[Senate Hearing 105-690]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 105-690
 
         S. 2082--THE INTERNATIONAL POSTAL SERVICES ACT OF 1998

=======================================================================

                                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

                                 ------                                
                                                                   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

                              ----------                              


                         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\
---------------------------------------------------------------------------
    \1\ Copy of S. 2082 appears in the Appendix on page 43.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \1\ Other statements provided for the record appear in the Appendix 
on pages 67-78.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Henderson appears in the Appendix 
on page 57.
---------------------------------------------------------------------------
    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.
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    \1\ The prepared statement of Mr. Kelly appears in the Appendix on 
page 65.
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    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\
---------------------------------------------------------------------------
    \1\ The Ad from Royal Mail appears in the Appendix on page 45.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \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
---------------------------------------------------------------------------
    \7\ USPS 1998 Marketing Plans at INT p. 2 (Oct. 1997).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \8\ 52 Fed. Reg. 13124 (Mar. 18, 1998).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \9\ In implementing these requirements, State might also consider 
delegating substantial authority in these matters to USTR.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
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.

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