Well, I think you make a point there.
That's something our staffers may want to consider in the bill
in terms of making legislation possible.
But I just thought I'd ask what percent of your market was
international, and you said 2 percent.
Correct me if I'm wrong; I may have bad information here.
The Postal Service does delivery between Waycross, Georgia and
Atlanta, Georgia, and Waycross, Georgia and London. Do I
understand correctly that it's cheaper to send something from
Waycross, Georgia to London than it is from Waycross, Georgia
to Atlanta? Is that correct?
Mr. Henderson. No. I'm not--if you're talking about the
comparison that's been in the media, if you took a 10-pound
package and mailed it across the United States, Express Mail,
it would be around $30. If you mailed it Express Mail--in other
words, the same service--to London, you're talking about $53.
So it's not cheaper. That comparison was made with Global
Package Link, which requires a customer to mail 10,000 pieces
over a year's period. But each mailing must be a minimum of 200
pieces or 50 pounds, and it's an electronic manifest. There's
no postage. A single piece, you have to go to a counter, it's
weighed, it's handled by a clerk--all of that work is taken
away in our Global Package Link. So it's really comparing
apples to oranges.
Senator Cleland. What is Global Package Link?
Mr. Henderson. It's a service that we provide to large
mailers in the United States who want to get into foreign
markets. It's a bulk package service.
Senator Cleland. And you are able to provide that service,
say, to London much cheaper than any other private domestic
company can?
Mr. Henderson. No, I don't think we can deliver it cheaper
than any other private delivery company. You'd have to ask the
customers that.
Senator Cleland. Well, I find it fascinating that you
mention that it would take 10 months to get a decision from
that governmental entity. What is the holdup in terms of time,
knowing that time is something that is sensitive to you?
Mr. Henderson. That's the statute itself.
Senator Cleland. The statute says it takes 10 months?
Mr. Henderson. That's the process in the statute.
Senator Cleland. The process takes 10 months?
Mr. Henderson. Yes.
Senator Cleland. Why does the process take 10 months?
Mr. Henderson. Because it's a full, open hearing for all of
the people who are interested in looking at your costs and your
revenues to examine those. If it were international, it would
be foreign administrations, U.S. businesses and foreign
businesses, and it takes that long for the procedures.
Senator Cleland. But you are a regulated entity; 98 percent
of your whole, entire work is a regulated entity, and 2 percent
is unregulated. I find it fascinating that you live in a
totally regulated environment as a quasi-government entity,
don't pay any taxes, don't have to make a profit, and yet for 2
percent more you fight any extension of that process to flesh
it out for customers, consumers, and the government. I just
find that fascinating.
But thank you for coming. My staff dug up something. We
didn't know that Royal Mail was going to be mentioned here at
all, I guarantee you, so this is not foresight here, but
looking back at the evolution of the Postal Service you
mentioned Royal Mail, so I'll mention this. The staff dug it
up. Actually, royalty did have a hegemony on postal service
until 1635, when the King of England decided that the average
person should have that privilege too, so Royal Mail was begun
a long time before our mail.
But I understand your point about competition. We'll take
that under advisement. Thank you very much.
Thank you, Mr. Chairman.
Senator Cochran. Thank you very much, Senator.
Mr. Henderson, in its Five Year Strategic Plan for 1998 to
2002, the Postal Service includes the goal to improve customer
satisfaction and to provide timely delivery, with indicators of
targets for on-time delivery of first class domestic mail. Has
the Postal Service set goals with similar indicators to
evaluate international business? And if so, what are they?
Mr. Henderson. We have set goals with individual countries
on delivery of the mail. We also get feedback from individual
customers on how we're performing on our customized products.
They have their own feedback processes, and they are very quick
to tell us if we're not meeting their expectations.
Senator Cochran. Do you have delivery standards for
international outbound mail similar to delivery standards for
domestic mail?
Mr. Henderson. Yes, we do. We have delivery standards with
foreign postal administrations that we meet on and agree to,
and that's for your average person's mailing overseas. For
individual large mailers, we reach agreements on acceptable
service standards with that mailer on how quickly they want
their product in that country and whether we can do it within
that timeframe.
Senator Cochran. Does the Postal Service have a system of
measurements in place to measure performance for international
outbound products? And if so, how are these results reported?
Mr. Henderson. We have a system with Price Waterhouse, and
they are shared among postal administrations throughout the
world.
Senator Cochran. In June of 1995 the Postal Service
embarked on an experiment by creating a strategic business
unit, the International Business Unit, the so-called ``IBU,''
to focus on the international market. The IBU developed a
strategy to regain market share. I am interested in knowing how
successful this strategy has been and whether the IBU concept
has succeeded in meeting its goals.
Mr. Henderson. The IBU concept is in the very early stages,
and I'd say that as a fledgling organization, its prospects
look very good. It has thus far met its goals, which are not
overly ambitious, but we hope to be more ambitious with those
goals in the future.
Senator Cochran. Some competitors say that the Postal
Service benefits through exclusive access to foreign postal
administrations as the sole representative of the U.S.
Government in the Universal Postal Union, which you have
discussed. On the other hand, the Postal Service says it is
burdened by its obligations as a member of the UPU.
Has the Postal Service conducted any studies to estimate
the costs of meeting its obligations as a member of the UPU?
And if so, could you provide us the results of those studies?
Mr. Henderson. I'm not aware that we've done any studies,
but if we have, we'll provide them.
Senator Cochran. Has the Postal Service conducted any
studies to estimate the cost of providing universal mail
service on an international basis? If so, could you provide us
the results of that study?
Mr. Henderson. Again, I'm not aware of any, but if we have
done any, we will provide them.
Senator Cochran. A proposal to allow private operator
associations and other stakeholders to participate in UPU
functions on a limited basis is under consideration, I'm told.
Would the U.S. Postal Service support this proposal?
Mr. Henderson. No, we will not. The UPU consists
essentially of foreign postal administrations. We do business
as one quasi-government entity to another national postal
administration. We don't think it would be appropriate to put a
private sector entity into that equation.
Senator Cochran. Mr. Dyhrkopp, you mentioned some of the
ideas of the Postal Board of Governors on this issue of
regulating international activities of the Postal Service. What
role, if any, do you think the Postal Rate Commission could
properly play--or the Board of Governors properly play--in
reviewing Postal Service competitive activities to ensure fair
competition?
Mr. Dyhrkopp. The way it is structured now and the way it
works--by the way, getting back to your question about 1970 and
the new law, did they forget to do anything about the
international part of it, or did they let it fall through the
cracks or what--I don't know, but there is one thing I want you
fellows to think about. If you read that law, it was very well
done. It was made up to take politics out of the Postal
Service, and also make the Postal Service self-supporting. The
Congressmen and the Senators who were involved with working on
it did a very good job. We have a good Postal Service. There is
no country in the world where you can send a letter from San
Juan, Puerto Rico to Nome, Alaska for $0.32, or out to Guam. If
we tinker with this thing, we could really hurt it.
I've been on the Board 4 years, and one of the things that
I hear all the time from competitors is that we need a level
playing field. Well, I can tell you, if we level that playing
field much more we're not going to have a Postal Service. So
you have to be very careful about this.
The Board takes its responsibilities very seriously. We ask
for all kinds of information; we demand it; we have it checked;
we have auditors and consultants come in. We don't just take
the administration's answers without a lot of investigation on
it. And when we feel like it's OK, that's fine; we'll pass it
and let it go. We don't send you anything that we don't look at
very, very carefully.
Senator Cochran. Some have suggested that if the Postal
Rate Commission were given more authority over international
postal rates, it would harm the Postal Service's ability to
compete internationally, and therefore damage the mailers'
ability to compete in the international marketplace. Is that a
legitimate concern, in your opinion?
Mr. Dyhrkopp. I think that if you operate with the Postal
Rate Commission on international mail, you're going to have to,
somehow or another, get all the international carriers involved
under regulation. You're going to have all the various
countries that are going to have to be involved in some way,
and I don't know how. But it would really be a monumental job
to try to do it and to make it work.
We keep worrying about the Postal Service not having enough
regulation. I think we ought to put some of the competitors
under some sort of regulations to see how their figures all
work out. But it would be very difficult when you are on a
worldwide basis, a global basis, to make that work because you
have so many foreign countries and other people involved.
Senator Cochran. Some figures that have been brought to our
attention indicate that the Postal Service's overall revenue
increased for the last fiscal year, 1997, by $1.7 billion,
while international revenues actually decreased by
approximately $27 million; and at present, international mail
constitutes less than 3 percent of overall mail volume. I think
Mr. Henderson mentioned that.
Considering these figures, how significant is the
contribution to overhead costs that international mail makes in
the context of holding down the cost of providing universal
services?
Mr. Dyhrkopp. Well, at the present time, like you said, it
doesn't contribute a great deal. But we intend to pursue this
market, and we're hoping that it will add quite a bit to it. It
will help us keep our domestic rates down.
We're just more or less really getting involved in it. It's
going to be a slow process to work it out.
Senator Cochran. So the fact is that international mail's
share of the overhead cost contribution has significantly
decreased over the last several years, is that right?
Mr. Dyhrkopp. Well, if you take it over the whole, it's not
really that much. If you pick out 1 year, there might be a
little difference in it. But it's really a fledgling business.
We started promoting it 3 or 4 years ago, and we're just
getting it going. I think it has a bright future, but it's like
any other new business. You have some rough spots in getting
everything working right.
Mr. Henderson. To give you the actual numbers, in 1996
there was a $360 million contribution; in 1997, a $273 million
contribution. You are correct, there is some erosion going on
in just pure letter mail that is going overseas. The electronic
erosion is having an impact on the Postal Service, that's
accurate.
Senator Cochran. Mr. Dyhrkopp, there is some question about
the accuracy of the cost system, the system for ascertaining
costs of providing mail services by the Postal Service. Do you
feel that the Postal Service subjects its review of its costs
and its evaluation of its costs in a correct way? Would these
pass a reliability test? And are you satisfied that the Postal
Service is costing its international products accurately?
Mr. Dyhrkopp. Yes. The Board has to approve all of these
reports and all of the functions that they do, and of course
costing has to be finally approved by the Board. And if we
didn't feel very comfortable with it, believe me, we would
really be going into it.
We have our own auditors, Ernst and Young. They audit the
whole Postal Service. We have the Inspection Service which does
a lot of auditing. Now we have the Inspector General, which is
totally separated from the Postal Service except that they
report to the Governors, and it's a very important tool to the
Governors.
If these figures weren't right, somebody is going to tell
us about them, and I can guarantee you we'll do something about
it.
Senator Cochran. Senator Levin.
Senator Levin. Thank you, Mr. Chairman. Just a couple
questions.
What is your estimate of the percentage of international
mail which you carry? Just a rough estimate.
Mr. Henderson. Of total mail?
Senator Levin. In other words, you said that 2 percent of
your business is international.
Mr. Henderson. Right.
Senator Levin. That's not my question. My question is, what
percentage of the total international mail is carried by the
Postal Service?
Mr. Henderson. I don't have that information.
Senator Levin. Do you think you carry more than any other
entity?
Mr. Henderson. Oh, no. We are a fledgling business.
Senator Levin. Would it be a small percentage?
Mr. Henderson. We're a smaller player, yes. To give you an
example, Global Package Link, which is the focus of a lot of
attention, is around a $33 million product. UPS, for example,
has a $2.9 billion enterprise, so we are very small.
Senator Levin. Is that $2.9 billion internationally?
Mr. Henderson. Yes. So we are a very small player in that.
Senator Levin. On the universal service that you made
reference to, and the fact that you're a member of the UPU, are
there any private sector entities in other countries that
participate in the Postal Union?
Mr. Henderson. None to my knowledge.
Senator Levin. Is there any private company that takes on
the same universal mail service commitment that you have, or
obligation that you have?
Mr. Henderson. Yes. There are several European countries
that take on universal obligations----
Senator Levin. No, I mean here. Are there any private
companies here that match your obligation by taking,
voluntarily, a commitment to do that?
Mr. Henderson. No, sir, none.
Senator Levin. We're talking about internationally, just on
the international side, right?
Mr. Henderson. Restate the question, please, I'm sorry.
Senator Levin. You have universal service internationally?
Mr. Henderson. Yes.
Senator Levin. Does any private company in the United
States voluntarily take on that same responsibility?
Mr. Henderson. Not to my knowledge.
Senator Levin. There are three reasons that you gave for
why the Postal Rate Commission could not do this function. One
was speed, the second was flexibility, and I think the third
was confidentiality, as I analyzed the testimony.
Those seem all to come back to statute, one way or another.
Mr. Henderson. They come back to pricing flexibility.
Senator Levin. Yes, but you say that on the pricing
flexibility, you might be able to be given that by statute.
Mr. Henderson. I hadn't thought of that, but that's
possible.
Senator Levin. With the Postal Rate Commission setting
certain parameters, with flexibility within those parameters?
Mr. Henderson. Well, the Postal Rate Commission oversight
of our pricing simply wouldn't allow us to remain competitive
in the marketplace.
Senator Levin. You're saying there's no way that we could
design amendments to current law which would have the pricing,
or the postage, set by the Postal Rate Commission, but in a way
which gives you the opportunity to move quickly, flexibly, and
with confidentiality?
Mr. Henderson. No, I wouldn't say that. There might be.
It's just that we haven't seen one yet, but I wouldn't shut the
door on that.
Senator Levin. Thank you.
Thank you, Mr. Chairman.
Senator Cochran. Senator Cleland.
Senator Cleland. Thank you very much, Mr. Chairman.
Mr. Henderson, thank you all very much for being with us.
Just one question.
When do you think the Inspector General report will be
completed and we will have some data that we can look at?
Mr. Henderson. I don't have a date, but I promised the
Chairman that I would get a date and get it back to you as
quickly as I could.
Senator Cleland. Before the end of the year, maybe?
Mr. Henderson. I would hope.
Senator Cleland. Thank you very much.
Thank you, Mr. Chairman.
Senator Cochran. Thank you, Senator.
Thank you very much, Mr. Henderson and Mr. Dyhrkopp, for
your assistance to the Subcommittee at this hearing. We
appreciate it very much.
We will now have our second panel of witnesses come
forward, please: Christopher McCormick, with L.L. Bean, Inc.,
Fred Smith, Chairman of FDX Corporation, and James P. Kelly,
CEO of United Parcel Service.
We appreciate very much the attendance of all of our
witnesses, and we thank you especially for providing the
Subcommittee copies of your statements, which we will have
printed in the record in full. We would encourage you to make
whatever summary comments--or reading of your statement if you
choose to do that--that you think might be helpful to the
Subcommittee.
Let's start with Mr. McCormick of L.L. Bean. You may
proceed.
STATEMENT OF CHRISTOPHER J. McCORMICK,\1\ SENIOR VICE PRESIDENT
OF ADVERTISING AND DIRECT MARKETING, L.L. BEAN, INC.
Mr. McCormick. Thank you, Chairman Cochran, Members of the
Subcommittee. My name is Christopher McCormick. I am Senior
Vice President of Advertising and Direct Marketing for L.L.
Bean. I appreciate the opportunity to appear before you today
to address concerns that we have with S. 2082 and its impact on
customers of the U.S. Postal Service's Global Package Link
service.
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\1\ The prepared statement of Mr. McCormick appears in the Appendix
on page 59.
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L.L. Bean is the largest outdoor specialty catalog marketer
in the United States. We are located in Freeport, Maine, where
the company was founded 86 years ago. Our 1997 sales exceeded
$1.1 billion to customers in the United States and in over 150
countries worldwide. Approximately 10 percent of our revenue is
derived from international sales, with our Japanese business
constituting about 90 percent of that revenue.
A key to competitiveness for direct marketing businesses is
the availability of high quality and low cost parcel shipping
and catalog delivery services. For L.L. Bean, these costs
constitute over $100 million annually. More than $40 million is
related to delivery costs for catalogs and other forms of
customer communications. The remainder represents costs for
domestic and international package shipping and delivery. The
success of our business is highly dependent upon effective
partnerships with the USPS and commercial parcel shippers.
Fortunately, the U.S. market is well served by high quality
and competitive commercial shippers, including those
represented here today--FedEx and UPS, as well as a national
Postal Service with a dedication and commitment to its
customers.
L.L. Bean has enjoyed excellent relations with each of
these organizations over the years. FedEx is today our
preferred carrier for our domestic package delivery. Both the
Postal Service and UPS have handled this business in the past.
USPS, through Global Package Link, services our Japanese parcel
and catalog delivery needs and, of course, delivers our
domestic catalogs.
In sum, L.L. Bean, the direct marketing industry, and in
turn the Nation as a whole, are well served by these quality
companies and worthy competitors.
L.L. Bean believes that careful deliberation and extreme
caution are called for in any changes contemplated by Congress
that might affect the competitive playing field in the parcel
delivery industry. In L.L. Bean's experience, healthy
competition in the industry has been the impetus for service
innovations, improved customer focus, and lower costs.
Particular customer needs--or market niches--are best served by
different companies at varying points in time, and individual
company strengths and their competitive edges evolve and change
over time.
By way of illustration, I would point to L.L. Bean's
experience in our relationship with FedEx for domestic package
delivery. In 1993, FedEx developed an exclusive package
delivery service for L.L. Bean. This new service made available
superior tracking and tracing capabilities that allow our
customers to know the status of orders en route to delivery. We
were able to implement this new service while holding the line
on costs and reducing delivery times. Today, an equivalent
level of service is broadly available in the market and serves
as the standard for domestic package delivery.
Similarly, in 1994 L.L. Bean identified a need for a
breakthrough in costs and quality of service for our
international customers. This need was driven by our growing
business in Japan. Customer research told us that we could not
sustain or grow this business over time without major
modifications to existing practices. The most significant issue
the research identified was the need to reduce shipping charges
and delivery times.
To place this issue into context, L.L. Bean has
traditionally served our international customers through a
cross-border mail order business model. We accept orders
through the phone, mail or fax at our Freeport location and
ship packages from Freeport to our international customers. As
our Japanese business experienced more rapid growth, we chose
to serve this market through the existing business approach,
with additional service enhancements. This business model
allows L.L. Bean to leverage our customer service, order
fulfillment capacities, and talented workforce in Maine as
opposed to investing in in-country facilities and labor.
From a U.S. trade perspective, this approach allows
companies to operate in foreign markets from a domestic base,
thereby contributing to the health of the U.S. economy by
generating domestic investments and jobs. However, for this
approach to succeed, the costs of package delivery represent a
substantial barrier to be overcome.
The USPS responded to our needs for lower costs and reduced
shipping times with their proposal in 1994 to handle our
business to Japan through Global Package Link. We chose the
USPS proposal over five others received through a competitive
review process. The GPL offering reduced our 1994 delivery
costs per package by approximately 50 percent, while reducing
delivery times from two to 3 weeks down to 5 to 7 days. The
USPS offering also met the critical test for universal service
to all households in Japan.
While the details of the competing proposals are protected
by confidentiality agreements, I can tell you that the costs
varied widely. One carrier's proposal was very close in price
to USPS, while the others ranged from two-thirds higher to more
than double the GPL offering. All carriers were able to meet
our delivery time standard, but the Postal Service product
provided the greatest certainty of universal household service
within Japan.
GPL has worked well for L.L. Bean over the 3 years it has
been in place. Indeed, it has become vital to the continued
existence of our cross-border mail order business in Japan.
This business experienced rapid growth in the early 1990's at a
time in which our catalog was a unique offering to Japanese
consumers, and the dollar-yen relationship was most favorable
to mail order products priced in U.S. dollars. Since 1994 the
change in the exchange rate has caused our products to
experience a relative price increase of over 50 percent as
compared to goods priced in yen.
Additionally, L.L. Bean catalogs are no longer unique to
Japanese consumers. The Japanese consumer now has an unlimited
choice of mail order offerings from U.S. and Japanese mail
order companies and from a wide array of worldwide mail order
competitors. Many of these competitors have chosen to serve
this market by investing in in-country facilities and capacity,
including several well-known U.S. companies. Naturally, catalog
businesses with in-country facilities have shipping cost
advantage, and catalog customers in Japan are becoming
increasingly sensitized to shipping rates.
Not surprisingly, our customer research bears out this
heightened consumer sensitivity to catalog shipping charges.
``Have to pay too much for delivery'' is the most cited problem
with 48 percent of respondents in a recent customer survey
identifying this as an issue; 16 percent of those customers
indicated that they were ``likely to not'' purchase from L.L.
Bean due to this issue; and a full 68 percent indicated that
they ``may not'' repurchase.
From these findings, we estimate that the high cost of
shipping may cost L.L. Bean from $3.6 million to $15.1 million
in 1998 sales.
It is clear that existing catalog customers in Japan are
dissatisfied with the current cost of shipping from the United
States to Japan. Not reducing existing rates will cause
significant market loss. Increased shipping rates would
jeopardize the existence of L.L. Bean's direct sales to Japan
and our international business unit.
While this business has been impacted by other factors,
including the unfavorable dollar-yen relationship, increased
competition and the overall decline of the Japanese economy,
shipping charges remain the most vital factor to keep companies
like ours in the business of cross-border mail order shipping.
I am sure that other customers of the Postal Service's GPL
service can describe similar impacts on their businesses in
Japan as well as other countries.
The struggle between the Postal Service and the commercial
parcel shippers over the Postal Service's role in international
shipping has implications well beyond which competitor obtains
this business. Given the extreme sensitivity of mail order
customers to shipping charges, the outcome of the current
struggle could determine whether this form of direct foreign
sales survives and grows or slows to a trickle.
There are two alternatives to its survival. One is the
further movement of United States direct marketers away from
serving foreign customers from a domestic base, toward an in-
country business model. This may require significant capital
investment, an investment that could have been made in the
domestic market.
The other alternative is for U.S. companies to abandon the
business to global competitors that are able to effectively
address the shipping cost issue through more cost-effective
postal or commercial carrier arrangements available through
their host countries. This would represent not only a loss to
U.S. mail order firms but to the economy as a whole through
erosion of domestic jobs and investment.
I am aware of the variety of issues and challenges the
competitors of the Postal Service have raised to the continued
role of the Postal Service in serving the international package
delivery market. I would not claim that L.L. Bean as a customer
of the Postal Service is qualified to independently examine in
depth each of these claims. We have, however, participated in a
General Accounting Office review of some of the issues; this
study is due out shortly.
We are also aware of the specific claims that gave rise to
the amendment you are considering here today, i.e., that the
GPL service is cross-subsidized by monopoly mail, thereby
allowing the Postal Service an unfair competitive advantage.
Again, we are not privy to the USPS cost justifications for
the prices they charge, but we have reviewed this question with
Postal Service officials. We have been assured that this
service is not cross-subsidized and cannot be cross-subsidized
under existing law.
We look forward to the day that mail order companies have a
viable choice of shippers to service our international
customers, at a price that will allow our business to survive
and prosper. We are confident that this choice will emerge as
it has in the domestic market, but urge careful thought and
cautious action on the part of Congress in intervening in a way
that disrupts the current balance among strong, healthy and
vigorous competitors in the package delivery business.
Thank you for allowing me to address this Subcommittee. I
would be happy to answer any questions you may have.
Senator Cochran. Thank you, Mr. McCormick, very much.
Fred Smith, Chairman and CEO of FDX Corporation, we welcome
you and you may proceed.
STATEMENT OF FRED SMITH,\1\ CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, FDX CORPORATION
Mr. Smith. Thank you, Mr. Chairman, on behalf of the
170,000 folks that make up the FDX team through our operating
subsidiaries, and in particular Federal Express and RPS. We
have a significant interest in this legislation and we are very
grateful for being included on this panel. We have submitted
written testimony, and if I could, I would like to just try to
paint a slightly broader picture here, if I might.
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\1\ The prepared statement of Mr. Smith appears in the Appendix on
page 61.
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Let me reiterate on the front end that we strongly support
this legislation, although we feel there are a couple other
points that should be added into it, and in fact we urge a much
broader reform of the postal issue to be taken up by the
Congress.
I think part of the problem that we have here, listening to
the testimony that has gone before, is that we're talking about
specific issues which are created by a much, much larger
mosaic. A little history is in order here.
The Congress gave the Post Office, the predecessor to the
USPS, a monopoly in 1871 to deliver letters, and that's all
that the Congress gave them a monopoly on. They didn't give
them the monopoly on moving packages or express or selling
goods or any other thing; it was moving letters. And for well
over a hundred years, the Postal Service--in many, many
different fora, mostly judicial--attempted to expand the common
sense and the common law definition of what a letter was. In
fact, one of the most famous of those was a Postal Service
lawyer in a court case, when pressed as to whether a political
bumper sticker like you might use in your election was a
letter, he stated that it was; and then he was asked if there
were any conditions under which it might not be a letter, and
he said, well, he guessed if it was stuck to a bumper, then it
might not be a letter any more.
But the Postal Service over and over again attempted to
expand this definition of a letter to include football tickets
and abstracts and surveys and prospectuses and so forth, in
order to protect that monopoly franchise. And of course, in the
legislation in 1970, the USPS took over, and not too long after
that technology and change began to modify the landscape.
What's been going on since that time, and with an
increasing urgency on the part of the Postal Service, would be
called in the private sector an effort to diversify, because
the Postal Service can see that its monopoly revenue stream of
moving letters is subject to electronic diversion to E-mail,
facsimile, and on the horizon, a great deal of invoices and
check remittances are likely to be moved electronically, as
well.
After that recognition dawned on just about everybody--and
there's a good example of that that was discussed here today,
when they were talking about how postal revenues
internationally are down. Well, the reason they're down is that
it takes a long time to send a letter internationally, and
facsimile takes not very much time at all; and if you look at
the statistics of the big telephone companies today, almost 30
percent of their foreign circuits are taken up moving faxes,
not taken up moving voice. And even greater, as WorldCom down
in Jackson, Mississippi is finding, moving data over the
Internet.
So with that recognition, you had this effort on the part
of the Postal Service to diversify, which is what you would
call it in the business world. They have a renewed interest in
the package delivery business after having, in essence, ceded
that business through very good competition represented by UPS
and, to a lesser degree, ourselves in years past. And the facts
of the matter are that the Postal Service's letter monopoly
gives it a huge advantage in engaging in all types of
commercial activities in which it would otherwise not be
competitive.
I forgot to bring today my tie that I bought at the Postal
Service a week or so ago to demonstrate this point. It's a Bugs
Bunny, Daffy Duck, and my favorite, Tasmanian Devil tie. It was
sold at the Postal Service--actually, it was sold in
Mississippi; it was bought by one of our fellows. No tax paid
on it. I wonder if our good friends at L.L. Bean would be as
interested in the Postal Service cross-subsidizing things once
they decide they want to start selling those ties and other
merchandise by mail, because what's the difference in terms of
vertical integration?
And the Postal Service, for instance in the case of global
mail, they cited in their testimony that they have $1.6 billion
or $1.7 billion in revenue, and they have a $200 million
surplus in that. Well, the vast majority of those revenues, as
the Postmaster General pointed out, don't come from moving
Global Package Link; they come from moving first class mail.
And then they sort of layer on top of that services which by
any commercial account would be significantly below cost, and
certainly below the cost were it provided in the commercial
marketplace, absent that cross-subsidization of the U.S. mail.
So when you cut through all of these issues, what the
Congress really has to decide is, does it want to have a
company, which it set up with a monopoly to move first class
letters--which a lot of people would debate with you today, why
the people in McLean, Virginia, sending letters to Potomac,
Maryland, are subsidizing moving a letter from Puerto Rico to
Guam, but I guess we'll take that up another day but that was a
big deal in 1871 before they had E-mail and fax and FedEx and
UPS. And by the way, we both serve every address in the 48
lower States, Hawaii, and Puerto Rico. The only place we don't
serve every place is Alaska. We don't go there every day, but
you ship something to any address in the United States, UPS and
FedEx will deliver.
So we strongly believe that the Postal Service's efforts at
diversification should be put in an appropriate context. There
is a bill over on the House side which does that, which we
strongly support, and we support your bill, Mr. Chairman, on
establishing this oversight of the Postal Rate Commission on
this international side.
There are two other things we think are urgent and which
need to be done, however. The second initiative is to get the
Postal Service, which is now a commercial business in many
respects--we need another Executive Branch agency representing
the United States at the Universal Postal Union, because you
have the Postal Service as the representative of the United
States, and then you have a representative of the Postal
Service as the representative of the U.S. Postal Service, Inc.
And the third thing is that the Postal Service needs to be
subjected to the same customs regulations as FedEx and UPS and
the other private carriers do. One of the biggest advantages
that they were able to offer L.L. Bean, which were unable to be
offered in the commercial sector, is that if you ship something
by Postal Service, that's the customs declaration you have to
use, right there, that one little bitty green thing right
there. The Postal Service has no legal responsibility
whatsoever for what you're shipping or the declaration that
you're making to the inbound customs service. And the reason
for those delays that L.L. Bean was experiencing on the
commercial side in those days, the customs service held up
everything that came in on the private carriers; things that
went by the Postal Service went right through because of that
little green declaration. That's an example of the manifests
that FedEx has to send on one of our international shipments,
with every possible detail about that shipment, and we are
responsible to the customs authorities, not the shippers, in
the event that there is contraband, drugs, or explosives in
that shipment.
So we would urge you to press forward with this
legislation, Mr. Chairman, but add into it the requirement that
the Executive Branch be represented by another entity--USTR,
Department of Commerce, or whomever. And then third, that the
customs requirements that apply to private carriers also be
applied to the Postal Service because it's in the national
interest for that to be the case.
The last thing I will say, Mr. Chairman, is one of the
things we at FedEx find most offensive about what the Postal
Service is doing--again, we don't begrudge them doing anything;
we're perfectly happy to compete with them, we're perfectly
happy for them to be in any kind of business they want,
provided that in that competitive sector they have to apply the
same overhead to the competitive services that they did to the
monopoly services, that they're subject to the same
regulations, like OSHA, that they're subject to the same
requirement to pay their fair share of taxes--they don't pay a
dime of it; they don't even buy license plates.
And most importantly, that they be subject to the same laws
as we are. We sued the Postal Service over their advertising
campaign. We subjected the Postal Service's advertising
campaign on Priority Mail to our lawyers and said, ``Could we
run that advertising campaign if we had a service like Priority
Mail?'' Our lawyers told us that if we conducted an advertising
campaign like that, we'd get the bejesus sued out of us. It's
misleading and it's false and it's not right, because their
defense in being able to do that is that they are exempt from
the same rules that apply to L.L. Bean or UPS or FedEx in terms
of advertising. So they can't have it both ways. They can't be
a government agency when it's convenient to be a government
agency, and a private company when it's convenient to be a
private company. This shibboleth about you're going to bring
into jeopardy the $0.32 stamp from Guam to Puerto Rico is a
convenient scare tactic to defuse what's really at issue here,
and it is a massive effort on a government-sanctioned monopoly
to diversify into services which are provided by the private
sector, with all that implies--taxes and the other benefits
that private enterprise brings to this country.
So we support the legislation and we very much appreciate
the opportunity to make these comments before you.
Senator Cochran. Thank you, Mr. Smith, very much for your
assistance to our Subcommittee.
Our final witness is James P. Kelly, Chairman and CEO of
United Parcel Service.
Mr. Kelly, you may proceed.
STATEMENT OF JAMES P. KELLY,\1\ CHAIRMAN AND CEO, UNITED PARCEL
SERVICE
Mr. Kelly. Good afternoon, Mr. Chairman and Members of the
Subcommittee. I am Jim Kelly, and I am Chairman and CEO of
United Parcel Service. I appreciate the opportunity to discuss
a topic that is important to me, our company, and the 330,000
people we employ worldwide.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Kelly appears in the Appendix on
page 65.
---------------------------------------------------------------------------
The need for meaningful reform of the U.S. Postal Service
has never been more clear or more timely. I applaud your
efforts here in this Subcommittee and commend your colleagues
in the House, who are also working diligently to examine the
role of the Postal Service in today's competitive marketplace.
We fully support this legislation. The proposal addresses a
serious problem, the fact that the Postal Rate Commission
currently has no oversight authority on international postal
rates and services. In effect, the current limited jurisdiction
that the Postal Rate Commission has over the Postal Service
stops at the water's edge. That leaves this government agency
free to do internationally what they are prohibited from doing
domestically. No other government agency operates without basic
oversight over its international activities.
Commission oversight is particularly important because the
Postal Service is increasingly using its government status and
advantages to undermine free market practices both here and
abroad. We contend the Postal Service is using revenue from its
monopoly to subsidize products that compete with the private
sector, including international services.
This abuse of the monopoly has a direct impact on American
consumers, who are now being forced to pay significantly more
for first class postage than they otherwise would. Why is the
Postal Service asking for another billion dollars every year
through the penny increase on the price of a monopoly stamp,
when they have generated more than a billion dollars in surplus
every year for the past 3 years and are doing so again this
year? Is the Postal Service truly planning to improve service
and focus on its mandate of universal letter mail service, or
is the agency going to use this revenue to subsidize
international and domestic services that compete unfairly with
the private sector? We suggest it will be the latter.
If the Postal Service were truly committed to its mandate
of providing universal letter mail service, why is it entering
into numerous other activities wholly unrelated to this
mission? The Postal Service is now processing bills, selling
mugs, T-shirts and hats, and hawking telephone cards. What does
this have to do with the universal delivery of mail? Absolutely
nothing. In fact, it forces the Postal Service to lose focus on
its primary mission.
We believe a first step toward rectifying this problem in
the international arena is to give the Postal Rate Commission
the power to set international rates and services. The result
will be more fair and equitable rates because for the first
time there would be a real relationship between actual costs
and international postal rates. If the playing field is
leveled, the Postal Service will be forced to look harder at
its primary mandated goal of providing efficient universal
delivery of letter mail.
Let me give you some examples of how the Postal Service is
currently operating in a manner that is anti-competitive and
anti-free enterprise. As a government agency, the Postal
Service enjoys numerous advantages that no private company is
permitted. I am sure that you and the other Members of the
Subcommittee have heard the exhaustive list, but permit me to
give you a few highlights.
The Postal Service pays no taxes--Federal, State, or local.
It enjoys unfair customs advantages. It is immune from motor
vehicle licensing fees for the hundreds of thousands of
vehicles it operates on our Nation's highways. It is not
subject to OSHA enforcement. And the Postal Service can borrow
at favorable interest rates because the Federal Government
backs its debts.
But the biggest advantage of all is that the Postal Service
is able to use its legally sanctioned monopoly like a weapon
against its competitors. The Postal Service amasses about $60
billion every year in revenue, and about $50 billion of this
comes from its monopoly, which is protected from effective
competition. We are all familiar with the phrase that ``power
corrupts, and absolute power corrupts absolutely.'' That is
certainly true of monopoly power.
Let me give you an example of how the Postal Service is
able to use its monopoly unfairly in the international arena.
The Postal Service charges $26.63 to ship a 10-pound package
via its Global Package Link from San Francisco to London.
That's $3 less than they charge to ship that same package via
Express Mail from Washington, D.C. to Baltimore. Common sense
dictates that it can't cost less to send a package overseas
than to send it up the road domestically.
During a recent appearance at the National Press Club,
former Postmaster General Marvin Runyon tried to explain this
anomaly by saying it was an ``apples to oranges'' comparison
because the GPL rate applies only where the shipper sends
10,000 packages overseas. That explanation is disingenuous at
best. It implies economies of scale. What the Postmaster
General did not say is that in order to get the cheap GPL rate,
the shipper need only send 10,000 packages over the course of
an entire year to all or any of the 11 countries where GPL
service is available. It doesn't take an economist to know that
any cost savings in the case of large volume shipments exist
only when the large volumes are shipped at one time to one
place, and not in bits and pieces over the course of a whole
year to different destinations.
So how can the Postal Service afford to charge one-quarter
of what the private sector charges for these international
shipments? It can't. The Postal Service is subsidizing the cost
of its international competitive services--and of other
competitive services--from the revenues it makes on its letter
monopoly.
I have no doubt that we would uncover other instances where
the Postal Service is unfairly undermining its competition on
international rates, if only the data were publicly available.
However, the Postal Service has consistently refused to expose
to the light of day any meaningful cost and rate information on
its individual international services. That is unacceptable in
the case of a government agency. In this era when even the CIA
is being forced to declassify sensitive information at record
speed, you would think the U.S. Postal Service could come clean
on its international costs. This refusal to make the
information available for public scrutiny leads naturally to
the question, ``What does the Postal Service have to hide?''
This is an example of why the Postal Rate Commission must
be strengthened both domestically and internationally. In fact,
the PRC itself has told Congress that it needs more oversight
authority precisely because the Postal Service is competing
more and more with the private sector.
The bill before you would go a long way toward assuring
Congress and the American public that the Postal Service would
not be able to abuse its monopoly power. By giving the
Commission the same jurisdiction over international postal
rates paid by American citizens as the Commission has with
respect to domestic postal rates, Congress would dispel some of
the questions now being raised, and a fair and rational
ratesetting process will foster true and open competition in
the global marketplace.
In fact, additional changes are also needed to make
Commission review fully effective, both internationally and
domestically. The Commission should be given subpoena power,
and its decisions should be made final and binding, subject
only to judicial review, rather than being reviewed by and
subject to modification by the Postal Service through its own
Governors.
I would not be before you today if the Postal Service were
focusing on its primary mission of delivering first class mail.
Unfortunately, the Postal Service is using its government
advantages to systematically and unfairly undermine its private
sector competitors. We do not object to free and open
competition; in fact, we embrace it because it makes us a
stronger, smarter company. But we vehemently object to unfair
competition on an unlevel playing field where government-
granted advantages are used like weapons in the marketplace.
Your legislation will take a meaningful step in the right
direction by helping to level the playing field
internationally.
Thank you for the opportunity to testify on this important
subject. I request that my remarks be submitted, and if there
are any questions, I would be happy to answer them. Thank you
very much.
Senator Cochran. Thank you, Mr. Kelly, for your assistance
to our Subcommittee. We appreciate your being here and giving
us the benefit of your thoughts on this legislation.
What do you think would happen, Mr. Kelly, if Congress did
enact this bill, and the Postal Service was subjected in its
international business to regulation by the Board of Governors
and the Postal Rate Commission? Would their costs, their
prices, go up? Would their charges to their customers, like
L.L. Bean, have to go up?
Mr. Kelly. Well, certainly on Global Package Link they
would have to go up. No one can believe that the Postal Service
is six or seven times more efficient than all the private
companies that engage in that same business.
Senator Cochran. Mr. McCormick, what is your view of what
would happen if this legislation were approved? Would it
increase your costs of shipping your goods and your catalogs?
Mr. McCormick. It's not clear to me what the impact on
costs would be----
Senator Cochran. The prices that you would be charged.
Mr. McCormick. My concern would be the lack of
responsiveness from the Postal Service to respond to market
needs and to our needs. For example, Mr. Henderson mentioned
that it takes 10 months for the PRC to rule on a rate case.
What he didn't mention was that it usually takes 4 to 6 months
for the Postal Service to gather data for the rate case before
it is proposed. So in essence, to come up with a new service or
a price or product, it takes a year and a half.
Back in 1994, if we had to go through that process for GPL,
we would have missed the entire upside of the Japanese market.
During those 2 years, 1994 and 1995, L.L. Bean's Japanese
business tripled--in large part, I think, due to GPL and
offering a competitive package service. If we had waited a year
and a half, we would have missed that upside of the market.
So that's my concern, that the Postal Service would not be
responsive to the customer's needs.
Senator Cochran. Mr. Smith pointed out the difference in
the customs treatment of your business when it is shipped
through the Postal Service, as compared with how it's treated
when it is shipped by FedEx or UPS.
How big a factor is this as far as your business is
concerned?
Mr. McCormick. On the customs clearance, I'm not aware of
any advantage that the Postal Service has on the customs. It's
my understanding that the General Accounting Office is looking
into any advantages the Postal Service may have, and that
report is out, I believe, this week.
From my understanding, L.L. Bean packages, once they are
landed in Tokyo, they are sorted by Japanese customs officials,
and anything under 10,000 yen in value goes through directly to
Japan Post--about $70 in value. Anything above $70 in value
goes into a separate room and is processed separately and is
billed to the consumer, to have them pay duties and taxes.
So I'm not sure if that is that dissimilar from all the
other shippers.
Senator Cochran. What other benefits or special customs
arrangements or mailing discounts do you see as benefits for
your company when you send overseas mail via the Postal
Service?
Mr. McCormick. I may have missed the question.
Senator Cochran. What mailing discounts or other customs
arrangements do you find that you derive in using the Postal
Service for overseas mail? You were talking about sending your
catalogs out, that this is a very important part of your
business.
Mr. McCormick. Right now we send our catalogs to Japan
through the USPS. We do not use the Postal Service for mail to
other countries. Right now we have an agreement with the Postal
Service to send our parcels and catalogs to Japan, and that's
the only arrangement we have right now.
Senator Cochran. Mr. Smith, you pointed out in your
statement the other obligations that you have that the Postal
Service doesn't have, to pay taxes and to comply with OSHA regs
and to meet the demands of the customs service and all the
rest. Are you suggesting that we probably ought to include in
this legislation some requirement that the Postal Service is
subjected to the same kinds of rules and laws that both your
business and Mr. Kelly's are subject to?
Mr. Smith. Mr. Chairman, during my remarks I noted a bill
that was in the House, sponsored by Congressman McHugh. We
support the philosophy behind that bill, which is to not
preclude the Postal Service from doing whatever it wants to do,
but dividing their services into two parts, the competitive and
the monopoly, and have a very strong oversight by the PRC and
assure that appropriate levels of overhead and compensatory
payments are made by the Postal Service for the business
privileges, just as the private sector does.
I might add, Mr. Chairman, that the GAO report is going to
be very clear about this issue on the USPS thing. I am amazed
to hear the gentleman from L.L. Bean state that he's not aware
of the differential treatment of postal services around the
world. We have a very big business in Japan; I've been in the
customs locations there many, many times, and I can assure you
that the postal clearance system is a radically different
system than the private clearance system. For all intents and
purposes, there is no clearance system, because as I pointed
out, this is an exact document. That is the documentation
that's required on a postal movement to Japan or anyplace else.
But the most significant difference is that the carrier in the
private sector is legally responsible to the customs
authorities in the importing country for that declaration as to
value, as to any kind of contraband, or whatever the case may
be, and the Postal Service has no such obligation.
Now, when you have a fine company like L.L. Bean, the
height of integrity, that's not a problem. It's a huge problem
when you're talking about a lot of people that want to ship a
lot of different things around the world in terms of security
and contraband and so forth. It's a radically different system,
and it confers on the Postal Service for low-value items and
anything moved through the Postal Service significant
advantages, as the GAO report will make clear, I'm sure.
Senator Cochran. Senator Levin.
Senator Levin. Thank you, Mr. Chairman.
You indicated, both of you, that there's a cross-subsidy
that exists. How do you prove it?
Mr. Smith. Well, Senator, I think that if the PRC had the
type of real enforcement powers that it ought to have in being
able to audit the Postal Service's books, it would be pretty
clear what's going on.
Senator Levin. But I mean, what's your proof of the
statement that there is currently a cross-subsidy? Your bids at
L.L. Bean were fairly close, you indicated?
Mr. McCormick. There was one other company very close to
USPS.
Senator Levin. I'm not sure about the ``six times''
reference. I want to get back to that in a minute.
But if they got two bids that were close to each other at
L.L. Bean, what is the proof of the fact, without looking into
their numbers--which you haven't been able to do, nor has
anybody else--that there is a cross-subsidy?
Mr. Smith. Well, Senator, I've been in this business now
for well over 25 years. I founded FedEx, and I've got a pretty
good handle on what it costs to pick up, transport, and deliver
things across the United States or around the world. We have
about a $4 billion international business, and I can assure you
that the private sector could not begin to be charging the
rates that the Postal Service is charging for this business,
and be producing--as the Postmaster General said--$33 million
in business.
The cross-subsidization--you may have been out of the room
when I mentioned this--part of the problem is, when you get
debating this issue, you always get down on specifics, and you
talk about, well, Global Package Link, and is it being cross-
subsidized or is it not? It's better to refer to this, in my
opinion, as a major diversification effort by a public
monopoly, because what the Postal Service is doing is to take
the stream of revenues which they have produced over the years
to other countries around the world, for moving first class
mail, and then what they do is layer on top of that--they just
put in these shipments that they're going to carry in the
commercial sector. So they don't attribute any equivalent line
haul costs to those shipments the way that UPS or FedEx does,
who fly their own airplanes across the ocean and so forth.
Now, if it's the intent of the Congress, if you want a
monopoly business to get involved in a lot of businesses that
are commercially done, that's fine; that's your choice to make.
But you ought to deal with it on that much broader issue and
not get hung up on the specifics of these individual things,
because it's very hard to pull the monopoly part of the Postal
Service and their competitive services apart. I could sit
here--and I'm sure Mr. Kelly could--and talk for 2 days about
that.
Senator Levin. You don't think there's going to be any
purpose served by that audit of Ernst and Young? You don't
think that audit is going to show us anything?
Mr. Smith. Well, it will be an estimate. I'm sure it's a
good faith estimate, and from their point of view, I'm sure the
Postal Service thinks that this is totally logical. I mean,
they ought to be able to do all these things. And their
attribution of costs--say, at Global Package Link--will be to
say, well, we've got this $1.7 billion worth of revenue on
there, so it doesn't cost us very much to put $33 million of
Global Package Link stuff. But it misses the much bigger issue,
which is, is it in the public interest for the government to
create subsidized--and they are subsidized, for all the reasons
we've gone over--activities which are also produced in the
private sector? That's why I use the example about the Bugs
Bunny tie. I mean, why not let----
Senator Levin. I presume that's part of their advertising
budget. They would consider that advertising, I assume; I don't
know----
Mr. Smith. A Bugs Bunny tie?
Senator Levin. I assume so.
Mr. Smith. No, sir. I think their view is----
Senator Levin. I doubt very much that they're in the tie
business to make profit off those ties. My hunch is that those
ties are promoting stamps, and they're in the stamp business.
Mr. Smith. Well, having gone to the Postal Service and
talked to the Senior Vice President of Marketing, and former
Postmaster General Runyon is a very good friend of mine, I
admire him greatly, and so forth, but I think the Postal
Service is in the process of a major diversification effort,
and if selling ties brings more people into the location where
they can then sell more Global Parcel Link, which is cross-
subsidized by monopoly rent--that's why it's so hard to take
these sinews and pull them apart. You have to look at the much
broader issue, and that's why we support the approach over on
the House side in the McHugh bill, because it's a broad-gauge
approach to what we think is a very broad-gauge problem.
Senator Levin. All right. I think it's useful to us,
however, to disaggregate to the extent we can to see whether or
not in fact there is a cross-subsidization.
Mr. Smith. Well, I just gave you the best example I could,
$1.6 billion, cross-subsidization----
Senator Levin. I understand. My question, though, is this.
Would you be willing, both of you, to look at the Ernst and
Young audit and critique it?
Mr. Kelly. I would think a more logical way to do it would
be to have the Postal Rate Commission have the oversight that
Congress intended----
Senator Levin. That's a chicken/egg issue.
Mr. Kelly. That's exactly right.
Senator Levin. But in order to get to either the chicken or
the egg----
Mr. Kelly. It has to be an unbiased outside third party
that audits in order to get the answers to the kinds of
questions that you're asking. And the reason you can't get the
answers is because of a lack of information, their refusal to
provide that information, particularly to the Postal Rate
Commission.
Senator Levin. You've got a chicken/egg problem here. In
order to get either the chicken or the egg, we are going to
look at an Ernst and Young audit--we've asked them for it--some
of us will look at it.
Would you be willing to give us your perspective--you have
not seen that audit, have you?
Mr. Smith. No, sir.
Senator Levin. Would you be willing to show us, from your
perspective, what's missing?
Mr. Kelly. Certainly. I'd be willing to do that, yes.
Mr. Smith. We would, too.
Senator Levin. All right.
On the customs requirements, Mr. Smith, that are not
applied to you----
Mr. Smith. That are applied.
Senator Levin [continuing]. That are applied to you that
are not applied to the Postal Service, is that long printout of
yours, is that something that is required by a foreign country?
Mr. Smith. In our country.
Senator Levin. So part of that is required by our
government, that printout?
Mr. Smith. Here's what we have to do, Senator. Let's say
FedEx, on one of our MD-11s, is going across the Atlantic or
the Pacific, going to Tokyo or Paris or London. When that
airplane lands in London, every piece on that airplane--every
piece--has to correspond exactly to a manifest that we have
submitted to the customs authorities that tells who shipped
that item, when it was shipped, what the commercial value of
that item is, a complete description of that item, and an
estimate of the duties that are due. And if anything on that
manifest is erroneous, we are responsible and subject to fines
or customs claims and so forth.
The Postal Service, when their customers fill out this
little green thing, there is no manifest. It just goes
anonymously into the airplane, in the underbelly, generally, of
a passenger airplane, sometimes on cargo airplanes. And in the
case of Global Package Link, they send an electronic advice
forward. But the vast majority of postal items that are sent
through the system aren't subject to any of those types of
customs controls.
I mentioned during my testimony that I am reliably informed
that the customs service is going to provide a report
themselves which details the very significant differences that
are applied to postal shipments than to those carried by
commercial carriers. This is an area of great concern. There is
a GAO study, and there is also a report that the customs
authorities themselves are doing.
Senator Levin. My question, though, is that manifest a
foreign customs requirement or is it our government's
requirement?
Mr. Smith. Well, it depends. If it's going to a foreign
customs country, it is required on the import side by the
foreign customs folks, and it is required by the U.S. Customs
folks on the export side.
Senator Levin. Both? When you are shipping packages and you
have to fill out a manifest to land at Heathrow Airport----
Mr. Smith. It's much more than a manifest. It's a shipping
document, of which this is just a summary.
Senator Levin. OK.
Mr. Smith. It's a shipping document that you have to fill
out.
Senator Levin. When you land your plane at Heathrow, is
that document required by the British authorities or by us?
Mr. Smith. By the British authorities.
Senator Levin. OK. And you're suggesting that the Postal
Service tell the British authorities that they should be bound
by the same thing?
Mr. Smith. You can do it either way. You can make the same
regulations that apply to the Postal Service apply to us, or
you can make the regulations apply to us that apply to the
Postal Service.
Senator Levin. That's an argument with the British
authorities, is it not?
Mr. Smith. Sir?
Senator Levin. That's an argument that we should take up
with the British?
Mr. Smith. Yes, and that's exactly why we are so urgent in
our request that there be someone other than the Postal Service
sitting at the Universal Postal Union, because what will happen
is, the UPU gets together and they say, ``We have these
government-to-government agreements, and the Postal Service are
exempt from all of these customs requirements,'' and Her
Majesty's Customs don't have any say-so about it, and U.S.
Customs doesn't. That's precisely why the U.S. Customs are
going to come out with this report.
Senator Levin. OK. Mr. Kelly, let me ask you a question.
What do you estimate the total percentage of international
shipments to be that are private, and what percentage is the
Postal Service? Lumped together, all the private entities. Do
you and your colleagues in the private world have 90 percent of
the international business, and the Postal Service 10 percent?
Mr. Kelly. I'm not sure what percent the Postal Service
has, but I believe they have 43 percent of the worldwide mail
market. The question was asked earlier in the day. I don't know
what percent of the package or express letter market they would
have.
Senator Levin. Could you give us a rough estimate?
Mr. Kelly. I really don't know. I know DHL and Federal
Express and ourselves and TNT--and there are tens or twenties
of players in that particular market--I don't know what that
particular number is.
Senator Levin. Do you have an estimate, Mr. Smith?
Mr. Smith. I would say that the Postal Service's presence
in the express mail market is pretty small.
Senator Levin. The GAO report here says it's 4 percent.
Mr. Smith. That doesn't surprise me.
Senator Levin. Would that surprise you, Mr. Kelly?
Mr. Kelly. No, it does not.
Senator Levin. My last question. One of you said that there
are different rules relative to advertising.
Mr. Smith. I did.
Senator Levin. Could you expand on that a little bit?
Mr. Smith. Well, the Postal Service has been in the express
mail business for many years, as I'm sure you're aware. And
from about the middle part of the 1970's until the current
time, the Postal Service has seen its market share decline--
these won't be totally accurate, but it's not far off--from
about 40 or 45 percent of the express mail business to about 7
percent, and it's sort of leveled off there.
Now, express, by our definition, is something that needs to
be moved fast. It needs to be moved on a time-certain basis,
meaning you get a guaranteed delivery, and the people who give
it to you want you to keep control of it. That's why we
developed our famous tracking and tracing system that lets
people move express documents and express packages and express
freight. We do all three.
The Postal Service began to promote a service some years
ago which they called Priority Mail. Now, Priority Mail is not
regular mail, it's not express, it sort of fits in between, and
they began to market it originally--they had a famous
advertising campaign that went ``2-2-2.'' You might remember
that; it was real ``in your face'' type advertising, $2 and 2
days and 2--whatever the case might be. They were hauled up
here before Congress, and Senator Pryor made them change it,
because it wasn't $2. It was $2.90, and it didn't get there in
2 days; it got there between 2 and 5 days, and so forth.
So they decided that they had a real market opportunity
here to compete in this sort of near-express business, and they
began promoting Priority Mail. But when they advertise Priority
Mail, they don't advertise it as ``this service doesn't have a
guarantee,'' ``this service isn't tracked,'' ``this service
gets there in 2, and sometimes 3 and 4 days,'' ``there's no
ability to guarantee this on Saturday.'' They began to compare
it directly to UPS and FedEx as if it was a direct competitor
to our overnight services--or, in the case of the much smaller
2-day service that we provide, we're not even able to compete
with them on a price basis because it's prohibited by the
Postal Service's own statutes, if it's a letter-type shipment.
So the advertising is just misleading, and it's false. For
instance, they say, ``We don't charge anything extra to deliver
on Saturday.'' But you can't get a guaranteed delivery on
Saturday. So we sued them in court--not because of our desire
to keep them out of the Priority Mail business, but because the
advertising, by the standards we're held to, would be deemed to
be false and misleading. The Postal Service's defense in that
lawsuit was that they were exempt from these rules because they
were under the Lanham Act, which exempts government agencies
from private suit.
Now, I'm not a lawyer or General Counsel, but I believe
that they have lost that argument in the first round, and
they're now appealing that, because the judge said, ``Look,
maybe in your monopoly business over here, that's true; but
you're getting over here in the commercial sector and competing
with folks.'' So that's what I was talking about.
Senator Levin. The current state of the law in that one
case is that they're governed by the same advertising rules
when they're dealing in commercial businesses? That's the most
recent opinion?
Mr. Smith. No, sir. The most recent opinion would be on the
Postal Service's side, that they're a government agency and
can't be sued----
Senator Levin. They won the case?
Mr. Smith. No. We, for the first time, have--I think this
would be the best way to put it. Their conduct was so egregious
that it went up before a Federal judge, and for the first time
a Federal judge said, ``You know, you're right. This thing sort
of goes over the edge.''
Senator Levin. At least in that case, you got a court
order.
Mr. Smith. Well, there was another case, too, Senator. I'm
not familiar with the exact citation, but there was another
private case brought on exactly the same over-the-top
rationale, and there was that decision, and then I believe our
decision was favorable to us, and that's gone to appeal. We'll
submit to you, if you want, the exact----
Senator Levin. We can check it out. Thanks.
Mr. Kelly. It goes, though, ``I want to be a private
business 1 day, and I want to be a government monopoly the next
day on a different issue.''
Senator Levin. Thanks.
Senator Cochran. Senator Cleland.
Senator Cleland. Thank you very much for all of you being
here, Mr. Smith, Mr. Kelly, and Mr. McCormick.
Mr. Smith and Mr. Kelly, I appreciate you all particularly
advocating that we must absolutely, positively run a tighter
ship in the government's shipping business. [Laughter.]
Let me just say that I am fascinated by the amount of
issues that we've uncovered here, particularly Mr. Smith.
You've taken this to a deep level that I really didn't expect,
but this is your business and you've been in it a long time and
you're a pioneer in it. I appreciate your insights into the
Postal Rate Commission, the advocated customs reform, and the
need for the government itself to have a representative in
dealing with international matters in terms of shipping, other
than the Postal Service. Those are fascinating issues that we
want to explore.
What I'd like to do is take it maybe even a little more
broadly, which I think is fascinating. Mr. Kelly, 5 years down
the road, in terms of international trade and international
shipping, based on the businesses that you all are into, where
is this country going? Is this the kind of reform that we
absolutely, positively need to get ourselves squared away, to
not unnecessarily compete in the private sector, and to allow
the Postal Service to do its thing? Is this the kind of reform
that you all see as critical to our ability as a country to
relate and magnify our options in international trade? Give us
your view 5 years down the road. Is this one of the things we
have to do?
Mr. Kelly. Well, Senator, we view ourselves as a
facilitator of global trade. And if in fact the kind of
predatory pricing that we're experiencing right now as a result
of Global Package Link continues to exist, continues to become
expanded, there's no way any private carrier could compete with
it. Obviously, our ability to trade would be relying on one
particular carrier, and that would be the Postal Service, if
that kind of pricing continues.
Senator Cleland. Thank you. Mr. Smith.
Mr. Smith. Well, Senator, that's a very good question,
because it has very, very broad strategic implications.
Unfortunately, because of a lot of the other issues going on in
Washington, the President's speech last week before the WTO
didn't get much play, but in it he talked about the
significance of international trade to this country's well-
being and economic health, and how important it was to
liberalize trade in general, and called for a number of
initiatives. He specifically noted that trade in services was
becoming as important as trade in manufactures, and he noted
that there had been significant progress in telecommunications;
there had been significant progress in financial services, and
very little improvement in transportation. And the President
himself specifically mentioned express delivery services.
Well, why did he do that? He did it because today the
sinews that connect the United States with its trading partners
are increasingly becoming air links and not sealift. Of the
total amount of trade conducted by the United States today,
about 20 percent of it goes to Canada and Mexico, so it doesn't
go across oceans. But of the 80 percent that does go across
oceans, 42 percent is carried by ship and 38 percent of that
value is now carried by air, even though the amount that is
carried by air is less than 2 percent of the tonnage.
So when you see CNN, when they're talking about
international trade and you see those big container ships and
what have you, that's the trade of the 1970's, not the trade of
2010--computers, electronics, pharmaceuticals, medicines,
aircraft parts, auto parts, they're going through airborne
trade links, and increasingly, door-to-door express delivery
systems like FedEx and our friends at UPS and our other able
competitors.
So these are the ways the United States will trade with
other countries, and it is a very large national issue because,
as I said before, what the Postal Service really wants to do is
to diversify. And they see this growth in international trade,
the current Asian crisis notwithstanding, and they want a piece
of that action. And we don't care if they're in there. As we
said over and over again, we're perfectly willing for them to
go compete, but we want them to have a set of rules on the
commercial sector that are similar to ours, and they should not
be able to cross-subsidize and, as Mr. Kelly said, charge
significantly below cost, meaning the cost of any commercial
entity providing these services, because all that is, really,
is a cross-subsidization of their government monopoly in its
broadest sense against private competition, which pays taxes,
which buys license plates, and which is subject to OSHA and all
the other things we have to do.
Senator Cleland. And this legislation before us, you feel,
is a step forward in that direction in the sense that it gives
the Postal Rate Commission a little broader oversight, doing
what it does domestically--doing that vis-a-vis the Postal
Service internationally; not an attempt to particularly wipe
them out, but to get to the bottom of the data and let everyone
know, and also properly regulate that as they see the Postal
Service mission? I think that's part of what we're at here.
What is the mission of the Postal Service? You get right down
to it, you're a military person, a fellow Vietnam guy, I think
that's part of what we're arguing about here, Mr. Chairman, is
determining what the proper role of the Postal Service is and
its particular role in international communications, travel,
and trade.
Well, in terms of this legislation, you mentioned
oversight. Mr. Smith and Mr. Kelly, your view of the Postal
Rate Commission and its role in terms of international affairs
of the Postal Service is not just setting rates or looking at
rate data, but it has to do with the proper role of the Postal
Service in that regard. Is that correct?
Mr. Kelly. The same kind of oversight the Postal Rate
Commission has here in the United States domestically is the
kind that it should have regarding the Postal Service in
international business.
The argument you heard about the ability to compete in
international markets is the same argument that exists in the
United States. Your ability to compete in markets is dependent
upon the services you can offer your customers, and speed, and
those kinds of issues. Well, the same arguments are here
internationally. If you accept those, if you accept that the
Postal Service should have a free hand to do whatever it
pleases and use its monopoly power however it chooses to, those
same arguments exist here in the United States with the Postal
Rate Commission's ability to see what happens to you. The exact
same argument.
Senator Cleland. Do you happen to see, Mr. Kelly, that the
bureaucracy of the 10-month analysis of the process to get to a
decision--is that particularly burdensome on the Postal
Service? Or is that just part of their doing business?
Mr. Kelly. I think the process should be hastened. As I
understand it, a great deal of the delay in the process is
caused by the Postal Rate Commission's inability to get
information from the Postal Service. So that process indeed
should be hastened, and we would encourage that to happen on a
much more expeditious level.
Senator Cleland. Well, thank you all very much for coming.
Thank you, Mr. McCormick.
Thank you, Mr. Chairman.
Senator Cochran. Thank you, Senator.
There was some discussion about the representation by the
Postal Service on the UPU. What is the view of this panel about
whether or not that should be changed to permit private
operators to also be represented in the UPU? Should there be a
corresponding requirement that universal service obligations be
assumed, and standards that are set by the organization be
assumed as well?
Mr. Kelly, what is your view?
Mr. Kelly. My reaction is that there should be a government
agency involved in that process, whether it is the State
Department or the Department of Transportation or whomever. It
would be like having United Airlines participate in bilateral
negotiations without any input from the Department of
Transportation or the State Department. Certainly, if they're
going to negotiate and make the rules for what happens
regarding international trade and customs and other issues that
affect the private sector, the private sector--or some other
branch of the government--ought to be involved in that process.
Senator Cochran. Do you think any additional requirements
ought to be placed on private companies, such as having to
provide mail services or parcel services, within the United
States at affordable prices, for any kind of international
obligation to come under scrutiny or Federal regulations to
ensure that prices charged are justified by the cost?
Mr. Kelly. The private sector is under a great deal of
scrutiny from dozens of government agencies, including the IRS
and including a host of other agencies that we come under great
scrutiny from, all of which the Postal Service is excluded
from. To the extent to which that should be increased, I would
not vote favorably.
Senator Cochran. What would be the response if you were
asked if your company could compete in the international
marketplace if your prices were subject to Postal Rate
Commission control? What would your reaction be to that, Mr.
Smith?
Mr. Smith. Well, my reaction to that would be as follows,
Senator. Again, I keep going back to this much larger question,
because you can't separate the tactical from the strategic.
The Postal Service's Government monopoly extends to letter
mail, nothing else. It has no monopoly nor a mandate to provide
parcel service or many other services that they provide. If the
Congress wants to reregulate the movement of goods after 20
years of dismantling that, with first the Air Cargo
Deregulation Act of 1977, the Interstate Deregulation Act of
1980, and then the Intrastate Preemption Act in 1994, that
would be your prerogative. And then if we're all under the
Postal Rate Commission or ICC or DOT, that's your choice.
We believe that the competitive marketplace has provided
enormous benefits to the shipping public in North America and
internationally. I don't think that that issue is the
appropriate one here, because it's the issue of the cross-
subsidization, not the issue of regulation.
Senator Cochran. Other Senators have asked us to submit
questions. We have some questions from Senator Torricelli for
the Postmaster General, which we will submit on his behalf, and
ask that they be answered for the record.
[The questions submitted by Senator Torricelli and the
answers thereto follows:]
QUESTIONS SUBMITTED BY SENATOR TORRICELLI
I know that, as Postmaster General, you have the
responsibility for appointing members to the Citizens Stamp
Advisory Committee (CSAC). These 13 individuals have the
immense responsibility of reading and evaluating over 40,000
recommendations for postage stamps every year.
Do you plan on solely accepting their recommendations for new
stamp issues, or, as Postmaster General, do you plan on making
your own recommendations? Specifically, the CSAC rejected a
petition to issue a stamp in honor of the 100th Anniversary of
the Jewish War Veterans of America, our Nation's oldest
veterans' organization. Would you be willing to overrule the
recommendation of the CSAC to issue a commemorative stamp that
they have rejected?
Answer: As you indicate, the dedicated and talented
individuals who serve on the Citizens' Stamp Advisory Committee
have the formidable--and challenging--task of reviewing the
many thousands of stamp proposals we receive each year and
recommending the adoption of the relatively small number that
can be selected. Their strengths, both individually and
collectively, have assured that the Postal Service's stamp
program is one of the finest and most diverse of any of the
world's 189 postal administrations. The wide variety of
interests, backgrounds, and accomplishments of the committee's
members assure that their recommendations are representative of
all sectors of our society.
That is an equation that I respect--and one that the Postal
Service has respected--for over 40 years. I do not anticipate
substituting my judgment for that of the committee in reviewing
and recommending the subjects for our commemorative stamp
program.
While the Committee has reviewed the proposal for a
commemorative stamp recognizing the 100th anniversary of the
Jewish War Veterans on a number of occasions, it was not
recommended for issuance. However, I am pleased to report the
committee is considering a proposal for a commemorative stamp
honoring all of those who served--American veterans.
Senator Cochran. I am also going to ask that we place in
the record this advertisement from Royal Mail that was
identified by one of our earlier witnesses, so that we will
have that in the record, as well.\1\
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\1\ The Ad from Royal Mail appears in the Appendix on page 45.
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Let me say again how much I appreciate the assistance that
you have all provided to our Subcommittee in gaining an
understanding of this issue and of the specific legislation
that we have pending before our Subcommittee. We thank you very
much for doing that, and for taking time from your busy
schedules to be with us today for this purpose.
Without any further indication of items to be included in
the record, I will announce that the hearing on this
legislation has been completed, and we will stand in recess
until the call of the Chair.
[Whereupon, at 4:17 p.m., the Subcommittee was adjourned,
to reconvene at the call of the Chair.]
A P P E N D I X
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PREPARED STATEMENT OF MR. HENDERSON
Thank you and good morning Mr. Chairman, and Members of the
Subcommittee. With me is the Vice Chairman of the Postal Service Board
of Governors, Einar Dyhrkopp. We're pleased to be here today and
welcome the opportunity to speak with you about the proposed
``International Postal Services Act of 1998.''
Mr. Chairman, I appreciate that you took the time to discuss this
legislation with me last month. I believe the dialogue we've begun will
lead to a solution that resolves the concerns behind S. 2082 and
protects the best interests of the Nation and America's mailers.
When you introduced this legislation, you raised two questions.
One, ``Do international mail services pay their own way?'' And two,
``Should Congress put international rates under the jurisdiction of the
Postal Rate Commission, as they did with domestic rates in 1970 when
the Postal Service was created?''
The answer to the first question is yes. International services do
pay their own way and more. As you pointed out when introducing the
bill, cross-subsidies between different classes of mail are prohibited
under postal ratemaking statutes.
In each rate case, the Postal Service must demonstrate to the
Postal Rate Commission that total international revenues exceed total
international costs. This ensures that domestic services, such as
First-Class Mail, are not cross-subsidizing international ones.
The law also provides a remedy to those who believe the Postal
Service is charging domestic rates that don't conform to these
requirements. They can file a complaint with the Rate Commission, which
has jurisdiction to investigate and recommend remedial action to the
Governors of the Postal Service. This remedy, in conjunction with the
ratemaking process, makes it unlikely that an actual cross-subsidy
could be established or survive.
Our performance bears this out. Our international business has run
a surplus in each of the last 5 years. Last year, fiscal year 1997, we
grossed $1.61 billion from our international business. Attributable
costs were $1.34 billion. The surplus was $273.2 million. These results
have been certified by independent auditors. Consequently, rather than
customers paying higher domestic rates to support international
services, international services are making a contribution to our
overhead that helps keep domestic rates down.
I believe these facts and the established safeguards are a
compelling response to the cross-subsidy issue. Nevertheless, in view
of the Subcommittee's interest, we're taking further steps. The Board
of Governors has asked the Inspector General of the Postal Service to
conduct an audit of the allocation of costs between the Postal
Service's domestic and international products and services. Their
findings will be reported to the Board and to you. This will provide an
objective, factual foundation for answering the cross-subsidization
issue. If any weaknesses emerge during this review, you have my
assurance that the Postal Service is willing and ready to work with you
to correct them.
That brings us to the second issue--whether international rates
should be placed under the domestic price setting system. As you might
expect, we firmly believe the answer is no, for three reasons.
First, unlike domestic letter mail, our international postal
business is not protected by the Private Express Statutes. Everything
we do in this field is subject to marketplace competition. The market
is the driving force regulating international postal services.
Any party whose prices were subject to regulation would be at a
unique disadvantage. In our case, it would take 10 months to change
prices. In addition, closely-held proprietary information on markets
and pricing strategy would be an open book to other firms and hundreds
of other postal administrations.
Second, we're not dealing with a single, uniform market, but
hundreds of marketplaces. Each has its own laws, customs, and market
nuances. For example, in Germany, Deutsche Post plans to go public in
the year 2000. While in China we're dealing with a state-run
institution with complex bureaucratic overhead. In every country,
circumstances are different. Transportation costs vary from border to
border and change constantly. Currencies fluctuate daily. Tariffs and
entry requirements can be revised at any time. This places a premium on
our ability to act quickly and to tailor specific customer solutions
under widely varying conditions.
Further, the domestic ratemaking process wasn't designed to handle
the unique requirements of international mail. It would create an
administrative nightmare for regulators. We have about 10 products and
services that go to hundreds of countries. There are 189 postal
administrations represented at the Universal Postal Union alone. The
actions of these nations determine about half of international mail
costs, in the form of ``terminal dues'' we pay them to deliver U.S.
origin mail on their soil. We have limited influence on these costs,
which are driven by the internal dynamics in the individual countries.
My third point is that none of this would be in the best interests
of customers. It would tend to drive us out of the international
marketplace and deprive consumers and businesses of all sizes of a
valuable service alternative.
Under current law, we have used flexibility in international
services to design and implement Global Package Link--a service that
helps American companies sell to individual customers abroad. We have
negotiated service agreements that meet special price or service needs
of a variety of mailers. In every case, we have opened doors to foreign
markets for American customers by providing them choice and value.
Placing international services in a domestic ratemaking format
would take away our flexibility. As I mentioned earlier, postal rate
proceedings typically take 10 months to complete. In addition, the
negotiated service agreements customers expect in international markets
are not available before the Postal Rate Commission. Without them, we
would expect to lose a large number of valuable customers. But more to
the point, they would lose us.
For these reasons, the Postal Service strongly believes that the
approach taken in S. 2082 goes well beyond what might be needed to
resolve the issues it's intended to address. Nevertheless, we're ready
to do our utmost to debunk the allegations of cross-subsidization to
the full satisfaction of this Subcommittee. We ask however, that in
doing so, we do not compromise the ability of the Postal Service to
serve its customers or to remain viable in world markets.
We are entering a new era of globalized postal services. Foreign
postal administrations are buying private delivery firms. They're
setting up shop in other nations. That includes right here at home. We
believe it is imperative that the United States Postal Service retain
its ability to respond. We are the bridge between universal mail
service at home and international markets. This Nation and our
customers need that bridge to remain strong, open, and toll free.
That concludes my prepared remarks. Vice Chairman Dyhrkopp would
now like to make a statement.
__________
PREPARED STATEMENT OF MR. DYHRKOPP
Mr. Chairman, I am pleased to be here with Postmaster General
Henderson to discuss the international mail services of the United
States Postal Service. As the Vice Chairman of the Board of Governors
of the Postal Service, in the absence of Chairman Winters who is out of
the country on personal travel, I want to lend the support of the
Governors to the Postmaster General's statement before you today.
I also want to assure you and the other Members of your
Subcommittee that the Board of Governors take very seriously our
oversight responsibilities as well as our role in the rate making
process. As you know, this takes on even greater significance in the
international mail area where the Postal Reorganization Act authorizes
the Postal Service to set international rates.
Mr. Chairman, with that in mind, I would like to take a step back
in history. The Postal Service authority over international mail
bestowed by the Nation's first Congress was continued under the Postal
Reorganization Act. In creating the Postal Service in 1970, the
Congress divested itself of the practice of Congress setting domestic
rates. Instead, Congress established shared responsibilities for
setting these domestic rates in the Postal Rate Commission and the
Postal Service. However, it also left in place the century old practice
of having the Postal Service set the international rates. Indeed,
Section 403 of the Postal Reorganization Act specifically directs the
Postal Service to arrange for the delivery of written materials and
parcels ``throughout the world,'' and to provide such other incidental
services as it finds ``appropriate to its functions and in the public
interest.''
As the postal administration of the United States, with the
authority over international mail and rates, the Postal Service is also
uniquely suited to represent the United States at the Universal Postal
Union, where it can and has dealt directly and effectively with the
postal administrations of other countries.
In fact, the Postal Service is a leader in the Universal Postal
Union. The Postal Service has taken a leading role in important UPU
work, and has been effective in assisting the UPU to be more responsive
in a rapidly changing world.
The question as to whether international rates should be placed
under the domestic price setting system is troubling to the Board. Here
again the Postmaster General has laid out several compelling arguments
as to why the present system is in the best interest of the American
public, with which the Board agrees.
With the international arena largely a deregulated environment, the
Postal Service faces serious competition. The Postal Service is but one
of many customer choices including several domestic private courier
services.
In addition, several foreign postal administrations have set up
shop here in the United States and are aggressively competing for the
international business. All of these domestic and international
competitors are unregulated.
The Board is very concerned over the allegations that international
mail services are being cross-subsidized with Postal Service domestic
products and services. The Postmaster General very effectively
communicated that this is prohibited under existing ratemaking
statutes. We have been assured by management in discussions on
international mail services that will not occur.
We now have the benefit of a certification by an outside CPA firm,
retained by the Board of Governors, establishing that domestic does not
subsidize international rates. There is an additional layer of
protection in having a firm independent of the organization certify the
accuracy of costing and revenue data.
Nevertheless, the Board has also taken a further step to address
the allegations which gave rise to this bill. We have asked the
independent Inspector General of the Postal Service to conduct an audit
into the cost relationships between domestic and international postal
services.
Their findings will be reported to us and made available to you.
This should provide an objective review and a factual foundation for
answering the cross-subsidization question. As the Postmaster General
has indicated and we fully support, the Postal Service is willing and
ready to work with you to implement practical solutions to any problems
that emerge.
Mr. Chairman, in closing, I want to assure you and the Members of
the Subcommittee that the Board of Governors of the Postal Service were
unanimous in our selection of Bill Henderson as our new Postmaster
General. We look forward to working with Bill and fully support him in
his future direction of the Postal Service.
Mr. Chairman, that concludes my prepared remarks. We will be happy
to answer any questions at this time.
__________
PREPARED STATEMENT OF MR. McCORMICK
Chairman Cochran and Members of the Subcommittee, my name is
Christopher McCormick. I am Senior Vice President of Advertising and
Direct Marketing for L.L. Bean, Inc. I appreciate the opportunity to
appear before you today to address concerns we have with S. 2082 and
it's impact on customers of the United States Postal Service's Global
Package Link (GPL) service.
L.L. Bean is the largest outdoor specialty catalog marketer in the
United States. We are located in Freeport, Maine where the company was
founded 86 years ago. Our 1997 sales exceeded $1.1 billion to customers
in the United States and in over 150 countries worldwide. Approximately
10 percent of our revenue is derived from International sales. The
focus of our International business is Canada, United Kingdom and Japan
with the Japanese business constituting about 90 percent of overall
International revenue.
A key to competitiveness for direct marketing businesses is the
availability of high quality and low cost parcel shipping and catalog
delivery services. For L.L. Bean, these costs constitute over $100
million dollars annually. More than $40 million dollars is related to
delivery costs for catalogs and other forms of customer communications.
The remainder represents costs for domestic and international package
shipping and delivery. The success of our business is highly dependent
upon effective partnerships with the USPS and commercial parcel
shippers.
Fortunately, the U.S. market is well served by high quality and
competitive commercial shippers including those represented here
today--FedEx and UPS, as well as, a national postal service with a
dedication and commitment to its customers.
L.L. Bean has enjoyed excellent relations with each of these
organizations over the years. FedEx is today our preferred carrier for
our domestic package delivery. Both the Postal Service and UPS, have
handled this business in the past. USPS, through Global Package Link
(GPL), services our Japanese parcel and catalog delivery needs and of
course, delivers our domestic catalogs.
In sum, L.L. Bean, the direct marketing industry and in turn, the
Nation as a whole, are well served by these quality companies and
worthy competitors.
L.L. Bean believes that careful deliberation and extreme caution
are called for in any changes contemplated by Congress that might
effect the competitive playing field in the parcel delivery industry.
In L.L. Bean's experience, healthy competition in the industry has
been the impetus for service innovations, improved customer focus and
lower costs. Particular customer needs, or market niches, are best
served by different companies at varying points in time, and individual
company strengths and their competitive edges, evolve and change over
time.
By way of illustration, I would point to L.L. Bean's experience in
our relationship with FedEx for domestic package delivery. In 1993,
FedEx developed an exclusive package delivery service for L.L. Bean.
This new service made available superior tracking and tracing
capabilities that allow our customers to know the status of orders in
route to delivery. We were able to implement this new service while
holding the line on costs and reducing delivery times. Today an
equivalent level of service is broadly available in the market and
serves as the standard for domestic package delivery.
Similarly, in 1994, L.L Bean identified a need for a break-through
in costs and quality of service for our international customers. This
need was driven by our growing business in Japan. Customer research
told us that we could not sustain or grow this business over time
without major modifications to existing practices. The most significant
issue the research identified was the need to reduce shipping charges
and delivery times.
To place this issue into context, L.L. Bean has traditionally
served our international customers through a cross-border mail order
business model. We accept orders through the phone, mail or fax at our
Freeport location and ship packages from Freeport to our international
customers. As our Japanese business experienced more rapid growth, we
chose to serve this market through the existing business approach with
additional service enhancements. This business model allows L.L. Bean
to leverage our customer service, order fulfillment capacities, and
talented workforce in Maine as opposed to investing in in-country
facilities and labor.
From an U.S. trade perspective this approach allows companies to
operate in foreign markets from a domestic base thereby contributing to
the health of the U.S. economy by generating domestic investments and
jobs. However, for this approach to succeed the costs of package
delivery represents a substantial barrier to overcome.
The USPS responded to our needs for lower costs and reduced
shipping times with their proposal in 1994 to handle our business to
Japan through a new service they had developed known as Global Package
Link (GPL). We chose the USPS proposal over five others received
through a competitive review process. The GPL offering reduced our 1994
delivery costs per package by approximately 50 percent, while reducing
delivery times from 2-3 weeks down to 5-7 days. The USPS offering also
met the critical test for universal service to all households in Japan.
While the details of the competing proposals we considered are
protected by confidentiality agreements, I can tell you that the costs
varied widely. One carrier's proposal was very close in price to USPS,
while the others ranged from two-thirds higher to more than double the
GPL offering. All carriers were able to meet our delivery time standard
but the Postal Service product provided the greatest certainty of
universal household service within Japan.
GPL has worked well for L.L. Bean over the three years it has been
in place. Indeed it has become vital to the continued existence of our
cross border mail order business in Japan. This business experienced
rapid growth in the early 1990's at a time in which our catalog was a
unique offering to Japanese consumers and the dollar-yen relationship
was most favorable to mail order products priced in U.S dollars. Since
1994 the change in the exchange rate has caused our products to
experience a relative price increase of over 50% as compared to goods
priced in yen.
Additionally, L.L. Bean catalogs are no longer unique to Japanese
consumers. The Japanese consumer now has an unlimited choice of mail
order offerings from U.S. and Japanese mail order companies and from a
wide array of world wide mail order competitors. Many of these
competitors have chosen to serve this market by investing in in-country
facilities and capacity, including several well-known U.S. companies.
Naturally, catalog businesses with in-country facilities have shipping
cost advantage, and catalog customers in Japan are becoming
increasingly sensitized to shipping rates.
Not surprisingly our customer research bears out this heightened
consumer sensitivity to catalog shipping charges. ``Have to pay too
much for delivery'' is the most cited problem with 48% of respondents
in a recent customer survey identifying this as an issue. Sixteen
percent of those customers indicated that they were ``likely to not''
purchase from L.L. Bean due to this issue and a full 68% indicated that
they ``may not'' repurchase.
From these findings, we estimate that the high cost of shipping may
cost L.L. Bean $3.6 million to $15.1 million in 1998 sales.
It is clear that existing catalog customers in Japan are
dissatisfied with the current cost of shipping from the U.S. to Japan.
Not reducing existing rates will cause significant market loss.
Increased shipping rates would jeopardize the existence of L.L. Bean's
direct sales to Japan and our international business unit.
While this business has been impacted by other factors including
the unfavorable dollar-yen relationship, increased competition and the
overall decline of the Japanese economy, shipping charges remain the
most vital factor to keep companies like ours in the business of cross
border mail order shopping. I am sure that other customers of the
USPS's GPL service can describe similar impacts on their businesses in
Japan as well as other countries.
The struggle between the USPS and the commercial parcel shippers
over the Postal Service's role in international shipping has
implications well beyond which competitor obtains this business. Given
the extreme sensitivity of mail order customers to shipping charges,
the outcome of the current struggle could determine whether this form
of direct foreign sales survives and grows or slows to a trickle.
There are two alternatives to its survival. One is the further
movement of U.S. direct marketers away from serving foreign customers
from a domestic base toward an in-country business model. This may
require significant capital investment. Investment that could have been
made in the domestic market.
The other alternative is for U.S. companies to abandon the business
to global competitors that are able to effectively address the shipping
cost issue through more cost effective postal or commercial carrier
arrangements available through their host countries. This would
represent not only a loss to U.S. mail order firms but to the economy
as a whole through erosion of domestic jobs and investment.
I am aware of the variety of issues and challenges the competitors
of the USPS have raised to the continued role of the Postal Service in
serving the international package delivery market. I would not claim
that L.L. Bean as a customer of the USPS is qualified to independently
examine in depth each of the claims. We have, however, participated in
a General Accounting Office review of some of the issues. This study is
due out very soon.
We are also aware of the specific claims that give rise to the
amendment you are considering here today, i.e., that the GPL service is
cross-subsidized by monopoly mail thereby allowing the USPS an unfair
competitive advantage.
Again we are not privy to the USPS cost-justifications for the
prices they charge but we have reviewed this question with USPS
officials. We have been assured that this service is not cross-
subsidized and can not be cross-subsidized under existing law.
As I stated earlier in this testimony, from our experience
different competitors in the package delivery business tend to serve
specific business needs or market niches better than others at
different points in time. The USPS has a history of serving the
specific customer need our current international package delivery
business requires. The nature of our business calls for the foreign
delivery of a high volume of relatively low value packages to
individual residences. In contrast, USPS's commercial competitors for
international delivery have historically served a market that requires
the shipment of relatively higher value business parcels delivered in
multiple packages to a single foreign business address.
We look forward to the day that mail order companies have a viable
choice of shippers to service our international customers, at a price
that will allow our business to survive and prosper. We are confident
that this choice will emerge as it has in the domestic market but urge
careful thought and cautious action, on the part of Congress in
intervening in a way that disrupts the current balance among strong,
healthy and vigorous competitors in the package delivery business.
Thank you for allowing me to address this Committee. I'd be happy
to answer any questions you may have.
__________
PREPARED STATEMENT OF MR. SMITH
On behalf of the 170,000 employees of FDX and its subsidiaries, I
would like to thank the Subcommittee for the opportunity to appear
today and present our views on necessary reforms in U.S. policies
towards international postal and delivery services. S. 2082 provides
for reform in one very important area: Postal Rate Commission oversight
of international rates. This is an effort that FDX has long supported.
In addition, I urge this Subcommittee to consider two other corrections
in current postal law. First, replace the Postal Service with a neutral
executive department as the U.S. policy marker for international postal
and delivery services. Second, apply laws that affect international
trade to all competitive services equally whether they be private or
postal. All three of these reforms are necessary to correct problems
which were either unseen or ignored in the 1970 Postal Reorganization
Act.
Rapidly changing technology and new business practices over the
past 30 years have fundamentally changed the commercial environment of
the Postal Service. In response, the Postal Service has become more and
more aggressive in competing with the private sector. The 1970 act
fails to provide ground rules for this competition. Today, all too
often we find that a legal privilege originally granted the Postal
Service as a shield to permit public service has become a sword that
provides unfair competitive advantage. While we are ready to compete
with anyone, including the Postal Service, the fundamental rule must be
that when the Postal Service enters a competitive market, it leaves
behind its governmental privileges and competes on the same terms as
everyone else. Otherwise, both competitive and non-competitive markets
are distorted, to the detriment of monopoly mailers, private
competitors and the U.S. economy as a whole. These problems can be
reviewed and addressed only by the committees of jurisdiction in
Congress because, remarkably, the 1970 act failed to vest any Executive
Department with continuing responsibility for policy issues in the
delivery services sector.
I am here today to discuss reform specifically in international
postal services. While balanced and comprehensive reform is required in
both domestic and international services, there are some aspects of
international postal policy where the need for reform is so urgent that
we cannot wait for a comprehensive reform package. International postal
policy is even more antiquated than domestic postal policy. When
Congress reorganized the Postal Service in 1970, it was so preoccupied
with the domestic issues that it paid virtually no attention to the
international. International services are today the most important area
of growth in our industry. Yet the governing legal framework lacks even
the checks and balances introduced in the domestic sector in 1970.
In 1970, the Postal Service faced minimal competition in
international services, and there was little temptation to overcharge
monopoly mailers and undercharge competitive services or use
governmental privileges for commercial ends. Today, the situation has
changed radically. With improvements in long distance communications
and transportation technologies, international delivery services have
become more important and more diverse. Private express companies like
Federal Express, UPS, and DHL have led the way in innovation and
service quality. National post offices such as the Dutch and British
have responded by ``going global.'' A British postal official announced
recently, ``The forces of globalization are rendering obsolete the idea
of a national postal market.'' Today, the total failure of the 1970 act
to address international issues can no longer be ignored.
Again, there are three specific reforms in the international area
that I believe need to be addressed in this session of Congress:
LFirst, regulatory oversight of domestic postal services
should be extended to the international postal services as well.
LSecond, the administration should be charged with
responsibility for developing and promoting a pro-competitive, pro-U.S.
policy for international delivery services just as it is for all other
international services.
LThird, U.S. laws that vitally affect international trade,
like customs laws, should apply equally to all competitive services.
I will explain each of these points briefly.
The case for the first point--extension of Postal Rate Commission
jurisdiction--is obvious. The policy reasons for PRC jurisdiction in
international markets are exactly the same a sin domestic markets. In
both cases, an independent check is needed to ensure that the Postal
Service does not overcharge monopoly customers and use the money to
subsidize rates for competitive services. The Postal Service itself
recognizes these constraints should apply to international rates as
well as domestic rates, but they have always resisted the idea of an
independent check. The Postal Rate Commission should have the same
authority to enforce these policies in the international market as in
the domestic market.
The Postal Service has argued that Postal Rate Commission
jurisdiction should not be extended to international services, because
the international market is more competitive than the domestic market.
If anything, this argument implies a greater rather than a diminished
need for regulation; a higher level of competition provides a greater
temptation to cross subsidize competitive services from the Postal
Service's huge pool of monopoly revenues. The Postal Service has also
said that the delays and costs of PRC review will make it more
difficult to compete in international markets. This argument, however,
in no way suggests that the protections afforded in the domestic market
should be missing in the international market. This is an argument for
improving and streamlining the entire regulatory process. Such a
comprehensive reform plan is now under consideration in the House and
supported by FDX. The need for comprehensive regulatory reform some
time in the future does not, however, undercut the need for extending
the regulatory protections of the 1970 act to the international arena
today.Another concern seems to be that oversight by the Postal Rate
Commission may result in increased rates for certain international
postal services. However, the Postal Service itself maintains that all
international rates cover appropriate costs. If that information is
correct, there should be no need for significant rate increases. All we
want is an independent check of the Postal Service's claims. Even if
the Postal Rate Commission were to find that some international rates
are priced too low, the effect on large mailers must be seen in proper
perspective. If the Postal Service is underpricing some services, it
must be covering costs by cross-subsidizing from other products. Large
mailers are big buyers of these other postal products. In other words,
if a large mailer is saving money on some international rates, it is
also probably paying for this practice through higher postage rates on
letters or advertising mail. Overall, it is unlikely that large mailers
realize significant net gains from underpriced international rates.
Meanwhile, it is certain that underpricing international postal
services creates market distortions that are damaging for all
concerned. Underpricing markets is a strategy for discouraging
investment and innovations.
In my view, there is no justification for the Postal Service
deliberately undercharging any services, domestic or international.
This is clearly the policy embodied in the 1970 act. The same
procedures that prevent such abuses in domestic postal services should
apply to international postal services.
Let me turn now to the second point--the need for a pro-
competitive, pro-American trade policy towards international delivery
services. Today, the Department of State, the Department of Commerce,
and the U.S. Trade Representative work together to promote free and
fair trade in international services. This policy serves the best
interest of the United States, because the United States excels in
sophisticated services. Recently, these efforts have yielded
spectacular results in the telecommunications sector.
One type of international services, however, is missing from the
trade-in-services mission of these Executive Departments: International
postal services. Why? Because the 1970 act failed to shift authority to
represent the United States at inter-governmental organizations from
the business-like Postal Service to an Executive Department which
represents all social and business interests of the United States
generally. The resulting conflict of interest is an anomaly in American
diplomacy. It's as if AT&T were responsible for U.S. telecommunications
policy or United Airlines for international aviation policy. Important
negotiations at the Universal Postal Union, the World Customs
Organization and the World Trade Organization are imminent. Yet the
trade-in-services machinery of the U.S. Government has so far paid no
attention to these negotiations which are crucial to the future of our
industry.
Not only is the combination of diplomatic and operational authority
in the Postal Service unique in American law, it is increasingly
becoming an anachronism at the Universal Postal Union itself. Today,
most developed countries are represented at the UPU by two types of
officials, ``regulators'' and ``operators,'' each with distinctly
different responsibilities. At the UPU, regulators from countries such
as Germany and the Netherlands are taking the lead in proposing
institutional reforms that will better separate commercial and
governmental functions. Meanwhile, the United States is one of the last
major countries to send an operator to represent the government itself.
In suggesting that an Executive Department should represent the
United States at inter-governmental organizations, I am not suggesting
the Postal Service should lose the power to negotiate operational
agreements with foreign postal services. I would like to emphasize this
point. As far as FDX is concerned, the Postal Service should have the
same authority to negotiate with foreign post offices as FedEx has to
deal with foreign companies. Perhaps nine-tenths of the current
Universal Postal Convention would be considered operational in nature
and left to the commercial discretion of the Postal Service. However,
when an international agreement requires the status of international
law--when it constitutes an obligation of the United States as distinct
from the Postal Service--then such an agreement should be negotiated
and concluded by an officer of an Executive Department and not by a
``business-like'' Postal Service.
Let me give you a simple example. The Postal Service and other
postal officials at the UPU have agreed on a simplified international
customs form for shipments valued at $400 or less. It looks like this
[Customs Form CN 22]. The shipper, not the post office, is responsible
for filling out this form. Postal services are generally not required
to provide the number of dutiable packages shipped through the post nor
do they generally give advance information on the shipments. The UPU
Convention also exempts post offices from liability for Customs
misdeclarations and any obligation to post customs bonds.
Meanwhile, when a private express carrier handles the same types of
shipments, it rather than the shipper is responsible for all customs
documentation. The customs information required is far more detailed
and complicated and presented in advance of the shipments arrival. We
are also liable for any customs misdeclarations and must post adequate
bonds to cover this liability. Customs can choose the shipments it
wants to see, and we present those shipments when the flight arrives.
We also pay all duties and taxes owed before the shipments are released
so that full duties and taxes are paid on 100 percent of all our
dutiable shipments. If a private express carrier were to deliver
packages after performing the minimal procedures required of a shipment
coming in through the post, it would be subject to fines and penalties.
Just to put that in perspective, I have here an average size manifest
for one flight which contains approximately 7,000 shipments. If we
followed the process for foreign postal shipments coming into the
United States, we would be subject to fines and penalties up to the
total value of the shipments, which, assuming an average value of $200
would amount to a $1.4M penalty for that one flight.
The correct customs policy should be a matter for the U.S.
Government, not the Postal Service, to decide. We strongly support
customs simplification and believe it is in the best interest of our
industry as well as the shipper. Shippers should have a choice of
carriers who can use simplified customs procedures. It is simply not
right for the Postal Service to use the diplomatic power of the United
States to promote international agreements that limit such privileges
to postal shipments.
This example leads directly to my third point--Customs laws are the
single greatest impediment to expansion of international delivery
services. Unduly rigid and detailed customs regulations impede all
types of traffic, but as is apparent from the above discussion, they
weigh more heavily on private shipments than postal. It is simply for
historical reasons that postal shipments have access to the simplified
procedures suitable for commercially insignificant shipments while the
same shipments by private carriers are burdened with customs procedures
developed to regulate cargo carried by sailing ships.
The development of truly global delivery services will being to the
international economy the same enormous benefits that national delivery
services have brought to the national economy. Such services will be
impossible, however, until customs procedures are greatly simplified
for all. This day will not come so long as a large and politically
powerful class of operators, the post offices, have a commercial
interest in blocking across-the-board customs simplification. FDX and
other private carriers have spent more than a decade working for
customs simplification at the World Customs Organization. While we have
made progress, without the support of the post offices we will never be
able to persuade customs officials of the need for really fundamental
simplifications.
The only solution to this impasse is to apply the customs laws
equally to all operators for competitive services. By this, I do not
mean a one-size-fits-all approach. Different levels of customs
procedures may be appropriate depending upon the nature and value of a
shipment, the extent or advance of computerized documentation, etc., by
``customs equality,'' I only mean that all levels of customs procedures
should be equally accessible to all types of carriers when tending
similar shipments for customs clearance.
I know there are some who say that a U.S. policy of equal customs
treatment for postal and private shipments will deprive U.S. shippers
of desirable international postal services like Global Package Link.
Not only does this contention ignore the rights of private carriers, it
also lacks rationale basis. If the United States had such a policy, why
would a foreign country who was already allowing importation of a large
quantity of U.S. goods under simplified customs procedures continue to
restrict such imports to a single U.S. operator in defiance of this
U.S. policy? It would lose nothing by allowing simplified clearance for
all U.S. operators under similar conditions. On the other hand, by
denying simplified clearance to U.S. carriers, a foreign country will
make it more difficult for its citizens to import American goods, and
it will fun the risk of the U.S. retaliation. The United States could
certainly respond by withholding simplified customs treatment for
postal shipments exported to the United States from such country,
especially considering that the foreign country will, in effect, be
favoring foreign post offices over all U.S. carriers. What foreign
country would want to start a trade dispute of such magnitude over a
mere formality?
I am convinced that true worldwide customs simplification must
await equal customs treatment for all operations. Post offices and
others who seek to preserve simplified customs processing as a special
privilege of post offices are the opponents, wittingly or not, of
genuine customs reform and the evolution of efficient, global delivery
services.
FDX certainly supports S. 2082, because it implements one of the
three points that I have noted, extension of Postal Rate Commission
jurisdiction to international mail. On the other hand, we feel strongly
the other two points, a neutral U.S. international postal policy and
customs simplification, are absolutely crucial to achieve even a
minimal level of reform in U.S. international postal policy. Both of
these issues are a critical juncture where immediate and decisive
action by the United States is urgently needed.
Thank you again for the opportunity to prevent the views of FDX.
__________
PREPARED STATEMENT OF MR. KELLY
Good morning, Mr. Chairman and Members of the Subcommittee. My name
is Jim Kelly, and I am the chairman and CEO of United Parcel Service.
I appreciate the opportunity to discuss a topic that is of foremost
importance to me, our company, and the 330,000 people we employ
worldwide. The need for meaningful reform of the U.S. Postal Service
has never been more clear or more timely. I applaud your efforts here
in this subcommittee and commend your colleagues in the House, who are
also working diligently to examine the role of the Postal Service in
today's competitive marketplace.
We fully support this legislation. The proposal addresses a serious
problem: the fact that the Postal Rate Commission currently has no
oversight authority on international postal rates and services. In
effect, the current limited jurisdiction that the PRC has over the
Postal Service stops at the water's edge. That leaves this government
agency free to do internationally what they are prohibited from doing
domestically. No other government agency operates without basic
oversight over its international activities.
Commission oversight is particularly important because the Postal
Service is increasingly using its government status and advantages to
undermine free market practices both here and abroad. We contend the
Postal Service is using revenue from its monopoly to subsidize products
that compete with the private sector, including international services.
This abuse of the monopoly has a direct impact on American
consumers, who are now being forced to pay significantly more for
first-class postage than they otherwise would. Why is the Postal
Service asking for another billion dollars every year through the penny
increase on the price of a monopoly stamp when they have generated more
than a billion dollars in surplus every year for the past three years
and are doing so again this year? Is the Postal Service truly planning
to improve service and focus on its mandate of universal letter mail
service, or is the agency going to use this revenue to subsidize
international and domestic services that compete unfairly with the
private sector? We suggest it will be the latter.
If the Postal Service were truly committed to its mandate of
providing universal letter mail service, why is it entering into
numerous other activities wholly unrelated to this mission? The Postal
Service is now processing bills, selling mugs, T-shirts and hats, and
is hawking telephone cards. What does this have to do with delivering
the mail? Absolutely nothing. In fact, it forces the Postal Service to
lose focus on its primary mission.
We believe a first step toward rectifying this problem in the
international arena is to give the Postal Rate Commission the power to
set international rates and services. The result will be more fair and
equitable rates because for the first time there would be a real
relationship between actual costs and international postal rates. If
the playing field is leveled, the Postal Service will be forced to look
harder at its primary mandated goal of providing efficient universal
delivery of letter mail.
Let me give you some examples of how the Postal Service is
currently operating in a manner that is anti-competitive and anti-free
enterprise. As a government agency, the Postal Service enjoys numerous
advantages that no private company is permitted. I'm sure that you and
the other Members of the Subcommittee have heard the exhaustive list,
but permit me to give you a few highlights. The Postal Service pays no
income taxes--Federal, State, or local. It enjoys unfair customs
advantages. It is immune from motor vehicle licensing fees for the
hundreds of thousands of vehicles it operates on our Nation's highways.
It is not subject to OSHA enforcement. And the Postal Service can
borrow at favorable interest rates because the federal government backs
its debts.
But the biggest advantage of all is that the Postal Service is able
to use its legally sanctioned monopoly like a weapon against its
competitors. The Postal Service amasses about $60 billion dollars every
year in revenue, and about $50 billion of this comes from its
monopoly--which is protected from effective competition. We are all
familiar with the phrase that ``Power corrupts and absolute power
corrupts absolutely.'' That is certainly true of monopoly power.
Let me give you an example of how the Postal Service is able to use
its monopoly unfairly in the international arena. The Postal Service
charges $26.63 to ship a 10-pound package via its Global Package Link
service from San Francisco to London. That's $3 dollars less than they
charge to ship that same package via Express Mail from Washington, D.C.
to Baltimore. Common sense dictates that it can't cost less to send a
package overseas than to send it domestically.
During a recent appearance at the National Press Club, former
Postmaster General Marvin Runyon tried to explain this anomaly by
saying it was an apples to oranges comparison because the GPL rate
applies only where the shipper sends 10,000 packages overseas. That
explanation is disingenuous at best. It implies economies of scale.
What the Postmaster General did not say is that in order to get the
cheap GPL rate, the shipper need only send 10,000 packages over the
course of an entire year to all or any of the 11 countries where GPL
service is available. It doesn't take an economist to know that any
cost savings in the case of large volume shipments exist only when the
large volumes are shipped at one time to one place, and not in bits and
pieces over the course of a whole year to different destinations.
So, how can the Postal Service afford to charge one-quarter of what
the private sector charges for these international shipments? It can't.
The Postal Service is subsidizing the cost of its international
competitive services, and of other competitive services, from the
revenues it makes on its letter monopoly.
I have no doubt that we would uncover other instances where the
Postal Service is unfairly undermining its competition on international
rates--if only the data were publicly available. However, the Postal
Service has consistently refused to expose to the light of day any
meaningful cost and rate information on its individual international
services. That is unacceptable in the case of a government agency. In
this era when even the CIA is being forced to declassify sensitive
information at record speed, you would think the U.S. Postal Service
could come clean on its international costs. This refusal to make the
information available for public scrutiny leads naturally to the
question, ``what does the Postal Service have to hide?''
This is an example of why the Postal Rate Commission must be
strengthened both domestically and internationally. In fact, the PRC
itself has told Congress that it needs more oversight authority
precisely because the Postal Service is competing more and more with
the private sector.
The bill before you would go a long way toward assuring Congress
and the American public that the Postal Service would not be able to
abuse its monopoly power. By giving the Commission the same
jurisdiction over international postal rates paid by American citizens
as the Commission has with respect to domestic postal rates, Congress
would dispel some of the questions now being raised. And a fair and
rational rate setting process will foster true and open competition in
the global marketplace.
In fact, additional changes are also needed to make Commission
review fully effective, both internationally and domestically. The
Commission should be given subpoena power, and its decisions should be
made final and binding, subject only to judicial review, rather than
being reviewed by and subject to modification by the Postal Service
through its Governors.
I would not be before you today if the Postal Service were focusing
on its primary mission of delivering first-class mail. Unfortunately,
the Postal Service is using its government advantages to systematically
and unfairly undermine its private sector competitors. We do not object
to free and open competition. In fact, we embrace it because it makes
us a stronger, smarter company. But we vehemently object to unfair
competition on an unlevel playing field where government-granted
advantages are used like a weapon in the marketplace. Your legislation
will take a meaningful step in the right direction by helping to level
the playing field internationally.
Thank you for this opportunity to testify on this important
subject. Mr. Chairman, I request that my written remarks be submitted
for the record. Thank you. I would be happy to answer any questions
Members of the Subcommittee might have.
__________
PREPARED STATEMENT OF DHL WORLDWIDE EXPRESS, INC.
I. Introduction
DHL Worldwide Express, Inc. (``DHL''), the U.S. arm of the DHL
Worldwide Express Network (the ``Network'') 1, appreciates
the opportunity to comment on S. 2082, the International Postal
Services Act of 1998. The Network employs over 59,000 people, serves
226 countries and generates over $6 billion in annual revenues. As the
world leader in the international transportation and delivery of time-
sensitive business documents and parcels, DHL strongly supports this
legislation, which would subject international postal services to
review by the Postal Rate Commission (``PRC'').
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\1\ The Network is comprised of essentially two completely separate
corporate entities: one, DHL Worldwide Express, Inc., a Delaware
Corporation, which, through its wholly owned operating subsidiary, DHL
Airways, Inc., is responsible for pick-up and delivery (including air
transport) of documents and packages originating in, or destined for,
points within the United States and its Territories; the other, DHL
International Limited (``DHLI''), a foreign corporation, which, through
subsidiary and affiliated companies, performs these same pick-up and
delivery functions for every point served by the Network outside of the
United States and its Territories. DHL and DHLI act as delivery agents
for each other in their respective regions.
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DHL has previously testified before Congress on comprehensive
postal reform issues and wishes to commend Chairman Cochran and the
Subcommittee staff for addressing an important element in regulatory
reform involving international postal services. Extension of PRC
jurisdiction to international mail products, however, is but one of
three essential elements required to provide a level playing field
between the U.S. Postal Service (``USPS'') and private international
delivery companies.
In order to ensure fair competition between USPS and private
express carriers in the international delivery market, DHL believes
that S. 2082 should be amended to include:
LProvisions to establish a clear separation between the
regulatory and operational functions of the U. S. Postal Service
(``USPS'') with respect to international postal services, including (i)
repeal of USPS' authority to regulate or discriminate against its
private competitors through its suspension power under the Private
Express Statutes, and (ii) elimination of the inherent conflict of
interest posed by USPS' representation of the Federal government's
interest in international policy-making bodies such as the Universal
Postal Union; and
LProvisions to ensure equal application of the laws--
including equal application of the anti-trust and customs laws--to
international delivery services provided by the USPS in direct
competition with private firms.
These elements would help ensure fairness in the international
delivery sector by restricting the ability of the USPS to employ its
quasi-governmental status and special legal privileges to discriminate
against, and compete unfairly with, private international delivery
companies. International postal reform legislation which includes these
important additional provisions is now being considered in the House of
Representatives. As explained more fully below, DHL strongly urges
inclusion of these provisions in Senate postal reform legislation as
well.
II. DHL and the International Air Express Industry
DHL specializes in the rapid, door-to-door transmission of time-
sensitive business documents and small parcels in the United States and
around the world. DHL is a fully integrated transportation and delivery
company: it operates its own fleet of jet aircraft, helicopters and
ground vehicles and also employs on-board couriers, scheduled
commercial aircraft and charter planes. To facilitate clearance of
international shipments, DHL maintains its own customs brokerage
operation in each of its scheduled ports of entry in the United States.
By exercising complete administrative control over each document or
parcel from pick-up to delivery, DHL provides a level and quality of
service that cannot be matched by the international services
traditionally provided by the USPS, foreign postal administrations and
other entities that lack technologically advanced tracking systems and
whose administrative control over shipments stops at national
boundaries.
In today's interdependent global market, the transfer of
information has become as significant to the world's business as the
transfer of goods and capital. Since their founding less than three
decades ago, DHL and other integrated international delivery companies
have played an increasingly essential role in the global economy. DHL
provides international express document services primarily to service
industries that compete in global markets--international financial
institutions and corporations, legal and consulting firms, government
entities, transportation and shipping companies, engineering and
construction firms and multinational institutions. Among other things,
international express delivery firms like DHL provide rapid and
reliable delivery of sensitive financial instruments, bills of lading
and corporate communications. At the same time, the private
international air express industry is also playing a growing role in
the manufacturing and distribution sectors of the economy. In
particular, the industry today handles increasing volumes of time-
sensitive small packages and heavier shipments of goods and parts for
merchandisers, just-in-time manufacturers, and research and technology
firms. These value-added delivery services greatly enhance the
efficiency, cost-effectiveness and competitiveness of individual firms,
national economies and the global market as a whole.
III. The Need to Reform Laws Governing International Delivery Services
The Mation's outdated postal laws--enacted nearly 30 years ago--are
ill-suited for today's dynamic market for international delivery
services, in which sophisticated and technologically advanced firms
provide fully integrated and critical delivery services to a wide array
of global businesses. In drafting the Postal Reorganization Act of
1970, Congress failed to anticipate the development of the private
express delivery industry and the competition it would create with
USPS, particularly in the area of international delivery services. The
1970 Act, not surprisingly, failed to include any mechanism for review
or oversight of USPS' international products as it did for domestic
mail products. As a result, a regulatory environment was created where
USPS is able to use its monopoly powers and quasi-governmental status
to compete unfairly with the private express industry for international
delivery business.
As explained in further detail below, current postal laws and
practices: (1) fail to provide for effective PRC--or, indeed, any--
oversight over USPS' international postal services and rates; (2)
unfairly permit the USPS to regulate the terms of competition between
itself and its private competitors in the international delivery
market--a fundamental conflict of interest; (3) fail to assure that
laws that regulate international commerce apply equally to directly
competitive international services provided by the USPS and its private
competitors; and (4) allow USPS to exploit its quasi- governmental
status to obtain unfair competitive advantages overseas in its
increasingly aggressive competition with private international delivery
firms. DHL submits that a balanced and effective approach to
international postal reform should address each of these deficiencies
in current law.
A. The PRC Lacks Jurisdiction Over International Services.
Perhaps the most fundamental flaw in the 1970 Act is its failure to
require PRC approval for USPS' international mail rates and products.
The PRC's regulatory oversight of domestic mail services is intended to
protect consumers and competitors against the abuse of USPS' monopoly
power by ensuring that domestic mail products are fairly priced and
cover attributable costs. These same concerns are no less important
with respect to international postal services. Without effective rate
review, there will always be a significant risk that USPS will use its
domestic monopoly power to compete unfairly for international market
share through predatory pricing, trade- distorting cross-subsidies from
monopoly products, and anti-competitive tying arrangements.
In introducing S. 2082, Chairman Cochran noted allegations that the
USPS uses its revenues from first class mail to subsidize its
international postal services. The Chairman also noted, however, that
the lack of PRC oversight over international mail under current law
prevents Congress, competitors, and the general public from determining
conclusively whether international mail is, in fact, covering its
attributable costs and is fairly priced, as USPS contends. There is
much troubling evidence, however, that USPS may, indeed, be providing
cross-subsidies to its competitive international postal services.
According to a recent report in Business Mailers Review, the data for
international services in the 1998 Postal Service Marketing Plans
differs from that reported in the 1996 Cost and Revenue Analysis and
the 1997 Rate Case. According to the data in the Marketing Plans, the
products of the USPS International Business Unit would cover barely 57
percent of attributable costs for such products. 2 Moreover,
the marketplace provides growing anecdotal evidence of such suspect
pricing practices. For example, USPS currently charges $26.63 for
shipping a 10 lb. parcel under its Global Package Link Service from San
Francisco to London--$3 less than the cost of shipping the same package
via Express Mail between Baltimore and Washington, D.C.
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\2\ See, e.g., USPS, Revenue Pieces and Weight Reports; USPS, Cost
and Revenue Analyses; Patelunas Testimony in R97-1 (Exhibits T-15E, J);
1998 USPS Marketing Plans (Oct. 1997).
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Congress last overhauled the general postal law in 1970--only one
year after the founding of DHL and years before the establishment of
Federal Express and other express delivery firms. At the time, the
limited competition provided by private on-board couriers services
could hardly have presaged the multi-billion dollar express delivery
industry of the late 1990's. The failure of the Postal Reorganization
Act of 1970 to grant PRC jurisdiction over international services may
have been viewed at the time as an innocuous oversight by Congress. As
the private international express industry has grown and created
genuine competition with USPS and foreign postal administrations,
however, the effects of this oversight have become increasingly
pronounced. There is simply no justification now for continuing to
exempt the USPS from PRC regulatory oversight and accountability in its
provision of international mail services. By harmonizing the PRC's
jurisdiction over domestic and international mail services, S. 2082
would make an important contribution to a fairer and more pro-
competitive regulatory environment for all international delivery
services, including international postal services.
B. Current Law Fails to Separate USPS' Regulatory and Operational
Roles.
The regulatory regime established under the 1970 postal law also
failed to establish a clear separation between the regulatory and
operational roles of the USPS. In particular, current law provides the
USPS with undue advantages by allowing USPS to set the rules under
which it also competes with private firms, particularly in the
provision of international services.
DHL and other private delivery firms have repeatedly noted that
their ability to compete in the world market is subject to the
administrative discretion of the USPS, which, in effect, self-
administers the postal monopoly laws. Under the Private Express
Statutes, the USPS asserts a ``monopoly'' on the carriage of ``letters
and packets,'' both domestic and international, over any ``post route''
in the United States. Under postal regulations promulgated and enforced
by the USPS, ``letters and packets'' are broadly defined to include all
manner of commercial and business documents, provided that such
documents are ``addressed'' to a specific person or ``directed'' to a
specific address. 3 Any violation of this self-defined
monopoly--by a carrier or user--can result in an injunction, fine or
imprisonment, or any combination thereof. 4 In order to fend
off Congressional legislation which would have limited the application
of the Private Express Statutes to, and provided a more secure legal
foundation for, the growing private express industry, the USPS
unilaterally chose to ``suspend'' its asserted monopoly in 1979 over
``extremely urgent letters'' which meet certain ``time of delivery'' or
``minimum pricing'' requirements. 5
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\3\ See generally 9 C.F.R. Part 310.
\4\ 39 C.F.R. 310.2.
\5\ 39 C.F.R. 320.6. Under the suspension regulations, the Postal
Service permits the private carriage of ``expressly urgent letters'' if
such carriage meets either a ``time of delivery'' test or a ``minimum
pricing'' test. Generally a ``letter'' will be presumed to be
``extremely urgent'' if it is delivered to the addressee by 10 a.m. the
next business day. Letters sent to jurisdictions outside of the United
States are deemed ``delivered'' when they are in the custody of the
international or overseas carrier at its last scheduled point of
departure from the United States. Similarly, letters sent from foreign
jurisdictions to the United States are deemed ``dispatched'' when they
are in the custody of the domestic carrier after clearance by U.S.
Customs. Id. The ``time of delivery'' suspension is available ``only if
the value or usefulness of the letter would be lost or greatly
diminished if [the letter] is not delivered within these time limits.''
Id. (Emphasis added).
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Alternatively, a ``letter'' will be conclusively presumed to be
``extremely urgent'' if the amount paid for private carriage is at
least $3.00 or twice the applicable U.S. postage for a first class mail
(including priority mail), whichever is greater. Id.
The suspension regulations, by their terms, require the
interposition of the USPS in either the content or price of time-
sensitive deliveries by its competitors. The current rules thus hold
DHL and other international express delivery firms hostage to
administrative exceptions granted, interpreted and enforced by a
monopoly that is, at the same time, aggressively seeking to compete for
their business. Such rules simply have no place in the commerce of the
1990's, in which global markets have already rendered a judgment on the
commercial importance of this industry. While a substantial argument
may be made that the Private Express Statutes have outlived their
usefulness altogether, Congress, at the very least, should amend the
postal laws to exclude competitive international services from the
scope of the monopoly and thus free private express companies from
regulation by a government-owned competitor.
Current law also authorizes the USPS to represent the United States
at international congresses of the Universal Postal Union (``UPU'')
without effective direction from the President, Congressional
oversight, or public participation. The international express industry
has repeatedly criticized this arrangement, under which USPS acts as
the sole U.S. negotiator of international postal agreements while, at
the same time, actively competing in the international delivery market.
In view of this untenable arrangement (as well as the longstanding
hostility of certain foreign postal administrations to the private
express industry) it is hardly surprising that various UPU acts and
policies impose discriminatory costs and burdensome regulation on the
international private express industry. For example, Article 25 of the
UPU Convention authorizes national post offices to intercept and return
international ``mail'' that has not been posted by the country of
dispatch. Other provisions permit non-cost-based interpostal charges,
such as terminal dues, that allow postal administrations to manipulate
international rates and thereby undermine private carriage. As with the
fundamental conflict of interest inherent in its suspension power under
the Private Express Statutes, it is equally unfair for the USPS to
exercise such broad powers to shape the international regulatory
environment under which it also competes with private express firms.
C. Current Laws Are Not Applied Equally to USPS and its Competitors.
A wide range of laws--ranging from antitrust to vehicle laws--are
applied differently to the USPS and its private competitors. In many
instances, this unequal application of the laws provides the USPS with
unfair competitive advantages over its private-sector competitors. The
effects of this disparate legal treatment are particularly pronounced
where USPS and private firms provide directly competitive delivery
services in the international marketplace.
In its providing competitive international services, the USPS--
unlike its private competitors--can take advantage of numerous special
legal benefits. These include claimed protections of sovereign
immunity, exemptions from the antitrust and unfair competition laws,
and preferential customs treatment. Under Part 128 of the Customs
Service regulations, for example, private express delivery companies
have numerous obligations that are not imposed on essentially similar
USPS services. These include:
Lthe requirement to obtain Customs bonds for certain
shipments and to undertake liability for customs duties, penalties and
fines, when acting as ``importer of record;''
Lthe obligation to make outbound and in-transit shipments
available for Customs Service inspection;
Lspecial manifesting, record keeping and automation
obligations; and
Lspecial training and security requirements. 6
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\6\ While some obligations imposed on the private international
express industry may be justified to assure that the Customs Service is
able to meet its enforcement obligations while providing the necessary
services to facilitate the expedited delivery of international
shipments, commercial fairness requires that USPS should not be
permitted to receive similar expedited customs treatment unless it
assumes the same obligations as those imposed on private express
companies.
The USPS also benefits from gaps or ambiguities in U.S. customs
practice. As a result of inadequate collection procedures, the USPS
fails to remit to Customs substantial amounts of duties and fees, which
it is obliged to collect. Due to its quasi-governmental status, the
USPS is also exempt from Customs fines, penalties and liquidated
damages. Moreover, unlike private delivery providers, the USPS does not
reimburse Customs for services provided in processing international
shipments.
Foreign legal requirements are also applied differently to
essentially equivalent USPS and private delivery service shipments. As
a national postal monopoly and quasi-governmental agency with exclusive
access to foreign postal administrations through the UPU, the USPS
often benefits from favorable foreign laws and practices unavailable to
private competitors. These laws and practices in many cases provide the
USPS with special customs rates; exemptions from duties, fees and
taxes; preferential customs clearance and other special services; and
favorable foreign taxes and other provisions designed to protect the
national postal monopoly and other favored providers.
Such differences in legal treatment--whether based on tradition,
practice, an outdated understanding of the international delivery
industry or abuse of USPS' quasi-governmental status--are fundamentally
unfair when applied to essentially competitive international services
and should be eliminated.
D. Congress Did Not Contemplate USPS' New Extra-Territorial Services at
the Time of Enactment of the Postal Reorganization Act of 1970.
The deficiencies in current U.S. regulation of international mail
services have been highlighted by the various competitive international
products introduced by the USPS in recent years. In 1995, for example,
the USPS announced its intention to compete ``aggressively'' in the
international market and to become a leading provider of efficient,
high value, reliable and secure, full-service international
communication and package delivery services. In implementing this
policy, the USPS created an International Business Unit, introduced an
array of new, value-added international services that go far beyond
traditional international mail and, in some instances, has contracted
with private foreign entities for delivery outside of the United
States..
Historically, USPS and its predecessors delivered international
mail to the sovereign boundaries of a foreign country, at which point
the foreign postal authority took control of the mail, cleared it
through customs and effected delivery. Unlike international express
delivery firms, the USPS did not provide--and, indeed, was generally
understood not to have the authority to provide--integrated, door-to-
door express delivery across national boundaries, with central
administrative control from the point of pickup to delivery.
International services introduced by USPS in recent years, however,
represent a fundamental shift in the manner in which the USPS provides
delivery services to foreign countries. For example, under its Global
Package Link (``GPL'') Service, the USPS is aggressively seeking to
provide international merchandise delivery services which are modeled
on, and compete directly with, the integrated delivery services
provided by private express companies. Under the GPL program, the USPS
employs its own designated customs broker for foreign customs clearance
and employs a ``delivery agent'' for expedited, secure delivery with
tracking in the foreign country. In effect, through the use of agents
in the foreign market, the GPL program purports to provide integrated,
end-to-end parcel delivery service identical to that provided by
private express companies. Similarly, USPS has recently expressed
interest in expanding its GPL service to include inbound ``mail''
shipments. Presumably this would require employment of a shipping
``agent'' on foreign soil who would coordinate pick-up, file advance
customs documentation--or even provide customs pre-clearance--and
ensure some measure of integrated control to the point of delivery in
the United States.
DHL does not object to direct competition with USPS, but merely
insists that such competition be fair and conducted on a level playing
field. In repeated submissions to the USPS, the international express
delivery industry has pointed out that the GPL service likely benefits
from cross-subsidization from monopoly classes of mail and/or plain
predatory pricing. In addition, the USPS is able to exploit its quasi-
governmental status to obtain special privileges from foreign postal
administrations. These including special customs rates; exemptions from
duties, fees and taxes; and special services for ``mail'' products that
enable USPS to provide sharply discounted prices and expedited customs
clearance. (This special treatment is the apparent basis for USPS'
claim that GPL provides the ``fastest clearance'' through the customs
administrations of participating foreign countries).
DHL and the international express delivery industry are concerned
not only with the scope of the special advantages afforded to the USPS
but with the aggressive efforts of the USPS to use these advantages to
expand into new competitive markets and services. The USPS has made it
clear that it intends to capitalize fully on its special ``mail''
privileges in competing for international delivery business. In its
recent marketing plans, the USPS notes that ``[t]he international
mailing market is deregulated and intensely competitive, particularly
in the expedited and package markets.'' The USPS will compete in this
open and competitive market by availing itself of special advantages
that flow from its status as the national postal monopoly, noting that
its ``close contacts with foreign postal administrations and
governments provide a unique customer value'' and a ``competitive
advantage'' that can be ``leveraged'' in seeking new international
business. 7
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\7\ USPS 1998 Marketing Plans at INT p. 2 (Oct. 1997).
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The development of the GPL service and other new USPS international
services vividly illustrates the unchecked growth of unfair USPS
competition in the international delivery market. From its beginnings
in late 1994 as a special program for catalogue company deliveries to
Japan, the GPL service has been expanded to 10 additional markets--
Brazil, Canada, Chile, China, France, Germany, Hong Kong, Mexico,
Singapore and the United Kingdom--and its minimum requirements have
been considerably liberalized. These extensive forays into the
competitive international market have often occurred under ``interim
rules'' with no meaningful oversight or prior public participation. In
recent months, for example, the USPS published an ``interim rule,'' to
take effect immediately, under which mail order companies can send
catalogues to the foregoing countries for as low as $0.80 per piece,
provided that they use the GPL service to deliver resulting orders.
8 This program is but a further effort by the USPS to
leverage its unfair cost and regulatory advantages--through a classic
tying arrangement--to gain further inroads in the competitive
international market.
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\8\ 52 Fed. Reg. 13124 (Mar. 18, 1998).
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It is inequitable to permit the USPS to benefit from cost and
regulatory privileges that are available only to national postal
administrations when it is seeking to provide--with no meaningful
oversight--international delivery services that are directly
competitive with the private sector. These special advantages harm not
only the international express industry but also lead to economic
inefficiencies that affect every American. Each time the USPS uses its
monopoly or quasi-governmental status or special legal privileges to
obtain an unfair advantage over its competitors, its services are not
as efficient as those provided by a company that would provide the
services on a competitive basis. Whether through higher costs for
consumers of noncompetitive products like standard mail, or through the
inefficient use of capital and labor that could be used more
efficiently in other economic sectors, these practices inevitably
damage and distort the United States economy.
IV. Specific Comments on International Postal Service Reform
Legislation
DHL believes that legislation to reform international postal and
delivery services should address each of the problem areas outlined
above. Accordingly, as described below, DHL urges the Senate to amend
S. 2082 to include other necessary reforms to parallel the draft
legislation now being considered in the House.
A. PRC Jurisdiction Should be Extended to International Postal
Services.
S. 2082 would subject international postal services to review by
the PRC. As noted above, the public policy considerations that underlie
PRC review of domestic mail rates--controlling predatory pricing and
abuses of monopoly power--apply with equal force to the classification
and pricing of international mail. S. 2082 addresses the significant
gap in current law by extending PRC authority to include review of
international services and rates. DHL strongly supports this important
change in law.
B. S. 2082 should be Amended to Eliminate USPS' Inherent Conflicts of
Interest in its Dual Roles as Regulator and Competitor and to
Ensure Equal Application of the Laws.
The private delivery industry believes that rapid technological
change and the continued evolution of the global market for information
transfer call for a serious examination by Congress of whether the
Private Express Statutes are obsolete and the postal monopoly should
finally be ended. Although Congress may not yet be ready to take such
steps, it can, by restricting the most serious abuses under current
law, make meaningful and pro-competitive reforms in the rules governing
international postal and delivery services. DHL urges the Senate to add
the following additional provisions governing international postal and
delivery services to S. 2082:
L1. USPS' Regulatory and Operational Roles Must be Legally
Separated.
As explained above, the USPS's authority under 39 U.S.C. Sec. 407
to represent the United States at intergovernmental organizations and
its exclusive access to national postal authorities enables USPS to
unfairly advance its competitive position in the international market
place at the expense of its private competitors. The USPS cannot
adequately represent the concerns of the entire U.S. international
delivery sector because, as a competitor, it has an interest to seek
measures that are most beneficial to itself. It is imperative that U.S.
law be amended to eliminate this inherent conflict of interest.
a. The Postal Laws Should Contain a Clear Statement of U.S. Policy on
the Separation of Regulatory and Operational Functions.
U.S. law should include an express statement that it is the policy
of the United States to promote and encourage a clear distinction--in
the U. S. Government and in the intergovernmental organizations of
which the United States is a member--between regulatory and operational
responsibilities with respect to the provision of international postal
services and other international delivery services. Such a statement is
consistent with traditional American notions of due process and equal
protection of the laws and comports with the European Union's
competition rules for public and private postal services in Europe.
This policy statement would also give clear direction to U.S.
negotiators in seeking to eliminate foreign laws and practices
maintained by national postal administrations and their governments
that discriminate against private international delivery companies.
Such a statement would send a powerful signal to foreign governments,
U.S. government agencies, the USPS and the private sector that the
United States supports the development of international postal policies
and practices based on fair competition and non-discrimination against
private delivery firms.
b. Responsibility for U.S. Postal Policy Formulation and
Intergovernmental Negotiation Authority Should be Transferred
to an Appropriate Federal Agency.
Authority to formulate U.S. policy on international postal and
delivery service matters and to represent the United States in
intergovernmental postal negotiations should be transferred from the
USPS to an appropriate agency of the Federal government. DHL has
previously proposed that the United States Trade Representative
(``USTR'') exercise these responsibilities and continues to believe
that USTR is best suited to serve in this capacity. DHL understands,
however, that there may be technical or other policy reasons that
might, instead, favor the Department of State for this important role.
Should Congress decide that State, rather than USTR, should represent
the United States in international organizations, State should, in any
event, be required to consult with and fully consider the views of
other appropriate agencies, including USTR, the Departments of
Commerce, Justice and Transportation, as well as the PRC. 9
Moreover, the law should provide that, in exercising these functions,
the appropriate agency should consult with the USPS and the private
sector on the same basis--the USPS should have no special status with
respect to consultations with the Federal government on the regulation
of international services.
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\9\ In implementing these requirements, State might also consider
delegating substantial authority in these matters to USTR.
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These provisions will help assure that the rules governing
international postal and delivery services will be developed and
applied in an impartial manner and that the interests of the entire
U.S. delivery sector are represented before intergovernmental
organizations. Unlike the USPS, the USTR (or State) would have no
inherent conflict of interest. Moreover, the U.S. government has a
proven track record in seeking open, pro-competitive and transparent
rules for international trade in goods and services, including delivery
services. Such substantial efforts will be required to eliminate the
rules and practices of foreign postal administrations and their
governments that discriminate against private international delivery
firms. Granting policy formulation and negotiating authority to the
USTR (or State) would enable the United States to advance these
important policy goals and to ensure fairness for all international
delivery providers.
c. The Law Should Forbid Discrimination in Agreements and Contracts.
The USPS should continue to be empowered to enter into contracts
and agreements for international postal and delivery services as it
deems appropriate. However, such contracts and agreements should not be
considered obligations of the United States and the USPS should be
required to notify the PRC and USTR (or State) of agreements with
foreign governmental agencies or instrumentalities.
U.S. law should also expressly prohibit any treaty, convention or
agreement concluded by the United States from making any undue or
unreasonable discrimination between the USPS and any other provider of
postal or delivery services, except where the provision of such
services by private companies is prohibited by U.S. law. Similarly,
U.S. law should forbid such discrimination in contracts and agreements
between the USPS and foreign government agencies or instrumentalities.
These provisions should help to prevent the USPS from abusing its
quasi-governmental status to obtain unfair advantages over its private
sector competitors.
d. Postal and Delivery Services Should be Integrated into U. S. Trade
Policy.
International postal and delivery services should be added to the
list of services that are monitored by the Department of Commerce (19
U.S.C. 2114b) and are subject to overall trade policy coordination
through the USTR (19 U.S.C. 2114c).
In negotiating international agreements like the North American
Free Trade Agreement and General Agreement on Trade in Services, the
United States has worked to establish the fundamental international
principle that monopolies and state enterprises should not be permitted
to employ their monopoly position to engage in anticompetitive
practices in competitive markets. 10 The U.S. government
also has worked with the U.S. international delivery industry on
efforts to remove unfair trade barriers in such jurisdictions as the
European Union, Mexico and Taiwan. 11 Adding international
postal and delivery services to the foregoing list of services would
help to assure greater consistency between U.S. postal policy and the
Nation's overall international trade policies and goals. Moreover, such
a change in the law would also encourage U.S. government efforts to
identify and eliminate foreign practices that discriminate against
private international delivery firms.
---------------------------------------------------------------------------
\10\ See North American Free Trade Agreement, Chapt. 15; General
Agreement on Trade in Services, Art. VIII. For example, NAFTA Article
1502 requires each participating country to assure, ``through
regulatory control, administrative supervision or the application of
other measures'' that private and government monopolies do not use
their monopoly position to ``engage . . . in anti-competitive practices
in a non-monopolized market in its territory that adversely affect [a
private foreign party], including through the discriminatory provision
of the monopoly good or service, cross-subsidization or predatory
conduct.'' Id.
\11\ See 1997 National Trade Estimate on Foreign Trade Barriers.
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2. The Law Should Ensure Equal Application of Fair Trade Rules to USPS
Competitive Services.
As illustrated by its Global Package Link Service and other
competitive international services, the USPS is moving aggressively to
compete directly with fully integrated international delivery providers
like DHL. In providing these new services in the competitive sector,
the USPS should no longer be permitted to exploit its quasi-government
status to gain unfair competitive advantages.
a. The Postal Laws Should Contain a Clear Statement of U.S. Policy
Regarding Equal Application of Relevant Laws.
U.S. law should include an express statement that it is the policy
of the United States to promote and encourage unrestricted and
undistorted competition in the provision of international postal and
delivery services. Such a clear statement of policy would help to
assure the equal application of U.S. laws to competitive international
delivery services and would provide guidance, direction and negotiating
leverage to U.S. government efforts to eliminate foreign laws and
practices that unfairly discriminate against private delivery services.
b. The Postal Laws Should Define Competitive Services
A definition of ``competitive international postal services''
should be added to U.S. law. Such services should be defined as those
international postal services that are provided by or on behalf of the
USPS and that compete directly with services provided by private
companies. The PRC should be authorized by law to designate specific
international postal services that meet this definition.
c. Antitrust and Unfair Competition Laws Should be Applied Equally.
In providing competitive international postal services, the law
should make clear that USPS is subject to the antitrust provisions of
the Clayton and Sherman Acts and the Federal Trade Commission Act in
the same manner as a private company that provides such services. The
USPS should not be permitted to engage in anticompetitive acts while in
direct international competition with private delivery firms.
d. Customs and Tax Laws Should be Applied Equally.
Postal reform legislation should also require equal application of
laws governing imports and exports and taxes to competitive
international services provided by the USPS and its private
competitors. Specifically, U.S. law should require that, with respect
to the USPS' competitive international postal services--
LUSPS may not tender export shipments to foreign
government authorities for clearance and importation except under laws
and procedures that are equally applicable to similar shipments by
private firms;
LU.S. customs laws shall be applied to USPS importations
and exportations in the same manner as they are applied to similar
shipments by private companies; and
LSimplified customs procedures under international postal
or customs agreements shall not be available to USPS imports from
foreign countries that have such procedures but deny access to such
procedures to shipments from the United States by the USPS or private
companies.
The law should also contain provisions designed to prevent foreign
postal administrations from imposing discriminatory taxes that are
designated to protect their national postal monopoly from competition
from U.S. private delivery firms.
e. Congress Should Require a Study of Unequal Application of Other Laws
In addition to mandating immediate changes in the application of
the foregoing laws, DHL believes that international postal reform
legislation should also provide for a study by Department of Justice of
other legal disparities in the treatment of competitive international
services provided by the USPS and private firms. A detailed, objective
study of all differences in treatment is crucial to assuring that the
goal of equal treatment for competitive international services is, in
fact, fully implemented. Congress should move rapidly to fully
implement any recommended changes as soon as possible after the
issuance of the Department's report.
V. Conclusion
In areas such as trade and telecommunications, the United States
has been a world leader in efforts to free international markets from
outdated regulatory schemes which hamper free and fair competition.
Some foreign countries are beginning to liberalize their own postal
regimes by moving toward privatization. Liberalization is long overdue
in our own Nation's postal laws as well. DHL believes that enactment of
S. 2082, together with the additional provisions described above, is an
important first step in this process. DHL is pleased to support S. 2082
and looks forward to working with the Chairman and Members of this
Subcommittee on this important legislation.
__________
PREPARED STATEMENT OF DIRECT MARKETING ASSOCIATION
Chairman Cochran and Members of the Subcommittee on International
Security, Proliferation and Federal Services:
Thank you for this opportunity to testify on S. 2082, a bill that
would place the setting of international postal rates under the
authority of the Postal Rate Commission in the same manner that
domestic postal rates are established.
Established in 1917, The Direct Marketing Association is the oldest
and largest trade association for business and nonprofit organizations
using direct marketing to reach their customers, members, and
prospects. We represent more than 3,600 companies in the United States
and 47 other nations. These include members such as L.L. Bean, which
will have an official testifying at this hearing, that are becoming
increasingly involved in the global marketplace.
In addition, this statement is being made on behalf of the
Coalition in Support of International Trade and Cooperation, a group of
postal customers, trade associations representing those customers, and
postal employee organizations and unions, all of which will be
significantly affected by this legislation. The members of the
coalition include:
Advertising Mail Marketing Association, Washington, D.C.
American Postal Workers Union, Washington, D.C.
Ballard Designs, Atlanta, GA
L.L. Bean, Freeport, ME
Current, Inc., Colorado Springs, CO
Damark International, Inc., Minneapolis, MN
The Direct Marketing Association, Washington, DC
Fingerhut Companies, Inc., Minnetonka, MN
Frontgate, Lebanon, OH
Garnet Hill, Lebanon, NH
Hammacher Schlemmer, Chicago, IL
J.C. Penney Company, Plano, TX
Land's End, Dodgeville, WI
Mail Order Association of America, Washington, D.C.
National Association of Letter Carriers, Washington, D.C.
National Association of Postal Supervisors, Alexandria, VA
National Association of Postmasters of the United States
Alexandria, VA
National League of Postmasters, Alexandria, VA
National Retail Federation, Washington, DC
National Rural Letter Carriers Association, Arlington, VA
Parcel Shippers Association, Washington, DC
Performance Data TransUnion Corporation, Chicago, IL
Territory Ahead, Santa Barbara, CA
TravelSmith, Novato, CA
Whispering Pines, Fairfield, CT
We respectfully oppose S. 2082 in its current form.
S. 2082 would place international postal rates under the ratemaking
process outlined in Title 39 of the U.S. Code. That process was the
creature of the Postal Reorganization Act of 1970, which removed postal
rate making from the legislative process to a regulatory process
superficially similar to public utility ratemaking.
In that process, the Postal Service Board of Governors is solely
responsible for developing and proposing increases in the rates of
postage. When it decides rate adjustments are necessary, the board
files an extensive request with the Postal Rate Commission, which then
commences an extensive proceeding on the record in accordance with the
Administrative Procedure Act.
The Postal Rate Commission must complete its consideration of the
proposal within ten months. If it has not issued a recommended decision
within that time frame, the Governors may put their proposed rates into
effect on a temporary basis . However, this has not happened in a major
rate case since the ten month period was enacted in the late 1970's.
When it concludes its proceeding, the Commission then forwards its
recommended decision to the Governors, who have sole authority to
implement the new rates. If the Governors disagree with the
Commission's recommendations, they have a series of options including
refusing to implement the rates or sending the recommended rates back
to the Commission for reconsideration. After the commission sends the
reconsidered case back to the Governors, the Governors may then change
the proposed rates by a unanimous vote. This has happened once in a
major rate case, in 1980.
We feel that this process is much too cumbersome, time consuming,
and expensive for domestic rates and see nothing but harm to customers
of both the Postal Service and its competitors in applying this process
to international rates
We are opposed to S. 2082 for four basic reasons:
1. It would place the Postal Service in a severely negative
competitive position by removing the flexibility to set international
rates when necessary to meet competitive pressures and provide the best
service for its customers. The complexity and length of the ratemaking
process mandated by this bill would probably mean that the Postal
Service could not compete against its largely unregulated competitors.
The bill is being pushed by competitors of the Postal Service as
``leveling the playing field.'' Just the opposite would occur. No
competitor of the Postal Service in the international mail field is
required to submit to a lengthy rate proceeding. They are essentially
free to set prices as they wish, when they wish.
The requirement for a lengthy rate proceeding would be anti-
competitive for another reason. Competitors would get an advance
glimpse at new products, which would give them ample opportunity to
develop counter measures to meet and beat the new competition.
Businesses in other fields , say the automobile industry, would dearly
love to have this competitive advantage over their rivals.
In the final analysis, the principal losers in this battle of the
behemoths--the Postal Service and its competitors--will be American
businesses that are working to build their international business.
2. The Postal Rate Commission already has on file data that, in our
opinion, show that the Postal Service is not using money from other
classes of mail to subsidize international postal rates. Overall,
international postal rates cover all of their attributable costs and
contribute more than $300 million annually to overhead costs.
The concern about cross-subsidization is a legitimate one, and one
that was addressed directly in the Postal Reorganization Act of 1970,
which forbids cross-subsidization. A simple reporting requirement,
however, would be sufficient and far less destructive to the
international business of the Postal Service and its customers.
3. The process of setting international postal rates is ultimately
based on treaties and agreements among nations in accordance with
policies developed by the Universal Postal Union, all of which are and
should be outside the purview and cost-based regulatory expertise of
the Postal Rate Commission.
In fact, the extensive hearings before the Commission required by
S. 2082 would require the Postal Service to provide specific country-
by-country data which could undermine America's position in any treaty
negotiations on international postal rates with other countries. This
bill would further unlevel the playing field against the Postal Service
in favor of foreign nations whose postal authorities, such as Royal
Mail and Dutch Post, are already operating in the United States and
competing with the Postal Service and American businesses for
international mail business. This bill creates a tilted playing field
that favors foreign countries over the American government, American
businesses and American workers.
4. The failure to include international postal rates in the
ratemaking process created by the Postal Reorganization Act was not an
``oversight.'' Prior to the Postal Reorganization Act, Congress,
through the regular legislative process, set all domestic postal rates,
but never set international rates. Those rates were always set by the
Postal Service by the process mentioned above. Congress saw no need to
change that process.
Much has been made by postal competitors about ``leveling the
playing field'' in the competition for international mail and parcels.
The charges are that the Postal Service enjoys advantages that private
companies do not have that tilt the playing field toward the Postal
Service. They claim that this is particularly true in the international
area.
The truth, we believe, is far more complex than that. Both the
Postal Service and private competitors enjoy unique advantages and
suffer from unique disadvantages that affect their ability to compete
and affect the service that we customers receive. We agree that a full
study should be made to determine what needs to be done, if anything,
to assure that the playing field is indeed level in the international
area.
One thing is certain now, however, is that S. 2082 would
dangerously tilt the playing field against the Postal Service in its
efforts to compete effectively in the volatile international mail
market. Customers, American businesses, can only lose.
__________
LETTER FROM R.R. DONNELLEY AND SONS COMPANY FOR THE RECORD
R.R. Donnelley and Sons Company
June 2, 1998
Hon. Thad Cochran, Chairman
Subcommittee on International Security, Proliferation and Federal
Services
Committee on Governmental Affairs
U.S. Senate
Washington, DC
Dear Mr. Chairman: I am pleased to offer the views of R.R.
Donnelley and Sons Company for the record of the Subcommittee's June 2,
1998 hearing on S. 2082, the International Postal Service Act of 1998.
As both the leader of the U.S. printing industry and the largest
customer of the U.S. Postal Service (USPS), our company has a
significant stake in assuring the continued global competitiveness of
both the postal system and mailed print. We greatly appreciate your
leadership on the entire array of postal issues and urge the
Subcommittee to carefully consider the implications of this
legislation, which has the potential for unintended, yet adverse,
consequences.
Introduction
As you know, R.R. Donnelley and Sons Company is a $5+ billion,
Fortune 250 leader in the management, reproduction, and distribution of
print and digital information for the publishing, retailing,
merchandising and information technology industries. We employ over
25,000 people throughout the world, with plants and facilities in 31
States, including such States as Mississippi, Pennsylvania and
Illinois.
Simply put, it is reasonably-priced, universal service on both an
international and domestic basis that drives our business interest in
postal policy issues such as S. 2082. We share and support our
customers' need for a global distribution channel that provides
universal service to residential and commercial customers every day in
a predictable and consistent manner. to this end, we engage the
services of the U.S. Postal Service--as well as those of United Parcel
Service, Federal Express and a variety of other alternative service
providers--in serving the global business needs of our customers. We
foresee no change to this requirement and, therefore, are concerned
about any potential changes to current law that would hamper the
ability of our customers to access any of the existing international
mail options currently available to them.
That having been said, we also state our appreciation and
endorsement of the basic principle underlying S. 2082. It does not
serve either our customers' interests or our own to have the Postal
Service subsidize its international postal services through revenues
derived from its domestic services. At the same time, we believe with
equal conviction that neither the American economy nor the American
public is well served by subjecting the U.S. Postal Service to an
additional layer of regulation in the international arena unless and
until all alternatives have been very thoroughly explored and found
inadequate to the task.
Key Policy Issues
As we stated in our comments to House Postal Subcommittee Chairman
John McHugh on the proposed revisions to H.R. 22, we believe there is
an important need to update the existing statutory framework which
governs the operations of the USPS. The current statutory blueprint was
enacted nearly three decades ago: Prior to the first global oil
embargo, prior to the reengineering that has so dramatically changed
the operations of so many companies in both the manufacturing and
service sectors of our economy, and prior to the arrival of the fierce
competition arising out of globalization and international competition.
For the overall American economy, Congress has responded to these
dramatic changes through a variety of policy initiatives that have
increased business flexibility, deregulated industrial operations, and
enhanced U.S. trade and exports. These solutions have paid handsome
dividends to the U.S. economy and are, in large measure, responsible
for the prosperity we are experiencing today. They are also, in our
view, appropriate measures to guide development of postal policy in the
21st century. As a result, we are concerned that any legislative
proposal which adds new or additional regulatory burdens--in either the
postal or any other industrial sector--may run contrary to the
flexibility/deregulation/export-growth recipe which has served our
Nation's economy so well over the past 20 years.
Therefore, R.R. Donnelley and Sons Company urges the Subcommittee
to fully review and explore the following questions:
LIs current governance in this issue area insufficient/
inadequate? The Governors of the Postal Service are already required to
establish ``reasonable and equitable'' classes of mail and ``reasonable
and equitable rates of postage'' for both international and domestic
postal services. Although international rates are not subject to review
by the Postal Rate Commission, we are aware of no evidence which
suggests that the Governors--all of whom have been appointed by the
President with the advice and consent of the United States Senate--have
been unsuccessful in the discharge of their responsibilities with
respect to international mail service.
LIs the PRC the appropriate regulatory forum? Assuming
that third party review of international rates is truly necessary, it
is appropriate to examine whether the Postal Rate Commission is the
proper forum for such review. International postal services involve
multi-layered and often complex treaty and contractual arrangements
with foreign postal administrations. It is clear that while the
Commission continues to do an admirable job with domestic mail
regulation, it has no experience or expertise in the international
area. Moreover, as the world's largest postal system and the world's
largest exporter of mail, the U.S. Postal Service must have the
flexibility to serve all American businesses and individuals who have
need for international mailing services in its dealings with the
International Postal Union and in its bilateral negotiations of
terminal dues and other settlement arrangements with countries
throughout the world.
LWhat are the consequences of subjecting all international
postal services to the jurisdiction of the Postal Rate Commission?
Other than the United States Postal Service, there really are only a
very few alternative international service providers and fewer still
that are willing to provide universal service worldwide. If rate
regulation of international services deprives the U.S. Postal Service
of revenues on high volume routes (that its private sector competitors
are interested in serving), the Postal Service may well be forced to
increase rates to destinations where the Postal Service is the only
service provider. This approach to rate determination also has
potential implications on the issue of universal service to the more
remote and less populated parts of the domestic system.
Conclusion
We believe that the underlying purpose of S. 2082 has legitimate
merit but that a variety of economic and policy trends strongly counsel
Congress stopping short of formally imposing rate regulation on the
U.S. Postal Service's international services. Moreover, we see a number
of alternatives to rate regulation that are available and worthy of
Subcommittee consideration before further action is taken on the
current proposal.
We thank you for the opportunity to submit our views to you and
stand ready to work with you on the important task of finding a
solution to the questions and concerns that underlie S. 2082 in a way
that serves the interests of all Americans.
Sincerely,
Jonathan P. Ward,
President and Chief Operating Officer
__________
LETTER FROM MR. HENDERSON WITH RESPONSES TO QUESTIONS
United States Postal Service
August 14, 1998
Hon. Thad Cochran, Chairman
Subcommittee on International Security, Proliferation and Federal
Services
Committee on Governmental Affairs
U.S. Senate
Washington, DC
Dear Mr. Chairman: Thank you for the opportunity to testify at your
Subcommittee's June 2 hearing on S. 2082, the International Postal
Services Act of 1998.
I am encouraged that your efforts to review the existing
arrangements affecting the exchange of mail with other nations take
into account the experience and perspective of the Postal Service.
While international delivery offers opportunities for various carriers
to serve specific segments of the market, only the United States Postal
Service provides every American mailer with a full-service gateway to
every corner of the world.
Enclosed are responses to questions that were raised at the hearing
or subsequently submitted for the hearing record. If I can be of
additional assistance on this, or any other postal issue, please let me
know.
Sincerely,
William J. Henderson
questions for record of international postal services act hearing
1. LHow often does the Postal Service change international rates?
A. LThe Postal Service changes the majority of its international
postage rates (air letters and cards, surface printed matter,
publishers' periodicals, surface parcel post, air printed-matter and
air parcel-post), on a cycle that generally conforms to the
implementation of domestic rates. Rate modifications for other
categories of international mail are done on an as-needed basis. These
categories can include International Surface Air Life (ISAL),
International Priority Airmail (IPA), Global Package Link (GPL),
Express Mail International Service (EMIS), and Global Priority Mail
(GPM).
2. LIs the Postal Service developing new rates for international
mail at this time? And if you are, when do you anticipate that new
international rates will be announced?
A. LYes, new postage rates for international mail are now being
developed. They will be publicly announced for notice and comment
following their approval by the Postal Service's Board of Governors,
which will be requested in September.
3. LWhat is the time frame for the completion of the Inspector
General's report on international postal rates?
A. LThe Inspector General anticipates issuing a report by the end
of the calendar year. Since the June 2 hearing, the Office of the
Inspector General has solicited input from professional Congressional
staff members, the Postal Rate Commission, Postal Service officials,
and the General Accounting Office. In initiating the audit regarding
the process of how international cost and revenue data are developed,
the Office of the Inspector General is focusing its efforts mainly on
the accumulation and validation of data.
4. LHas the Postal Service conducted any studies to estimate the
costs of meeting its obligations as a member of the UPU? And if so,
could you provide us the results of those studies?
A. LNo such studies exist, but we are working to develop
estimates that we will be happy to share with you.
5. LHas the Postal Service conducted any studies to estimate the
cost of providing universal mail service on an international basis? If
so, could you provide us the results of that study?
A. LNo specific studies have been conducted to estimate the cost
of the United States Postal Service's universal service obligation.
However, we are working to develop estimates that we will share with
you.
-